Analysts Think Alt Manager KKR Is a Buy Again

KKR shares are down about 9% this year, more than other alternative managers. (Dreamstime)

The private-equity business stands on the verge of a fund-raising opportunity, as regulators prepare to let it pitch PE funds to small investors. Some analysts have decided that alternative manager KKR & Co. is poised to benefit.

Early last week, Piper Sandler analyst John Barnidge started coverage of KKR with a Buy rating. He sees some 8% upside, to $150, from the stock’s current price of $138.

“KKR has a leading position executing on the retail opportunity along with a number of diversified growth levers,” Barnidge wrote. A wholly owned insurance company and a relationship with the mutual fund manager Capital Group position KKR well, for retail distribution of its private funds.

Later last week, Morgan Stanley’s Michael Cyprys added KKR to his list of top picks. He had already raised it to a Buy back in mid-May, with a $150 price target.

KKR became all the more attractive a purchase to Cyprys because the shares have underperformed those of other alternative managers this year. KKR is down about 9%, compared with a 2% decline for the group, and the 5%-plus rise of the S&P 500.

Both analysts point out that capital markets are becoming more active. If investors regain their appetite for stock offerings, that will let private-equity firms exit from some of the company investments in their swollen portfolios.

The PE industry has been stalled by its dearth of exits—and distributions to investors—over the last five years. That has made institutions like universities and pension funds less eager to invest.

By Cyprys’s math, PE firms have taken in $1.5 trillion more than they have distributed, since 2018. In a June 27 note, he contends that this phenomenon is cyclical. Exits and distributions will improve from here, he hopes.

The slowdown in institutional fund-raising is, of course, why the PE industry is leaning on regulators to allow marketing to the rest of us.

KKR has done well in its half-century of private-equity investing. Over that period, the firm has had a 25% internal rate of return on investments held for at least two years, compared with the 12% for the S&P 500.

Secular tailwinds are driving growth in private credit, infrastructure investment and insurance, says Cyprys. That leads him to predict 16% annual growth in KKR’s asset management fees over the next five years, and 19% growth in its performance-driven fees—adding up to 20% growth in earnings per share.

Right now, KKR stock trades at about 20 times the consensus estimate for around $6.65 a share in earnings next year. That is five turns higher than the multiple on its rival Apollo Global Management.

But Barnidge argues that KKR’s insurance-fortified balance sheet positions it as an industry consolidator and disrupter. It deserves a premium valuation, he concludes.

Write to Bill Alpert at william.alpert@barrons.com