Q2 2022 KKR & Co Inc Earnings Call
[music].
[laughter] 19 states to thank you for standing by.
I'm going to take a ars 22nd quarter 'twenty 'twenty earnings conference call.
Today's presentation.
This will be interesting.
Following management's prepared remarks, the conference will be open for questions.
It's pretty much the Dupont upgrade assistance during the conference. Please press Star zero.
As a reminder, this conference is being recorded.
I will now hand, the call over to <unk>.
Craig Larson.
I think these two relations for KKR.
Greg. Please go ahead.
You operator, good morning.
Everyone welcome to our second quarter 2022 earnings call.
Morning, as usual I'm joined by Rob Lewin, our CFO .
Scott Nuttall, our co Chief Executive Officer.
We'd 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 I can't Kiara com.
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 refer to our earnings release, and our SEC filings for cautionary factors about these statements.
This quarter, we're reporting fee related earnings per share of <unk> 52 cents and after tax distributable earnings of 95.
Looking at the first half of 2022 compared to 2021, we feel very good about our performance against the challenging market backdrop.
Management fees are up 39%.
The related earnings increased 28%.
And our after tax the increased 14%.
Now before we go into more details on our results we like to highlight the changes to our business lines, we posted to our website last week and are also reflected in todays earnings release.
We've seen a dramatic increase in the scale of our real assets business. So we've split private markets into two business lines private equity and real assets.
Our private equity business line is comprised of our traditional P for P E and growth strategies.
While real assets includes real estate infrastructure and energy.
And at the same time, we're changing the name of our public markets business line to credit and liquid strategies.
More descriptive name for the capital that we manage here.
The driver of these changes is the gross and increasing significance of our real assets business.
KKR today is a meaningfully more diversified firm by strategy and by geography, and it was only a few years ago.
To give you a sense of the growth we've experienced here at the end of 2019, so two and half years ago.
Real assets, a U N was $28 million.
Today that number is 114 does.
So it's over four times the size today compared to just two and a half years ago.
And the drivers of this growth are several.
At the end of 2019, Infrastructure's AUM was $15 billion.
Driven by the scaling of our flagship fund together with our expansion into Adjacencies like Asia and core insurance and.
Even today is almost $50 billion.
Within real estate AUM has increased from 9 billion at the end of 2019, so over $60 billion today.
And Thats pretty evenly split between real estate equity and real estate credit.
Our opportunistic equity strategies had been scaling.
We now have core plus strategies across the Americas, Europe and Asia.
We acquired the Japanese REIT business earlier this year.
And Thats, all alongside a meaningful increase in the breadth of our real estate credit platform driven by global Atlantic.
And in energy, our strategic positioning has improved through our ownership interest in crashing energy, while AUM has increased to almost $4 million.
Page nine of the earnings release, our profile is increasing significance more digitally.
So the bars that you see on this page in total reflect to what we previously referred to as private markets.
You see each of the bars broken into their private equity and real assets components.
So alongside of the AUM growth was just ran through you're beginning to see a meaningful increase in real asset management fees and deployment.
And at the same time private equity strategies have been scaling.
AUM increased from 92 billion at the end of 2019 to 172 billion today.
Driven by the continued growth of our flagship private equity funds alongside the scaling of poor core private equity and our growth strategies.
When you look at the private equity figures for June 32022, and compare those to 2019.
Yeah.
Management fees and capital invested have all been growing at a compounded annual growth rate of approximately 30%.
Now turning to the quarter itself in our key operating metrics.
Assets under management came in at 491 billion.
That's up 14% year over year.
Our fee paying AUM increased to 384 billion up 20% compared to last year.
This growth is driven by our continued fundraising momentum with 25 billion of new capital raised in Q2, and 52 billion for the first half of the year.
In terms of fund raising for the quarter, we'd highlight four things.
First really building them up with just ran through a few months ago.
Is the increasing significance of real assets as fundraising across infrastructure and real estate contributed over 40% of new capital raised in the quarter.
Of particular note, we closed on over $4 billion of capital for our Asia infrastructure strategy.
Second we closed on a new 5 billion multi asset class strategic partnership in the corner.
The broad framework that this partnership is similar to those we've talked about with you before it's long dated in nature with recycling provisions.
And with around 2 billion recently committed the net impact of new capital raised in Q2 was approximately $3 billion.
This helps bring our total strategic and perpetual capital to $232 million.
Our 44% of our fee paying AUM.
Third is global Atlantic.
It's been a good environment for organic activity at G. As new capital raised in the quarter totaled approximately 6 billion. This was seen in both our credit and real assets business life.
And finally, the fourth point is really the breadth of activity that we're seeing across the credit business.
In addition to GE, we were active in the CLO markets in the U S and Europe in the private credit markets.
And of note here in Q2, we held a final closing of our Asia credit fun and early in Q3, we announced the final close of our asset based finance firm.
Now alongside of our capital raising we also continue to find compelling opportunities in which to invest.
We deployed $19 billion in the quarter and over $40 billion year to date.
Again, one of the key drivers of our activity in the corner with our real assets business with $8 billion of capital invested.
Within infrastructure core infra was most active deploying across the U S and Europe .
Real estate credit, including global Atlantic and K RAF totaled $4 million.
Real estate equity investment was concentrated in the Americas really on both the opportunistic and core plus fronts.
Private equity accounted for 6 billion in the quarter driven by activity in the U S.
And credit.
Deployment of 5 billion was driven by G. A related private credit activity and importantly at the end of the quarter, we had $115 billion of dry powder ready to deploy into new opportunities.
Now before turning it over to Rob we want to spend a few minutes on a piece of cake E. R that permeates everything that we do and that's ESG. So two things here.
First in June we published our 11th annual sustainability report.
The report this year titled scaling up.
Outlines how we have been scaling efforts to manage ESG issues across our investment portfolio as.
As well as our global operations.
This year marked a significant expansion of the scope of our ESG reporting which builds on our history of transparency we.
We hope you will take time to go through that report in more detail.
And on the back of that we want to drill down to spend a few minutes on the S. In ESG.
Social component.
This is really important to us.
And one spot where we've shown real leadership and we're going to walk through now is I work around broad employee ownership and our portfolio of companies.
And we plan to share more stories like this with you in the future.
Yeah.
Maybe if you will recall pizza presentation on C. H I overhead doors at our 2018 Investor day.
We were the fourth private equity owner of the business, it's a garage door manufacturing business and EBITDA margins at that time were already top quartile for a building products company at 21%.
Now one of the things that our teams saw was an opportunity to engage with this workforce in a way that hadn't been done before.
And so began our seven year journey.
We introduced a broad based equity program at the outset of our investment so all 800 employees largely hourly workers.
Received an ownership interest in the company.
And we continue to invest in the employee base along the way.
And by partnering with a workforce operational improvements were seen at every level.
Injury rates declined meaningfully employee engagement increased meaningfully.
And product quality improves somewhat.
So in total revenues more than doubled over our ownership and EBITDA more than tripled as EBITDA margins increased from 21% to 35% all organic.
So he was a very successful investment for us It was a 10 X multiple of money transaction for our clients.
And through the broad based equity program. It was also a very successful investment for the employees of C. H I.
On average the warehouse and factory workers each made a $175000 on the sale.
And the most tenured workers made approximately $800000.
So they earn multiples of their annual salary through the sale.
And now it's just this morning, we're pleased to have announced the sale of Minnesota rubber and plastics our MRP.
C. H I, we introduced a broad based equity ownership program across all of them are pes employees, including many hourly workers when we acquired MRP in 2018.
Over 1300, Nonmanagement employees across six countries in four states.
And the company and its employees it performs well.
We've seen significant improvements in safety waste reduction.
The speed of new product delivery.
And earnings growth as EBITDA margins grew from 21% to 25% over our ownership.
So again this will be a strong investment for our fund investors, we expect Seattle to be a three X multiple of our cost and approximately three and a half years.
At the same time, we think it's a great event for Mlps employees.
On average employees will receive 100% of their annual income and equity payoffs from the sale.
With a more tenured employees, receiving 200 per cent of their annual income.
Yeah.
And now we want to turn these experiences into a movement.
We've implemented broad based employee ownership programs across many of our traditional P and impact investments over 25 to date.
We've touched over 50000 employees.
And that number is gonna grow meaningfully from here.
In addition, we have.
Have found a new nonprofit called ownership works to support public and private companies that are transitioning to shared ownership models like the ones, we implemented at C H I and MRP.
At this time ownership works includes over 60 member firms pursuing this mission.
We think part of creating a movement will be storytelling, which is why we walked through the C. H I N. MRP examples and we look forward to having many additional stories to review review with you in the quarters and years ahead.
And with that I'll turn it over to Rob. Thanks, a lot Craig and thank you everyone for joining our call. This morning.
First to go through our quarterly P&L.
Our management fees came in at $655 million.
That's up 36% compared to the second quarter of 2021.
To put that into context Q2 of 2021 already reflected a full quarter of global Atlantic management fees. So.
So the 35 plus percent growth really reflects the organic momentum that we have across the firm today.
That transaction and monitoring fees were 107 million for the quarter.
The decrease here was driven by our capital markets business, which I will spend a bit of time on shortly.
As it relates to our expenses our fee related comp margin consistent with prior quarters was 22.5%.
Operating expenses totaled $137 million.
This increase was driven by a few things, including a heightened level of activity in corporate travel and office operations.
As well as continued investments in both our technology build out and marketing organization.
This is all critical investment that we feel is setting us up for future growth.
And it's very consistent with our plans for the year.
Bringing it altogether, our fee related earnings totaled $461 million or 52 cents per share this quarter.
Moving to our realization related revenue, which is very positive for us this quarter and in aggregate represented one of our highest in the firm's history.
Realized performance income came in at $731 million.
Our carried interest was driven by modernization of Internet brands.
A number of public market exits.
And the sales of opportunistic real estate assets.
Realized investment income totaled 277 million driven by the same transactions.
In total our asset management operating earnings were just over $950 million.
Our insurance segment also had a very strong quarter generating $137 million of operating earnings.
Together these earnings streams, resulting in after tax de of 840 million or 95 cents per share.
Year to date, our after tax do you Miss over $1 8 billion up 14% year on year.
Which I think highlights the continued strength of our business model.
Yeah.
Taking a step back from the quarterly numbers.
The momentum across the firm continues to be exceptionally strong.
And there is high confidence that we're doing the things that we need to do.
Really across the board to set ourselves up for the future.
We've had continued fundraising success with 52 billion of new capital raised year to date.
We are on our way to reaching our goal of being top three in everything that we do.
And with 65% of that new capital coming into our real assets and credit businesses, where become they get meaningfully more diversified asset management firm.
Management fees in turn are up 39% for the first half of 2022.
And with 44 billion of AUM that will become fee paying when it enters its investment period, we have a good line of sight on future management fee growth.
The quality of our investment portfolio as evidenced by our relative investment performance as well as our ability to monetize these investments through the cycle.
Realized gains for KKR up are up in the first half of 2022 compared to the same period last year.
Though we had a lighter quarter in capital markets fees for the first half of 2022 or approximately $340 million.
Very solid against what has clearly been a challenged market backdrop since the beginning of the year.
We remain really excited about the potential for our capital markets business.
We have a unique business model and an ability to recruit and retain best in class talent.
Additionally, we have 25 billion of total cash and investments on our balance sheet.
Last quarter on this call. We spent a lot of time detailing the strength of both our investment portfolio as well as the unique nature of our long dated and fixed liabilities.
We have no doubt that our position here represents a real competitive advantage, especially in a more volatile market environment.
And it will allow for us to emerge from this period in an even stronger position.
Turning to our investment performance.
The traditional private equity business was down 7% in the quarter compared to broad industries that were down over 16%.
And over the last 12 months the portfolio was up four while the MSCI world was down 14%.
Importantly, inception to date IRR for the key flagship returns across geographies remain strong at 32%, 19% and 38% across our Americas, Europe and Asia portfolio of companies.
Similarly, opportunistic real estate was up 1% in the quarter and over the last 12 months up 23%.
With infrastructure down one and up 8% over the last 12 months.
On the leveraged credit side of the portfolio was down six for the quarter and down 5% for the last 12 months.
Our alternative credit portfolio was down one in Q2 and up 6% and the LTM.
Next to go through our balance sheet investment performance was down 5% in the quarter and up 1% over the last 12 months.
We spent time last quarter reviewing the core private equity portfolio.
Corporate <unk> remains the largest allocation of our balance sheet today.
Over 30% of our investments are in this strategy.
For Q2, this portfolio was down two and a half per se, but up 16% over the last 12 months.
The underlying fundamentals of the core P portfolio remained resilient with organic revenue and EBITDA up approximately 12% and 10% respectively through the first half of 2022.
Yeah.
Turning a minute to focus on our Asia franchise.
With the closing of our acquisition of the Japanese REIT manager K J R. M.
The growth in our Asia Infra strategy.
And our first Asia private credit funds.
We continue to feel that we have a really differentiated position and a critical geography.
Our Asia focused capital has increased threefold since the end of 2019, now reaching 59 billion.
Most recently, we have raised over 4 billion of capital so far for Asia infrastructure strategy.
The capital raised already larger than its predecessor, which at $3 8 billion was previously the largest infra fund in the region.
We now clearly have the number one franchise in a space that has a tremendous addressable market and real secular tailwind.
As a result of all of this activity.
The moat that we have created around our Asia business continues to expand.
Finally, I want to take a minute just to review our long term financial goals.
As we have stated in the last few calls.
We expect our FRE to be four plus dollars per share and our after tax distributable earnings to be over $7 per share by 2026.
These goals have not changed.
And we continue to have a great deal of confidence in our ability to meet or exceed our targets.
Relative to what we are all reading right now and many corporate headlines KKR isn't a really unique position.
Where we have both the P&L and the business momentum to be able to continue investing back into our business for crest.
It's one of the many reasons that we are all so excited about the long term potential.
With that let me hand, it off to Scott.
Thank you Rob and thank you everybody for joining our call. This morning.
A few weeks ago, we hosted a conference for our global private equity and real asset clients.
People from around the World came and spent three days with us at our first in person event like this since 2019.
I thought today I'd share a handful of key takeaways from the event.
First as a whole investment performance has never been stronger across the firm.
This is a quarterly earnings call. So the discussion on investment performance tends to be focused on the last 90 days.
But when you take a step back and look at inception to date IRR is across our key funds, we've been delivering differentiated absolute and relative performance for our clients.
Second we've talked a great deal on these calls about how we're highly thematic in our investment approach.
This was evident in all of the presentations.
We think we got the macro right.
And with volatility expected to continue and a more challenging economic environment ahead of us it will be critical for us to continue to be on the right side of key macro trends and highly connected across the firm.
Third we've been balanced investors.
As just one example across our traditional PE funds over the last 12 months. We've returned more capital then we deploy.
This is in contrast to perception and has helped us in the fund raising numbers that you've been seeing.
Fourth our newer businesses are off to a fantastic start.
Over the last five years, we've launched a series of Adjacencies that are early in their lifecycle.
You're seeing innovation across our firm.
And in our experience. It takes 10 years for businesses to scale and inflect in a way that can move the needle.
So there continues to be a great deal of growth ahead.
Ahead of us.
And finally, our people.
We have never felt better about the talent and the phone.
It was fun to be able to show up our deep bench at the conference.
As we listened to three days of presentations and discussions it becomes apparent we have a unified team that is focused on generating exceptional outcomes.
Our numbers speak to the strength quality and resiliency not only of our model.
But of our most important asset.
Our people.
As we step back from the conference and the markets for a minute.
There's no doubt the <unk>.
Operating environment has shifted compared to six months ago, we are not overly concerned with near term volatility or the business cycle.
In fact.
Nothing has changed about the path we're on.
With record dry powder multiple scaling businesses, a large and liquid balance sheet and further innovation and expansion underway.
Our confidence level is high.
And we find it as exactly times like this when we make some of our best investments and strategic moves.
So our outlook has not changed.
And we are focused on capitalizing on the opportunity any short term market behavior gives us too.
To create even greater long term value for all of us.
With that we're happy to take your questions.
Thank you very much.
Ladies and gentlemen at this time, we will be conducting a question answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is at least in Q.
You may be starting to if you would like to remove your question from the queue.
So what this means using speaker equipment, it is might be necessary to pick up your handset before pressing the star.
I will say the quake could you. Please ask only one question and then join the queue. If you have any further.
Great.
The first question is from an explosive.
Goldman Sachs. Please go ahead.
Hey, good morning, everybody. Thanks for thanks for the question question on deployment in a in a bit of a multi part or I guess, but all related so the $44 billion of committed capital they'll turn on fees. Once deployed can you help break down which businesses. These balances that sit within and how are you thinking about the pace and timing.
<unk> of deploying this capital over the next dog and that's 12 months or so you know what it means for management fees and transaction fees as kind of part of that and I guess when you take a little bit of a step back we've seen a pretty meaningful decline in a sponsor backed announcements in this space over the last month or two to what extend is a you know sort of tighter finish.
What conditions do you think could weigh on kkr's ability to deploy capital.
Yeah. Good morning, Alex It's Rob Thanks, a lot for the question. When you look at the $44 billion of capital that's up I think 8 billion quarter over quarter from last quarter blended management fee rate on that is just north of 1%, a one point out of 4% and its spread.
Pretty nicely across our three asset management businesses and so in our private equity business.
Our core private equity business, what would be reflected in that number across real assets and you see our Asia infrastructure strategy, where so far we've raised over 4 billion of capital as Craig noted that has not yet turned on so it would be in that 44 billion dollar figure and then our credit business most of our credit business.
Our closed end funds are going to be turned on when that capital gets invested and so it's spread nicely across our three asset management businesses.
And then Alex it's Craig maybe just one point to look I think as it relates to deploy I mean, it's interesting.
A couple of things one just on the stats you know.
Private equity and real assets deployment in the first half of the year was 27 billion.
That's up from 12 in the first half of last year. So when you look.
Broadly in terms of overall level of activity, you've actually seen a healthy amount of activity now your point on the state of the credit markets, though is it's certainly a fair one.
We're seeing a couple of dynamics there.
Announced M&A as a whole is is down so I think when you look at new issuance, you're seeing that that that overall, new issuance numbers down I think you know banks are feeling more cautious so I think when you're you're seeing both of those things reflected in terms of overall level of levels of activity in the private credit markets, but I think importantly.
Markets are open and functioning and we still have the ability to to.
Finance transactions, we're not at a point where.
Where our ability to finance transactions Ah is impacting our ability to get things done.
Thank you Sir.
The next question is from.
Craig Siegenthaler.
Please go ahead.
Thanks, Good morning, everyone.
Yeah.
Had a question on private equity performance and I know, it's just 90 days, but inside of the 7% Mark for corporate private equity and do you have the breakout of public versus private in the quarter and also do you have any color on the main funds like Americas 12.
Nextgen tell thank you very much.
Hey, great. Good morning, it's Rob.
Thanks, a lot for the question.
Certainly like what you would've seen in the quarter is that our publics were down.
Our more than our privates.
Part of that was impacted by an M&A trade, where on one of our private strategic trade that resulted in a north of a $1 billion right up on our private portfolio.
I think you're right. When you said it is only a 90 day period I think that's important to put into context, we feel really good about how we valued our book this quarter. We spent a lot of time on it of course, you've got a mix of both DCF in comparable companies that are going to flow through and impact our marks I do think it's important though to think about you know coming into 2000.
'twenty, two where a private equity performance was and in 2019, we generated a 27% return for our investors that was 17% in 2020 at 46% in 2021. So we came into this period of volatility, but a lot of embedded gains. If you invested a dollar with US you know if theres a lot of ins and outs of course, but just on those returns.
Alone in 2019, and it's definitely worth close to $2 today with some of the marks that we've taken in Q2.
Yeah, I think the only thing I'd add Greg fundamentally the companies are continuing to perform well.
So you know I think you've largely saying some multiple contraction this quarter.
The underlying fundamental performance of the portfolio continues to be strong.
Yeah.
That's very much. The next question is from Jerry Alright, Oh, It's two stories. Please go ahead.
[laughter].
Hey, Jerry there we can't area.
Okay.
Jerry Your line is open but she loves telescope.
How 'bout now can you hear me all right there we go Hey, Gerry.
Okay. Thanks.
Just actually hoping to get a little bit of an update on capital management and a it looks like just during the quarter. There there wasn't any incremental buybacks or at least from the period from from May 1st onward, just kind of hope will make it a little bit of update how you're thinking about that and potentially how.
Or we should think about it going forward.
Hey, Gerry Thanks for the question like most things I think in our business, probably looking quarter to quarter, that's a little bit less relevant I'm looking over time and since we initiated our buyback program. Several years ago, we've bought back or canceled approximately 85 million shares that's done give or take at around 25.
Dollars per share I wish a little bit lower than our book value today, and so when we look back at our body of work over the last several years and we feel good.
Additional to that and if you look at Q2 in isolation. We had also completed the acquisition of KJ I am almost $2 billion and issued no equity as part of that and so as we think about.
Capital allocation and buybacks, what we are most focused on as a management team is ensuring that we drive the highest level of profitability on a per share basis, and theres multiple ways of being able to get there and ultimately for moving our capital around in a way that maximizes our away and we think that's a real core competency of ours that ultimately we will.
Drive long term you know best performance from a profitability on a per share basis. Our expectation is share buybacks are going to continue to be a part of that as we move forward.
Thank you very much and the next question is from Brian Chin of JMP. Please go ahead.
Thanks, Good morning, everyone. So if I look at net realized performance income prior to 'twenty 'twenty. One it was running at about $1 billion annually for a few years, despite varying operating backdrop backdrops and then as the business scaled that essentially doubled to $2 billion plus in 2021 and based on results in the first half of this year you're still running.
At about $2 billion. So is this $2 billion run rate level of reasonable expectation moving forward. Despite the more challenging backdrop or if the volatility persists persist do you think you'll trend back towards the prior $1 billion level, just trying to get some additional perspective here on the baseline level of realizations moving forward.
Yeah. Thanks, a lot for the question and and so we're probably going to stay away from providing that wasn't for our guidance certainly on things like realization I think what we will say, though is that we've been really proud of our ability to be able to monetize it through the first half of this year in a highly volatile environment I think that speaks to a couple of things Scott touched on the strength.
If our underlying portfolio and no doubt without real strong performance in our portfolio, we wouldn't have been able to achieve those exits. It also speaks to the diversification of our business model and what we have talked about over time is a real scaling of our capital that is eligible for carry as well as our deployment and as a result of that you know our expectation.
Over time as Youre going to see our carried interest and realized performance income scaling over time, and we think can be you know pretty significant scaling as we know that a number of years and in some of our newer funds that are much larger and you start to get to scale at our metric. So hopefully that gives you a bit of color.
Yeah.
Yeah.
Thank you the next.
Question is from Patrick.
Got it.
This research is correct.
Oh, Hey, good morning, everyone.
The mark to market on the fee paying side of the U M. Rolled forward was significantly worse than most people expected. So could you flesh out kind of some of the key drivers in the negative marks on the fee paying AUM side, maybe by strategy indoor vehicles and in that vein you know it looks like management fees actually came in more or less in line. So is it fair to assume.
But the fee rate on the more negatively mark that AUM was dramatically lower.
The inflows.
Patrick you you you hit it perfectly so the majority of that change in value and as a result, and and real interest rates going up in the fixed income portfolio at global Atlantic trading down and so that's what's driving it and as you think about you know are our fee rate on the club Atlantic pool of capital that's materially lower than that.
The rest of our business and so that's why you end up in a scenario, where our management fees.
Pretty disproportional to what you see in terms of the change in value on our fee paying assets.
Thank you.
First question is from all North Gila.
Okay.
Good morning. My question is on the secondary side could you discuss your view on the answer post secondary funds at this point in the cycle and how you're thinking about positioning them there on getting exposure email kind of Q1.
Thank you.
Yeah.
And so we have we have no. Thanks, a lot for the question we have nothing.
That's a minute to report as it relates to secondaries, but that's organic or inorganic it's a space that we continue to look at with interested is certainly adjacent.
Our core private equity strategies across the firm.
And so it's it's one that we're spending time on I think what's important to note as we've talked about our.
Goals, our financial measures that we expect to achieve over the next four to five years generating four plus dollars of FRE. That's based on principally thinks that KKR doing today doesn't rely on any inorganic activity and so while we'll continue to look at the space I've spent time on it there's a lot of areas that we're focused.
Take care that are in front of us that we started where we have track records and we've got a lot of opportunity to scale. This.
Okay.
Thank you Chris.
Question is from Brian <unk> of Deutsche Bank. Please go ahead.
Great. Thanks, Good morning folks. Thanks for taking my question, maybe just to focus on the real asset segmentation and more strategically and how youre thinking about it I guess.
Two parter first are you you've already built this business obviously.
The the quiet the reason for our justification for segmenting it out.
But is there also a change in management focus and are focusing on this on this area disproportionately you've got going forward and then the second part of that is on the infrastructure side.
Can you talk about your view on energy transition I don't know if that would fit into.
And your infrastructure strategy or whether you would consider over the long term.
Raising I and energy transition on and maybe just your views long term in that area given that you've seen.
He's got a lot of focus on real assets broadly in general.
Hey, Brian It's Craig why don't I start I'm sure on the overarching question you were asking Scott will add look I think in terms of the two businesses you mentioned infrastructure.
You're right, we have seen really dramatic scaling and both of those.
Businesses. If you go back to our Investor day in April of last year.
Walk through infrastructure as a case study of how honest if we we look to build investment platforms again with strong performance of flagship strategies, and then look to scale and and innovate at the same time and that innovation can come geographically as it did with Asia in fruit and it also could come in terms of expansion into new risk reward as we see it also with <unk>.
So we have a you know at this 0.3 distinct market segments and in from they've got the global Infra Fund series Asia diversified for its interesting it that at that Investor Day, you gave a little over a year ago, we gave some goals or targets we set out.
A M at that point was $17 billion.
We estimated that in for AUM at the at the end of this year would exceed 30 billion.
You know we're in the high Fifty's now so we've obviously had a lot of success there all organic.
We talk to management fees doubling from 150 to about 300 for 2022 through the first six months. We're at 170, so we're comfortably on our way to exceeding that target.
And in terms of real estate are really from a blank slate beginning with a bank like slate in 2013.
The platform has grown into a powerful fully integrated platform.
60 billion of AUM today split pretty equally between debt and equity.
We have over a dozen vehicles with independent economics. So I think when we look at how we're situated in the opportunities for continued growth on top of that we feel great about how we're positioned.
And then you're right is as it relates to the opportunities that we have to continue to grow and invest.
In a lot of the areas of ESG I think today, you've seen that both through our impact strategy, you've also seen that through our infrastructure strategy.
So nothing new to report on that as it relates to.
How do we think about renewables or or a dedicated strategy along those lines nothing to report today, but I think you'll continue to see that as a real focus of ours. It's absolutely one of the six or seven core themes that we're pursuing on a global basis.
Yeah, Brian just in terms of your question on the strategic focus is there any change the answer is no I think it was really just recognition that these businesses have scaled both infrastructure and real estate were efforts that we started post financial crisis.
And we've been in business building mode. We continue to be but we found that there was at times a bit of a misunderstanding on the private markets. Prior segmentation. There is periodically a presumption that that was mostly private equity.
And that's just not the case as you can see in the chart just to give you a sense for the numbers, we deployed about $40 billion in the first half of this year.
Real assets with 17 billion of the 40.
Credit was 13 and.
In private equity was 10.
So to the partially pick up the prior question on the deal environment.
But equity has been sub 25% of our deployment over the last 12 months give or take and real assets just as a larger and larger part of our firm. So we thought it was time to break it out and share with you more explicitly going forward, but no change in focus.
Thank you Sir the next question is from Finian O'shea of Wells Fargo Securities. Please go ahead.
Hi, good morning.
Question on on Bdcs.
One of your peers.
Lower did see pretty meaningfully this morning, seeing if you have them.
Any initial take on on what that might mean for the product line.
And maybe if this is.
Have a first mover or or just a one off for that group. Thank you.
Hey, Phil it's Craig Thanks for the question.
Case, obviously, a publicly traded entity, it's got its own <unk>.
Management team its own shareholders its own board. So so really it's probably a better question for there.
Coming earnings call in and not ours.
Just in terms of F. S. K broadly, we're really pleased with the performance of the business and the progress that we've seen over the last couple of years.
But in terms of your specific question on fee structure, we'd point you to a S. K.
Yeah.
The next question is from Michael <unk> Morgan Stanley . Please go ahead.
Hey, good morning, Thanks for taking the question I was hoping you can talk about retail on the private wealth side. How can you just update us on some of the initiatives. There that you have on the retail side, how much was raised in the quarter, maybe where that sits from an AUR standpoint today and more broadly on retail talk about some of the distribution initiatives in the private wealth channel, including around the crest.
Product and platform expansion and then just a quickie for a clean up question for Rob or Dan just around the amount of capital raised to monetize off the balance sheet in the quarter. Thank you.
Thanks, Mike.
Why don't I begin just first as it relates to overall a whim.
We have about $70 billion in total AR. That's in three buckets that includes funds and strategies that we mark that we market through channels that also includes the the efforts of our own team that is focused on our direct sales and activities with with wealth and private wealth and high net worth and ultra high net worth individuals.
And then that also includes that democratize piece that you're mentioning which was a hair below $6 billion as of as of June 30.
In terms of the update on the democratized.
So first on on crest so.
Reminder, right crest, we began taking third party capital in June of 2021.
As of June 2022, it was $1 3 billion.
Crossed that $1 billion threshold earlier this year, obviously, we believe that's the fastest.
Any private REIT has crossed that threshold.
<unk> has been very strong net annualized returns net north of 20% and the distribution footprint is growing which.
Which is great to see so as I know you will be well aware in particular there are there are three main warehouses in the U S.
Crest has been on one of those since much of it was on board at a second quite recently within the last week actually and is scheduled to be launched on the third in the coming weeks. So also in Q3 and these are important milestones for us with the wire houses and at the same time, we're focused on expanding distribution that's.
True as it relates to the our a and broker dealer channels domestically as well as the private wealth channels internationally. So we feel great about the long term path of crest is on the performance, it's delivered and the opportunity ahead of us.
And then as it relates again to the gist of your questions on the.
Democratize.
Where we are Holistically again AUM in total was was was $5 seven a year ago. It was at three and a half we've.
We've been hiring distribution channel and we expect to continue to do so.
As we think about broadening distribution of these products and then finally, you're gonna see more innovation here. So.
We expect over the coming two or three quarters will have lunch democratized infrastructure.
And private equity strategies, and we expect to see those launched quite broadly both in the U S. As well as internationally. So I think to date. These democratized products have really been focused in our real estate and credit and it feels to us like there's real interest in expanding those opportunities into additional add.
Our classes like in for MTGE, where honestly, there's a lot more white space for us So I think with our track record of our ability to innovate.
Brand, how we're positioned it just feels like we're really well positioned.
And then my quick follow up in the quarter, we had realizations of about $400 million off the balance sheet deployment of about 800 million in that $800 million does not include the roughly 1 billion seven.
Turning to the K J R M acquisition.
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The next question is from the Sun.
BMO capital markets. Please go ahead.
Oh, great. Good morning, Thanks for taking my question I wanted to come back to the fund performance and traditional private equity.
Could you give us a little more detail around the fundamental performance of the portfolio companies you gave us some helpful metrics related to the cool P book and I was wondering how that was tracking relative to the cool book and could you also update us on the marks and growth equity this quarter. Thank you.
Sure in Memphis, you cut out on the second part there. So I'll, let you repeat that or actually if you could repeat that in a second so it was private equity portfolio and then what was the second part.
It was around the the marks in growth equity this quarter. If you could provide us any details that would be great. Thank you I've got it.
First as it relates to the revenue and EBITDA trends I think as Scott noted.
At the outset, we've been really well situated given.
Given the focus we have and the themes that we've invested behind so the underlying performance of the portfolio companies continues to be quite strong and.
So we're in in looking back historically and look at this on a on a fair value weighted basis are the.
The revenue and EBITDA growth that we've seen in the private equity portfolio is is in double digits on a trailing 12 month basis.
So we've been really pleased with the with.
With the resiliency that you've been seeing in terms of the in terms of the underlying private equity portfolio and then as it relates to the growth strategies that we've seen.
And performance this quarter, you know again, recognizing that the S&P MSCI were down 16% in the quarter.
Our next Gen Tech portfolio was down in the low double digits, a health care was actually up modestly in the quarter. So I think in the quarter, a really volatile period, we feel good about that overall performance and in particular feel very good about the performance and the experience that are a L.
L piece of had them on a on an inception to date basis.
Thank you very much.
Next question is from Chris Kotowski Oppenheimer <unk> Company. Please go ahead.
Yeah.
Craig's discussion of the the equity participation was interesting, but most of the examples you listed where kind of you know.
Traditional mid western industrial companies, so I'm wondering if that kind of deep equity.
Participation is that a strategy that you kind of pursue across the board in all your transactions, whether it's private equity energy and health care.
Okay.
Or or or Doug do certain industries that lend themselves to this kind of you know deep.
Deep broad participation and others don't I'm, just kind of curious how you think about employing that strategy strategically.
It's a great question, Chris It's Scott and astute so you're right. We actually started piloting this program with our U S industrials private equity investments.
And this was a bit over 10 years ago that we started this effort and so some of what you're seeing in some of those early investments now being exited which is why you've got C. C. H I N MRP. The two examples that have happened in the very recent past what we have done though is now that we've kind of developed this strategy as we are rolling this out across.
All of our control investments.
In private equity starting in North America, and we're actually looking at it now for Europe , and potentially Asia as well. So it was piloted there and we're now expanding across everything that we do that's control so there'll be more to come on this but we've been really pleased with the results and we think this effort is applicable across industries and geographies.
Thank you Sir the next question is from Robert <unk>.
Okay B W. P.
Yeah.
Great. Thanks. Good morning, Thanks for taking my questions I guess, I'll actually I have a little bit of a multi parter. It. So the first one is you know maybe Rob if you could update us on where things stand.
This quarter, so far as Youre thinking as you look ahead for you know realization activity than you know.
The second question on the really on the insurance business could you give us a sense of kind of global land its contribution to our flows organic growth this quarter kind of how that business.
Very good environment for obviously annuity sales and maybe update us on the momentum of that business.
And.
With that kind of current spread expectations.
Yeah, Hey, Rob I'll I'll I'll take both of those and so on the monetization point okay.
Another positive area for us this quarter and I think continues to show the momentum so as we sit here today based on transactions that have happened or wherever you have deals that have been signed up and we expect to close this quarter and we have visibility to around $500 million of monetization related revenue.
Some pretty good momentum on the monetization front in spite of the environment that we're in and if we achieve those numbers a ballpark would.
We'll be about 75 per cent realized performance revenue and the balance from realized investment income as it relates to global Atlantic you are right in a rising rate environment.
I think you know me.
See a little bit more momentum certainly in the individual channel from a sales perspective, and you know flows this quarter were really strong.
They were about $6 billion.
Of total inflows in the quarter.
What a great quarter for G. I again, there's no block activity are in that number and the spread you know give or take around 100 basis points in the business and so we're feeling really good about how G. H positioned going into this period of time and their relationships across the bank and broker dealer channel I think I serve them really well and to take advantage of what is.
You know what.
A apply to environment in terms of annuity sales.
Yeah.
Thank you Sir.
Next question is a follow up from Brian Mckenna.
Oh, great. Thanks for the follow up just on the quarter to date realizations, how much that $500 million is tied to the C. H I transaction I mean, it might be a little early for this but how is Marshall wace been performing year to date, just trying to think through what that incentive fee might look like in the fourth quarter. Thanks, Yeah sure. Thanks, Brian .
And so what we're not going to give specific numbers on individual deals.
As it relates to the Q3 monetization I think I think the punch line is we feel pretty good across the board in terms of our ability to generate monetization outcome. So they so far this year and you've seen that in Q1, and Q2 and we're off to a good start in Q3.
It's to Marshall Wace, maybe just take a step back I mean, we feel great about that partnership I, they're north of 60 billion of AUM today. When we started that partnership that was right around 20 billion.
Got you and maybe a touch below so they've done just a phenomenal job on behalf of their clients and have grown considerably as a result gain year to date, you know they've got a bunch of different strategies, but overall the performance has been strong it's been on the positive side our.
We'll see how things wrap up between now and the end of September I'm as you know that'll dictate their annual incentive fee for most of what they do and so you know as.
As we sit here today there are in positive territory.
Not quite like last year, but but we feel you know overall just great about that partnership so far.
Thank you. The next question is a formula.
Please go ahead.
Oh, great. Thanks for taking the follow up I wanted to come back to your earlier comments around returning more capital L. PS then you've deployed and that's helping conversations in private equity and I was wondering whether you've seen any change in L. P appetite for cool private equity and how do you view the outlook for deployment there.
Thank you.
So I think we feel and Rufus thinks I think on for we're just really thrilled.
With how the business is positioned.
The opportunities for us as we think about our trajectory going forward just.
Just to give you a sense two years ago, a AUM was $12 billion as of as of June 30 that number is 32.
And youre going to see that through our balance sheet.
You'll see that through the management fee line.
Over time with continued performance, you'll see that in investment income and again youre going to see that over time as it relates to capital markets. So we have a number of ways to win which is exciting for us that business is global so I think it's it's just it continues to feel like the business is wonderfully well positioned.
On the deployment outlook again, we're in a choppy environment. So we'll have to see the the willing buyer willing seller dynamic certainly, but as we think about the long term trajectory and opportunity for us just feel exceptionally and uniquely well positioned yeah. Just a quick follow up there if it so all of our 115 billion of dry powder.
Approximately $13 billion of that isn't quite private equity. So we came into this period of time.
With a lot of firepower in that part of our best first and as Greg said, we felt pretty advantaged.
As we think about you know owning businesses in that part of our business for 10 to 15 year period of time gives you just a different lens and being able to evaluate acquisition opportunities in some of the things that might matter more than a three to five to seven year investment might matter a little bit less when your hold period is for that duration of time. So you know we would.
Do you expect there to be a real deployment across that business over the next several quarters. Yeah, just more broadly as a reminder roof. As we came into this period of time in a really fortunate position around P broadly there.
We had raised the vast vast majority.
The capital for our flagship private equity funds.
Before this year started including the vast bulk of the capital for our core strategy. So while investors maybe take a little bit of time to get their bearings on T. He in particular, that's not really impacting much what we're seeing in terms of P fund raise that.
Majority of capital, we're raising right now is around credit and real assets, where we continue to see a good amount of interest.
Thank you, Sir ladies and gentlemen, gentlemen, we have reached the end of the question and answer session.
I'd like to turn the call back to Craig for some closing comments.
Chris Thanks for your help and thank you everybody for.
Joining us really appreciate the time and attention.
On our quarterly results and if we don't speak with you in between look forward to chatting with everybody next quarter. Thank you again.
Thank you Sir.
Okay James.
Today's conference you may do so.
Can make your lines at this time and thank you for your participation.
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Yeah.