Adds CFO quotes paragraphs 4,5, co-CEO quote paragraph 12,13, analyst comment paragraphs 9,10

By Isla Binnie and Niket Nishant

NEW YORK, July 31 (Reuters) - KKR KKR.N executives said strong momentum in their business gave them confidence on Thursday of beating earnings targets for 2026, after the investment group reported higher second quarter profit bolstered by an increase in fee-related earnings.

The New York-based firm and its peers have seen the traditional private equity model of buying and selling companies face headwinds as high interest rates hampered divestments, and this year President Donald Trump's trade war froze some deals.

But investors have expressed more optimism in recent weeks and market activity has picked up, including a handful of initial public offerings. KKR and its peers are also branching out into different asset classes including credit and asset-backed finance.

"Our team remains very excited around the business momentum we are seeing across the firm," KKR Chief Financial Officer Rob Lewin said.

"As you look at 2026, as a management team, we look at that portfolio, we look at our $350 million of operating earnings guidance for next year, and we feel really good in our ability to beat that."

Last week, the world's biggest alternative asset manager Blackstone BX.N said it expects a revival in deals and IPOs.

KKR on Thursday reported 9% growth in adjusted net income to $1.1 billion, or $1.18 per adjusted share, ahead of an LSEG SmartEstimate of $1.13 per share. It said the earnings were supported by growing management fees and its capital markets business.

Its shares retreated to trade 1.4% lower in morning trading, while the S&P 500 benchmark index .SPX was up 0.5%.

Some of the share price reaction could be due to the fact the stock is relatively expensive, analysts said.

"KKR's shares are slightly to modestly overvalued relative to our current and revised fair value estimate," said Greggory Warren, an analyst at Morningstar.

VOLATILITY

Market volatility was high in the quarter, stemming from Trump's pledges to impose tariffs on trading partners around the world. Fee-related income, however, can provide money managers with stable earnings when markets are turbulent. Large firms like KKR also benefit from having diversified portfolios.

Co-Chief Executive Scott Nuttall said volatility creates investment opportunities. He added that 80% of earnings came from recurring revenue streams.

"The commentary makes it sounds like business is very difficult, the results and our experience speak otherwise," Nuttall said.

KKR's assets under management now total $686 billion, a 14% annual increase. It raised $28 billion in new capital, less than the $30.5 billion it had hauled in during the first quarter.

KKR made a raft of announcements in the days before the earnings. It acquired HealthCare Royalty Partners, which buys rights to the royalties flowing from pharmaceutical companies' drug sales, and announced an investment of almost $4 billion in a data center development in Texas with Energy Capital Partners.

KKR also teamed up with Capital Group to seek SEC approval for a fund that blends public and private equity, looking to capitalize on rising demand from wealthy retail investors.

Separately, KKR said it had raised $6.5 billion to invest in asset-backed finance. It said this fund will focus on opportunities to buy debt similar to the deal it and PIMCO struck with motorcycle maker Harley Davidson HOG.N.

(Reporting by Isla Binnie; Editing by Edwina Gibbs and Elaine Hardcastle)

((isla.binnie@thomsonreuters.com; Reuters Messaging: isla.binnie.thomsonreuters.com@reuters.net/))