Q1 2020 Earnings Call
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I would not like the hand, the conference Overachieve speaking today to Mr., Craig Larson head of Investor Relations for KKR. Thank you. Please go ahead Sir.
Thank you operator.
Welcome to our first quarter 2020 earnings call as usual I'm joined this morning by Scott not all our co president and co COO.
And by Rob Lewis our CFO.
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 <unk> Dot com.
The call will contain forward looking statements, which do not guarantee future events or performance. So please refer to our SEC 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 and call.
Before we get into the results, we want to start by recognizing the extremely challenging times and we're all experiencing.
We hope that everyone on the call our shape unhealthy.
Our thoughts of course, our with those most affected by Kobin 19, particularly those on the front line.
As a firm our priority during the pandemic has been the health and safety of our employees.
At the same time continuing to provide best in class investment services.
Like many of you we largely been working remotely over the last several weeks yeah. Thanks to the tremendous efforts of our technology and operations teams. It's felt like connectivity crossett from is actually increases and similarly dialogue. We've been habit, we've been having across her LP base has also increased as we look if anything over communicate given.
Volatility.
And it turns in helping doesn't need during the pandemic, we establish kinky ours global really fun and we're also incredibly proud of all their portfolio companies are doing in support of cold.
Now turning to our results were going to begin on page two of our supplements.
And you went for the quarter came in at 207 billion.
Compared to 218, as a 12 31 and 200 billion one year ago.
New capital raised in Q1 total 7 billion.
Driven by fundraising in our real estate in Asia infrastructure strategies, as well as within private equity and.
And driven by asset growth management fees for the quarter as well as a trailing 12 months are up 14%.
We reported aftertax distributable earnings of 355 million for the first quarter or 42 cents on a per adjusted share basis and looking on a trailing LTM basis, we generated after tax D of approximately 1.4 billion.
Book value per share, which is mark to market every corner came in at $16.52.
As Rob will talk about in a few minutes investment performance over the past 12 months has been nicely ahead of both equity and fixed income indices.
So our book value was down only modestly over the trailing 12 months.
And finally touching on a topic, we introduced last quarter inclusion in Russells benchmark indices continues to be a priority for us.
We've been meaningfully engaged with what's the rough so over the last couple of months.
And well any decision on something like index inclusion is obviously flupsy Russell's and not ours, we believe we meet muscles requirements.
And with that.
We used to turn things over to Rob.
Thanks, a lot right and Hello, everyone.
Really glad to be speaking with all of you say and hope that you and your family.
Hey, I know.
Beginning with the quarter's financial performance.
Weve reported solid results, especially when you consider how challenge the operating and monetization environment was from mid February.
Looking at our distributable earnings piano on page three of the stuff.
And starting with our operating revenue.
Total fees came in at 426 million for the quarter.
Of those fees approximately 75% our management fees, which were up 14% versus last year.
Our management teams are largely driven by commitments to our bonds and the investee costs of our assets as opposed to the attributes of our funds.
Which is a real financial benefit that our industry affords during periods of market dislocation.
I realize performance income came in at just over 370 million in the quarter driven by the sale of pure group and in South Korea. The sale of case, yes technologies.
In total carry generating exits in Q1 on a blended basis for done it ran a house hogs aren't doesn't cost.
And finally realized investment income for the quarter totaled 145.
In aggregate revenues grew by 11% this quarter compared to a year ago.
Moving to expenses.
Compensation of benefits totaled 377 million, while noncompensation expenses totaled 94.
One thing to note here.
Our total compensation ratio.
Including equity based comp came in at 40% for the quarter.
As you think about your go forward models, you should continue to expect our total compensation ratio to remain variable and the low 40% range for the remainder of 2020.
And finally, our operating margin came in at 50% second quarter.
With an increase in our after tax distributable earnings per share of 11%.
Looking forward, we actually have reasonably good line of sight on future carried interest and total realized investment income from transactions that have closed since 331 word up inside and are expected to close.
As of today that number is an excess of 400 million.
While small number of those transactions still reliant various regulatory approvals to close.
So there is some uncertainty or around achieving 100% of that figure. It has definitely helpful to go into the next couple of quarters with installed base of additional revenue.
As a point of reference a year ago on this call that same number was a little over two anymore.
So in a quarter with tremendous volatility.
All three forms of our revenue increased our margins were maintaining our distributable earnings per share increased by 11% and our visibility into our near term earnings has meaningfully improved relative to a year ago.
However, this quarter clearly to bring a chair of adverse impacts to our financial profile as well.
You can see that most clearly in our book value per share where all of our investments are mark to market every quarter as that came in at $60 in 52 cents at March 31st.
Specific to our balance sheet investment performance for the quarter was down 14%.
Compared to down 20% for the S&P 500.
For the trailing 12 months balance sheet investment performance was down 2%.
Compared to down 7% to the S&P 500.
While our book value per share decreased 14% since the end of December it is still relatively close to flat from this time last year.
Turning more specifically to our broader investment performance for the quarter. Please go to page for the supplemental presentation.
Well you can see that many of the asset classes, where we invest have been affected by the market downturn this quarter.
Performance remains positive over the last 12 months.
Our most recent flagship private equity funds were down 6% in the quarter and our entire PE portfolio is down 12% compared to down 21% for the M. A C I World Index.
Outperformance was driven both by are modest exposure to areas directly impacted by the pandemic.
As an example, direct energy is less than 2% at the private equity portfolio.
Alongside greater exposure to a number of technology and online oriented investments that performed quite well.
Turning to real assets, our flagship real estate funds depreciated, 1% over the quarter, while our infrastructure flagship fund appreciated by 18% in the quarter, which was driven by a significant exit that was that a valuation well in excess of its carrying value.
While our energy returns are not shown in the supplement this quarter because the M&A you on threshold for what appears on this page we know what's in front of my topic right now.
Our direct energy funds in aggregate were down 33% in the quarter.
But as a reminder, this is only 1% of our totally you want.
On the public market size alternative credit and leverage credit depreciated by 16% and 13% respectively.
This compares to the LSTA into high yield bond indices that were both down around 13% in the quarter.
We do believe that the combination of our continued strong relative investment performance, especially in our flagship funds as long as a 44 year history of operating through market cycles will hold us in good stead with our clients.
While undoubtedly some investing clients have slowed down that pay significant.
We're also finding that there are others looking for ways to invest into the dislocation.
I think example in the two month window from March 1st your makers, we have closed on R&D legal documentation on over $10 billion at new commitments across their funds.
In terms of what this all means for our fundraising outlook, it's a little too early to say.
We've grown our management fees over the last three years by approximately 50%.
And we've shared in the last couple of quarters, but given the funds we have come into the market that we felt we could do that again from 2019 three 2022.
We're still confident in our trajectory.
But our best judgment sitting here today is that the three year path to now take us a few additional quarters to achieve.
So destination is very much the same imations take us a little longer together.
This is obviously a dynamic environment. So we'll keep you updated for the extend our views change.
Two final points before I hand, it off the Scott.
The first relates to liquidity.
During the first quarter, we Opportunistically raised 500 million a 30 year senior notes priced at three and fight.
We knew at the time of his valuable capital to raise but it certainly feels quite differentiated in this environment.
And in April we thought it made sense to take advantage of an opening in the investment grade markets for an additional 250 million up three and three quarter percent senior notes that mature in 2029.
Taken together, we have two and a half billion dollars of cash and short term investments. In addition to our undrawn revolver capacity, providing significant liquidity and financial flexibility.
The weighted average maturity of our debt portfolio today is over 15 years.
The second question relates to our share buyback activity.
Since the last earnings call. We have retired 11 million shares at an average price of just over $23 per share.
Looking at our buyback program since inception in total we've used over 1.3 billion to retire shares at a weighted average cost of just under $19 per share.
We are confident that the shares we repurchased in Q1 will be a very good use of capital as we look forward over the next several years.
As you would have seen in our press release, we've increased our share repurchase authorization back up to 500 million.
And with that I would like to turn it over to Scott.
Thank you Rob Hello, everybody.
Thanks for joining our call today.
I Hope you and your families are safe and healthy.
And that you're doing as well as can be expected during this strange time.
The first thing I want to do as acknowledge how much the world has changed since our last call with you.
It's pretty remarkable.
I'm sure you're all working to process it.
Just like we are.
So I thought today I would spend some time, telling you how we're approaching the crisis as a from.
And what we think it means for us.
Before I do that.
Let me go back to the global financial crisis, because it was formative for firms.
At the time of the GFC.
Okay care was a smaller more narrowly focused from.
We had a private equity franchise alongside a young U.S. centric credit business.
Our capital markets business was neeson.
And we did not have a balance sheet.
As we went through that crisis, we focused first on defense and our portfolio companies.
We reposition companies, where we had two.
And we were laser focused on capital structures and debt maturity profiles.
We were not forced sellers.
And on balance.
Our teams did a very good job during that period.
We also made some good new investments largely in PE.
And we raised our first third party capital in credit.
During this time, we also took advantage of market dislocation and merger then private asset management business.
Into one of our public permanent capital vehicles.
Creating KKR as you think of it today.
However.
We found during and immediately after the G.S.C.
Our businesses and footprint, we're not relevant.
To many of the very interesting investment opportunities we were saying.
We became frustrated by that.
And that frustration help set us on the course to make sure that the next time.
There was a crisis or a meaningful investment opportunity.
We would have the ability to invest more flexibly in any risk reward we found interesting.
In short.
We wanted to feel as good about our offerings as we did about our defense.
So we spent the last 10 years since that crisis building KKR based on that formative experience.
Over that time, we've gone from a few hundred million a balance sheet assets to $20 billion.
And we have dramatically increased our capital markets capabilities.
We've also meaningfully expanded and diversified our business.
Since last crisis, we've gone from two investing businesses to 24.
10 offices to 21.
And 45 billion of a U M to 207 billion.
Because of all this we now have the ability to invest in opportunities we like anywhere in the world.
So looking back the last crisis was critical developmentally for us.
We made some great investments, we made large and important moves for the from strategically.
And it was an inflection point.
That drove us to meaningfully expand our business in the years post crisis.
We're viewing this crisis as providing similar opportunities.
But off a larger base of capital.
The U.N. and capabilities to work with.
So the possibilities from here or greater too.
So we find ourselves in the fortunate position of being ready as a firm this time.
Not only play defense.
But also play more often.
And we've been doing a lot of both over the last several weeks.
I thought I would share a bit of color on what we're doing on both fronts.
But before I do that let me remind you wire business model positions us well for periods of volatility.
Our model provides a significant amount of stability and visibility.
How about 80% of our capital is committed for an average of eight years or more.
And we had 58 billion in dry powder waiting to be called for new investments.
When you have contractually committed capital that cannot be taken away.
And our liquid balance sheet.
It is good news.
In asset prices get cheaper.
Also our management fees are largely calculated on committed or invested capital and not influenced by marks.
So our management fees are very steady.
As an example, our fees actually grew year over year in both 2008 in 2009.
Plus we have a lot of committed capital on which we're not yet earning fees.
19 about $19 billion committed with a weighted average management fee rate of about a 100 basis points.
It turns on when the capital invested or enters its investment period.
So we have nice stability of management fees and visibility on how they will grow.
We're also global.
Have you heard from Rob the visibility of our near term exit pipeline remain tight.
That is doing some part to our Asia portfolio.
Where of course, the virus hit first.
And where we've seen some economies reopen ahead of Europe and the U.S.
As we've discussed.
We also have a large and liquid balance sheet.
During times like this we can use our balance sheet to be aggressive.
For new investments.
First strategic acquisitions.
And for buying our own stock.
We view our balance sheet is a critical strategic tool.
Never more so than now.
Having said all about there's no doubt this crisis is impacting our business.
We've been playing a good amount of defense over the last several weeks.
Largely focused on protecting what we have.
Most of our people around the world are working from home.
We're finding that it's actually going quite well.
Hats off to our technology team.
We're very well connected as a firm.
And our teams are functioning at a high level.
We're also focused on our portfolio companies.
We were fortunate from a portfolio construction standpoint, as we think quite underweight direct energy.
Retail and hospitality.
Those account for only 2%.
4% and 1% of our global investments respectively.
Now to be clear, we definitely have a number of tough situations to manage.
But it's a relatively small percentage of the total right now.
Much smaller than it could have been with a different approach the portfolio construction.
So the from is operating well through this and while we have a lot to manage.
It is manageable.
And well defenses, taking some of our time.
We're spending at least as much time on all fronts.
We've been using our business model in dry powder to invest into these markets.
As I explained we've been preparing for an environment like this for over a decade.
More recently as we've mentioned on prior calls.
Starting a couple of years ago, we repositioned, our distressed and private equity teams to be closer together and create a target list or shopping list.
Debt and equity that we would want to buy if and when dislocation occurred.
This preparation has helped us.
Since the crisis began which we mark is when the market started to be more volatile on February 21st.
We've invested or committed approximately $8 billion of capital as a fraud.
This amount includes dollars invested by our leverage credit teams and the traded loan and how you have markets.
Of the 8 billion approximately 5 billion has been in credit of some type.
And 3 billion has been an equity.
We are using the target lifts, we've been building over the last few years and investing into companies, we know and like.
At risk reward levels, we find attractive.
We're also finding opportunities for our portfolio companies to pursue M&A.
And to invest behind former portfolio companies like we recently did with Us foods.
And we're looking at noncore subsidiary sales from companies looking to de lever or buy back stock.
So there's plenty to do on new investments.
We're also spending even more time than usual with our clients.
Part of this is making sure they know what's happening with their portfolios.
But a lot of it is discussing how to invest into these markets and ways. We can work together.
We're encouraged by those conversations which have helped lead to 41st time clients committing capital to us.
Since the beginning of the year.
Hopefully that gives you some color.
We've been busy busy on both defense and offense.
And the firm's incredibly well connected through this.
There's no doubt the near term path ahead is uncertain.
But there are several critical areas, where we have clarity.
We expect to continue to be successful raising in deploying capital.
We expect to continued to be able to generate returns well above what's available on the public markets.
We expect to be able to use this crisis as we did the last one.
To evolve and grow our business aggressively through and coming out of this.
And to create the next inflection point for our firm.
Thank you for joining our call.
We're happy to take your questions.
Thank you Sir as a reminder to ask a question you would need to press star one on your telephone.
Your question press the pound key.
Due to the essence of time, we ask that you. Please limit yourselves to one question and one follow up.
Please standby, while we compile the Q and a roster.
I show our first question comes from Alex Blostein from Goldman Sachs. Please go ahead.
Good morning, Thanks, Thanks for the call thanks for taking the questions.
So first wanted to start with the outlook on fund raising the path, taking a little bit longer.
Makes sense, given obviously lots of near term uncertainty, but I wonder if you guys can talk a little bit about how the composition of the fundraising pipeline Ami change relative to your original expectations.
Which products could be smaller which products could be larger where you could continue to be pretty active versus the areas that could actually take a little bit longer.
Hi, Alex Craig, It's why don't I begin with that and I'll, let Scott add on at the end.
Just to give you a sense of where we're fund raising currently.
Because it is the Brett is something that I think you'll see in this so in Asia, where fundraising for our private equity strategy.
Also outside of private equity in real assets.
In Europe that includes fund raising for opportunistic real estate indirect lending.
Also fund raising across our dislocation Americas opportunistic real estate real estate credit and core plus.
Real estate strategies.
And at the same time, that's going to continue areas that you're going to see in a more continuous basis, including our CLL business, we had issued a new celo.
Actually a few weeks ago as well as areas like our BD season in the hedge fund partnerships. So I think it say it continues to be a very active.
You know list of areas, where we're fund raising.
Scottish widows anything you'd add on top of that.
Yes. Thanks for the question, Alex a couple of things one.
Overall say, we remain very optimistic on the go forward when it comes to fund raising so in terms of your question about composition.
No material change to the composition.
In terms of where you see ourselves accessing capital.
Maybe just a little bit of color for yet there's just been a lot of dialogue.
And engagement with our clients easily two to three times.
As usual and.
Everything from comparing notes on the environment.
Explaining what we're seeing through our portfolio, especially in Asia, given our large Asia portfolio, where we started to see recovery how did the rest of the world lot of questions on that we're talking them about their portfolios, but basically every conversation then pivots to offense and where to lean in.
I think we have a lot of clients around the world that.
Invested into the recovery post GFC and are looking for ways to play offense and we had a couple of these in the prepared remarks, but 40, new Lps since year end.
10 billion raised in the last two months and in particular, we're seeing high net worth and retail read in addition to institutional capital. So there's no change in expectation for outcomes you know the commentary around it may just take additional few quarters is our best guess.
But as the markets continue to recover.
Hey, shorten that over time, but it's highly path dependent.
But no change in composition.
Great of course that makes sense.
My follow up question just around the 10 billion number that Robbins Guy you. Both just mentioned to $10 billion on plus two months can you give sense, what what was in may.
And then again, we kind of strategies drove that drove that fund raising over the course of May and give us maybe you sense on the sort of timing one that actually is going to come in and to management fees. Thanks.
Great. Thanks, Alex so.
Well, we were trying to do at the 10 billion would not guide at quarter to quarter in terms of where fund raising is but instead to ticket make good sense.
Thats or community that we're still raising capital despite the volatility in the markets.
And the Best example, we could gave US a 10 billion.
Close commitments or commitments that we haven't legal documentation.
To close.
They are trying to parse it.
Thats going to be Q1, or two to four Q3.
[music].
Right.
Gotcha, alright, thanks very much.
Thank you. Thank you.
Thank you I'm next question comes from Bill Katz from Citigroup. Please go ahead.
Okay. Thank you very much and hope everyone is doing okay joins crisis and thanks for that really well thought out prepared commentary.
A couple of hot button topics that seem to go through the old space to this hurting seasons is some of the composition of Filos as well as a potential clawback, which just given the performance metrics in the quarter I was wondering if you could address both maybe on the seal those how much of your revenues come from base management fees versus maybe subordinated performance fee.
And then how we should we think about any clawback risk if at all on Nick I guess the carry thank you.
Hey, Bill, it's Rob I'll hand, the both questions.
Anoxia lows I just put into context, we do about 17 million a quarter of management vision concerts yellow complex, a little more than 10 million of the 17 million our subordinated management fees are more at risk.
Across that 17 million, we see de Minimis impact in Q2, where compliance today or at the end of 331 with all of our.
See tests.
Based on what we see today with downgrades coming through our portfolios wells, where we are in the market. We did see some impact in Q3 in Q4 right now we think that that's a material impact.
But as that yeah, when things change over the course the quarter, we'll make sure to update everybody on our on our Q.
[noise] [noise] and then on the second part of that question.
No it was around Clawbacks.
Our today, we've got.
Roughly 99, a buyback exposure through KKR and that's.
Few small clawbacks and a number of different funds globally on it's not a its not something that the regular part of our business and you know what we should Florida is to have our accrued carry certainly be north of any clawback liability is an immaterial way and that's really how we present our numbers for the billion 26 of acute care.
I read that we have on our balance sheet.
Net of the 99 o'clock that liabilities that we have spread across the firm in a bunch of.
Given it's a smaller ways, but again, that's pretty normal course for us I'd say that some form of clawback liability our business and as of now it's relatively contained.
Great and if I could get in my follow up even though the officials a two parter just US Guy you had mentioned using your capital for both investments as well as potential M&A.
Just sort of one is how was that a generic comment or is there an opportunity here to potentially pick up some distressed assets, that's a strategic level and if so what were to me when might you be thinking.
Oh, Thanks for the question, though I you know as you know, we're we're always looking for opportunities.
And we continue to look in this environment they may provide.
Some strategic opportunities that we find interesting we're going up a really high bar just like we always do.
In terms of areas, where we may be looking you know I would point to some of the younger areas for us whether it's real assets.
Which is a place that we've been building businesses around the world.
As one potential opportunity, we're also thinking about opportunities on the distribution front.
But nothing specific that I would point you to right now just didn't observation that when you get in periods like like this.
Sometimes opportunities come our way that we find especially interesting.
Okay. Thank you.
Thank you and operator, if we could just ask everyone to please limit themselves to actually to one question I would just be really helpful. As we look to work our way through the Q. If you have a follow up feel free of course to then get back in and we can circle back around we appreciate it.
Thank you.
Your next question comes from Chris Kotowski from Oppenheimer. Please go ahead.
Yeah, good morning, and thank you.
Scott I thought the color you gave on the actor investments that you're making it was really interesting just a couple of things around that one is when you said the 5 billion <unk> of credit investments.
Does that include.
Investments made by your portfolio companies themselves to retire debt at a discount and up curious is there a lot of that kind of activity or was the window, where they were distressed too short and then secondly, you mentioned you did in an investment in U.S. foods and I was curious was that.
Since it's a publicly traded company it was was that equity or or debt and and.
And.
Yes, why would you invest in a publicly traded company in a private equity portfolio.
Thanks for the current questions Chris first on the 5 billion no that does not include activity by our portfolio companies themselves in terms of buying their own debt discount there was some of that activity, but not extensive activity. So that 5 billion. I mentioned was just for the firm's account I'm specifically.
The U.S. huge investment that was a convert.
So it was a convert into company, we know well.
Thank you.
Our next question comes from Craig Siegenthaler from Credit Suisse. Please go ahead.
Thanks, and good morning, everyone.
Good morning, I wanted your I'm going to carry updated thoughts on F. Ari stability in 2020 from current levels I'm, just giving your previous comments to Bill's question on steel of subordinated fees and also some other sources arrests, including mark to market on NAV based funds friendship.
I think is a small component for you guys I'm capital markets transaction fees, which are actually already quite low and I and I'm forgetting. If you include any every performance fees, including coming like your BDC business Franklin Square and operate two so maybe just on pack other sources of risks that could maybe developed throughout the year and of course.
Yes that would be offset by a shadow ATM deployment and fundraising too I guess I wanted to unpack those decide source service there.
Great. Thanks. Thanks.
It's Rob and maybe the best way do this is to take or I'm, sorry and component parts.
The first and most important our management fees on as you know, which are roughly 75% of our total fees this quarter I'm, even with the potential impact.
I see on those Florida. He is a fairly minor part of our overall business and as you said our Navy based funds is also pretty minor and so as we look at our management fee component, we think it's stable.
As a significant growth in front of it.
For example that is being up 14% year over year this quarter.
On top of that we've also guided that we expect to grow our management fees by greater than 50% over the next three and change gears.
The other 25% of our fees today are made up of the combination of transaction monitoring fees I think over time I, probably bias to go out based on the overall size of KKR and how they grows.
Well as our capital markets, but access, which we think the long term growth engine for us and at a normalized environment, it's really should be able to take some additional share with the business model, we set up in the people that we have.
And maybe the last component.
The margin piece of it what we've indicated in the past is that if we're able to achieve the management fee growth trajectory that we think we can do over the next few years that we would expect to see some margin expansion.
Through our business and so while we haven't guided to a specific FRB number out we do think that when you break out all the component parts that it that it would suggest two things one a meaningful amount of stability and to some real upside from here.
Thank you I.
Sure on next question comes from Devin Ryan from JMP Securities. Please go ahead.
Hey, good morning, everyone. Thanks for taking my question.
I just would love to maybe dig in a little bit more about how the investing playbook from here I heard the comments about kind of moving the distressed team closer to.
The PE team and just trying to think about whether you guys are going to be looking at.
Maybe you know opportunities in areas that you shied away from because valuation werent interesting, but now we're getting to some.
Pretty severe distressed and so that could be more attractive war is it more kind of focusing on the same yeah. Yeah. I guess, maybe areas you have been focused on but just potentially getting a little more attractive valuations you're trying to think about what distress kind of define might look like you guys and just kind of the investor playbook about.
Hey, Kevin Thanks for the question it's Scott.
You know I would say.
Seeing this rolling out in a few different waves and it's probably you know for big themes as we kind of see how this until it from an investment opportunity standpoint, I'd say the first wave was.
Investing and dislocated traded credit in equities.
And that we were particularly busy on that front over the last couple of months.
And the commentary you gave around.
The target list that we had created were very helpful. In that regard. So there were a number of companies that we were tracking both credit and equity.
We are frankly, the prices were too high but we had a target price we've done the work and we were able to buy on the back of that work when the dislocation first showed up and some of those opportunities. We're very shortly so we were able to move quickly by virtue of that.
That was gonna wave one we continued to see opportunities there spreads are still wide and we continue to deploy capital into that opportunity set.
Secondly, we have seen is providing liquidity to companies that are indeed.
And those tend to take the form of either structured equity or credit.
And we've got the from working very well together across both PE.
Credit real estate infrastructure, where appropriate basically making sure that fall answer on deck.
And when we have companies that we know in like they're looking for liquidity, we can move quickly.
And you US Foods is one example that but we have several other opportunities like that that we're working on affirm right now.
Third big theme would be around portfolio companies, making acquisitions.
We're starting to see opportunities of that type of merge now and are working with several of our portfolio companies that are looking to grow and be consolidators through this time and there again, probably a lot of those conversations have been going on for months or years, but there wasn't a meeting of minds on valuation.
Opportunity in times like this is perhaps everybody becomes a more economic around what can get done in the synergies or even more powerful relative to the basin earnings and so we're busy there.
And then the force theme I would mention is around companies, both public and private.
That are looking to sell noncore subs.
And they're doing that to de lever where to buy back stock.
Or in some cases and little bit above.
And that wave is starting to show up so what we've seen generally that started in the treated markets and now has moved into more the private markets and so we're busy on all of those fronts as we sit here today and that's part of the reason were some crews you ask about the deployment opportunity ahead of us and the return opportunity on the on the deployed capital.
And yes to your question some of those are in areas that we made a shied away from in the past because valuations were too high and they started to come back or way.
Thank you.
Next question comes from Patrick Davitt from Autonomous Research. Please go ahead.
Hey, good morning, everyone.
Thanks for the industry exposure break up until they're all the other firms have also been giving us more color around what percentage of the portfolio. They view us, particularly stressed are exposed to this recession. If I believe you have one high profile I want to spend the press that doesn't fit into the three buckets. You gave could you maybe frame your view of the pool.
Fully a rest from that standpoint, the percent of expose companies that you maybe a bucketed into a meaningful stressed category and then Conversely, perhaps the for set that has been category just as as more okay or maybe even benefiting from this environment.
Thanks, Patrick it's Robin.
I'll take that question.
So we're not going to disclose how we break company that and to different buckets, but but we could tell you.
It's what Scott mentioned on the call and I'll expand on a little bit more is we feel really good relative portfolio construction and it's going to be a combination of.
Limited exposure and energy retail travel hospitality on leisure through our portfolio.
On the upside I think we've become overweight over the last number of years.
Online and E commerce businesses, which have held up.
Well over the last couple of months.
And then the last point around portfolio construction.
As we obviously have.
Fair bit of waiting towards Asia, as a from north of 30% about private equity portfolio today.
As is exposed to Asia or directly exposed to the Asia market.
Which is held up on a relative basis better than the U.S. in Europe.
Overall, we feel we feel good about our portfolio Scott mentioned the call. We certainly have I'm are.
Companies that are going to need some additional support through this period of time, but we think the overall construction of our portfolio in the health of our companies. It's part of the reason why you would have seen on our investment performance will adopt pretty good enough private equity businesses over the last quarter and especially if you look over the last 12 months.
Thank you.
Our next question comes from Glenn Schorr from Evercore. Please go ahead.
Hi, Thanks, that's a good lead into the question I want to talk a little bit more about the is your franchise.
Yes, both the short term in the long term short term meaning.
Besides holding up better what Ken what can you use in terms of those marketing being ahead of US an opening up and what can you learn from that across the franchise, where the opportunities are and then longer term is a little tougher because right now there's a little more China related friction that nationalism everywhere in the world and I just I don't know.
With that has any implications on your thought process about the Asia franchise, because it's such an important part of who you are thanks.
Hey, Thanks for the question Glenn.
It's Scott So I'd say first on the short term it's been hugely helpful.
Having such a broad.
Platform in Asia in such a big portfolio in Asia, because obviously, we were able to see several.
Of those countries and markets be impacted by the crisis ahead of Europe, and the U.S. and you know Weve started to see those I love those markets now bottom and start to see some improvement and so just to give you little bit of color. When the crisis started we moved to kind of a daily.
Call.
The top people in the from from all around the world, including in Asia in the Asia team sharing his insights from what they were seeing that our portfolio and on the ground very early and so we've been able to kind of learn from that as we adjust our approach in Europe, and the U.S. and on the back of those learnings and we are seeing slow improvement.
Across a number of our portfolio companies, we started to see it in Asia.
Most manufacturing facilities are kinda now operating at 70% to 100% the capacity.
We're starting to see that also incur in parts of Europe, and we're actually in some markets even than you are starting to see a bottoming.
Now to be clear, it's not it's not of the it's more like.
Elevator down escalator up types that the charts that we're seeing across the portfolio, where we started to see that happened in Asia over the last few weeks.
Now, it's showing up in the rest of the world. So it's been very helpful to us as Weve navigated all this in terms the longer term, we feel great about or Asian franchise, and the opportunity we have in front of us.
I was reminded me of eight of our 22 offices there.
Two of those are in China six outside.
We see a big opportunity to grow our business as you know from prior discussions we started in Asia in private equity and have now really been bringing the rest of kick cares businesses in Asia.
Ross real estate infrastructure credit just to name some examples growth technology.
Also bringing Asia and so we continue to see a big opportunity to expand our platform in that part of the world and regardless of what happens with the China dialogue.
We still feel quite good about the opportunity ahead for the trial.
Hey, Glenn what one at this point I'll just.
Wed mentioned when we're talking about our Asia franchise. That's that's relevant we've talked a lot of by Japan carve that out.
Over the last several quarters and how that's been a real strategy for US there, we actually had a first exit of one of our carve outs that we announced in March the sale of Alpha beta.
And that closed in April around three times on muscles money for us and you'll see that flow through our our Q2 financials, but that was.
A nice win for that strategy for us in Japan.
Thank you.
Sure. Our next question comes from Mike Carrier from Bank of America. Please go ahead.
Good morning, Thanks for taking the question just have a question on performance fees investment income.
The level of carry eligible you you seem to lessen some firms your ratio of paying carries above 60% and then like we hire people rally I mean, you mentioned the 400 million pipeline. So curious on the outlook of performance fees, maybe a bit further out unrealized tough to predict but on one hand.
It seems like a fairly challenging backdrop.
Every but some of these that you make it look a bit better configured so any additional color you can provide including the stability of interest income and dividends for the balance sheet. Thanks.
Sure I'll cover all covered most of those.
Yeah.
There's a lot about the environment thats difficult to predict right now and Carrie realized carried interest I would certainly be at the top that list I think for all of us.
But as you said there is some encouraging I statistics, we had to that 60%.
Total carry eligible that you and I today out would be and carry paymode on of liquidation.
The basis and.
And our crude carriers still stands at north of $1 billion I think the most critical thing and what we try and do every quarter is to give your visibility in terms of what we actually do now on our carried interest and I realize balance sheet earnings, which is the 400 plus million dollar number that I mentioned in the prepared remarks.
As it relates to our interest and dividends you know those have been elevated over much of the last three quarters for largely the same reason.
We have on the margin loan against our Pfizer shares and we've used that margin on fairly low LTV large amount to take a dividend.
In Q3 Q4 in Q1.
So that represented about two thirds of our interest and dividends this quarter and think that the other third of that is on is relatively stable.
Yes.
Interest rates now near zero.
I'll take a little bit of ahead on our cash balance on on our.
On our interest line item, but on the overall line should be reasonably stable going forward.
Thank you next question comes from Robert Lee from KBW.
Great. Thanks for taking my questions that I hope everyone.
Doing well.
The environment.
We have a question on the capital markets business. So.
No.
Yes.
You bet it makes sense, but at least in the near term.
That business slow, but by the same token seeks then.
Maybe investment activity or opportunities you know kind of maybe pick up there remain healthy.
There is that there's actually some near term opportunity to that'd be more resilient. So how should we think about kind of.
The capital markets business over the coming quarters.
So.
It's it's Robin I'll take that question.
We won with an interesting quarter for us.
Nine of revenue sort of in line with the 50 to 70 of baseline revenue that we had suggested our last call, but half of our business in Q1.
And third party business pretty meaningful, especially in a quarter, where KKR didn't have a lot of deployment across.
Our organization.
Let's see we continue to feel that an and.
Capital markets environments that are stable that we should be able in ordinary course to generate 50 to 70 million a corridor and then have the upside potential from some large transactions that have been a regular occurrence as part of that business.
Which is exactly why we've average.
[noise] and that process over the last years.
As it relates to the near term and I'm not sure where we're yet in normalized capital market type environment.
And so for Q2, we might be on the lower end.
That $50 million to $70 million range, it's certainly too early to say and there's a lot of the quarter left to go out but.
We do think that business in off market opportunities when when capital is scarce is where that business can really shine around some of the larger transactions. They continue to come through our pipeline.
Thank you.
Next question comes from Brian, but down from Deutsche Bank. Please go ahead.
Great. Thanks, Im wondering folks are actually your phone right right to Rob's question.
In this environment.
Maybe you just got to Rob if you can characterize.
The deployment capabilities in terms of anything getting to lead with that because of an energy crisis, and how that might sort of how you're thinking that my project out for the rest of the year certainly if we get you know more contagion second wave and then the how you see.
Your your both through capital markets business in your balance sheet.
Being used to to help get deals done that you know a lot of a different Kent, Kent due to that extent.
Thanks for the question, Brian It's got I'll take that.
In terms of deployment opportunities being delayed.
I'd say, there's probably a bit of a pause that went on to especially during the first several weeks of the crisis as people were trying to.
Process, what was happening, but we've actually started to see our our pipelines pickup.
Around the world some of it was in the areas that I mentioned in terms of some of the.
You know providing capital to companies in need of liquidity the rescue type opportunities.
But we're also seeing some larger scale private markets opportunities begin to re emerge.
As an example, our pipeline in Asia is very active right now.
So I don't think that's going to have a big impact over the long term will it's all path dependent obviously, but we are starting to see.
Pipelines pick up on the back of some some improvement maybe in the visibility.
In terms of timing.
So we'll keep you posted on that but no big long term change just a few things me again, good pumped into the back half that might have been my first though.
In terms of key theme in the balance sheet. It's a great question, we really view our model is providing us with a real advantage in times like this.
In some of the deals that we've been able to get done during periods of dislocation have been because.
We have been able to use the balance sheet and our capital markets business to access financing, both equity and debt when others couldn't.
So we've had several situations over time, including recently, where we were not necessarily the highest bidder, but we were the only better that could actually access the capital.
Financing certainty.
So we as in prior periods like this are viewing Casey I'm in the balance sheet is providing us with a real strategic tool to be able to do that again and so good question. We're focused on making sure that we've got liquidity on the balance sheet and.
Capital markets team is really well connected with our deal teams.
Make sure that we can do that well in the time like this.
Thank you, Brian It's Craig just one one tangential point.
As it relates to capital markets and as value add and certainly in strategic value is greater in periods. Like this sometimes people asked that question in the framework of our own portfolio companies.
One thing that I think it is helpful. Just understand is so after the capital markets team has been to position us.
In allow us to be in a in a position of strength entering this volatility. So when we look across the private equity portfolio in whole, we really have very few near term maturities. So when we look at.
The maturities of of of our portfolio companies and what we see in 2020 and 2021 that represents only about 4% of.
The quantum of of that being a long term debt that we have so I think we've given the strength of of capital markets. It. It does help us allow us to be front footed when when there is periods of volatility I think it's also been very helpful. In positioning us well as we entered the spirit.
Thank you.
Your next question.
Operator, you there we can't a week, we get everything.
Thank you I show next question comes from Chris Harris from Wells Fargo.
Thanks, guys.
Can you can you give us an update on where things stand with respect to the ownership of your stock by index and long only investors and related to that.
But do you anticipate the potential Russell index might might do to that number.
Hi, Chris It's Craig So I think we've.
Seen a nice increase.
As it relates to not only index buying and that index ownership.
But also as it relates to mutual funds, who do you look at those benchmark indices as they make their investment decisions.
And it's really been our experience there that has a really influenced started decision as it relates to as it relates to Russell.
So in terms of the when we look at each yes in that passive amount.
That's that's been in the six mid Sixtys between 16 70 million shares that had been owned by those those index providers and as it relates to Russell you know first there are those essence strategies that are directly linked to those indices like the Russell 1000 3000.
Thanks, Matt it's pretty straightforward it a lot of you've done that Matt.
Again, I think it's it's it wouldn't would suggest a teens million.
In the teams as it relates to.
There was more formulaic strategies and really the second piece that has really most interested asked or are those mutual funds that are benchmarked against those industries in its indices.
And our ability to market ourselves through to those institutions increase our mindshare and as we looked at it we think that second piece should even be you know more more powerful them at first and so you know recognizing that we use.
I've spent a fair amount of time is as you'd expect looking at Russell you know they publish a pretty detailed construction in methodology document and within that you know they they review a whole series of considerations for public equities domiciled market cap float structure, a whole series of items. So of course leaves.
You know, where you that document pretty closely and alongside of that as we mentioned earlier have meaningfully engaged directly with for two Russell over the last couple of months. So as we stated earlier, while well any decision on index inclusion is it's obviously their decision to not ours, we believe we need Russell's requirement.
Thank you.
Last question comes from Michael Cyprys from Morgan Stanley. Please go ahead.
Hey, good morning, Thanks for taking the question I'm just wanted to ask around LP demand. It certainly heard you on the 10 billion of new commitments.
Coming in the door, but I'm, just hoping you could talk little bit more around how you see LP demand for the private markets evolving and this backdrop in on one hand, you up at the mine denominator effect that drives allocations higher and lower distributions from the asset class for all the so that means help you have to fund commitments and the allocations from elsewhere in the portfolio what could be a challenge.
Thank you have low rates and so maybe there's more demand I just curious how you see these sort of pieces and they'll piece navigating through these dynamics and the impact it could have on the asset class do we see more secondary activity and there's not a part of the marketplace that you'd like to have more presence and.
Thanks, Michael Scott.
Take those and it's great question and they did a bit early honestly to be able to give you a definitive answer on it.
I think you're right you know there's going to be a little less give me some puts and takes right theres going to be questions for some of the institutional investors around the denominator effect.
And what happens with the rest of their portfolio and their allocations to alternatives.
But frankly, we've we've started to see the public markets rebound.
So I think what were initial questions about that now there's a little bit of uncertainty as to whether the denominator effect will be the consideration or not I think we're just going to have to give that a bit of time to see how that that settles out. The last time that happened. What we saw was not a big reduction in allocations to alternatives, but actually an increase in the allocation to alternatives.
So that.
Intuitional investors could actually keep investing in the asset class. So we'll see what happens here, but it's pretty tough dependent I think on the flip side of that your entirely right I think even the conversation to last handful of weeks, we see I use around the world. There is a real recognition that low rate environment [noise] went to the virtually no rate environment.
And they need to keep looking for ways to generate returns.
And so the dialogue around alternatives continues which is why those conversations I think pivot pretty quickly from defense to offense and so we take that is encouraging we think investors around the world, they're going to continue to.
Look to the private markets for returns as they are expecting lesson last out of their traditional fixed income and public equities portfolios. We think that's great for us.
We're also find me just as an incremental piece of color that during this period of time there continues to be a lot of interest from the insurance space, which tends to be quite liquid and conservative in its approach that we've been quite active and our dialogue with insurance companies over this period of time and from the high net worth in retail markets right.
Seeing them lean into this from an option standpoint, as well so there's lots of twos and frozen all of that.
But overall, we think it bodes well for our business is gonna be and even greater need for return and if you think about.
Power of the illiquidity premium.
That the alternative space provides the lowered the overall normal market return is the greater that illiquidity premium is as a percentage of the total return.
And so there's even more interest in what we do we think coming out of this.
In terms of your question in the secondary market.
It's a space that we continue to spend time on and have looked at from time to time I think there will be opportunities for.
Secondary space to continue to grow and that's one of the areas that we look to periodically as we think about other opportunities for us strategically.
But nothing to report today on that front.
Thank you.
This concludes today's session at this time I like to turn the call back over to Mr., Craig Larson for closing remarks. Please go ahead.
Thank you operator for help thank you everybody for joining our call. We look forward to give me your update next quarter and for any follow up items of course, please feel free to reach out to an economist.
Or me directly thank you once again.
Ladies and gentlemen, this concludes today's conference call. Thank you for participate and you may now disconnect.
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