(By Mani) KKR & Co.
) is well positioned to start generating substantially greater distributable earnings (DE) by 2013 and that this is likely to generate substantially higher actual distributions.
While both DE and distributions will be dependent on market conditions, KKR is substantially better positioned to earn more carry sooner than most peers because of a combination of the facts works in its favor.
First, the asset manager's flagship $17.6 billion 2006 Fund is not subject to "hurdles," and the fact that it has had more success in monetizing more of its investments than peers.
"We expect that in 2013 KKR will have a higher percentage of its private equity AUM in a "cash carry" mode than most of its peers," Oppenheimer analyst Chris Kotowski wrote in a note to clients.
KKR came public via an unusual route as it first floated a $5 billion investment vehicle called KKR Private Equity Investors (KPE) in 2006 which was registered in the Netherlands. This vehicle invested heavily in the 2006 Fund, The European III fund and made large direct investments in a number of deals including Dollar General, HCA and Alliance Boots.
The 2006 fund represents 44 percent of KKR's invested private equity capital, but has not yet generated significant "cash carry" for distributions despite some $5 billion in gains, of which about $2 billion have been realized.
If and when the 2006 fund crosses over, cash carry assets under management (AUM) should increase to $27 billion from $10 billion and the estimated gains that can generate cash carry for distributions will likely increase to $9 billion from $4 billion. Unlike most peers, the 2006 Fund does not have to overcome any "hurdle" to generate carry.
Most private equity funds are subject to hurdle rates of return, typically an 8 percent internal rate of return (IRR). Thus, there is no carry income on the first 8 percent of IRR returns, a 100 percent carry on the next 2 percent, and then 20 percent for anything above that. However, in the past, the LP agreements with investors were all custom made, and by good fortune, KKR did not have minimum hurdles in its 2006 Fund agreement.
KKR currently has about $9.9 billion of AUM that is eligible to earn cash carry. The unrealized gains in these funds as of March 31 were about $3.9 billion. This would theoretically be "worth" about $800 million in carry fees, although KKR would probably seek to maximize the gains further over time and thereby increase the carry fees.