Robust Capital Raising And Diverse Assets Will Drive Future Opportunities

Key Takeaways

• KKR's capital diversification beyond flagship funds highlights potential for sustainable revenue growth and robust management fee increases.
  
• Strategic growth in private credit, real assets, and wealth management aims to enhance earnings and expand margins through efficiencies and partnerships.
  
• KKR's growth strategy in asset management comes with high initial costs and exposure to market volatility, affecting margins and earnings stability.

Catalysts

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

• KKR's robust capital raising efforts reflect strong optimism, with $114 billion in new capital raised in 2024, up significantly from $70 billion in 2023. Only 15% of this capital came from flagship funds, suggesting sustainable revenue growth potential from a broad range of strategies beyond their traditional offerings.
  
• The company's diversification across asset classes, including increased focus on private credit and real assets, positions KKR for enhanced management fee growth, potentially accelerating off the 14% increase seen in 2024. This reflects a strong foundation for future revenue expansion.
  
• The integration with Global Atlantic is set to enhance KKR’s recurring earnings through strategic investments in infrastructure and real estate equities, potentially boosting net margins by leveraging KKR's broad investment capabilities against long-dated liabilities.
  
• KKR's Strategic Holdings is envisioned as a long-term driver of sustainable earnings growth, with company stakes generating substantial revenue and EBITDA. The projected increase in operating earnings of an additional $50 million by 2026 and $100 million by 2028 and 2030 signifies confidence in continued earnings per share growth.
  
• Dynamic expansion in the wealth management sector, including the promising partnership with Capital Group, aims to tap into the mass affluent market, potentially escalating revenues and aiding margin expansion through higher-efficiency operations and distribution channels.

KKR Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on KKR compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming KKR's revenue will decrease by 18.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.6% today to 39.2% in 3 years time.
• The bullish analysts expect earnings to reach $5.6 billion (and earnings per share of $8.03) 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 price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, up 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

• KKR's expansion and increased scale in private wealth and asset management require significant up-front costs, which could temporarily increase operating expenses and affect net margins.
  
• The volatility in M&A markets and the potential for fluctuating asset valuations could lead to uneven realized investment income, impacting earnings stability.
  
• Dependence on capital markets for growth exposes KKR to risks from interest rate changes and geopolitical factors that might affect future revenues and profit margins.
  
• The pace of deploying raised capital significantly influences management fees; delays in deployment or market disruptions could slow fee growth and affect overall revenue.
  
• Regulatory and political uncertainty can impact KKR’s insurance and strategic holdings operations, potentially creating risk for consistent revenue and earnings growth.

Valuation

• The assumed bullish price target for KKR is $170.55, which represents two standard deviations above the consensus price target of $135.52. This valuation is based on what can be assumed as the expectations of KKR's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $14.4 billion, earnings will come to $5.6 billion, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 8.4%.
• Given the current share price of $102.28, the bullish analyst price target of $170.55 is 40.0% 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.