KKR & Co. Inc. (KKR) Earnings Call Transcript & Summary

All right. Good morning, everyone. Let's get started. This is Craig Siegenthaler from Credit Suisse. It is my pleasure to introduce Rob Lewin from KKR. Rob is the firm's new Chief Financial Officer and he joined KKR in 2004. He's held a diverse set of roles at KKR, including Head of Human Talent and Strategic Talent, Head of Corporate Development, Treasurer and Co-Head of the firm's credit and capital markets business. Rob also worked in Hong Kong from 2006 to 2010 and helped to launch KKR's very successful Asian franchise. First, a little background on KKR. KKR is one of the oldest private equity firms and was founded in 1976. Despite its age, KKR is one of the fastest-growing firms in our coverage. They have benefited from the acceleration and the expansion of their business outside of private equity which they really started more than 5 years ago. Also aiding growth has been the firm's differentiated growth model which leverages its big balance sheet and capital markets franchise. Good morning, Rob. It's great to have you here with us.

Thanks a lot, Craig. I appreciate being here.

So maybe to start off, and this is a different question, but given your background and that you're new to the CFO role, maybe just kind of walk us through your background and what makes a good fit for this position?

Yes. Sure. Well, as Craig noted, I've been at KKR for 16 years now. And really, the first half of my career at KKR was as an investment professional on the private equity side of our business, both in the U.S. and several years in Asia. Over the second half of the career, I spent most of that time around our balance sheet and corporate strategy. I did spend some time helping to co-lead our credit and capital markets business. And then most recently, over the last couple of years, I had oversight globally for human capital. And I really do believe that the diverse set of experiences will allow me to have a greater impact in this seat. I have a fairly good sense of our different businesses across the firm, having spent time in 2 different geographies. And over the last couple of years, the ability to really oversee and lead our human capital effort as we made some key strategic decisions on talent, I think, will certainly serve me well.

So coming back to the business, KKR's growth rate since the financial crisis has been really impressive and highlights how well the firm is positioned across the liquid alts. We've been asking this question to a lot of our speakers over the last couple of days, but what inning do you think we are in the secular migration to alternatives?

Yes. It's a good question. I think the way I describe it is we're probably in the middle innings, but it is a very long game. And so you've seen the secular migration going on for 10, 15, 20 years. And so our expectation is that's going to continue and you've got a number of secular tailwinds at our industry's back right now. And certainly, as you look at where rates are, I mean, I haven't checked this morning, but whether 10-year was yesterday, the 30-year under 1.8%, that is a real tailwind for our industry and it's something that I think will probably accelerate. That's a secular shift to alternatives over time. And so that would be one. The other one is just looking at the penetration of different client bases across the globe. And certainly, there's a number of corporate pensions in the U.S. and some regional sovereigns that have significant allocations to alternatives, but we think that can increase. And then you have a whole wide variety of clients around the globe, whether that's regional sovereigns who don't have exposure to alternatives today or different parts of the market whether those are insurance companies or the retail investor that has a de minimis allocation to alternatives today. And really, it's a combination of those 2 tailwinds that we think we're in the middle innings of what is a very long-term secular shift.

So Rob, is it fair to say you're not really seeing any signs that the secular migration is slowing?

No. We're not. If anything, it's probably the opposite. And I think as alternative firms get more sophisticated around product creation, particularly for some of these new channels, insurance companies, retail investors, if anything, we're seeing the opposite of that, Craig.

So similar question, but I wanted you to walk across the different businesses. Do you think there's more upside when you look at the industry and then you look at KKR's businesses? In some of the businesses that are less mature, like maybe credit, real estate, infrastructure relative to private equity, which has been around much longer, you guys have been in it much longer. And arguably, it's more competitive today, especially when you look at the levels of dry powder.

Yes. So we aspire to be top 3 in everything that we do. And I think you can make a very good argument that KKR's Global Private Equity franchise is top 3 today. And some of the other franchises you noted are -- certainly, our real estate business, potentially our credit and infrastructure businesses, are on the path to being where we want them to be. And so I think it would be a fair commentary to say that there's more upside in those businesses where we have conviction that they could be top 3 global players but aren't yet there. That said, I think looking at our private equity franchise specifically, we see significant opportunities to grow that as well, whether that's regionally. We have 3 separate fund strategies in the Americas, Europe and Asia, and believe all 3 of those can grow. We've got adjacent products that we think are very exciting to our private equity business, a health care growth franchise, a technology growth franchise. And we recently launched a core private equity business a couple of years ago from a standing start where we really had no capital under management. Today, we have in and around $10 billion of capital under management against that strategy in just a couple of years, and it becomes what we believe is a real clear leader in that space. So there's clearly more upside as it relates to AUM growth in some of the newer products, less mature products, but we also look at where our private equity franchise can go and believe that there's a ton of upside still left for us to achieve there.

Rob, right now, KKR arguably has the strongest year in near-term pipeline in this space, Asia buyout, U.S. buyout infrastructure. How do you frame the size or the potential growth from those businesses? And also, what are the risks to maybe not raising levels of capital like we've seen in the last vintage?

Yes. And so what Craig is referring to is we've got 3 large funds -- our 3 largest fund strategies are either in the market or we expect to be in the market at some reasonable short period of time, and that would be our Americas and Asia private equity fund strategies as well as our global infrastructure fund strategy. The last time those 3 funds raised capital in aggregate, they raised approximately $30 billion of capital. We have not given guidance as it relates to where we expect the next vintage of those funds to raise capital at, but we've got a lot of conviction sitting here today and a lot of comfort that it would be comfortably north of the $30 billion from the last round. The other thing that gives us a lot of comfort as it relates to management fee growth over time, while KKR is certainly an old firm as it relates to many of our competitors, we've been around for close to 45 years, of the 22 fund strategies that we have today, 18 of them are less than a decade old. And we really think it takes 10 to 12 years to create scaled franchises. And so it's really the combination of having the visibility on those 3 more flagship-oriented fund strategies that you referenced, Craig, as well as some of our newer businesses that we're in the process of scaling that really gives us that conviction that we can scale our asset management revenues over time. One of the examples we've recently -- we've given is that over the last 3 years, we've increased our management fees by 50%, and we have a lot of conviction that we can scale our fee revenues by an additional 50-plus percent over the next 3 years.

So how does this increased competition in the industry, record levels of dry powder, how does it affect the industry's ability to generate double-digit returns? And I think one nice thing is -- one of the benchmarks, interest rates are so low, maybe you don't need to generate the same returns you generate in the last 20 years, but maybe talk about that dynamic.

Sure. I think it's a very good question. It's a topical question. I think the first thing I'd start with is looking at some of the fund returns that we've been able to generate. Our largest business, private equity today, last year in 2019, our private equity business generated 29% return. The year before that, with the MSCI World down for the year, we outperformed by over 1,000 basis points. And so we continue to be able to figure out ways to generate compelling returns for our investors in what has been a low rate environment. The second way I'd probably address your question is, undoubtedly, I think competition has increased in the U.S. That's a fair question. And oftentimes, the question we receive in these types of settings is quite U.S.-centric as it relates to competition. But when you look at KKR, and let's just take our private equity business as an example and stay on that business, over half of our investment professionals reside and work outside of the U.S. And when you look at where we've deployed capital in 2019, the region that was the most active in deployment was Asia. The region that was second most active was Europe. And our third most active region was the U.S. And so we do benefit from having long-dated fund structures that allow us to pick and choose the right time to be able to enter the market from a competitive perspective. For sure, the world has become more competitive. We got a question in a meeting we were at recently. And the competition, let's say, in the U.S. for right now, with additional forms of capital forming that are more private-oriented, absolutely, we need to navigate that on the buy side. The quite interesting side of that dynamic too is it's a whole new pool of capital or an increasingly large book capital that can also be a buyer for our assets and additional way to monetize assets. And so there's a positive and then a negative to that increased competition.

One thing we hear you guys talk a lot about with your investing themes is buying complexity, selling simplicity. When did you guys really start to develop this theme? And maybe talk about 1 or 2 large investments where this theme has actually worked out.

That's been a long time since we've been talking about that phrase internally. It's got to be 4 or 5 years at least, if not more. And so really, what that means is we look at the public markets, and I don't just mean the public equity markets, I also mean the public debt markets. Public markets really like simple stories. And for us, where we're going to generate returns for our investors is when we can take something complicated and leverage our operational expertise, leverage our industry expertise, our global expertise, our capital markets team and what they bring to the table. When we can leverage some combination of things that we think are differentiated, that is when we think that we could deliver ultimately more simpler and better stories for the public markets and access a cheaper form of capital over time. And so that is how we think about taking something that is complex, bringing our resources to bear and making it simpler for the public markets to digest. And one of the best recent examples of that for KKR where that's really played out is in Japan. And Japan is still a nascent buyout market for alternatives players and for KKR. But if you look over the last several years, by our count, there's been 7 corporate carve-outs of size done in Japan. And corporate carve-outs in Japan are very complicated deals to get done. Oftentimes, businesses have intertwined systems, have intertwined management teams, product offerings. Of those 7 deals, we've led 5 of them. And so that's the best example of a theme where we've taken something that we think is really complicated, used our global resources that we have available to us to create what we think are differentiated outcomes for our investors.

So turning the topic now on the C-corp index add. You guys discussed on the 4Q earnings call your view of getting into the Russell 1000 Index. It sounds like it's going to happen. I just want to understand if there's any risk that it's not happening in June? And what could be that risk?

Sure. So what we believe is that include -- being included in the Russell Index is something certainly our existing shareholders want, a lot of our prospective shareholders want, and we really do think it's the next evolution for KKR as a public company. I also say it is a big strategic priority for us to be included in 2020. And we're actively working with our Board on what changes we might need to make, if any, to be included in the Russell Index. And so we're committed to going through that process. Is there risk, Craig, of that happening? Certainly. There's risk in all aspects of our business. But I'd tell you that it is a real priority for us to figure out a way to make that work in 2020.

How do you size the buying opportunity and potential of the stock valuation from the Russell add?

There's really 2 ways to look at that. And the first is more formulaic and, I think, well understood, which are ETFs or index-linked funds where you have more automatic buying if we're included. And I know, Craig, in a lot of your research that you've been very early on in its trend on, I mean you've done the math on that number, we've done the math. And that's somewhere around 15 million shares, just a few percent of our public float, give or take. The bigger opportunity and what we think is a lot more powerful, but it's a little bit more of a subjective analysis, are fund complexes where their returns are really benchmarked against the Russell. And we think by virtue of getting into the Russell, it will allow us to market to a wider range of fund complexes and certainly have much more mindshare if they're indexed to the Russell and were included. And so to us, that's a much more -- or the much larger opportunity that we have in front of us in being included in the Russell. But the analysis as to how much buying that creates is, as I've noted, one that is a lot more subjective in nature as is formulaic.

So then one step further, when you think about the S&P 500, today, you have to convert to a single share class. I'm guessing that may be a deal breaker, but rules can change. And this wasn't always the S&P standard. So is the view internally maybe the way to see if the rules for the index change down the road?