Global private equity (PE) major KKR & Co said its significant exposure to the Asia market has been “hugely helpful” as businesses in the region are starting to set foot on the road to recovery in the wake of the COVID-19 pandemic.
“…it’s been hugely helpful having such a broad platform in Asia and such a big portfolio in Asia… We were able to see several of those countries and markets be impacted by the crisis ahead of Europe and the U.S., and we’ve started to see those a lot of those markets now bottom and start to see some improvement,” said KKR co-president and co-COO Scott Nuttall during the PE firm’s first-quarter earnings call on Wednesday.
KKR’s Asia portfolio, which accounts for over 30 per cent of the firm’s private equity business, has held up on a relative basis, better than its performance in the US and Europe, said KKR chief financial officer Robert Lewin. “Overall, we feel good about our portfolio.”
The PE investor sees significant opportunities emerging in the private markets, especially in Asia where the pipeline “is very active.”
The novel coronavirus struck in Asia first, and the region’s economy is recovering ahead of other parts of the world. As a result, the firm’s significant exposure to Asia has enabled it to see how markets have been impacted in the region and gave it time to accordingly adjust its approach to its business in other territories.
KKR said its Asia portfolio has shown improvement, with most manufacturing facilities operating at 70 per cent to full capacity. The weighting towards Asian markets has secured the strength of the asset manager’s portfolio construction, according to Nuttall.
“The overall construction of our portfolio and the health of our companies is part of the reason why you would have seen our investment performance hold up pretty good in our private equity businesses over the last quarter,” he said.
The New York-headquartered investor reported an 11 per cent jump in its after-tax distributable earnings in the January-March period on Wednesday.
“In terms of the longer term, we feel great about our Asia franchise and the opportunity we have in front of us,” Nuttall added.
The Asia business is also where KKR is seeing a clearer exit pipeline in the short-term. The firm recently cashed out of Japanese DJ equipment maker AlphaTheta Corp, marking its first carve-out exit in the country. The divestment generated a 3x multiple for KKR.
Further, the firm’s realised performance income reached over $370 million in the past quarter, partly driven by its exit from South Korea’s KCF Technologies.
In terms of fundraising, Nuttall said KKR has been busy in Asia, and there was “no material change to the composition in … accessing capital.” The pandemic has caused the firm to engage in frequent communication with its clients, “easily two to three times the usual.”
In addition to private equity, KKR has been raising funds to spruce up its real estate, infrastructure credit, and growth technology strategies in Asia. Its new capital raised in Q1 totalled $7 billion, driven by fundraising in Asia infrastructure, along with real estate and private equity.
“We continue to see a big opportunity to expand our platform in that part of the world,” Nuttall said.
Defence vs offence
Overall, KKR’s most recent flagship private equity funds depreciated 6 per cent in the first quarter of 2020, while the entire PE portfolio was down 12 per cent.
This is primarily because of its modest exposure to areas directly impacted by the pandemic as well as greater exposure to technology and online oriented investments.
“During times like this, we can use our balance sheet to be aggressive for new investments, for strategic acquisitions and for buying our own stock,” said Nuttall.
He asserted that KKR has been playing a good amount of defence over the last few weeks. However, at the same time, it is also spending as much time on offence.
“We repositioned our distressed and private equity teams to be closer together and created target lists or shopping lists for debt and equity that we would want to buy if and when dislocation occurred.”
Since the crisis began, KRR has invested or committed around $8 billion of capital, including $5 billion in credit and $3 billion in equity.
In addition, the $207 billion asset manager said it had some $58 billion in dry powder for new investments, and saw opportunities for its portfolio companies to pursue M&A.