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

Good morning, everyone. Let's get started. This is Craig Siegenthaler from Crédit Suisse, and it is my pleasure to introduce Rob Lewin from KKR. Rob is the firm's CFO, and he joined KKR in 2004. Rob has held a diverse set of roles at KKR, including Head of Talent -- 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 successful Asia business. Rob, thank you for joining us today.

Craig, thanks a lot for having us and for hosting this conference. We appreciate it.

So first, just a quick background on KKR. KKR is one of the oldest private equity firms and was founded in 1976. Despite its age, KKR has been one of the fastest-growing firms in our coverage. They have benefited from an accelerating -- accelerating their expansion outside of private equity 5-plus years ago. Also aiding its growth has been the firm's differentiated growth model, which uses its big balance sheet and capital markets franchise. Rob, maybe a good place to start is KKR's differentiated business model. What is differentiated at KKR relative to your main competitors? And maybe, highlight how this was evident in 2020, which started off as a very challenging year for the industry, but improved dramatically in the second half.

Right. Thanks a lot, Craig. I'm very happy to be here. So maybe let's start with the similarities in KKR's business model. The core of what we do and the core of what we always will do is really as an asset management firm, and we manage alternative products on behalf of clients globally. And we do so across the spectrum in areas like private equity, real assets as well as credit. In terms of what differentiates KKR, you said it, at the outset, our balance sheet and our capital markets business, let me just spend a second on what we've intentionally created really over the last 15 years. We set out to create an Asset Management business that really was able to do 2 things: one, invest on behalf of our clients in a differentiated way, and we think our unique business model allows for that; and then also very importantly, to be able to capture more of the upsides that our insurance -- excuse me, that our investing activities create for the firm. And likewise, we think that our model is able to do that. You referenced 2020. And probably no other year, Craig, other than 2020 was our unique business model on display in terms of the impact that it could have for our firm. So I think the #1 place where it's impactful. We're in the markets every day, particularly if you look at our Capital Markets franchise, we've got 70-plus people focused on capital markets activities, debt and equity side, really in the global markets each and every day. And I think it was that market insight, our global coverage that really gave us the confidence to lean-in from an investing perspective in the first half of the year. I think on any measure, you look at our activity from a deployment perspective in the first half of 2020, and we were as active as we've ever been in terms of deploying capital and committed capital, probably more active than we've ever been as a firm. And so, it's very early days in those investments. But if you look at how the markets have rebounded, Craig, and you look at, I think, our -- all of our outlooks for global economies, we're feeling really good about the capital we put to work in the first half of the year. And we think that's going to generate benefits for us for many years to come as those investments mature. I think the second way that really impacted our business model impacted, how we operated in 2020, and I'm sure we're going to touch on this later in the conversation, but it was our acquisition of Global Atlantic. I think there's absolutely no way, Craig, that, that transaction happened without our unique business model. If you bring yourself back to the middle of 2020, and we really -- we were negotiating that deal in April through June of 2020, still the troughs of the market, we were able to commit to a $4.5 billion transaction at that point in time. We were able to do that because we have a big and liquid balance sheet and we had a capital markets arm that gave us the confidence that we were going to be able to syndicate out the equity that we needed to, to make that transaction work. Maybe the last thing I'll highlight in terms of our differentiated business model really goes to our ability to monetize the content that we create and have more ways to win from the P&L perspective. I think, those that spent time, maybe less time around KKR, I look at KKR and said, big balance sheet and big Capital Markets business, maybe more volatility. If you go look at 2020, in particular, obviously, one of the more volatile years, especially the first half of the year that we've had in a decade plus, KKR in every quarter of 2020 grew its distributable operating earnings. I don't think you're going to find many -- other financial services terms, probably not many -- that many corporates globally that were able to grow their operating earnings in the first quarter or the second quarter of 2020. And we were able to do that, I think, in large part by virtue of the business model that we've created over the years.

So Rob, I was wondering if you could expand into the balance sheet strategy. And then, what are some ways you use this capital base, maybe that some of your competitors can't?

Sure. And maybe first, just to put into context, KKR is trading today somewhere around $45 per share and our book value per share is about $23. So it's a very relevant part of the firm in our overall valuation today. I'd say, we use our balance sheet in a few different ways. The first and the biggest way is that we're investing a significant amount alongside our limited partners across all of KKR's investment products. And in many cases, we are the single largest investor in many of our products. A second way we use our capital is really to seed new strategies that we have as a firm. And clearly, the ability to put capital work gets us in business quicker. I think, it accelerates the growth profile of those new businesses. I think, what it also does for us, really importantly, as we think about recruiting new talent to drive some of these new strategies, I think having that balance sheet capital to get to in business day 1 is a real differentiator for recruiting talent. To the third way, we use our balance sheet is really more around inorganic activity. And we touched on Global Atlantic. But we've used our balance sheet -- the partnership we did on the BDC space with FS Investments a couple of years ago, our stake in Marshall Wace to fill up our purchase of Avago several years ago, we've been able to use our balance sheet to grow inorganically in a way that's been very efficient for our shareholders. And then the last way that we use our balance sheet and scale is really as we think about capital allocation, it's on share buybacks and return of capital to our shareholders. We launched our buyback program about 5 years ago. Since that point in time, we've used about $1.4 billion of capital to retire or repurchase just over 70 million shares, so an average price per share of a little under $20. And as we think about KKR's current share price, we think that body of work has been pretty good for us and for our existing shareholders.

So Rob, I know you've covered this, partly in the balance sheet comments, in your earlier comments. But maybe just talk about how your business model has evolved over the last 5 years? Because it does look different today than it did 5 years ago.

So here's what I'd say. Our business model of Asset Management business, meaningful balance sheet and a Capital Markets business that sits in between everything we do has really been largely unchanged. I think, what's very different is the composition of our revenues in each one of those streams. So let's take them in turn. Starting with our Asset Management business. 5 years ago, there were many businesses that were in today of scale. Our core private equity business, as an example, were amongst global leaders in that business. Today, that was a business we were not in 5 years ago. Our impact business, our growth franchises, our dislocation opportunities -- strategy, all businesses that didn't exist 5 years ago that are a scaled contributor to our revenues today. If you look at our Capital Markets franchise and you look at how that business has evolved over the last 5 years, Craig, 5 years ago, as you know, that business was really a run rate $200 million a year business for the firm, very nice business. Fast forward to now, over the last 3 years, we've averaged almost $500 million a year in revenue from our Capital Markets franchise, a very high flow-through profitability business for us. And we've done that by extending our products and really following KKR's products. We've done that by extending our geographic coverage. If you look at where revenues come from over the last couple of years and substantial amounts come from Europe and Asia. And we've got a really attractive third-party Capital Market's business that feels like every day is winning new mandates from clients, and I think is a real validator of what we're doing in that side of our business. And we expect to be able to continue to take share there. And then you look at our balance sheet. And our balance sheet strategy is very much the same in some respects, except for a couple. Number one, it's a lot bigger, and so it's roughly twice the size as it was 5 years ago. And so more diverse sets of revenue streams coming off the larger-sized balance sheet. And number two, we really have pivoted over the last several years and repositioned our balance sheet to be more of a compounder of capital and less one that's going to generate a lot of annual cash yield at least in the near term.

So we talked about what you have. Let's talk for a second about what you don't have. So what do you view as the main product or geographic gaps in your business today? And how could you look to fill that?

Sure. So I think, you're going to hear us say this a lot, Craig, but we don't want to be all things to all people. Our goal really is to be a top 3 player in everything we're in or have conviction that will become a top 3 player in everything that we do. And we don't look at our mix today and say, we've got big gaping holes at all. Really, what we're focused on is ensuring that we're scaling what we have today. We've got a large opportunity across the firm in all the products we're in today, including our most mature products in private equity. We're focused on continuing building out adjacent product sets. We've got a lot of success doing this over the last 5 to 7 years, leveraging our existing expertise, our existing capabilities to launch new products. I think, an area of investment you're likely to see from us, continue to see from us is in distribution and marketing at KKR. I think, we've made a lot of strides over the last several years on expanding what we do, but we still think we're really early innings. And if you look at our investment track record, you look at the people that we have at the firm and you look at our brand and our culture, we think we're underpenetrated from a client distribution perspective. So we're going to be investing a lot there in the future. And going forward, I think, the other thing you could hopefully see us be able to continue to do, some smart M&A trades to generate increased inorganic growth. But we don't look at ourselves today and say, we've got gaping holes, we've got to go fill or areas that require really substantial investment from an asset management footprint perspective. And I really do think it's that focus and that lens that's driven the really great execution we've had over the last few years.

So let's pivot into insurance now. So arguably, the most exciting thing that happened at KKR last year was the Global Atlantic transaction. And it actually just closed this quarter. And it's really a game changer for KKR because it opens up a whole new avenue for growth. So we wanted to see if you could talk about the growth opportunity that Global Atlantic provides in the insurance portfolio.

Sure. I'll start with how excited we are to be partnered with Allan Levine and the whole Global Atlantic management team. We think it's just a first-rate management team. We're working so well together already, and a great platform to really invest off of. Maybe to answer your question about where we think growth is going to come from Global Atlantic. It would be helpful to take a step back and look at their business profile today. Global Atlantic is largely a fixed annuity and life insurance provider. And they get that exposure in 2 ways, predominantly. First is through selling through retail channels, and they've got 200-plus bank and broker-dealer distribution relationships that they are able to access to be able to sell their products. These are long-standing relationships, and we think, create a real differentiated ability to distribute products. That would be number one. Number two is through their institutional channel. And to simplify what that part of the business is, it's really about getting the same type of exposures for the Global Atlantic balance sheet, but doing that in partnership with other institutions, largely insurance and reinsurance companies. And that's been a great avenue of growth for Global Atlantic. Especially more recently. As you know, they completed 3 block reinsurance transactions in the back half of 2020. That added about $16 billion of AUM. Where we see growth coming from collectively with the GA team, I think it's a lot around what drove both of us to want to be able to do this type of a transaction together. We see a huge opportunity to complement the existing Global Atlantic investment team with KKR's investment team. And we really think we can help them source and originate unique investment product that will generate additional outflow and yield, and ultimately, ROE for the benefit of all stakeholders of GA. And the second really interesting reason why we think this combination can be compelling in the future is if you look at Global Atlantic, they've grown themselves, over the last 1.5 decades, into a $5 billion book value business. They've really done that over their history without going out and raising any additional primary equity. And so as we think about growing together, especially the growth avenues that we think exist in the institutional channel of the GA business, we really do think KKR is unique access to capital, should help them deliver additional growth opportunities that they really haven't seized on much in their -- since their founding 15 years ago. I think, the last area of joint opportunity between both firms, I think, you get 2 really good creative management teams together that both come from slightly different worlds in some respects, in slightly similar worlds in other respects, we think a lot of good things will come from that. And we're already seeing the fruits of that and how the teams have been working together over the last 7 or 8 months since we announced the deal in July.

So sticking with Global Atlantic for a minute, but turning to the financial side. What are the -- what's the financial profile implications of Global Atlantic because KKR owns roughly 60% of the business.

So I'll simplify it. I think, there's really 2 levels of -- that investors should think about as it relates to the economic impact that Global Atlantic will have on KKR. The first is, we are Global Atlantic's investment manager across their entire balance sheet. By virtue of that relationship, and we think products that we'll be able to manage for them directly, we announced at the time we acquired GA, last July, that we thought a couple of years out, we should be generating around $200 million of annual management fees from that relationship. Now Global Atlantic's asset footprint has increased by approximately 25% over the last 7 or 8 months, assets a little over $70 billion, are going to a little over $90 billion or so, give or take. And that's just given us that much more confidence that we should be able to achieve or outachieve that $200 million target that we set out several months back. And the second component of earnings that we would expect to be able to generate from GA relates to our ownership percentage. And so, just to look at some quick math, if GA's book value is roughly $5 billion and we're able to generate roughly a 12% to 13% ROE, you take our 60% ownership stake of that, that will yield about $360 million to $390 million of incremental profitability that will flow through to KKR. If you add the $200-plus million of management fee revenue that we expect to be able to achieve over a couple of year period of time that we think has got a really high flow-through to profitability and you add that to the incremental operating earnings by virtue of our ownership, you can see a very clear path in the near-term, Craig, of generating $500-plus million of incremental profitability by virtue of this partnership. Now let's compare that $500-plus million number to our $3 billion-or-so purchase price for a 60% stake. We think, in that respect, it's quite an attractive return. But I think, probably the more important measure that our investors should think about is we only raised $1.15 billion of equity to get this deal done. And so the $500-plus million of what we see as incremental profitability coming from this transaction in the relative near-term compared to that, just north of $1 billion of equity is obviously a really attractive return for our shareholders.

So I think we've exhausted insurance. So let's move over to fundraising. So -- and this might be the strongest point to the KKR story right now, but you have arguably the most robust fundraising outlook in the sector right now, especially on -- over the next few quarters. So I was wondering if you could walk us through the very large raises planned for 2021.

Sure. It is, as you noted, an area of significant momentum right now. Last year, we raised $44 billion of capital. To put that into perspective for people listening today, that's relative to $29 billion on average that we had in the preceding 5 years. And so a real big step-up in our fundraising just in 2020 alone, and $44 billion was a record number for us. As you noted, we've got 4 large benchmark strategies that are either in the market or will be in the market in the relative short term. Our Asia PE franchise has already closed on $13.5 billion of capital. That's relative to $9 billion in the predecessor funds, so about 50% growth on that franchise so far. Our Americas private equity strategy as well as our global infrastructure strategy currently in the marketplace from a fundraising perspective. And our European PE business is likely to be in the market sometime over the next 12 months or so. And so, we've got a lot of momentum in that part of the business, and we do think that's going to be enhanced by virtue of some of these big benchmark fundraises that we should have out there over the course of the next 12 to 18 months.

So sticking with fundraising, you also have a number of smaller businesses raising too. Can you talk about these relatively newer strategies, and maybe help us quantify what type of capital they can bring to KKR?

Yes. So as you know, we've got over 20 additional strategies at the firm that are raising capital or will be raising capital over the next couple of years. And so, I want to bring you back to something I said earlier on in this conversation. We're not going to be in a business unless we've got conviction that we can be a top 3 player in that business. And so, we expect each one of those '20 strategies to achieve real scale in the future and be a top 3 player or we wouldn't be in those businesses today. Just to try and dimensionalize those strategies, if you look at our private markets business, we've got a lot of activity going across our core strategy. So that's core private equity, I mentioned that earlier, but also core infrastructure and core plus real estate. We think those strategies are highly synergistic with our balance sheet strategy as well as our Capital Markets strategy. Our real estate business is at a real inflection point for KKR right now. We think proforma for Global Atlantic, our AUM in that business stands at about $25 billion. With some additional product extensions and really scaling what we have, we think our real estate business is right at the cusp of generating material profitability to the firm. And then I'd say our growth businesses, also on the private market side of our -- of KKR have a ton of momentum. Right now, investment performance there has been exceptionally good, and we're quite excited about what those businesses broadly can do from a fundraising perspective in the future and an overall investment return for our clients. Turning to the public market side of the business. It's largely our credit business in the private -- in the public market side of our business. Proforma for GA, that business is about $155 billion of AUM right now. We've got a ton of momentum there clearly. And just speaking with the team over the last number of days, I know they're quite excited about potential raises in both leverage credit, liquid credit as well as the private credit spectrum of the market.