My investment style can be best classified as boring. I don't turnover portfolios very often. Our largest holding has been the same position for close to six years now. I rotate between a familiar universe for investment. Every so often I add a new name to that universe while removing an older one.
One name I have been following for quite sometime is KKR. Actually, I have been following a majority of the private equity names that are listed publicly because investors, very simply put, don't understand them and even loathe them, to a certain extent. Loathing creates value. Misunderstanding a sector creates further value. Being in what's considered a boring sector adds steroids to the value consideration.
There is value in private equity currently. KKR is perhaps the most dynamic name in the space given their investment banking approach towards private equity, with considerable growth taking place, not just in traditional metrics such as assets under management, but growth in their capital markets desk, which is pursuing deals in competition with the likes of Goldman etc.
KKR announced this past week that they are converting to C Corp from a partnership structure. Why is this important?
- No more K-1s. Investors despise complicated tax reporting. K1s kept many investors away from KKR.
- Currency for acquisitions. A traditional C-Corp allows KKR to have a much more valuable equity currency if they decide to expand through acquisition. This allows for more aggressive growth over the long-term.
- Expanded universe of investors. The current partnership structure is prohibitive to ownership. A C-Corp allows for mutual fund participation, as well as inclusion in various indices.
Aside from the fact that KKR is basically a mini-Goldman now that it is taking on a C-Corp structure, the stock remains tremendously undervalued. As far back as late-2016, the private equity names have had undervaluation written all over them.
Despite the 50% gain from this point, shares of KKR remain undervalued, especially in light of their conversion to a C-Corp.
For example, it should be noted that since going public in 2010, book value for KKR has nearly tripled.
Assets under management have quadrupled, with further acceleration in AUM in sight.
And they have consistently posted a return on equity in the mid-teens.
The stock price, in the meantime, has only brought in a little more than a double during that time period.
Along with the transition to a C-Corp, the company also doubled their stock buyback to $500 million authorized.
Is KKR going to make the hair on the back of your neck standup while tying your underwear in a knot? Absolutely not. However, in an environment that is filled with ridiculous valuation and tremendous downside in many popular names, KKR stands out as a long-term compounder with only a moderate amount of risk going forward.
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