Sterne Agee analyst Jason Weyeneth takes a look at KKR’s fourth quarter earnings.

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KKR’s fourth-quarter earnings

KKR & Co. L.P. (NYSE:KKR) reported a sizable 4Q13 beat with key metrics ahead of expectations including the shareholder distribution. We would expect the stock to react favorably to these results particularly given the shares have underperformed peers year-to-date (and in 2013).

Sizable headline ENI beat

KKR & Co. L.P. (NYSE:KKR) reported economic net income (ENI) of $1.08, well ahead of our $0.80 estimate and the Street at $0.88. The beat was fairly broad based with +$0.03 stronger fee-related earnings (FRE), +$0.12 stronger net carried interest, +$0.07 greater investment income, and +0.06 of lower taxes. The upside strength in FRE reflected higher incentive income in the Public Markets segment, as well as higher transaction fees in the Private Markets segment (we had anticipated sequential decline given elevated 3Q13 from Gardner Denver deal), as well as higher incentive income from the public markets segment. The upside in net carried interest and investment income reflected stronger portfolio marks and balance sheet returns than we had modeled with the private equity portfolio and balance sheet up +8.4% and +6.5%, respectively.

Distribution ahead of expectations

KKR & Co. L.P. (NYSE:KKR) announced a 4Q13 distribution of $0.48, ahead of our $0.43 estimate and the consensus expectation of $0.38. The distribution was comprised of $0.12 of FRE, $0.22 of realized performance fees, and $0.14 of realized balance sheet income (after 60% hold back). All three components were stronger than we anticipated and the payout represents a 68.9% payout ratio. KKR & Co. L.P. (NYSE:KKR)’s total 2013 distribution was $1.40 (70.9% payout ratio).

Fee-paying asset growth driven by public markets segment

KKR & Co. L.P. (NYSE:KKR) ended the year with $77.4 billion of fee-paying assets, up 5% sequentially driven by strong capital raising and capital being put to work in the public markets segment. During the quarter, KKR & Co. L.P. (NYSE:KKR) raised $3.8 billion including final closes for their private equity fund NAXI ($9.0 billion), Real Estate Fund ($1.5 billion), and Special Situations fund ($2.0 billion). Early in 2014, fee-paying and total assets should grow by ~$8.4 billion with the close of their prior announced AVOCA INC (OTCMKTS:AVOA) acquisition (European credit manager). Total assets under management (AUM) ended the year at $94.3 billion.

Book value continues to grow

KKR & Co. L.P. (NYSE:KKR) ended the year with a $10.83 book value, up 7.5% sequentially, driven by the strong performance of balance sheet assets. For the year KKR generated a 27.4% return on equity.

More Post 10:00 Call. Management will host a conference call today (2/6) at 10:00am EST. 877-303-2917.

Any Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and any potential conflicts of interest may be found by clicking on the report link below. Past performance is no guarantee of future results.
KKR Note 

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