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

Hi, good afternoon, everyone. I am Patrick Davitt, the U.S. asset manager analyst here at Autonomous. Our next presentation is from KKR's President and COO, Scott Nuttall, who's worked his way up through the ranks at KKR, I think, from the very beginning of his career and has now largely seen as the likely CEO of the business. As a reminder, if you have any questions for Scott, we're using Pigeonhole. You should see a live Q&A tab on the right side of your screen. So before we get into the chat, Scott, I know you have some quick intro comments, and we'll start off with that.

Great. Thank you, Patrick, and thanks for having me back again this year. Great to be with you. Hello, everybody. Thanks for joining. And with my partner, Joe Bae, I'm Co-President, Co-COO. What we thought we would do is just share with you quickly, before Patrick and I got into some Q&A, a little bit at a high level what we're seeing from our seats and a little bit of the story from our standpoints. So we'll quickly move through these slides, which should be posted by now, but there's a few main messages I wanted to at least start out with as we set the stage for the Q&A. The first is, as you can see on the slide here, we are very fortunate. We are actually in a secularly growing industry. And if you flip the slide, Alec, you can see what we're talking about. This shows you the growth in the amount of capital raised in private capital by asset class over the last several years. And you can see it's a little bit of a dip in 2020, but we've seen really attractive growth across asset classes, a 14% CAGR, and this is amount raised per year. And if you flip the slide, you can see what that means in terms of the industry growth itself. So you can see it's now a $14 trillion industry expected to grow meaningfully from here, but it's been growing at a double-digit clip. And if you look at the right-hand side, and this is something that I'll hit on, that there's a lot of businesses and parts to alternatives that are now quite large markets in and of themselves. It's not just private equity or hedge funds. You can see a number of these other asset classes are quite significant. So if you flip the slide, Alec, the allocations to alternatives continues to grow. This just gives you a sense from pension funds, what their average asset allocation to alternatives has been, broken down across the different elements of alts. And if you flip again, you can see what's expected to happen from here. So this is a survey of investors as to what they expect to do between now and 2025, and you can see a significant percentage are expected to increase or significantly increase their exposure to alternatives. So we've seen a lot of growth in allocations, and that growth is expected to grow from here. So we're very fortunate that we sit in this industry that's growing quite quickly and is expected to continue to. So if we go to the next slide, a little bit about KKR. If we pivot, we're actually growing faster than that fast-growing industry. So the next slide gives you a sense for it. So left-hand side, again, that 11% CAGR, right-hand side is KKR. So you can see we've been growing at basically double the industry growth rate. In fairness, if you take out our acquisition of Global Atlantic, which is the insurance company we acquired last year, you can see it's still a 19% CAGR. So we're growing faster than the industry itself. The reason for that is investment performance and a lot of other things, but it really begins with investment performance. In our industry, if you've got a good fundraising environment and a good performance, good things happen. And this is something that we talk about every quarter on our calls, in every investor meeting that we're in is what we've been seeing. This is, inception to date, performance across our key carrying bearing funds, which are more lucrative funds that we manage, and you can see there the rates of return have been quite attractive. The next thing I want to just pivot to is where we are as a firm. We are a bit different in that we started a number of the businesses that we are in really right around or right after the financial crisis. And in our business, it takes 10-plus years to really start to achieve scale. You've got to be around Fund III before you start to see significant scale in asset classes. And so what we've really been the beneficiary of, especially recently, is a number of the businesses that we began in the 2010 to 2013 time frame really getting to that 10-plus year inflection point. So if you flip the slide, you can see we have lots of different ways to grow. The traditional successor funds, Asia III was $9 billion, goes to Asia IV at $15 billion. We've also got lots of ways to create adjacencies. Private equity creates health care growth and tech growth and impact in core PE. Basically, what we're finding across a number of our investing activities, we're finding adjacencies with a slightly different risk/reward, but is creating new asset classes or sub-asset classes, big opportunity for us. Next is we're quite global. We have half of our investment people outside the United States, and so geographic expansion is a big opportunity. We've been taking a number of our businesses to Europe and then to Asia, in particular, Asia the last few years. And then you can see just real expansion of platforms. Opportunistic U.S. real estate is how we started. We now have 9 different real estate strategies. We're global, we're debt, we're equity and we're core plus. And it's not just on the investing front where we see we can grow a lot. Distribution is the case as well. We were bit of a late bloomer on distribution. We've been investing a lot in our sales teams around the world. You can see we're now got a global team, institutional focus, insurance, retail and so much more of a solutions-oriented approach, not just selling a fund, but trying to create a broader relationship. Capital markets is a business that's different for us. It's something that we created in 2006. This is a large-scale business where we syndicate our own equity and debt capital to third parties, and we also do that now for third parties, and that business has also grown dramatically, and then most recently, the acquisition of the Global Atlantic, which gives us lots of other ways to grow and win. So from our seats, we've kind of been working away for the last 10-plus years to get ourselves in a position to now have all these different ways to grow, which are now right in front of us. If you could flip the slide. And what we've decided we want to do is only be in businesses -- we have a very simple strategy, only be in businesses where we think we can be top 3 in the world. We either want to be there now or we want a clear path to get there. And because of the relative youth of some of our businesses, that path ahead is incredibly exciting. And you can see on some of these businesses on the slide, real estate, what we're doing here is we're comparing ourselves to the market leader, infrastructure, et cetera. We think even in businesses where we have scale, like in credit, we can double again from here. So big opportunity for growth across everything that we're seeing. And to the visibility point, and this is something I'm sure Patrick and I will get into, we have been very active raising capital. You can see 2020 over 2019, our fundraising was up 72%, but we have even more in front of us than what happened last year. So we have a lot of visibility on near-term fundraising. You can see the right-hand side of the slide is 20-plus different strategies. There's high visibility to a lot of capital being raised, and we just so happen to be out in the market at the time. We've got investment performance that I can't recall of ever being any better and a fundraising environment that I've never seen this good either. And so we've got lots of visibility and confidence. We just need to go execute. Flip the slide. The result of all this is management fees have been growing. This is a slide we shared for the first time, actually, at our Investor Day in April. It just kind of shows our management fee profile as our businesses have been scaling and what it looks like. And you can see the growth of a lot of the nonprivate equity parts of the business, in particular. And if you flip the slide again, we put on here 2021 and 2022, kind of our general expectation as to what's going to happen. So you can see up into the right at a more significant slope is kind of the expectation given the fundraising calendar we have in front of us and all the recent fundraising that we completed. I mentioned our capital markets franchise. This is something that is a bit different for us. This is a business that we created really on the back of the observation that we were sourcing opportunities that were bigger than we could responsibly hold on our own funds. And so we started a business where we could syndicate excess equity and debt to third parties and retain some economics on that. And also allowed us to build closer relationships with investors because they wanted to get that co-invest call. And so you can see how the business has grown. I won't take you through the slide. The numbers are there. Significant business for us now, roughly $500 million business the last few years on average. And you can see lots of ways to grow that as well as that business grows around the world and grows with the rest of the firm. This is another growth area for us, not just on the investing side, but capital markets as well. And capital markets just grows with our deployment, and you can see the way the slide is laid out is pretty straightforward. Top of the slide is our capital deployment across the firm. Bottom of the slide is our capital markets transaction fees. So as KKR grows, our capital markets fees tend to grow as well. The other thing, and these are a couple of new slides, Patrick, we have not shared in the past, is we wanted to just lay out it for everybody just quickly why we've got such visibility on not only fees and such excitement about our capital markets fees from here as well, but it's not just management and transaction fees. It's also carry. And so what this shows you is our firm deployment. You can see from 2010 to '14 about an 8% CAGR, and then you can see what's happened since 2015. We've kind of grown from kind of $8 billion to $10 billion of deployment in a year to last year; the last 12 months, a little over $30 billion of deployment. So a 31% CAGR. And if you flip the slide, there's a pretty tried and true aspect of our business. About 70% of the carry that we generated in the last 2 years were from investments made 4 to 6 years prior to the last couple of years. This is a lag, right? You make the investment. You need to work the investments in the ground. And then it tends to get realized 4 to 6 years later. And if you flip the slide, Alec, you can get a sense from what I'm talking about. Those yellow bars are going to drive our future carry. So as we talk about our expectation that we're going to be at $4 to $5 per share in TDE in '23 to '24, this is a contributing factor. Those dollars are in the ground now and will generate carry in future years. And then the other piece of it, just another way to look at this, is that where we have embedded latent earnings power as a firm. And so you can see the bars here actually show our realized carried interest and our realized investment income on our balance sheet. And the line shows our unrealized carried interest and the embedded gains on our balance sheet. You can see how wide the gap is. We now have over $12 billion of unrealized carried interest and embedded gains, highest it's ever been. Those numbers are not in our earnings yet. They are to be realized. And as we're monetizing investments in the future, that will start to show up. So if you could -- if you step back, what I'm painting the picture of is very straightforward. We see a big path to management fee growth, path to transaction fee growth through capital markets, path to carry growth because of all the deployment and the nice investment performance we've had. And then also, as a result of all the embedded and latent earnings power that we have, real path, we believe, over time, to overall growth in the balance sheet earnings as well. And so you put all that together, this is -- this chart shows you our book value per share. We changed our dividend policy to have more compounding starting in 2016, and you can see what's happened with our book value per share growth since then. And so we expect to continue to compound the balance sheet, along with all the other aspects of our business model. And then you add on top of that Global Atlantic. So last summer, we announced the acquisition of GA, which is a life and annuity company. We'll talk about this in Q&A, I'm sure, so I'll be brief. But in effect, Global Atlantic further scales everything I've just talked about, gets us to top 3 faster in a bunch of our different asset classes. We are the asset manager for Global Atlantic's now $98-plus billion balance sheet, and so it adds significantly to our AUM and fee paying AUM. And it is highly accretive to a bunch of our metrics. And so we'll get into this, but this is another element that creates another way for us to grow and win. And the punchline of all of this, I think, is really this last slide that I want to kind of hit on, which, if you could flip it, Alec, thank you, is really, earlier this year, we've shared 2 pieces of guidance. One is that we expect fee-related earnings next year to be over $2 per share. And we expect our after-tax distributable earnings to be $4 to $5 per share in the '23 to '24 time frame. To put that $4 to $5 in context, that was a bit over $2 last year. So we see significant earnings growth ahead. So Patrick, unless there's anything else you'd like me to hit before we get into it, happy to launch into Q&A.

No. That's great. Thank you, Scott. And obviously, some very punchy growth numbers you guys have been putting out there.

One thing I hear a lot from investors is how confident are you that these are kind of baseline aspirations or baseline for growth for you. Do you think there's a lot of room to overshoot these guides as you look through kind of all the things that are coming through the pipe?

It's a good question, Patrick. As you know, because we've been working together a long time, we've been public since 2009. And so I think if you look back, you'll find that we have not given out guidance like this in the past. And I think this ability to provide all of our partners as shareholders with this visibility has been kind of hard-earned as we've been building all these businesses the last decade plus. But I think the punchline is we do feel confident that we can achieve these numbers. Otherwise, we wouldn't have shared them. I think the consensus is already drifting a bit ahead of this in terms of fee-related earnings. And to be clear, we said to everybody, we thought we could comfortably exceed $2 per share in FRE next year. I think the consensus is now close to $2.20, give or take. And then TDE seems to be lagging a little bit. It's a little bit further behind. I think we said $4 to $5 in '23 to '24. The '23 numbers are a bit below $4. So I think it's -- the market is starting to understand what we're talking about. And hopefully, the visibility and confidence we have is starting to be shared by others. So I don't have an update on guidance for you today, but the punchline answer to your question is, yes, we're confident.

Great. In that vein, a lot of investors I talked to like to suggest that private equity is a mature business. Even some of your competitors have suggested private equity is a mature business. But it seems like -- I mean, obviously, you have a lot of things that build up to this $2 per share, but it still seems like you're suggesting private equity as a growth business for you. So what are the building blocks on KKR's view that private equity really still is a growth business for you and the industry, at least?

Yes. Well, look, if you think back to the slides I just went through, I don't know a lot of industries that are growing industry-wide at the rate at double-digit CAGRs over significant periods of time on trillions of dollars. So that's your kind of starting point. And within that, private equity is still growing at a very attractive rate. It's -- for us, it's about $113 billion of our AUM is in private equity, and we are still seeing significant scaling opportunities, to be clear. And that's really in 3 major buckets. There's the flagship funds, right, which is what everybody talks about and tends to get the headlines, and those are 3 regional funds. We do this a bit different. We raised regional vehicles. It allows us to raise more aggregate capital, frankly. And you got -- you can diversify your vintage risk, you can diversify your carry risk. And so I do agree with you, there's -- it's a misconception this is a low growth space. Just to put it in context. Our Asia -- last Asia Fund was $9 billion. The one we just raised is $15 billion. We're in the market right now with the successor to America's PE Fund, the last one was [ $13.5 billion ]. We're coming with Europe. We're seeing real momentum even in the flagship funds that we've been raising for, in some cases, decades, but that's just part one. So we see growth there. We're also seeing opportunities to create new strategies like core, and just -- this is not something we talk about a lot, but our core strategy is now about $14 billion of AUM, and it's on its first iteration. And so this is buying companies that we want to hold for a longer period of time, great companies, lower risk, slightly lower reward, but that is also another growth element in private equity that we see significant upside going forward. And then the third piece is growth. We started a growth platform. We now have growth tech, health care growth and impact. Those are all 3 young strategies already at $8 billion of AUM, all raising successor funds or just raised successor funds. So the combination of those 3 kind of flagship core growth, we think there's lots of growth ahead for our private equity franchise. So we're looking forward to keeping everybody updated. And if you go back to that fundraising slide I put up and all the funds coming to market, you'll see a lot of those funds fit into this category.

Right. Okay. That's helpful. I guess the other kind of new leg to the growth stool, at least since we talked last year, is obviously the Global Atlantic deal, which you touched on briefly. You already really had about a larger balance sheet relative to your comps and a balance sheet compounding model, so it's not as big a change for you as it might have been for some of your competitors. But I'd love to get your thoughts around why KKR believes this even more balance sheet heavy approach of actually owning the insurance assets outright is the right model against other large alternative firms saying the opposite.

Yes. Look, I think to us, it really starts with the model that we've created, right? So our business model, you're right, is a bit different. We've really kind of married the compounding of our own capital that's invested alongside our third-party investors. And our basic view on this, Patrick, is that we want to double our market cap again, right? That's the job. So we've got to go create another $45 billion to $50 billion market cap. We believe that we can do that faster with the combination of compounding our own capital alongside the people that we're working to. And so that's been the model that we've created. It's worked quite nicely for us. And so the GA investment really just fits into that model. We like the balance sheet investment. We own a bit over 60%. So we don't own 100% of the insurer. We've got a great partnership with a really talented management team, and we're the investment manager, and they run the insurance company. We own about 60% of that insurance company. And for us, it's about a $3 billion investment on our balance sheet. Now to put that into context, our market cap is somewhere between $45 billion and $50 billion. So it's pretty small in the grand scheme of KKR, but that's an attractive, we think, low to mid-teens returning investment in and of itself, that $3 billion investment, much like the rest of the KKR balance sheet, frankly. It's just going to compound quite nicely. Then on top of that low to mid-teens return we can make through the book value compounding of GA, we also are the asset managers so we get management fee and we get carry. When you combine the 2, you get to a very attractive overall returns on capital on an unlevered basis, which is, really, if you think about our overall model, the same way we think about KKR as a whole. If the balance sheet can compound at an attractive rate, and we get fee and carry on hundreds of billions of third-party capital, you very quickly get to a 20% to 30% ROE without leverage. It's the same idea. So that's how we thought about KKR, and that's why this was a very natural and very, frankly, us way to invest in the insurance space. So we're just looking at it the same way we look at everything else that we do.

Okay. And the other side of that is obviously feeding the beast, so to speak. And a lot of your competitors have built extensive asset origination capabilities to service these kind of assets. To what extent is KKR already equipped to take on the GA book? Or do you think there's a lot more building than you've got to service those assets?

It's a really good question. I'd say we're largely equipped, and it gives us an opportunity to build even more and faster. So as I mentioned a little bit in the opening remarks, GA really scales us meaningfully in a number of places; in particular, real estate credit and corporate credit adds even more assets. And we have a lot of capabilities there already. We were already a large player in both of those spaces. We're just a larger player now. So a lot of this is leveraging what we were already doing, but we're also -- to be clear, we're adding originators, so that we can originate even more for Global Atlantic's appetite, and so it's a little bit of both. So real estate credit, we've added some teams, and we're doing more than we ever have. In private credit, I mentioned at the Investor Day in detail, we went through kind of the asset-based finance platforms. You're going to see us buying and creating even more of those going forward. So this really gives us an opportunity to accelerate the scaling that we were already pursuing because we have capital in hand to invest. And so a little bit of hiring, and there will be some more acquiring and partnering going forward, but it will be in the context of having a highly accretive third-party partner that's going to be paying us economics along the way.

That's helpful. And that feeds into another kind of buzzword in the industry right now, which is kind of permanent capital. And obviously, GA's insurance assets add a lot of that. But could you also walk through the key drivers of the permanent capital growth strategy away from the insurance side of the business, which I think also feeds into growing the retail side of the business?

Yes. Absolutely. So there's a variety of different aspects to this kind of perpetual capital story. The first is ones we've already talked about. Balance sheet and GA are 2 important elements of that because our -- both of those assets are going to continue to compound and have permanency to them. We also manage third-party perpetual capital vehicles. So as an example, we have a public REIT. Ticker is KREF. We have a public BDC platform, which is the FSK and FSKR vehicles, where we are the third-party manager for those vehicles. We have different closed-end funds around the world that we manage that all have perpetual capital within them and pay us a fee and carry on a permanent basis. And we're looking to further the number of vehicles and to scale the vehicles that we have. So that would be the second building block. The third building block would be the strategic investor partnerships that we've created. They're not quite perpetual, but they tend to have 20- to 30-year lives, and so we put them in a similar category. And think of these as long-term partnerships with investors that give us recycling. And so we can invest their capital. When we monetize it, it gets recommitted to us programmatically. And so that's another aspect of it. And then to your point, we're also creating a number of different vehicles for the retail market that are more open-ended, that have capital that sticks with us for a very long period of time. And that will be across real estate, I'm guessing, infrastructure, certainly credit, even private equity in time. So there's a big opportunity for more perpetual capital there, too.

Great. That's helpful. And I want to get to a couple of macro questions before I get to the Q&A, which we're getting quite a few in the Pigeonhole here. How about we start with what's happened since we sat here this time last year? There's obviously a lot of focus on the stressed aspects of your portfolio then, how it would perform through the crisis. Now that it's pretty clearly feeling like a V-shaped recovery, at least in the U.S., could you quickly update us on how the portfolio performed through the crisis, how you see it positioned today? And any areas of distress or problems you see still working themselves through that you would highlight?

Sure. We've been really pleased. I mean, obviously, it's been incredibly tragic last 15 months. But in terms of how our portfolio has performed, it's been -- it's performed great. And I think the -- for us, a lot of it was, we -- as you know, we've become very thematic over the last several years. We are very thematic heading into COVID and spent a lot of our money, frankly, around tech, digital transformation, a number of themes that frankly have been accelerated as a result of the pandemic. But we knew we were late cycle, and so we were purposely underexposed to energy, retail, hospitality. And so heading into COVID, Patrick, we had a total of 7% of our AUM across those 3 areas. So we were meaningfully underweight in those 3 areas. And so the portfolio, it was tricky to manage, but if you look across asset classes, private equity, infrastructure, real estate credit, we had positioned the whole firm in that general direction. So we had far fewer problems than probably people feared when we got into it. And the second thing, and probably just as powerful, is we had been getting ready for dislocation. I think looking back, GFC, we played too much defense, not enough offense. And so we've been carrying those lessons around for over 10 years. And so this time around, we had the firm position to invest into dislocation, and so we invested a lot of capital last year. It was our most active year ever. So our private markets funds, we -- our deployment last 12 months is up 77%. A lot of folks in our space were flat to down. So it's not only the portfolio did okay because we were positioned reasonably well, we also took the last 12 months as a real opportunity to lean in. And I think the combination of those 2 things is going to continue to serve us really nicely. And in terms of areas where we have concerns, relative to the quantum of the capital we manage and the size of the portfolio, there's nothing I'd call out to you. I think things are pretty well in hand. There's always going to be some things you're worried about and focus on, but nothing that's material in the grand scheme of things.

Great. I'm sure you guys get tired of the inflation rates questions, but I'd say it's still one of the most common discussions I have with investors. So clearly, still top of mind. How do you think KKR is positioned for an inflation and/or rate shock in the coming months or year? And how do you think KKR and the alts were broadly -- or do you think KKR and the alts more broadly are better or worse positioned than other financial services verticals for that kind of environment?

Well, I think we're better positioned than most. I mean, just to give you a sense, we do think that rates are going to -- likely going to tick up a bit. We're not anticipating a big shock. There could be some bouts of volatility, which, frankly, from our sheet, we've got nearly $70 billion of dry powder. So back to the point about volatility can be our friend as long as we're positioned to deploy into that. So there may be -- we're expecting a little bit of noise, a little bit of dislocation here and there. But largely speaking, we're overall expecting rates to tick up a bit, but that to be in the context of really robust economic growth. And we think that combination can work okay. And in terms of your question about how we're positioned, we think we're positioned quite nicely actually on purpose. We've got $165 billion of AUM that we manage in credit that is largely floating rate, right? And actually, some of -- a lot of the vehicles we manage there have fixed hurdles. So as rates go up and our base rate goes up, we actually have a better chance of making more carry. So it's kind of not something that's entirely intuitive, but it happens to be the case. An increasing rate environment is good for Global Atlantic, as an example. So we think that's quite helpful in the grand scheme of things. And as we look at our own debt on our balance sheet, long duration, fixed cost of capital, quite low cost, less than 4% cost of debt, it's fixed. And we've been working to make sure we got the right fixed floating exposure across our portfolio companies. So long way of saying, we got a big liquid balance sheet. We got a lot of capital at the ready to deploy. And to some extent, we hope there's a little bit of dislocation now and then because that means there'll probably be some pretty interesting buying opportunities. But we're not expecting any great shock to the system that's [indiscernible].

Fair enough. I guess, the other side to this kind of macro discussion is the investment opportunity, and perhaps what now looks like could have been a missed investment opportunity given how quickly things have recovered. To what extent do you think that the continued government backstops and Fed liquidity have derailed the scale of the investment opportunities you would have normally had?