KKR & Co. reported a loss for the first quarter after its biggest investment, in payments processor First Data Corp., lost a fifth of its value, highlighting the heightened exposure a private equity firm takes on when it bets its own money on a company.
The alternative-asset manager had a loss in economic net income, which reflects both realized and unrealized investment gains, of $553 million, or 65 cents a share, according to a statement Monday. That result, which is after-tax, compares with a $526 million profit in the same period last year and falls short of the average 33-cent loss expected by 15 analysts in a Bloomberg survey.
KKR’s exposure to First Data accounted for $300 million of the firm’s loss before taxes. The investment is unusual among private equity managers because in addition to investing client capital from its funds, KKR bet about $1 billion of its own money on the company from 2007 to 2014. The move, which the buyout firm was able to do because it has the largest balance sheet among its peers, allows it to keep more of the investment’s gains while also being more exposed to its losses.
“Balance sheet losses were far worse than what we were modeling, among the worst quarters for the balance sheet for KKR as a public company,” Wells Fargo & Co. analyst Chris Harris said in a note to clients Monday. “The writedown of First Data and various energy investments accounted for roughly 60 percent of the losses.”
KKR fell 3 percent to $14.49 at the close of trading in New York. The stock is down 5.9 percent, including reinvested dividends, this year.
The firm, which in October unveiled a $500 million share repurchase plan, said it’s bought back $388 million of stock. Carlyle Group LP, Apollo Global Management LLC and Fortress Investment Group LLC announced buyback programs this year collectively worth $550 million.
Global stocks slumped in January and February, eroding the value of companies that buyout firms have taken public and still own. A market rebound in March restored some of the losses. The firms mark the value of the investments they hold -- a key determinant of economic net income -- in line with the market.
KKR said its private equity portfolio declined 0.9 percent in the quarter and investments on its balance sheet fell 5.4 percent. Blackstone Group LP, which reported results last week, said its private equity holdings appreciated 1.7 percent. The Standard & Poor’s 500 index of large U.S. companies was up 0.8 percent.
The first quarter “was a volatile and strange quarter,” Scott Nuttall, KKR’s head of global capital and asset management, said on a conference call Monday with investors and analysts. “Our view is the vast, vast preponderance of the marks are just related to the volatility and some of the noise that we’re seeing in terms of commodity prices or otherwise.”
Referring to how market upheaval might affect the firm’s decisions on when to exit a portfolio company, Nuttall said, “The vast majority of those are going to be situations where we do not necessarily have a gun to our head.”
First Data, which KKR took public in October at $16 a share, closed as low as $8.67 on Feb. 11 after posting a fourth-quarter loss and revenue that missed analysts’ estimates. Shares of the Atlanta-based company finished the quarter at $12.94, down 19 percent for the three-month period.
“This does not concern us,” Nuttall said of First Data’s decline, calling the company’s fundamental performance “quite good.”
KKR took First Data private in 2007 in a $29.8 billion leveraged buyout, the fifth-biggest in a three-year LBO boom that KKR co-founder Henry Kravis dubbed the industry’s golden age. The firm sunk $2.7 billion of its own and its clients’ money into the initial deal. After the company struggled through the recession under several chief executive officers, KKR settled on CEO Frank Bisignano. In 2014, KKR led a $3.5 billion equity raise, after which the firm and its funds had put a total of $3.9 billion into First Data, its biggest-ever investment in a company.
First Data on Monday posted a net loss of $56 million for the first quarter, compared with a $112 million loss a year earlier. Adjusted profit of 24 cents a share beat by one cent the average estimate of 21 analysts surveyed by Bloomberg. The stock rose 2.6 percent to $13.34 at the close of trading.
KKR’s cash profits, which reflect earnings on fund management fees and sales of companies, were $169 million in the first quarter, down 65 percent from a year earlier. The firm pays a fixed quarterly dividend of 16 cents a share, which it said stockholders will receive on May 19.
Assets under KKR’s management were $126.4 billion as of March 31, up from $119.5 billion on Dec. 31. The firm raised $10.6 billion during the quarter and distributed $2.8 billion to clients.
Nuttall said he expects KKR’s new North American private equity fund, the firm’s 12th, to raise the maximum $12 billion agreed to with investors. With money from KKR and employees, the pool will probably be $12.5 billion to $13 billion, he said. The firm’s current pool, which finished raising $9 billion in 2013, was producing a 20 percent annualized return after fees and was valued at 1.5 times cost as of Dec. 31.
