Q3 2022 KKR & Co Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to kill cancer ours third quarter 2022 earnings conference call. During today's presentation, all parties will be in a listen only mode.
Following management prepared remarks, the conference will be opened for questions. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this call is being recorded.
I will now hand, the call over to Craig Larson head of Investor Relations for KKR Craig. Please go ahead Sir.
Thank you operator, good morning, everyone welcome to our third quarter 2022 earnings call.
This morning, as usual I'm joined by Rob Lewin, our Chief Financial Officer.
And 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 at KKR 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.
I'm going to begin the call by spending a few minutes walking through the quarter.
So we look at our results I think they really highlight the resiliency of our business model.
Our management fees for the quarter were $671 million.
That's up 20% compared to Q3 of last year.
Management fee growth for the quarter as well as over the last 12 months has been most meaningful without a real assets business.
As you'll recall, we began reporting separately last quarter.
And that transaction and monitoring fees were $168 million for the quarter with capital markets contributing $116 million.
So it goes through our expenses or fee related compensation margin consistent with prior quarters was 22.5%.
And other operating expenses increased modestly from last quarter coming in at $146 million.
Yeah.
In total our fee related earnings grew to 542 million or <unk> 61 per share.
With an FRE margin of 61%.
This is now the eighth consecutive quarter that our FRE margin has exceeded 60%.
Next realized performance income was $498 million with realized carried interest driven by monetization of CACI overhead doors, Pfizer as well as Max health care.
Realized investment income was $285 million driven by similar monetization events.
Adding these two lines together so looking at realized performance income together with realized investment income really to get a complete picture of our monetization activities.
Total realized gains for this first nine months of the year are 10% ahead of last year.
Given all of the volatility experienced across markets in 2022.
We think this speaks to the breadth of our platform and again, the resiliency of our business model.
So overall, our asset management operating earnings were $959 million.
In our insurance segment had another very strong quarter generating $127 million of operating earnings.
Together. This resulted in an after tax distributable earnings of $824 million or 93 per share.
Turning to investment performance you can see the details of the quarter and the LTM period on page seven of the press release.
Just looking at this page the traditional private equity portfolio was down 4% in the quarter <unk>.
Compared to broad indices that were down 5% to 6%.
And over the last 12 months, the BG portfolio was minus 8%.
Paired to the S&P 500, and MSCI world indices that were down 15% and 19% respectively.
In real assets, our portfolio continued to perform again in a quarter with a lot of volatility.
The opportunistic real estate portfolio was minus one in the quarter and plus 11 over the last 12 months, while the infra portfolio was up one in the quarter and is plus five LTM.
On the leveraged credit side, the portfolio was up one in the quarter and down 5% over the last 12 months.
And our alternative credit portfolio was down one for the quarter and up three in the LTE M.
There has been meaningful volatility in the credit markets over these periods as well the high yield index declined 1% in the quarter and is up 15% over the last 12 months just as a point of comparison.
In terms of our balance sheet investments investment performance was flat in the quarter and down 5% over the last 12 months.
Core private equity, which Rob will touch on in a moment and it's still our largest allocation was up 2% in the quarter and it's up 8% over the LTM.
Turning to fundraising in the quarter, we raised $13 billion, bringing new capital raised to 65 billion year to date.
With that our assets under management increased to $496 billion and fee paying AUM now totals 398 billion.
To help put these figures into perspective over the past two years, both our AUM and our fee paying AUM have more than doubled.
We also continue to deploy capital with 16 billion invested in Q3.
Credit strategies invested 7 billion in the quarter with the remainder of the quarter's deployment roughly split between real assets and private equity.
And with that I'm pleased to turn the call over to Rob.
Thanks, a lot Craig and good morning, everyone.
Let me start by saying a few words on the operating environment.
As you know.
The third quarter and really the first nine months of 2022 were very challenging across markets.
High levels of inflation are clearly impacting global consumers.
The sharp increase in interest rates has had multiple knock on effects that will invariably slow much of the global economy.
In chart equity and bond indices had been very volatile and virtually all of them are down significantly year to date.
Our capital markets activity has meaningfully slowed global equity and credit issuance are significantly below historical norms.
Now despite all of this volatility and uncertainty the overall mood and sentiment across KKR is quite positive.
And we thought it would be worthwhile. This morning to go through five key reasons, why we feel the way we do.
First let me remind you why our business model positions us well for periods like this one there.
There are a few key reasons why.
About 90% of our capital is perpetual or committed for an average of eight years or more from inception.
Our management fees are largely calculated on committed or invested capital.
And as a result are more insulated from fluctuating NAV of our funds.
Therefore, much of our management fees are highly predictable and that visibility in turn provides us with the continued ability to invest back into the firm for growth.
We also have 43 billion of committed capital yet to turn on that has a weighted average management fee rate of about 100 basis points.
And finally, and maybe most critical in moments like these we have 113 billion of uncalled capital from our investors that we can use to invest into the current dislocation.
While those statistics are all meaningful in their own right. I think it's also helpful. When viewed in comparison to where we were as a firm even a short while back.
Two and a half years ago March 31, 2020, so right as we entered Covid. We had 57 billion of dry powder with 19 billion of committed capital yet to earn management fees.
That compares to the 113 billion and 43 billion I mentioned a moment ago.
So both of these figures have doubled more or less over the last two and a half years.
And when you consider our relative positioning has affirmed those numbers don't account for the significant increase we've had in perpetual capital largely due to our partnership with global Atlantic and our acquisition of J J R. M S.
As well as the meaningful increase in the diversification of our business, both by geography and strategy.
This brings me to my second reason for optimism.
We're fortunate due to our fundraising success are definitely a bit of luck on timing that we are in a position to deploy a significant amount of dry powder with asset prices more dislocated and while capital is quite scarce.
As a result, we are starting to become a lot more constructive on our opportunity sets.
We are already finding opportunities across the credit landscape.
Our real estate at corporate credit teams are all very active.
But more exciting is our outlook for the coming 12 months to 18 months across all asset classes and geographies.
We are mobilizing our teams and resources against what we see as a growing opportunity to put our client capital to work.
Take for example in private equity.
Oftentimes our best Vintages result from investments made during periods of market distress.
The early two thousands the GSE or what we went through a couple of years ago.
We think 2023 kept presented such an opportunity.
And the key here is that we've really set ourselves up to be able to outperform in this environment, given our expertise and breadth across geographies industries and asset classes.
And most importantly, our culture really incentivize our people to work across the firm to ensure that both information and capability travel and that we can make each other better.
As a result, we are uniquely positioned to find creative and attractive investment opportunities.
Turning now to performance, which is my third point.
Please turn to page eight of the earnings release.
As Greg went through every quarter, we report our investment performance for the quarter and trailing 12 months period across our major asset classes.
That's really the only tells part of the story.
Is it doesn't capture investment returns since inception.
These funds all continue to outperform their comparable public indices.
Our clients really in all channels rely on us to produce differentiated outcomes compared to what they can achieve and traditional asset classes.
And that is just what we've been doing.
Now to be clear, we certainly have today and will in the future a handful of more difficult situations to manage.
But our thematic approach, which we have talked about many times and our focus on portfolio. Construction are two critical reasons why you see this kind of outperformance.
Which brings me to my fourth point.
The strength of our fund performance continues to allow us to raise capital from our investors.
Q3, new capital raised of 13 billion brings year to date fundraising to 65 billion.
To put that number in perspective, that's already our second best year of fundraising ever.
And we still have a quarter to go.
Even more notably this was against a much more challenging fundraising backdrop than the past few years.
And with that many of our largest flagships in the market.
And looking ahead over the next 12 to 18 months, we continue to have a really active calendar.
Constructive about the outlook for scaling our strategies that are coming to market.
And finally, I want to turn to my fifth point.
And focus on the competitive differentiation that our balance sheet creates in periods like these.
There is not a corporate that I know that doesn't wish they had more capital availability right now.
And we are very confident in our ability to deploy our excess capital and opportunities that can both generate compelling investment returns and also helped build and scale the firm at the same time.
Part of what generates this confidence is the strength of our existing investment portfolio.
Our focus on asset allocation and really where the puck is going.
Has served us well.
While the S&P 500 declined 15% over the last 12 months, our balance sheet was off only four 7%.
And over the last three and five years, our annual returns have been 16% and 14%.
Also several hundred basis points ahead of the S&P over these periods.
One of the key drivers of this outperformance is the shift that we made a few years ago to increase our exposure to real assets.
The fair value of our real assets investments have increased from $2 4 billion two years ago to $4 2 billion as of 930 and today represent almost a quarter of our investment portfolio.
Our largest allocation on the balance sheet remains core private equity and this really gets into business building and how the balance sheet allows us to play offense.
As a reminder, core P is a long duration investment strategy, where we expect to hold these investments for 10 to 15 plus years.
I believe they carry a more modest risk return profile compared to our traditional private equity model.
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.
So from a standing start six years ago, we've put together this really incredible global portfolio of 17 companies with 32 billion of AUM that is both third party capital together with balance sheet catheter.
We believe we have the largest court be asset management business in the world.
And as shareholders. We are all participating in core P. E. Three the compounding of value on our balance sheet.
Alongside the management fees capital markets revenue fee related earnings and carried interest that has generated over time.
That combination is incredibly powerful.
Our acquisition of global Atlantic in July 2020, right on the heels of Covid is perhaps the best example of how our balance sheet positioned us to play offense when others could not during that period of severe dislocation.
We have deep conviction that G. A can be a long term compounding capital much like core private equity and.
And we are partnered here with a first rate management team.
So far G. A has been performing exceptionally well.
Over the last 12 months, they have generated an ROE of about 21% well ahead of our expectations.
AUM has increased from approximately 70 billion had announcements to over 130 billion as of 930 really helping to also drive our asset management economics.
Core private equity and global Atlantic are great. Examples, but there are just two of many.
We know that our model will continue to allow us to find ways to use the balance sheet, where we can simultaneously generate compelling investment returns and also use it to grow and scale the firm at the same time.
We have also created a liability structure on our balance sheet that allows for playing real offense. In this environment. We are very intentionally funded ourselves with long dated liabilities that are fixed cost of capital.
The average maturity of our recourse debt is around 20 years and has a weighted average fixed coupon of approximately 3% after tax.
Obviously that just isn't replicable today and represents a huge asset for us right now.
With all of this hopefully it's clear why we remain so excited about our long term opportunities.
So in summary.
Number one our model is durable and diverse with significant recurring revenues.
To the next 12 to 18 months shippers that great deployment opportunities and we are extremely well positioned to invest into them.
Number three.
We are generating excellent investment performance on behalf of our clients.
And for our fundraising success has been notable especially given the backdrop and we remain very well positioned to achieve growth from here.
And finally number five our balance sheet is a strategic differentiator, whose value is even more meaningful in moments like these.
The opportunity set in front of us over the next five to 10 years is a mess and we have never felt better positioned competitively.
That's why the tone inside the firm is so constructive right now.
Our long term goals that we have articulated for 2026 are unchanged and we have a great deal of confidence in our ability to achieve that.
And with that Scott, Craig and I are happy to take any questions that you have.
Thank you at this time, we'll be conducting a question and answer session.
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I'll go out for.
For participants using speaker equipment, it may be necessary to pick up your handset.
Before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Alex <unk>.
With Goldman Sachs. Please proceed with your question.
Hey, everybody. Good morning. Thanks for thanks for the question apologies for two Potter, but problem is there a kind of related so just starting with private equity.
So finding its financing costs are obviously up pretty meaningfully you know growth slower credit spreads are widening so I hear the optimism to deploy capital, but curious how you're thinking about deployment in private equity specifically and how are the return profile of where you could deploy money today berries versus what you could have done a couple of years ago. In other words are you still on.
Underwriting too you know high teens to 20% of Irr's and I guess are the lower multiples lower entry multiples enough to offset both the growth headwinds as well as higher financing costs and then I had a quick follow up just on the growth in private equity management fees for the next 12 to 18 months.
Hey, Alex Thank you for the.
Multiple part of why don't I start with a couple of observations just on deployment one.
Public markets and.
Why don't we start there a public market valuations have obviously come down.
Very meaningfully.
Our macro team does this work every quarter, where they look across the breadth of markets and asset classes and looked at current valuations versus the 20 year average.
In Japanese equities as an example are at 8% of their long term average and that's just one example, that's a pretty remarkable statistic.
And at the same point in time capital is obviously very precious as you noted so I think the combination of of markets coming down scaling with capital being very precious is a is a great thing for us and we have lots of tools at our disposal in terms of finding ways to be relevant.
Thank you remember.
Our deployment history during Covid.
In a period, which even arguably it was more dramatically dislocated more dramatically shut down.
I think we feel great about the connectivity that we had as a firm and the opportunities that we were able to find in terms of deploying capital.
In private equity and private markets broadly and I guess the final thought that I would make just as it relates to the financing market.
Is look we have 70 people globally in our capital markets business and the strategic value of this business increases during periods of volatility and distress.
So I think as it relates to our ability to finance transactions given our position.
The best in class talent, we have here on a global basis, our ability to access in finance and capital markets areas of distress is actually something that we think of as being as a real competitive advantage of ours.
Hey, Alex its Scott just a couple of things I'd add on to what Craig said.
You're right the financing costs are up I'd say multiples.
Generally speaking are down more.
Financing costs are up.
And if you look kind of over time.
And you run out the math.
Hanging in a little bit more to get the financing in place. It doesn't have that large an impact on returns as long as you've got the right assets the right thematic.
And you're able to make the company better while you own. It. So the bottom line is we are still pricing the IRR as to where we were before it's just a bit of a different mix.
And then Alex switching to your question as it relates to management fees across private equity and growth from here. Obviously as you know a couple of our big Flagships, we got done over the last 12 months to 24 months.
We continue to raise the number of adjacent products that we're excited about that are in their scaling phase and also remember that our core private equity business is a business that generates management fees as capital is deployed as opposed to committed capital at the onset of the fund and so as we continue to deploy capital and core private equity you should see some natural growth there as well.
So we're constructive as it relates to growth in our private equity management fees over the coming quarters.
And then obviously at some point there in the future I will have a re raise of our flagship strategies.
Our next question comes from Craig Siegenthaler with Bank of America. Please proceed with your question.
Thanks, Good morning, everyone. Good morning.
So my question is on global latex.
I wanted to see how early stage credit quality metrics have trended inside MGA and <unk> and we know it's coming off very strong levels, but have you seen a pickup in delinquencies non accruals criticized assets OTT is and then if the U S does enter an economic recession next year or at least if the economy.
Does slow a lot.
Do you expect to see a pickup in <unk> next year off about a very very low base currently.
Great Hey, great. Thanks for the question. So the short answer is that we have not seen any deterioration of credit quality.
Cross Global Atlantic.
And as you as you look forward and as you look at different sensitivities, we feel really good with how that book is positioned I would note that they're NTIC rated assets are that.
That 95 plus percent of them RNA I see one or two so investment grade in nature and so we feel really good about the underlying strength of the bucket global Atlantic.
Yeah.
Great. Thank you Rob.
Correct.
Our next question comes from Jerry O'hara with Jefferies. Please proceed with your question.
Great. Thanks for taking the question this morning.
Just kind of circling back I guess on some comments made and some of the recent quarters just around the expansion of platform distribution for some of the democratized retail products, hoping we could get an update there and perhaps any kind of commentary around around flows and the AR in the quarter.
Would also be helpful. Thank you.
Hey, Jerry it's Craig I'm glad you asked about why don't I start.
First just to your specific question on flows.
We did see new capital raised in the quarter slow versus Q2.
With volatility in the quarter.
We're not really terribly surprised by that new capital raised across all of our democratize products was about 500 million in the quarter.
This would have been about half of that now.
That doesn't tell you is all that's going on under the Hood, because there's quite a lot I think first just as it relates to crest and and distribution.
There were three main wire houses in the U S. As you know we've been on one of those since we launched 15 months ago, and we're really pleased with our market share in our positioning there.
We were added to a second warehouse in August and then launched on the third right at the very end of September .
So with all the volatility in the quarter and the timing of these launches.
Not really seen the impact of that in the 930 numbers, but the breadth of our distribution. There has certainly increased in the quarter.
Second we did make a series of filings as you may have seen on our infrastructure products.
Unfortunately, not only have an active registration statement on file there isn't a lot of additional detail.
Can give you here because of the FCC's private placement rules, but wanted to highlight that as something noteworthy.
We have made additional filings on additional private equity as well as credit products in the quarter.
And for US, we continue to hire and onboard and build the team is focused on this opportunity for us I think the main takeaways.
If you were to kind of step back from the 90 day period. If you will is we expect to have democratized products across our four main asset classes real estate infrastructure private equity and credit.
This continues to be a real priority for us.
And the Great news for US one this is a huge end market, it's a massive opportunity and in many ways. It's all upside for us and it continues to feel like we're really wonderfully well positioned.
Against this just enormous opportunity.
Yeah, the only thing I would add Jerry Scott as you.
You know Rob mentioned that we continue to feel great about what we shared with you in terms of our growth plans through 2026, we had very little.
Private wealth in those numbers.
So to Craig's point. This is all in front of us and upside for us relative to what's in the firm today and hopefully I'll provide upside to the trajectory we shared with you at our analyst day amongst other quarterly calls.
Our next question is with Patrick Davitt with Autonomous Research. Please proceed with your question.
Hey, good morning, everyone did.
Could you give us an update on the announced but not closed our realizations for for Q and then maybe taking a step back any updated broader thoughts on the potential for realized cash flow to come down you know over the next few quarters into next year given the decrease in net accrued carry in and you have more difficulty getting deals done.
Yeah, sure, Hey, Hey, Patrick Thanks for the question.
Based on transactions that have happened or where we have deals that have either been signed up or we expect that are closed or we expect to close this quarter. We've got approximately $350 million of realized performance revenue and realized investment revenue that we feel good about so continued momentum on the monetization front in spite of the environment.
And if we achieve those numbers and this part is important ballpark around 30% comes from carried interest and the balance from realized investment income and incentive fees that would come in at that lower comp range and so a higher flow through on monetization at least what we've got quarter to date in respect of.
Of our realized monetization revenue in the future.
Of course.
Some of this is going to be impacted by the environment and I've said this before.
We don't you know, we don't need straight lineup market. So what we need are periods of time, where volatility is down and pockets of time, where volatility is down to be able to monetize our portfolio and while you're right. We've taken some marks as an industry and as a firm are we still have approximately $9 billion of embedded revenue that sits on the balance sheet.
Across our carried interest out line item as well as our balance sheet and so that's the fair value of those assets relative to their cost.
That gives us a good bit of visibility in terms of generating meaningful revenue in the future when we do get those pockets.
Or opportunities to be able to monetize our portfolio.
Yeah.
Our next question is from Bill Katz with Credit Suisse. Please proceed with your question.
Okay. Let me. Thank you very much for taking the question. This morning, So maybe circling back to the insurance platform. Just wondering if you could talk a little bit about the implications of higher interest rates as it relates to any kind of lapse or.
Surrender dynamics and or a block opportunities. Thank you.
Yeah, Hey, Bill, it's Rob I'll I'll I'll take this or I'll start Oh overall the punch line is we think <unk> should be a net beneficiary of a rising rate environment first.
For a couple of reasons and I'll touch on surrenders have yet.
One our flows should be better both on the individual as well as on the institutional side of that business.
On the individual side, it's just easier to be able to to sell and distribute a 4% annuity than it is a one 5% annuity and then on the institutional side you referenced blocks.
We should benefit here and we're seeing this in our pipeline because all things equal.
Our reinsurance clients are going to realize a lower losses at a higher rate environment and so I think that's why you're seeing our pipeline I'll pick up on the block side.
As it relates to the balance sheet, specifically your assets and liabilities are pretty tightly matched at GE. As you know so we don't expect much impact here, but we definitely do have some floating rate exposure and so overall, we should be doing better on the balance sheet and a higher rate environment and then you mentioned surrenders at the end it's still early of course.
But so far in 2022 as well as in Q3 of 2022, we've experienced lower surrenders than what we were expecting.
Tribute I'm a good part of this to the design of our products are which disincentivize policyholders from surrendering before they're expected to do so and so as you think about a global Atlantic and our policies, but 75% of those policies.
Either have surrender charges or arent able to be surrendered again back to product design and why we you know.
Why we feel like we got our arms around that kind of a risk in a rising rate environment.
Of course, something that we continue to watch but the punch line is we think in this kind of a rising rate type of environment that we're in right now G. A should be a net beneficiary.
Our next question is from Brian Bedell with Deutsche Bank. Please proceed with your question.
Great. Thanks, good morning folks.
My question is on fund raising 13 billion for <unk> can you unpack the real asset component of the fund raising that could only get about a third or so of that from the fund tables within that $6 billion.
And in that segment.
And then also if you can sort of comment on that.
The pension plan appetite and your your view on that.
Channel given rising long term rates.
And then just the one comment on the fundraising.
Fundraising so far year to date.
Being the second best year.
I imagine, it's still a challenging environment near term at least sue just want to be sure that you're not expecting a fundraising to exceed the 2021, which of course was a record year with flagships.
Hey, Brian It's Craig why don't I, why don't I start.
And I'll start on your last 0.1st look I think with market volatility the tone of the fundraising market has become more challenging but to be clear we feel great about the body of work here. So as Rob noted and as you mentioned a second ago, New capital raised for the first nine months of 65 billion.
Again through nine months already the second most active fundraising year for in our history without a lot of flagships in the market.
When I think back to where consensus estimates were for us at the beginning of this year.
Number for 2022 for the full year was in that $55 billion to $60 billion range.
So again, we've already raised more capital relative to what was expected at the outset of the year and that has been accomplished in a more difficult fundraising environment and we still got another quarter ago.
So.
Look I think again, we feel great about everything that we've accomplished a couple of other thoughts one.
You mentioned the fundraising that we've had in some of the real asset areas.
When I think of activity for us in strategies like infrastructure real estate and credit strategies that can or should participate in a rising rate environment or inflation protected that's been two thirds of the capital that we've raised over the trailing 12 months.
And then finally I think also.
In terms of innovation over half of the capital we raised in the trailing 12 months again.
Were in strategies that didn't exist within KKR.
Five years ago.
In real assets one of those.
Contributors to the quarter is a great example of our Asia infrastructure strategy is a great example of this Asia was outside of the mandate of our flagship fund series.
The first generation fun again, we feel great about performance and that was certainly one of the contributors to real assets in the quarter.
That would've been the largest piece as it relates to the infrastructure component and then within our real estate you have a handful of components.
The largest of which would have included a th contribution within the within our real estate footprint.
So, but again I think the main takeaway, we feel really great about everything that we've done so far this year.
Yeah, the only thing I would add Brian to you.
Your pension plan question, if theres no doubt some U S pension plans.
Or getting their bearings right now and trying to figure out you know where the market's going to go.
But you know, we're having a lot of very productive conversations to Craig's point around anything that's got an inflation protection element for yield.
Credit infrastructure real estate.
A lot of good dialogues on those fronts, even with some of those that are still getting their bearings and may be more active early part of next year than the end of this year.
Remember, we're spending a lot of time.
With institutions, we've never spend time with before.
Insurance companies Globe globally are trying to figure out how to navigate the rate environment sovereign wealth funds have a different dynamic entirely as to family offices and high net worth investors.
So we're having more dialogue than we've ever had before about the markets and the macro.
In introducing what we're doing.
And I think to the bigger broader point and you referenced this in your question. We were incredibly fortunate we raised over $120 billion last year, our large flagships had been in the market over the last couple of years before the more recent more challenged markets.
So we really got a bit lucky with our timing and that's why we have the $113 billion.
Of dry powder to put to work.
In an environment like this companies still need capital.
And we find private capital tends to have less competition at.
At a time like this.
Public markets are more difficult corporate M&A is more challenged so we've got a lot of capital to put to work companies still need it.
Yeah.
Our next question is with are not kept up with B N. P. Please proceed with your question.
Good morning, Mike.
My question is regarding capital deployment in the infrastructure.
Hopefully give us quite a bit of taking private equity I'm. Just wondering if you could see I mean for a second on it.
Other key players out there have been unaffected by the macro environment deploying quite quick I'm, just wondering specifically how you see the uptick in terms of deployments in infrastructure and should we be thinking of a similar.
Timeframe that you experienced in the past and where the opportunities may lie in front. Thank you.
Yes, Greg why don't I start look one of the main point there is a massive need for infrastructure.
Capital globally.
And alongside of that massive need you're really seeing a step function change in the footprint of our business. So whether that's our global Infra Fund series Asian interest one series diversified core.
Two years ago was $15 billion and today, we're at 50, so alongside of that presence you're seeing similarly, a step function increase in terms of our deployment in that team's remained among the busiest within KKR.
We've invested $11 billion of capital globally over the last 12 months and infrastructure in 2020 that number was a little over $2 billion. So again <unk> seen a big ramp in that activity and that's something that I think we would expect that you should you should continue to see for us.
One of our largest deployments in the quarter was at a.
A take private of a.
Our French renewables business, we had another take private that has announced is scheduled to close in Q4 I think to take private dynamic is actually also something that's just worth mentioning it's true in infrastructure. It's also chew them more broadly.
We've announced again, where we've closed on a four take price this year with a fifth set to close.
In Q4.
But again the main takeaway on infra is a high level of activity for us.
Scott I'd tell you the punch line is consistent with your comment our pipeline is strong.
Across both value add and core infrastructure. So we've been announcing deals and we continue to have a full pipeline.
Our next question is from Michael Cyprus with Morgan Stanley . Please proceed with your question.
Great. Thanks, maybe just continuing with the real asset theme. There can you talk a little bit about how you're expanding your capacity to invest in real assets, where youre looking to expand the platform as you look out over the next year or two where are you hiring and can you also talk about the sort of added benefit on the transactional revenue side as real.
<unk> deployment continues to come up it looked like that was pretty strong in the quarter there as well and then just a cleanup question for Rob If you could just mentioned the investments and realizations off the balance sheet in the corner.
You wanted to start with realizations.
Chuck in the quarter, Mike and thanks for the question about $800 million of deployment.
And modernization, so that's a little bit north of 400 million off of the balance sheet.
Yes.
Why don't I start on the on the first part I'll, let Scott.
That in.
Look I think if you look at it.
A statistic to kind of help frame the growth in the presence in the marketplace, We had 118 billion.
In real assets at the end of the quarter two years ago that number was 30.
And naturally in the evolution of these businesses.
Capex runs through your income statement and so you're you hire people you need to bring on World class talent to then have the opportunity to raise capital and then Youre looking to earn your right to grow build and scale both of those funds themselves as well as where you see opportunities to expand into other areas, where you can be relevant so I think we.
Feel.
We feel great about the progress that we've made but our hockey sticks arent in the air.
I think we see the opportunity set ahead of us.
Look we're the leading one or two providers are in some of those businesses and it just feels like there is a tremendous opportunity for us to continue to build and grow and scale off without at all off of all of the growth that we've already I think you've already begun to see.
Yeah, just a couple of other thoughts Mike Thanks for the question.
Just take real estate will take the two pieces of real assets and turn real estate a few things I'd call out one is Asia.
We continue to expand the team.
You saw the acquisition.
We completed in Japan of the platform now called K J R. M. We have 160 people now in Tokyo focused on what is the second largest real estate market in the world and.
And that's a J REIT platform as a reminder, so Asia would be one thing I'd call out. We've also expanded the platform. We started an opportunistic but we've also now expanded the core plus.
And so we're raising capital across U S Europe and Asia are core.
Core plus so that'd be a second area I'd call out third would be credit right. Now we think the real estate credit opportunity is very attractive.
Those financing markets have become more challenged in the traditional format.
We're seeing excess return in a very strong pipeline across all we do in real estate credit that platform. As a reminder, is now approaching $30 billion of AUM and that's all on top of the regular way opportunistic funds, where we remain highly thematic and we're raising capital and continuing to build the teams.
And infrastructure similar set of themes I'd call out again Asia, Our Asia infrastructure platform, Rob referenced it from a fundraising standpoint, but we continue to see a lot of opportunity there and frankly less on the ground competition and that platform is scaled meaningfully in quite quickly.
So building out our core infrastructure business, so moving from value add into core in a bigger way and heard the discussion earlier about some of the take private so I'd say Europe would be another area I'd called out there's just a lot of activity and a lot of opportunity in particular lately on the renewable and energy transition front.
So a lot going on.
Our next question comes from Lucas Hone with BMO capital markets. Please proceed with your question.
Great. Good morning, Thanks, very much I was hoping to get your thoughts around the trajectory of fee related performance revenues in a fairly big increase this quarter from the real assets business can you give us a bit more detail about how we might think about the growth of that line item looking out a year or two.
Perhaps if you take a normalized view on investment performance and growth and some of its.
Its products. Thank you.
Rufus you hit on it there at the end as we think about that line item in our P&L.
That is going to be largely driven.
By our open ended it more perpetual vehicles that are more yield based in nature.
As you would've heard a couple of times already on this call. We have a lot of conviction that we can scale that part of our business. We've got a lot of conviction that we continue to perform on behalf of that client base.
And as you combine those two things you know our view as you look over the coming quarters and years Youre going to see a real ramp up in that line item over time.
Okay.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Chris Kotowski with Oppenheimer <unk> Company. Please proceed with your question.
Yeah, I Wonder if you could give us your thoughts on.
The financing markets you know I guess Twitter has done Tenneco God European approval. So so the banks are in fact kind of perhaps have some inventory to work through and I'm wondering if you can talk a bit about how how long do you think that that is going to be.
An obstacle.
For financing.
Transactions in the public markets and and and how much is how much is that an obstacle for you too to do to pursue public to privates in general.
Hey, Chris It's Craig why don't I start look.
The financing markets have become more challenging.
Certainly relative to a year ago and six months ago.
But again when we look at that honestly is an opportunity for us and we mentioned it earlier.
If you go back to 2020, we.
We very creatively, we're able to find lots of ways.
To deploy capital in very dislocated environments, So I'm not at all trying to.
Minimize your thoughts your points of view on the bags et cetera, and you've seen a lot of it.
The impacts of that in broad statistics, but when you see that you know the broadly syndicated market in Q3.
Was at its lowest levels since the global financial crisis.
That gives you a sense of how dislocated.
Markets are and.
And what that means.
And how things can become more challenging and financing in the broadly syndicated markets now theres, a flip side to that point, obviously as it relates to private credit.
And I think we look at the environment and private credit currently and we are a.
Very very constructive so when syndicated markets are challenged.
And as Todd mentioned earlier companies still need capital, that's a really interesting opportunity for us so base rates are higher spreads or higher protections are better.
The risk reward just feels like.
It's it feels very attractive to us at this moment in time and the opportunity for us in our direct lending business is not only going to be in new transactions and new deals like the ones that you referenced but historically around half of our deployment has traditionally come from companies, where we're the incumbent lender and in markets like these where volumes are down and there is.
Uncertainty Ah that percentage is even going to be higher. So if you look more recently that number would be at about 70%. So I think there are two sides of that coin.
Hum.
Got.
Again on the topic broadly.
Yeah, Chris It's Scott just a couple of things one I use the word obstacle I think first it's important to understand we think it's a real opportunity for us.
So to Craig's point private credit deployment, our real estate credit deployment, we are seeing dramatically more interesting risk reward and we saw even a few months ago.
I'd also point to mezzanine. We think this is it going to be a really interesting opportunity for mezz.
New transactions with sponsors in particular tend to be over advertising. This type of environment and you've got a more attractive risk reward there are opportunistic credit fund raising.
Anytime that high yield market trades below 85, the one year returns tend to be in the high Twenty's and so we're having really productive dialogue with investors all around the world who are looking to pivot into the leveraged credit markets on the trading side. In addition to the private side.
You're right [noise], new deals are harder to finance part of the reason, we built our capital markets business and we have that team sitting in the middle of the firm that can talk directly to debt investors. So we can place our own capital structures, you may lean a bit more on the private credit market in this environment, maybe some portable capital structures, but we can we're finding ways to get there.
Deals done.
So I think as we sit here today, we're finding ourselves incredibly enthusiastic about the opportunity that this environment represents for a large part of the firm across our credit platform.
It appears that there are no further questions at this time I would now like to turn the floor back over to Craig Larson for closing comments.
We'd just like to thank everybody for your time and interest in <unk> and we look forward to connecting next quarter. Thank you so much.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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