KKR: Lowering Our Fair Value Estimate on Private Credit Headwinds

Key Morningstar Metrics for KKR

• Fair Value Estimate
  : $115.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

While KKR KKR does not have as much direct lending exposure as private-credit-heavy peers Ares and Blue Owl, the alternative asset manager will not be immune to the near-to-medium-term headwinds posed by concerns about the private credit market.

Why it matters: Alternative asset managers rely on their reputation, product offerings, and investment performance history not only to raise capital, but also to maintain their standing as go-to firms for institutional and high-net-worth investors seeking exposure to the private markets.

• Managers with private credit offerings, like KKR, have been hit hard by the negative perceptions currently attached to the private credit market, brought on by peer Blue Owl’s handling of some of its private credit funds, as well as concerns that artificial intelligence will disrupt software firms—a key area of direct lending for a lot of private credit funds.
• These issues have raised concerns about liquidity for these types of funds, especially given the riskiness of their direct lending portfolios, which is likely to both affect their fundraising efforts and increase redemption requests in the near to medium term.
• While KKR’s exposure to private credit is far less than that of its peers, the company does have enough exposure to where we see it having an impact in the next several years.

The bottom line: Expectations for diminished fundraising and increased redemptions for its credit and liquid strategies segment have led us to reduce our fair value estimate for KKR to $115 per share from $140, noting that the firm garnered 48% of its fee-earning AUM and 31% of its base management fees from its credit segment last year.

• Even with the valuation change, the company’s shares remain moderately undervalued, with few catalysts that we can see to move them off their lows.
• That said, we have seen some movement in the market more recently to separate the most at-risk firms from those with less exposure to direct lending.