by Tim Melvin | November 22, 2013 1:51 pm
One of the most difficult investing tasks this year is finding income-producing securities that aren’t trading at elevated levels.
The unfortunate unintended consequence of fiscal stimulus programs is that income investors can no longer rely on bonds or bank-related products to meet their needs. They have been forced into the stock market in search of yield, and this has helped pushed many dividend stocks to high levels. I have increasingly advised investors in need of income to look at alternatives to traditional investments, provided by the private equity industry.
Some of the major private equity firms have developed finance companies, business development companies and REITs to provide a permanent source of capital. These entities finance some of their middle-market transactions with loans and short-term financing that produce very high yields. They also own some income-producing assets directly in partnership with their private equity parent. They are able to leverage the relationships and skill of the private equity firm into profitable deals for themselves, and the resulting income is passed along to shareholders.
Kohlberg Kravis and Roberts (KKR[1]) is one of the best and best-known private equity firms in the world today, and it has several entities that are worth consideration by yield starved investors. One of those is KKR Financial Holdings (KFN[2]), a finance company that invests in bonds, secured and senior loans, equities, oil and gas royalties and commercial real estate properties.
KFN is an early investor in a new venture by its private equity parent, Maritime Finance. Maritime Finance will invest in financing for the maritime industry including drilling rigs, development and production assets, subsea construction vessels and other traditional shipping assets. As the funds are invested, Maritime is expected to throw off high yields, which will be distributed to shareholders as part of the KKR Financial dividend.
KFN shares trade for less than book value and currently yield more than 9%.
Of course, KKR stock itself might present an interesting income-producing alternative for investors.
KKR recently changed its distribution policy and will distribute 40% of the net realized principal investment income earned quarterly, in addition to the traditional fee-related earnings and cash carried interest components previously paid. Although it will be a lumpy income stream, the firm has paid out $1.62 cents per share so far this fiscal year for a yield of nearly 7%. Last year’s distributions total 84 cents per share.
The firm has one of the best records in the private equity industry, and assets under management have grown by 23% a year for the past decade. As these assets pay off in the form of fees and investment profits, the gains will be shared with shareholders.
As of this writing, Tim Melvin was long KFN.
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