KKR falls as BMO slashes target on private credit concerns
Analyst cuts price target 15% despite $4.75B CoolIT exit delivering 15x return
KKR shares slipped in premarket trading Thursday after BMO Capital Markets cut its price target on the private equity firm by 15%, citing growing concerns about rising defaults in the private credit market.
The New York-based investment manager fell more than 2% to $88.91, extending losses that have driven the stock down 26% over the past 12 months and leaving it trading 15% below its 100-day moving average. The decline comes even as the firm announced one of its most successful exits in recent years.
BMO analyst James McGlynn reduced his price target to $106 from $125, representing a roughly 17% upside from Wednesday's close, while maintaining an "outperform" rating. The cut reflects a broader cooling of sentiment toward private credit, a market that has attracted hundreds of billions of dollars from institutional investors seeking higher yields in a rising rate environment.
The downgrade underscores mounting pressure on alternative asset managers that have aggressively expanded into direct lending. BMO's action follows similar moves by other major firms, with Barclays lowering its objective to $127 from $136, TD Cowen cutting to $131 from $146, and UBS Group reducing its target to $125 from $168.
Despite the analyst pessimism, KKR announced a $4.75 billion agreement to sell CoolIT Systems, a data center cooling company, to Ecolab Inc. The deal, expected to close in the third quarter, will generate a 15x return on KKR's original equity investment. The firm acquired CoolIT in 2023 through its Global Impact Fund II.
The exit highlights KKR's ability to capitalize on the artificial intelligence boom, as CoolIT's liquid cooling technology reduces energy usage by 30% to 40% compared to traditional systems—making it increasingly valuable for energy-intensive AI data centers. All 650 CoolIT employees will receive cash payouts linked to their ownership stakes, with compensation ranging from one to more than eight years of annual pay.
The stark contrast between a celebrated investment exit and analyst downgrades illustrates the challenges facing the alternative asset management sector. Private credit, once hailed as the industry's growth engine, faces questions about loan quality as economic growth slows and interest rates remain elevated.
Technical indicators paint a mixed picture. KKR's Relative Strength Index stands at 38.8, approaching oversold territory, suggesting the selling pressure may be overextended. However, the stock remains well below key resistance at $90 and could find support around $82.50, according to technical analysis.
Notably, company insiders have been buyers rather than sellers during the decline. In the past 90 days, insiders including chief executive Joseph Y. Bae have purchased approximately 393,872 shares worth about $40 million, boosting insider ownership to 23.2%. Bae personally acquired 125,000 shares, while director Matt Cohler bought 43,872 shares.
The analyst consensus remains positive despite recent cuts, with 19 firms rating KKR a "buy" or "strong buy" versus two "hold" ratings and no "sell" recommendations. The average price target sits at $149, implying significant upside from current levels even after the downward revisions.
KKR's current valuation reflects some of these concerns. The stock trades at 38.9 times trailing earnings, a premium to many traditional asset managers, but its forward price-to-earnings ratio of 13.7 suggests earnings growth could support a higher multiple if the firm can navigate the private credit headwinds successfully.
Investors will be watching KKR's next earnings report closely for signs of stress in its credit portfolio and management's outlook for deal-making in what has become an increasingly cautious market environment. The firm's ability to continue generating returns like the CoolIT exit while maintaining disciplined risk management will be crucial to regaining investor confidence.