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KKR: Strong Growth And Abundant Potential

Alex Smith

Alphyn Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. The fund posted a return of -21.7% for the quarter, underperforming its benchmark, the S&P 500 Index which returned -19.6% in the same quarter. You should check out Alphyn Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Alphyn Capital highlighted a few stocks and KKR & Co. Inc. (NYSE:KKR) is one of them. KKR provides investment and private equity asset management services. Year-to-date, KKR stock lost 12.5% and on May 12th it had a closing price of $25.71. Its market cap is of $21.57 billion. Here is what Alphyn Capital said:

"KKR is one of the preeminent private equity managers. The business model is quite simply to use both their balance sheet ($16bn) and client funds ($218bn in AUM) to buy companies/assets, grow their value through a combination of operational improvement and financial engineering, and sell at a premium. In this way KKR earns management fees on fee-paying AUM (a recurring earning stream, especially on capital locked in for 8+years), earns performance fees based on the rates of return generated, and grows the value of its balance sheet. Despite its size, KKR still has plenty of room to grow earnings as it scales relatively new strategies, such as in real estate, healthcare, energy, and hedge funds, by a factor of 4-5x over the next decade, and then harvest performance fees as the strategies mature. Current conditions will certainly impact KKR’s portfolio companies, especially given their liberal use of debt. I expect it to leverage its in-house full service Capital Markets division, which has raised cumulatively approx. $1tr in equity and debit for both KKR companies an external clients since inception in 2007, and political access to find creative financing solutions. As point of reference, businesses backed by the private equity industry employ more than 8.8 million Americans at over 35,000 companies, accounting for 5% of the United States’ GDP. 7 This gives the industry significant clout, perhaps explaining why it is lobbying to have access to the $377 billion of small business loans and grants baked into the U.S.'s $2 trillion coronavirus relief bill. 8 As of year end 2019, KKR could reasonably be valued at ~$35 per share, by adding the balance sheet value of $19.26 per share to the KKR fee generating business value of $16 per share ($1.67 per share in after tax distributable earnings valued at a reasonable 10x). Even allowing for significant write downs to the portfolio in the next couple of quarters given market conditions, KKR is priced with a margin of safety in the low $20’s where we bought the shares."

In Q4 2019, the number of bullish hedge fund positions on KKR stock increased by about 30% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with KKR's upside potential.

Disclosure: None. This article is originally published at Insider Monkey.