Kohlberg Kravis Roberts (NYSE:KKR) is a top private equity firm with a diversified portfolio. Recently they decided to cash out on the resilience of the markets by selling off some of their investments, including a stake in Sunrise Senior Living, Avincis, and shares of HCA Holdings (NYSE:HCA) and NXP Semiconductors (NASDAQ:NXPI). But, most notably, they sold Oriental Brewery to Anheuser-Busch InBev for a lucrative sale price of $5.8 billion, which is more than five times their initial investment in 2009.
At face value shareholders should see these asset sales as a big win, as their distributable income is up 74% for the quarter compared to the past year. However, forthcoming investors may wonder about the future of KKR and how they will stack up against their competitors, most notably Blackstone Group (NYSE:BX), which has almost three times the amount of assets under management.
As we have already seen, a bull market can push any large private equity firm to new heights, and KKR is just that. The reason a thriving market benefits PE firms so greatly is because it gives them the opportunity to sell off assets for considerable gains, especially through IPOs, which tend to conform to the success of the market. KKR has capitalized on this, and if a bull market continues, so will the immense success of KKR. In fact, I believe a strong market can push their value up nearly 20% higher, approaching a $30 share price, placing them at a record high for the company.
Currently, KKR is still diversifying their investments through several industries and strategic techniques. In June they dropped $700 million into First Data, the heavily leveraged payment processing company they bought in 2007. Even more recently they decided to provide $680 million in financing to Preferred Sands, a private company that produces sand for oil and gas producers. And now they are seeking full control of WMF, a German tableware manufacturer which they already own a 72% stake in.
The $680 million investment in Preferred Sands is coming from KKR's "special situation fund," which they launched in 2012 and has provided a staggering 41% gain over the last 12 months. Not only is KKR expanding their reach to diverse industries, but they are showing their presence in buyouts and rescue financing.
But the diversification does not stop there. Over 40% of KKR's Q2 earnings came from outside their fund operations. For example, their capital markets group raised $1.8 billion from third parties for First Data, one of the companies in their own PE fund, while collecting handsomely on the fees. Obviously diversification will help minimize risk, but like always, a downturn in the economy can be fatal.
KKR, like most PE firms, has their pulse on the markets. As great as KKR can thrive during a bull market, a bear market can drive it right back to where it came from -- just like it can for all asset management companies. However, KKR has a solid history of favorable returns and are showing strong diversity in their investment strategies. With its current yield sitting at 7.04% and a shrinking P/E ratio, KKR is worth a look for any income investor.
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