I always read the "Big Four" private-equity firms quarterly-earnings reports religiously, as these firms -- Apollo Global (APO) , Blackstone Group (BX) , Carlyle Group (CG) and KKR (KKR) -- have long been around and typically beat the S&P 500. KKR reported after the bell last night, and let's check out what the firm said.
Now, I've often said that smart investors would be well advised to use PE firms' approaches and timeframes and eschew that of short-term traders.
Scott Nuttall, head of KKR's Global Capital and Asset Management Group, addressed the differences between these two approaches last night during the firm's conference call, saying that more than 70% of the firm's management fees "comes from capital that is locked up for at least eight years from inception.
"Because of this dynamic, we operate and invest with a different view -- a longer-term view," Nuttall said. "While most of the Street operates in increments of 90 days or less, our frame of reference and timeline in measuring performance is much longer."
In other words, KKR goes into each deal thinking of an eight-year holding period at a time when most people I talk to about markets have a hard time holding onto a stock for eight weeks.
Here are some other things that really stood out in the firm's latest report and conference call:
KKR Sold Long-Term Holdings
KKR has been doing a lot of selling recently. In fact, the latest quarter saw the firm ring up its third-highest after-tax distributable earnings since KKR became a publicly traded company.
But because of KKR's focus on valuation and willingness to hold assets for a long time, the firm had a 3.2x average multiple of invested capital and a 19% annual internal rate of return.
The lesson: Being valuation sensitive and letting time work in your favor is the "secret sauce" that private-equity firms use -- and smart investors should do the same.
KKR Has Lots of Cash
The firm is also hanging onto a lot of that cash right now.
"We like liquidity in this type of environment," CFO Bill Janetschek said during the conference call. "To the extent that there's going to be dislocations, we want to have the ability to have that cash and take on those types of opportunities. Keep in mind cash is probably one of the best hedges you could possibly have."
Hmm ... it seems to me that I read that somewhere else recently.
KKR isn't just holding onto cash at the balance-sheet level. The firm's investment portfolios have record amounts of dry powder as well. Nuttall said that makes sense given global markets' current volatility and dislocations.
"With patient capital and the added benefit of $38 billion of record dry powder, we feel well positioned to take advantage of opportunities that arise from this dislocation," he told the conference call. "In effect, when you have locked-up capital and a lot of dry powder to deploy, it's great news when assets get cheaper."
I agree.
The Market Has Some Value Plays
KKR officials said they see some pockets of value out there.
For instance, they pointed out that many Asian markets are currently in bear-market territory. Management also said it's watching Europe, as KKR thinks significant opportunities are developing even though valuations still seem a little high.
Officials also said KKR has been investing in environmental-safety companies, particularly in Asia. The firm also reported several investments in things like dairy farms, pork producers and chicken producers, with a focus on food safety.
I think both of those are high-growth areas, offering the potential for huge future returns.
KKR's Stock Price
Nuttall said on the conference call that no one at the firm is happy with KKR's stock price, which has plunged some 40% over the past year.
The executive noted that management owns more than 40% of the stock, so the shares' decline has hit company executives' personally. The firm has been buying back shares over the past year, and KKR officials have commented on several occasions that they think the stock is cheaper than it should be.
At least one analyst agrees. Keefe, Bruyette & Woods is maintaining its "Outperform" rating on the stock, writing in a research note: "We remain comfortable that the risk/reward in KKR is compelling for patient investors willing to wait out the current volatility and macro headwinds."
I concur. I think long-term investors should buy KKR at current levels -- then purchase more if the price drops further.
The Bottom Line
Savvy investors should read KKR's quarterly reports for insights into what the smart, patient money is doing in today's difficult market.
My advice: Put down your stock charts and read the latest report in its entirety.
