Invest Like The Super-Rich With This 7.2% Yielder

KKR had economic net income of $2.38 over the past four quarters for a current price-to-ENI multiple of 9.8. ENI could improve next year on stronger merger and acquisition activity as private equity looks to unlock the huge amount of cash held by corporations. My conservative estimate is for an increase of 15% in ENI to $2.74 and a target price of $27.40 a share for a 17% gain on top of the 7% dividend yield.

Growth in alternative investments has added a lot of strength to private equity earnings over the past few years, and this should continue in the near term. Real estate has rebounded, but new construction is still significantly below its historical average, and household formation has yet to recover.

One of the biggest drivers for KKR is the stock market and a strong reception for IPOs. The life cycle for a private equity deal is around 5 years, meaning that the companies bought or financed at the lows of the recession are going to be ready to come to market — which should mean big profits for the firm. Management noted in the third-quarter conference call that the company has $2.5 billion in deals in the pipeline, which should translate to good fee growth as well.

Risks to Consider: There is a reason only accredited investors are allowed to directly invest in private equity. Returns can be volatile, and the same goes for stocks of the private equity companies. Economic net income and sales vary more than traditional companies and may not necessarily trend upward.

Action to Take –> Direct investment in private equity deals might be off-limits, but you can still get a piece of this high-risk, high-reward asset class through the shares of firms like KKR. A position in the shares can help diversify a portfolio otherwise focused only on bonds and stocks.