Q4 2020 KKR & Co Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to KKR is fourth quarter, 'twenty and 'twenty earnings Conference call.
During todays presentation, all parties will be in a listen only mode. Following management's prepared remarks, the conference will be opened for questions.
At that time, if you'd like to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder of this conference call is being recorded.
I would now like to turn the call over to Craig Larson head of Investor Relations for KKR Craig. Please go ahead.
Thank you operator.
Good morning, everyone and welcome to our fourth quarter, 'twenty and 'twenty earnings call.
I'm joined this morning by Scott Nuttall, our co President and co C of O L and.
And by Rob Lewin, our CFO.
We would like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures and our press release, which is available on the Investor Center section and take care of Dot com.
This call will contain forward looking statements, which do not guarantee of future events or performance.
Please refer to our SEC filings filings for cautionary factors related to the statements and like previous quarters. We've also posted a supplementary deck on our website.
And we'll be referring to over the course of the call.
Thank you everyone for joining us we hope you and your families are safe and healthy.
Our call. This morning is organized into three parts.
The first relates to where we've been with a focus on our fourth quarter results. We had a strong finish to a solid year and I'm.
I'm going to walk you through the.
The second part of the call relates to where we're going.
Rob is going to lead you through this part of the car.
This includes and update on the global Atlantic acquisition, which closed on February 1st and Additionally, Rob is going to review some important changes and our reporting and compensation framework.
And also introduce new fee related earnings per share guidance is part of it.
And finally, Scott will offer some thoughts both on our year as well as our outlook.
Turning first of the results and page two of our supplement you can see that we had the success we had a successful year.
And the upper left hand corner of the page assets under management grew 15% to 252 billion driven both by investment performance. In addition to new capital raised 'twenty and 'twenty was a record fundraising year for us and.
And churn management fees grew by 16% year over year to $1 4 billion.
Looking at the bottom left hand corner book value per share continue to compound.
At year end and our book value per share was $23 and nine states, representing a 20 per cent increase from a year ago.
And finally on the bottom right hand side after tax distributable earnings increased 8% to $1 5 billion for the year.
When you look at this page more broadly from 2016 to 'twenty and 'twenty, we've seen our AUM and management fees grow at a compound annual growth rates of 18 and 15% respectively.
Book value per share has compounded and 17% annually and remember in addition to the compounding dividends are being paid out of alongside.
And with the growth and the earnings power of the firm.
And unrealized carry and embedded gains and our balance sheet, both at record levels as of 12 31.
And we're well positioned to see an acceleration and earnings growth from here.
Now, let's dive a little deeper into our results for the quarter. Please turn to page three of the supplement.
Focusing on our revenues management fees of $393 million are up 24 per cent compared to the fourth quarter of last year.
And increased 9% just from last quarter, driven by fee paying AUM growth as well as $22 million of catch up management fees related to capital raised and strategies that had already begun the investment period.
Net transaction and monitoring fees were up nicely.
Capital markets fees of $193 million is this is the strongest quarterly figure we've reported in two years.
Fees here continues to be diversified across geographies with a little over 40 per cent of revenues for the quarter and the year coming from each of the U S and Europe with about 15% coming from Asia.
And realized performance income and realized investment income totaled 392 million net numbers right on top of the 390 million update we issued in December.
Notable contributors this quarter.
Modernizations and fiserv and that the court as well as just over $100 million and incentive fees of Marshall Wace and.
And our blended basis, our key exits this quarter were done at over two times cost.
Turning to our expenses.
Compensation, including equity based comp was 376 million apply implying a 35% compensation margin for the quarter.
And bringing our co op margin for the year to 38, 7% well inside of the low forties total comp ratio. We've discussed on these calls now for some time.
You did see a modestly greater skewed towards the equity based comp in the quarter as we issued some stock to employees as part of our year and co process.
And remember as always our intent is to repurchase shares and offset dilution from shares issued to employees overtime.
Non compensation operating expenses came in at $124 million essentially flat year over year.
So for the quarter were reporting after tax distributable earnings of $431 million or 49 cents per share up 11% on a per share basis relative to Q4 of 2019.
And looking at the results for the full year on the right hand side, we're really proud of the results you see on the page.
All of the market volatility and challenges over 'twenty and 'twenty management fees increased 16% capital markets fees increased 17%.
Aggregate revenues increased 8%.
It was 150 basis points of margin improvement operating earnings were up 11%.
And well after tax to <unk> per share for the year compares favorably to 2019.
Worth, noting the we completed the majority of our financings related to global Atlantic in Q3, which is burdened our after tax day <unk> per share in advance of the revenues and earnings associated with the acquisition.
And in addition to the P&L metrics, you've seen continued acceleration and our fund raising new capital raised in 'twenty and 'twenty totaled 44 billion of 72% increase compared to 2019.
More on this and a couple of minutes.
Moving to page four you see our investment performance.
This has continued to be of real strength for the firm and so.
'twenty and 'twenty, our flagship private equity funds returned 32 per cent well ahead of the 17 and 18% total return figures of the MSCI World and S&P 500 indices.
Performance here was strongest in the Americas, driven by a number of digital and tech oriented investments as well as strong performance and some of our carve outs Americans 12 appreciated 48% over the year.
And real estate, our flagship opportunistic funds appreciated, 8%, which compares quite favorably to its benchmark, which appreciated one per cent and negative performance across major REIT indices and.
And our infrastructure three funds had a gross return of 3% well above its benchmark, which declined 7% in 'twenty and 'twenty.
And our more mature infrastructure to fund had an excellent year appreciating, 34% driven by a number of sizeable modernizations.
Our alternative credit flagship funds had a strong Q4 up 9% for the quarter. The finished flat for the year.
And there's and update our dislocation fund, which we launched in the midst of the pandemic and.
The continued its strong its its strong start up 16% and the fourth quarter and for the year is up over 50% on and on annualized basis.
And leveraged credit, which is the largest of our credit businesses by a U N. The composite was up seven per cent for the year compared to three 8% for the O S. T. A.
Looking at page five of the deck investment performance has helped US continue to raise capital. We raised 12 billion and Q4 and a record 44 billion for the year up over 70% from 2019.
Notably we brought in 17 billion of AUM for our Asia strategies and 2020.
Representing almost 40% of new capital raised.
Asia real estate and age of infrastructure both held their final closes in Q4 wrapping up two very successful first of all fund raises for us.
And on top of our success in Asia, we've grown our core platform this quarter with capital raised and coffee as well as the $1st raised and our new core infrastructure strategy.
And it's worth highlighting the continued scaling of the real estate platform.
Driven by new capital raised at our Asia, and Americas opportunistic strategies as well as core plus real estate.
AUM across the platform has increased from 9 billion of year ago to over 25 billion of pro forma for G. H.
And we continue to have a lot of growth opportunities ahead of us we're highlighting this on the right hand side of the page.
Looking at strategies, and the market or expected to come to market over the next two years, we have four flagship strategies 20, plus additional strategies with GAA and top of that.
And I have two final items to touch on before turning the call over to Rob.
The first consistent with historical practice, we're pleased to announce and increase in our annual dividend per share from 54 to 58 cents.
This change will go into effect, beginning with any dividend to be announced for the first quarter of 2021.
And second we're excited to announce it will be hosting a virtual investor day, the morning of April 14th and <unk>.
<unk>, our business and more detail and also focus on the growth we see over the coming years, we hope that you'll be able to join the standards.
And with that I'd like to turn the call over to Robyn.
Thanks, a lot of Craig.
Turning our attention to the global Atlantic as announced last week, we closed and our acquisition of GI and February of the first and.
And wanted to provide some key updates.
Between signing and closing assets of Gia have increased significantly.
We had and oversubscribed equity co investment process and that allowed us to bring down our ownership to approximately 60% our desired level.
The racing primary capital, Virginia at the same time.
The long term impact that we expect EBITDA to have on our financials has increased considerably compared to the figures discussed when the transaction was announced in July of 2020.
And most importantly, we continue to work exceptionally well with the <unk>.
Let me spend a few minutes from some of the details.
First in terms of GH footprint.
AUM has increased from 72 billion of announcements to 90 billion of 12, 31 and increase of roughly 25 per cent.
This growth in AUM between signing and closing was well ahead of our expectations.
The strength of <unk> platform is clearly evident and both at the individual channel G. A has strong and better relationships here with over 200 banks and broker dealers.
In addition to it the institutional channel, where it's the leader and block pension risk transfer and flow reinsurance.
Particular note Jay reinsured over $16 billion, and three separate block acquisitions, and the third and fourth quarters of 2020.
So the fundamentals of the business, we acquired remain compelling.
Slide six of the supplement update you on what this asset growth does for some of our important operating metrics.
Taking a look at the top of the slide you can see the impact on KKR day you at.
With the increase was 36% of 300 of 42 billion.
As all of these assets will immediately hit our fee paying AUM. This.
Asian results out of 48 per cent increase and that figure from 186 billion to just over 275 billion.
And we now manage approximately 120 billion on behalf of insurance companies and believe we are well positioned to further partner with the insurance balance sheet overtime.
I think the bottom half of the stages, particularly worth calling out and you'll see the transaction increases our perpetual capital by five times from $22 billion to 112 billion.
And we now have 43 per cent of our capital base that either perpetual or with multi decade recycling provisions.
And 86% of our capital overall will now have the contractual life of over eight years from inception.
Jay provides more scale and it does so and a permanent what meaningfully advancing several important strategic initiatives for us all at once.
As Jason investment manager, we are focused on bringing our asset management and origination expertise expertise to bear on behalf of global Atlantic and its policyholders.
Jay already had a strong investment track record and an accomplished team of investment professionals.
Working together, we believe we can further improve <unk> risk adjusted return profile.
Now as it relates to the transaction itself J was acquired for $4 7 billion or one times book value at close.
Following the successful co investment process that was led by our capital markets team. We now have an approximate 60 per cent interest and GI and we were also able to raise $250 million of primary capital, which really does set the business up nicely for future organic and inorganic growth.
Of the $4 7 billion dollar purchase price plus $250 million primary race, we funded our share which is approximately 3 billion three of the $1 9 billion of proceeds raised and our August mandatory convertible and senior note issuances with the remainder of coming from cash on our balance sheet.
In terms of our financial results, you'll remember that there are really two ways. The G. A impacts of distributable earnings the.
The first are the management fees regenerate SGA as investment manager.
When we announced the transaction in July we mentioned that we expect net management fees to increase by at least 200 million over the next couple of years as we wrap up our work with <unk>.
This reflects management fees, we earn SGA as investment manager as well as fees generated on assets that we manage directly.
This figure is net of operating expenses, which in part relate the strategies that we aren't investing directly.
Given the increase and <unk> asset since the announcement of the deal our confidence around exceeding the 200 million target has certainly increased.
The second way the G. A impacts our P&L is through our share of their operating earnings.
As noted earlier.
G as book value was approximately $5 billion.
For illustrative purposes, which could help your modeling if you assume the 12% to 13% Roe and.
It took our 60% share that would suggest annual earnings and the range of 360 to 390 million running through our financials. These.
These earnings will show up and our P&L through our insurance segment operating earnings.
In terms of our financial reporting Jay is now the majority on subsidiary so we will consolidate their financials into our GAAP earnings starting in Q1.
As it relates to our segment results.
And we will be introducing a new insurance segment that was disclosed sort of financial information, including our share of their adjusted operating earnings that I just referenced.
Well then use this profitability measure and I walked the KKR total distributable earnings I'll review of prototype of our segment earnings of just a few minutes.
Now this all of these nicely into the second topic related to some important changes, we're making and our reporting and our compensation framework more broadly and 2021.
Looking at page seven of the supplement.
We feel that we have never had better line of sight better visibility into our management fees as we do right now.
With G. Eight we've added a significant stream of perpetual management fees and.
Additionally, as you heard earlier from Craig management fees across KKR of continuing to scale and we're in the we're in the early stages of and active fundraising cycle that includes the races across a number of our larger benchmark strategies.
Putting these two dynamics together, we have increased visibility of our fee revenue as well as meaningful confidence and our ability to scale from here.
As a result, we now have an opportunity to change our compensation framework and a way that we think should really benefit our shareholders.
Currently we talk about comp and comp margins as a percentage of our total distributable revenues.
Our historical guidance here has target of low forty's overall comp margin.
But that compensation figure has been a single number based on all forms of revenue.
Starting in 2021, we are going to decouple, our compensation into its component pieces.
Let me walk through the changes to our framework before pulling it altogether. Please take a look at page eight.
The first piece relates to fee related compensation.
We expect our fee related revenue to have and annual cash comp load and the range of 20 to 25 per cent.
To be clear.
Given our line of sight and outlook around our fee revenues. We believe this range allows for a base level of comp to be paid across the firm and all operating environments, including gears, where monetization are more challenged.
In terms of our other forms of compensation for our realized performance revenue, which is primarily driven by carried interest or range of annual cash comp is expected to be 60 to 70 per cent.
I realized investment income from our balance sheet will have and expect the cash comp load of 10 to 20 per cent.
We believe this change will benefit take care of shareholders and a number of ways.
It will enhance the transparency of how our compensation pool of gets formed and the profit to be derived from our three of forms of revenue.
It will also create better alignment as compensation of KKR will become even more success based and aligned with the realized investment performance of our funds.
We think this change is advantageous for both of our public shareholders as well as our fun limited partners.
And from a P&L perspective, this change deliveries of much higher flow through of our fee related earnings to our shareholders.
We believe this will also provide greater line of sight to the drivers of the growth and margin expansion of our FRE going forward.
And finally, we believe this change will make the economics from our balance sheet clear.
Our balance sheet is positioned to generate excellent returns.
We have average 21, 5% over the last two years.
And it does so without any fixed expenses, which are all borne by our fee revenues and now of modest and variable comp load.
When you take a step back and compare these characteristics of the other balance sheets. We think this is fairly unique and with continued performance. We believe these attributes will lead to a higher multiple being applied to our balance sheet over time.
Now, even though we are breaking out of compensation into its component parts. We will continue to track our aggregate compensation margin, including equity based comp.
And of normalized operating environment, you should expect our comp ratio to be roughly in line with our current levels and.
And environment, where we have elevated levels of successful monetization our comp margin is likely to tick up a bit.
And a more challenged environment.
The monetization or lower and you should also expect to see our comp margins go down which will provide some level of the added protection to our operated or operating earnings.
Let me repeat this part of it.
It's a really important piece to be clear on.
These changes are not about increasing compensation on the enterprise.
As an example, if we apply the midpoint of our new compensation range as to our actual 2000 and 'twenty revenues, our compensation margin would've been 38, 6%.
This compares to a reported comp margin of $38 seven per cent for the year.
So this change is really about how our comp pool is calculated and creating more visibility and flow through of our fee revenue to our shareholders, while adding a bit more variability and our comp margin based on our performance.
And we are confident we can achieve that while not increasing the overall compensation paid by the firm.
In connection with these changes you'll see that we expect to make a couple of adjustments to our financial reporting to bring it more in line with our peer set and allow for easier comparability for our investors and analysts.
The first change is to build two of new simplified fully burdened fee related earnings figure with individual compensation components as described a minute ago.
On this page you can see KKR is distributable operating earnings as you think of them today, but now titled the asset management and operating earnings.
This will then be added to our share of G. As earnings to arrive at a total distributable operating earnings line as you work your way towards the after tax distributable earnings.
Please note that we've included a more detailed prototype of our second the financial profile and definitions of the appendix on pages 10 and 11.
In addition, consistent with our peers when calculating after tax distributable earnings going forward, we will no longer include equity based compensation as an expense.
At this point, we believe we are one of the few alternative asset management firms that reflects equity based compensation as an expense and our reported total distributable earnings.
This has been of sorts of confusion at times and particular as investors look at relative valuation multiples. So we're going to conform to our peers and make it easier for our shareholders to compare results.
Equity based compensation will of course still be disclosed in our earnings release, and as we think about aggregate compensation and comp margins it will be of key input.
But it will not be included within our reported after tax D. E of our after tax of the per share metrics.
And finally, let me spend a minute on our fee related earnings give.
Given all of our growth avenues, and the visibility of that I spoke of earlier, we see a clear path for F of eight to comfortably exceed $2 per share for 2022 day.
This anticipated growth will be in spite of some large investments, we intend to make across technology and distribution and marketing over the next couple of years, which we believe will benefit our FRE and the EE well beyond 2022.
We know we have already as an important financial metric to our investors and we intend to provide periodic updates on our progress.
And with that let me hand, it off the Scott.
Thank you Rob and.
Thank you everybody for joining our call today.
Given everything already covered I'm going to be brief.
First a quick comment on global Atlantic.
The G. A transaction is highly strategic for KKR.
It meaningfully expands our base of permanent capital further.
Further diversifies and skills of our business and significantly grows our position within the insurance industry.
The acquisition of also improves the quality and visibility of our earnings.
And G. A strong and experienced management team is of critical element of this transaction.
We see a number of growth opportunities working with our new partners.
In short this is a meaningful development for us and we look forward to keeping you posted on our collective progress.
Second.
A couple of thoughts on KKR and more broadly.
And the senior team, we just spent the better part of a week and our annual strategic planning meetings.
Listening to the discussions and presentations and those sessions was incredibly energizing.
And of nearly 45 years and business, we've never had a stronger management team.
Your line of sight to our near term results more ways to grow and more confidence and our future.
This confidence is driving our announcements today and sharing our belief that we can comfortably exceed $2 per share and FRE next year.
And even more exciting we see significant growth beyond that.
We know we have discussed a lot of information on this call.
And that is one of the reasons, we're looking forward to our April Investor Day, We think it will be helpful. For example for everyone to hear of global Atlantic CEO, Alan Levine and talk about G E and its growth prospects.
And we'll also spend a significant amount of time detailing the building blocks of the firms growth plants, which we think will help you understand why we're so optimistic about.
About the path of ahead for us.
We thank you for your partnership Trust and time.
And are happy to take your questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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We ask that you. Please limit to one question and no follow up if there was a follow up question you can reenter the queue by hitting star one on your telephone keypad.
From participants using speaker equipment and may be necessary to pick up of your handset before pressing the star keys, one moment. Please while we poll for questions.
My first question comes from Bill Katz with Citigroup. Please proceed with your question.
Okay. Thank you very much for taking the questions and thanks for the enhanced disclosure it is super helpful.
And maybe tying together two of the points you guys are highlighting of could you unpack for US maybe the walk up to the two dollar number of plus for 'twenty and 'twenty two between maybe the legacy KKR platform versus G. E. Just given where the assets are your ownership of a pro forma ownership versus at the time of the deal and then Rob just the point of clarification.
<unk> when you mentioned your scenarios with the comp ratios and up down realization backdrop I was little confused by the ratio being down was that the comp ratio of being down one of the FRE margin being down if the monetization of a down thank you.
Great. Thanks, a lot bill for the question to be clear of that would be if we have lower monetization slower successful monetization of our anticipation is that our comp ratio would be going down as.
And as we're making the compensation I take care of them are success based in terms of your question around 2022.
Sorry.
It's really a combination of of a bunch of different things and that's given us confidence and being able to achieve that target out into the future I'd say. The first is is management fees come and go cross you know our existing platform.
And you know through our different products and and geographies and the scaling of that Craig referenced earlier and the call. A second piece of it is clearly the increased confidence that we have and and global Atlantic and they're scaling of assets and our ability to work constructively with them and we also continue to see a lot of opportunities to scale of the breadth of our products and what we cover and our capital.
And that's business as well as different clients and so when you add all of that together are inclusive of insuring that we monitor expense management, we feel really good that we should be able to comfortably exceed $2 per share of FRE in 2022.
Thank you.
Our next question is from Glenn Schorr with Evercore ISI. Please proceed with your question.
Hi, Thank you.
Just curious your thoughts on the current or to let's just call. It 2021 realization backdrop. It M&A is super active spacs are even more active markets are at their highest I'm just curious on how you balance those thoughts with the investment opportunities are.
That are out there because you have some of your flagship funds that are only say past investor day, I know, we're trying to get to the other side from more capitalized. So curious on how you see that landscape.
Yeah, Hi, Glen its it it's Rob Thanks for the question and Scott of probably jumping here at some point as well listen we're very constructive from a monetization perspective.
And if you look at our Q1 line of sight in terms of realized carry and balance sheet revenue as we sit here today, we feel really good that we've got deals that are signed and are close that would represent greater than $375 million of revenue in Q1, and so we agree that the the market backdrop and is one that that's quite an interesting.
And one as it relates to being able to monetize investments.
Yeah.
Yeah, and Glenn So I'd say look and we agree with your comment we're very constructive on the backdrop for monetization and broadly and it is you know of.
Across the board.
And there's M&A, there's a strategic sales their sales the sponsors there's leverage recaps dividends and so a lot of different opportunities for us to monetize I would also say, though despite the overall valuation environment.
We continue to be very active in terms of deployment as we talked about and the last call. We've been really leaning into a number of investment themes that we think will be accelerated by the.
The period of time, and so our pipelines are actually quite full as we head through the first quarter here.
Thanks, very much I appreciate it.
Thank you.
Our next question comes from Alex Blaustein with Goldman Sachs. Please proceed with your question.
Great. Good morning, Thanks for taking the question I was hoping we cannot pack of the trajectory from management fee growth a little bit more it sounds like fundraising momentum is really strong if we look at the deployment activity in the quarter I think it's been it was one of the best we've seen and a long time from you guys. So all of that feels like we could see a little bit of fat and little.
Faster kind of turning on and the fees and some of the some of the larger funds. So so maybe kind of help us bridge kind of Standalone KKR management fees for 'twenty, one 'twenty two relative to your sort of price targets of 50% plus growth and then Rob I was hoping we could get a jumping off point from management fees for G E.
Specifically that will I guess start to come in and the first quarter and how they expect to sort of ramp to that $200 million plus number are the you alluded to.
Yep. Thanks, Thanks, a lot of Alex and and maybe I'll take the second part of your question first and and then head back to the first part of it. So I think it'd be probably helpful for us to break down the.
And that management fees from global Atlantic that we expect to receive and and a few different pieces. The first is that we will have and IMA across jays asset base.
We have agreed with the regulators that of fee there will not be in excess of 30 basis points.
We also intend to manage assets directly for G. A wearable charged the relative fee rates for other similar to the large investors and those strategies offsetting both of those two.
The revenue lines or some expenses, which include paying out the investment managers, who perform services that KKR does not perform today the.
Net of those three items together is really what generates the $200 million of net management fee revenue that we expect to be able to achieve a couple of years out that we talked about earlier as well as our belief that we've got a path to a higher number over a similar period of time and said we don't have an exact timetable as you know when and when.
When.
Those numbers will will effectively be generated and in large part because of the need to ramp up of our own direct origination as G. As investment manager, but we feel really good you know and being able to achieve these numbers a couple of years from now and so as you think about you know year, one, which I know you asked about explicitly I'd say.
And that we feel good about achieving somewhere around half the two thirds of our 200 plus million dollar target and you're one.
Of our investment here and partnership with Global Atlantic.
In terms of and the second part of your question. So obviously, we feel good about the trajectory of G. E E and the good start that I think we're gonna have and in year, one and being up and a ramp.
I'd say, we feel incrementally better about our ability to achieve 50 plus per cent management fee growth.
Over you know I think we said between 2019 and 2022 and so our.
Our expectation as you think of better 2022 F. I read is that we should be you know north of that number but we don't have any further guidance on the specifics.
Yeah, just one clarifying thing Alex on that just to be clear. The the 50 plus percent growth that Rob mentioned was the organic before G. A so I think of the punch line and we feel better about being able to meet or exceed that and then you've got global Atlanta and on top of that so none of that gets you to the higher number obviously yep.
Yep that makes perfect sense, great. Thanks for all of it or do you go guys. Thanks.
Thanks, Alex.
Our next question comes from Jerry O'hara with Jefferies. Please proceed with your question.
Great. Thanks, and good morning, maybe.
Maybe just touching on geographic opportunities and the Asia has been clearly the source of strength throughout our 'twenty and 'twenty. Both in terms of fund raising but I think also other capital metrics, perhaps you could give us a little color on what what 'twenty 'twenty one might might have in store for for outlook, just and in terms of some of those channel.
The capital formation trends. Thank you.
Hey, Jerry it's Craig why don't I start there.
And I think Scott may add on and so look I think in many ways. When we think of deployment. The interesting aspect here are really rate really relates to the increasing balance of the firm. So historically.
Private markets deployment was clearly driven by private equity and we've seen and the last handful of years, you're correct Asia be very strong for us and I think we do expect deployment and the region again to be after the Scott had alluded to earlier, but I think in many ways. One of the other interesting points here are really relates to the growth and the <unk>.
And its footprint for us so infrastructure real estate energy and I think there's a real opportunity for a more balanced deployment for us given that scaling so and for at this point the business is global and the team is busy everywhere.
And real estate, we mentioned in the prepared remarks, and the growth of the platform. We've seen a significant ramp. So I think overall, we look at you know the opportunity for us as being meaningful given the varied pools of capital that we have really across geographies.
Yeah. The only thing I would add Jerry is the if we continue to see these opportunities across the number of these investment themes that we discussed and and Asia of courses and the most of our come out of the Covid period more quickly than other parts of the world and so we are kind of seeing more regular.
The activity levels on the ground and a number of those markets.
Helpful.
Thank you.
Our next question comes from Patrick Davitt with Autonomous Research. Please proceed with your question.
Hey, good morning, guys.
My question is on the the kind of compensation and shift does this come with kind of explicit discussions with the employees that theyre going to be paid.
Difference and years with with few realizations I guess in other words do we have your assurance and and a bad realization here youre not suddenly going to have a 30 or 35% of FRE and compensation ratio and through that lens do you worry of this could create retention issues and bad realization here is that people are getting paid and meaningfully less than at other firms.
Hey, Patrick of its Rob let me start off of it. So I think of really important component of this change.
Is the fact that we feel like we're able to make this change today given the scaling of our management fee growth based on what we've had historically and what we see you know prospectively over the next couple of years inclusive of the G. A acquisition and so we feel today that we're at that inflection point, where we will able to compensate our firm based on the fee revenues that we have.
Today and downside scenarios in terms of employee communication and of course, you know what this is something that we've been closely linked up with our of senior employees on and I would say this type of change impacts our senior employees are by far the most and a couple of comments there one are.
And your employees are all big shareholders of KKR, and we think that this is certainly a benefit to our shareholders and that's why we did it and we think our senior employees are also more used to more variability and their annual compensation based on performance and frankly, it's something I think they.
You know like us as part of their the overall compensation framework and as we think about being competitive and the market for talent.
And we certainly see that dynamic where you know for senior talent, there is more variability and compensation for performance.
Yeah, Hey, Patrick and Scott just a.
So the jump on and I think of the base.
The question is do we plan to stick to it.
The answer is yes.
And we've been talking about this potential.
Potential change internally for the last few years and.
And you know working to Rob's point get to the scale and diversity and visit.
And where we thought we could tell you this and stick to it.
And you know us well right we're deliberate people.
We're very careful about what we commit to.
And we do not intend to the lab.
And you our shareholders down.
So we would not announce there's so much we're confident we can deliver in these comp range it and all operating environments.
And to Rob's point, yes, we talked about this with our partners of the firm everybody gets the alignment.
And over 35 or 30 to 35 per cent of the stock give or take.
So we think it's the right change and you know we've kind of been building towards it for the last several years.
Great. Thank you.
Thank you.
Our next question comes from Craig Siegenthaler, with Craig and Credit Suisse. Please proceed with your question.
Thanks, Kevin Good morning, everyone.
Good morning, I wanted to come back to your comments on a global Atlantic. So you know, we watch T expand and the disability with the Union and transaction last year. So I wanted to see if you could talk about some of the other insurance verticals that and she could expand into really outside of annuities and could we see a dish.
And all of disability transactions in 2021.
And thanks for the question Craig It's Scott.
The first off I think you're right. We did the transaction with you know the the book with the disability book.
It was suffice it to say it was structured in such a weighted it was much closer to and annuity book and the disability book in terms of what it means for us and so it really is not and it's taking different kinds of risks and the global Atlantic and.
And it was a it was more just that the the transaction was structured to make it the the risk that we wanted to take and as we talked about and the prior calls and we really like the the G. A team is very focused on taking particular kinds of risk. So you shouldn't take that change and strategy in terms of the other insurance verticals.
I think from the time the thing you should expect that we're going to stay focused on annuities are life and the other existing businesses of global Atlantic. We don't have any plans to meaningfully change that and we'll continue to execute that through the individual channel and the institutional channel as we've discussed through its various forms and we'll keep you posted.
And I never say never in terms of and the evolution of the strategy, but we're focused on that's what got us here.
And you Scott.
Thank you.
Our next question comes from Devin Ryan with JMP Securities. Please proceed with your question.
Okay, great and good morning, everyone.
Good morning.
And I want to ask the question here on the capital markets business, and and really just trying to get a little bit more context around how the platform of scaled over the past couple of years of any stats you can provide around the size and number of people and any incremental capabilities really what I'm just looking at the kind of think about it the parsing through.
And what's been a very good backdrop for the business and and obviously you guys have evolved here versus you know how the broader platform has.
And has grown and and that just you know kind of the follow on to that any additional color for what you're expecting out of the business for 'twenty and 'twenty one.
Hey, Devin.
Let me take that one so I think.
And it's really good question as we think about the scaling of our cap of markets platform of I'd say, it's really and in three components. The first was really around our geographic breadth and as as you know this business started really is predominantly a U S centric business, but we've got a highly skilled team of capital markets professionals that today are all over the world. So.
<unk>, Okay cares businesses all over the world, we talked about it earlier, but you know KKR capital deployment for the year was pretty well spread out between the Americas Europe and in Asia and that was all covered by our capital markets team second thing. It is really about building out the product capability to be able to follow kkr's evolution from a product standpoint, so as we've.
Expanding into asset classes like infrastructure, and real estate and aspects of our structured and principal credit you know our capital markets teams has followed along side and we've gone out and recruited what we think is best in class talent to cover those areas and then the last piece of it is really our approach, we think sort of I read the unique approach.
The you know non KKR clients and being able to cover those clients and being able to speak for capital structures, We think and a really unique way and a way that is highly coordinated you know.
And with our credit pools of capital as well and that's the expanding part of our business and the U S. But also in Europe, and and and aspects of Asia as well, we're starting to get some real traction and so I think when you add that all together that's why you're you're seeing you know.
And the scaling of that business overtime and maturation of that business you know as we look out you know of.
A few years, we certainly see continued meaningful growth over and above the levels that we've been operating and over the last couple of years. So we're excited about the outlook for that business and and what we think it can become over time.
Okay very helpful. Thank you guys.
Thank you.
Our next question comes from Jeremy Campbell with Barclays. Please proceed with your question.
Hey, Thanks, guys.
And thanks for all of the great color today with the new info its very helpful and.
Just wanted to check and here with maybe a little bit more of a simplistic question you know for newer investors coming to KKR and taken a look at that $2 plus every target and 'twenty 'twenty two was very helpful.
And also be hoping to get some color on the growth algorithm for FRE going forward. You know Scott you had noted earlier that the prior of fee revenue guide was 50%, which kind of translates to the mid teens top line CAGR, but that didn't include insurance and and then Rob I think you had mentioned also some potential for FRE margin expansion, so kind of just putting these.
Pieces together you know over time would it be fair to think about you know all of our medium to long run FRE growth cadence of somewhere in the mid teens mid teens plus.
Yeah.
Hey, Jeremy So is that where we're not going to on this call provide guidance out beyond 2022, and I think as we get to our Investor day in April we could provide a little bit more.
Substance about what we see from a longer term growth trajectory perspective, suffice it to say, though we've got you know.
A lot of things that have quite of bit of momentum across the firm right. Now you know still a number of young strategies. So it's not of just about the next two years growth in terms of of how we see our platform developing and we think you know asset management capital markets and insurance will all be growers and a fairly robust way over the back.
Several years and not just over the next couple of.
Hey, Jeremy Scott and look it isn't an astute question, we'll try to shed some light directionally for you in April.
Got it thanks guys.
And <unk>.
Our next question comes from Mike Carrier with Bank of America. Please proceed with your question.
Great Good morning, and thanks for taking the question of.
And just given the the growth you've seen and book value you know the <unk> business and then the strategic outlook, just curious any change or a shift and how youre thinking about the balance sheet, including level of monetization and capital management moving forward.
Yeah.
Hey, Mike No change you know we're going to go through the same process. We go through every year as we think about or our balance sheet and and how we manage our capital allocation and you know Uh huh.
The first point as always is how we think about return of capital to shareholders. As you know this quarter, we announced an increase and our dividend from 54 to 58 cents. Craig also noted and in his prepared remarks that we're going to continue to opportunistically over time repurchase shares to keep our share count flat for employee of dilution.
And then.
Most importantly, as is to be able to strategically reinvest our capital base back into our business for growth and there's no. Better example of that type of transaction and then what we were able to accomplish this past year with Grub Atlantic.
And Hey, Mike and Scott just one other thing as you know we remain very focused on compounding our cash.
And I'm counting or a U N compounding our balance sheet. We think the addition of global Atlantic will allow us to do both of those things at a faster rate over time, so no change in our expected.
Got it thanks a lot.
Thank you.
Our next question is from Robert Lee with K B W. Please proceed with your question.
Great. Good morning, Thanks for taking my questions.
And maybe I'll try and squeeze into two part of the first one is the first part of it is and maybe update us just given the robust fundraising and you've had and your robust outlook, maybe update us on kind of your cross sell with and your LP base mean, any kind of metrics you can share and like how.
Any of your Lps or mezzanine and two three of more products and kind of where your penetration of.
Global one piece and then you know second part is really going back to an earlier question you guys have always been known for having a I believe kind of one comp pool components of the firm as opposed to and having you know people have specific points and specific funds per se I'm, assuming with the chain.
And but that your traditional approach to your comp pool of housing.
Hasnt changed.
And Rob It's Craig why don't I take the first part of that.
And thanks for the question on the on cross selling look I think we continue to make very good progress at year end, we were at about a 1200 investors at this point of approaching that level and that continues to be a real focus for us first in terms of increasing the overall breadth of our LP base.
We held as we mentioned the final close in.
In the fourth quarter of our Asian infrastructure fund and the 25 per cent of the Lps and that fund our new fund investors to KKR, We love seeing statistics like that and then as it relates to the cross sell of at this point, we're at about two products per client.
We've seen that number of continue to migrate up and it migrates up slowly honestly, because as you're adding clients you're typically adding the one product at a time of our largest category of client average is almost five products per client. So I think as we look overall, we still see significant opportunities for us both in terms of increasing the.
Overall number of Lps as well as those those cross sales statistics and I think you know in addition to that when we think of areas like us and retail again and see continued long term opportunities for us.
Yeah and on the second part of your question and Rob and no change of what we're really talking about is how the compensation pool is calculated and we're not changing in terms of the.
Approach, we've taken which we think is really important culturally for us that everybody participates and everything.
Oh, it's more about the how the aggregated the calculus.
And now it's shared.
Great. Thanks for taking my questions.
Thank you.
Our next question comes from Chris Harris with Wells Fargo. Please proceed with your question.
Yeah, Hey, Rob how.
How should we be thinking about the tax rate on a pro forma basis and then the you know the.
The insurance segment operating earnings that you highlighted of $3 60 of 390 is that of pretax or and after tax number.
Yeah, So as we build up of our P&L, We're gonna show or our insurance segment on an after tax basis.
To answer your question, specifically, there and as it relates to the KKR is overall, our tax expense and no change to prior guidance overtime, we would expect to see our tax rate migrate up to the statutory rate and the low twenty's, but that will take some time is as we still have quite of bit of deferred tax asset.
From the C Corp conversion of couple of years back.
Okay, great. Thank you.
Our next question comes from Michael Cyprus with Morgan Stanley. Please proceed with your question.
Hey, good morning, Thanks for taking the question just wanted to circle back on the the comp teeth is maybe just on the equity comps and stops now excluded from the the earnings framework going forward just curious what the outlook is for equity comp to grow from the I think it was 246 million level or so here in 'twenty and 'twenty and then could you also just talk about the underpinning for the 60 to 70.
Per cent carried interest of the comp ratio of.
And just how you thought about setting that is I think it's a bit different from maybe where it was five or six years ago and a little bit different from from some of the peers. So just curious how you're thinking about that.
Sure. Thanks, a lot for the question, Mike So on an equity based comp.
One of them, it's very important to understand as we look at the aggregate compensation of margin, we're going to continue to do that and we're going to continue to look at that and.
Most of the of equity based comp and it's a core component as you think about 2021, maybe the expectation should be that we should have modest growth.
And in that line item commensurate with the growth of the firm. So as you noted we were.
And the mid two forties and 2020, you know I could see that number being in the $250 million to $300 million range and 2021 and.
And as we thought about the the 60 to 70 per cent comp margin on them.
The performance revenues is that a lot of different variables went into that inclusive of how we thought about our comp rages on our other forms of of revenue. We also looked at the competitive framework not just you know some of the big alternatives firms that went public at the same time of us, but some firms that went public after us with different comp ratios.
And we thought about the competitive dynamic with our own people and and the number of firms that we compete against are for talent that has a compensation pools on carried interest that are effectively 100 per cent and so it was a really looking at all of those different factors and and coming up with the range of 60 to 70 per cent that we thought was appropriate.
Great. Thank you.
Our next question comes from my Mod give lot what Zane. Please proceed with your question.
Oh, Yeah, that's what it sounds like you're not from Exxon and.
The N P and perhaps a quick question. Please can you talk about the opportunities you see to grow global Atlantic through bolt on deals and more generally do you see opportunities to accelerate growth are talking to the new strategy is true bolt ons and thank you.
Thank you for the question.
But the the short answer is we see a significant number of ways and we.
And global went out of can grow together I think that the first and the primary focus is going to be doing that.
On a organic basis and so the business itself really goes the market in two channels of the first.
Is the are the individual channel.
Where we of.
And chips with 200, plus banks and broker dealers.
You should expect us to continue the to scale organically and through that channel.
And secondly, the institutional channel, where it's really the executing and three different ways blocks, which Rob mentioned, we did 16 billion and Q3 Q4 of last year, but there's also flow reinsurance relationships, there's pension risk transfer opportunities and.
And so we see you know at least those three different ways to grow institutionally as well.
So the primary focus right now is growing organically.
Three of those different channels and the relationships there are opportunities to your point to also consider acquisitions over time.
The global Atlantic Management team has done the number of acquisitions through their history and that could also be another opportunity for us as we go forward nothing on the drawing board right now, but that is an opportunity to your point, that's something that we're keeping an eye on and then I would also say the last thing that we're focused on although it's going to take a good amount of time and energy and the near.
The term here particular is ways that we could jointly developed products and then also potentially leverage global Atlantic of distribution for things like KKR is doing and so that could be another area of growth for us as well.
Our next question comes from Chris Kotowski with Oppenheimer. Please proceed with your question.
Yeah. Good morning, and thank you I wanted to go back to how we should expect to see the global Atlantic revenues flow in through.
The the P&L since the since we're all ramping up our models and starting over anyway, but.
You know, presumably the the the third of 30 or let's call. It 25 basis points that that goes against us.
Under the I M a.
Presumably that hits upfront and so you know so if you figure of 25 basis points on $90 billion. That's that's some kind of kind of like 225 million gross and that you would have and so presumably there is $100 million of expense or thereabouts of expense and comp that goes against that and then presumably over.
<unk> as you move.
Those assets into your fund strategies.
And we should see the.
Revenues build up is that kind of the way we should think about it as we model out the next four of six eight quarters.
Thanks, Chris.
I think your your direction and and the and the right ballpark and and that's right as we built up to the the net 200 million plus over the next couple of years, we got there through the I M. A C. We got there through you know an assumption around how we're going to ramp up.
And vesting assets directly on behalf of G E offsetting that with the amount of investment expenses and other expenses.
You know that well need to bear and inclusive of other asset managers for the G. A balance sheet today, who are doing things to take care of it doesn't do and so when you add all those things together and you're getting to that 200, plus number and as you think about year. One you know.
And our ability to achieve 50 to 75 per cent of the 50% excuse me. The two thirds of that seems reasonably in line with the math that you went through.
Okay.
And just if I could squeeze and one more.
When I did back of the envelope and kind of reverse engineering your comp ratio for 'twenty, and 'twenty and I got to something around 36% using your methodology the.
The slightly lower than what we actually saw good that'd be right.
And no I'm you know is as we looked at it and if we looked at the midpoint of the ranges that we outlined at the.
38, 6% number.
And just to be clear because I think of it could impact some of your numbers you know as we think about the incentive fees against martial ways. We're assuming that that gets comped and the balance sheet revenue of number of 10 to 20 per cent comp range as opposed to a realized performance revenue number and that's what could be creating a little bit of that.
So to some of your numbers.
Okay alright, thank you.
Yeah.
Our next question comes from Brian Bedell with Deutsche Bank. Please proceed with your question.
Oh, great. Thanks, good morning, folks and and thanks for all the color of Coca Cola and clarification and really helpful. Most of my questions have been answered, but maybe just one back on the FRE of confidence of over $2.
Maybe if you could just comment on a little bit on the fund raising side of that and it looks to me like you you'd be able to exceed the you know the 'twenty and 'twenty annual level of fundraising each of the next two years based on the profile. So I just wanted to sanity check.
That seems right given and and maybe that gets the you know the flagship component of that obviously would be large and just sort of the cadence of the timing of that and and then and then what you're assuming for capital markets business, our fees and that $2 of debt the law.
Level of 'twenty, and 'twenty at least or where do we expect the group growth on that.
Hey, Brian It's Scott.
We're not going to be able to share with you kind of fund raising guidance or capital markets revenue guidance.
If you look at page five of the supplemental materials you can see on the right hand side all of the strategies, we have coming to market, including the number of flagship strategies.
And so I think as long as the fundraising environment stays with us and he's probably frankly improved a bit and for the last time, we talked.
We do feel good about our ability to meaningfully scale of our AUM from here and have a good fund raising outcomes of the next couple of years and we're not going to put a precise number on it but we feel good on a kind of of.
Team in place spaces, and then we're also making new investments and distribution as well that we'll talk about more in April.
The capital markets and had a very nice year last year.
After you know and quiet spring given the pandemic.
And you know we do see real opportunity is the scale there as well we've incorporated all of that though into kind of the F. Our re guidance. We gave you where we said we could comfortably exceed the $2 per share that is that's incorporated into that statement and that guidance and.
And the outcomes, we think can be a bit fungible, but oh with fund raising case, the EM global Atlantic and all of the other ways, we have the winter incorporated and that message.
Okay, Okay fair enough. Thank you.
Thank you.
Ladies and gentlemen, we've reached the end of the question and answer session I would now like to turn the call back over to Craig Larson for closing comments.
Just thank you everybody for your time and attention and we know that we had a number of items to impact this quarter.
We're always available of course for any follow ups.
And selling that we look we look forward to seeing everybody chatting with everybody next quarter and again at the April of Investor Day. So thanks again.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
The conference call has ended please disconnect your lines. Thank you.