More Videos:

Rising Expectations for KKR Amid Energy Future Bankruptcy Talk

Tickers in this article: APO AVGO HCA KKR NLSN SYY

NEW YORK ( TheStreet) - Private equity manager KKR may see its share of negative headlines as one of its investments, Energy Future Holdings , the biggest buyout in the history of the private equity industry, hurdles towards bankruptcy. Energy Future's troubles aside, one stock analyst believes KKR is undervalued and that returns from the firm's flagship 2006 fund may translate to gains for the firm's shareholders.

Oppenheimer analyst Chris Kotowski wrote in a recent report that he believes, despite KKR's "black eye" of a buyout in Energy Future, the firm's other investments in its 2006 flagship fund have performed strongly, raising opportunity for public shareholders.

"There are a good many investments in this portfolio that have the ability to appreciate further. We don���t want to put too fine a point on it, but it's pretty easy to see where you could get another 5% or 10% more appreciation from here," Kotowski wrote in a note dated March 6.

Kotowski calculates that if KKR's 2006 fund were liquidated at current prices, it would generate 89 cents in earnings for public shareholders, and notes that KKR's history for conservative investment raises the prospect of additional earnings.

"Some like First Data and Samson seem to be works in progress where markdowns have been taken, but KKR seems to be working the situation. Others, like Capsugel, Biomet and Go Daddy, seem like companies that are well positioned to grow," Kotowski said of yet-to-be-realized KKR buyout investments that may eventually provide earnings for public shareholders.

Publicly traded alternative asset managers such as KKR, Blackstone Group , Apollo Global Management , and Carlyle Group derive their earnings from annual management fees on the assets they manage. The PE firms also generate earnings from the value of residual interests they hold in their funds, which now span private equity, distressed debt and other host of other alternative assets.

Rising assets under management provides shareholders in PE firms with some reliable earnings streams, however, it is the prospect of realized and unrealized gains from fund investments, or so-called 'carry,' that often drives the shares of PE firms.

Over the last 12 months Blackstone Group and Apollo Management have seen their shares rise over 80% and 40% respectively as both PE firms realize many of their largest investments like Hilton Worldwide and LyondellBasell .

In 2013, Apollo Group accounted for over 10% for the private equity industry's fundraising and investment realization activity, capping a banner year for the Leon Black run firm. 

Kotowski, the Oppenheimer analyst, now foresees the prospect that 2014 is KKR's year, given many of its yet-to-be realized investments. That comes even as KKR's biggest-ever investment faces a rising prospect of bankruptcy, according to media reports of restructuring talks. Warren Buffett, an Energy Future bondholder, recently expressed little hope that the company would be able to avoid a default.