KKR’s ENI falls; CLOs scrapped

The firm disclosed that it has reached first closes on its European direct lending, Special Situations II and Infrastructure II funds.

Economic net income (ENI) fell at KKR in the first quarter of 2015, on the back of mark-to-market losses in its credit segment and from an energy-focused hedge fund that the firm bought a stake in last year. Its net income rose year-on-year however.

ENI for the first quarter totalled $599.4 million, a year-on-year fall from the $630.3 million recorded a year earlier, according to the firm’s first quarter results ended 31 March 2015.

KKR’s management disclosed in an investor call that two under-performing CLOs were dissolved and that foreign exchange rates had hit how the firm values its European direct lending investments. Aside from the currency hit and the two CLOs – which had a disproportional number of early repayments which reduced the expected return on equity to single digits – the firm marked down some credit assets including facilities for the energy sector. 

In the middle of 2014, KKR bought a stake in Blackgold, a hedge fund focused on energy investments. In early April, the fund revised its energy credit losses up to 17 percent from a 6 percent fall reported in December. KKR has written down the investment by about $15 million, management said on the call. 

Net income under US GAAP reporting standards rose to $270.5 million for the first quarter, up from $210 million in the same period the year before. The firm announced a dividend payment of 46 cents, up from 43 cents for the first quarter of 2014.

DL & FUNDRAISING

The credit losses have not put KKR off the strategy as on the call Bill Janetschek, chief financial officer said that KKR sees direct lending as a real growth area and added that the firm has been very pleased with the performance. Pointing to the “organic growth” in assets over the past three years, Janetschek said assets under management in private credit have grown from around $3.5 billion to $15 billion. 

In 2013, the firm’s flagship direct lending funds produced gross returns of 24 percent. The same figure for 2014 was 8 percent. 

KKR has reached a small first close on their first European direct lending fund. The manager is now moving investments made by that fund from its own balance sheet into the fund which is targeting €1.5 billion, as previously reported by PDI

The real estate credit team brought on-board by KKR from Rialto Capital Management have begun doing deals using the firm’s balance sheet, management added in answer to a question about $200 million deployed into real estate. The aim is to prove the strategy and KKR will then seek third party funds to support the platform. 

KKR’s second special situations fund has reached a first close of $1.7 billion. The vehicle is the follow-up to the firm’s first $2 billion distressed and event-driven fund. Special situations strategies reported gross returns of 24 percent in 2013, according to the presentation. 

Assets under management reached $99 billion and the firm has raised another $1.4 billion in investor commitments since 31 March this year.