KKR expects lower valuations for its portfolios due to Covid-19

"We have concluded that many of our investments will be reduced in value from their prior valuations," said the GP in a SEC filing. "These reductions are driven primarily by actual and expected revenue declines arising out of the Covid-19 pandemic."

KKR expects these reductions in valuation to have an adverse impact on the overall value of its investment portfolio, as well as a corresponding impact on its book value per share, accrued carried interest and assets under management. It also forecasts that some of the factors that drove these declines, particularly period over period revenue declines, will continue in the second quarter of the year.

Furthermore, the GP expects that limitation on travel and social distancing requirements will challenge its ability to market new funds and strategies.

"Fund investors may become restricted by their asset allocation policies to invest in new or successor funds that we provide, because these policies often restrict the amount that they are permitted to invest in alternative assets," added the GP.

KKR forecasts increased difficulty in making new deals and performing successful exits, due to lower valuations, decreased revenues and earnings, lack of potential buyers with financial resources to pursue an acquisition, and volatility in the financial markets.

"While the market dislocation caused by Covid-19 may present attractive investment opportunities, due to increased volatility in the financial markets we may not be able to complete those investments. Our funds may also have more limited opportunities to successfully exit existing investments, or limited or no ability to conduct initial public offerings in equity capital markets, resulting in a reduced ability to realise value from such investments."

Furthermore, KKR expects its portfolio companies to face increased credit and liquidity risk in the future, due to the limited or higher cost of access to preferred sources of funding, which may result in potential impairment of its funds' equity investments. 

"Changes in the debt financing markets are impacting the ability of our portfolio companies to meet their respective financial obligations," said the GP in the statement. "We and our funds may experience similar difficulties, and certain funds have been subject to margin calls when the value of securities that collateralise their margin loan decreased substantially."

The GP also underlined that many of its portfolio companies operate in industries that are materially impacted by Covid-19, including healthcare, travel, entertainment, hospitality, senior living and retail industries, and are facing operational and financial hardships resulting from closure of stores, restrictions on travel, quarantines or stay-at-home orders.

"If the disruptions caused by Covid-19 continue and the restrictions put in place are not lifted, the businesses of these portfolio companies could suffer materially or become insolvent, which would decrease the value of our funds' investments."

KKR also expects an increase in cybersecurity risks linked to remote working and potential loss of productivity, or a delay in the roll out of strategic plans.

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