Q3 2019 Earnings Call
Ladies and gentleman. Please stand by your conference will begin momentarily, ladies and gentlemen, please standby. Thank you for your patience.
Ask a question. Please press star one on your telephone keypad.
And to.
Oh, so to ask a question we ask that you limit to one question with one follow up.
So this call with me recorded I would now like to hand, the call over to Craig Larson head of Investor Relations for KKR Fracked. Please go ahead.
Thanks norm.
Welcome to our third quarter 2019 earnings call. Thanks for joining us as usual I'm joined by Bill Janetschek our CFO .
It's gotten a little or co president and co COO.
We'd like to remind everyone that we'll be referring to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release, which is available on the inventor Investor Center section at <unk> Dot Com and.
And the call will contain forward looking statements, which do not guarantee future events or performance. So please refer to our FCC filings for cautionary factors related to these statements.
Unlike previous quarters. We've also posted a supplementary presentation on our website that we'll be referring to over the course of the call.
And I'm going to begin by referencing pages to amsthree that deck.
In summary, we're pleased with our fundamental and how we're positioned looking forward.
Focusing on page two of the deck. Most importantly, the earnings power. The from continues to grow nicely as can be seen by the charts on the left hand side of the page.
Our aim is now 208 billion.
Well book value was $18 in 22 cents per adjusted share.
As you know, we're big believers in the power of compounding and we've been seeing that power through our book value.
Over the last year book value per share grew 9% well ahead of equity and fixed income indices.
And over the last three years Weve compound at book value per share 15% each year.
Although paying out dividends along side of this.
Looking at the top right hand chart on page two.
Management fees have grown steadily up 16% year over year on an LTM basis due to asset growth. In addition to a modest increase in the blended management fee rate in both private markets and public markets [laughter].
And after tax distributable earnings totaled one and a half billion for the trailing 12 months.
It's worth noting that strong investment performance has helped drive a 46% increase in the net unrealized carry figure on our balance sheet year to date, despite generating over 800 million and realize carried interest over the nine months.
This increase in the net unrealized carry balance should bode well over time in terms of realized carry and in turn our distributable earnings.
Turning to page three of the deck, you'll see some additional detail on our financial results and.
And please remember as you look through these that we do include equity based compensation charges within our operating expenses as well as within our after tax distributable earnings as we report our results.
After tax de he came in at 389 million for the quarter or 46 cents on a per adjusted share basis.
Our compensation margin came in right at that 40% level.
Pretax distributable operating earnings margin was a healthy 51%.
Fee related earnings for the quarter with 250 million and on an LTM basis, our 1.1 billion.
As we evaluate our performance there are five things were focused on.
We need to generate investment performance raise capital.
Find attractive new investments.
Monetize existing investments and finally user model to capture more economics from everything that we do.
I'll, let the euro progress on the first two and Bill will cover the remaining three.
Let's start with investment performance I'll be referencing pays for the deck.
So beginning with private equity the private equity portfolio in its entirety appreciate at 12% over the trailing 12 months.
This compares favorably to the M. A C out world that appreciate it 2.4% on a total return basis.
Where we saw notable performance was in our flagship private equity funds as you see on the page.
The blended performance across these funds.
These are our more recent vintages that have been investing for at least two years.
It was quite strong appreciating, 26% driven by Asia three.
Our flagship real estate and infrastructure funds appreciated 21, and 9% respectively.
Well the commodity environment pressured our benchmark energy fund energy income and growth declined 15% on an LTM basis performed well ahead of its benchmark.
And credit or alternative and leverage credit strategies at both appreciate at 4% on a blended basis.
Turning to fund raising capital inflows total 5 billion in the quarter and 29 billion over the last four months.
We held the first close in the successor to our technology growth strategy and had inflows across our European P E real estate credit and it back strategies as was the number of credit strategies, including silos and leveraged credit.
Capital inflows are the trailing 12 months have contributed to 57 billion of dry powder at quarter end.
Importantly, we also have approximately $20 billion of capital commitments have become fee paying when they are either invested 400 their restaurant Besson period at a weighted average rate of around 110 basis points, providing directly out of sight towards future management fees and with that I'll turn it over to bill.
Thanks, Craig I'll start with the third thing, we need to do well, which is invest in new opportunities.
Deployment this quarter in public markets was 2 billion largely coming from a private credit strategies.
Year to date public mortgage deployment, it 6 billion up over 20% compared to the first nine months of 18.
The private markets, we invested 2.4 billion in the quarter driven by private equity investments in Europe , and the U.S. In addition to 400 million across our real estate strategy.
Through the first nine months to 2019 private markets Deflating. These 10 billion.
Up 8% year over year.
Now, let's turn to monetization activity in the quarter.
As reported in our monetization update in late December activity. This quarter was driven by both strategic transactions in secondary sales.
We had just over 500 million of realized carried interest in investment income this quarter.
We had our final I did in the quarter in both PR Ray health and National vision at a blended multiple of five times our cost.
And we're beginning to see realized carry from public markets with 15 million in Q3, and 10 million last quarter.
Finally last thing we need to do well is huge our model to capture greater economics for our investors and the firm.
Capital markets this quarter transaction fees totaled 84 million.
Now periodically will have transactions that can lift capital markets be in a quarter.
We had two of those in the third quarter of last year that contributed over 100 million.
We didnt have any transactions that this side this quarter.
<unk> fundamentals remain quite healthy.
These this quarter, we generated across approximately 50 transaction.
25% of revenue in the quarter and year to date came from third parties.
And a little over 40% of revenue this quarter was generated from outside the U.S.
And year to date that percentage is 55%.
So we can keep continuing to see diversification across the capital markets platform.
Finally, let me give you a little color on monetization activities as we stand here today.
Transactions that have closed or have been signed and are expected to close should contribute 925 million and realized carried interest and realize investment income in Q4 19 were early 2020.
Oh that 925 million, we expect 375 million to close in Q4, and it's only the end of October .
Turning to page five to supplement you'll see a summary of our core fundamentals across the five categories.
The power of a model is evident in our result, and we're quite pleased with the momentum were seeing.
And with that I'll turn it over to Scott.
Thanks Bill.
And thank everybody for joining our call.
Our results this quarter are straightforward, so I'm going to be brief.
Last quarter I discuss the powerful combination of more mature track records and an expanding investor base.
As a reminder, 18 of our current 22 investment strategies were launched in the last 10 years and in our experience. It takes about a decade to start to achieve scale.
So we have a lot of growth ahead.
But it is also important remember that as we were building new investment businesses over the last 10 years, we've been simultaneously building our distribution capabilities.
The results have been encouraging with our investor base growing from 275 investors 10 years ago to over thousands today.
But we still have a long way to go.
We see an opportunity to expand distribution to all channels institutional insurance and the retail in high net worth market.
As we continue to generate investment performance mature our track records expand or distribution footprint and create new products, we see significant growth ahead.
I want to put this in perspective.
Please take a look at page six of the supplement.
There you will see that our management fees have grown 50% over the last three years from about $800 million to 1.2 billion.
Over the three years organic new capital raised exceeded $90 billion.
This was done with a significant number of first time funds.
And a young distribution effort.
Now look at the right hand side of the chart.
This shows the strategies, where we expect to be fund raising over the next three years.
You will see the list includes our three largest funds EGP Americans P E and global infrastructure.
Which aggregated $30 billion in their last vintage.
But it also shows there is over 20 other strategies, we expect to have in the market.
So given whats coming to market plus or ongoing distribution efforts.
If the fundraising environment cooperates and we continue to perform we believe we can grow our management fees by at least 50% again over the next three years.
With that we're happy to take your questions.
Thank you as a reminder, ladies and gentlemen to ask a question. The star one two movies. So from the Q. It's pound key we ask that you limit yourself to one question with one follow up our first question comes from Alex Blostein of Goldman Sachs Lightness open.
Hey, Greg Good morning, guys I'm, just talking maybe on the last point that you mentioned starting on slide six a definite encouraging to hear the 50% management fee growth over the next three years, but how should we think about the incremental margin.
On on that growth given the fact, so much of the investments I guess are already in place.
Thanks for the question Alex to be clear just I sit at least 50% is what were.
Expecting if the market cooperates and you know I think as we've been talking about for last several years, you're right we've been investing in bringing on new teams.
And a lot of that investment was coming ahead of the revenues. So we would expect there to be positive operating leverage over that period of time.
We will continue to be making investments in a variety of new products and other initiatives for the from including building out distribution further, but even net of those new investments, we still expect the operating margin to increase somewhat.
Great. That's helpful. And then my follow up for Bill Craig.
Looking at 375, and the 925 and carried in realizing come to you guys highlighted and for Q1 then into early 2020 does that include any sort of utilization from from five serve in the margin margin loan arrangement you guys have set off or.
Any of that monetization activity will be on top of the numbers you provided.
Hey, Alex this is bill in embedded into the 925 is some portion of a than expected by Pfizer dividend in the fourth quarter, but keep in mind. That's only one monetization at of a total of 11, when I count and so when you think about that 925 million.
Two were already secondaries that had been completed which you software and one and train line, but more importantly, we have several strategic sales that had been sign that are expected to close in between now and in Q1 at 2020 and that's both in the U.S. and in Japan and Korea. So Oh.
A lot of opportunity from the monetization point of view.
Now a great Scott just appreciate the question on Pfizer because we've been getting this question a bit from our shareholders.
And I think people have noted that the merger if I sort of in first data has caused pfizer stock to increase materially this year.
To be clear from our standpoint, we think the market is still just beginning to understand the opportunity from that merger.
And we don't think the the upside is yet reflected in Pfizer stock price and so to your point, we did put in place a modest margin loan. So we could return some capital back to our investors, but keep the upside on those shares because we think theres quite a bit remaining.
That makes perfect sounds great. Thanks, guys.
Thank you.
Our next question comes from Robert Lee of KBW. Your line is open.
Great. Thanks, Good morning, guys. Thanks for taking my question.
Hey, Rob.
Hey, maybe.
Following up on kind of you know the fund raising and I know you've maybe Scott you talked about this in the past, but you maybe update us on no kind of where you're.
LP base now and maybe this success you had I've had so far on kind of getting.
Investors are invested in kind of multiple platforms I'm, just trying to see some updated numbers.
Oh sure Rob just thanks for the question look I think we continue to make good progress. So we're now a bit over a thousand investors on average the cross sells about 1.9 products per client.
But as you know when when you're meaningfully expanding your investor base that tends to happen in one product at a time. So even today, we still only have 41% of our investors that are in more than one product.
But just to give you a sense for the opportunity the top 70.
Average four and a half.
Products. So that we think there's a significant amount of opportunity not only to expand the investor base, but also further but also that cross sell statistic as we said in the prepared remark I think there's opportunity institutionally. There's also opportunity in insurance, we've gone from 8 billion to 26 billion.
From the insurance markets. Since 2015, there's also opportunity in the retail and find that works market. We've gone from 9 billion there to 35 billion.
Since 2015, and those are areas, where we we see significantly more opportunity ahead. So.
That's those are some stats for you, but long story short, we still see a lot of upside.
Great and maybe follow up for Bill a little bit of a modeling question, but in tax rate.
Pretty low and I know, it's hard to forecast quarter to quarter, but if I look at the balance sheet looks like tax act that come down pretty utilize a bunch of the tax assets. The last several quarters should.
We'd be thinking that this no changes or maybe a salary.
Path to kind of a more normalized tax rate is is that you're maybe realizing some of the assets faster.
Hey, Rob that's a good question one that we spend a lot lot of time on each quarter.
But based upon what we had originally said was where we thought that the tax rate was going to being the high single digits in walk its way all the way up to.
21% from the federal corporate level over five to 60 period, that's still going to be the case. However to your point in is it very good point to the extent that we actually have monetization that are accelerating and we're using that tax asset up in years, one and two we might act.
That's right and you could see it then go up so that's why you can see that last quarter, our effective tax rate was 15%.
This quarter for a whole host a different reasons. It was actually only 9% again I'd say, there's probably on every call. It's incredibly hard to model out, but I would I would still stick with something in probably the low teens for the next year or two but again.
Try to make sure that you have as much information as us and we'll update that number probably just about every quarter.
Great. Thanks, Phil Thanks for taking my question.
Thanks, Rob.
Thank you next question comes from Bill Katz.
Citi. Your line is open.
Hey, good morning, Thanks for taking my question.
First one would just be could you provide no performance is very strong in a quarter and a this is Ben Herbert on for Bill I'm, just maybe some portfolio company health.
Update just metrics quarter over quarter and year over year.
Yeah sure about it's a it's Scott I mean, the bottom line is it's been pretty consistent so last 12 months about 10% revenue growth and the global PE portfolio in about 10% EBITDA growth.
And it's been in that area for the last several quarters.
Great. Thank you and then a follow up would just be you know how are you thinking about the fixed dividend policy currently and I'm just kind of in light of pretty substantial cash build on the balance sheet a year to date.
No no news at this moment it did topic, we've historically address on the fourth quarter fall, but as we think about the dividend level, though remember that we have a disposition toys compounding so returning capital to invest back into from is always going to be important to us and we want to preserve flexibility through share repurchases that.
Ed we should see an upward bias to the dividend overtime.
So the punch line is taken into next quarter.
Great. Thanks for taking my question.
Thank you.
Our next question comes from Craig Siegenthaler with Credit Suisse. Your line is open.
Thanks, Good morning, everyone.
Turning.
So while it just first on easy I can you update us on your strategy to broaden out the Asia business outside of the upcoming expected raise in the Asia buyout fund, including infrastructure private debt and real estate.
Sure Scott so.
Thanks for the question you're right, there's a big priority for the from this year was expanding our our Asia platform outside of a private equity and or the.
The summary is that we're on track we have launched efforts across infrastructure real estate.
Credit and we're also going to be launching an effort and technology growth as well within the Asia focus I think for new businesses focused on Asia, leveraging the footprint. We already have so you'll see us add people, but to be able to do that but we're leveraging the team on the ground in the eight offices, we haven't read.
Okay.
Thanks, and I just a CFO question here for Bill on the Caffari math I'm, just wondering in the quarter, how much base comp and non comp expense I was allocated against investment income this quarter.
Hey, Craig it's the same methodology that we've been using you take the fee income over the total income and then you take our operating expenses backing out stock based comp and whatever that percentages is the amount allocated to fee related earnings you take it back on line is that number and that's how you that's how you get too.
The fee related earnings numbers are not nothing's changed this quarter.
Got it thanks Bill.
Thank you.
Our next question comes from my carrier of Bank of America Merrill Lynch. Your line is open.
Good morning, and thanks for taking the questions.
Maybe first just overall investment performance is strong across the board energy you pointed out.
How some of the trade concerns you impacted your performance or not in the agent strategy because it doesn't look like it has or has it increased the demand in some of the private strategies given that some of the public markets have been more impact.
Hey, Mike described section of the question, Yeah, I think when when we look at and again this is something that weve.
We've looked at very closely as as you'd expect.
And the investments we've made in China have tended to be very focused on domestic consumption.
And not I really subject to the wins of Oh trade negotiations. So when we look across the overall private equity portfolio revenues as well as cost exposure to watches in that low single digit range on both of those and I think there is a on the flip side of that.
Point, I think you're right there can be.
Opportunities, resulting from a what's going on from the trade front as it relates to investment opportunities. So I think the the overall impact on the on the portfolio is one that is.
Is one that's pretty small and at the same point, it's on a we're trying to find ways to pursue opportunities. If there are companies that.
I have decided to exit the region.
That's helpful. And then just as a follow up you guys mentioned you some of the fundraising.
In the growth equity area I, just more curious whether its investment opportunities or like fund raising traction like how that's been going with some of the recent like IPO issues relative to some of the private market that are out there in the growth space.
Look I think there there are our two aspects of that there is that the performance question within healthcare growth as well as the TMT growth and the statistics there on the first funds. This is a very positive answer.
On both of those again, where we're fundraising on CMC. So that I get you can certainly get a assessed by looking at the at the fund table for the returns that we've seen but I think it's been a very pleasant experience today as it relates to our Lps and on the IPO market question look I think.
A couple of thoughts overall first look the IPO market is marketed windows and it always has been and they're going to be times when that market feels more accessible than others. So remembering that current dynamics overall don't really feel all that out of the ordinary and when investors are pushing back I think from our standpoint.
Can be a sign of a healthy.
Functioning market I think the second point to declare the IPO window is not shot so at the end of last week, we price the IPO software one.
Our European portfolio company of ours that IPO raised approximately $700 million was a sizable IPO the book was well oversubscribed.
And the stock traded up 3% in his first day of trading so investors maybe more selective at the moment, but again the window is not shot and then Mike just add a little bit of flavor and this is not really related to the growth portfolio, but in the framework of the from overall I think when were asked about the IPO market you know the underlying question on.
Often relates to the outlook for future Monetizations and ultimately.
Whether the coverage there and if we're going to be able to generate future dee.
And from that standpoint, what's a bigger factor here actually isn't the IPO market remember, we're typically not selling stock in an IPO.
It's the significance as well as the performance of the public holdings as a whole.
So from that standpoint, you know the public's are about 25% of the PE portfolio as a whole year to date. The public's are up 45% said performance has been very strong.
Now at a statistic like that as I was going to be helped in the largest holding is up over 80%, but just to be clear performance is actually quite broad. So if you take first data five survive that math the public's are still up 27% cert on Saturday. So again performance overall has been has been quite good.
The only thing I would add Mike is the only thing I would add is that we have we have seen some pushback on a couple Australian IPO spud to greg's.
Point, though it's a global market and you know I wouldn't extrapolate from that.
There was a positive to the extent, we do see the IPO market difficult probably means it's less fun to be a public company and so that's me there's more investment opportunities for us across the firm.
All right. Thanks, a lot.
Thank you.
Our next question comes from Glenn Schorr of Evercore. Your line is open.
Hello them.
Might be related to mikes question.
If you look at your macro team the great Henry <unk>.
If you looked at their outlook of something.
Whether it be Oh, one like resets and formally or something like a slowdown in 11 12.
His comments are interesting about a tipping point underscoring.
That low interest rates are not going to be the held pretty the credit creation or equity valuations. So this along with <unk>.
Lead up to the question of how does that.
Factor into both your capital deployment of capital markets activity.
I'll do my follow up separately.
Oh, thanks fun.
Thanks to get fixed forgiving in not to the great. Henry Mcveigh I will I tell you here's what we're saying I'd say, we see an basically up.
Industrial recession, we think now in the U.S. in Europe to great extent.
Consumer and services look okay.
We're watching the data closely so to be clear where.
We are expecting or whatever is coming to be kind of more of a normal recession.
But we're seeing a bit of a rolling recession right now, we believe really starting with a with the industrial sector.
Yes in Europe Asia is a bit of a different story.
So we do see opportunity coming out of all of this but as we think about.
To your question on deployment as we think about how to invest into it what we're seeing is there's more volatility in the market.
There is more dispersion in the market.
So we continue to see a have have not [noise].
Market and to some extent of have have not economy and so as a result of that you know where we're spending time is where.
The market is.
Undervaluing companies. So we're finding complexity as punished any change in outlook is punished in the market overall is quite skittish.
So what we're seeing as a result of that is.
It's a five foot level, where we operate.
It was more interesting companies going private there's interest from companies that want to make themselves simpler. So they are selling noncore assets. That's a global trend. We continue to see our strategy continues to be by complexity and sell simplicity and we think thats a strategy that works as we go into this.
Of the cycle, which we think it's going to be far more of a normal recession than what happened last time.
Very clear thanks, just a quick follow up when you look you talk about the statistics that you mentioned earlier on the penetration rates in the number of products.
I'm curious about.
How you relationship management function is going to change to improve those numbers and sell into your current LP base, while you have 20 plus.
New strategies being rolled over then or or raising capital some of them brand new over the next three years like in other words, you raised 94 billion in the last three years should we be thinking semi study markets. That's a lot more over the next three years, given all the additional strategies and the penetration rate efforts.
Well I think if you look at the last three years.
We did not have the the big three funds that I mentioned in his on the right hand, upper right hand side of slide six in the market in the way we will over the next three.
So that's the first thing I would say so all else equal you would expect that to have a positive bias on that 90 plus billion dollar number and you're right on the bottom right hand side. There was more strategies than we had the last three years as well. So I think what we're saying to you is all else equal you know, we would expect to exceed that number on a on for the next three years.
If the market if the market cooperates.
I think in terms of your question about relationship management part of that is that our relationships can team continue to mature.
And broaden.
And we actually have a an approach from a marketing standpoint, where the relationship management team. The calls on an investor actually is calling with all KKR products in their bag and then there's supplemented by product specialists that can help go deeper on any individual fund or strategy.
And so we think we're set up to be able to increase our cross sell stats because you don't have that five to take care of people be successful in one client you need one to build trust and then to deliver the rest of the phone.
I think Glenn if you think of the way that works day to day, so for our first 35 years.
We probably only had a dialogue with a handful of people.
<unk> pension plan and that was primary private equity focused and if you think of our team now.
That dialogue will have expanded to the liquid credit.
Professionals, the alternative credit professionals within real assets infrastructure real estate credit and equity energy et cetera, and at the same time, having a dialogue.
Above that with the CIO as it relates to potential partnership opportunities. So I think theres an aspect to that that actually as Scott said building like interest in that cross sell focus is something that when it works can happen very nationally.
Yeah, I think the other thing that's it's hard to give you a number on this one but I think is a positive bias back to the points I made about insurance in retail.
Kind of four years ago, roughly 17 billion of U.M. now 60.
And we continue to invest in distribution in those areas and I think hopefully that's a.
Positive bias to the numbers as well.
Thank you pretty soon.
Thank you. Thank you.
And our next question comes from Patrick Davin Autonomous your line is open.
Hi, Good morning, guys how are you.
Hey doing.
Good just to double check the 375 are you expecting the fourth quarter would that include kind of the normal pop in.
The normal for Q pop in public markets incentive fees.
No. So that does not include incentive fees. It all what we're talking about is real realized carry him realized balance sheet income.
Nothing do with incentive fees.
Awesome. Thanks.
Then on the I guess flagship private equity LTM performance you I think you highlighted Asia three is being a big driver of that.
I guess could you kind of walk there maybe some more specifics into what drove such a big move in that number from last quarter.
Patrick It's it's really broad broad performance across the portfolio, but the I think the broad trends, we're seeing within Asia.
Continues and again the experience without these continues to be one I think thats very positive.
And that number is as a whole.
As it relates Asia three specifically.
And Patrick one other thing to keep in mind, when you're thinking about going from the second quarter to third quarter in that big pop when I was talking earlier about the 925 million to come either in the fourth quarter over the first quarter.
Three of those physicians worst strategic in Asia, three and so we had them properly marketing from a valuation point of view, but we get a little better on each of those exits and that's what actually really drove the big increase any any IR quarter over quarter.
So if the that 26% you're showing includes Fourq you 18, it's fair to assume that's probably going to come up pretty significantly again when that rolls off.
No.
What happened from an IRS perspective, Patrick is that much.
As we got close to those strategic sales happening that was embedded into valuation that we've done as of September thirtyth and so you actually so where some of the uplift in those positions in the third quarter, so on a mark to market basis.
A good amount of it but not all of it is embedded in evaluation.
That being said the monetization wells it will take place in the fourth wondering first quarter.
Okay I get that I'll follow up later, thank you.
Thank you.
And our next question comes from Michael Cyprys Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question just curious your perspectives on purchase price multiples today on a new transactions as we look across the industry I think on average we're seeing new deals at around 11 times EBITDA in terms of purchase price multiples, which is a little bit above where we were pre crisis with some folks site as a risk here late cycle, but arguably the mic.
Excellent growth profile or perhaps a little bit different today. So just curious your perspective looking on per though there on that for the industry and then also for Kicky our specific.
Yeah, Mike Let me, let me start there and then Scott to Bill May chime in but I think one of the thing that's interesting when you look at private equity deployment.
As you look we continue to see more dislocation.
More opportunity in better risk reward outside of the U.S. and part of that is exactly what you're talking about which is valuation related. So if you look at total returns over the last five years returns for S&P has more than two X out of of the MSC Asia Pacific and so overall, we are seeing greater value overall in the region.
And so if you look year to date in terms of investment activity again, it's interesting, but dollars invested in Asia together with Europe are actually over two and a half at two and a half times that of the U.S.
And again I think what you're seeing is is given overall valuation levels, a pretty disciplined approach as it relates to U.S. investments most specifically.
And just give you a little more color on the 2.4 billion that we've invested.
Glitter and private market.
400 million was was in the U.S. and so to Craig's point, a majority of the capital that would deploying right now is certainly outside the U.S. and when you look into whats in the pipeline right now on transactions that assign but yet to close on the buy side again the amount in certainly U.S. private equity is.
Small component of the capital that we're deploying.
Great just as a quick follow up question, maybe just on the comp ratio curious your latest thinking around that I think was around 40% under in the quarter at a time when the realizations were a little bit higher off the balance sheet.
So just curious given the 50% growth the management fees are expecting over the next three years, how would you expect the comp ratio to trend from here.
And Michael a this is bill I'll Echo what Scott said earlier.
As we continue to grow the platforms and as we continue to raise more capital and to the extent that those management fees go up you will see margin improvement that being said when you look at where we are in 2019, probably early part of 2020, we had a lot of.
R&D going European now as we continue to expand and a lot of the platforms, especially in Asia. So I would say that at 40%.
Ratio that was reported in the third quarter is probably going to be close to that.
Certainly the next couple of quarters, but again as we continue to grow our business you do we'll certainly be operating improvement and you should see margin expansion.
Thank you.
Thank you.
Thank you and our next question comes from Chris Harris of Wells Fargo. Your line is open.
Thanks, guys.
For the flagship funds to be launched over the coming 12 months I just want to clarify does that mean, when you expect to start to fund raising or when those funds could potentially go lives.
So I think will.
Launch all three of those in the coming or 12 months, Chris and then the question in terms of when they're going to be turned on is ultimately going to be a deployment question.
And so we'll have to we'll have to play it by year. So I think in terms of of your of your models as you think over the next 12 to 18 months again knock on wood should be helpful. From an anyone's standpoint, and then the fee paying aspect will depend when those ones get turned on but just to be clear, Chris I think the expectation we shared with you.
For in terms of the trajectory for management fees incorporates when we expect them to turn on.
As opposed to when they're good dollars are raised just when they hit revenue.
And the ones that will be about those three large flagship funds that were talking about the management fees get turned on based upon [noise].
Committed capital and not invested capital.
Got it okay.
Just a quick one on the quarter.
What drove the upside to the guidance you previously gave on gross carry unrealized investment income.
Feet between the time, we actually send out the press release at least for which was probably a week before quarter end. We ended up having some activity that was unknown to us that week earlier and so.
Got it is nothing but good news.
Okay, great. Thank you.
Sure.
Thank you and our next question comes from Devin Ryan of JMP Securities. Your line is open.
Great Good morning, everyone.
Accordingly.
Just a follow up on some of that commentary on the distribution investments, you're making you spoke a I get to some of the specifics on institutional side, but you alluded to and I guess, it's referenced investments on the retail and high net worth the effort. So I'm just curious what specifically incremental there I guess reading between the lines it sounds like maybe.
There's some new initiatives that that maybe haven't launched yet or just trying to think about what exactly that is and also expectations for fund raising in that channel.
It doesn't Scott so great question. So there's two channels that we were referring to one is the insurance market.
Where we've seen a significant amount of growth and interest and what we're doing and I'd say keep it back up even to a higher level for a second.
Given we have 17 or 18 trillion of negative rates in the world.
We are seeing a number of investors in all channels.
Struggle with how to make money in this environment.
So as we travel around the world and talked a number of different types of investors.
The basic theme is it's very hard to make money in a negative rate world.
We believe we need more alternatives in order to achieve our objectives. So I'd say before this dynamic in this.
Where recent significant increase in negative rates, we had a lot of wind at our back I would say the velocity of the windows are back as an industry has only increased as a result of that dynamic as part of that.
There was the institutional piece, which we've talked a lot about historically, there's insurance, which we really began to focus on really in earnest over the course of the last four or five years.
And we're seeing significant early returns both in our regular way products, but also structured products that are packaged in a way that is easier for insurance companies to invest and so I think I think about taking a portfolio of alternatives using structure and trying to figure out how to create investment grade notes off the back of a portfolio.
Types of things that we're doing in the insurance space that we think is broadening the investor interest in what we're doing.
Aided by that overall backdrop, so that 8 billion go into 26 billion in insurance. The last four years is with just a few people in our firm focused on the space.
So the point is if we increased the staffing in that area and increase the global focus on the insurance space, We think theres significant upside for their regular way and structured.
Sure in the retail in high net worth.
With that spaces to give you a sense year to date, 22% of the capital we've raised.
Has been from the resale and high net worth market and as we've been tracking that's that over the last several years, we've kind of steadily seen that statistic go up from about 10% 15 and now the last several quarters you know in excess of 20% of the money, we're raising from retail and high net worth.
That is across virtually everything you're going to see on the right hand side of page six both individual product format and then in lot of cases, where we're.
Basically packaging several different types of strategies, together and selling into the high net worth and retail market. There again, we have a very small team internally.
Which we think with incremental investment in the size of that team that number of 35 billion a in that channel, which is up from 9 billion four years ago. We think that 35 can go up meaningfully from here.
And a lot of is just incremental staffing and incremental focus on the space at the same time, we're finding investor interest in what we do only increase.
Okay, Great color. Thanks, and then I'm just a quick follow up on.
Hey, you am today, that's above cost, but not yet paying carried interest I'm not sure if I missed it but can you just give an update of kind of where that stands and then how we should think about the trajectory of those assets contributing a period interest longer term.
David This is bill we actually put out in in the supplement in the first quarter that information its pretty much in line with where it was in the first quarter. So no new news to the extent that we see an acceleration in that number.
We'll certainly update you.
The only thing I would add Devon is last summer, we did an investor day, and Joe Bay, and I put up a slide that kind of showed that we believe were under earning our carry relative to our potential and that slide shows we've been at about 1 billion three give or take at that point of a trailing 12 months carry and we saw an opportunity for that to go.
At a $2 billion or more.
Over the next five this years and so we still think that is is the case actually we're more confident in that in that outlook today than we were last summer and even more broadly at that event, we put up numbers for book value per share and total distributable earnings out five years and 10 years.
So as a chart in there that actually lays out that a that outlook for the firm. We what we thought were pretty conservative assumptions at the time and there again I'd tell you that we're more confident and being able to exceed that outlook today than we were even if that the last summer and it just very very specifically on page 13, when you take look the investment table right now we've got.
Ah carry interest eligible.
Mandate of approximately $130 billion, that's actually up from 123 billion that reporting into first quarter and again just to give you referenced the number in the first quarter. It was about 88 billion. So 88 billion into 123 was eligible to start receiving Kerry until late life like I said that that number is.
Certainly a little north of that but.
Certainly with more capital being raised we expect that number to go up based upon obviously performance still being there.
No. Okay terrific. Thanks for all the color there appreciate it guys.
Thank you. Thank you and our next question comes from Brian Patel of Deutsche Bank. Your line is open.
Great. Thanks, guys.
Just in that most my questions have been asked but maybe just a follow up on the insurance side just in terms of that group.
I can think Scott for the comment on on sort of the efforts there.
Do you expect that to be more of a block and blocking and tackling the type of increasing penetration or or a is it possible you might.
I have some strategic agreements that could really step that insurance you know penetration up dramatically in the next couple of years.
We're pursuing both.
Brian I'd say definitely on the blocking and tackling and a number of the relationships that we've developed in the insurance space I would put more in the strategic partnership category, where now invested with us across multiple different products in scale and our cross selling statistics cross the insurance space are actually better than the firm as a whole disk.
Right that uses our relative youth of our effort in the insurance space, but I think is definitely brought blocking and tackling and we have done somebody if something's quietly on the strategic fronts.
It's also supplying the firm with a U.M. and we continue to spend time looking at doing more of those and some of them maybe modest but we're looking at some bigger moves as well far too early to be able to predict if anything happens, but I think you should expect both blocking and tackling and strategic efforts on the front.
Okay. Okay. That's helpful and then I'm just a clarification on the the 375 and then 925 that includes the device or a margin loan in Fourq, you and then into and once you in is that roughly expected to be nearly the same level as it was in threeq.
Uh huh.
No not going to really comment on very specific the granular numbers on that other than to say that did that do it will be and an additional distribution made to our Lps in order to return capital to them and in New York Shoe that is more more carry being paid to the firm as well as and balance sheet realization took I'd say there.
Those numbers include what we expect to do on the margin loan over the next few quarters did you okay great.
Great. Thank you.
Thank you.
Thank you and I'm currently showing no further questions I'd like to turn call back over to Mr., Craig Larson for closing comments.
Thank you Norma thanks, everybody for joining our call. Please feel free of course to follow up directly with any follow ups and we'll talk to you next quarter.
Ladies and gentlemen, thank you for your participation. This concludes today's conference you may now disconnect.
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