UPDATE 3-KKR defies market with stellar 2nd-quarter earnings

* Q2 adjusted ENI/share 74 cents vs 16 cents seen by
analysts
* Q2 distributed earnings $104.5 mln, up 1 pct
* Assets $61.5 bln end June vs $62.3 bln end March

By Greg Roumeliotis
July 27 (Reuters) - KKR & Co LP bucked a declining
trend among alternative asset companies to report a 73.4 percent
jump in quarterly earnings on Friday, driven by successful exits
from private equity investments and a rise in the value of its
portfolio.
Fears over the euro zone's debt crisis and faltering global
economic growth have weighed on the valuation of private equity
portfolios of firms such as Blackstone Group LP and
Carlyle Group LP, often mirroring stock market declines.
KKR's portfolio has proved more resilient.
KKR's private equity portfolio appreciated 5.1 percent in
the second quarter, while Blackstone's portfolio lost 4.2
percent of its value and Carlyle's portfolio depreciated 2
percent.
"Against a challenging economic and capital markets
backdrop, we are pleased with our results," KKR co-founders and
co-chief executives, Henry Kravis and George Roberts, said in a
statement.
A major driver of KKR's gains was Walgreen Co's
investment in pharmacy group Alliance Boots GmbH. The biggest
U.S. drug store chain said last month it would pay $6.7 billion
for a 45 percent stake in the KKR portfolio company.
Although KKR has yet to book the money to be paid by
Walgreen, the deal resulted in a huge mark-up of Alliance Boots
in its portfolio, with the company's value on its balance sheet
jumping from $391.7 million as of the end of March to $650.6
million as of the end of June.
KKR's 11 billion pound buyout of Alliance Boots in 2007, at
the height of the credit boom, later raised concerns among
investors that the firm fell into the same trap many private
equity firms found themselves, overpaying and borrowing heavily
for megadeals that have since dropped in value.
Walgreen's investment in Boots was therefore celebrated last
month, not just by KKR, but by the wider private equity industry
and referenced by Blackstone CEO Stephen Schwarzman on his
firm's earnings conference call last week.
The deal raised KKR's valuation of Boots in its portfolio
from 1.1 times its investment cost to 1.9 times, KKR said.
Should Walgreen follow through with its plan to buy the
remainder of Boots, KKR stands to earn 2.7 times its initial
investment, a person familiar with the situation told Reuters
last month.
"People were pleasantly surprised. It's a 2007 investment, a
very large investment, and we have been saying for several years
to our investors that we actually feel quite good about the
investments we made in the 2006-2007 period," Scott Nuttall,
head of KKR's Global Capital and Asset Management Group, told
analysts on a conference call.
Were it not for the Boots deal, KKR said its private
portfolio would have been relatively flat to slightly down. Its
public portfolio was up 0.3 percent, outperforming a 2.8 percent
drop in the S&P 500 Index, the firm added.

INVESTMENT INCOME GAINS
KKR said second-quarter economic net income (ENI), a measure
of profitability taking into account the mark-to-market
valuation of its assets, rose to $546.1 million in the second
quarter from $315 million a year ago.
This significantly exceeded analysts' expectations, beating
even the highest of estimates from major brokerages. After-tax
ENI per adjusted unit was 74 cents, compared with the average
forecast of analysts polled by Reuters of 16 cents.
Gains came mostly from investment income, originating from
balance sheet investments, rather than its funds. KKR does not
distribute investment income to public shareholders, so
distributed earnings were up only 1 percent to $104.5 million.
The second-quarter distribution per common unit was 13
cents, compared with 11 cents a year ago.
KKR, whose investments include retailer Toys R US Inc,
Internet domain registration company Go Daddy Group Inc and
hospital operator HCA Holdings Inc, said assets under
management dropped to $61.5 billion at the end of June from
$62.3 billion at the end of March due to payouts to investors.
KKR was founded in 1976 by Kravis, Roberts and Jerome
Kohlberg. The firm gained fame through its $25 billion leveraged
buyout of RJR Nabisco in 1988, a battle that was immortalized in
the 1990 bestseller, "Barbarians at the Gate."
While private equity still accounts for most of KKR's assets
under management, the firm has been diversifying into credit and
hedge funds and last month announced the acquisition of Prisma
Capital Partners LP, a hedge fund of funds manager with $7.8
billion of assets under management as of April 1.

On Friday, KKR said it would start a new capital markets
business in joint venture with Stone Point Capital LLC will
target middle-market and private equity-backed companies as well
as make principal investments.
KKR gave few new details on fundraising. During the quarter
it closed on $4 billion of energy and infrastructure fund
commitments and raised more than $3 billion for its second Asian
fund.
But it offered no new update on its North American XI Fund,
which secured $6 billion in investor commitments last February.
Nuttall said the fund was due to wrap up fundraising by February
2013.