What risk factors does KKR face?
KKR: A global investment company with expanding assets and strong performance (Part 12 of 16)
Difficult market conditions
Since KKR & Co. L.P. (KKR) is an alternative asset manager, it has less flexibility to alter holdings than traditional asset managers such as BlackRock (BLK), State Street (STT), and Morgan Stanley (MS). These asset managers make up 4.39% of the Financial Select Sector SPDR Fund (XLF).
Invested companies and thus KKR may see their leverages impacted during downturns. Slower economic growth and downturns in the economy are risk factors that can adversely affect a company’s business in many ways. It can impact the valuations of portfolio companies and reduce the ability of the company to raise or deploy new capital. This could impact net income and cash flows.
Interest rates and credit availability
KKR’s business is affected by interest rates, credit availability, conditions of the financial markets, economic uncertainty, changes in the laws, trade barriers, exchange rate fluctuations, trade barriers, and political scenarios.
For example, during the recent downturn in March 2009, KKR witnessed the lowest aggregate valuation of its private equity funds. Investments in private equity funds managed by KKR were marked down to two-thirds of their original cost.
The company’s European Fund II, European Fund III, 2006 Fund, and Asian Fund had multiples of invested capital of 0.5x, 0.6x, 0.7x, and 0.8x, respectively. This reflected the losses across funds.
Competition can further impact KKR’s business. Competition can drive fees lower and push hurdle rates. KKR faces competition from The Blackstone Group (BX), The Carlyle Group (CG), Apollo Global Management (APO), and asset managers that form part of the Financial Select Sector SPDR Fund (XLF).
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