KKR (KKR, Financial) is one of the largest alternative asset managers in the world, overseeing $496 billion in assets under management (AUM). Approximately 80% of the company’s AUM is held under capital commitments that are eight years or longer, resulting in a highly predictable management fee revenue stream. KKR has also grown AUM at a mid-teens rate over the past decade, largely due to the company’s success in leveraging its well-established brand and its existing relationships to expand into new strategies and geographies. Today, 22 of KKR’s 28 strategies are less than 10 years old, and we believe many of these have considerable runway for future growth. Furthermore, we think the market is undervaluing KKR due to the company’s large balance sheet investments and the near-term volatility of its performance fees. We estimate that KKR’s investments are worth ~$17/share today, or 36% of its current market capitalization, which is considerably higher than its peers. After adjusting for these factors, KKR trades at a high-single-digit multiple of our forward earnings estimate. In fact, shares trade at just 16x our estimate of fee earnings, and that is without ascribing any value to carried interest earnings or to KKR’s insurance unit. We find this a very attractive valuation for a business with KKR’s growth outlook and return profile.
From David Herro (Trades, Portfolio)'s Oakmark Global Fund fourth-quarter 2022 commentary.
