Private Equity: Recapping the KKR Q1 Conference Call

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The KKR conference call for the first quarter occurred on Wednesday morning. Executives at the firm revealed that although they were stung a little by the economic upheaval, KKR continues to prove its business model.

The company exited some businesses early in the quarter at an average of 3.5 times the initial cost. Although they are working remotely like the rest of us, KKR, in the 2-month window from March 1 through May 1, has closed on or in legal documentation on over $10 billion of new commitments across our fund platform.

KKR Conference Call for Q1

Co-President Scott Nuttall talked about how the lessons of the Great Financial Crisis have positioned the firm to deal with and prosper for the current economic crisis. He reminded analysts that at the time of the GFC, “KKR was a smaller, more narrowly focused firm. We had a private equity franchise alongside a young U.S.-centric credit business. Our capital markets business was nascent, and we did not have a balance sheet.”

This forced the firm to play defense, shoring up portfolio companies, examining capital structures, and debt profiles. However, they were not able to take advantage of the many opportunities they saw develop in various markets. When that crisis ended, they began shaping the firm to be able to support the portfolio investments and aggressively move to take advantage of new opportunities.

KKR now has a $20 billion balance sheet that can be used to invest in companies and assets at attractive prices. KKR has also dramatically increased its capital markets capabilities.

The firm has grown from 2 investment businesses to 24 around the world. This will allow KKR not only to play defense but also play more offense.

Other Highlights from the Call

The firm also repositioned its distressed and private equity teams to be closer together. These teams created shopping lists for debt and equity that we would want to buy if and when the dislocation occurred. Now that the dislocation has arrived, they have been able to move quickly to make investments at attractive prices.

Mr. Nuttall told us that “Since the crisis began, which we mark is when the market started to be more volatile on February 21, we’ve invested or committed approximately $8 billion of capital as a firm. This amount includes dollars invested by our leveraged credit teams in the traded loan and high yield markets. Of the $8 billion, approximately $5 billion has been in credit of some type and $3 billion has been in equity. We are using the target list we’ve been building over the last few years.”

Opportunities for 2020 and Beyond

Mr. Nuttall also unveiled the four big investing themes KKR sees developing. First is investing in dislocated traded credit and equities. Thanks to their shopping lists, they were able to take advantage of short-term opportunities that arose early in the crisis.

The second is providing liquidity to companies that are in need. He said these opportunities tend to take the form of either structured equity or credit. He said, “when we have companies that we know, and like, they are looking for liquidity, we can move quickly.”

The third is the opportunity for portfolio companies to make acquisitions. Several of KKR’s portfolio companies that are looking to grow and be consolidators through this time. Pricing for add on deals right now is more attractive than it has been for some time, and bargains are becoming available.

The final theme is public and private companies that are looking to sell non-core subsidiaries. Companies are raising cash to de-lever their balance sheets or take advantage of opportunities to buy back stock at low prices. Mr. Nuttall is excited about this opportunity telling investors, “That’s part of the reason we’re so enthusiastic about the deployment opportunity ahead of us and the return opportunity on the deployed capital.”

Recent: Private Equity: Carlyle Group Reports Fourth Quarter Earnings

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