SVN Capital: “KKR is One of the Most Attractive Businesses Within the Portfolio”

SVN Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here.  A quarterly portfolio gross return of 16.7%, and 15.3% net of all fees was recorded by the fund for the first half of 2021. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of SVN Capital, the fund mentioned KKR & Co. Inc. (NYSE: KKR), and discussed its stance on the firm. KKR & Co. Inc. is a New York, New York-based private equity company, that currently has a $33.9 billion market capitalization. KKR delivered a 44.05% return since the beginning of the year, extending its 12-month revenues to 67.17%. The stock closed at $58.03 per share on July 08, 2021.

Here is what SVN Capital has to say about KKR & Co. Inc. in its Q2 2021 investor letter:

KKR is one of the largest alternative asset managers in the world, with $367 billion in assets under management, but it is better known for its private equity business which is only one of 26 strategies that it manages.

Asset management has been compared to farming: raise capital, put it to work, cultivate, and then harvest. While the fund is operating (putting it to work and cultivating, which is usually seven to 10 years), KKR gets a management fee (~2% of the fund/year) and an incentive fee (cultivating and harvesting, ~20% of profits over a specific hurdle rate). The bigger the fund and the better the performance, KKR gets to collect a healthy management and incentive fee.

The alternative asset management industry, which is currently $14 trillion, has grown at 11% CAGR over the last six years, while KKR has grown at almost 22% over the same period. One of the reasons for the industry’s growth is due to the superior return profile and lower reported volatility when compared to traditional public equities. One of the reasons for KKR’s growth is its ability to execute each one of the steps in the farming analogy above, and to do so well. For example, KKR expects to raise more than $100 billion in 2021/2022. In terms of “cultivating,” KKR announced the acquisition of Global Atlantic, a leader in annuities, for $4.7 billion, increasing its permanent capital base. I expect this owner-operated asset manager to continue growing for a long time to come.

A typical strategy takes about seven to 10 years to reach maturity before it starts generating a healthy incentive fee. The management fee has grown at a 15% CAGR over the last six years, while the incentive fee has grown at a 42% CAGR over the last three years. At KKR, almost 50% of the strategies are less than six years old, setting up a significant fee-growth opportunity in the future.

Even though the stock has gone up 3x since the pandemic in 2020, I believe KKR is one of the most attractive businesses within the portfolio; it has a significant asset growth tailwind, immense opportunities to grow many of the existing strategies to scale, and to reinvest in new strategies.”


Based on our calculations, KKR & Co. Inc. (NYSE: KKR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. KKR & Co. Inc. was in 45 hedge fund portfolios at the end of the first quarter of 2021, compared to 44 funds in the fourth quarter of 2020. KKR  delivered a 13.85% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.