KKR, Apollo, Blackstone, Oaktree, Carlyle Turn In Solid Quarter

  • Kohlberg Kravis Roberts & Co. now taking profits on KKR 2006 Fund LP
  • Apollo’s private equity funds appreciate by 14% in Q1, drawing praise
  • Blackstone signals realization cycle; Carlyle cites fundraising costs

Kohlberg Kravis Roberts & Co., Apollo Global Management LLC, Blackstone Group LP, Oaktree Capital Group LLC and Carlyle Group LP turned in mostly solid results as global markets gained traction, upping the value of portfolio holdings and paving the way for fresh deals and new business.

“It was a pretty good quarter,” said sell-side equity analyst Robert Lee of Keefe, Bruyette & Woods. “We saw a lot of realization activity and generating of incentive fees. They’re still raising money for new strategies. The underlying performance of what they had did pretty well and it was helped by the public markets.”

With a recovery in the economy and the buyout business overall, many firms are now seeing funds raised prior to the 2008 financial crisis exceed hurdle returns — typically 8 percent — which allows them to generate incentive fees on realizations.

“It varies, but generally, you’re starting to see more managers in a position to generate incentive income as the performance of funds have improved and more investments have matured and the markets have been open to monetizing investments,” Lee told Buyouts.

To be sure, there are headwinds, including higher valuations being paid for target companies and tough competition in fundraising. But overall, favorable conditions for monetizing assets and the availability of better terms on debt stoked returns.

Fueled by several transactions, KKR & Co. filled a remaining $275 million “netting hole” in its $16 billion KKR 2006 Fund LP after secondary offerings of HCA Inc, The Nielsen Company B.V. and Dollar General Corp, making it eligible to generate profit distributions. The firm also announced sales of its investments in BMG Rights Management GmbH in Europe and Intelligence Ltd. in Japan.

One analyst described the netting hole fix as “the big news” in the quarter for KKR. The firm also won points on Wall Street by moving to distribute 40 percent of its balance sheet gains, a move that will increase its cash distributions to shareholders.

Meanwhile, Apollo Global Management drew praise by reporting a 14 percent appreciation in its private equity holdings in the first quarter, well ahead of the 15 percent annual return typically expected.

“Apollo decimated that assumption on the up side,” Oppenheimer & Co. analyst Ben Chittenden said in a note to clients. He upgraded Apollo Global to outperform and praised the firm’s first-quarter results as outstanding.

Blackstone, the largest alternative asset manager, reported rising valuations of its holdings and asset sales by its real estate, private equity and hedge fund units. It signaled a focus on harvesting gains across its portfolio, noted analysts.

“Blackstone appears in the early stages of a sizable realization cycle that should highlight the cash earnings power of the franchise,” Sterne Agee & Leach analyst Jason Weyeneth said in a note to clients. Stephen A. Schwarzman, Blackstone’s chairman and chief executive officer, said in a prepared statement that greater realizations, which reached $6 billion in the quarter, “drove our second-best quarter for cash earnings since becoming a public company” in 2007.

Oaktree Capital continued to gain traction as a distressed debt and credit-focused shop with reported earnings of $1.95 per unit, well ahead of the consensus estimate of $1.51. “The strong beat was driven by higher-than-expected incentive revenues and investment income, helped in part by strong realizations,” Lee of Keefe, Bruyette & Woods said in a note to clients.

Meantime, Carlyle Group reported total fundraising of $4.9 billion in the quarter, while its realized proceeds topped $4.1 billion. Looking ahead, the firm sees flat distributable earnings in 2013.

“Based on the projected time line for our current pipeline, we expect that our investment pace, realizations, and realized performance fees, while strong, may be weighted towards the end of 2013,” Carlyle Group co-CEO David Rubenstein said on a conference call with analysts.

Carlyle Group’s first-quarter fees benefited from its NGP Energy Capital Management investment. Rubenstein also revealed “higher costs associated with increased pace of fundraising.” He added: “We expect our fee related earnings this year to be impacted by a number of initiatives that we are investing in now to strengthen our performance in 2014, ‘15 and beyond.”

The quintet of KKR, Apollo, Blackstone, Oaktree and Carlyle soon may be joined by Ares Management LLC, which may be preparing to an initial public offering of its own, according to reports.

While the quarterly updates are directed mostly toward public unit holders with metrics such as economic net income, limited partners often gain insight on the overall health of the firm, return data, as well as updates on new business efforts and fundraising.