Capital Raising And Global Atlantic Integration Will Unlock Future Potential

Key Takeaways

• Integration with Global Atlantic boosts strategic investment opportunities in infrastructure, enhancing KKR's recurring earnings and net margins.
  
• Expansion into individual offerings via K-Series and hybrid credit products is set to grow client base and fee-related revenues.
  
• KKR's future earnings and revenue face potential risks from reliance on non-GAAP measures, Strategic Holdings, Global Atlantic, and uncertain market and financial conditions.

Catalysts

A private equity and real estate investment firm specializing in direct and fund of fund investments.

• KKR's asset management business is experiencing strong momentum, with significant capital raising efforts across various strategies. The company's private equity and real assets businesses together raised $15 billion, and total new capital raised for 2024 was $114 billion, indicating potential for increased future revenue from management fees.
  
• The integration of Global Atlantic (GA) with KKR is expected to unlock new opportunities for strategic investments, particularly in infrastructure and real estate equities. This could enhance KKR's ability to generate recurring earnings and improve net margins as the connectivity between KKR and GA increases.
  
• KKR is expanding its offerings to individuals, particularly through the K-Series vehicles and upcoming hybrid credit products. This is anticipated to broaden KKR's client base and generate additional fee-related revenues, supporting future earnings growth.
  
• KKR's Strategic Holdings segment is expected to be a significant driver of future financial performance, with a focus on high-quality, cash-generative businesses. Recent commitments to increase stakes in certain strategic businesses could lead to higher management fees and future carried interest, positively impacting earnings.
  
• KKR's ongoing fundraising super cycle, along with strengthening market conditions, suggests that its capital markets business and flagship funds are poised for growth. This is expected to drive higher transaction fees and realized performance income, contributing to enhanced future earnings per share (EPS).

KKR Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KKR's revenue will decrease by 21.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 44.0% in 3 years time.
• Analysts expect earnings to reach $5.6 billion (and earnings per share of $6.82) by about April 2028, up from $3.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.4x on those 2028 earnings, down from 29.5x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

KKR Future Earnings Per Share Growth

Risks

• The reliance on non-GAAP measures and forward-looking statements that do not guarantee future performance presents a risk to the transparency and predictability of KKR's financials, potentially affecting investor confidence and earnings predictability.
  
• The significant increase in Strategic Holdings investment carries risks if these businesses do not perform as expected, potentially impacting future earnings projections and net margins.
  
• The integration and reliance on Global Atlantic for long-term strategic investments introduce risk if market conditions or performance diverge from expectations, affecting revenue and operational earnings growth.
  
• Uncertain market conditions, such as political, geopolitical, inflationary pressures, and interest rate changes, could negatively impact the deployment, monetizations, and fundraising, which are critical to KKR’s revenue stream.
  
• The evolving nature of the asset-based finance market and ongoing shifts in the bank partnership landscape might alter the risk-reward dynamics, leading to potential mismatches in income assumptions and realized earnings.

Valuation

• The analysts have a consensus price target of $135.52 for KKR based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $194.0, and the most bearish reporting a price target of just $114.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.7 billion, earnings will come to $5.6 billion, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of $102.28, the analyst price target of $135.52 is 24.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.