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

Good morning. My name is Patrick Davitt. I'm the U.S. asset manager analyst here at Autonomous. And we're excited to have a double header here this morning with the CEOs of KKR and Apollo. As a reminder, we're using Pigeonhole for the audience Q&A. So you can submit questions there, and I'll try to pepper them in from the pad here as we get through. So it's my pleasure to welcome KKR Co-CEO, Joseph Bae to the stage. Thanks for joining us this morning.

Thanks, Patrick. First time here.

So appreciate it. Yes, so given we have most of the major CEOs at this conference, I'm starting all of the discussions with kind of similar high-level questions. so we can compare and contrast easier. So given everything going on in the world and your position as one of the largest owners of assets in the world, I think it's best to start at macro. There's a view that the Fed probably needs to force a recession to tackle persistent inflation. Do you agree with that view? And what's your outlook for inflation rates in the economy from here?

Sure. Well, we obviously have a very large global portfolio. So maybe I could talk about how we think about the macro environment based on what we're seeing in the marketplace. I think this obvious race around inflation is obviously what we all are focused on. It's persistently high. Here in the U.S., I think you got to really bifurcate the inflation numbers. If you really look at what's happening on inflation in the U.S. today, commodity and goods inflation seems to be relatively under control and has moved down meaningfully, right? So goods inflation last quarter was 1.5%, so even below the Fed's 2% target rate today in the U.S., but where it's persistently high is obviously on the services side, where inflation is still running at close to 7% in the U.S. The reason for that, I think, is pretty clear. As supply chains start healing globally as China reopens, you're seeing the good side of it come down faster to a more normalized rate. Services are sticky right now because labor is super, super tight in the U.S. as well as in many other markets in Europe and other places. So we're at a higher inflation rate, and we have some structural things like the energy transition and the massive investments going on there, which is fundamentally can be inflationary to the economy. So to get inflation down to closer to the Fed's target rate, rates are going to be high persistently long because inflation will be high persistency longer. And ultimately, what that's going to do globally and certainly here in the U.S., it's going to put pressure on growth rates -- this fundamental economic growth rates. So I don't disagree with you that there's going to be a mild recession. I think our view for 2023 is the U.S. economy is going to model along. For most of this year, we're going to see probably modest GDP growth and probably dip into a mild recession in the fourth quarter of this year and early in 2024. But I think the curve of this recession is going to be very different than many others, not like the 2008 recession we saw in the U.S. This is going to look and feel, we think, much more like the 2001 recession, where in that recession, you saw unemployment rates go up by 200 basis points. It was relatively shallow. And I think we're going to see something more similar to that arc in this mild downturn in the United States. And the reason we feel that way, I think, is one of our biggest issues here is there are too many open jobs. Right? It's hard for an economy to get in that much trouble when one of your biggest problems is there's too many job openings that need to be filled. So unemployment will definitely increase during this downturn, probably go up 150, 200 basis points through that recession, but I wouldn't be surprised if, on a full calendar year 2023 basis, we actually see modest GDP growth in the U.S. and the recession starts hitting us in the fourth quarter and going into 2024. The metric we are looking at very closely in the U.S. is really credit tightening. What's happening in the banking system today with the regional banks, a lot of these banks are obviously sitting on meaningful unrealized losses that they need to work through over time. So the bar is set pretty high today in terms of new lending, especially at the regional banks and the smaller community banks. You layer on top of that heightened regulation for the sector. Cost of funds for these banks have obviously gone up with interest rates going up. And that's going to put a pretty tight credit environment for small and medium-sized businesses in particular. And those businesses obviously employ 70% of all workers in the United States, small and medium-sized companies. So as business sentiment in that sector, access to capital in that sector, continues to be tight or negative, I think you're going to see a headwind in terms of real fundamental GDP growth. When you leave the United States, again, in Europe, they haven't seen the same deflation in goods. Their goods inflation is still running at 7%, 8% today, Europe, right? So the difference there -- are real differences in these economies, inflation is higher in Europe today, particularly in goods, but they also haven't raised rates as rapidly as we have here in the United States, right? So they have probably more tightening on a relative basis to do with the ECB and what the Fed needs to do here. We think we could see a small increase in rates in the States in the middle of this year, probably coming down 25 basis points by the end of the year and then coming down even further, maybe 75 basis points by the end of 2024, assuming there's a mild recession in the United States.

Makes sense. So is there anything kind of real time in your portfolios given the breadth of assets you hold that are showing any signs of construction or stress emerging, particularly in the U.S.?

Yes. I would say, on an overall basis, we have over 100 portfolio companies globally in our PE part of our business today. I think we're seeing some of the similar trends that we've been talking about. On a year-over-year basis, our portfolio has actually been quite resilient globally, particularly here in the United States. We've seen revenue growth year-over-year in the low double digits across our portfolio. So there has been pricing power. We're in sectors and thematics that have real secular growth behind them. But what we have seen is some margin pressure in the portfolio, right? Our EBITDA growth year-over-year is probably low single to mid-single-digit EBITDA growth across the portfolio versus low double-digit revenue growth. So we're starting to feel that bite of inflation and margin pressure. And I think this is probably where we're a little bit off consensus in terms of earnings. S&P consensus, I think, is flat earnings for the year in 2023. Given the trends we're seeing in terms of margins and inflation, we think S&P earnings are probably going to be down 5% to 10%. So we have a slightly more negative view on that.

Interesting. Okay. So more broadly, there's still a view in the marketplace, I think, that alts and PE specifically are among the most negatively exposed verticals to everything we're talking about higher rates, slower economy, recession. So do you think they're missing something? And why do you think the industry and/or KKR more specifically can outperform that view?

Yes. Listen, I think if the very simplistic view people is you buy a company, you put a lot of leverage on it and you pray for multiple expansion. If that was really our business model, I think what you're saying is absolutely something to be worried about. It's obviously not what private equity does, and it's certainly not what KKR does. I think our ability over 5 decades to generate alpha and superior returns is fundamentally driven by our ability to improve companies when we buy them, right? We are not passive owners of businesses. We buy businesses, we target businesses that we think either have superior growth potential in terms of the sectors they're in and their competitive positioning or we invest in companies that we think there's meaningful operational improvement in those businesses, some margin expansion, productivity, cost reduction opportunities. And that's really where most of our alpha is generating, right? Our ability to be controlled shareholders, active owners of businesses to drive fundamental change. We have a team of operational specialists called Capstone. It's 100 people inside our firm. All they do is work with our portfolio companies every day to drive operational improvement in their businesses. I think the second thing, if you look over time and the reason to be more optimistic, I think, about private equity in this moment, when there are dislocations, when valuations contract, those are the best buying opportunities ultimately for private equity. You're buying assets, really good assets at lower prices, right? So our vintage returns are always better in these periods of downturns where we can deploy capital when the market is low. And then I would say, in terms of the last several years, if you had looked at the vast majority of our investment committee deck, I think we all know that there was a period of heightened valuations and in those periods, you have to be cautious on what you buy because prices are very high. You have to be very, very disciplined in terms of how you're going to create value in those companies. And importantly, you have to have realistic assumptions around exit that's on the back end, 4, 5, 6 years in a more normalized interest rate environment. And I think our industry is getting better and better at that. We think we're pretty disciplined at that. And the thematic bet that we make across different sectors is very different than the broad public market. Our portfolio is not constructed like the S&P 500 or the Russell 2000. We're looking at sectors and themes that we really do think have meaningfully higher growth rates, so you think about software, you think about automation, you think about workforce retraining, those are the big sectors where we're leaning in and which we think will have a very resilient growth through the cycle.

Excellent. So I hate to go there, but KKR has had some of the more high-profile problem positions in the press recently. So do you think there could be more of those in the mix? Or do you think they're fairly idiosyncratic and concentrated?

Listen, I think any investor or asset owner with a very large global portfolio is going to have a handful of issues. I think they're very idiosyncratic to the sector and to the company. And the way we think about it is, I gave you the broader metrics in terms of our portfolio company performance operationally, right? It's in very, very good shape. If you look at our recent flagship funds in private equity, where some of these issues you're talking about, people focus sometimes on the problem children of it and don't always focus on the winners in that portfolio. But if you look at our U.S., European and Asian flagship private equity funds that are currently invested, the returns there from the inception of those funds is north of 20%. Right? So on a portfolio basis, clearly, there are going to be a small number of problems. We've gone through COVID, we've gone through a massive increase in interest rates, but the fundamental portfolio is in very, very good shape.

Makes sense. [indiscernible] with the private credit obviously, the topic du jour for most people, it's been a huge growth driver for you. I think other alts as well. But there's still a view in the marketplace that this is where all the credit risk is hiding. So what about those portfolios do you think the market is missing? And if private credit is not where the problems are emerging in credit, where do you think we should be looking?

Yes. I would say a couple of things. So for us, credit has been an incredibly strong area of growth for KKR. Just to put it in context, we manage around $500 billion of AUM today. $200 billion of that is in our credit platforms. And if you break that down within the $200 billion, we have around $110 billion in leveraged credit and $85 billion in what you would consider private credit or alternative credit right? And one of the fastest-growing parts of that is direct lending, right? So the big picture, again, is the issue in the world is not that there's too much credit, right? The opportunity in the world is that there's not enough credit available because the banks are pulling back. They're being more conservative. The debt capital markets are largely shut in many places for traditional bond financing. So firms like ourselves and others are able to meaningfully grow our credit businesses by being a source of capital when there's a fundamental mismatch in the supply and demand of credit in the marketplace today. That's not to say that we don't expect credit losses to increase. They've been at historically low levels during this very benign period of zero interest rates. That's clearly going to tick up across the market, not just private credit, but in public credit, public bonds as well. So we're all thinking that's going to happen. What gives us comfort in terms of our private and direct lending book is a couple of things. If you look at our most recent direct lending fund, 100% of those loans are senior secured first thing, right? So they're very, very safe in the capital structure. If you look at across our private credit book, our average position sizing is 1%, so we have massive diversification within those credit pools. And I would say the third really important thing, the distinction is where we participate in this marketplace is we're financing larger mid-size companies. Businesses with $150 million to $200 million of EBITDA on average. These are stronger companies, more diversified customer bases, stronger business models versus a lot of participants in this marketplace that are focused on the lower end of the market, companies with $10 million, $15 million, $20 million, $25 million of EBITDA. Those are very, very different credit risks, we think much more susceptible to potential pickups over time.

Makes sense. So a big pitch for private....

One other thing I'd just say, I mean we're talking about the existing portfolios I think probably what you've heard from others, and we certainly share this view, is that this is an incredibly good time to have dry powder to deploy within private credit and direct lending, right? Rates are up meaningfully, right? 3 months SOFR at 450 to 500 versus a year ago. You have a better economic terms in terms of upfront fees for sure. You have better creditor protections in terms of covenants and make holes, so a new direct lending deal today is getting done at 12%, 12.5% expected return fee on a first lien secured basis. That's a pretty spectacular risk return profile.

Sure. And any view on where there could be some problems emerging in credit? Or do you think we're just looking in the wrong place?

Well, listen, I think a lot of it has to do with where we see some of the macro pressures, right? Businesses in the service sector that are very, very dependent on labor are going to feel a much greater pinch in terms of margins and trying to work through this incredible wage inflation that we've seen in the economy that's going to be with us for a while. More commoditized businesses without any real pricing power are going to face more margin pressure. I think that's where you're going to start seeing the credit issues emerge.

Got it. Excellent. So a big pitch, if we were talking a year ago for private credit was obviously that it's floating rate, and that's exposure you want through the Fed hiking cycle. So how should we think about the attractiveness of the asset class, given it's such a big part of your growth math now in a world where the Fed could start cutting?

Yes. I think the biggest question is, again, the role that private credit plays, right? It's a provider of capital when other pools of capital are pulling back, the traditional banks, the capital markets where credit is constrained, right? The risk is not if the Fed cuts rates 150 basis points, right? Certainly, the pricing of our private credit may come down a little bit to reflect the rates, but the relative spread to the risk-free rate will still be meaningfully attractive. If you're making 10% to 10.5% and the Fed's interest rates are 200 basis points lower than where they are today, that's still a really interesting risk reward relative to the risk-free rate. I think what could -- would slow the private credit markets is if you saw the banks come back in a meaningful way in terms of lending or if you saw the capital markets reopen in a very dramatic way in terms of the bond market. I don't think anyone is predicting either of those things to happen in the near term.

And I imagine in that scenario, there's probably a lot more deal activity happening?

Yes, I think......

So more recently, a consistent message coming out of the 1Q earnings call, I think, from almost every manager was the big incremental opportunity from the recent bank failures will be asset-backed finance. So as banks look to push these assets to better homes, like insurance balance sheet, I would imagine KKR is pretty well positioned for that opportunity. So do you have any early anecdotes of wins as a role of this shift and maybe a broader view on the longer-term opportunity from this pitch?

Yes. I mean I think one of the real issues that everyone should be watching is the what's happened with not just regional banks, but banks in the U.S. generally. They're definitely pulling back. There's a meaningful amount of unrealized losses that they need to work through in terms of duration mismatches given where rates have gone. So lending is going to be constrained fundamentally and bank balance sheets are going to shrink in the U.S., we think, in the next 5 years. And what that means are they're going to be significant parts or segments of where traditional banks lend capital historically that needs to be filled by other providers cap. Asset-backed financing is absolutely one of those categories where the banks are probably pulling back more meaningfully than others. And it's been a huge area of growth for our firm. So just to put it in context, we managed today around $33 billion in AUM in the strategy around asset-backed financing. A big part of that growth we've seen in the last several years is our partnership with Global Atlantic, our insurance company. High-grade ABF is a very insurance-friendly product. From a capital charge ratings standpoint, et cetera, they love this product. So Global Atlantic has around $142 billion of AUM. On top of that, we manage around $56 billion of capital for third-party insurance companies. And many of those clients like GA are looking for more and more exposure to the ABF market. So what we have done in the past several years is we've set up 18 different origination and servicing platforms in the ABF space. This is in transportation, it's residential housing, it's consumer finance, really in anticipation for meeting this growing demand from ABF.

And we've heard some reporting on potential kind of bank partnerships from other firms. Is that something you see as an incremental opportunity?

Yes. I think whether you're a third-party insurance company or Global Atlantic and you have the demand for this product, the high-grade ABF or your regional banks or other banks who historically lent to the space and have customers in the space, I think there's a role for firms like ourselves to connect that supply and demand in an asset-class service.

[Operator Instructions]. So moving to CRE, which is the latest bugaboo for investors. It has been for a while, I guess. But as you and your competitors like to point out, all CRE is not created equal. Can you remind us of your real estate mix and how the cash flows are trending in that portfolio?

Absolutely. So just to frame it again within the KKR context, we manage around $65 billion in real estate, out of a total of $500 billion. That split pretty equally between equity investments and credit investments in the real estate space today. So I would say, overall, we're feeling very, very good about our portfolio mix. There are clearly segments in the CRE space that are under a lot more pressure than others. U.S. office being clearly one of those. We have less than 5% exposure to the U.S. office space in our total portfolio. Around 2/3 of our portfolio are clearly in the segments that we think have real resiliency and durability, right? So there are segments like logistics, industrials, student housing, self-storage to name a couple and single multifamily housing. And I think what we're seeing operationally, again, in terms of performance is that despite all the noise in the real estate market, our portfolio with that construction is seeing fundamental organic net operating income growth, right? So profitability is increasing in our portfolio despite all the other noise. And I think that's a big part of it is the mix of what we own and what we have avoided in the past 3 to 5 years. The challenge in this space, obviously, is with interest rates rising by over 500 basis points, cap rates have moved, right? So it's less about the fundamental operating performance, it's much more about the valuation cap rates at this point in the cycle.

Excellent. So through that lens of cap rates, your marks have been a little bit more negative than what we've seen from some of the other managers. So you think you're being more conservative? Or is there something about the mix that might make it more susceptible to the [indiscernible]?

Yes. I think we've observed the same thing. I'm not going to comment on the valuation methodologies of other firms on this stage. But what I'll say is, as I mentioned, the fundamental profitability growth and the NOI increases are strong and stable. So we feel very, very good about the fundamentals, our valuation methodology, we work with an independent third-party agent. It's been very consistent, we think, very prudent. And it really does weighed the current cap rate environment we live in right? So it's more a true mark-to-market on where we are today versus some longer-term just discounted cash flow assumption, which I think some others may be using.

Right. Okay. So on this topic, you have kind of another angle of the CRE exposure with Global Atlantic. So could you frame -- maybe frame the exposure there? And is there any significant CRE equity exposure, which is something I think people are most concerned about.

Yes. Now we feel great about Global Atlantic's positioning here. I mean, as an insurance company, first of all, their entire investment portfolio is extremely conservative, right? 95% of their investment portfolio is NAIC rated 1 or 2 securities, so investment-grade securities. Within their broader portfolio, they have $123 billion of invested assets, total AUM of $142 billion. Our exposure to commercial real estate is less than 3% of their assets. It's around $3.5 billion today. 97% of that exposure is in first lien mortgages. So we're very, very well protected and the LTV for those mortgages are lower, quite frankly, than many of our other portfolios within Global Atlantic. So we think it's very defensive, and we're in a very secure position here.

Makes sense. So let's move to the investment environment. I think investors were disappointed by deployment for the whole group in 1Q. You have a lot of dry powder. Competitors have a lot of dry powder. Deal volumes remain subdued. So how close do you think we are to bid asking it to a level where we see a lot more activity and opportunity for deployment?

Sure. I mean, listen, I think this is not an unexpected outcome, right? When there's dislocation in the capital markets where you see major moves in interest rates like we've seen, and we've seen the instability in the banking market, deal volumes generally slow down for some short period of time. And as you mentioned, I think the real slowdown is more about a mismatch between buyers and sellers in terms of price expectations today. Owners of assets are looking back and saying, I could have gotten this price 2 years ago from my business. Buyers of assets are saying interest rates are higher, there's more volatility, we need to pay a lower price. So we're at this transition right now where buyers and sellers have not gotten on the same page or found common ground in terms of price discovery. That's really what's happening in private equity today. What we're seeing in our pipeline though, I think, is very encouraging. Here in the U.S., I think public to private, it's not just the U.S., I would say globally, I think the public markets have capitulated faster in terms of valuation expectations. So our expectation is you're going to see more public to privates happen in our industry. You're going to see more structured investments pipes into public companies and private companies, maybe full change of control deals will be more challenged. And you're going to see greater carve-out opportunities. As companies come under pressure, as growth rates come down, they will be divesting non core businesses at a faster pace. And we're seeing that pipeline in our own businesses in U.S., Europe and Asia. So we think the back half of this year, hopefully, we'll start seeing a pickup in that activity. I would see -- I think the area where it's unclear how quickly it's going to come back is the sponsor-to-sponsor trade, right? I think sponsors obviously clearly have holding power, and they clearly have expectations of what they are trying to achieve in terms of valuations for their companies. But I think in the public markets, in particular, you're going to see more activity, and that's just private equity right? And that's been slow for the last several quarters for sure, but where you've seen meaningful activity in the marketplace in our deployment and others, infrastructure is probably one of the busiest businesses and moments in time we've seen for a lot of good reasons. There are more privatizations of assets this incredible need for infrastructure investment around the world. And then you layer on top of all that, where we're seeing a climate change and energy transition. So a very, very exciting place to be investing if you have the pools of capital. And it's also an asset class that is defensive, that's yield oriented and has fundamental protection to CPI, right? A lot of those contracts have CPI protections built in. So investors are investing a lot more capital in that space. And then the second area, which we've talked about earlier also is in private credit and direct lending and ABF. That's been a real bright spot.

So you just hit on it, deployment hasn't slowed in infrastructure. And I think that's a big part of the growth opportunity for you and some of your competitors. So maybe talk about the franchise you're building there as well.

Yes. Again, I think infrastructure is one of the more exciting parts of our firm at this moment in time for some of the macro reasons I mentioned. Again, to frame it at KKR, we manage around a little over $50 billion in infrastructure. And when you think about what we have today in our platform, we have a very large global opportunistic infrastructure fund and then we have a large Asia infrastructure fund, both opportunistic. On top of that, we have an open-ended institutional product called [ DSIP ], which is around $8 billion more permanently capital, but that's core infrastructure, more stabilized, yield-oriented strategy. There are two big growth vectors that we're building beyond that. The first is obviously around climate and energy transition. When you think about the scale of investment that needs to take place and the willingness of allocators, institutional allocators, pension funds, cyber wealth funds, governments, to invest behind us right now. That's going to be a really exciting opportunity for us. And the second area, which we'll talk about later, is really more around these democratized vehicles, the private wealth channel, where infrastructure is a very attractive asset class.

So that's a good segue to your strong growth guidance. You've consistently talked about kind of having 30-plus strategies in the market over the next 12 to 18 months and then a longer-term FRE target of $4 a share, so on that topic first, it sounds like kind of looking through the 1Q calls that fundraising difficulties have expanded beyond just fee, so let's start with maybe updating us on how the fundraising conversations with LPs are evolving through the ongoing volatility.

Yes. Well, first of all, let me hit on the guidance we gave out to 2026 for FRE $4 per share. I think our outlook and our conviction remains very, very strong. There's no change in terms of our confidence that we're going to achieve those targets. To your question around the fundraising environment today, I think you really need to look at different asset classes again and some of the dynamics in terms of the cycle of where some of these firms are in fund raising. So for KKR, private equity fundraising is clearly more difficult today than it has been in the past, right? U.S. pension funds, sovereign funds are all feeling this denominator effect. The pace of monetizations across private equity, people haven't been selling a lot of assets in the last couple of years. So less money is coming back to some of these big institutional pockets. So it's creating a slowdown in pressure in traditional private equity fundraising. And these funds for a firm like ours or other private equity funds, you typically raise episodically, a closed-end fund and raise the fund, invest that capital over the next 4 or 5 years, then you go back and raise successor fund. The good news here at KKR is for our private equity flagship funds, we closed and raised those funds previously. We're not in the market with those funds today. We raised those funds in the last couple of years and our flagship funds in private equity U.S., Europe and Asia, are all 50-plus percent bigger than the prior funds. So we've locked in that capital. We have a ton of dry powder and very well positioned. In growth equity, which is a series of health care, technology and impact, similarly, we're actually closing many of those funds right now in a tough environment, but given the performance and track record, those funds are all meaningfully bigger than their prior package, right? So those funds have done great actually in terms of fundraising. I think if you're trying to raise a new fund today, or trying to enter the market with a new fundraising launch right now, it's going to be more challenging. But those flagship funds probably won't be back in the market for another 2 to 3 years. Other asset classes you talked about, I think infrastructure, we talked about there's a lot of institutional interest in infrastructure right now. We've got the largest infrastructure business in Asia in the marketplace. We're top 3 globally in the marketplace and infrastructure. We're going to be launching a successor flagship fund at the end of this year in infrastructure. We talked about climate where this massive investor appetite, we think that's going to be a meaningful opportunity for growth. And in private credit, I think, again, there are a lot of dynamics where insurance companies, other institutional investors are very bullish on the private credit opportunity. So we're seeing real capital formation, fundraising momentum in those areas. I would say where it's been a little more difficult is real estate, right? With this overhang of what's happening in U.S. office, what's going on with cap rates, I think you're seeing less probably bullish momentum in terms of fundraising our real estate right now.

So through that lens, how do you see the cadence of those 30-plus strategies you talked about kind of showing up in reported gross flows this year?

Yes. So I think what's different at KKR at this moment in the fundraising cycle is, again, that our flagships are not in the market, right? And that's a good thing. We raised that capital, we locked at very large pools of capital and private equity and growth over the last 2 to 3 years. So where we are raising capital are in the non-flagship private equity business is right now, infrastructure, credit, real assets. So if you look at the $67 billion of new inflows that we've seen over the last 12 months, 95% of that capital was away from our traditional private equity funds, right? And I think that's likely what you're going to see going forward for the next 12, 18 months because we don't have the flagship PE funds coming back to market. We'll be raising more capital about infrastructure, real estate and private credit for the most part.

So last point on fundraising is private wealth, which is obviously top of mind for everyone in your group, but there's been a lot of noise in the marketplace this year. So firstly, do you sense any change in demand conversations from your distribution partners in particular?

Yes. I would say I think all of our distribution partners understand that this is a massive opportunity, not just for them, but for players in the off space. And again, to just frame the big picture, the amount of assets that sit within the private wealth channel is larger, meaningfully larger than what sits in the pension fund channel, insurance channel or [indiscernible] wealth channel, right? $180-plus trillion of wealth sitting in the hands of individuals and households. Today, alternatives broadly defined, are only 1% penetrated in that channel. I think the consensus view, we certainly believe this to be true, is that in the next 5-plus years, that 1% is going to grow meaningfully in terms of penetration. If you assume it gets to 5%, let's say, in the next decade of a $200 trillion pool of assets from 1% to 5%, you're talking about $9 billion to $10 trillion of AUM, migrating from individual investors, private wealth investors into the alternative space. So we feel like this is one of the most exciting long-term opportunities for our industry and for KKR in particular. And I say KKR particular, because to be successful in this space, you just can't show up and say, "I want to raise money from one of these wire-houses" You need a long-term track record. You need a recognizable brand that households and individuals know and trust. You need to have the distribution capability, the sales force, you need to be able to design the product that makes sense for a retail investor versus an institutional investor. And that all takes a lot of time and effort, and it's only the biggest players, we think, in the industry that are really going to be capital -- able to capitalize on it at scale.

So this fits with a question from the audience. Just firstly, how have your products been -- the current products in the market could you frame what you have in the market, how they've been tracking through this recent volatility and then looking forward, how does the new product and distributor launch calendar look this year?

Yes. So we are at the very front end of it. We have 1 product that's been in the market now for several quarters. That's KREST, which is our real estate product. That's performed very well. It was up 8% last year. That's a 5% cash yield and doing fine in the marketplace. What we've been doing in the first half of this year is really positioning 2 other major products. It's our democratized private equity product and it's sort of democratized infrastructure product. and we're at the very front end of that. So we've launched our PE product internationally just last quarter -- this quarter. And in the first month closing, we've raised a little over $400 million, which we think is a very exciting milestone and data point. That will be in our second quarter fundraising numbers. So we're going to build on that. We're going to launch our private equity to [indiscernible] product in the United States in the second quarter. And again, infrastructure comes right behind that. We'll have an international version for infrastructure and then a platform for U.S. investors in infrastructure.

So it sounds like distributors are still very much asking for this regardless of the noise.

Very much engaged in the conversation. And again, we're just getting started, but we like our chances. We like the early momentum.

So moving on, you were one of the architects of KKR's Asia strategy. And I think KKR is probably the best positioned there now. So can you talk us through what you see as the big opportunities there and how China factors into that? How much time do we have? That's a big question.

So we are, by far, the largest alternatives platform in the region in Asia today. We have around a little over $60 billion of AUM, the largest private equity investor, the largest infrastructure investor, one of the largest private credit investors in the market. And our business has really been built since 2005 around a very localized model in each of these countries. So we have 8 offices in Asia. We have 400 people on the ground in the region. So very, very deep coverage in the marketplace. And I would say there are things about Asia, which are just undeniable. They are going to have higher and really interesting real GDP growth rates for the next several decades. Right? So even with all the disruption right now in China, the economy is growing at 5-plus percent on a real basis. I think India just posted a 6-plus percent real GDP growth rate in the Wall Street Journal yesterday. So this fundamental growth is what's exciting about the region, Southeast Asia as well. You're talking about a massive millennial population and a very rapidly growing middle class. That's what the bed is in Asia for us. right? We're betting that there's going to be another 100 million middle-class households in China in the next 10 years, right? We're betting that India's GDP per capita is going to go from 2,500 to 10,000 in the next decade, right, over 15 years. That's going to drive massive, massive opportunities in sectors like domestic consumption and services in particular. Those are the areas that we're really focused on. We're not in China, India, Southeast Asia for manufacturing and export-driven businesses. We're in these countries investing behind great domestic consumer and services platforms. We own the largest pet food company in China. We own the largest men's deodorant business in India. We own one of the largest retail pharmacy chains in China. Your question about the geopolitical issues with China are very, very real, obviously. So what that means is we got to be very smart and tactical and disciplined about where we invest. We have never been investing in China to take advantage of that tech, right? So we don't have semiconductor investments in China. We don't have AI investments in China. What we are focused on is this very large sweet spot of a growing middle class, millennial population, services and goods increasing in that marketplace.

Great. Turning to Capital Markets, which is another unique aspect of your business relative to the others. It's been holding up, I think, a lot better than maybe people had expected in this volatility. So I think it would be helpful maybe for this audience to compare and contrast that business with more traditional investment banking fee business and maybe through that lens, do you think it's become more protective from cyclicality than you think than maybe we would think?

Yes. Our business -- our Capital Markets business today looks nothing like an investment bank. Okay? So we are not an investment bank. We do not do merger and acquisition advisory work. We are not a market maker. We don't write research for companies or clients. That's not what we do. The reason we created our Capital Markets business initially over a decade ago was to pull together real experts and specialists to help raise capital for our own portfolio companies. As we are financing acquisitions, as we're refinancing companies, making sure we get the best terms that we have direct relationships with all the providers of credit in the marketplace. And then we expanded that to the equity side. So when our companies are looking to go public, when they're looking to do secondary offerings to exit, we have internal resources and expertise and relationships with clients who are direct buyers that we can allocate to of those securities. So that's been an incredibly valuable piece of what we've built across our investment platform and working with our companies and our deal teams to access capital on the most efficient, most advantageous terms. And on the back of that success, other sponsors, quite frankly, have come to us and said, "Can you help us raise financing for our deals as well". So we have a very successful third-party capital markets business now. where we work with around 300 other sponsors globally in the marketplace. So that business is very, very different. It is very specialized. And honestly, if you think about a world like today, where access to capital is one of the biggest headwinds. How do you raise that capital? How do you structure capital structures today? How do you raise equity in a market like this? This is where the value of having a Capital Markets business of KKR is really, really highlighted.

Makes sense. I'm going to move to insurance before we get to last couple of questions on Global Atlantic. Could you perhaps update us on the growth trends there. And this puts with a question from the audience. Congratulations on the recent MetLife deal. So it's one, how does the organic outlook look from here? And two, do you see a pipeline of large deals like the MetLife deal beyond that?

Yes. Yes. I mean, Global Atlantic, as all of you know, is an acquisition we made back in 2020, really in the middle of the COVID lockdown period. Today, the book value of Global Atlantic is around $4.5 billion, put that in context, our market cap is around $45 billion to $50 billion given the day, so it's around 10% of our value, let's say, as a firm. And it's been an extraordinary several years of growth for the platform. When we bought Global Atlantic, the business had a little over $70 billion in AUM. Today, it has a little over $140 billion in AUM. And I think that really speaks to the growth potential. It's really in 2 channels. The individual channel issuing annuities has obviously been a very, very attractive space. Last year in 2022, the origination through the individual channel was the highest in Global Atlantic's history. And that's because when there's market volatility and rates are higher, individuals who are using this for their retirement, they can get paid more, higher rates in a very safe format. These are guaranteed products, right? Very, very secure products. And the demand for that increases when there's volatility. It increases when they're worried about investing in public equities and other asset classes. So we've seen very, very strong inflows on the individual side and put that in context, that's probably $10-plus billion a year of inflows on the individual side. What also happens is there's the institutional side of it, which is buying these blocks like the MetLife block. Those are more episodic, obviously, right? It's a bilateral negotiation with large insurance companies that are looking to do smart things in terms of their portfolio and their balance sheets and their capital charges. And honestly, in markets like this where rates are higher, there's more opportunity to unlock some of those trades because it's easier for them, the sellers actually, when we talk about buyers and sellers, it's easier for the sellers to justify doing something when rates are higher and that could get a trade off in the right way. So we think we're going to see opportunities on both sides. Insurance is inherently cyclical and tied to rates in some ways. So it's hard to predict. It's not like every 6 months, we could promise there's going to be another big MetLife block, but I think what GA has done and proven over the years, they are a very reliable counterparty to any insurance company when they're looking for those types of capital solutions. So we expect to see more activity going forward.

Okay. Makes sense. I want to move to capital now as we get towards the end. You obviously generated a ton of cash flow from both your funds and your balance sheet and that's generally been reinvested into new opportunities. I feel like the tone on repurchases seemed a little bit more constructive on the last earnings call. You can push back on that if you want. But do you think we're getting to a point where the balance sheet scale exceeds the available reinvestment opportunities. So perhaps you might rethink the whole capital return stack at some point?

I think share buybacks has historically been and will absolutely, on a go-forward basis, be an important driver of value creation and something we use our cash for. But it's our employees and partners own 30% of the stock at KKR. As you can imagine, we're very focused on shareholder value creation and how we allocate the excess capital we generate as a business. And we think about this, I think, in a very rational way, like where are we going to get the best return for that marginal dollar of liquidity. That could be buying back shares depending on the share price, depending on what we can do in terms of M&A, for the balance sheets like Global Atlantic. And what we can do in terms of our core private equity investment. That's a huge allocation of our balance sheet, long-term ownership and really, really great companies that we want to compound over time. right? So that's the third major use of balance sheet capital that we have. And at different points in the cycle, we will rotate capital in different ways based on how attractive those 3 pools are really with an eye towards maximizing return for shareholders. Now if you look at our track record and buybacks since 2015, when we changed our dividend policy, we're very proud of that track record. We bought back 85 million shares at an average price of $26 a share. So it's been very, very good for shareholders over time. And again, on a go-forward basis, share buybacks are definitely going to be one of the things we use for our capital.

You mentioned M&A. Are there any verticals where you could -- do you still see significant M&A factoring in the mix as you've gotten a lot more balanced.

Listen, I think there's no glaring hole, I think, in our portfolio mix or where we're focused right now. And the truth is, I think M&A in the asset management industry is very hard. These are people businesses. You need cultural fit. There are a lot of things that need to line up. So I wouldn't say never, but I would say where the priorities are. If we could find another great Global Atlantic outside the U.S., that would be a pretty interesting use of capital in terms of strategic M&A. We get asked all the time about the secondary space. I think that's a nice to have, not a must have for us. So if the right opportunity came that was interesting, we'd certainly consider it, but it's not something we feel must have today in the business. And I think the general profile of what we're looking for is pretty clear, we've articulated this for. The more permanence to the capital that we're buying, the more attractive it is to us, the more culturally friendly it is in terms of integration. Obviously, low headcount is good. And if it really drives FRE growth, fundamentally, it creates an engine for FRE growth like Global Atlantic has. Those are some of the criteria we look at in terms of M&A.

So I'm going to end with a question I've been asking everyone, because I think a lot of people in this room and investors, I talk to, think we're headed towards a recession or at least significant economic slowing. So it would seem counterintuitive to be buying asset managers that are levered to risk assets. So through that lens, why do you think, the people in this room should be buying KKR stock now given that uncertainty?

Listen, I think like investing in any stock as an investor, you got to ask yourselves some really fundamental questions. Are you in the right sector? I think the alts space today is definitely taking share within the broader asset management world. You've seen that in terms of our ability to raise capital, the growth in our management fees, growing double digits year-over-year in terms of capital flows into our business. So I think the alts space generally is, from a secular standpoint, clearly, a really interesting place to be. Once you clear that sector screen, I think the question is, does the company have a lot of different tools to win. We've talked about some of those here. We've got a very diversified business. We've got our core private equity business, obviously, that we've been in for 50 years, but it's infrastructure, it's real estate, it's private credit, a lot of different levers to monetize different kind of cycles and environments. And then I think the third question is really just about the fundamental earnings, right? When we invest in companies, we're always asking ourselves, is this company under-earning or over-earning in terms of where their current profitability is. I think it's very, very clear that in this moment in time, firms like us and KKR in particular, we're under-earning our potential because we're not monetizing a lot of investments like we report cash revenues and earnings when we sell stuff, right? Beyond our management fees and fee-related earnings. We have enormous embedded gains in our investment portfolio that will get monetized. It's a question of when, and what price, but there's a huge, I think, visibility in terms of the earnings potential of the firm already baked into what we have. And then when you layer on top of that, all the growth we're seeing across these different businesses. I would argue this is a great time, actually, to get it to the stock and it's under-earning its potential.

Thanks for the time.

Really appreciate it.

Yes. That's great. Thank you.