KKR Profit Declines; Firm Evaluating Change of Corporate Structure -Update
By Miriam Gottfried
KKR & Co.'s fourth-quarter profit fell as it faced a higher-than-expected provision for income taxes. The firm said it is weighing whether to change its corporate structure on the heels of the new tax law.
For the quarter ended Dec. 31, the New York private-equity firm's earnings fell to $166.4 million, or 32 cents a share from $171 million, or 35 cents a share, a year earlier.
Economic profit, a closely watched performance measure that reflects unrealized investment gains, rose to $414.9 million, or 48 cents a share, from $339.2 million, or 40 cents a share, a year earlier. The result fell short of the 52-cent average estimate of analysts polled by FactSet.
Both metrics were hurt by the higher tax provision, which was unrelated to the new tax law passed by Congress late last year.
KKR's shares declined 4% in midday trading.
KKR said its senior management and board are "evaluating whether to convert from a partnership to a corporation." The new tax law lowers the corporate tax rate to 21% from 35%, making that structure more attractive. But KKR's peers including Blackstone Group LP, Apollo Global Management LLC and Carlyle Group LP have expressed caution during their fourth-quarter earnings calls this week and last, citing the potential negative effects a change in corporate structure would have on their profits.
Those negatives could potentially be offset by a higher stock price. The shares of publicly traded private-equity firms aren't included in indexes because of their partnership structure. Becoming "C corporations" would make it easier for many investors to own their shares, increasing demand.
Had the new tax law been in place at the beginning of 2017, KKR's reported after-tax economic net income would have been about 17% lower if it were structured as a traditional corporation, the firm said on conference call Thursday. To make up that difference, the price-to-earnings multiple KKR's stock trades at would need to expand by roughly two turns, it said.
"We will take into account all variables going forward and we will report back, certainly next quarter," KKR Chief Financial Officer Bill Janetschek said on the call. The firm is "seriously considering" making the switch, he said.
Activist investor ValueAct Capital Management LP first announced a 4.9% stake in KKR last April, arguing its stock was undervalued because of fears that the private-equity firm won't survive after its founders are gone. The firm has since increased its position, reporting a stake of just under 10% in a Nov. 27 filing. KKR has said its interactions with the hedge fund have been positive and that ValueAct "shares its visions" for the firm.
KKR said its distributable earnings, the portion of profits that could be paid out to shareholders, climbed to $427.1 million, or 52 cents a share, from $389.9 million, or 48 cents a share. Aiding that growth were sales of stakes in U.K. pet retailer Pets at Home Group PLC and U.S. Foods Holding Corp., among other divestitures.
KKR's private-equity portfolio climbed 7.4% in the quarter. That compares with a 6.8% gain for Blackstone, a 9.1% rise for Apollo and growth of 8% at Carlyle during the quarter. The S&P 500 index rose 6.1%.
Assets under management were $168 billion, up 30% over the previous year. KKR said it closed an $8.5 billion core-investment strategy fund in the quarter, with $3 billion of that coming from its own balance sheet.
Assets will climb by $14 billion after the closure of its partnership with FS Investments, announced in December.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
February 08, 2018 13:12 ET (18:12 GMT)Copyright (c) 2018 Dow Jones & Company, Inc.