KKR earnings fall, miss estimates; shares slump

NEW YORK (Reuters) - Private equity firm KKR & Co (KKR.N) reported lower-than-expected second-quarter earnings as investment income declined and gains in the value of its investments slowed, sending its shares down 7 percent.

KKR, which has investments in companies including retailer Dollar General (DG.N), hospital operator HCA (HCA.N) and media ratings company Nielsen (NLSN.N), also reported on Wednesday that its private equity funds rose 4 percent in the quarter and 10 percent for the year to date.

While the value of its investments increased, the rise was smaller than in the year-earlier quarter. KKR said its fee earnings can be significantly influenced by when deals close, meaning the numbers it reports on a quarterly basis can be "lumpy."

"In private equity, we continue to be very active on a global basis," said Scott Nuttall, a partner and director at KKR who leads the company's earnings conference calls. "Valuations are relatively attractive and the financing markets are open for our companies."

Deals it has struck this year include a $2.375 billion pact to buy Pfizer's (PFE.N) Capsugel unit and an investment of $90 million Australian dollars in Australian recycling group CMA Corp Ltd (CMV.AX).

"The transaction environment in private equity has remained quite busy," said Nuttall. KKR invested, or committed to invest, just over $3 billion of equity in nine companies in the second quarter, including five traditional leveraged buyouts and four growth equity opportunities, he said.

KKR, co-founded by "buyout king" Henry Kravis, listed on the New York Stock Exchange just over a year ago, following in the footsteps of bigger rival Blackstone Group (BX.N) and setting the stage for others such as Apollo Global Management (APO.N) to follow. Carlyle Group has also been making plans to go public, sources have told Reuters.

As well as making private equity investments, KKR has a capital markets division that arranges debt and equity financing for deals and underwrites securities offerings. It also has an asset management unit.

EARNINGS MISS

KKR's economic net income (ENI), a measure used by private equity firms to report earnings, was $315 million in the second quarter, down 27 percent from a year earlier.

ENI after tax per adjusted unit fell to 36 cents from 48 cents. Analysts' average forecast was 40 cents.

Investment income declined to $239.8 million from $370.6 million.

KKR shares were down $1.01 to $13.13 in afternoon trading.

The earnings miss was "mostly a timing issue," Sandler O'Neill analyst Michael Kim said in a research note. The lower-than-expected investment income was a function of higher management fee refunds and higher-than-expected taxes, he wrote.

Kim said he expects a "step-up in fundraising, deal flow, realizations, carry and distributions to unit holders over time, likely translating into rising earnings power".

By other metrics, KKR's second-quarter results improved. Fee-related earnings were $76 million, up from $63 million a year earlier. Using general accepted accounting principles, net income rose to $39.6 million from $29.9 million.

Assets under management totaled $61.9 billion, up from $54.4 billion a year earlier.

"We are in a very fortunate position," said Nuttall. "We have long-dated capital ... In times like this, companies need capital. Many of the traditional providers are gone."

KKR said it would pay a distribution to shareholders of 11 cents per unit.

It also said its recent investment in energy company Hilcorp Resources Holding is expected to add 6 cents per unit to its fourth-quarter distribution.

Marathon Oil Corp (MRO.N) in June struck a deal to buy oil and gas properties in Texas's Eagle Ford shale field for $3.5 billion from KKR and Hilcorp. With the sale, KKR nearly tripled the investment it made just a year ago.

FUNDRAISING MOMENTUM

KKR is in the process of raising money for its latest buyout fund, which has a target size of $8 billion to $10 billion, according to a publication earlier this year by the Oregon Investment Council, which committed $525 million.

Investors had been anticipating a new KKR fund for more than a year, but did not expect it to be close to the size of the global $18 billion buyout fund KKR raised in 2006.

Nuttall said the fundraising environment has been improving for private equity and KKR is having productive dialogues with investors.

Overall, KKR has about $14 billion of "dry powder" -- capital available to invest -- Nuttall said. About $12 billion of that is to be invested through its private equity funds.

Nuttall said KKR is "pretty well funded" in Europe and has a reasonable amount left to invest in Asia.

It has about $4 billion left to invest from its North American fund, which will decline as the deals it has recently struck close. Nuttall said KKR has made distributions to the investors in its private equity funds of $4.3 billion this year.

Blackstone recently reported second-quarter ENI of $703 million, up from $205 million a year earlier. The value of its private equity funds rose 9 percent in the quarter.

(Reporting by Megan Davies; Editing by Tim Dobbyn and John Wallace)