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

All right. Good afternoon, everybody. I'm Jeremy Campbell, and I cover the exchanges, brokers and asset managers sector here at Barclays. Kicking off our slate of alternative asset managers that we cover is Rob Lewin, KKR's CFO. Rob, very happy to have you here at our now virtual Global Financial Services Conference. I don't -- I wish we could be doing this in person but happy to have you here nonetheless.

Yes. Thanks a lot for including KKR and me in your conference and look forward to the discussion.

Great. So I just -- why don't we start off with the topic that's on a lot of people's minds here is the Global Atlantic. You guys announced your planned acquisition earlier this year. Guidance around the deal seems pretty positive to the tune of about $200 million in incremental fee-related revenue at a pretty high incremental margin. So I guess, first, just at a high level, why did it make sense for KKR to enter the insurance business today? And I guess, what drew you guys to Global Atlantic in particular?

Yes, great. Well, it's a good first question to get started with. Like any acquisition we're going to do, I think we're going to be focused on 3 things, and that's going to be the industry that we're investing into, the business model and the management team that we're backing and then how we can mutually make each other better than we can do on our own. And so let's take each one of those in order. The first is the industry. Insurance has been a big target market for us for a long period of time. We have roughly $30 billion of assets under management exposed to insurance companies today. The total addressable market, as you know, is just massive. It's about $30 trillion of investable assets. Now clearly, only a small subset of that $30 trillion is applicable to the products that KKR has available today. But we see, in a low rate environment, the likelihood for a greater share of alternatives being part of the investable asset universe for insurance. So just a really massive overall market for us to be able to penetrate. The second and clearly the most exciting from our perspective is the business and the management team. It's a management team that started at Global Atlantic roughly 15 years ago from scratch. Super high-quality team, we think best-in-class and we couldn't be more excited to invest behind their creativity and their forward-leaning approach to how they've built out their business. In terms of the Global Atlantic franchise itself, the one thing that's really attracted us to the business is their differentiated distribution capability, and they've got really entrenched positions today in the bank and broker-dealer, a channel that we see real secular growth from -- on a go-forward basis and we think is pretty defensible from a barrier to entry perspective as well. And then finally, how can we make each other better in our respective businesses? And I think the Global Atlantic team would say they were attracted to a partner like KKR and our ability to help them source and originate differentiated assets that could increase their net investment margin and ultimately their ROE to their shareholders. And then from our perspective, we've been pretty clear on the financial benefits of this transaction, which we think are substantial to KKR. It takes our AUM from a little over $220 billion to close to $300 billion on a pro forma basis. The investing assets that we manage on behalf of insurance companies go up roughly 3.5x from $30 billion to around $100 billion. And maybe the most significant stat would be that our perpetual assets that we manage on behalf of our clients go from roughly $70 billion to close to $95 billion, so north of 4x increase and something that's been a real strategic initiative for us. And then finally, I think you get 2 high-quality management teams together. And undoubtedly, they'll figure out ways to make each other better, and we've already seen that dialogue start to take place with the Global Atlantic team and the sharing of ideas across both of our businesses have already led to, I think, things where we can work on together.

Got it. And then I guess once you close the deal, how do you guys think about the growth algorithm in the insurance world between organic and inorganic opportunities?

Yes. So I think it's going to be both. And if you look at Global Atlantic's history, they've really generated nice organic growth in their history as well as some inorganic growth, too. And I think one of the neat things when you look at Global Atlantic, over the last 5 years, they've roughly doubled the size of their business, their assets have doubled in size. And they've been able to do that without raising additional equity capital. And so when you think about one of KKR's core competencies is it's having access to capital, especially equity capital. And so I do think one of the real opportunities here is it could allow Global Atlantic to be able to look at things that maybe they had trouble in the past looking at on their own with the access to capital that we can bring to bear on situations. But they've done a great job historically growing organically and inorganically. And as we think about the future, we very much think both are opportunities here for us going forward.

Got you. And then I guess, if you kind of look at the fact pattern in the industry these days, it seems like there's upside from using sidecar vehicles, right? And you just talked about your access to capital at KKR and all your different LP networks out there. I kind of wonder if this would be especially important for KKR and Global Atlantic, especially since you're -- it's going to be a majority-owned insurance company here. And maybe if you launch something like this, you might not have to use your own capital as part of any inorganic-type transaction on a go-forward basis. Can you just kind of perhaps discuss your appetite for sidecar vehicle or using that third-party capital as part of any kind of future inorganic adds here?

Yes. I think you're spot-on in the question. And of course, one of our competitors has used the sidecar model, I think, very successfully over time. Global Atlantic actually has one meaningful-sized sidecar that they just raised over the last several months. And as we think about the future, that can certainly be an additional area of our tool, our collective toolkit in being able to approach inorganic situations that just allow you to extend your capital and doing so in a vehicle that we think can also deliver interesting or compelling investment returns to the investors who are backing the sidecars. So we do think the sidecar strategy could be a win-win, both for our investors, new investors, Global Atlantic investors as well as being able to extend the Global Atlantic franchise and be able to compete for some little bit larger-sized transactions.

Got it. And then I guess within the inorganic vein, you talked about bringing 2 great management teams together and looking at opportunities. Now what do you think like the KKR value prop is in insurance world? Now that we're getting into a, let's call it, relatively crowded field here with most alternative asset managers having some sort of insurance relationship, what do you see as what KKR can kind of bring to the table with Global Atlantic and looking at these inorganic opportunities?

Yes. Sorry, Jeremy, you broke up at the end. You said inorganic opportunities, right?

Correct, correct.

Yes. So I think it's a couple of things. The first, and it always starts with the management team, and we're backing a team that we've got a lot of confidence in can really structure transactions in the right way, who can evaluate risk return in a way that's consistent with how we'd evaluate it. I think you also need to look at the credibility of the team, the trust-based relationship they have within the number of counterparties, and they've been working since founding this business, really creating a number of long-standing trust-based relationships that are really important in a lot of the inorganic types of discussions that you're referring to, particularly blocks or reinsurance transactions. Next, I would say, would be access to capital. It is absolutely a competitive environment to be able to source inorganic transactions in this space. But I do think as you go a little bit more upmarket to larger-sized transactions, there are fewer competitors that could compete at that level. And then I think the third thing really is the combination of the Global Atlantic investment team that we've been quite impressed by, as well as our own ability to help them source and originate investment product that could generate additional return. And as you think about driving these inorganic transactions, a big component is how you might be able to reposition the asset side of the equation. And so you combine those 3 things together, we think we've got quite a compelling opportunity set in front of us and positioning from a marketplace to be able to generate some nice inorganic activity over the coming years.

Got it. And then you kind of alluded to this earlier but this really globally low rates regime presents an interesting opportunity. I mean I guess, how do you guys think about the TAM for insurance acquisitions, either for yourselves or I guess just industry-wide with all these different alt partners?

Yes. I think it's -- the pipeline today around these types of transactions is relatively high. Our expectation is that's likely to continue out into the future, I think, as a number of companies out there are looking at their own balance sheets and figuring ways that they can extend their own capital base, our expectation is there's going to continue to be a fair bit of activity here over the coming years. So for us, it's really a question of how we position ourselves and ensure that we stay disciplined on the transactions that fit best in terms of the areas where we think collectively we can differentiate ourselves.

Great. And then just let's put it all together, right? We talked about organic, we talked about inorganic. Can you just remind us of what your overall growth assumption is here going forward? Are kind of high teens to low 20s insurance asset growth sustainable?

Yes. I don't believe we've guided a specific asset growth level. I think we've said 2 things as it relates to the Global Atlantic acquisition. We see a team and a business model that, over time, has generated mid-teen types of returns through cycles on an ROE basis. And our expectation is with the right level of investment, that we've got the right team here where we could generate those types of returns through the cycle. And then the second thing we've commented on are our own economics. KKR's asset management economics, by virtue of this combination, where we said by the end of the year 1, when you combine our share of Global Atlantic's distributed learnings, we intend to own roughly 60% of Global Atlantic as well as the management fees that we expect to earn by virtue of being the investment manager at Global Atlantic and, over time, managing specific products directly, we think that adds up to roughly $500 million of after-tax distributable earnings for KKR sort of on a run rate basis at the end of year 1.

Got it. And then, Rob, I think one of the things you guys talked about in that financial guide was perhaps looking for an opportunity to take the fee rate portion of that a little bit higher on the go forward. I know this is subject to all different types of approvals here. But maybe can you just discuss your appetite for kind of requestable higher fee rate, more in line with where some of the industry norms are? And remind us maybe some of like the process involved, like what's the -- is there a typical time line with like a regulatory approval process? What does that look like? And what might some of the pushbacks look like, too?

Sure. And so as I hope you understand, we don't want to get out in front of the discussions that we're going to have from a regulatory perspective on this call and those conversations are going. But I would say a couple of things. One, KKR through its asset management business and its capital markets business has regulators all over the world. Our goal is to have a really good relationship and a constructive dialogue with those regulators. Our intention on the insurance side would be to do the exact same thing. I do think some of the things that differentiate KKR's acquisition of Global Atlantic here from an alignment perspective, it is our majority ownership here, and we are going to be very much aligned with the overall performance of the insurance business in terms of our own economics. And so I hope you understand we're not going to get into detail as it relates to specific dialogue on how we see these conversations play out and we want to make sure that we're doing that with the regulators. And once we reach an agreement on what an appropriate arrangement is, we'll, of course, make sure to be transparent with our investors and our analysts around what that economic rate looks like.

Yes. Never a good idea to front-run regulators, I guess, right? And then maybe just one last one here on Global Atlantic. I know on your last earnings call, Scott had kind of reiterated the breadth and the depth of GA's distribution network, I think you alluded to a bit earlier today in our conversation here. Do you see the potential for takeout to kind of leverage these relationships for externalities, either to supplement your own retail products or develop new ones outside of kind of the core GA pipe?

Jeremy, I think that's a really good question. And so to start with, our investment here and partnership with GA is not predicated on that type of convergence. But when you think about GA's product offering when you think about their relationship in the bank and broker-dealer channel, when you look at KKR's product offering and our own set of relationships across those same institutions, we think we're exceptionally well positioned to take advantage of that convergence over time. And so we think it's a huge opportunity. We've already started dialogue on the topic, but it's not something that our transaction here is predicated on and it could take a little bit longer period of time to play out.

Got you. And then I guess just speaking of the retail channel. It's been an area where you guys have been putting a lot of effort into for a while now. I mean can you just elaborate a bit on the steps you've taken so far to give kind of retail investors access to your platform?

Sure. I think there's a couple of different ways that we're trying to invest across our retail platform at KKR. The first is a direct distribution to family offices and high-net-worth clients and providing them access to both our funds and importantly, our co-investments across our various products on a global basis. We have a separate team that is very much focused on the platforms. And so think high-net-worth platforms that sit inside of banks. And that's been an area of real growth for us and we found that our brand has really resonated inside of those channels. And the third area is really through partnerships. And certainly, as we look at different distribution globally, there's going to be things where we can find people who do things better than we can do in our own right. And a great example of that is what we've done in the JV we have with FS Investments in the BDC space. That's been a very successful venture for us over the last couple of years as we entered into it. I'd be remiss, as we talked about retail and our own investment, if I didn't also mention, and you probably saw a couple of weeks ago, we announced a new hire to lead our global fundraising effort at KKR. This individual comes with a vast amount of experience across different disciplines on a distribution basis but does have quite a bit of experience in retail distribution. And so we've made a lot of upfront investments across the 3 areas, making investments clearly in talent, and it started to pay dividends already for us. If you look back in 2015, we managed about $9 billion of retail assets. Today, that's closer to the mid-$30s billion, and we see a lot of opportunity for growth here with continued execution across the investments we have already made.

Got it. And then I would just naturally think that that's something like real estate or even infrastructure would be a little bit more retail-friendly from a positioning standpoint. You mentioned, obviously, credit inside the BDC as well. But I guess what products do retail investors have access to? And is there a way to make some of these channels a little bit more retail-friendly?

Yes. I think you hit on some products that could certainly fit with retail investors. Real estate and credit, of course, are 2 that have traditionally been fairly large ones. I think the key for us is to make sure that we are linking our product development and our distribution truly as one function. And I think it's more important in retail distribution than it is in any other form of distribution. And so I think if we're able to do that, between our brand, our global brand, our multi-decade record of investment performance on behalf of our investors, we think we should have a real opportunity to meaningfully scale what we're doing in the retail universe.

Got it. And then just I'd be remiss if I didn't ask about what -- obviously, with the DOL and some of these inside 401(k)s, I would assume that this is much more of a potential partnership opportunity with perhaps some more traditional asset managers out there. Have you guys given any thoughts so far as how you might approach that market, if at all?

Yes, sure. Listen, of course, we spent a lot of time already on the topic. What I would say is it is very early days. The opportunity is an immense one for our industry. We say the retail investor as a whole has a fairly low, on a relative basis, exposure to alternative investments today. And we're trying to think through the best way that we can make our product offering available to retail investors. And clearly, the DOL guidance that you referenced could potentially be something that would allow for that in greater scale in the future. But I would say we're still very much in the early innings. That's how we're going to approach that.

And so I think even Scott kind of used the baseload for this, early innings, right? I think you said a second inning, I think in the last earnings call. As we look ahead, like what's it going to take for us to get to the second inning stretch, right? What's going on? Is it really further developing like the 401(k) retirement plan? Is it actually going full retail outside of the ultra-high net worth kind of class? What is it going to take from a market perspective to get there?

Yes. Listen, I think it's going to be a lot of execution on a number of the investments that we've already made and probably over the next couple of years, some additional targeted investments that we're going to need to make on top of those that we've already made. But I think we've laid the foundation for a lot of that growth. And so I don't have a timetable for you but I do think it's visible. And I do think at some point over the next few years, I think the nature of the dialogue that we'll be having with our shareholders and our analysts around where we are from a distribution perspective, retail is going to be very different than the one that we're having today. Mind you, as I mentioned, we've gone from $9 billion of AUM to, I think, $36 billion of AUM in this space over the last 5 years. And so I do think that the trajectory we're on is quite a positive one and gives us confidence in terms of our ability to execute, and as you say, get to that second inning stretch, to use your terminology.

Got it. And then I think we'll just pause there for a second. I think for those kind of tuned in here, we do have audience response questions, should be on a side bar for you guys take a look at. I think the first one is that we want to make sure you click in through is, how are you involved with KKR right now? I think overweight, equal weight, underweight or just not involved? There's other ones there, too, so please feel free to respond to all of them, but that one would be kind of reporting on track at this point. And so Rob, I guess back to just the conversation here when we're talking, you're in the fairly early stages of building out your presence in Asia at this point, too, and kind of taking a little bit of a unique approach to that. First, can you explain a little bit about the Asia strategy and particularly your breadth of products and why you chose the approach you guys chose?