Q1 2023 KKR & Co Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Kkr's first quarter 2023 earnings Conference call.
During todays presentation, all parties will be in listen only mode. Following management's prepared remarks, the conference will be opened for questions. If.
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Please note this conference is being recorded.
I'll now hand, the call over to Craig Larson head of Investor Relations for KKR Craig. Please go ahead. Thank.
Thank you operator.
Good afternoon, everyone welcome to our first quarter 2023 earnings call.
As usual for the call I'm joined by Scott Nuttall, Our co Chief Executive Officer, and Rob Lewin, Our Chief Financial 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 Dot 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 our fee related earnings per share came in at 62 cents and after tax distributable earnings came in at 81 cents per share.
I'm going to begin the call by walking through the details for the quarter before turning things over to Rob.
So beginning with management fees management fee growth continues to be a real bright spot for us.
In Q1 management fees were 738 million, that's up 18% year over year and looking over the last 12 months management fees are up 23%.
Looking a little deeper over the last 12 months management fees in private equity and credit both increased 18% while in real assets management fees are up 40%.
Net transaction and monitoring fees were $142 million for the quarter of $110 million of which came from our capital markets business.
Our fee related compensation margin was at the midpoint for the quarter at 22, and a half per cent and.
In other operating expenses were $150 million.
So putting that together fee related earnings were $549 million for the quarter.
Or <unk> 62 per share, which I mentioned a moment ago.
And that's what's an FRE margin of 61%.
This is now the 10th consecutive quarter, where you've seen our FRE margin at or above that 60% level.
Walking further down the income statement realized performance income totaled $175 million driven by our traditional and core private equity businesses.
And realized investment income was $198 million for the quarter driven by activity and growth equity.
Both realized performance and investment income compensation margins were at their mid points for the quarter.
Our asset management operating earnings were $778 million in.
In our insurance segment generated $205 million of pre tax operating earnings, which I'll spend another minute on shortly.
So in aggregate. This resulted in after tax distributable earnings of 719 million or <unk> 81 per share.
Now turning to investment performance the traditional private equity business was up 2% for the quarter and over the last 12 months was down 9%.
Importantly, here inception to date IRR for our blended flagship funds. So Americas 12, Europe five in Asia for <unk>.
Remained strong at 22%, which is meaningfully ahead of the corresponding 7% figure for the MSCI World.
In real assets, the real estate portfolio was down 3% in Q1.
While we are all seeing a difficult market for a handful of areas within real estate our portfolio continues to be heavily weighted towards those assets in themes, where youre seeing strong fundamentals and cash flow growth. So think industrial assets Datacenters rental housing student housing and storage.
However, as cap rates increased in the quarter that more than offset NOI growth leading to the modest decline in the portfolio for the quarter.
Infrastructure was up 7% in the quarter. This performance reflects the strength of our infrastructure portfolio on a global basis.
And with higher interest rates, which we strategically leaned into more inflation protected assets.
On the leveraged credit side of the portfolio was up 4% in the quarter outperforming its index.
The alternative credit portfolio was up 2%.
And for the balance sheet investment performance was flat in Q1.
Now in addition, we have two new updates that can be seen through the earnings release.
First I briefly mentioned our insurance results this quarter turning back to this topic. We expect you saw the recast financials, we posted last week on our website and also filed through an 8-K.
These changes reflected two things first prefabs be guidance and as required for all of our SEC filers, we implemented new accounting principles of L. Hei with <unk> insurance segment.
To reflect the new accounting standards for long duration contracts, such as life insurance and annuities.
Overall, the impacts year on our segment financials are quite modest there was a $1 million positive impact to 2021 pretax insurance segment operating earnings.
And a $74 million positive impact to 2022 pre tax insurance segment operating earnings.
And in terms of 12 31 book value there is an increase of $480 million.
And second to confirm some other alternative asset management companies and enhanced comparability, we're reporting our insurance segment operating earnings on a pre tax not an after tax basis.
So as you look at page three of the earnings release income taxes attributable to Kkr's asset management in our insurance segment are now captured within that single line item titled income taxes on operating earnings.
The 8-K referenced a moment ago recast our financials, reflecting all of these changes for 2021 as well as on a quarterly basis for 2022 to help everyone look at our results on a comparable basis.
And the second change within our press release Youll see on page 25, we've included additional disclosure on our core private equity strategy.
With 34 billion of AUM, we believe we have the largest core P asset management business in the world.
Corporate <unk> remains the largest allocation we have on our balance sheet. So we thought the additional disclosure in context would be helpful for investors this quarter as well as in quarters to come.
As a reminder, this is a long duration investment strategy for us where we expect to hold investments for 10 to 15 plus years and believe these investments carry a more modest risk return profile compared to traditional p/e.
And as you can see on the page our core P E balance sheet investments have increased steadily.
From $1 4 billion in 2018 to over $5 7 billion of fair value today.
The five 7% fair value compares to the $2 7 billion of costs or two one multiple of costs. Currently are strong return over approximately five years.
In total core comprises approximately 32% of total balance sheet investments.
And consists of 19 companies across multiple industries and geographies.
And with a little over 20% of total PE capital invested in the last 12 months and a coffee we remained very active in the space.
And one final note consistent with historical practice, we increased our dividend to $16.05 per share per quarter or <unk> 66 on an annualized basis. This is now the fourth consecutive year, we've increased our dividend since we changed our corporate structure.
And with that I'm pleased to turn the call over to Rod.
Thanks, a lot Greg.
Past few months have certainly continued to be dynamic on the macro front.
However, different backdrops do create opportunities, especially for firms like ours.
Stature locked up capital.
And if we can't amount of dry powder.
And a global and highly coordinated investment team with expertise that spans multiple different asset classes.
I thought it would be helpful. This morning to go through what we are experiencing day to day across the firm.
Let's start with fund raising.
We raised $12 billion of capital in the quarter.
In private equity active.
Activity. This quarter included the final close on European Fund six at $8 billion.
It is approximately 20% larger than its predecessor.
It's a really great outcome and what is the most challenged part of the fund raising market.
Now gives us $40 billion of committed capital in total looking at our active traditional PE funds across Asia, North America and Europe .
We believe this is the largest active capital base for traditional private equity by a wide margin.
And credit illiquid strategies, we raised almost 9 billion in Q1, which.
Which is just about what we raised on average per quarter in 2022.
In total, though the 12 billion of new capital raised is a little bit on the lighter side for us.
That is going to follow up with a little more color on the fund raising environment in a few minutes.
Now against this backdrop, we still do feel incredibly fortunate for a few reasons.
First since 2020, we raised approximately $60 billion of capital for our traditional private equity and core private equity franchises.
Given all of the flagships raised over this period too.
2023 was never going to be an outsized fundraising year for us.
So our focus in private equity is on investing the capital that we have previously raised.
And we have almost as dry powder as we've ever had as a firm to invest into this dislocated environment.
That'd be clear we are still in the market fundraising for 30, plus strategies largely in real assets and credit over the next 12 to 18 months and our fundraising teams remain highly engaged with our clients.
Second we continue to make progress against our strategic priorities.
As an example, we've talked in private wealth and democratize products several times on these calls.
And we are pleased that since our last earnings call, our democratize private equity vehicle outside the U S raised over $400 million just one platform at its first close.
Which will show up in our Q2 results.
It's a great start for us and we hope to build on this momentum with the wire Hudson as the domestic vehicle comes online in the second half of the year.
And in terms of our democratized infrastructure strategy, our U S vehicles expecting a first close over the summer while its international counterpart is right on its heels with a first close expected soon thereafter.
We are really excited about both of these strategies.
And while we're in the earlier days, we're pleased with initial reception and enthusiasm.
The launch of these products is a critical step in addressing the huge private wealth and market.
Bringing products that traditionally have largely not been accessible to non institutional clients on a global scale.
And third on the insurance front.
Mentum really does continue with local Atlantic.
M. A G. A has almost doubled since we announced the acquisition in July 2020 from 72 billion to 142 billion today.
And since the transaction closed in early 2021, our share of book value has increased from $2 9 billion to $4 4 billion.
In terms of Q1.
Actual performance continued to run ahead of our expectations.
And capital raising remains robust.
Well James did not announce any block transactions in Q1.
Our pipeline Europe compelling opportunities remains quite strong.
And we would expect greater activity over time.
Turning now to deployment.
We have $106 billion of dry powder, which.
Which is close to a record figure for us.
I feel really excited about the investing environment that we are currently in.
So we remain incredibly well positioned the portfolio for the future.
I'm looking what our teams have done more recently we.
We continue to be pretty creative about putting that capital to work.
And European private equity, we announced the acquisition of the F. G S Global a leading strategic communications advisory firm.
This is the latest example of the team's focused on proprietary opportunities, where we can provide bulk drug capital and a global network of resources to help an entrepreneurial world class management team that we've known and worked with for over a decade.
In infrastructure, we closed on the acquisition of vantage towers in partnership with Vodafone.
That is just a latest take private transaction, we have announced or closed on 10 take private since the beginning of 2022.
And investment largely from our diversified core infra funds that this is the second largest telecom tower company in Europe .
And in our credit business, we are very constructive on the rest of reward we're seeing today in the market.
As the syndicated loan markets have remained choppy.
New issue volumes are down over 50% year to date.
Companies looking for debt capital continue to increasingly look to the private credit markets where base rates are up.
Brad's are wider and lender protections are more significant.
We believe that we are in the best direct lending environment that we have seen for the past 10 plus years.
Now with interesting deployment, which largely comes from higher volatility.
That's kind of a more challenged monetization environment.
The environment continues to be quiet.
And our expectation is that it will remain soft for much of 2023.
However, as we've discussed in prior calls our business model has multiple advantages.
And one of them is that 90 plus percent of our capital is locked up for the long term or perpetual in nature.
We are not for sellers and we won't look to aggressively monetize our portfolio unless it's into a window that maximize outcomes for our investors.
Even with the volatility and Mark counts, we have appropriately taken over the last 12 to 15 months.
We maintain over $9 billion of embedded games on our balance sheet.
So if we never made another investment and created no additional value or returns we are positioned to generate nine plus billion dollars of monetization related revenue.
The key message you're hearing from US today is that we remain highly confident in our portfolio.
And we'll optimize the monetization outcome when it is most advantageous to our investors.
So to summarize.
While the past several months I've presented a more challenging operating environment. It.
It has not changed our long term outlook.
We continue to have more conviction in our ability to meet our goals.
How far are you a four plus dollars per share in after tax de of $7 per share by 2026.
We did when we first issued that guidance in late 2021.
And our teaching materials posted at the beginning of this year, we introduced six very significant drivers of value creation for KKR.
These areas real assets Asia Pacific core private equity private wealth and.
Parents as.
As well as the opportunities afforded to us through our balance sheet.
Continue to position us for substantial growth.
And that is why we have the confidence that we do.
Long term fundamentals.
With that let me hand, it off to Scott.
Thank you Robyn.
And thank you everybody for joining our call today.
I thought today I'd talk about what we're seeing near term.
And how we're feeling longer term.
Near term the market volatility is doing three things.
It's causing some institutional asset allocators to be more cautious and delayed decisions.
It's making us want to sell less of our portfolio.
And it's creating some very attractive investment opportunities for us.
On the fundraising front, we are seeing some investors pause as they get their bearings.
This is in particular true in some U S and European institutions.
It has not been the case in other areas.
Until this changes it would likely slow down capital formation in the near term for some of our efforts.
We don't expect this to have a big impact on the firm for a couple of reasons.
First as Rob noted we are not in the market with their flagship PE funds this year.
We expect those to come back to market in 2024 and 2025.
Frankly, we're fortunate with that timing.
We have been actively raising capital however for our non private equity businesses.
To put some numbers to this new capital raised over the last 12 months totaled $67 billion.
63 billion or 95% of that number was raised and strategies outside of traditional private equity funds.
Given the growth and scaling across our credit and real asset platforms, we are meaningfully more diversified across strategies and someone less familiar with KKR, we'd likely expect.
Second we are seeing the benefit of increased diversification across our distribution channels and are less reliant on any one type of investor than we used to be.
As background, a handful of years ago, we sold almost exclusively to institutions.
Today, we sell the institutions insurance and private wealth.
Taking those in turn.
Well, some institutions are pulling back or delaying a bit others like sovereign wealth funds or not and.
And we are having a number of productive dialogues globally in particular around private credit and real assets.
Our insurance efforts are also scaling meaningfully you heard the $142 billion number frankly Atlantic. If you include the 56 billion. We have from third party insurers, we now manage nearly $200 billion for insurance companies globally.
That number is up nearly 50% from two years ago.
Also as Rob referenced we're now live with our democratize PE and infrastructure strategies.
Our democratize real estate product has been raising capital since mid 2021 and is adding more platforms.
And we have another private credit vehicles for the wealth channel and the pipeline for later this year.
So we will have all four of our major asset classes and democratize format available globally and being added to multiple new platforms over the course of the next several quarters.
Candidly, we don't yet know what all of this will yield.
But we do know it will be upside for us relative to what we've been doing to date.
And we know that the private wealth opportunity is significant for the firm.
So we are diversifying KKR not just in how we invest but in how we access capital.
And we see all this lining up really well for us over the next couple of years.
We expect to be back in the market with our flagship funds at a more hospitable time.
Which will coincide with us continuing to scale, our insurance efforts, which are proving counter cyclical and benefiting from a higher rate environment.
At which point, we will also be more mature in private wealth with their products on multiple platforms and multiple geographies.
All while our recently expanded sales force up from 100 to 280 people in the last couple of years.
Hitting their stride.
So despite the near term fund raising environment, we feel good about the progress, we're making and now have multiple ways to win with more momentum coming.
So that all bodes well.
On the monetization front, we will likely sell less in an environment like this but we are seeing the value of the portfolio continued to grow. So this is really just a timing question.
And on the investing front.
Great News is times like these tend to generate some of our best investments.
We expect the next couple of years to be strong vintage years for returns across asset classes.
So we expect our earnings down the road to be higher as we monetize the investments we're making in this environment.
Putting this all together, while the near term may feel harder to interpret in the next couple of quarters may stay bumpy in markets, we actually feel great about how we're building the firm and executing our plan.
Now switching to go longer term.
Last quarter I referenced the market volatility and suggested it is important to separate the signal from the noise.
And that we remain focused on what we can control.
That continues to be the case.
The market noise has not changed our bottom line, we feel even more convicted and hitting the FRE and after tax the targets we shared with you.
Let me explain why.
In January we shared how the earnings power of the firm has evolved.
We are in a fundamentally different place than we were even a few years ago.
Because we report D E largely on a cash basis, there will be times, we are over earning that earnings power.
In times, we are under earnings.
In times like this when we are selling less we are under earning.
But we look at how that earnings power is trending.
And our progress has been significant.
Our ability to create forward looking financial outcomes is well ahead of where we were just a few years ago.
The capital, we're raising is increasing the amount of dry powder, we have already a near record 106 billion.
And we have a lot of management fee growth visibility with 37 billion of committed capital where fees turn on when the capital is invested.
Our carry bearing invested capital up three times over the last five or so years is continuing to scale with a great investing environment in front of us as we deploy our dry powder.
And our embedded gains continued to increase.
From 2 billion to 9 billion over the last three years.
Putting all this together and stepping back our run rate earnings power has doubled over the last three years at KKR.
That's a metric we think matters.
Especially when the noise is loud.
So thank you for taking the time to understand our business.
And hopefully it's clear why we are so optimistic about the path and growth ahead.
With that we're happy to take your questions.
Thank you well now be conducting a question and answer session.
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Okay.
Thank you and our first question is from the line of Alex Boston with Goldman Sachs. Please proceed with your questions.
Yes.
Hey, good morning, guys. Thanks for taking the question, maybe we could start with some of the dynamics you're seeing in private credit and specifically I was hoping we can zoning on direct lending.
So Scott you suggested that's an area, where you continue to see opportunities in the environment remains obviously quite quite interesting. There can you help maybe unpack like sort of the sizing of that business for you guys outside of the BDC and ultimately how much of third party capital outside of a G. Eight you have in there and the opportunity to really scale that where you could.
In the third party assets into the franchise.
Sounds good thanks for the question I'll ask Craig wanted to kick off and then I'll jump off yeah. Sure. So look I think in terms of of the industry just to start there Alex in somebody's Amyx, we're saying I think mid market private equity firms, which really are a lot of the driver of that in terms of the deployment you see here do you have a lot of dry powder and so you're seeing more of these firms more mid market borrowers.
Generally who want to use the private debt markets.
So we expect the private debt markets broadly indirect lending specifically to continue to grow and take share and I think in terms of KKR you should expect to see us grow here in a number of ways first in a traditional institutional format. So we're fundraising for our U.
U S and European direct lending strategy second we have our BDC as you mentioned and.
And we think there'll be opportunities over time to introduce additional vehicles focused on the private wealth opportunity and finally global Atlantic is also active here. So I think in summary, direct lending. It's a core part of our credit business lot of lots of ways for us to grow we think that can be in the institutional private wealth insurance businesses.
Cross multiple forms of capital traditional funds and separately managed accounts perpetual capital and that's both in the U S and outside the U S. So.
Again, the backdrop for us just feels really constructive with with lots of opportunities going out yes. It does.
A couple of thoughts I'd add Alex So first off if you think about our overall private credit in our corporate credit business, it's roughly 75 billion or so of assets.
If you include our real estate credit, which is a very large business for us.
That adds another roughly 30 to 35 billion. So we're 110 give or take billions of total between the two.
And that is to your question really said across a number of different vehicles, we've got global Atlantic.
Got our BDC and other permanent vehicles, we have funds, we have separate accounts and we're raising capital across all of those and we continue to see to Craig's point.
A real opportunity to continue to scale those businesses, especially in this environment, where the traditional banks are pulling back, but I would highlight a few things direct lending and it gets a lot of attention in the senior secured opportunity is definitely there spreads are wider protections or greater we think this is going be a great vintage period, and we're finding real interest from them.
This was around the world in that seniority plus yield off a higher base rate. So we think that interest will continue.
Thing that doesn't get as much attention as our asset based finance business.
Which is also a very large opportunity for us a very large business that is roughly a four to five trillion dollar end market in terms of opportunity on its way to seven trillion. This is think of it as a series of different hard assets and consumer assets that the banks used to finance that they are pulling back from we have a number of platforms that we've created to go after that space again.
<unk> access to cross.
All the different types of vehicles I mentioned, and then real estate real estate credit you can imagine what that market looks like over the next several years, it's going to be a big opportunity for us to scale there as well.
Already one of the largest players so big opportunity for growth as we think about how do we double our 200 billion plus in credit globally again from here.
Great. Thanks, so much thank you.
The next question is from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Good afternoon. Thanks, you mentioned holding on to some things longer and pausing realizations and last week, a competitor gave a pretty big guide down on T realizes your expectations for the year basically saying they didn't expect a big uptick until 2024. So do you agree with this view and I guess more specifically looks.
At your pipeline and conversations still thinks theres, a path to boasting a posting meaningful pick up in the second half. Thank you.
Hey, Patrick Thanks for the question, So I think and I flagged. This in the prepared remarks, we're seeing a pretty quiet monetization.
I would look out there right now.
What we're seeing our current pipeline and our expectation is probably going to remain that way for the duration of the year now I think there's a few separate points to hit on here for KKR, specifically I think the most important point and I mentioned. This earlier is that 90 plus percent of our capital I'd take you or is it a perpetually locked up for eight plus years from inception.
Terms of our carry eligible AUM I bet that number's, probably closer to 100 per cent and so we are generally not for sellers into the marketplace.
Number two.
The near term here it could be pretty slow there are a number of factors that really contribute to our confidence in being able to generate very meaningful step ups in modernization related revenue in the future when the environment improves number one it's the health of our existing portfolio. It's really strong I don't think that we can overstate that point enough, we feel really good that'd be good.
The macro right coming into this period of time and will exit it in a stronger position competitively as a result.
Number two is really neat scaling a diversification of our capital deployment over the last five years, that's going to generate the carrying balance sheet game for the future Scott hit on this in his prepared remarks, but our carry eligible AUM is up three times versus the Lat last vantage, which is generating today is carrie.
And number three it's our dry powder 106 billion almost a record number for us and 95 plus percent of that.
<unk> hundred 6 billion is carry eligible and so it really is a question here around the tradeoffs between monitors modernizing investments today versus in the future, but it's one of the key reasons why we included that earnings power framework that we did in our teaching materials from January .
That metric I think that really speaks to the go forward opportunity for us and why we remain constructive on the longer term ability to generate real monetization at Thompson ultimately seven plus dollars per share of T D.
26, yeah, the only thing I'd add Patrick a couple of things one is obviously going to be heavily market dependent.
You hit on it we've gone from 2 billion to $9 billion of unrealized gains in the last three years. So that's the number that we track that's why we share that with you. So this is just a matter of when do we choose that we want to monetize some of those gains.
On the margin, especially in U S and Europe , we're probably going to choose to wait.
But keep in mind one of the things we benefit from is a more global portfolio than most Asia. In particular has some different market dynamics going on right now and I think that'll help on the margin, but the the bigger picture message you should take as you know the $4 of F. R E plus that we shared in the $7 plus of TD eight per share a few years out we still feel great about that.
Wouldn't get too worried about what we sell in the next couple of quarters I'd focus more on that earnings power, where do we expect to end up my personal perspective is I would expect those numbers will go up relative to down based on what we're going through now.
Okay. Thank.
Thank you.
The next question is from the line of Brian Mckenna with JMP Securities. Please proceed with your question.
Great. Thanks, So I had a question on your infrastructure business fun for us about $10 billion of uncalled commitments. So how should we think about the quarterly placement pace of deployment here for the remainder of the year and then do you have any initial expectations around the size and timing of fund five.
Yeah.
Hey, Brian It's Craig why don't I start.
First on deployment.
One of the things that is interesting and you've picked up on this is the real scaling you've seen over time in deployment.
So in a in 2019 and for deployment was $2 1 billion in 2020 it was 2.2.
Over the trailing 12 months, we've invested $14 billion across the infrastructure platform activity is very high this remains among the busiest teams in the framework of our firm and.
And it's global so and returns again as you would've seen the snapshot from page seven.
<unk> has continued to be a we think strong and differentiated so I think that the activity level continues to be high our where we havent announced anything as it relates to <unk>.
The timing of future fund, raising et cetera, but I think if we continue to execute the work.
We have there'll be continued opportunities for us and then one one other point here is again innovation is not is going to continue in the framework of the firm.
And and I think youre seeing that real time in terms of what we talked about in the prepared remarks on democratized infrastructure.
As an avenue that also will continue to help us both from a deployment and honestly from a fundraising standpoint as well.
Awesome. Thanks, Greg.
Okay.
Our next question is from the line of Mike Brown with <unk>. Please proceed with your question.
Alright, Thank you so Ah.
In the quarter concerns related to the fixed annuity surrenders really really picked up in March as the liquidity stress really.
We are on the market.
G. A what what did you guys see in terms of the fixed annuity surrenders in the quarter and what have you seen thus far in the second quarter and then if you just take the other side. What are you guys seeing on the organic growth side, how is that performance been in the first quarter, specifically towards the tail end and then into the second quarter. Thank you.
Mike It's Rob Thanks, a lot for the question a punch line, it's no surprises as it.
It relates to surrenders they remain in line with management's expectation on initial underwriting.
So we feel good about that that has continued into the second quarter as well into April as it relates to the opportunity from here clearly the opportunity we think on the retail side of the business, given where interest rates are and where our annuity is.
There's price annuities are priced at today remains a really robust one that our team is very focused on we have very strong market share there and I mentioned this earlier through the prepared remarks, but the institutional side of our business has a real healthy pipeline right now and so yeah, a little bit lumpier in nature, but we feel good with what we're seeing there and some of the <unk>.
Risk reward that exists in that part of the market as well.
Okay, great to hear thank you. Thank you. Thank you.
The next question is from the line of Brett, Brian , but dealt with Deutsche Bank. Please proceed with your question.
Great. Good afternoon folks maybe just on capital deployment, how how are you thinking about the pace and I guess in the context of monetization slowing down you know clearly the.
The market is slower and you don't want to be monetizing in this environment.
And and heard you loud and clear you're you're eager to of course to deploy in this environment with valuations being good.
But to what extent well any kind of slowdown in their markets prevent you from from doing that and and how important can your own internal capital markets business be in sort of narrowing that gap versus say you know you are using other or other means of deploying capital.
And then if I could just we then just 37 billion of committed capital that comes into fee paying AUM just your expectations, that's a timing on that.
Hey, Brian It's Craig why don't I start and then Rob can pick up on that the 37 billion number.
Just a couple of observations I guess in terms of deployment look first off over the last 18 months.
We've seen a lot of dislocation in valuations have come down pretty meaningfully in a lot of the primary markets.
Have either been shut in thinking of the IPO market or the syndicated debt markets again, as an example, which aren't fully healed. So.
Capital at the moment is precious but all of those things from a deployment standpoint, we look at I think a very good things for us.
And as Rob pointed out in our prepared remarks with our fundraising success heading into this period, we're really well positioned when you put those two things together.
No I think in this backdrop look we're gonna be value focused we're going to look for those opportunities where our off but our operational resources and focus can really move the needle.
<unk> corporate carve outs, we've been active in pursuing public to privates I think that's an example of where you're seeing probably as much activity from us as anybody within the industry and so we're going to continue to be opportunistic across that across those those those parts of the opportunity set and I think finally, the other thing you were saying because it is <unk>.
<unk> is a is the balance you're seeing across the firm a real diversification real balance over the trailing 12 months traditional private equity deployment was $11 billion real estate was 10 and infrastructure again as I mentioned, a moment ago was 14, so you're seeing a real balance in.
In in that level of investment activity.
And I think it's also just worth highlighting.
And it's kind of related to the first but the growth you've seen also in terms of real asset deployment with us with the growth in our infrastructure and real estate platforms, you've seen a big step up in.
Overall deployment and that is also true within the credit business. So in 2019 deployment in credit was $10 billion 2020. It was 10.3 trailing 12 months it was $17 billion.
And then I think as it relates to the capital markets, you're bringing up a very fair point, just as it relates to the strength of the team and what having 70 people can do for us as we're trying to put capital structures together and.
And look to finance that that that those deployment opportunities and today. Despite all of the disruption we've not had a situation.
Where we haven't been able to finance an opportunity that we wanted to pursue.
And I think the strength of the team and the breadth that we have in terms of the global capital markets franchise as a critical part of that.
Scott just a couple of things I'd add one as I mentioned in the prepared remarks, I think it is going to be great couple of vintage years, where walk into here. So if you first start with equity which is probably the focus of your question. There's a couple of things that go on buyers and sellers need to find common ground there.
It usually takes about 12 months.
For that to happen as the markets adjust we seem to be countering that we're starting to work to the other side of that obviously the bank.
Failures created a little bit of a pause in some discussions, but we are pretty active on a number of different fronts. So we think that will not be something that holds us up for much longer I think the financing markets to Craig's good point capital markets into your question has been a secret weapon for US. It has allowed us to get some deals done we've done a couple of deals where we spoken for.
100% equity and then the private credit market shows up and put the financing in place. So we're not it's not letting the financing markets hold us back in T. He or in infrastructure. In fact, it's kind of creating some opportunities where maybe it's tougher competition that don't have the same capability sets and same capital markets team.
And then as I mentioned before on the credit side, it's more of a flow and more opportunity across both corporate and real estate credit for us.
And Brian just as a quick follow up on the $37 billion of capital no firm guidance. There, but are you know a decent rule of thumb would be three to four years until that shows up in fee paying AUM as a reminder on.
That capital comes in at close to 100 basis points on a.
Weighted average pay basis, okay, great great. Thanks for all the great color.
Thank you.
Our next question is from the line of Michael <unk> with Morgan Stanley . Please proceed with your question.
Hey, good afternoon. Thanks for taking the question as you guys have continued to grow out your insurance relationships can you talk about how you have expanded your investment capabilities, there, where you see room to further scale some of those capabilities, maybe in real estate credit and maybe you could talk about some of the initiatives there and then what white space opportunities remain at this.
Where you could broaden out the investment capability set there.
Hey, Michael It's got really good question I would say theres no doubt that broadening our insurance our relationships, both with global Atlantic and with third parties.
It has allowed us to meaningfully scale at some parts of the firm.
In particular, I would say all the things private credit direct lending asset based finance that I mentioned before maybe part of a firm that has had the biggest impact was across real estate credit to think of the year before we did the global Atlantic transaction in real estate credit team originated something like $2 billion of loans in the.
First year after it was somewhere in like 12 or 13 billion.
So it's allowed us to meaningfully scale our presence both from an origination standpoint, and also allowed us I think to do an even better job.
For the third party insurers because now we are operating just like them through the regulatory environment that they're living with as an operator as opposed to just an agent.
And I think there's opportunities to grow in all of those spaces. These are very large end markets.
You know our strategy in everything we do is to only be in businesses, where we are or can get the top three in that space and we feel great across all of those fronts.
It also gives us an opportunity to look more globally and as we're looking at in particular for global Atlantic blocks across Asia, or Europe and <unk>.
Adding insurance clients outside the U S. I'd say, our client base is heavier in the U S. Today, but we're building relationships outside the U S as well and it gives us an opportunity to expand just like we did in the U S origination footprint across all those areas. We can do it outside the U S too and we're starting to do that now across both Europe and Asia across those asset classes.
So it's been a big positive for us on a number of different fronts as it kind of vaulted us to top three across a number of those different businesses much faster.
They have kind of a white space to the second part of your question.
More broadly I think there are a number of different things that we could point to the biggest impact on the firm. However, it is just going to be six getting everything that we started we see an opportunity to double and triple several of the businesses that we're in as you know a lot of the businesses. We've started when the last sort of in the last handful of years over 50% of the firm is not yet scaled in our definition over 50.
Percentage of the money. We raised last year is this strategy is less than five years old. So the biggest impact is going to be scaling what we started but there are some other areas I'd point to the energy transition and climate is something that we could point to that point to life Sciences is another big area that over time could be meaningful for us in terms of coming attractions.
Great. Thanks, and if I could just sneak in a housekeeping question for Rob just on the investment deployment off the balance sheet, we would've been disappointed if you didn't ask that when Michael.
You're very consistent.
[laughter], Thanks, Mike, where we were at a 500 of deployment in the quarter and realizations about 150 million.
Great. Thank you so much thank you.
Our next question is from the line of an unsecured part with B M. P. Parva. Please proceed with your question.
Yeah good afternoon.
Thanks for taking my question.
If I could follow up on the deployment in credit.
If I could follow up on the deployment in credit.
Depicted by yourself and most of your peers is a significant opportunity to take market share from from the banks, yes, yes, when we look at Q1 data here.
Is it a problem isn't credits it was quite soft.
I was just wondering.
What sort of dynamics.
What counts for us.
He really did come and pick up here. Thank you.
That's correct why don't I start and look I think it's.
The first quarter, because I think we will all remember March in particular was a really disruptive period. We've had two big failure since the beginning of March just a tremendous amount of volatility and all of that those dynamics are not gonna be helpful. From a financing market standpoint from a deal standpoint is as.
Scott had mentioned a moment or two ago, so I wouldn't read too much into the industry honestly in terms of these trailing 90 days a lot of that activity in private credit does end up being financial sponsor driven in the framework of new transactions and we think over time as you have refinancing opportunities as the market strengthens and as you have that that.
M&A activity from mid market sponsors a pick up that you'll see deployment in turn pick up because I think the overall share is one where you're you're continuing to see a growth in share in private credit broadly. So I again, I would I wouldn't look to read too much into the trailing 90 days.
Okay.
Thank you.
Our next question is from the line of Benjamin <unk> with Barclays. Please proceed with your question.
Hi, Thanks, so much for taking the question I kind of want to revisit Scott some of your comments about fundraising I'm just thinking about sort of the the more you know excess caution across the L. P base could you maybe characterize that a little bit is it sort of denominator effect issues or is it sort of a broad skittishness that sort of just the way all decision, making and then kind of in the context of the 30 funds you've got coming to <unk>.
How much of that is expected to start raising in the back half of the year, just maybe to help us think through the sort of risk that some of that gets pushed farther into 2024.
Great. Thanks, Dan.
Look in terms of the L. P dynamic it really depends on.
What product area, you were talking about what kind of investor you're talking about so I'd say, where there has been perhaps a bit more caution on the margin has been around U S and European pensions.
And some of that is definitely a denominator effect as they're trying to get their bearings.
Heading into this year.
And some of them are over at their alternatives allocation.
Trying to sort out how much of the budget do they want to spend and how quickly.
But that is just that particular segment and it tends to be more equity focused.
As opposed to credit and real estate credit focused in terms of those dynamics, but when you kind of go broader than that and you go to sovereign wealth funds, we're not feeling that dynamic at all whether it's Asia or the middle east they seem to have a good amount of capital and are looking to put it to work across.
Different asset classes and geographies insurance companies. Despite the higher base rate, we continue to see a significant amount of interest in what we're doing and you heard the comments that were now a couple of hundred billion near enough that we're managing for insurance companies. It's been quite good for their businesses in terms of especially in the life and annuity side and so we're getting the benefit of that.
Growth, it's a family offices are actually a bit contrarian in this environment and reviewing this which we agree with is a great period to put money to work.
Actually finding family offices, leading in and you can you know you know what we said about private wealth.
That's all new so this is the first time some of these spaces have had access to things like private equity and infrastructure and so we'll see what all that yields but this is a new dynamic for us. So I wouldn't over index to just the U S and European pensions, and I would say as a footnote even on that score I think some of them have learned from the post G. F C peer.
<unk>.
There may be some invested less coming out of the financial crisis and they might've hoped.
So as opposed to turning off we're finding maybe they're reducing the amount they're committing in this environment, but not turning it off.
The bigger point I would make is that if you think more broadly across everything that we're doing across private equity infrastructure real estate and credit.
There is a significant amount of investor dialogue, both institutions and individuals.
So I wouldnt take too much caution from the comments just on the margin. We are hearing this from some people and I think the bank crisis in March probably said that a bit but there's also acknowledgment from a number of the people that we're talking to that they don't want to underinvest or under commit because I think there's an understanding in the next couple of years are going to be a really good investment period.
And your question on the 30 investment strategies I think most of those will be in the market over the course of the next 12 months, including the back half of this year.
And the only thing I'd add to that last point, Ben just again I think the part of the market.
Where we've seen the most headlines and where you're probably seeing the most congestion is in traditional private equity again as we mentioned we've had a final close on our Europe six fund.
20% larger than its predecessor, great outcome are probably worth noting that almost 25% of the Lps in that fund.
Our new investors there, they're now new clients of KKR.
So we've talked for a long time on these calls of our focus on growing the LP base.
And the success that we're having there but more importantly, following on that again as we'd mentioned we.
We are now we're not going to be in the market with a flagship PE fund this year and we don't expect to be back in the market till 'twenty four 'twenty five and we feel fortunate with that timing and instead it allows us to focus on deploying that capital. So I think perhaps the traditional <unk> space might be the the the one place where you might hear people delaying or are having there.
The greatest impact on seeing those fundraisers be elongated and we're really fortunate in that we have no no activity for the back half of this year and maybe just one other macro comment I'd make a Venezuela. If you think about this.
If you step back and think about our firm's of 15 years ago. We managed about 50 billion of capital 10 years ago at less than 105 years ago less than 200 now in excess of 500 and.
And what we tend to find coming out of periods of time like this where you've got a bit of a market dislocation and the question around economic cycles.
As investors tend to look back and say what performed when the markets are difficult.
And what we've found is overtime alternatives has tended to perform quite well and usually what happens coming out of an environment like this as they increase their allocation to alts.
Our expectation is that the same thing will happen here that will be a nice winded our back as we kind of head into the next several years and launched the flagship funds that Craig Craig was referencing and then you've got on top of that the compounding benefit of private wealth.
So the reason you hear the optimism in our voices is over the next several years, we actually think we're going to look back on this period of time. They feel like this is quite been quite helpful and help fuel the next leg of growth for the industry and for the phone.
Great. Thanks for all the extra color. Thank you.
Our next question is from the line of Bill Katz with Credit Suisse. Please proceed with your question.
Yeah.
Hi, Good afternoon. This is Michael Kelly on for Bill.
You've seen a nice uptrend in the non G. A related credit fee raised over the last four quarters with a nice step up in <unk> was there anything to call out in the fee rate. This quarter and then how should we think about the trend and that moving forward from here. Thank you.
Thanks, Michael nothing specifically to call out, it's a little bit of a mix issue that we're benefiting from.
You'd see that uptick, but nothing specifically other than a little bit of a mix of product.
Thank you.
The next question is from the line of Fin O'shea with Wells Fargo. Please proceed with your question.
Hi, everyone. Good afternoon.
Just sort of a follow up to the last question on the higher fee rates.
Is there an ability to rotate sort of the back book into more direct origination now that longer.
Longer term yields have come back down and if so how would you size that that runway for opportunity for.
Optimizing the G E book Thank you.
Great. Thanks, Yeah, just to clarify for the.
To separate those two out that that question was related to pick them up Atlantic you don't when we first purchased club Atlantic. We spent a lot of time working with the team to make sure that we were very thoughtful around how we rotate into buck from G. A source assets to KKR sourced assets, we weren't in a rush we continue not to be in a rush and that's happened methodically over time.
And as a result, you've seen our blended fee rate step up in a pretty balanced way over the last couple of years today, our blended fee rate of G. Eight when you cut through.
Oh, the math is roughly 30 basis points I think there's some opportunity over time to continue to rotate the book will continue to do that in the most thoughtful way we can in conjunction with the Gia investment team, but I wouldn't expect any market changes it from a from the trajectory that we've had over the last couple of years back.
Thank you.
The next question is from Alex <unk> with Goldman Sachs.
Alright, Thank you guys for taking the follow up.
Maybe just zooming out for a second I was hoping to get your latest perspective on capital management in light of kind of where we are in the cycle yourself and obviously many of your peers are going through a bit of an earnings lull, but you outlined multiple times now that the firm.
Continues to be really well positioned you guys have significant amount of embedded earnings powers, you've outlined so why why not lean into the share count shrinkage, a little bit more here to take advantage of a significantly higher earnings our earnings power were down the road.
Yeah. Thanks, Alex So it's it's a good question the right question.
I'll start with just a broader framework around capital allocation, you've probably heard me say this a couple of times before the most important thing that we can do as a management team is to have a consistent approach. Our approach is very much our OE based and ultimately when we're allocating capital. The question that we are always looking to answer is what is going to drive the best risk adjust.
That outcome on a per share basis, there's no more important question than that.
We think as a management team moving our marginal dollar of liquidity around to the highest ROE opportunity as a railcar competency.
Now specifically on the question of share buyback I mean, if you take a look at our body of work we've had on our buyback authorization now in place for several years, we have repurchased or retired 85 plus million shares that's almost 10% of our shares outstanding it's well north of 10% of our public float the average price at which we bought back a retired.
Sure it's about $25 a share so we really like our body of work.
And on top of that at the same time, if you look back over the past couple of years, whether that's etihad excuse me, whether that's K J R. M. Our global Atlantic We've completed almost $5 billion of purchase price related M&A and we havent had to issue that many shares to be able to do that.
Those transactions have been most of the cash funded.
And so when you take a step back we don't look at share buyback in sort of one discrete bucket, we look at capital allocation as a whole now I'll just say, we do expect share buybacks to be a big part of our tool kit on a go forward basis.
And we're going to evaluate them the same way, we evaluate all capital allocation, but yeah as we think over the next.
There are quarters in years Youre going to continue to see isolated into our share count when it makes sense from liquidity standpoint, when it makes sense from a opportunity relative to other opportunity sets out there and then obviously where our share prices at so thanks.
Thanks for the question hopefully that's helpful color and how we as a management team. The value you think are marginal dollars of liquidity.
Yep I appreciate it thanks, Thanks, Alex.
Thank you. Our final question is from the line of Finian O'shea with Wells Fargo. Please proceed with your questions.
Center either.
Please go ahead with your question.
Sorry about that I was back on you and thank you for the follow up as well could you touch on the outlook for.
Capital market transaction fees, I think that was looked a little strong in the in the context of the softer environment.
A lot of this.
Perhaps one offer or has the.
Development of your platform there.
Started to show through and maybe we can expect a stable to improving level levels throughout the year.
We're really proud of how durable our capital markets business has been and what it's been a really tough capital markets environment, obviously equity markets largely shot.
Leveraged finance markets have been largely shut for some period of time and if you look at our average quarterly revenue over the past four quarters, it's been a little bit north of $100 million per quarter.
So I think it's important to to think about that in context of our capital markets franchise, seven plus years ago, There's probably a $200 million of your business in good markets.
Five plus years ago is probably a $400 million a year in good markets type business and today, you know our LTM revenues, a little bit north of that 400 number and really tough environment and so no guidance as it relates to to a forward looking quarters, but we do.
Looking at the performance that the team has been able to generate in it.
Tough market and feel really great about how we're positioned and do know that when we do come out of this period of time when markets open back up you know, we as management team and I have every expectation that we're gonna be talking about a capital markets business three five years from now that's well in excess of the size that it is today for a number of reasons just how we're positioned.
Additive like our access to talent, we see a lot of talent potentially coming out of our traditional source of capital markets and institutions, where we could take advantage of that and then it's KKR expands what we do.
That's a real opportunity for our capital markets business.
Thanks, that's very helpful and.
One final if I may any color or line of sight on second quarter monetization and that's all for me. Thank you.
Great. Thanks for that question, it's plus or minus around $125 million. A forward look that we have again in context of the nine plus billion dollars of embedded gains on our balance sheet.
Thank you at this time, we've reached the end of our question and answer session I'll hand, the floor back to Craig Larson for closing remarks.
Rob. Thank you for your help and thank you everyone for your interest in Kicky are we look forward to speaking again post our Q2 results and if you have any questions in the interim please of course follow up with US directly. Thank you once again.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.