Kohlberg Kravis Roberts posted lower third-quarter profit on Thursday, as its private equity portfolio grew more modestly than in the past.
The private equity giant reported that its quarterly economic net income – a measure of profit that includes unrealized investment gains – fell 17 percent, to $508.7 million before taxes, from the period a year earlier. K.K.R. said its private equity investments appreciated 2.2 percent in the quarter, compared with 5.9 percent in the third quarter of 2013.
The after-tax earnings of 50 cents a share exceeded analysts’ expectations of 44 cents, according to a survey by Thomson Reuters. K.K.R.’s shares were up more than 1 percent as of midday on Thursday.
The slowing growth of K.K.R.’s private investments reflected the trajectory of the public stock market, which has leveled out in recent months after soaring last year. But with the market still near its heights, K.K.R. was able to generate cash by selling investments.
Distributable earnings before taxes, which reflect cash that can be distributed to shareholders, doubled to $504.8 million from the period a year earlier, K.K.R. said. Total cash revenue rose 74 percent, to $800 million.
K.K.R. sold several of its holdings in the quarter. It closed a sale of Ipreo Holdings, which specializes in software for capital markets, to the Blackstone Group and an arm of Goldman Sachs for a reported $975 million. It also sold shares in companies it had previously taken public, including China Modern Dairy and Santander Consumer USA, the American auto-lending arm of the Spanish banking giant Grupo Santander.
But with many assets trading at seemingly lofty valuations, K.K.R. was more circumspect when it came to making new investments.
“We’ve probably been more cautious of late,” Scott C. Nuttall, K.K.R.’s head of global capital and asset management, told analysts on Thursday. He said his colleagues were “more sellers than buyers in private equity.”
To find investing opportunities, K.K.R. has often had to stray from its traditional playbook of leveraged buyouts. One analyst, Chris Kotowski of Oppenheimer, pointed to a string of recent deals in which K.K.R. took minority stakes in fast-growing companies, including a German software maker called arago and Magic Leap, a start-up making augmented-reality technology.
Mr. Kotowski called the deals “un-K.K.R.-like.”
In the past, Mr. Nuttall said, the firm would have declined to do such deals, despite finding them “interesting.” But now, he said, K.K.R. has been using its own balance sheet — as opposed to the funds it manages — to make these investments.
“Think of these as opportunities sourced by our investment teams that historically we’ve passed on and now we have a way to monetize,” Mr. Nuttall said.
Many private equity investors are waiting for markets to turn before plunging into new deals. A bout of volatility last week signaled to many traders that a long rally in stocks might be fading. A rival of K.K.R.’s, Stephen A. Schwarzman of the Blackstone Group, said at the time that his firm was “uniquely positioned to take advantage of market volatility.”
On Thursday, Mr. Nuttall said, “where there’s a little bit of fear we get excited and find opportunity.”
K.K.R. and its rivals tend to use nonstandard metrics to report earnings. Using generally accepted accounting principles, K.K.R. reported an $89.9 million profit for the quarter, 56 percent lower than in the period a year earlier.
The firm, which is run by Henry R. Kravis and George R. Roberts, declared a dividend of 45 cents a share.
K.K.R.’s assets under management rose to $96.1 billion from $90.2 billion in the period a year earlier.
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