KKR executives speaking on the firm's earnings call yesterday (26 July) reported mixed performance for its alternative credit segment in the second quarter. The firm's flagship special situations fund showed flat returns and its mezzanine fund generated 3 percent gross returns in Q2. KKR's Lending Partners II fund saw the strongest numbers: up 9 percent gross returns in the second quarter and 12 percent year-to-date.
Scott Nuttall, head of KKR's global capital and asset management group, said that overall performance metrics for the credit segment did not fully reflect returns due to moves to monetise the CLO equity portfolio that effected the balances released before the call. He added that the firm's CLO business was up by more than 4 percent and that its overall credit unit was up 2.2 percent during the second quarter.
According to materials released in conjunction with the call, alternative credit makes up 10 percent of KKR's total investments, with other credit holdings making up another 5 percent. CLOs are 11 percent of the firm's assets.
KKR's second mezzanine fund, Private Credit Opportunities, is still in the market and thought to have gathered about $350 million towards its $2 billion goal. The firm is also continuing to raise funds for other leveraged credit vehicles, including high-yield leveraged loans, CLOs and separate accounts. Looking ahead, Nuttall said that the firm would be raising capital for the third iteration its Global Direct Lending fund.
Overall, KKR reported economic net income (ENI) of $248.8 million, an improvement from the $506 million loss in ENI reported in the first quarter, but well below the $839.9 million gain in the second quarter of 2015. KKR attributed the decreases in part to a decrease in value of certain of the firm's publicly held investments, including First Data Corporation.
KKR's assets under management stood at $131 billion at the end of June, a $4 billion increase from the previous quarter and a 14 percent increase over the second quarter of 2015. KKR attributed the increase to capital raised by its private equity, hedge fund and credit businesses. Success in fundraising during the second quarter left KKR with record levels of dry powder at approximately $38 billion, a 48 percent increase year-over-year.
In their presentation and materials, KKR executives directly addressed what they see as misperceptions about the effects of the firm's long-term business approach, which they say is being misjudged by markets focusing on short-term metrics.