KKR's current valuation gives a 14.5% CAGR over 10 years*
*Please note that this is opinion based on the math below which could be wrong. Not investment advice
The firm made famous by the RJR Nabisco incident appears to be well priced today. Do note that I am not experienced in valuing Asset management firms, so take this rookie analysis with a pinch of salt and do your own due diligence.
We begin with identifying a valuation framework. KKR themselves recommended to value the business on 3 key pillars :
KKR Book Value Per Share (their own balance sheet investments + cash etc, not AUM) - 1x multiple
Management Fee earnings (10x - 20x multiple since it appears to be a stable, predictable income stream. I'd go with 10x for conservative reasons, taking note that Fee earnings are sometimes reinvested and not distributed.
Realised Performance Income (highly variable. Apply 50% discount for taxes and employee pool, give 5x multiple on the rest.
Reference to this framework from here : https://yetanothervalueblog.com/2019/03/kkr-is-too-cheap.html
Based on Q2, 2022 report, KKR's numbers for valuation purposes are as follows :
Book Value Per Share (BVPS) : $26.78
Management Fee Earnings per Share : $2.50
Performance Income : For simplicity, let’s make this $0 since we are in a bear market. You will see that the valuation is supported by just BVPS and Management Fee Earnings
Putting a 10x multiple on Manage Fee Earnings, that's $22.50 in value. Adding that to BVPS, we come to a very conservative value of $49.28 per share.
The Value 10 years out
Now, at roughly $52 a share (8th August, 2022), KKR is arguably fairly priced assuming the static business as is today. KKR's value 10 years out is dependent on their ability to increase Book Value Per share (BVPS) + earn a higher Management Fee (a function of AUM). Assuming they are able to do both, here are some projections from 10 years ago (2012) :
BVPS grew from $9.87 in Dec 2012 to $26.78 in Aug 2022 (~10.5% CAGR)
Management Fee earnings / shares grew from $0.45 in Dec 2012 to $2.50 in Aug 2022 (~18.6% CAGR)
KKR share price was roughly $13 in December 2012. So that represents roughly a 1 x BVPS + 10x Manage Fee per share. The valuation framework used today appears to be supported by the numbers in 2012. This checks out so far in my books.
Assuming KKR maintains this growth trajectory, we can reasonably expect the following in 2032 :
BVPS (10.5% CAGR) : $72.68 2)
Management Fee per share : $13 (apply 10x multiple for value below)
Value Per Share in 2032 : $72.68 + $13*10 = $202.
At today's share price of $52, that's about 3.88x return and an above market rate of return of 14.5% a year.
Note : I am not a financial advisor and this is my personal portfolio. Do not blindly follow and do your due diligence. You can lose money by investing in the stock market. All my writing is opinion and NOT advice.
I have been wrong on some firms. Peloton for example didn’t grow as intended and management tore through the balance sheet with little discipline. This is par for the course in investing. You win some, you lose some. Had you blindly followed my work on Peloton, you’d have lost over 80% of your capital. Proceed with caution.