Q4 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily. Thank you for your patience Sam Please standby.
[music].
During today's presentation, all parties will be in listen only mode.
Following management's prepared remarks, the conference will be open for questions.
Ask a question during this session you'll need to press Star then one on your telephone.
Please be advised to today's conference is being recorded if you require any further assistance. Please press star then zero.
I'll now hand, the call over the Craig Larson head of Investor Relations for KKR Craig. Please go ahead.
Thank you Crystal.
Welcome to our fourth quarter 2019 earnings call.
I'm joined this morning, much got level or co president and co COO.
The first time on one of these calls I'm pleased to be joined by Robert Our CFO.
You know Rob was named CFO in connection with Bill Janetschek retirement.
We'd like to remind everyone that will refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release, which is available on the Investor Center section at KKR Dot com.
The call will contain forward looking statements, which do not guarantee future events or performance. So please refer to our actually see filings for cautionary factors related to these savings.
Unlike previous quarters, we've also posted a supplementary tack on our website that we'll be referring to over the course of the call and I'm going to begin by referencing pages, two and three of that Doug.
[music] focusing first on page two.
Most importantly, the earnings power of the from continues to grow nicely as you can see from the charts on the left hand side of the page our AG. When is it 218 billion while book value is $19 in 24 cents per adjusted share.
As you know, we're big believers in the power compounding and we've been seeing that power thread book value over the last year book value per share grew 24%.
That's what are the largest increases we've seen over any 12 month period as a public company.
And over the last three years, we've called out of book value per share 17% each year.
Remember in addition to this compounding dividends are being paid out along side.
Looking at the right hand chart on page two management sees management fees have been growing steadily up 15% year over year, given our asset growth.
And after tax distributable earnings totaled 1.4 billion for the trailing 12 months down from last year, partly due to realize gains being lower in 2018.
Robin Scott or both kinda talk about our visibility here in a few minutes.
Page three of the supplements the supplementary data provides a snapshot some of our headline numbers for the quarter as well as for the year.
After tax distributable earnings came in at 375 million for the quarter or 44 cents on a per adjusted share basis fee related earnings for the quarter or 271 million in on a full year basis were just over a billion.
Year over year are 80, when and fee paying a when were up 12% and 14% and both increased 5% compared to 930.
Looking at organic fundraising activity, we had our most active fund raising quarter of the year in Q4, it driven by number of our younger platforms and strategies private markets. We held the first close in our Asia infrastructure strategy and had inflows across for real estate strategies. We also raised capital for the sake.
Second interpretation of our next generation technology growth strategy.
Our final close here early in 2020. This second fun is over three times the size of the first.
In public markets, we raised in Australia enlisted permanent capital vehicle.
So inflows into several credit products, including our leverage credit in CLL businesses.
And also of note during the quarter, we closed on the final 5% of our partnership with Marshall Wace, bringing our total ownership to 40%.
Since we announced the first step of our partnership here in September 2015, you ended Marshall Wace has increased from 22 billion to $45 million.
And from investing standpoint, Q4 was our most active deployment quarter 2019.
We invested over $4 billion in both private and public markets.
In private markets investment activity reflects really two things the global nature of our footprint.
As well as the increasing diversification diversification across our strategies.
From an equity investment activity was mostly out of Europe and Asia. This was true in the fourth quarter as well as for the year.
Investment activity outside of private equity continues to grow and significance.
P.E. represented a little less than half of the four and a half billing of capital invested in private markets, where the quarter.
And a little more than half of the 14 billion of capital invested over the year.
As our core equity infrastructure real estate and growth equity platforms are scaling you're seeing the impacted this through the deployment triggers.
Public markets investment activity also exceeded 4 billion in quarter with activity here driven by your opportunities in our private credit business in the U.S. as well as Europe.
And for the year public markets deployment was 10 billion.
An increase of 45%.
As with private markets as our credit platform to scaling you're seeing the impact of that through these deployments statistics.
And with that I'm pleased to introduce every one to roblin.
Rob Joint Kicky, our 16 years ago and for the first half of his career working our private equity business as an investment professional both here in the U.S. as well as in Asia and for the second half of his career when Rob and his family returned to the U.S.T. cell the series a position across our other businesses go heading kicky, our credit and capital markets.
And also serving as our treasurer and head of corporate development.
Most recently, Rob as head of human capital and strategic talent for us.
Rob.
Thanks, a lot Craig and Hello, everyone. It's a pleasure to be on the call. This morning, and I hope to have the opportunity to meet and yet no. Many of you over the months and quarters ahead.
I'd also like to thank bill for his leadership of take years finance function over the last 20 years.
And add scheme as a tradition of operational excellence and first rate controls I.
I have every intention of continuing that focus and tradition.
Turning to our financials for the quarter.
Management fees as Greg noted continued to trend very well at 13% compared to the fourth quarter of 2018 and up 15% for the year.
In capital markets transaction fees for the quarter totaled 107 million and 410 million for the full year.
These are very solid results for us, but both numbers are down from a record results in Q4, 2018 and full year 2018.
I will circle back to our capital markets business in a moment.
Turning to monetization activity in the quarter, we had 245 million of realized performance income.
226 million of total realized investment income.
Regenerating exit activity this quarter was driven by a number of European and Asian investments.
These exits were accomplished at a blended multiple of approximately 2.8 times our cost.
Moving to our expenses.
Compensation of benefits, which includes equity based comp came in at 358 million for the quarter or 37% of our total revenue.
For the year total compensation was 39% of revenue.
Both figures are below our low fortys compensation ratio target.
Occupancy taken together with other operating expenses came in at a 122 million.
Other operating expenses were more elevated in the fourth quarter, primarily due to 20 million of nonrecurring expense related to the Australian listed permanent capital vehicle that Craig mentioned earlier on the call.
Putting this altogether.
Moving to 12% tax rate for the quarter. After tax distributable earnings were 375 million or 44 cents per share.
I thought it would pause here and it's been a minute on our capital markets business.
We have worked we have worked very hard over the last decade to diversify this business from a small us based team that was focused primarily on KKR private equity deals.
Today, our capital markets business has meaningful breadth across asset class products and.
That diversification resulted in over 60% of our capital markets revenue coming from outside the U.S. in 2019 and around a quarter by revenue coming from non KKR clients.
As a result of this increased rack, we now have the business to a point, where baseline quarterly revenue should be in the $50 million to $70 million range.
This is driven by ordinary course financing in refinancing activities, assuming reasonable capital market conditions.
In addition to that baseline revenue, we have also positioned ourselves to be a meaningful participant in several large transactions a year.
Which is why the business has exceeded 100 million of revenue in six of the last eight quarters and also averaged almost $500 million of revenue over the last three years.
In short our business now has a more baseline revenue component, which we think we can grow overtime together with upside from larger deal activity.
As we look forward to Q1 2020, we don't have any of those large transactions in the pipeline.
So the expectation from here is that our capital markets revenue in Q1 is more likely in that $50 million to $70 million range, which is consistent with Q1 of 2019.
Now most important.
As we think about the growth of our distributable earnings over the next several years really all of the core fundamentals in our business are at record levels.
Our fee paying assets under management, they're up 14% this year and currently stand at 161 billion.
The highest it has ever been and that is in advance of some of our larger strategies that are set to raise funds over the next 12 to 18 months.
Our net unrealized carried interest is up 62% year over year.
This is driven by both robust performance across our various strategies and the significant increase in our carry eligible.
That is above its respective hurdle.
You can see this on page four of the supplemental deck.
Two years ago around half of our carry eligible AUM was in a position debate carry as over 55 billion with seasoning and still working its way through preferred returns.
That's for two years the amount of capital in a position to pay Carey has now increased 60% to 93 billion.
And finally, our balance sheet, a stronger today than it has ever been.
Over the last several years, our balance sheet has been accruing significant gains, which you're clearly seeing come through in book value compounding.
But we're not yet realizing those gains through distributable earnings.
If you look at the last three years, our balance sheet investments have averaged a 15% return, but our realized performance has averaged seven.
In 2019, this difference with even more extreme.
As we generated a 25% return, but our realized performance was just six.
This has generated a record 2 billion of embedded gains on our balance sheet.
Which creates significant visibility for us around our long term distributable earnings trajectory.
Let me now pivot from the numbers themselves I spent some time in our investment performance.
We saw very strong performance across our major investing platforms in 2019.
Looking at page five of the supplemental presentation.
Our recent private equity flagship funds appreciated by 29% this year and the PE portfolio in its entirety appreciated by 27%.
Our flagship real estate and infrastructure funds appreciated, 24% and 13% respectively.
Energy incoming growth did decline for the year given the volatility in the asset class, but this is a relatively small strategy for us today at about 1% other assets under management.
Our credit business had solid performance with our alternative and leverage credit strategies, returning to 8% and 9% on a blended basis.
And finally as you've likely seen in the press release, we've announced the increase in our different.
We set our current annual dividend of 50 cents per share when we converted to a corporation in the middle of 2018.
For 2020, we've increased our dividend to 54 cents for the year and 8% increase.
This is consistent with our stated intention to grow the dividends over time, while still retaining most of our earnings to invest back into the farm and also to support our share buyback activities.
Focusing on buybacks since we initiated our share repurchase program in total we've used over 1 billion to retire shares at a weighted average cost of just under $18 per share.
Thats, a dollarsthirty below our current book value per share.
And with that let me turn over to Scott.
Thank you Rob.
Thank you everybody for joining our call today.
I'm going to touch on three topics this morning.
The first is 2019.
As you heard from Craig and Rob we finished the year well.
Most important is the progress we made over the course of the year.
Management fees were up 15% well book value per share grew 24%.
And our return on equity.
We look out on a marked basis with 24% for the year.
Our model of third party assets plus capital markets, plus our balance sheet is working.
And in 2019, we grew virtually all our businesses and launched several new platforms, including a number of strategies in Asia as.
As well as our global impact effort.
So we're pleased with the year.
And do our progress as an important bridge to the opportunity we have ahead of us.
This brings me and my second topic.
Visibility.
We have more visibility now than I can recall in our 10 years as a public company.
As introduced on this call last quarter, we expect to launch fundraising for our three largest flagship funds over the next several months.
And over the next three years, we expect to be fund raising for over 20 additional strategies.
Many of which are now between fund to and fund five.
With strong track records on top of a growing investor base.
In addition, our unrealized carried interest is up 62% over the last 12 months.
And our cash carry eligible AUM.
Is up 60% over the last two years.
Given all this visibility.
Our confidence is high.
Assuming the fundraising environment continued to cooperate and with continued investment performance. We believe we can grow our management fees by at least 50% over the next three years.
And about 18 months ago, and our July 2018, Investor day, we shared with the with assumptions more conservative than or actual experience. We felt we could double pretax distributable earnings and book value per share over the next five years.
And then roughly do it again over the subsequent five.
Given our progress in visibility.
Our conviction in being able to exceed these numbers is higher today than it was 18 months ago.
Finally.
I wanted to discuss our shareholder base.
As you know we converted to a C Corp about 18 months ago.
We felt changing our corporate structure would make our stock easier to buy and easier to home.
Greatly expanding the universe of investors that could own our stock.
That has proven to be the case.
We've seen a significant change in our investor base with many more mutual fund the index funds owning our stock and we've been added to several indices.
We're still introducing ourselves to investors that are new to this space and new to KKR.
So the full impact of C Corp conversion, we believe is not yet in our stock.
As we've been out meeting new investors, we've learned that many are benchmark indices that we're not in today.
And they are less likely to be shareholders of ours as a result.
One of the largest index families where we are not included is the Russell.
We believe being part of Russell's indices would allow us to further our goal of broadening our shareholder base.
And is the sensible next step on our journey to getting proper price discovery.
And a proper valuation for our stock.
So we're discussing with our board taking the steps necessary to be included in the Russell indices when they rebalance this spring.
We will keep you posted on the details.
We thank you for your partnership.
And we're happy to take your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the Q. Please press the pound key once again to ask a question. Please press Star then one now.
And Chris.
Anybody thats going to say ask everyone in the queue. If they wouldn't mind asking one question a follow up that will just let us to make sure we work our way all through the queue. Thanks in advance.
Thank you and we will take our first question from Craig Siegenthaler from Credit Suisse. Your line is open.
Thanks, Good morning, everyone.
And Greg.
Scott I really appreciate the commentary around the Russell 1000 add we think you'll get a nice benefit from that in terms of the shareholder base on evaluation, but as you look at what you need to deal in terms of corporate governance, and moving a small mounting voting rights in the flow.
From your peers, yeah from your side of things what really is the big thing you have to give up like why wouldn't you do it.
Let me let me just take the first part of that lets rod as Craig as Craig look.
First we'd actually like to thank you for your thoughts and persistence on this issue I know you've asked us as well as our appears about this for a few earnings cycles in a row now, but look I think overall as it relates to incremental buying that can come from two places.
First our EPS and strategies that are linked directly to the Russell 1000 2000.
And the map for that's pretty straight forward I know you and most of your peers have done that and the second piece really relates to mutual funds that are benchmark to those indices and our ability to market ourselves through to those institutions increase our mindshare and so as we've looked at it it's really the second piece that to US we think should even be.
More powerful is going to hurt than the first now it's not going to be immediate it's going to.
Makes him elbow grease, and some 42, but that's okay.
So as we put those two pieces together and gain to Vic can gain conviction that just felt like that was a sensible next step for us and trying to get proper valuation yeah. Craig. It's got look I think what you should take from this is there were working with our board.
To take the steps required for Russell includes.
So what's in your question is that we are in that process right now and that's our expectation.
Thank you.
Thank you.
Thank you. Our next question comes from Patrick Davitt from Autonomous Research. Your line is open.
Hey, guys good morning.
Sorry, if I missed this but did you give the pipeline of announcement not closed carry and investment income.
No it driveway.
Yes show so based on.
Where we are today, we have either closed or signed.
Proximately.
700 million worth of deals across our realized carried interest that realized investment income, we would expect that 700 million to be realized through the first half of 2020.
As a point of comparison is probably helpful. This number was roughly 400 million at this time last year. So we feel pretty good at this stage of the year.
As it relates to what our exit profile looks like.
Awesome, Thanks, and then.
It gets no widely known that cares more exposed to China than some of your comps could you. Please update us on the PE portfolio is exposure there and any broader thoughts you have on on your view of the exposure to the current a virus.
Thanks, Patrick it's it's Craig and we have been asked by a number of folks if we could quantify our direct presence in China. So.
The largest part of our business in China is within private equity.
And when you look at the fair value of investments of companies based in China as a percentage of our AG when it's a low single digit percentage of our AUM. So it's it's between upper sent.
For second half just to answer.
Now again, there is obviously very large human element as it relates to what everyone is experiencing but in terms of the specific question.
The exposure.
Thank you.
Thank you.
Thank you. Our next question comes from Gerry O'hara from Jefferies. Your line is open.
Great. Thanks.
Maybe one for Scott you touched on sort of those 20 strategies that are coming to the market over the next 12 to 18 months, perhaps even sooner, but I think you know kind of going back to the Investor Day comments, you talked about some of them being perhaps closer or coming up on respective inflection points I don't know theres. Some that have made more progress.
Since then and others are some that you perhaps would highlight is kind of nearing that a quote unquote inflection point that might be worth highlighting thank you.
Oh, Thanks, Jerry I'm going to as Craig you do the first part and I'll give some some thoughts on the back end, yes sure. So injury. Thanks for the question so last quarter.
No you'll remember we highlighted the three benchmark strategies that we expect we launched over the coming 12 months, That's Asia PE Americas PE.
In global Infra.
We are fundraising for our Asia PE strategy currently no alongside of that we also had noted that there were over 20 additional strategies that we expect we fund raising over the next three years. So I think overall from a scaling aspects there are actually a few prongs to this.
The first is that.
Moving from fund one to fund two to three to four I think that piece is pretty easy to understand.
You know this quarter that the growth that we've seen in our next Gen Tech fund with its final close this quarter being three times. The first is a great example, second part of the geographic expansion again, we talked to the first close this quarter of our global infrastructure strategy.
Relative or excuse me, our Asia infrastructure strategy.
As as a geographic expansion along side of our global infrastructure presence.
Third would be adjacent Ses or fund raising for core real estate strategy that fits nicely within the suite of strategies, we have within real estate and that's alongside of the growth and scaling we have from a distribution channels insurance and retail or both topics. We've we've touched on historically as well as LP expansion. So I think you combine all of those.
Things and we see certainly a lot of upside and as Scott had referenced on the call. The conviction that we have in our ability to.
At least Sci management fees grew at least by 50%.
Again over the next three years now in terms of of your question on scaling in timing. We don't we don't have any specific guidance on on when you would see that again, we'd lunch fund raising for one of those three benchmark strategies, we Havent launch fund raising for the two benchmark strategies. So I think.
In that three year timeframe reasonable to think that that again that run rate number really you would see the back end of that period, but we feel very good about the opportunity we have and and.
The first aspartame I'd say, Jerry the only thing I'd add is at the Investor day in subsequent we've shared slides kind of showing where we are for some of these platforms relative to where the largest player is and as a reminder, we only want to be in businesses, where we think we are we are on a path to be top three.
So the point, we've been trying to make is there's a ton of opportunity for us to meaningfully scale. A number. These businesses that we've started I think the short answer. Your question is we are on track or ahead today, where we thought we would be when we put that slide up for the first time in 2018, and that's everything from infrastructure real estate.
Early in credit growth core equity and then our broader corporate credit business, which were focused on doubling again from here. So feel really good about it and several of those are right in that inflection point today.
Or or nearing it. So we're that's one of the reasons you hear us speaking with such conviction on the visibility that we have for the firm.
Great. That's that's actually very helpful. And then just a follow up around the dividend and the decision to.
Increase it perhaps.
Some of the inputs or metrics that you kind of look too.
Clearly fr is probably one of them, but kind of just if you could help us understand how you got comfortable increasing the dividend I think it's 8% in the coming here. Thank you.
No problem Theres not one specific metric that we take a look at really were focused on what the overall growth of our business profile looks like.
What we have said and.
Continue believe is that we want to increase our dividends over time as a business scales.
I also want to assure that are in started that we're retaining a significant amount of our capital to reinvest back into our business, where we continue to see a ton of opportunity and also have additional capital available for share buyback activity.
Okay. That's helpful. Thanks for taking my questions.
Thank you Sir.
Thank you Sir our next question comes from Mike Carrier from Bank of America. Your line is open.
Good morning, and thanks for taking the questions.
We Scott first just on the visibility. So you went to fund raising that makes sense the net accrued.
On the realizations tough to predict but it sounds like the outlets pretty good there I guess just your comments on the balance sheet.
Like how should we be thinking about.
The appreciation that we've seen relative to the realization pacing.
How does that maybe shift or pick up like we'll just be in line with realization activity anything it's more nuance there.
Hey, Thanks, Mike look I think the message on the balance sheet is that it's been performing really well as you can see from the charts in the deck.
You know we've continued to see very attractive compounding.
Over the course of the last year, which is just continuing what we've seen since we change the dividend policy at the end of 2015 to the messages that we're really pleased with the underlying performance of the balance sheet I think weve.
I've been very happy with the repositioning that we've made and we're getting closer to our asset allocation targets. So it's all Gordon going according to plan.
In terms of how do you think about how much of that we're going to realize that is going to be very hard to give you any specific guidance or what I will tell you is that we watch is what is the embedded unrealized gain.
We have within that balance sheet and the point that we're trying to make if you look at.
If you look at some of the slides and you look at slide six in particular on the deck. The unrealized gain continues to increase we're now at a record level. So embedded within that 22 billion of balance sheet assets.
Is it $2 billion unrealized gain that we think will be realized over the next several years and that's on top of the regular way dividends and other investment income that we received through the balance sheet. So what I would tell you is.
We expect to see a general upward bias as we continue to.
Execute our balance sheet strategy, but that upward bias would not only be on book value per share, but also overtime unrealized gains and investment income.
Okay. That's helpful. And then just on the follow up.
Rob you mentioned on the comp ratio coming in a little bit better the quarter in than even the full year blow that 40.
Trying to understand like should we read something into this in terms of.
You've seen that trend down on that continue to scale the business or is it a little too early to.
To be thinking that the comp ratios had lower.
Sure.
Sorry, but I focused on the annual numbers and less the quarterly numbers and so we were at 39%. This year, 40% last year as what we've communicated as you know is that we're targeting about 40% level that is still the target that we certainly hope they continue to scale, our revenue and be in a position, where we can bring that number down over time.
As we think about comp margin. We also do keep a close eye on overall operating margins, which were at 50% for the year another target for us and I do think it's fair to say that as we thought about our Q4 called margin.
We we certainly had an eye towards that 50% overall margin and wanted to try to achieve that.
Got it alright, thanks a lot.
Thank you. Thank you.
Thank you Sir our next question comes from Glenn Schorr from Evercore. Your line is open.
Hi, Thanks.
So.
Thinking about your capital markets comments.
And there are a little lower than the last time I think.
You talked to us.
And what's interesting is your commentary about the forward pipeline and.
The 700 million worth of deals up from 400.
Those two things.
Don't have to be mutually exclusive but they're interesting to me. So I guess the question is is it feels like you're confident your capital raising in your exits and you realizations, but yet the capital markets keeps coming down.
Is it just less a few less big chunky deals.
Or or is there anything to be set about pricing and what you capture on those deals and just trying to square those two.
Yes. Thanks for the question Glenn I appreciate you clarifying so.
Let's take it in pieces to be to be clear the 700 million of unrealized gains our gains that we expect to be coming through sorry in terms of cat carry and realized gains on the on the balance sheet. That's on the that's on the exit side. So those are things that we are exiting from the portfolio and for the most part exits don't result.
In capital markets. These.
Where the capital markets fees tend to come from is.
Exits that maybe related to things like ipos or secondaries, but the vast majority of the capital markets fees are probably going to be from newer transactions for refinancings are activities in the portfolio.
On a regular way basis. So that's the first distinction I want to make the second thing I want to make clear is we're not guiding you down on capital markets.
What we're trying to do is make sure that you understand how we see the capital markets business from quarter to quarter and a lot of that is going to be driven by that new deal activity or that refinancing activity level that I referenced and so it's purely I'm just trying to give you a sense for for what we see in terms of how the business is beginning.
To function, which is a baseline that even without large new deal activity, we see a significant amount of confidence and that's about 50 to 70 range that Rob mentioned.
And then then on top of that when we have large transactions like we did in Q4.
You will see some potentially meaningful upside.
And that's how you get to this kind of 100 million plus kind of numbers that we've been reporting six out of the last eight quarters and that's why we've been averaging about.
For 50 $500 million a year for the last few years. So we're just trying to do the build up with you. So that we have a way of talking about it with you going forward and hopefully can help you understand why the results are coming out the way they are.
Okay. That's helpful. Thank you.
One more quickly.
The press is somehow got enough hold of the notion that the private equity business is starting to get.
More activist in nature and taking.
Minority pieces, and and public companies and and being.
More aggressive on that front I'm just they use one of your investments in one of the Argus I'm just curious.
Yeah to get your thoughts on if you feel like.
Theres anything different at all going on in terms of how you go about your P. business.
Short answer is no.
And we saw the articles too I think just to be real clear on elaborating. So I think this is Dave and Busters investment that we made the got some attention I think frankly, it got to quite a bit of attention because of its consumer services.
In nature, but to be clear, there's nothing new here from our standpoint, we've made 40 investments over the last several years in public companies $3 billion.
We're not activists.
In the traditional sense, we're working with the management teams are those companies in the constructive manner I think that the press ran with it a bit frankly.
I appreciate it thank you.
Yes.
Thank you Sir our next question comes from Alex Blostein from Goldman Sachs. Your line is open.
Great. Thanks, Good morning, everybody and Rob welcome to a call.
A follow up question on capital Mark Sorry capital management I guess so.
Got you underscored significant visibility.
Your growth both from management fees and carry as well as balance sheet realizations and appreciate the dividend increase of 8%, but the dividend yield is around 2%.
That's obviously below your peers and below financials broadly I guess, given the confidence in the business what would it take for you guys to pursue more aggressive capital return strategy, whether it's a bigger buyback given comments around valuation or or a higher dividend. Thanks.
Alex I think we're really happy with our strategy, So I think to.
The way, we think about it when we change the dividend policy at the end of 2015.
We basically we're targeting a level that was at about the S&P 500 recipe financials dividend yield.
And not to say, that's a hard and fast rule, but that's we've been in and around there.
Since we made that change to a bit below and as you can see what's been happening since we made that changes the book value per share has been compounding and we bought back quite a bit of stock along the way I think you should expect us to continue that general capital management policy, which is a steady annual increase and the dividend.
And then buybacks that really are used to.
At a minimum.
Offset share dilution from compensation and so those two elements of our strategy. We're very pleased with we think that will allow us to compound book value per share at a very attractive rate and also give us the capital that we need to invest in growth.
Got it thanks, and then my follow up around management fee growth.
If we look at this quarter sequential growth.
It was up modestly, but if you look at keeping you I'm is actually quite a bit quarter over quarter things up about 5%.
Can you help reconcile I guess and just thinking through and just walk us through any timing dynamics that may have delayed some of the management fee recognition in Q4.
Would help you guys out into Q1, starting up obviously, a higher base here. Thanks.
Hi, Alex it's Rob.
Hi, good it's a timing issue we had a couple of fund strategies that close at the end of the quarter one that was.
Meaningful in size and so it shows up in a fee paying assets under management, but we're not going to start collecting management fees until Q1.
Awesome, Thanks very much.
Thank you.
Thank you. Our next question comes from Robert Lee from KBW. Your line is open for.
Great. Thanks, Thanks for taking my questions and Rob Good luck in your new role.
Yes.
First question that I guess kind of maybe little more kind of.
How you think running the business I mean.
Expanded as you pointed out a lot over the last couple of years.
20, you know.
Strategies are raising four and in different in the.
Most of which are comparatively newer to the from lease over last five plus years. So im just curious how you've had to change or alter your investment process, how you're kind of decision making is happening then with that are you seeing any kind of pressure to change what's your somewhat unique kind of comp structure.
Compared to some of your peers.
I'll take that thanks Robert.
So.
Hi level.
You're right. We have we have created a number of new strategies over the course of last several years and as we talked about in the past about 18 of the 22 investment strategies, we have as a firm our new in the last decade.
But you know the the.
A number those businesses were started now multiple years ago. So.
5678 years ago, probably felt like there was a much higher percentage of brand new as we sit here today as we're getting on to fund to fund three for a number of these strategies, we actually don't feel as new as an enterprise as we did at that point.
Internally and so in terms of the running of the business. The investment process. The short answer is we havent had to change it what we have done as we've created investment committees that are relevant to each of those strategies and portfolio committees that are relevant to each of those strategies, which is how weve run the firm for very long time.
We have hired people into the firm.
To help us build those businesses alongside existing KKR executives and everyone was hired into the firm's one from comp structure. So everyone signed up for the culture and the compensation structure that we've always operated under so theres no change there either and so as we build.
Both around the world and across strategies, we've been very purposeful and trying to make sure that we do it the way we've built all KKR businesses and so it really hasn't been the case that weve had pressure on changing our process or changing our comp structure away from what you would normally expect given some of these businesses are a little little bit more markets.
Pacing than some others.
Great and maybe as a follow up.
You've clearly highlighted the potential for realizations overtime, we know what the building capacity there.
But clearly as the.
Investors seem to be on a kind of.
Concerned about the potential for you and your peers have kind of get those realizations over the this call. The intermediate term. So understanding you can't predict specifics and you gave the color on what you have in the can so far.
But is there any color you could give on how we should be thinking about where you think most likely realizations as the us Asia kind of any kind of sense of.
For thinking of your potential the next say you know year to where you think that.
What may drive that on it and the high level.
I think it's pretty broad based footwear, where were seeing inside the firm is that a number the businesses that we just talked about that were created over.
Over the last five to 10 years, and you understand that management fees show up before the carry but a number of those businesses are now maturing in a number of those pools of capital are getting into their carry earning and carry paying years and that's part of the reason you see slide four of the deck.
That Rob walk through that 58 billion of.
Cash carry paying a you I'm going to 93 billion that is very broad based when you look beneath it is Asia Europe, and the U.S. and it is across multiple different businesses and strategies and so that when we think about the Leighton earnings power of the firm.
Part of the reason we have this confidence as we have been watching these investments mature and now be of these funds being above their hurdle rate and getting into the cash carry paying phase and so it is really broad base. There's no specific theme I would call out for you and that's part of the reason that we continue to see our carried diversifying and continue.
The increase rub one thing it's Craig one thing I'd add its it is interesting when you look at the overall PE.
Performance in 2019, the portfolio as a whole was up 27% our privates were up 17%. So certainly strong performance as it relates to the private part of the portfolio, our publics were up over 60% and.
And so often as it relates to those companies that are our public those often are more mature investments for us and you've seen some of the benefits of that even in the second half of the year with investments in Monetizations, we've seen in companies like software one and trend line. So just again I think thats. Another another interesting data point, yes, So I guess, what I would say Rob as I.
I wouldn't get too worried about what happens in any one quarter.
But we keep an eye on as the embedded gains on the balance sheet as we referenced and then the unrealized carry within our underlying a U M and both of those are at record levels and up significantly over the last 12 months and so that's what we're keeping an eye on for both the near term and the intermediate term.
Great. Thanks for taking my questions.
Thank you.
Thank you.
Our next question comes from Chris Harris from Wells Fargo. Your line is open.
Thanks, guys.
Few questions on your incentive fees I guess, the first part is.
Why were Marshall wace incentive fees, so low this quarter it sounds like.
The growth has been pretty good over there and then also I think that that line item is being impacted by lower BDC fees. So how much revenue is attributable to that and what needs to occur for the BDC incentive fees to be recovered.
Hey, Chris as Craig Let me take the let me take the first crack at that so.
As it relates to incentive fees. They were about 1.5% of our total revenues in 2019, a little less than that in terms of Q4.
And the answer to the person first part of your question does does really relate principally to timing. So our our largest hedge fund partnership incentive fees crystallize on 930, and we report those results on a one quarter lag. So we see those through our financials in Q4, so broad markets in broad.
Markets, you could think back to the fourth quarter last years I'm show you remember was a very volatile where the S&P was down about 14%.
So the impact of this actually had no bearing on the incentive fee, we recognized in Q4 a year ago.
And instead, we felt that impact in our Q4 results. This year given the timing of when that incentive fee crystallizes. So that's what you see is it as it relates to that dynamic.
And then overall in terms of where we get incentive fees, you're right that we get.
Incentive fees from.
Our hedge fund partnerships those do tend to crystallize annually and you will tend to see that in the fourth quarter and then the second place we see incentive fees is from a handful of credit oriented strategies and platforms largest of which is the BDC platform now in terms of the BDC platform, we actually needs to be little cautious.
So how we talk about this.
Because again this line item is is a small topic for KKR again, it's it's that percent half of our total revenues. It's a more significant topic for a publicly listed BDC that hasn't reported their results yet but in terms of of that entity Fs K Fs K did state on their last earnings call. They it.
Expect incentive fees over the next few quarters to be muted.
And I think really consistent with that disclosure that's what you saw in Q4.
As about 80% of the incentive fees for KKR in Q4 were driven by those hedge fund partnerships.
Does that make sense.
Yes. It does thank you.
Great.
Thank you.
Next question comes from Brian Patel from Deutsche Bank. Your line is open.
Great. Thanks, good morning folks.
Got it my questions were asked and answered, but maybe just the zone in little bit one of the capital markets.
In the 50 to 75 million quarterly run rate.
I think you mentioned I think Rob you mentioned, 25% of the of the revenue from the capital markets businesses outside of kick here are just wondering if some if that also applies to that 50 to 75 million core run rate and a and then didn't and then maybe talk about the efforts to.
Due to grow that revenue stream outside of any or.
Whereas the 50 75 really just to get your hobbies.
Yes, Brian the that 50 to 70 range that we gave would include our third party.
The markets business, and we think a decent rule of thumb for right. Now is that's it that's going to be roughly a quarter of our business.
Going forward in terms of being able to grow that baseline I think that comes from two areas. I think that comes from continued growth of the KKR platform across different asset classes and continued penetration.
Third party capital markets business that has a lot of momentum right now.
So those would be to two areas that we think will help get that baseline number up overtime.
Okay, Yes, just and then he really clear brines is just to jump in so that 50 to 70 again excludes what we see in terms of larger transactions last two years, we've deployed and syndicated the sum total of about $30 billion per year.
So we expect to have large transactions over the course of any given year the messages in some quarters. They close in some quarters. They don't and that's what we're trying to clarify but to be clear. The 50 to 70 is without those.
Something like Q4, which was the 107 million we had one of those close so we're just trying to be transparent with it.
Totally and it can be lumpy within cake yours.
And with third party as well in other words and lumpy part of that would it be in the addition to the 50 to 70, you really can be anywhere where does that also.
You know more much more heavily skewed just to take care.
I'd say the larger deals are gonna be likely more skewed, especially the ones, where we make 30 to 70 million per transaction. They tend to have an equity and debt syndication element you can have larger third party deals as well, but they tend to top out in the $10 million to $20 million range just to give you a sense.
Okay. That's good color and then maybe just maybe Scott just if you want to come a little bit on the deployment environment.
Given obviously markets is.
Of has that moved quite nicely this year in valuations broadly or scratched <unk>.
Where do you guys see better opportunities where are you more more cautious are you in general about the deployment in Berman you know a more cautious overall were could you just see plenty of opportunity given your breath of investment capabilities.
Let me just in the high level and I, let Craig run through kind of what we've seen around the world I'd say on the whole.
The averages lie.
So when when when you're looking at a market multiple we're finding that that really is a very can be very misleading statistic because the markets are incredibly bifurcated and so we're seeing significant dispersion in multiples.
Have have not dynamic we talked about the last few quarters, where you have you got growth and simplicity valuation multiples incredibly high if you've got complexity or less growth you can be left behind by the by the market. So we're really seeing this dynamic around the world of a bifurcated market and in the U.S. certainly.
In other parts of the world a bifurcated the economy.
So we the in all of that you have a lot of complexity and you were finding a lot to do but it is not stuff that we'd be apparent reading the popular press, it's very much on the ground type work and the overall theme I would say is we're continuing to buy that complexity and sell into the market what the market's want which is that.
Empliciti and so with all that is kind of a global overarching kind of all product areas statement, Craig when you run through what some of the teams are most focused on yeah I'd say.
Brian Let me touch on private on private markets first few things to know first as it relates to private equity.
We have been seeing more opportunity better risk reward outside of the U.S. and part of that is a valuation related if you look at total returns over the last five years returns of the S&P have exceeded the MSC Asia Pacific by almost two x.. So I think we have been seeing that.
Risk reward and you see that in some of the deployment figures and some of that is secular. So we talked on these calls for some time of the drivers of our activity in Japan.
In that continues.
Exiting year almost has three prong southern our corporate partnerships, there our growth and tech opportunities.
And we're making investments alongside of families. We've done this recently, Germany, Sweden.
Asia again, we talked about partnerships in Japan.
We acquired camels international it's a carve out from Campbell soup company for our core strategy. Another example of a carve out transaction and I think in an area like infrastructure.
We've been leaning into midstream so over the course of the year, we closed on a western Canadian midstream joint venture in order to pipeline investment in Abu Dhabi.
So thats been a inactive.
Active area for us.
And again as I think it as it relates to public markets.
I think what.
And we touched on this in the prepared remarks, you know the activity that we saw in private credit.
Both here and in Europe was was interesting the syndicated market in the second half of last year was very unfriendly to new issuers.
And if something wasn't well known to the market reception was very poor again goes back to Scott's Avenue.
Now this backdrop can be great for private credit solutions, and that's really what you saw in the back half.
In the back half from unemployment standpoint.
Great that's great color. Thank you.
Thank you.
Thank you Sir our next question comes from Chris Kotowski from Oppenheimer and company. Your line is open.
Good morning.
This was the second quarter in a row, where your interest and dividend income was over 180 million in that line used to run like 60 70 million.
So I assume it's either some kind of dividend recap and or or margin lawn and I'm wondering.
Does that relate just to your balance sheet investment or or or could you have margin loans against.
The carried interest receivable as well.
Or does it.
So that that number specifically around our balance sheet in both cases, we did a dividend.
A large dividends in both Q3 in Q4.
Advisers.
I'd say on a run rate basis, while we're not going to guide a specific number let's run rate interest and dividend line items going to be closer and more in the ballpark of what it was in Q4 2018 and what it's been in Q3 Q4 2019.
Okay. When you say you did the dividend out of five serves.
Basically what we did Chris is we did a second.
You know draw on the margin loan that we talked about last quarter against our Pfizer physician.
So that shows up as a dividend as opposed to.
Some kind of sale that's all just okay.
As it relates only to the balance sheet position not to any anything in the carried interest receivable that you've got it.
Correct, Yeah, right and when you referenced the 700 million before that is in terms of carry aren't in terms of.
I assume that's in terms of carry not in terms of transaction value.
Yes, thats right that both our carry that I realized carry and our realized balance sheet.
Investment income and we think that first half of 2020.
You can that we can see today and it's the end of January I think as the important points. So as we've all that's why we've had lot of visibility and it's not even February yet.
Right. Okay got it thank you so much.
Thanks, Chris.
Thank you Sir our next question comes from Michael Cypress from Morgan Stanley. Your line is open.
Hey, good morning, Thanks for taking the questions just wanted to circle back on the deployment levels. They were up nicely year on year, especially in the.
Public market segment, and so I just curious how you would characterize the pace of deployment.
In 2019 as this elevated in your view at all and how to think about the right pacing and run rate of deployment into 2020.
I don't think Michael I would call it elevated I'd say, one one place we probably did see elevated over the course of the years, what Craig mentioned around private credit in the fourth quarter, which you know if you look at our alternative credit strategies, we deployed 4 billion.
That's a that's a big number if you were to annualize that I don't think I think that would be a bit misleading, but when I look at the year as a whole is that kind of mentioned over the last couple of years, we've been in and around $30 billion.
Deployment and syndicated capital.
And given our growing capital base and the growing activity, we have all around the world.
I think all else equal you would expect to see that number continue to go up.
Great and just a follow up maybe just on retail initiatives, maybe could just update us on how much you raised in 2019 versus 18, and maybe talk about some of the new strategies are introducing the overall sort of approach to the retail channel and there's been some recent regulatory proposals out there I guess, just how meaningful or are you thinking.
About that for growth.
Hey, Mike as Craig Let me take the first part sure on the retailer behind that were side high net worth excuse me look we've gone from about 9 billion. If they win in 2015 to 37 billion today and so that.
CAGR is approaching 50%.
And on the one hand it it while those numbers are significant in that dollar value is significant is still feels to us like we're just getting started but when you look at the capital that we raised from individuals Thats high net worth Ultra high net worth platforms that number was about 20% of new capital raised in 2019.
Actually up a little higher than that so it's it's a significant number and I think as we think about the opportunities.
In this channel we do think our brand is something that is really impactful for us.
It's a great asset now in terms of.
The end of the question as it relates to the definition of opening credited investor a couple of thoughts there look I think we're.
We're encouraged by the Fccs efforts to expand that definition.
In in standard now in terms of our activity to date almost all of our structures are private threec seven funds, which can only be offered to qualify purchasers as opposed to credit investors. So the impact of this in terms of what we've been doing is actually a little muted.
However, looking forward we have several initiatives.
For retail high net worth and development that would focus on the space and so I think the proposed amendment if its adopt it.
I would expand that full of investors. The only thing I would add Michael is the high level, we're going to be introducing multiple products into the retail space and we're hiring more people.
And so we're staffing up to do even more in retail over the next several years and so you'll continue to hear us talk about that in my expectation is over time.
Number Craig mentioned, which is about 20% of last year's capital raised that 20% I think is going to keep going up.
Great. Thanks, so much.
Thank you. Our next question comes from L. Katz from Citi. Your line is open.
Okay. Thanks, very much for getting on and a lot graduations on this motion.
Just maybe a follow up on them at the mid 75 embedded in your discussion about the outlook over next couple of years, but how do you think about the into play on margins from here.
Obviously, a lot of things reinvesting in but same time, you're scaling something very significantly.
Can you continue to migrate that margin up from here or is it more just to sort of back in and sort of whole where you are is actually asset scale.
Hey, Bill, It's Scott Art, our expectation is you're right, we're going to be continuing to scale, our businesses and will allow us to bring margins up we're going to be in Russia reinvesting.
Some of that back into growth and distribution technology and number of other areas.
Our our view is the net of all that will allow us to increase our margins over the next several years and so that should be your general expectations that you will see that that margin gravitate upward, we're not going to give you know any guidance per se by period, but that is what we're working to do net of the reinvestment.
Great. That's helpful and just one more conceptual coming back to like what you might look like a couple of years from now. So if you continue to scale. Your platform part of your balance sheet strategy has been to accelerate that scaling, but as you ultimately scale to where you think you can get to does the balance sheet just in general become a little.
Salient and that longer term you might look to reconsider your payout ratio notwithstanding the fact, he said in the near term that no major changes.
I I think your expectation should be that we continue to grow our balance sheet, while we continue to grow our fee paying 81.
I think that should be your general expectation on capital management standpoint, I think the or investors should expect that we're going to continue to compound book value, while we compound anyway.
And bill as Craig on the only thing I'd add on that is remember employees own roughly 40% of the stock. So there is great alignment in terms of the stock price and that is something that from an IR standpoint, we feel everyday when you go to the lunch or.
Just keep that in mind at the same time.
Understood. Thank you very much taking the questions today.
Thanks, Bill and stuff.
Thank you.
And we do have a follow up from Michael Cypress from Morgan Stanley. Your line is open.
Great. Thanks for taking my quick follow up here just wondered on the balance sheet wondered how much was deployed in realized off balance sheet in the quarter.
Sure we deployed off the balance sheet of roughly $1 billion of capital.
Through the year.
And then we.
We monetized roughly 350 million of capital through the quarter. So the billion of.
Well I met Ed 350 monetization.
And that's for the quarter right yes.
Okay. Thank you.
Thank you.
Thank you and that does conclude our question and answer session from today's conference I now, let's turn the conference back over to Craig Larson for any closing remarks.
Thank you crystal thank everybody for joining the call. Please of course follow up with us with any additional questions. We look forward to chatting next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
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