Q2 2019 Earnings Call
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Following management's prepared remarks, the conference will be open for questions.
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This call is being recorded.
I'll now hand, the call over to Craig Larson head of Investor Relations for KKR Craig. Please go ahead.
Thanks Michelle.
Welcome to our second quarter 2019 earnings call. Thanks for joining us as usual I'm joined by Bill Janetschek our CFO .
And Scott Nuttall or co president and co CEO .
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 <unk> Dot com.
This call will contain forward looking statements, which do not guarantee future events or performance.
So please refer to our SEC filings for cautionary factors related to these statements and like previous quarters, we've posted a supplementary a supplementary presentation on our website.
That will be referring to over the course of the call.
And I'm going to begin by referencing pages, two and three of the deck.
So page two shows a summary of our four key metrics.
The strength of our underlying fundamentals are evident in the trends that you see on the page, perhaps most importantly, the earnings power of the firm continues to grow nicely as can be seen by the charts on the left hand side.
Our eight U N is now at 206 billion.
And book value per share is $17.81.
Spending a minute on book value, we've seen attractive returns really across asset classes and this performance combined with the power of compounding has driven the 14% year over year increase in our book value per share.
This 14% figure compares compares favourably to broad market indices like the MSC, our world, which is up 7% over this timeframe.
As well as fixed income indices like the LSTA, that's up about 4% over the last 12 months.
Highlighting the strong performance, we've seen unrealized carried interest one of the key components of our book.
Is up 21% since last quarter.
And its increased 45% since the beginning of the year.
Looking at the right hand side of the page alongside of this management fees have grown steadily.
And distributable earnings on an LTM basis have increased 12%.
Turning to page three you'll see some additional details.
We reported after tax distributable earnings of 327 million for the quarter.
Or 39 cents on a per adjusted share basis.
And as a reminder, as you look at these figures we do report our distributor learnings after taking into account equity based charges.
Management fees for the quarter came in at 303 million up 16% compared to Q2 2018.
And 70% comparing the year over year LTM periods.
Fee related earnings for the quarter, our 287 million.
And on an LTM basis, our $1.1 billion. This is a record fee related earnings figure for us.
On a trailing 12 month basis up 28% compared to the LTM figure as of a year ago.
No as we've reviewed historically there were five things we need to do well.
As we evaluate our performance we need to generate investment performance.
We need to raise capital.
Find attractive new investments.
Monetize existing investments.
And use our model to capture more economics from everything that we do.
I'm going to update you on the progress on the first two and bill is going to cover the remaining three.
In terms of our investment performance. Please take a look at page four of the deck, which shows the trailing 12 month performance across our flagship partners.
In private equity our three flagship funds appreciated 12% on a blended basis and the private equity portfolio as a whole appreciated 15%.
Both of these figures compare favorably to the 7% total return of the MSR World mentioned a minute ago.
Our real asset strategies are performing as well with a more mature real estate and infrastructure flagship funds up seven and 13%.
While our flagship energy fund is flat over the last 12 months compared to a 36% decline in snps oil and gas MP select index.
And in credit our comps it performance compares favorably relative to the LSTA and the HFRX special sits indices, which our plus four and minus 8.7% respectively over the last 12 months.
In terms of fundraising we raised six and a half billion of new capital in the quarter.
We held an initial close in our new Asia real estate strategy.
We priced new silos in the us in Europe , and had inflows into leverage credit estimates as well as various alternative credit products.
Additionally, we progressed in our goal of raising long duration capital.
As of quarter end, we now have $43 billion in permanent and strategic capital that has either recycling or a very long expected life.
15, plus years or more at inception.
In total inflows in the quarter contributed to $56 billion of dry powder at quarter end and included in this is 18 billion of capital commitments that become fee paying on an as invested basis at a weighted average rate of just over 100 basis points.
And with that I'll turn it over to Bill.
Thanks, Craig.
I'll start with the third thing, we need to do well, which is fine new investment opportunities.
We invested 5.8 billion across businesses and geographies in the second quarter.
Public market supply and it was 1.8 billion coming primarily from our private credit and direct lending strategies.
On the aftermarket side, we invested $4 billion.
The largest contributors were our newest core investment coming out of Europe .
And in Middle Eastern Midstream investment from our infrastructure fund.
Other notable investments were a handful of Asia private equity investments.
Any European private equity investment.
Shifting to monetization activity, we completed a number of secondaries, including our final exit from higher.
We also completed multiple strategic sales that positively impacted both our fund and the balance sheet.
On a blended basis the PE exits were done at four times our costs.
For the quarter. It was $358 million of gross total realized carried interest and total realized investment income.
This compares to 600 million that as we stand here today has closed or has been signed and is expected to close in 2019 or 2020.
Which at this point, we expect $250 million to close in Q3.
And it's only the end of July .
And finally last thing we need to do well as you go model at AIU and capital markets and balance sheet.
To capture greater economics for our investors and the firm from all of our activities.
Focusing first on capital markets TCM had a strong quarter with $150 million of transaction fees.
The market environment in Q2, certainly improved compared to Q1 of this year.
Performance in this quarter highlighted the geographic breadth of the business as capital markets revenues added Asia and Europe .
Both outpace revenues in North America.
If you turn to page five of the supplement I'm going to spend a minute on our core investing strategy as we've seen core begin to impact our balance sheet investment performance.
And our book value compounding.
We introduced a core strategy on this call two years ago with a focus on investments that have a lower tied to return profile than private equity, but asylum businesses and we want to own for 10 plus years.
We chose to commit significant balance sheet capital alongside a handful of partners.
We currently have 10 and a half billion today land focused on its strategy, including three and a half billion, we've committed of our own capital.
Now to you Jim.
Looking at LP capital together with balance sheet capital, we've invested a total of 4 billion through transactions are for Us Europe and Asia.
With the gross I R 21%.
And in terms of the investment line on the segment balance sheet.
Four has a fair value of 1.9 billion as of quarter end.
Keep in mind, the 21% IR has not run through our total distributor earnings yet and is all unrealized gain.
However, core has contributed approximately $425 million of balance sheet value.
Since we began investing in the strategy.
We feel we're off to a good five and we'll keep you posted along the way.
There are two other points I'd like to make in relation to the balance sheet.
The first thing I want to point out is you will see bridge bio Biopharma investment is now our third largest balance sheet.
Following into Q2, IPO and strong trading post IPO fair value as of June Thirtyth was $395 million.
And its market five times our cost.
Given its significance, we wanted to provide that additional color.
The second thing I like to call out relate to our debt obligations.
We recently priced two bond offerings, a euro denominated offering and a us dollar denominated refinancing of the 2020 maturity both at attractive rates.
Putting aside any premium associated with taking out the 2020 notes.
We will have added approximately $725 million in liquidity to the balance sheet.
With effectively no increase in interest expense.
And with that I'll turn it over to Scott.
Thanks, Bill and thanks, everybody for joining our call.
I'm going to focus today on how weve been scaling.
And how we think about the trajectory for our business from here.
I mentioned on our last call that despite our 43 year history, where young from.
18 of our 22 strategies were launched in the last decade.
And in our business it takes about a decade to start to achieve scale.
So we have a lot of growth ahead of us as we go from fund one or two to fund three four and five across the majority of the firms investing activities.
We think that upside is dramatic.
But for US this growth opportunity is compounded by the fact that while we've been launching new investing businesses. We've also been making large investments in distribution.
We were late to building on our distribution efforts.
Remember 10 years ago.
We had about a dozen people on our fundraising team and 275 investors.
We now have 90 people on the team and nearly a thousand investors.
Well, we still have a long way to go.
Our investor account has been growing.
And our cross sell stats have been improving.
But we still see an opportunity to meaningfully expand both of those numbers.
As a result going forward, we expect to see our A.U.M. compounds significantly from the powerful combination of more mature track records and a growing investor base.
Page six of the deck gives you a good sense of what's been happening on this front over the last seven years.
We report in our press release, the gross new capital raised every quarter.
That number can be lumpy, given the timing of closings and when our funds come to market.
Especially the larger funds.
To give a better sense for what we were experiencing.
This chart looks at the new capital raised and acquired on a trailing three year basis.
You can see from the chart that despite the use of many of our strategies and relationships. The trailing three year number has grown from 18 billion in 2012.
$95 billion today.
And with acquisitions.
The number is over $100 billion.
As you can see from the chart.
He has grown from about $8 billion to 20 to 30 billion as our three regional PE funds have scale.
What's more dramatic however is our non PE funds.
Which on this trailing three year basis have gone from 9 billion of capital raised to 73 billion.
As you look at this chart and think about these numbers. Please keep in mind, what I said.
This has all happened with a lot of fun ones and a lot of new relationships.
So while we're pleased with the progress we've made.
We feel like the last 10 years of building track records and relationships position us to really scale from here.
We see growth from creating new investment platforms scaling our existing platforms with existing relationships and doing more with those existing investors.
And we see even more upside from creating new relationships across channels and around the world.
And on top of these points, it's important to recognize that in the next six to 18 months.
We'll be in the market for our largest three funds.
Asia, PE Americas, PE and infrastructure.
So the long term opportunity is large.
And the near term visibility is high.
Thank you for joining our call.
We are happy to take your questions.
Ladies and gentlemen, if youd like to ask a question. Please press Star then one.
If your question has been answered you like to remove yourself from the queue you May press the pound key.
Once again to ask a question. Please press Star then one.
And Michelle we'd like to ask everyone. If they wouldn't mind to please ask one question and then one follow up if necessary to just allow us to work our way through the queue. Thank you.
And our first question comes from Michael Carrier Bank of America. Your line is open.
Good morning, Thanks for taking the questions.
Maybe the first question Scott you mentioned sort of the fundraising you outlook focus on distribution some of the opportunities there.
I guess, just given the pace of deployment.
And then the performance relative to whether its appears in the benchmarks.
How should we be thinking about it I think we have a pretty good view maybe over the year in the second half in terms of what's out there.
But if you're thinking about 20 and 21.
Both on the distribution with the flagships like how meaningful can it be over that time Brian .
Craig why don't you kick it off and talk about what we see coming to market over the next couple of years and then I'll give some color yes sure. So Mike in terms of where a fund raising currently why don't we start there.
That would include fundraising for a number of European strategies. So that's private equity opportunistic real estate and direct lending.
In Asia, where fund raising.
For strategies outside of private equity within including infrastructure real estate.
And we're also fund raising across our impact real estate credit special situations.
And our next generation technology growth strategy and at the same time.
We have areas, where we look to raise capital on a more continuous basis that includes the CLL business leverage credit platforms in the U.S. in Europe .
As well as our BDC and hedge fund partnerships.
Yes, I'd say it just doesn't overlay Michael I'd say the.
The opportunity to scale from here, we think is dramatic.
We mentioned the three large funds coming to market in the next six to 18 months, because those do tend to be a little bit more sizeable when they do come.
But as you can you can tell from the chart on page six of the deck, it's more much more than just the larger episodic funds coming to market, that's showing up in the numbers and so the way we look at it is we have these 18 other businesses of the 22 that were in that are starting to work their way through kind of the fund one fund two dynamic and as we've talked about in the past, we think successor funds can be multiples of the prior and we just happen to have that in a lot of different places across the firm.
And so it's the the opportunity to scale is something that we are.
Quite optimistic about and at the same time the reason we mentioned.
That you know we have been building out distribution is we see opportunity everywhere.
More institutional relationships insurance retail high net worth structured products.
We begin we believe we're just scratching the surface and there's a lot of incremental relationships, we can create and a lot of relationships. We can build from a good start so.
So long way of saying, we see a lot of upside and this chart has been created during a period of time, where we're just creating a lot of things.
All right Thats helpful. And then just a quick follow up.
You guys talk about.
Our OE as a metric just given the balance sheet.
But you mentioned core you on this call and the growth in that area.
When you think about like how that impacts the balance sheet, meaning the mark to market more immediately versus say the the benefits on the realization flowing through d., but that can take.
Years for that to play out.
Like how do you think about that.
In in especially relative to our OEM that being a metric.
Yeah, Mike.
Thanks for asking about it and it's actually a very good question precisely for the.
The reason you mention and core is a great example of this dynamic so.
As we look at our are we evaluate our performance. We do look at our are we on a market basis in order to really focus on total value creation and I think to us.
That aspect is critical so for the numerator I will look at the change in book value over the last 12 months and as you know we mark to market. The best Thank you.
In our book.
And we'll add the dividends to that to really look at the total value. That's been created whether that's paid out in the dividend or retain on the balance sheet.
And we'll look at that versus the average book over that period. So if you do that over the last 12 months you'd get a 16.5%.
And I think as we think about an after tax are are we 16.5% with really low.
Net leverage as a firm is very attractive versus brought financials.
So that's that's how we focus on on our growing and again I think most importantly, reflecting mark to market in the numerator and the denominator is a critical piece of that.
Okay. Thanks, a lot.
Thank you.
Our next question comes from Craig Siegenthaler of Credit Suisse. Your line is open.
Thanks, Good morning.
Arnie.
Last quarter, you had a slide that provided us an update on the KKR shareholder base. Following the C Corp conversion and I didn't see it this quarter, but im wondering if you had any fresh data points that you can share with us in terms of how your investor base has evolved over the last three months.
Oh, great. Thanks for asking about you know the answer is actually a good ones. So.
Thinking back to what we had last quarter.
If I could have you jot down three numbers and then let me.
Walk through what the represent so the three numbers are 177.
291, and then.
332.
So as you pointed out last quarter within the supplement we had a slide that highlighted the evolution and our shareholder base since conversion and what it showed most significantly was an increase in the mutual fund the index fund and the other institutional components. So if you were to go back and look at that slide.
As of year end 2017, so preqin version that group combined to own a 177 million units that first number.
And as of year end 18, so post conversion that group combined to own 291.
So over 2018, we saw an increase of 114 million shares.
Looking at that.
Part of our shareholder base soda to help put some numbers around that update as of March 30, Onest that group owns 332 million shares. So in that three month period, we saw an increase of 41 million or about 14%.
With increases across all three categories.
And the other statistic that we look at.
It's a number of institutions that filed Thirteenx gives a sense of bretts. So we saw a double digit percentage increase in the institutions that file 13 US was a 12% increase and when you look at again just over that time period.
So we've we've seen a continued improvement across all these statistics as you.
Probably get a sense, we follow them pretty coke pretty closely to okay. Good progress.
And I think.
Two other final thoughts one when we look at these stats as best as we can against other large financials and C. Corp's. Both those that are inside the S&P 500 and outside it looks like we still have a lot of room to grow. So I think we've seen continued progress which is great.
But importantly, I'm still feels like there's like there is a lot to do.
Thanks, Craig.
Our next question comes from Patrick Davitt of.
Hi, Thomas Research your line is open.
Hi, guys good morning.
Good morning, Tony.
On the capital markets revenue I think it came in a lot better than anyone was expecting given the lack of kind of large visible deals could you walk through maybe the key drivers of the increase in syndicated capital and the surgeon revenue there.
Sure Patrick This is bill I remember when we mentioned.
The number in the first quarter.
With only about 60 million, we said that capital markets was quote quote unquote shot for probably half of the quarter capital markets is rebounding and we saw a nice activity in the second quarter.
The interesting thing this quarter and that's why I highlighted in prepared remarks is we've always talked about the geographic breadth and this quarter the fees generated from Europe and from major we're actually in excess of the fee generation from the U.S.
And so that that is positive.
As far as the geographic expansion that we talked about but more importantly.
From a from a revenue point of view we have.
Keep your portfolio companies plus we also have our third party business and when you look at it.
Yes activity during the quarter about 70% of the revenue is generated from.
Yes.
Issuances and about 30% from equity issuances.
And the mandates were in excess of 35. So that means this came from over 35 separate and distinct.
Clients that actually.
Use KKR and capital markets.
In their business and lastly, when you think about those 35 mandate.
We're only two mandates that were in excess of 20 $20 million and so again. This is again the broad breadth of the activity in capital markets This quarter.
But did you give the person that was third party.
I did not but.
This quarter it was roughly about 15%.
Okay. Okay. Thank you.
Thank you.
Our next question comes from Gerald O'hara of Jefferies. Your line is open.
Great. Thanks.
Bill maybe staying with you for a minute.
Just kind of looking at the.
Income taxes in the quarter and thinking about how to model that going forward is this a reasonable run rate to start to begin that sort of linear increase over the next several years I know you kind of given a given some guidance previous Anastasia increase to sort of the low twentys and 2023.
Any any kind of change and how that progression might play out or should we still kind of think about it as somewhat linear in nature.
Journals.
As you know we talked about this every single quarter since we actually didn't convert to C Corp, and trying to give you better guidance as to how to model. This but what we did say was that when we did go see core about half of the step up was choice goodwill and we'd be amortized over 15 years, and so thats pretty linear in that back to the model. The other 50% was actually tied to specific assets.
Specific funds in carry and as we sold those investments we will get the benefit of that shelter.
What's happening in this quarter. So we're talking about second quarter 2019 is there were a couple of investments.
Which weren't written up much as of.
June Thirtyth 2018, when we did go see core.
A lot of the appreciation occurred after that time and so when those investments were monetized, we didn't have any shelter as far as against that income.
That being said, we still have a heavily decent amount.
Shelter to provide huge investments that.
When we when C Corp had a lower cost.
And value and so we were able to allocate to those investments and those investments are sold will get the benefit of that tax reduction, but as I mentioned.
A year ago. It is very hard to predict we.
You try to keep things simple said that it was going to roughly go up a few percentage points every single year on a walk from roughly 9% up to 22.
And so long winded way of telling you that it's pretty hard to model I wouldn't hardwire, a 15% rate, which is the rate this quarter next quarter it could be depending on the mix of assets could be 11.
Or we could very well be that if all the assets that are sold in the third quarter were written up at all when we when C Corp. The tax rate on that will be 22%.
Okay. Thanks for the thanks for the color I appreciate it.
Our next question comes from Bill Katz of Citi. Your line is open.
Okay. Thank you very much for taking your questions. This morning, and I certainly appreciate page six of the supplement is very very helpful.
So big picture question as you continue to scale your business and diversify.
Can you talk a little about maybe the dividend policy and how important does the book value strategy remain.
I'd say the book value the book value compounding.
Remains a critical priority and focus for us though.
As we've talked about in the past in particular got into it in good detail when we changed our distribution policy several years ago.
We're big believers in the power of long term compounding.
And if you flip back to page two of the deck.
And look at the bottom left hand side, you can see over the last few years since the distribution policy was changed.
We've started to see meaningful compounding in our book from $12 or so to the better part of 18 in a relatively short period of time.
So book value compounding.
Continues to be a big part of our story as does a U.M. compounding and fee related earnings compounding. So we're focused on all of the above.
Dividend policy is something that we'll revisit on an annual basis.
But we're going to continue to invest in our own growth embed our bet on ourselves and that will show up in our book value per share. So I think you should expect all else equal that have the dividend policy.
Move up the dividend over time, so we do expect it to grow.
But will largely be focused on compounding book as we compound the rest of our metrics.
Okay, and a bit more tactical question, just coming back to the four redriver sequentially.
Just given the very strong activity on the transaction line is there a way to think about the incremental impact of that activity on flurry.
Well Bill when you do when you focus on.
The transaction fee you have to break it down between KTM and.
And KKR proper as you know in private markets, you see transaction fees and they were quite robust, but there also was a big increase in fee credits because remember on the private market side.
We have a sharing arrangement with our Lps and roughly speaking that 82, the LPD 20 to us. So you see a transaction fee go up on the private market side. That's good news, but the fee credit is going to be adjusted in the economics to us roughly be about.
That 20%.
Again to belabor the point, if you go back to capital market any sort of transaction fee report there is going to be 100%.
Interestingly, though you still are pretty robust activity.
In the second quarter compared to the first and if you take the transaction monitoring fees and netted against fee credit you actually so our increase of roughly about a $23 million and keep in mind.
If you look at the capital and that is why we went from investing 3.3 billion to almost 4 billion and so you should expect that that transaction fee would be higher this quarter.
Okay. I was just trying to get to the incremental four we contribution but we can follow up offline. Okay. Thank you very much taking the question. This morning.
Thanks, Bob.
Our next question comes from Alex Boasting of Goldman Sachs. Your line is open.
Hey, good morning, everyone. Thanks.
Scott.
To follow up to your discussion around scaling the business and the fact that maybe you guys were late at some of the distribution initiatives, but maybe happened sort of catching up over the last couple of years.
As you look out and especially as we look at the flagship funds that are on the horizon here, how should we think about the comp rate being in that 40% range for now.
How much flexibility you guys have to bring that down over the next couple of years.
So I think the guidance. We've given you is that we expect that the comp ratio to be in the low fortys.
Alex I think that's what we'd suggest is still the right assumption to use.
As we scale our businesses and in particular as we see carried interest we generated from a number of these fund ones and twos that have been invested but not yet realized.
And as our AUM and fees continued to scale from all the good work that teams have been doing in terms of creating a very attractive track records.
We would have more flexibility over time to potentially bring that down but in the next couple of years I wouldn't guide you any differently than the low fortys.
Okay fair enough.
And then just a quick follow up bill to to your.
Kind of.
State of the Union sort of update on where realized incentive income investments then for the next couple of quarters, So that $600 million number I just want to make sure.
Does that contemplate any disposition of first data Fi OS.
Kind of the related transaction, there or any of your other public holdings.
Good good question to be clear it does not contemplate any secondaries. So these are transactions that have closed or strategic sales that have been signed and have yet to close and you referenced was it the 250, which we expect in the in the third quarter and the headline number was 600, because there were a couple of strategic sales and taken place.
We have signed documentation and we expect.
Those to close in the early part of 2020.
Great. Thanks, so much.
Yes.
Our next question comes from Glenn Schorr of Evercore. Your line is open.
Thanks very much.
But I can get on this one.
We hear all the growth of scaling the distribution will get it and it's working great.
If you look at the proposal out of out of Elizabeth Warren recently.
It would suggest something other than we all we all believe is taking place so I guess I'm.
I'd love to give you a shot to either a.
Responds and or be talk about how the business would adapt if some of those proposals are put in place.
Thank you Brian for the question.
Always appreciate being given an opportunity.
I'm not going to take you up on it today.
Okay. No problem. So we're not we're not going to comment and I think we're obviously at the beginning of probably.
A season of a number of different things that will be in the in the media and we'll we'll watch it as well you and we'll let you know as these things develop.
If and how it impacts our business I would tell you that we have.
Been focused for the last decade, plus on making sure that.
We have a robust effort around all things the SG and making sure that we're being thoughtful about all the stakeholders.
To whom we're responsible and so we'll continue to focus on that endeavor and then.
Just as the environment adjusts.
Okay, maybe a business really is one.
This seems to be a rising public to private trend.
Curious if you are you're seeing that's the same degree I am if it's just a function of differential in valuations and think of it as a seasonal thing.
We're seeing it to and I think it is providing opportunities to us.
I think the market.
Glenn it's a it's become a bit of a have have not market.
I think if the company has.
Real growth or is uncertain.
Sectors and as it really simple story.
They tend to get a high multiple and a lot of capital goes that direction, if there's some complexity a bit slower growth.
If there's.
More explaining needs to be done.
There's a lot of companies that get left behind.
And so we are seeing this bifurcated market develop and I do think that is leading to more interest on the part of management teams to consider going private transactions. So that's clearly creating opportunities for us.
I'd say the market's focus on.
Simple stories is also creating opportunities in so far as a number of companies are selling noncore subsidiaries and we've been particularly active around corporate carve outs all around the world and I think thats a derivative of this public to private trend. It's more of a simplified trend that we're benefiting from but we're seeing the same thing youre.
Okay. Thanks very much.
Our next question comes from Chris Kotowski of Oppenheimer and company. Your line is open yeah, good morning, and thanks.
The I noticed the carried interest receivable was up 21% linked quarter and that just seems like a big number in kind of a a whole home market is there any particular story behind that.
Hey, Chris its no particular story other than we we manage a lot of capital and the appreciation was quite robust during during the quarter for example, private equity or private equity portfolio is up 6.4%.
So if you manage a lot of capital and you see that appreciation, you'll see that come through in the accrued carry number and the only thing I'd add Chris is it's also coming from non PE and we mentioned a number of these younger funds are now getting invested the dollars in the ground are growing and the accrued carry is starting to tick up for non PE as well and we've shared that we think there's significant upside to our carried interest line over time as that continues to play out and those investments are exited so you know all else equal we hope to see that the accrued carry from non you continue to grow right exactly that point, we actually we actually had a slide in the supplemental deck last quarter and the $123 billion of eligible.
Kerry that we carry eligible funds that we manage that number was 88 billion. So again to Scott's point as we continue to grow the business not only in PE, but continue to add different mandates and they work their way through the preferred returns and then or Kelly carry eligible you're going to see that number go up.
Okay, and then as a follow up is as rich bio also in the in the health care growth fund or is it just a balance sheet investments.
Good question and it's not a straightforward answer did the the answer is that it was originally on our balance sheet.
Again, the beauty of our balance sheet is we have the ability to use some of that bounty capital into proof concept and then we go raise capital with a third party mandate attached respighi, we invested over four separate tranches the first.
Who were made specifically just on the balance sheet and then as we raise a fund and that fund was eligible to participate in that investment. The fun participated so that $395 million is balance sheet capital plus a sliver of the GP interest in a healthcare growth, but more importantly, you've got.
The $395 million value, but it's only $75 million as cost and we've made that investment over the last.
Two and a half years.
Well I guess, what I was also wondering about is obviously it's nice.
It would be nice to have a five bang or in the in your first time biotechs.
I mean is that did that help boost the performance of the fund by a similar amount as to what we see on your balance sheet.
And it certainly has and that's a very very good a very good point and when you take into account. We're just talking about the 395 million, which is our investment on our balance sheet.
Embedded in there is also some some accrued carry because healthcare growth fund because the IR that it has right now healthcare growth funding is right now remember too early funding we had some big write ups shows the gross IR is I think over a 100%.
And so youre going to see that Big Bang that you talk about.
Okay all right. Thank you.
Thanks, Chris.
Our next question comes from Devin Ryan of JMP Securities. Your line is open.
Okay, great good morning, everyone.
Most of my questions have been asked but maybe just one here.
For Scott you had mentioned a lot of visibility into the business near term and you'd given some longer term perspective on fee related earnings and the trajectory at the Investor day, but since then we've got some pretty specific fiery guidance.
For the next few years from some of your peers just.
Given this transparency, which I think has been helpful to the market and so.
If possible is it possible to give us anything more granular on where you see fee related earnings maybe over the next two to three years or range of growth rates from here just based on that level of visibility you have into the business and some of the moving parts like fund raising or deployment.
A great question, Devin and appreciate this opportunity as well, but also not going to pick up on it.
I think we're not we're not comfortable giving a every guidance per se I think what we are comfortable doing is just sharing with you the trends that we're seeing in the business.
And as you can tell from the narrative and the significant growth we've had in management fees, 16% give or take plus the opportunities we see to continue to scale our capital markets businesses.
Yeah, we'll share with you what we're seeing but we do see meaningful upside and the opportunity to create operating leverage as well.
But no specific guidance, but I'd tell you. The the overall sentiment here is we've put in a lot of hard work in the last decade.
Getting ourself to this point in terms of creating track records and new relationships and if we can create page six with fund ones and new relationships.
Kind of in a motive.
Being very optimistic around what we can do as we as we scale from this point forward, so upbeat, but no specifics for you and just to give you a a little bit of color very very short term remember you. When you take a look at fee paying a UN.
Year over year, its up 9% and we have talked about.
Shadow fee paying AUM that number is roughly.
$18 billion in at over 100 basis points of the income attached to that to that as that capital is invested over the next couple of years, you're certainly going to be able to see management fees increase because of that.
Yes.
Okay, well I figured I'd give it a shot but I appreciate it guys.
I just try to Chris.
Our next question comes from Chris Harris of Wells Fargo. Your line is open.
So there's a lot of negative yielding debt in Europe . As you guys know how is this impacting your business or your approach to investing in that region if at all.
Oh, it's a great question and it's.
What we're finding in Europe .
Is that the opportunity in the private markets and the opportunity to generate a return from capturing the illiquidity premium Chris is it significant.
And so it's it's not impacting our investment approach per se, but we are finding that when we talk to investors around the world, especially those in Europe are with big European components of their portfolio. They are looking to do more with us because they are focused on figuring out how to capture that illiquidity premium for them.
So it hasn't really changed how we're investing per se.
But what it has done is allowed us to create a series of.
Discussions with investors that are trying to figure out how to position their portfolio and a negative yielding environment. So we're seeing more flows into things like private credit infrastructure real estate.
Anything that has a yield coming from the liquid or private markets. We're finding a lot of interest.
Got it thank you.
Thank you.
Our next question comes from Michael Cyprys of Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question just hoping you could talk a little bit about some of the newer product initiatives that you're introducing targeted toward insurance companies and in particular I saw you recently had a return to enhance structured note that I think in past across a number of your strategies, but pays a fixed distribution. So I guess, what sort of market opportunities do you see for these sort of innovative solutions and how you're able to structure such a high coupon that pays out on the sort of structure down are you evolving the return streams in Palatine or private equity funds to match you could just help us understand that thank you.
Thank you Michael Yeah, I think this kind of this question brings together a few different themes. We've covered in the past one is that we're focused on how we can continue to raise capital that is longer duration.
As you know we're focused on kind of generating more permanent capital and recycling long term you know 15, plus year lockup type capital and so that's one thing we've been very focused on.
Another thing we have been very focused on is building our relationships out in the insurance space.
And over the course of the last.
Four or so years, we've seen our A.U.M. from insurance companies go from 8 billion to north of 25 billion.
And as we've been spending time on across those two themes. We have found an opportunity in a number of different respects to innovate to create products that.
Achieved both objectives raise longer term capital for us to invest in compound for our partners and do it in a format that is attractive for insurers and easier for them to invest in.
And so the the.
Product that you're talking about is just one example of many that we have been working on.
And a number of them have actually been been completed.
The answer to your higher level question around how can you generate yield on a private markets portfolio is relatively straight forward. You know if you think about what we do.
You know private equity and growth equity, it's true traditionally do not generate much correct.
Current return.
But if you think about it bridged basically everything else we're doing does.
Private credit infrastructure real estate equity real estate credit energy as just some examples.
And so we're finding that you can create a more diversified portfolio of alternatives that does have a recurring yield and I think it's a combination of that recurring yield plus upside of private and growth equity and other asset classes that we think is an opportunity to create hybrid products that are attractive both on the run and then also in terms of long term upside.
Great. Thanks, Okay back in the queue to ask upon them.
Thank you.
Our next question comes from Robert Lee of KBW. Your line is open.
Great. Good morning, Thanks for taking my questions.
And I apologize if this maybe went over this because I got on the call little bit late but just going back to kind of capital management and the dividend.
About a year anniversary since you won.
Converted to reset the dividend so how should we think about your view about dividend growth from here.
Since we're kind of year end at this point and.
Second question is a really really it's kind of more to comp ratio and the carry pool I guess.
I think you guys are somewhat unique in that you pay everyone pretty much out of one big carry pool.
I believe as opposed to points on the specific fund, but as you get.
Bigger as you have many more strategies is that.
A model that other becomes easier to execute on or is there.
The pressure to to change it is kind of the firm becomes more more diverse.
Hey, Rob. This is bill we did cover both these points earlier on but to the punch line is as it relates to the change in dividend policy, it's something that we'll address annually and probably something that will be discussed on the fourth quarter call.
As it relates to that one comp pool.
What we mentioned earlier is that were talking that comfortable to be in the low fortys.
And remember we pay everyone off of one P.M. now and we don't break down specifically how that.
How that income is generated whether or not its fee income or where they're not carry on balance sheet earnings. We look at everything more holistically, but you've got to believe that as we continue to scale, our business and grow that business.
You should see overtime margin improvement, but that's not going to happen next quarter per se and so when we went to the C Corp conversion and we only reported one comp number we said that we would get it to argue that number in the in the low fortys to make sure that the operating margins would be roughly that 50% and so there's not going to be any change anytime soon and I think on the last part of your question Rob. The you know the pressure to change it we know it we don't see any pressure to change that this has been a part of how the cake has operated from inception.
That everybody's always participated in the global carry pool.
It's a critical part of our culture.
And allows us to make sure we connect the dots across the firm and everybody works together and so we expect that to continue to be the case.
Okay, great. Thanks for taking my questions.
Thank you.
Our next question is a follow up from Michael Cyprys Morgan Stanley . Your line is open.
Oh line lending just how you're seeing that used across the industry today and in terms of order of magnitude and size and to what extent is just kick here.
Capital call lending when you're making deployment.
Delaying capital costs, a using leverage and then drawing down on that.
You know Mike you actually just cut in half way through your question, which would you would you mind just repeating it we didnt catch you were silent for the first part.
Oh sure I was just asking about capital call line lending so when you're.
Buying an asset in a fund.
Using leverage initially to buy then drawing down on the line to it and then repaying it off in the future just curious what you're seeing across the industry in terms of usage of this form of leverage you know what sort of magnitude and size do you see for this part of the industry and to what extent is Kiki are using this form of leverage.
And Michael This is bill I'll take that one.
When you think about the administrative eased by having a subscription facility in each one of the fun.
We've been doing that.
For the past few years and so that line is not kept open a much much at all.
It again more for administrative fees and is it as opposed to anything.
As it relates maybe to a question that you might be asking as far as to the extent that you use a facility.
Do you actually increase the return profile of that particular fund because of the delay draw, but I just want to let you know that as we report to our Lps. We report the IR because of us having the ability to use that subscription line, but we also report a return as if we didn't use the subscription line. So we actually have these transparency report where again, we report, but both of those numbers.
Great and what would be the typical duration of overdraw on that.
It typically on average if we have that facility, we dryness facility and it usually gets paid down every six months.
Got it okay. So six months thanks, so much.
Thank you you're welcome.
There are no further questions I like to turn the call back over to Craig Larson for any closing remarks.
Michelle Thanks for your health and thank you everybody for joining our call plays of course follow up directly with with anything else and we look forward to chatting next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.