KKR & Co. (KKR) — a leading global investment firm with $519 billion in assets under management (AUM) — carries our highest investment recommendation of 5-STARS, or Strong Buy, notes equity analyst Cathy Seifert in CFRA Research's flagship newsletter, The Outlook.
The company expanded its presence in the insurance and pension risk transfer market with the 2021 acquisition of a majority controlling interest in Global Atlantic, a life insurer and annuity writer. As a result of that acquisition, KKR operates in the insurance and asset management/private equity space.
KKR derives asset management revenues from management fees on invested funds and performance fees on the realization of investments either through a private sale or an initial public offering. The firm reported a 6% Y/Y rise in assets under management at June 30, 2023, to $519 billion, despite challenging market conditions, largely due to $54 billion of new capital raised in the trailing 12 months.
Fee-generating AUM equaled 81% of June 30, 2023 AUM. This ratio is above many peers and will likely help offset the volatility in performance-based revenues amid more muted market performance expectations. Perpetual capital, or capital that is not subject to exit strategies like typical private equity capital, reached $200 billion at June 30, 2023, or nearly 39% of firm-wide AUM, aided by the acquisition of Global Atlantic.
During the 12 months ended June 30, 2023, the firm invested $51 billion of capital into new investments, leaving it with uncalled commitments (often referred to as “dry powder”) of some $100 billion at June 30, 2023.
We expect KKR’s asset management focus for the remainder of 2023 and into 2024 to remain in three broad areas: private equity, real assets, and credit and liquid strategies. At June 30, 2023, 33% of assets under management (or $170 billion) were allocated to private equity strategies, while real assets accounted for 23% (or about $122 billion) and credit strategies for the remaining 44% (or about $227 billion).
This level of asset diversification is about in line with the average for KKR’s peers. Some of KKR’s peers have a more concentrated asset strategy, while others are more diversified than KKR.
We expect KKR’s insurance strategy, in addition to being a source of perpetual, fee-generating capital, will operate under the Global Atlantic brand and be focused on offering retail customers a suite of annuity products, while offering institutional clients customized reinsurance and funding agreements as well as pension risk transfer services.
While KKR and its private equity peers are not immune to a decline in asset values and market volatility, we believe steps the firm has taken to diversify its revenue base, increase transparency, simplify its reporting structure, and reduce volatility will positively impact the shares.
We also believe continued favorable secular growth trends in the demand for private equity products provide the shares with an attractive tailwind and catalyst. Our $75 target price values the shares at 16x our 2024 distributable EPS (D-EPS) estimate of $4.70 (up from D-EPS of $3.50 we estimate for 2023) and at 13.3x our 2025 D-EPS estimate $5.65, versus the shares’ three-year average forward multiple of 16.1x and the three-year average forward multiple of 16.8x for KKR’s closest private equity peers.
Risks to our view include a significant downturn in world economies amid attempts by central banks to contain inflation through a rise in interest rates. A rise in interest rates and in fixed income yields may also curb demand for private equity and other alternative investments.
