Falling Profit
The operation now ranks fourth in terms of profitability at the company, with a margin of 39 percent compared with private equity's 64 percent during the first quarter. The business produced $60.5 million in economic net income last quarter, about one-third of the $175.5 million for private equity.
Blackstone's credit and marketable alternative business, which comprised its fund-of-funds unit as well as GSO, increased economic net income 40 percent in 2010 to $372 million from the previous year. Private-equity profit fell by about 1 percent to $485 million over the same period. Blackstone started reporting GSO and the fund of funds separately last quarter.
KKR has been slower to diversify. The business that houses its main non-LBO operations reported economic net income of $15.9 million in the first quarter compared with the private- equity unit, which cleared $276.7 million in the period.
'Core and Heritage'
KKR Asset Management has expanded into mezzanine lending and so-called special situations in which the firm uses debt to rescue or expand companies. Through that business, headed by William Sonneborn, 41, formerly the president of money manager TCW Group Inc., KKR is also getting into hedge funds. The firm hired a group of former Goldman Sachs Group Inc. traders led by Bob Howard to pursue a long-short equities strategy that allows managers to bet on rising and falling stocks.
In real estate, KKR hired former Goldman Sachs executive Ralph Rosenberg to oversee investments. Initially, KKR won't raise a discrete real estate fund, instead opting to tap existing equity and debt funds for property deals, Scott Nuttall, head of global capital at KKR, said on a May 4 conference call.
"Private equity is our core and heritage, and it's still the biggest business, and we expect it to be going forward," Nuttall said in an interview. "It may take us longer, but our expansion will be quite sustainable."
Oregon Fund
The search for new revenue reflects the limits of leveraged buyouts as targets become more expensive and clients balk at committing new funds. The first three months of 2011 represents the fifth straight quarter without a fund closing on more than $5 billion, according to Pitchbook, a private-equity deal database.