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2019-11-09 21:29:50

The following segment was excerpted from this fund letter.

KKR & Co. (NYSE:KKR) - The thesis remains the same, a strong balance sheet with $17+/share in cash and investments, an undemanding sub-6X distributable earnings valuation (ex cash and investments), conservative accounting, high insider ownership (40%+), and strong secular tailwinds with the industry growing AUM at +12% per year. KKR shares sold off more than 10% on news of Elizabeth Warren's bill targeting private equity. In the short term, her bill will certainly be part of her campaign trail talking points. However, for the bill to actually become a law would seem to require not only that Warren becomes the nominee and beats the incumbent, but also that Democrats also carry the House and Senate. On top of this, it would also require that private equity lobbying groups also prove ineffective at muting the legislation.

The proposal has three major components. The first is eliminating the preferential carried interest tax treatment, which would not impact us as shareholders at all. The second taxes certain monitoring fees at 100%, effectively eliminating them. KKR does not break out the materiality of these fees, but given the employees own 40% of the firm and have over $5B of their own money invested in KKR funds, it seems unlikely that charging themselves fees is the secret sauce at KKR. The final component of the legislation would tie the debt and pension obligations back to the funds. It seems highly unlikely that this feature can be done retroactively or would apply to non-U.S. companies, but going forward it could make the more levered companies less attractive, and it could help employ hundreds of lawyers to find the workarounds. In my opinion, none of these policies should impact the flow of AUM to KKR. Clearly, having Elizabeth Warren on the campaign trail vilifying private equity funds is not ideal here, but her actual proposal is by no means a death blow to KKR. The only thing I know for sure is that nothing will happen before 2021.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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