KKR: Profits in private equity
Big money can be made investing in non-public corporations via such firms.
Private equity is capital that is invested in companies that are not publicly traded -- private corporations that have not gone public or have not been bought out by bigger companies.
Private equity investing is where the big money is often made. Luckily for us, a few private equity firms are publicly traded. One of our favorite private equity companies is Kohlberg Kravis and Roberts (KKR).
Like hedge funds, private equity firms have flexibility to invest in business development companies, residential and commercial real estate and senior floating prime rate loans and other forms of credit. Right now, many of them are buying foreclosed properties in California, Arizona and Florida -- and making a bundle.
Based in New York and managed by billionaire Henry Kravis's firm, KKR specializes in investing in high-yielding corporate bonds (often mislabeled "junk" bonds), real estate and natural resources.
KKR just posted its fourth-quarter results and they are spectacular. Co-CEO Henry Kravis stated, "Our private equity portfolio and our balance sheet both appreciated 24% in 2012, outperforming the S&P 500 and MSCI World indices by over 700 basis points."
KKR also reported a record quarterly distribution of 70 cents per share, paid on Valentine's Day. That payment is more than double the 32 cents that the company paid a year ago.
Kravis added, "In 2012 we completed transactions that returned over $9 billion to all investors in our private equity funds and co-investment vehicles, the highest figure in our 36-year history, and contributed to a record annual distribution of $1.22 per common unit."
Based on the past four dividends, the annualized yield is 7.8%. Going forward, KKR could pay out 10% during the next four quarters. It is no wonder investors can't get enough of KKR.
I still think KKR is undervalued, based on its expected dividend yield (10%), its price-to-earnings ratio (7-8) and its price-to-earnings-to-growth (PEG) ratio (0.17). Anything less than 1 is considered an excellent PEG ratio.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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