Q1 2022 KKR & Co Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
Welcome to Kkr's first quarter 2022 earnings conference call.
During todays presentation, all parties will be in listen only mode.
Following management's prepared remarks, the conference will open for questions.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
I'll now hand, the call over to Craig Larson head of Investor Relations for KKR Craig. Please go ahead.
Thank you operator, good morning, everyone welcome to our first quarter 2022 earnings call. This morning, I'm joined by Scott Nuttall, Our co Chief Executive Officer.
And 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 in our press release, which is available on the Investor Center section at KKR Dot Com and.
And as a reminder, we report our segment numbers on an adjusted share basis.
This call will contain forward looking statements, which do not guarantee future events or performance. Please.
Please refer to our earnings release, and our SEC filings for cautionary factors about these statements.
So we're pleased to be reporting strong results. This morning.
Fee related earnings per share for the first quarter were 69 cents up 66% year over year.
And as higher quarterly figure as we've ever reported.
And after tax de per share came in at $1.10.
That's up almost 50% compared to the first quarter of 2021.
And is the second highest quarterly figure we've reported.
And when you look at the quarter, our results and our activities Youre seeing really four things first you're seeing the strength and resiliency of our model as well as our people.
Despite all of the volatility and uncertainty we're reporting strong results pretty much across every metric.
Second as businesses inside Kicky are growing and scaling their inflicting.
They're having a real impact on our numbers.
In private markets for example, our infrastructure and our real estate platforms of scale.
So our real asset strategies comprised over half of both our fundraising and our deployment over the last 12 months.
Third, we're finding creative ways to enhance our strategic positioning.
Last week, we closed on the previously announced acquisition of the Japanese REIT business is one of the largest real estate platforms in the second largest real estate market in the world.
And finally, despite the volatility and increased uncertainty our limited partners are continuing to entrust us with their capital.
Strong investment performance has been a critical driver of all of the success that we've had here.
Now looking at a few topics in more detail, let's begin with fundraising.
New capital raised in Q1 totaled $26 billion and 132 billion over the last 12 months.
Of note in private markets, both our global infrastructure for fund and North America Fund 13 held final closes in the first quarter.
Including employee commitments infrastructure for totaled 17 billion, that's over two times larger than necessary.
And North America, 13 closed out at $19 billion over 35% larger than its predecessor.
Also we're continuing to raise capital for our European private equity strategy. At this point, we were at $7 1 billion already surpassing and size the prior European P/e vintage.
And it's worth highlighting the regional approach we've taken in our traditional private equity business with individual funds across the Americas Asia and Europe .
Stead of having a single global fund.
We think this allows us to maximize our fund raising potential.
<unk> capital across our three regional private equity funds currently exceeds $40 billion and we're still raising capital for a European P E strategy.
At the same time it allows us to diversify our carry pools reduces our vintage risk across these funds and importantly, we're less susceptible to the tone of the fundraising environment at a single point in time.
And a public market $9 billion of new capital raised is among the highest quarterly figures we reported.
Activity here was widespread including hedge funds and credit.
And alternative credit we raised capital across our asset based finance Asia credit and direct lending strategies.
Private credit credit strategies in Europe , and the next vintage of our opportunistic strategy and our leveraged credit we.
We saw activity across a number of separately managed accounts and loan strategies. In addition to our CLO business, where we issued our 41 U S CLO in the quarter.
Global Atlantic closed on a block transaction in the quarter, which contributed 3 billion. This is reflected in both private and public markets.
And so these fund raising efforts helps bringing AUM to $479 billion and fee paying AUM to 371 billion, both up approximately 30% year over year.
Turning to investment activities capital invested in the quarter totaled 21 billion and.
In private markets, our real assets platform invested $9 billion of capital, including $4 5 billion in real estate driven.
Driven by activity in our Americas, and our European opportunistic equity strategies as well as real estate credit.
Our infrastructure platform invested over $3 billion of capital led by activity in the U S and Asia with $3 5 billion of P/e deployment relatively evenly spread across geographies.
In public markets G. As really added to the pace of investment activity in private credit most meaningfully in asset based finance as well as indirect lending.
Spending a minute actually an asset based finance, we invested in ABF across a number of pools of capital that are all looking for different risk reward all the way from a private credit funds and our BDC platform.
Global Atlantic.
So the addressable market for us and available Investable capital has increased materially as our credit platforms growth. We're excited about this.
And deployment here has become meaningful in the quarter total ADF deployment was a little over $5 billion and we had $2 4 billion indirect lending activity in Q1 alongside of this.
Now shifting to investment performance you can see these details on page seven of the press release.
The private equity portfolio was marked down 5% in the quarter, which was right in line with the decline of the MSCI World.
While over the last 12 months the <unk> portfolio was up 19% 800 basis points ahead of the MSCI World.
In real assets, our portfolios continue to perform.
In real estate.
The opportunistic portfolio feels well positioned given its focus on industrial and multifamily scenes you see the opportunistic real estate portfolio appreciated 11% in the quarter and is up 30% over the last 12 months.
And in infrastructure our strategy in our view, that's also well positioned in an inflationary environment.
You see the portfolio appreciated 6% in the quarter and that's up 11% over the last four months.
On the credit side leveraged credit was down two for the quarter and up three over the last 12 months essentially in line with brought high yield and leveraged loan indices will.
While alternative credit was down one in the quarter and up 9% LTM.
Circling back to the acquisition of the Japanese REIT, which is now known as K J R. M.
The acquisition adds AUM, but it really goes far beyond that it's a wonderfully strategic transaction for us across a number of areas of focus, including real estate Asia perpetual capital as well as private wealth.
And one final note here as a piece of the financing for the acquisition in April we raised approximately $475 million equivalent of Japanese yen denominated notes across a range of maturities at a weighted average coupon of around one 2%.
And with that I'll turn the call over to Ralph.
Thanks, a lot Craig.
I'll try and quickly step through our quarterly financials.
Our management fees continue to scale at a really rapid pace increase.
Increasing by 46% in the LTM period to $2 3 billion.
And reaching $625 million just for the quarter alone.
Our management fee growth this quarter was really driven by the fundraising activity that Craig ran through.
Ive note Europe six entered its investment period in the quarter.
And we had approximately $20 million of catch up fees from the final closes of America's 13 and infra for.
Our capital raising success alongside our investment activity brought fee paying AUM to 371 billion, which is up 29% year on year.
Our net transaction and monitoring fees were $306 million for the quarter, driven primarily by our capital markets franchise, which are $255 million on.
Most 1 billion for the LTM period.
The quarter's transactions consistent with past trends were diversified across clients strategies as well as geographies.
Our operating expenses totaled $126 million for the quarter.
As discussed on previous calls we would continue to expect modest increases here as we expand our footprint.
Invest in marketing and technology.
Hopefully have our employees back out on the road and traveling.
When you pull it altogether our fee related earnings this quarter increased to 600, excuse me $605 million, that's up 66% compared to just a year ago.
Moving down our income statement.
I realized carried interest totaled $580 million in the quarter, while realized investment income came in at $349 million.
In any environment. We think these are very solid results.
However, when you layer on the volatility in Q1, we were quite pleased in our ability to achieve this outcome and very much reflects the breadth and scale of our firm today.
Turning to our insurance segment, we had a very solid quarter generating $116 million of operating earnings.
In aggregate our after tax distributable earnings were 969 million for the first quarter or $1 10 per share.
I now want to turn to our balance sheet for a moment.
During periods of market volatility.
We'll hear from some who are concerned that the balance sheet increases our risk profile.
That's not our perspective.
It's actually quite the opposite.
So we thought it'd be worthwhile, explaining what we believe to be true.
Having a balance sheet, especially one with the attributes of ours is a meaningful differentiator and a real positive during periods of market dislocation.
Let's begin with the liability side of our balance sheet, which we think is pretty unique and a real source of differentiation.
We are very fortunate to have access to long dated and low cost liabilities.
The average maturity of our recourse debt outstanding including our recent yen issuance is approximately 20 years with a weighted average coupon of about three 5%.
100% of that coupon is fixed.
So we have minimal duration risk no exposure to margin calls our after tax cost of debt is less than 3% and we have no risk around rising interest rates.
In terms of the asset side of our balance sheet as you'd expect we have a very deep commitment to asset allocation risk, which has helped deliver exceptional results for our shareholders.
Over the last one three and five years, our annual returns have been 15%, 20% and 16% respectively.
And as we go a layer deeper around take chiara its investment portfolio.
One of the key strategic decisions, we made a number of years ago was the launch of core private equity business.
It's a great example of how we used our balance sheet to help create what we believe is today the largest business of its kind and.
And an important contributor to our management fees and fee related earnings as.
As well as representing the largest allocation we have on the balance sheet today.
Core private equity has a long duration of investment strategy.
We expect to hold these investments for 10 to 15 plus years and believe they carry on a more modest risk return profile compared to traditional private equity.
We're looking for mid to high teens gross IRR that we can compound for north of a decade.
These are businesses, we believe have strong secular tailwind with defensible market positions solid cash flow dynamics and as a result benefited from a more stable earnings profile.
And with equity and fixed income indices of five plus percent in the quarter.
Key reason our balance sheet portfolio was flat in Q1 was the 3% appreciation in our core portfolio.
This portfolio is performing extremely well and we believe has many of the right attributes to outperform if we go through a period of volatility and real inflation, including having real pricing power.
Today core private equity accounts for 30% of our balance sheet investments or $5 5 billion.
Now we enter core private equity not only because we thought it would be a stable long term compounded for our balance sheet.
But also because it is highly synergistic with our overall business model.
We were confident that we have the ability to become a global leader in core P/e asset management and that our capital markets business would be able to support these investments over time as they accessed both the debt and equity capital markets.
So from a standing start five years ago, we put together this incredible global portfolio, which now number over 15 companies and growing.
And with 32 billion of AUM that is third party capital together with balance sheet capital. We believe we have the largest core asset management business in the world.
And our returns since inception has been very strong with a gross IRR of 26%, which gives us the confidence that we'll be able to continue to scale the franchise.
And alongside the management fees will earn over the duration of these long dated investments. We are also entitled to an annual allocation of carried interest from our clients, which we earn every Q1.
For 2021 performance alone would generate approximately $250 million of carry which is reflected in Q1 results.
So the opportunity for performance related revenue can be a very significant one over time with continued compounding deployment and performance.
Moreover, our core portfolio companies have generated approximately 10% of capital markets fees over the last couple of years.
And as the portfolio grows we would expect transaction activity to grow alongside them.
So to recap we have created and exposure on our balance sheet that has performed extremely well and is more stable return characteristics.
And we have been able to meaningfully augment our asset level return by becoming the leading asset manager in the space and therefore, creating a combination of incremental management fees and carry as well as capital markets revenues.
Okay.
Given the increased scale and diversification of our balance sheet portfolio, we have decided to enhance our disclosure.
In our 10-Q, beginning this quarter, we will provide the 20 largest balance sheet positions with their cost and fair value instead of just our five largest investments.
We think this will enhance transparency and with 13 of the top 20 positions as of March 31st being core private equity investments. It will help highlight the performance of this portfolio going forward.
Now turning back to our broader balance sheet strategy and the benefits. It provides in periods of dislocation.
We think this is the type of environment, where are connected and collaborative business model excels.
This was particularly evident in the first half of 2020, where I think we really outperformed.
Having access to this additional source of capital when the market goes risk off is hugely valuable.
And we would bet all investment firms with loved this additional source of liquidity in markets like these.
And finally, there is obviously a huge advantage of this capital base as we pursue strategic acquisitions.
The Best example of that.
There is really no way that we would've been able to pursue global Atlantic in early 2020, when capital markets were severely dislocated without the benefit of our capital base.
And as Craig mentioned, we recently announced a highly strategic acquisition of a Japanese REIT manager were refunded the entirety of the $1 billion purchase price without issuing any equity.
We understand the value of that limited dilution to all shareholders.
Especially right now given our current trading price.
Between these two transactions alone.
We expect to generate well north of $300 million of fee related earnings next year with most coming from perpetual capital.
And we required relatively little equity dilution to be able to achieve that.
So we're using our balance sheet to generate really high rois.
While at the same time, creating additional FRE.
And while supporting all of this business building, an inorganic activity, we've used the balance sheet to buy back our own stock.
Since 2015, we have used $2 2 billion to repurchase or retire 85 million shares at a weighted average price of $25.50.
So hopefully that helps provide additional context around the balance sheet, including.
Including some examples of its strategic value.
And how that can enhance overall economic outcomes across different market environments with that let me hand, it off to Scott.
Thank you Rob.
A dynamic three months since our last call and there is certainly more information to process and uncertainty to navigate.
While environments like this earnings Xiety, creating for most is exactly times like this when the strength of our culture and business model becomes more apparent.
Yes.
Our connected firm and culture is excellent it making sure information travels and opportunities find the right pool of capital.
With valuations down and cost of capital up.
More companies need solutions that are not readily apparent.
And our clients want more information.
The result is the investments we make during times like these have the potential for higher returns.
And our clients develop an even better understanding of what makes us special.
Said another way.
When dislocation occurs you get a real sense for culture and investment acumen.
And we feel incredibly well positioned for this environment.
We have record dry powder, we have clients that trust us.
We have multiple growing businesses globally we.
We have sustained our connected culture.
And we feel ready for what's next.
I'm sure we will talk more today about the macro and what all this means.
But regardless of speculation about near term rates inflation and the economy.
We remain focused on executing our strategy and confident we will achieve the five year plan, we shared with you in November .
With that we're happy to take your questions.
Yeah.
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 from your telephone keypad.
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You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
So that we may address questions from as many participants as possible. We ask you limit yourself to one question and one follow up.
One moment, please when we poll for questions. Thank you.
Thank you our first question will be coming from the line of Alex <unk> with Goldman Sachs. Please proceed with your question.
Thanks, Good morning, everybody.
I was hoping we could start with fund raising comments.
For the last couple of months.
We've heard a lot and talked a lot about some of the crowd in this in the in the private equity space. It doesn't seem to be affecting you guys. A whole lot given your comments on the latest one raises and obviously Europe is going quite well as well so.
While I understand it's probably hard to generalize, but maybe you can help us sort of contextualize.
What are you hearing from Lps, that's going well and maybe some of the areas as you look out over the next 12 to 18 months that could become more challenge with respect to your own fundraising efforts.
Great. Thanks for the question Alex its Scott good morning.
We've heard some of the same comments you have regarding the environment, you're right, we're not really being impacted by this dynamic but.
So let me give you a little bit of color on what we're seeing and why that's the case.
It is true we are hearing from some Lps.
That theyre seeing GPS come back to the market faster than expected and it is a bit of a crowding effect.
This is particularly true from our seats around the more traditional and institutional investors.
So I think some of the public pension funds and some sovereign wealth, but importantly, it's the traditional investors in private equity proper, we're not hearing that about other alternative asset classes.
We're also not hearing that from newer investors.
And the alternative asset class broadly defined including P/e.
So from our from our advantage point.
We raised 26 billion in the first quarter of 132 billion in the last 12 months.
And as a reminder, we raised almost all of our flagship private equity funds over the last couple of years. So it is a bit over $40 billion for that fund cycle.
So any private equity market Crowdings, just not impacting what we're doing today. If you look at where were raising money this year.
Most of the dollars, we're raising is around real estate infrastructure and credit.
Where we have a lot of investor interest if anything we're seeing that interest to go up.
And as inflation and rates rise.
So we're really not experiencing that crowding dynamic for multiple reason and that's before you even get to the increased interest from private wealth and insurance companies.
And all the new entrants that we've talked about in prior quarters.
So we continue to feel great about how we're positioned we're not changing our plans for the year.
And in terms of the your question about what do we see kind of down the road that could impact US. There is nothing negative we're kind of feeling a little bit like right now real assets and credit.
Where do you want to be and we're lined up well against that.
Great. Thanks for that and my follow up is around the wealth channel and.
Scott You mentioned you guys are kind of continue to build out there I wanted to crest a little bit.
Really strong investment performance. It looks like you guys are up 9% year to date and that's on the back of North of 20% return last year.
The pace has been slower than maybe some of us would've expected. So wondering if you or if you can talk through some of the hurdles that.
That you might be facing.
Accelerating growth in kras and getting it out on platforms.
And what would it take for that product to scale, perhaps a little bit faster.
Hey, Alex It's Craig why don't I start and before we.
Why don't I take a step back even just to begin with.
We think overall the opportunity within private wealth to introduce these tailored democratize products is massive.
And we think we're really well positioned against this.
Really interesting asset class and over time, we do expect to have democratized products really across all of our asset classes.
And alongside of this we're continuing to invest in sales marketing data digital talent et cetera.
So where we are today and we do tend to look at these in a more aggregate basis. We've got the three broad democratized solutions there on multiple platforms.
And on top of that we have bespoke solutions that are tailored for individual platforms looking across these products. We have about $5 6 billion of AUM and I don't think we really want on these calls to.
Get into the habit of giving individual updates on all of these I think the overall takeaway that we want you to have is one we've got a great brand that we think in this channel is second to none.
And exceptional long term track record.
I think that can be buttressed from some of the individual product track records that again I appreciate youre noticing we.
We think we have a proven ability to innovate in product design and we have strong relationships at all levels with these distribution partners. So it's a really exciting long term opportunity and we actually feel great about the progress that we've made.
To date.
Great. Thanks very much.
Thanks.
Our next question is from the line of Michael Cyprus with Morgan Stanley . Please proceed with your questions.
Yes.
Hey, good morning, Thanks for taking the question just given everything going on from an inflationary backdrop rising rate supply chain bottleneck. So just hoping you could talk a little bit about how you see that impacting your portfolio companies and maybe you could talk a little bit about how you're helping your portfolio companies manage through this environment and if you could just update us on what sort of.
Revenue and EBITDA growth trends youre seeing across your portfolios.
Hey, Mike it's Rob.
Thanks for the question so I.
We're looking across our portfolio today, obviously like others were seeing.
A stickier inflation environment Theres, three things that we're watching quite a bit.
Is labor availability and wage inflation received certainly seeing that across our portfolio on a global basis.
And particularly in the U S. We're focused on housing.
Short supply there due to Andre building over the last 15 years, especially with millennials.
Now we are moving their way into prime homeownership years.
And then the last thing that I think is creating the stickiness is just an under spend on capex.
Related to energy supply, which is going to continue to put pressure on pricing. There now the one thing that we're definitely seeing on the other side of this across our portfolios as an easing around supply chain.
And so as we look at 2022.
Our expectation on inflation is we're going to be in the 7% to 8% range, we do see that moderating into 2023.
There was a lot of work that we're doing across our portfolio right now to share our best practices. Obviously, a lot of work for years has gone into interest rate hedging and that continues given a potential increase in rates going forward.
But you would have heard us on these calls and in other forums for a long period of time talking about these potential inflationary trends, we feel really good about how we've set up the broader portfolio.
As you look at the underlying revenue and earnings growth across our portfolio.
It continues to be exceptionally strong.
And and we feel really good with how we position the overall portfolio going forward.
Michael its Scott, let me just add a couple of things as you know we have taken this thematic approach of last several years one of the things that we have been focused on besides some of the very specific themes. We've discussed in the past is we knew at some point inflation would show up.
So we've been quite focused on investing in businesses all around the world that have real pricing power and Thats part of the reason I think you've seen the portfolio perform well.
And in terms of your question about how we're helping our portfolio companies. In addition to the very specific procurement programs and other things that we do to kind of be able to use our scale thoughtfully, we're making sure that they have access to the information that we have the information is traveling they can see what we're seeing across the markets.
And I think that has helped them get ahead of what it was kind of happening in some of the supply chains.
And the portfolio is performing well I mean, our staff through last year.
Revenues and EBITDA and a lot of parts of what we're doing up 20, 30%. We continue to see very strong trends in the first quarter. Despite.
The macro backdrop.
Great and just as a follow up question just around rising rates I was hoping maybe you could help frame for us how you see rising rates impacting different parts of your business. Maybe just in credit maybe you can help us understand what portion of the credit book is floating rate and then when we look at GAA, how should we think about the sort of repricing.
<unk> of that portfolio there in terms of rising rate benefit and then on the fixed rate side. How do you think about the timeframe for that and is there any sort of risk around.
Our liabilities are resending customer rescission activity and a higher rate environment.
Of course.
All good questions. Thanks, Mike.
I think there's obviously a lot of pros and cons across our business as it relates to a rising rate environment, but on balance we feel like we're relatively pretty well positioned you referenced that we've got a very sizable credit business. Most of our leveraged credit AUM is floating rate in nature. Most of our private credit AUM is also floating rate in nature and so as interest rates.
Go up our returns will go up and then as you know in most of our fund products. Our hurdles are fixed so the likelihood of earning additional incentive fees goes up as well.
On the whole as we look at global Atlantic and Theres. Some puts and takes we think a rising rate environment over time is largely a net positive to global Atlantic.
And what you can see certainly is rising rates impacting their fixed income book you referenced but.
Our assets and liabilities are very well matched at global Atlantic and so as interest.
<unk> rise the value of your liabilities effectively offset the degradation of value in your assets in a rising rate environment.
I think the other important point to note across KKR and I referenced this in our prepared remarks think about our own liability structure, we've set ourselves up with 20 year duration cap.
Capital, that's all fixed in nature at less than 3% after tax cost of debt and then I think the last thing that we think about KKR in this kind of a rising rate environment increased volatility in the markets potential for.
Multiples to come down as we sit on a $115 billion of dry powder across the firm that's a record number for us.
And really allows us I think to be on our front foot as it relates to investing through this period of time.
Great. Thank you. Thank you. Thank you.
The next question is from the line of Glenn Schorr with Evercore. Please proceed with your questions.
Hello, there thanks.
So a question on capital markets and transaction fees were pretty good pretty darn resilient considering the environment.
But the market got a little worse in April .
So I wonder if you could just help.
Talk through exits down but deployment is good diversification.
Tell us what to expect because I feel like people discounted as a component of management fees, but it's a big piece that seems to be more resilient than something thanks.
Hey, Glenn it's Rob I'll start off here I said last quarter, what we talked about on this call was that we felt like a normal functioning markets or capital markets is a plus or minus $200 million a quarter type of revenue business now.
Now in Q4 of last year in Q1 of this year, we were on the plus side of that probably a couple of things in Q1 of this year than we were expecting in Q2 that probably got pulled forward a bit but I think what's more important is that not mistaking and I think you referenced this in your question not mistake in the quarter to quarter variability.
And our income with the durability of our franchise as well as its growth prospects.
What you've seen I think over the last number of years is both highly durable a pipeline to potentially generate fees a broadening of transaction the transactions and just lots of growth areas in those growth areas are going to come from continuing to fall at KKR is on growth I referenced core private equity.
A little bit earlier, but theres, a number of different opportunities like that across the firm.
And obviously, we believe we're going to continue to be able to take a lot of share given our business model and our access to talent with third party clients as well and so as we think about that business in the future.
We're very excited to continue to invest behind that and we see a lot of growth over the next number of years.
That's great.
Something you said during the prepared.
Interesting on an ABS deployment.
I think you said $5 billion.
Uh huh.
At an average fee. So the question I have is is.
Do you expect to be increasing the <unk>.
The ramp in terms of the ABF both.
Growth and deployment on a quarterly basis and is that going to increase.
They have a higher <unk>.
<unk> flow coming up from that I'm, just curious how big of a contributor and not get too.
Yes, Glenn it's Scott.
Why don't I start thanks for the question and honestly, we probably don't spend enough time talking about the platform.
That we've built here so first taking a step back ABS is a massive market. So its.
$4 five trillion in size.
And it is expected to go to seven plus trillion over the coming four to five years in comparison the high yield market is $1 five trillion market.
So we're already talking about a market that is multiples of the high yield market.
With better growth prospects and much like leverage lending to corporates ABF.
ABF plays a critical part in the financing markets.
It is helping finance day to day operations through mortgages credit cards receivables financings equipment leasing et cetera, and so what you have is alongside of this massive market you have high barriers to entry and honestly in our view a lack of scale capital.
So we're finding attractive risk return and at the same time, we also like the diversification on top of regular way or away from regular way traded credit. So in terms of Austin and are appropriately three things of note. One as we noted during the prepared remarks, we have different pools of capital and we're looking for a different risk reward. So thats all the way from.
Private credit funds in the BDC to global Atlanta, So the addressable market is huge our available capital has increased materially and so to your point. This is why youre seeing this ramp and deployment for us. The second point is we've been busy so last year deploy.
Deployment exceeded 15 billion, including CA.
$5 billion. This quarter. So yes. This is a as the overall credit platform has grown this becomes a really interesting.
Area for Us and third and this is important.
We've partnered with 15, or so specialty finance platforms globally, and those folks were originating opportunities that from our view again or otherwise difficult to access. So these platforms have 5000 employees over $100 billion of Num global it's across industries and they helped.
US access to attractive risk return. So again, we've built this unique platform, which allows us to have confidence when we think of the forward origination so its becoming a growing and interesting part of the firm no question.
Thanks, Craig I appreciate it.
Our next question is from the line of Bill Katz with Citigroup. Please proceed with your question.
Okay. Thank you very much for taking the questions look forward looking through the Q a little bit later on.
In terms of maybe going into the new course since the dynamics have changed pretty dramatically first quarter to second quarter, even within the period can you talk a little about where you're seeing the opportunity to deploy core to date and then I was wondering if you could speak a little bit to maybe the monetization activity.
How the decline in the private equity and the net accrued carry sequentially might impact the opportunity for that realization outlook. Thank you.
Thanks, Bill, it's Craig why don't I start on deployment and Rob will give the monetization update.
Look deployment is a meaty question so.
You have inflation interest rates.
Outlook for economic growth, all being front of mind for us as they have been for some time.
And alongside of that we.
We expect a number of rate hikes this year.
With central banks shrinking their balance sheets.
Against these topics were expecting more volatility.
So what are the implications of this a few one as a firm we need to be as connected as ever and we need to continue to be somatic.
So in terms of areas of focus for US a couple of thoughts one you've already heard this from.
Robin Scott said earlier, but get long pricing power, so with labor shortages higher input costs.
Do you think companies with pricing power advantage.
Number two.
One more collateral based cash flows. So we believe real assets investments that can keep up with nominal GDP are interesting. So thats infrastructure real estate asset based finance and you've heard this again in the prepared remarks, when you look at it probably when we're asked about deployment and often tends to be with a private equity lens for us.
So if you look.
In both last year as well as in the first quarter private equity deployment as a percentage of our firm has been a teen percentage and so is the breadth of the firm's increase you've seen these real assets become materially.
Greater for us in terms of deployment.
So when you look at real assets in terms of private markets deployment real assets, where it's 55% of private markets deployment in 2021, 67% of deployment in the first quarter of this year.
Three digitization north.
Automation logistics, we're in the midst of an innovation boom in disruption technological change from our standpoint is finished continue.
For security, including energy security data payment cyber all areas and these are areas, where we think we bring a unique lens and a lot of industry expertise.
And then five were in <unk>.
Many ways of savings Bull market and in Asia, you have a $1 billion millennials, who want to build a safety net through increased savings for the families.
That means themes like nesting retirement products financial planning all should benefit.
And I think the other point in this again I would just touch on relates to culture and.
I would reinforce something Thats got had touched on but we have a culture that's wonderfully connected.
In our view and dislocation occurs.
That's some solutions for companies become less apparent and Thats when you get a real sense for culture and acumen and we think we have a culture that really allows us to stay wonderfully connected and allows us to be on our front foot in these periods.
Hey, Bill it's Rob let me follow up on your question around returns and monetization that you referenced are Q1 returns in private equity just want to put that into context for a bit.
We're up 46% in 2021, and <unk> and so we gave back.
Five points in Q1, but over the last 15 months of our <unk> portfolio is still up around 40%.
And as you think about that decline.
<unk> on quarter, the down five points, we actually had a position at 12 31 that was marked at about 24 times multiple of money that traded down about 40% in the quarter still marked at 14 times multiple of money still a fantastic investment for us at $3 31, and represented a good chunk of that decline.
In terms of the impact around monetization, we feel great about our monetization pipeline right now certainly relative to where we are from.
From the overall volatility in the markets and so you saw very healthy Q1 monetization revenue number and as we head into Q2 here based on transactions that have happened or that we have line of sight to either through signed deals and.
An LOI or equivalent we already have line of sight to 600 plus million dollars of revenue that we feel good about.
And I think this represents a couple of things one just the overall breadth of Kkr's portfolio today global nature of different products and to that underlying strength of our portfolio that we've talked about now like all quarters. There is definitely some risk and some of these deals happening but at the same time, given the strength of the pipeline I referenced there's some upside to these numbers as well.
And just in terms of character of revenue assuming.
Assuming that we're able to achieve these numbers I'd say about ballpark, 75% of that revenue would come from realized performance revenue and then the balance would come from realized investment income.
Hopefully that helps provide a bit of color there bill.
Super Helpful. And then just as a follow up.
I'm not sure if you Rob or Scott you want to chime in but so Chris there's been some conversation around some budding regulation and the insurance side I guess, there's sort of a split house between year periods about when I'm, having a balance sheet is a good or bad thing with that listen I. Appreciate your ownership of Gis, maybe slightly different to all of that can you talk a little about how you might see any reg.
<unk> risk in the insurance business, and any pros or cons that or opportunities that might surface for you as a result, thank you.
Yeah, Hey, Bill it's Rob.
We talked a bit about this last call I'd say really no new update from us.
What we're focused on with global Atlantic focused on is continuing to have a really close and transparent relationship with its regulators.
We know that the regulatory community continues to gather information and industry feedback and we want to make sure that global Atlantic as a part of that beyond that theres not a ton that we can comment on.
To say that we really don't anticipate many changes to the business model of trying to thoughtfully invest behind the long term promises that we've made to policyholders.
And so.
We feel again overall very.
Constructive around the global Atlantic relationship with its regulators and <unk>.
And are focused on continuing that type of transparency in the future.
Thanks, so much.
Yeah.
Our next question comes from the line of Brian Mckenna with JMP Securities. Please proceed with your question.
Great. Thanks, if we annualize the first quarter FRE Youre at $2 75 run rate for 2022, and as you noted before back in November you updated your FRE target to $4 plus in five years or by 2026, So if youre approaching $3 of FRE. This year are you willing to move forward. This five year timeline at all.
It's Rob Thanks, Thanks, a lot for the question.
We.
We don't spend.
Honestly a ton of time thinking about.
Sorry, Nick.
Near term targets not how we manage our business and so I think what you're less likely to get from us.
As a continual update around.
Around where we see FRB going in the short term, but what I would tell you.
Is that we will update you hopefully very continually on how we see our business trending and hopefully what you've heard from US is the level of excitement we have across our firm today.
We have so much more momentum today than we had even six or 12 months ago. You look at many of the big product raises we've had over the last six or 12 months, we have well exceeded the fundraising targets that we had for those.
We're likely to have Scott mentioned close to 30 products in the market and then over the course of the next 12 months, many of which are poised to scale in areas like infrastructure and real estate and floating rate credit areas, where we're seeing real secular growth, obviously global Atlantic market positioning.
And where they are situated from a growth perspective is much better than when we underwrote that transaction two years ago.
Sort of momentum across our capital markets business as I referenced so our expectation is for really robust near term and long term FRE growth.
And hopefully that helps give you a little bit of color without <unk>.
Providing continual updates around FRE targets.
Color I'd add Brian is historically, if you look back.
And we've shared kind of a view as to where we might end up we've had the tendency to outperform.
Our intention is to continue that record.
Yep got it helpful.
And then could you talk about the mix of your net unrealized carried interest how much of the $4 $2 billion is tied to traditional private equity products and then how much is it related to newer strategies that have expanded meaningfully over the past several years and then how should we think about that mix evolving over time.
Yes, it's a good question I'd say, it's still a very much weighted towards our traditional private equity products are regional private equity products today, but you are starting to see.
Climb in.
Our unrealized carried interest in infrastructure and real estate in particular, and as we think about mix and as we look forward to what that can become over time, we certainly see a much higher percentage of our realized carried interest coming from areas like infrastructure and real estate in parts of our credit business.
Thank you guys.
Our next question is from the line of Patrick Davitt with Autonomous Research. Please proceed with your questions.
Hey, good morning, everyone. Most of my questions have been asked.
Could you maybe walk through the economic impact of <unk> in particular to AUM and fee earnings and maybe also frame how it's organic growth has tracked over the last few periods.
Sure it's Rob so what we've announced is.
At current exchange rates, I think close to <unk> billion.
Of incremental AUM, that's all perpetual capital to our managed Reits in the Japan market, we see a lot of opportunity to grow that franchise in Japan, we see a real opportunity to leverage that team and their strength in the Japan market for the benefit of both our core plus franchise in Japan.
As well as our opportunistic franchise in the region. So we believe we should be able to raise more capital from those strategies as a result of this transaction and lastly, we are setting up our capital markets business to make sure that we're able to support.
The franchise locally in Japan, as they pursue acquisitions on quite a regular basis as well as our refinancings in terms of the economic implications of what we said is that our expectation is on a synergize basis I wish.
Should be able to deliver around $100 million of incremental FRE from that platform in 2023.
Great. Thanks, and then how is the organic growth.
It's been strong.
They've done a couple of things I think really well at one day.
I will launch the second REIT, which has had a good market following trading at a really nice level relative to book.
And.
Organic flows have been strong as well. So this is a business that we started not all that long ago by Mitsubishi and UBS together and so really it's been.
Their entire growth has been organic in nature.
And then one quick follow up on the $600 million pipeline is that what you expect to close in <unk> or is that kind of a two quarter view.
That's a one quarter view based on what we have line of sight on today. So that's that would be all Q2.
Great. Thank you thank.
Thank you.
Our next question is coming from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.
Thank you and good morning, everyone.
Thanks.
So I was looking for a state of the Union on European Asia business, especially given the Japanese REIT acquisition and you also have a pretty big pipeline of fundraising in your Asian products over the near term, but what I was really looking for is what were the real strategic merits of the Japanese REIT acquisition, including cross sell.
And then also how is your China business bearing following some degree decoupling between the Western China and I know I asked a few questions in there. So I'm just not going to ask my follow up.
Thanks, Greg Thanks, Greg maybe I'll start.
Craig ill, let chip in here along the way in terms of just state of the Union to our Asia Pac business, we've talked about this on prior calls.
We have every expectation that over time, our Asia Pac business there'll be as big as our U S business and we're investing behind that theme and I think.
The acquisition of the Japanese REIT managers very much consistent with that overall theme.
Just to put some numbers around it I think at the end of 2019, we had about $20 billion of AUM.
In Asia Pac too.
Two plus years forward pro forma for the acquisition, we're close to 55 billion.
Almost a tripling of our AUM in a short period of time I think we've got a lot of competitive advantages in the region.
And we've got a real opportunity to take advantage of that head start we have the access we have to talent really across the region.
To be able to drive further growth in terms of the strategic merits of.
The acquisition honestly that piece of it was a really short conversation.
Want to be able to double down on our lead in Asia.
We've got ambitions to really be able to scale, a real estate business, both in Asia Pac and in Japan, The second largest real estate market in the world and globally.
We want access to more perpetual capital at the firm as well as different avenues to be able to reach private wealth investors and so this acquisition really our something from a strategic perspective made a ton of sense as we were evaluating it.
Greg you want to hit on.
Yeah, Gregg on China, a couple of thoughts one I think.
Look China investing in China has become more complex and so we think it's critical to have the right resources in order to navigate the complexity.
So we think its you need a best in class local team, but you need more we think it is important to a specialized resources like our public affairs team like our global Institute to help navigate that complexity. So we think China is going to continue to be.
A critical long term engine of global growth.
A very important market no question.
And we think we bring unique skills and a differentiated approach to that market.
I think when you look at where we've been investing a lot of it has been behind themes like domestic consumption. So we remain committed to being a leading investor domestically in China.
And we want to help leading local firms.
To continue to grow and prosper and we think we're well positioned and.
And to give you a sense just of significance overall as a firm.
When you look at our exposure it does remain quite modest just given the breadth of our firm today. So.
<unk> in China from an AUM standpoint are probably a little over 1% of our AUM just to give you a sense of scale.
Right, Rob that was perfect. Thank you. Thanks.
Thanks, a lot Craig.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your questions.
Great. Thanks, Good morning folks that was my question on Asia as well.
Okay.
Hey, good detail.
Can you hear me.
Yeah, we can hear you Brian Okay, great great Okay great.
Great.
So then I'll just do one as well.
Going back to Craig I think what you said in the prepared remarks on.
Enhancing.
The related earnings with other creative ideas like you Jr. But maybe if you can just talk about.
What you view as maybe the pipeline for doing more acquisitions to enhance and grow the FRE inorganically and how important he is private wealth management within that thought.
Thought process.
Sure.
Brian .
Rob ill.
Take that so.
When we evaluate anything for our balance sheet. The first measure that we're going to look at always is going to be what drives.
The highest and best ROE over a long period of time.
Now given how we're situated I think with our brand and our track record on our access to distribution. There is a lot of inorganic asset management activity, where we think we can help make those businesses better maybe they can help make us better and ultimately that's what's going to drive the highest ROA and Thats. What you saw I think in the.
Acquisition, we closed last week.
What you saw.
That partnership with global Atlantic and we've got multiple different examples of that over the years and so we've got a team that's very much focused on how we can.
Really leverage the core competencies, we have here at KKR to be able to continue to drive ROE and we think a lot of times, that's going to lend itself to incremental FRE as well, but thats not necessarily going to be the primary driver here of any transaction.
But you're certainly seeing that is as it relates to the things that we've done.
Organically over the last number of years, the last point on inorganic growth, while we're going to be focused on it and it's something that we think is a real opportunity here long term. It was referenced earlier on the call that we had a couple of targets. We've put out there for plus dollars of of FRE seven plus dollars of TD that was on and that was on a organic basis.
And so anything that we would do from an inorganic perspective on.
On the FRP side should certainly be accretive to that.
Yes, the only thing I would add Brian is I think the point, we're trying to get across as well will continue to remain active looking at inorganic opportunities.
And that's something we will keep you updated on but if you just look back I think we were trying to say is that the balance sheet has allowed us to pursue those.
With minimal equity issuance, while also buying back 10% of our outstanding shares since 2015, and if you think about it Marshall Wace Franklin Square Global Atlantic, where we talked about with core now the J REIT.
That's over 200 billion.
AUM that was bought with minimal equity dilution and using the balance sheet is that strategic weapon and a lot of the things that we've done that I listed have been done during periods of time, where there's some dislocation or some volatility.
That's great color. Thank you very much.
Thank you. Thank you.
Thank you. Our next question is from the line of Arnold Giblen with BNP Paribas. Please proceed with your question.
Hey, good morning, Thanks for taking my question just a quick follow up on the on the M&A question I'm. Just wondering if you could comment a bit more generally about corporate.
Corporate M&A in the market in general.
Given what you are thinking about.
Certain pockets of the market being more congestion on the fundraising side and also maybe a more challenging markets for <unk>.
Are you seeing.
A bigger pipeline of potential deals.
The industry level.
Hey, it's Rob we weren't able to hear all of that question I think I think it was as it relates to corporate M&A in the pipeline we're seeing.
Certainly a lot of activity across the GP space.
And I think we get to take a look at quite a bit of it.
Inorganic activity in our space, particularly inorganic activity that requires integration is hard and so while we'll look at a lot.
And theres quite a bit that crosses our desk.
The pipeline is full I think the likelihood of any one of these deals happening is still relatively low and so we've been fortunate that we've been able to do some large things over the years, we would anticipate being able to do that in the future, especially given the size of the M&A pipeline, but it's also not a need to do for us either I think we're in a fourth.
<unk> in a position where we've got a lot of avenues to organically grow our business, but if we can find something where we can use our balance sheet to complement what we're doing and drive additional growth. We're certainly going to look at that yes, Scott the only thing I would add if it's corporate M&A from.
Third party capital investing for our funds standpoint.
And as Craig mentioned the deployment has been active the pipelines are busy.
And there are public the private dialogues happening. So it is not as much fun to be a public company right now and so thats part of the pipeline.
We're seeing buildup.
So for the firm itself.
Dialog continues its been active in I think in an environment like this probably makes people think maybe it's not such a bad idea to be part of a larger firm that has a lot of different ways to win and raise capital and invest so we're active on both fronts.
Alright, thank you.
Okay.
Thank you. The next question is from the line of roof as long with BMO capital markets. Please proceed with your question.
Great. Good morning, Thanks for taking my question I wanted to come back to your comments around the balance sheet and I hear you on the differentiation and the Optionality at all or is it seems like many investors haven't given you full credit for the balance sheet. Yet. So would you consider capping the size of the balance sheet at some point or pursuing other strategic options.
If the market doesn't give you credit for your balance sheet over the long term. Thank you.
Yes.
Thanks for the question.
I think the first thing to consider as you think about our balance sheet strategy is that is very much an alliance strategy KKR employees or are the largest group of shareholders and the firm.
Almost 30% Okay care, so we start from a very aligned perspective.
And as we sit here today, we see more opportunities to leverage the broader platform and ecosystem at KKR to drive ROE with that capital inside of KKR.
And so long as that continues.
We're able to drive additional ROE on that capital base for the benefit of all shareholders.
Then youre going to see a consistent strategy to the extent that that changes over time, where we're not seeing that attractive level of return that obviously, we might have a different strategy, but certainly as we sit here today.
We are highly convicted in the way that we're operating the opportunities we see and the long term accretion that we're able to create for all shareholders by virtue of the capital base that we have.
Yes, the only thing I'd add is if you think about the job we have.
Good to think about how do we double the stock price as quickly as possible how do we double our market cap as quickly and thoughtfully as possible given the risks we're taking.
And the reason that we built a model that we have is that we believe with a combination of third party capital plus our own capital invested alongside we can create that next $50 billion and then the next $100 billion of market cap after that.
With greater line of sight.
More confidence.
So no the answer to your question is no we're not planning to cap it.
But over time, if the market doesn't certainly appreciated the model the way that we do we have lots of different things that we can do to express our view on that.
We've been buying back stock, we've been making acquisitions and converting balance sheet into fee related earnings. There's lots of different things that we can do strategically with that balance sheet, but thats really where its coming from how do we get the market cap from $50 billion to 100, and then 200 and so forth.
Understood.
A quick follow up any thoughts around shifting the compensation mix between FRE and carry to a greater extent.
No is the short answer is this I think we feel good about the compensation structure that we've put in place now a little bit more than a year ago. I think it's working really well for our firm on making sure. We've got alignment in the right place between our employees our shareholders and our limited partners and we think that balances is about right for us right now.
Thank you.
Thank you.
Thank you. Our next question is from the line of Chris Kotowski with Oppenheimer. Please proceed with your question.
Yes, good morning.
Craig's formulation of the state of the Union overview and I Wonder if we could have something similar on your approach to <unk>.
NRG investing because I mean, you have had four different.
Energy or natural resource dedicated funds none of them are investing in obviously fossil fuels has been just a terrible place to be for most of the last decade.
And people were wondering whether it would ever be an investable sector again.
Now there is obviously a big capital need there.
But at the same time, you've kind of got it.
Navigate the euro ESG commitments and I guess I'm wondering if you can explain.
The rules of the road as you see them between investing in.
Fossil fuels versus new new energy transition.
And how you plan to thread that needle.
Chris Great question, why don't I start as Craig So look at a high level, we're committed to investing in the energy transition and the shift to clean energy. So.
<unk> Mis, we invest in a diverse range of energy sources, So let's touch first on renewables.
Thank.
Global clean energy developers and operators, we've been increasingly active in this space and you've seen that across really a number of strategies, including areas for us like infrastructure as well as our impact business now alongside of that is conventional energy interactivity here is really being done through a permanent capital vehicle that.
We own a teens percentage of that's called <unk> energy and we think Christian can become a real leader in developing best in class ESG programs. In addition to creating significant equity value.
We receive management fees and increase over time as Christian scales its business.
<unk> incentive fee eligible based on the total return on the equity and from a business standpoint question has low leverage its free cash flow positive has an excellent team in place.
And it is operating in an area that we think theres real M&A opportunities. So.
That's our overall approach hopefully that gives you a better sense.
Yes.
Curious about the idea of like traditional fossil fuel dedicated fund is that an idea of the market that is placed.
Come and gone.
I think and maybe this is a this gets perhaps into a little bit of a history lesson around crescent honestly, Chris So.
In 2020, we traded in an entity that was called independents energy.
And through that we had combined our energy income and growth fund.
Some energy investments from the balance sheet co investment assets and those were contributed together with <unk>.
Investments from an insurance client.
That formed independent synergy and then what you saw five or six months ago. It was in December of 2021.
We merge that entity with a public E&P company to form Chris It.
So kristen as a $2 6 billion market cap company again, we own a teens percentage, but what really Crescent is is the next step.
It's the next evolution of those dedicated funds for us.
So that's really the that's how are our views and our focus is really we expect will be through question. Yes. There is no plans Christopher traditional fossil fuels fund, we haven't actually invested in conventional oil and gas and our private equity funds since 2018.
Don't have any plans to really.
Work, we're doing is through crescent on the more conventional side and focused on improving the ESG footprint of every investment that they make and the team is doing a great job around that and then as Craig mentioned, we're doing a lot in renewables across infrastructure asset based finance through GAA and otherwise so that those are some of the areas of focus right now.
Thank you that's it for me.
Thank you.
Our next question is from the line of Finian O'shea with Wells Fargo. Please proceed with your questions.
Hi, good morning.
Mostly asked and answered for me as well.
If you haven't.
Updated us on today's call.
Private wealth progress.
Do you have any highlights for <unk>.
Upcoming product.
Rollout type ideas or progress and relationships across the retail channels.
So fan.
Again, we actually feel great about the progress we've made Rome wasn't built in a day.
And how we're positioned against this opportunity.
Nothing to announce right at the moment as it relates to incremental products, but again over time, we expect to have democratized products across all of our asset classes.
And we're investing in all of the areas that we think it takes to be successful in this channel in this channel.
Reflecting that point of view.
We said a couple of quarters ago that we think.
New capital raised from individuals is going to be a third to half of new capital raised for us as a firm and then in the medium term and no change in that outlook or point of view for us.
It's just.
A really exciting opportunity there when we look at our brand our long term track record the ability that we have to innovate.
And product design and the relationships. We have we just think we're really well positioned against this enormous market.
Great. Thank you.
Thank you.
Yeah.
Our final question comes from the line of Robert Lee with <unk>. Please proceed with your questions.
Thanks, so much and thanks, so much for your patience this morning with follow up questions.
So I just had one last quick one.
Many of your peers have.
Either acquired or historic to build organically secondaries or solutions capability. If you will can you just remind us of your.
Your interest in that business segment, which is I think not a place you traditionally you've traditionally been as focused on but it seems to be a.
A hot sector for across the industry and for many peers.
Yeah, Hey, Rob it is.
Certainly a sector. We continue to look at it is not a need to do type of acquisition for us.
But if we find a platform that we've got conviction can be a top three player that we can help make them better they can help make us better.
And the valuation makes sense.
It could be something that we could pursue in the future.
And so yes, we've.
We've got a as I mentioned earlier, we've got a team that looks across different our inorganic opportunities at the firm as we lineup different potential subsectors of the asset management space clearly the addressable market and the secondary space is quite large.
But from our perspective, it's got to work for us.
And it's got to be something that we've got we've got a lot of conviction is going to fit in well within our firm, which in part is going to require it to be a top three player and.
So.
We'll continue to keep you updated of course on our progress in our thinking.
That's where we are right now.
Okay, Great fair enough. Thanks for thanks for your patience this morning.
Thank you our pleasure thanks Robyn.
Thank you at this time, we've reached the end of our question and answer session I will now hand, the call back to management for closing remarks.
Thank you everybody for your time and patience. This morning, and your interest in KKR, we look forward to following up with many of you directly.
And if not we look forward to giving you our next update.
90 days or so thanks again, thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.