KKR’s First-Quarter Results Beat Expectations, with Strong Core Management Fee Growth

Overview

UBS’s review of KKR’s first-quarter results highlights that despite beating expectations, the stock underperformed on the day. The report notes that underlying core fee rates exceeded market projections, and fundraising remains robust. Although equity expansion will weigh on forward EPS—particularly in 2027—UBS sees strong growth prospects and attractive current valuations, maintaining a Buy rating and raising the target price to $126.

Core views

Fundraising and Core Fees: Q1 cash inflows reached $28 billion, with credit leading at $15 billion, driven by investment-grade asset-backed financing strategies. Management remains optimistic about broad demand across credit, private equity, real assets, and wealth management. Fundraising has already outpaced the pace implied by the $300 billion investor-day target, with strong confidence for 2026. Infrastructure V is expected to close in Q2 2026, while Asia Infrastructure III and Asian/European PE funds are slated to close or launch within the next 18 months. Wealth management may slow slightly in Q2 due to tariff concerns. UBS estimates that Q1 core fee rates exceeded market expectations, supporting underlying business performance. Exit and Realization Visibility: Management projects strong visibility into future realization pipelines, anticipating over $1.2 billion in total proceeds over the next few quarters, primarily from OneStream (closing in Q2 2026), secondary sales, CoolIT, and select 2021 investments. Despite macro uncertainties potentially pushing 2026 ANI/share below the investor-day target of $7+, some realizations may be deferred to 2027. Strategic Value of Arctos Acquisition: KKR completed the Arctos deal, adding roughly $16 billion in AUM and $10 billion in paid AUM. Arctos focuses on sports franchise equity and GP solutions, with fee economics broadly aligned with KKR’s core PE portfolio (~110 bps). While financials won’t be reported separately, this acquisition expands KKR’s long-term strategic options in wealth management and beyond. Equity Expansion and EPS Impact: Following the quarter, UBS revised upward its management fee, FRE, and ANI forecasts, though these gains were offset by higher share counts. Equity expansion stems from three sources: convertible bond-to-equity dilution (an additional 21 million shares expected in Q2 2026), shares issued related to the Arctos acquisition (~6.9 million shares), and vesting of co-CEO equity incentives (15 million shares vested on December 31). Excluding these adjustments, 2026 EPS would rise by 3%, with a slight uptick in 2027. UBS raised 2026 EPS to $6.27 (from $6.20) and lowered 2027 EPS to $7.32 (from $7.60). Software and Direct Lending Risks Remain Controllable: Software accounts for about 7% of total AUM (roughly 15% within PE), with solid fundamentals and high single-digit revenue/EBITDA growth. Direct lending makes up around 5% of total AUM, with minimal private BDC exposure (~0.4%). Management emphasizes strong historical performance across all years and growing institutional interest.

Analysis framework

UBS employs a bottom-up approach to earnings and valuation analysis. For earnings forecasts, it starts with core management fee rates, fundraising progress, and realization pipelines—key business drivers—to derive FRE and ANI projections, then incorporates equity adjustment effects (distinguishing between convertible bond dilution, merger-related share issuance, and equity incentive vesting) to arrive at diluted EPS estimates. For valuation, UBS combines P/ANI multiples (adjusted net income multiple) with SOTP segment-based valuation. This time, the target price was raised from $113 to $126, primarily driven by increased valuation multiples: P/E rose to 17x, and FRE multiple to 21.5x. Additionally, UBS introduced FSR (forecasted stock return) and MRA (market return assumption) comparisons to anchor ratings; KKR’s projected stock return of 24.4% significantly exceeds the market return assumption of 8.9%, supporting the Buy rating.

Methodology notes

• Valuation MethodSOTP Segment-Based Valuation

  Segment-based valuation method

  A technique that values each of the company’s business segments separately and then sums them up. In this case, UBS combined the P/ANI multiple approach with SOTP to reflect KKR’s diverse business lines—such as PE, credit, and real assets—each exhibiting distinct growth characteristics and profitability profiles.

• Valuation MethodPE/PEG valuation

  Price-to-Earnings (P/E) valuation

  A method of assessing valuation by dividing the stock price by earnings per share. UBS noted that KKR’s P/E based on 2027 expected EPS stands at 13.9x, deeming it attractive relative to its growth prospects, and raised the target P/E multiple to 17x to boost the target price.

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  The gap between surface-level results and core fundamentals

  UBS pointed out that Q1 included a significant catch-up fee component, which may have caused some investors to question the sustainability of the results; however, deeper analysis revealed that core fee rates actually exceeded market expectations. This reflects an institutional analytical perspective that seeks to identify expectation gaps between superficial data and underlying trends during earnings commentary.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• KKR & Co. Inc (KKR.US)

  Core subject of the report, rated Buy by UBS

  Strengths

  Core fee rates better than expected, strong fundraising momentum exceeding targets, high visibility of realization pipelines, strategic options unlocked by Arctos acquisition, controllable risks in software and direct lending

  Weaknesses

  Equity expansion (convertible bond dilution, merger-related share issuance, CEO equity vesting) weighs on forward EPS; 2026 ANI/share may fall short of investor-day targets

  Comparison

  Q1 stock price dropped 1.3%, while peers in alternative asset management averaged a 1.9% gain, lagging behind industry peers

  Risks

  Complexity of company-specific valuations, insurance returns and interest rate risks, market sensitivity, competition, regulatory challenges, and difficulties in forecasting and valuation

Key data

• First-Quarter Cash InflowsUS$28 billionIncluding US$15 billion in credit, led by IG ABF strategy
• Additional AUM from Arctos AcquisitionApproximately US$16 billionIncludes about US$10 billion in paid AUM, focusing on sports franchise equity and GP solutions
• Projected Total Realization Proceeds Over Next Few QuartersOver US$1.2 billionSupported by OneStream, secondary sales, CoolIT, and other investments
• 2026 EPS Forecast (UBS, Diluted)US$6.27Previously US$6.20, raised by about 1%
• 2027 EPS Forecast (UBS, Diluted)US$7.32Previously US$7.60, lowered by about 4%, mainly due to equity expansion
• Target PriceUS$126Previously US$113, based on 17x P/E and 21.5x FRE multiples
• Forecasted Stock Return (FSR)24.4%Includes 23.6% expected stock price appreciation and 0.8% dividend yield, far exceeding the 8.9% market return assumption

Impact & implications

The report concludes that although equity expansion temporarily pressures EPS, KKR’s fundamentals remain sound, with improving core fee rates and robust fundraising laying the groundwork for future growth. UBS anticipates that as exit activities gain momentum, the stock could see revaluation gains within the year. While the Arctos acquisition may not show significant financial impact, it strategically opens new avenues for long-term growth in wealth management and sports assets. Risks associated with software and direct lending remain manageable and do not pose systemic threats to the overall portfolio.

Risks

• Complexity of company-specific valuations
• Insurance returns and interest rate risks
• Market sensitivity
• Competition and regulatory risks
• Challenges in forecasting and valuation

What to watch

• Progress of Infrastructure V fund closing in Q2 2026
• Whether the slowdown in wealth management due to tariff concerns in Q2 2025 will persist into Q2 2026
• Actual pace of equity expansion, particularly convertible bond-to-equity conversion (21 million shares expected in Q2 2026) and CEO equity vesting on December 31 (15 million shares)
• Status of realizing over US$1.2 billion in total proceeds over the next few quarters, especially final execution of deals like OneStream and CoolIT