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

Okay. Welcome, everybody, to the TD Cowen Inaugural Financial Services & Fintech Summit. My name is Bill Katz. I'm thankful very much for everybody to join today. [Operator Instructions] I will be monitoring that as we go along. And before we get started, just for those of you that are able to vote in II, we would ask that you vote 5 stars for me in the asset manager, brokers and exchanges section. I am thrilled to be kicking off day 2 of our conference with a discussion with KKR, which continues to be our top alternatives pick. Joining us today from KKR is Robert Lewin, who is the Chief Financial Officer. Rob joined KKR back in 2004 and since joining the firm has held a variety of positions, including running private equity or -- private equity, co-leading the firm's credit and Capital Markets businesses, serving as Treasurer, Head of Capital Corporate Development, and most recently, Head of Human Capital Strategic Talent. And for those of you with long memory, Rob was also instrumental in building out the Asia platform, which is one of the fastest areas of growth as well. KKR sits on about $580 billion of assets under management and is well diversified. So Rob, first of all, thank you very much for joining today. We appreciate you participating, and welcome to the conference.

Great, Bill. Thank you. Thank you so much to you and TD Cowen for having us here this morning.

Sure. Our pleasure. So I thought maybe just to warm up the conversation a little bit, maybe a couple of big picture questions, then we can dive into some more of the aspects of the business in particular. Just for a big picture down. First, as you look around in your conversation with investors, obviously, KKR has a very wide net of relationships, whether it be retail, institutional or the insurance side. I was wondering if you could talk a little bit about how the conversation is going around allocations. And maybe you can answer that through the prism of both in the U.S. as well as maybe abroad.

Yes, sure. I think -- again, thanks for having me, and it's exciting for us to be able to talk about our strategy with the investors and shareholders that you have on the line today. So when you think about our distribution platform at KKR and you compare it even to as recently as 5 years ago, we're just a lot more diversified. And you mentioned institutional. We've also built out a lot of resources in the insurance space and of course, a big build out of private wealth, which I'm sure we'll get into. But it's also not just U.S. We spent a lot of time and resources being thoughtful about how we extend our distribution to Europe and Asia as well. And so in a lot of ways, we are always in the market. And different parts of the market are going to ebb and flow and be stronger or weaker. And if you look at the past 2-plus years, so from the beginning of 2022 through Q1 of 2024, we raised about $180 billion of capital. It's a pretty healthy number for us. And especially when you juxtapose that against what has been a challenging fundraising environment, we're quite proud of that outcome, and I think speaks to the investment we've made across different channels and region on the distribution side. I think we're starting to see allocations soften a little bit. It's been a tough couple of years for our space. But I think there's a lot more to prove about it. And I think we'll have a much better idea where the capital-raising landscape and what that looks like towards the end of 2024, especially as we have some big flagships coming to the market.

Great. In April at your Investor Day, you laid out a number of very impressive KPIs in terms of $1 trillion of assets under management, the opportunity to get to $15 of adjusted net income inside of 10 years, and I think the base year was 2023 and that you expect to get to more sort of annuitized business model, including 70% of earnings from asset management, insurance as well as strategic holdings. As you look ahead from the management side of things, how do you sort of see the opportunities and challenges for the team as you further scale along sort of multiple dimensions here?

Well, I think the most important thing as you think about some of the financial targets that we laid out at our Investor Day is that we now today have all the pieces in place to be able to achieve those targets. And so from a management team's perspective, the opportunity and of course, as you mentioned, the challenge, too, is really all about execution. But we are singularly focused as a management team on executing. If we're able to be successful at that, we've got a high degree of confidence in being able to achieve the targets that we laid out because we don't need to create anything new. And so when you look at our business model today, it's been very much purpose built over many decades. So we have an asset management business, an insurance business and now strategic holdings. And when they all work synergistically together, we believe we generate much better outcomes. And they all take advantage of the things that we think we're uniquely really good at: investing acumen; taking advantage of our collaborative culture; and also capital allocation. So just if you stick with our asset management business for a second, lots of different ways for us to be able to exceed $1 trillion of AUM over the next 5 years. That's a target that we've laid out. We think we're just situated differently in our insurance business. Again, a lot of different ways for us to be able to double AUM and to do so at a high level of ROE. And then in strategic holdings, our newest segment, really an unconstrained market opportunity for us and an area where we feel like we've got a real right to win and takes advantage of things that we're really good at KKR. And so back to where the conversation started, the pieces are built out. We're focused on the execution component, and we don't need to create anything new in order to be able to achieve some of the targets we lay out, which includes taking our adjusted net income from $3.40 last year to $15-plus per share in 10 years or less.

Okay. Maybe one more big picture question. Just in terms of -- and I know it's been coming up over the last couple of weeks through the conference season, but how would you categorize today in terms of some of the key flywheel for the industry in terms of deployment and net realizations as we look out maybe deeper into this quarter or even into the second half of the year? Should investors be anticipating a continued pickup in activity levels as we look out maybe the second half of the year into next year? Or will it take longer than that just given the mixed macro backdrop?

Based on what we see, I think we do see a pickup that is coming. I think any time you start with this question, I think you've got to start with the building blocks, which start in the capital markets. And to me, the thing I always look at in terms of the best leading indicator for activity is the health of the leveraged finance markets. And we've seen more sustained strength in the leveraged finance markets over the past number of months than we have at any point in the last few years. The equity markets are certainly very strong right now. Some of the equity capital markets around IPOs and secondaries, a little bit less so. But if you move on to what that means for deployment for us or for the industry, we're seeing a real pickup. We're really active across infrastructure, KKR, all regions. Private equity deployment have been a bit slower, but we've got a number of announced and not yet closed transactions that are coming. Just in a far different place as it relates to credit deployment of KKR over the last 12 months, we've put to work over $20 billion of capital in the credit. And while we have been more active on the real estate credit side as the market is dislocated, we're starting to get very active, especially with deals of scale in real estate equity. Our pipeline there is growing quite a bit. So we're quite optimistic about what the deployment landscape will look like. Monetizations have lagged. At the same time, and I said this on our Q1 call, we look at our pipelines on monetizations. And they're definitely better today than they were 12 or 18 months ago. A good example is something that we've been able to get done in the markets. We partially monetized the U.S. private equity portfolio company called [ F11 ] earlier in Q2 through a secondary trade in the equity markets. We were able to do that at roughly 20x our invested cost on that tranche. And so we're able to get done, obviously, a really healthy monetization in this market. And so we're encouraged around what Q2 and the back half of the year could look like. But of course, things still need to come together in order to be able to achieve what I would expect to be higher levels of activity.

Okay. Terrific. Maybe we can dive into -- and yes. [Operator Instructions] I'll try and multitask, keep us on time and also take the question. Maybe diving into now some of the businesses, if you will. I'd like to start in the sort of the wealth management, retail area. By any calculation, it seems like a massive global opportunity, whether it be your management team, guesses or others. I think one of your competitors at a recent investor day, they had a very interesting statistic that 50% of semi-liquid product sales in 2023 went to top 2 to 3 -- top 2 to 6 players. And that's up from like I think, 17% just a couple of years ago. And then almost about the same time, Schwab, their Investor Day had indicated that they want to curate an alternative platform across 5 different vectors and only use about 8 to 10 manufacturers along the way, right, 1 to 2 per vertical. So as you see the industry evolving, I was wondering whether you could talk about how do you see the industry evolving? And then how should investors be bullish on KKR within that evolution?

Yes. I think -- and we've talked about this a lot. We think the long-term opportunity here is very substantial for our space. And we, as a management team, are very focused on making sure that we develop products and vehicles that we can be really proud of from a client experience perspective for the next decade-plus. That's our goal. And if we're able to do that, we think AUM will follow. But we really believe, Bill, we're going to be a winner in this space as it continues to evolve. And we think there's a number of things that will dictate who the winners will be. Certainly, brand in this marketplace is really important as is track record, and we think we've got an almost 50-year track record of doing right by our clients. And we think we've provided lots of -- or have the capabilities inside of our firm to generate investment returns from here and scale that are able to be in line with our historical track records. We think scale is really important, scale in terms of relationship with intermediaries. But also, of course, this channel requires a massive upfront investment, which we have largely already made. And then the last point, I think this gets lost over sometimes is around product innovation. And we spent 2-plus years really innovating vehicles and products for this market. And so we feel really good about the long-term opportunity. Now to take a step back, maybe I think it's worth just framing where we are today with individual investors. Roughly $70 billion of our $580 billion of capital come from individual investors. This is predominantly ultra-high net worth and family offices who have invested in our traditional fund products. And to date, we've been raising anywhere around 10% to 20% of our capital from individual investors. We believe, over time, that number could be 30% to 50%. And one of the ways that we think we can grow in the space is through our K-Series of products. These are the products we spent a couple of years incubating that are really tailored for the private wealth community. We now have big products up and running in private equity, infrastructure, real estate and credit. It's very early days for us, but the momentum has been strong. If you look this time last year, we had roughly $2 billion of assets in our K-Series. Today or as of April 1, that number is roughly $9 billion. So a lot of growth. But of course, we're cognizant of the fact that it's $9 billion out of $580 billion. So we've got a lot of work to do to be able to achieve our ambitions. But we feel like we're having this conversation 3, 5, 7 years from now, we're going to be talking about a part of our firm that's a lot bigger than what it is today.

Great. And then maybe related to that, and first off, congratulations on the alliance with Capital Group. We think this is a particularly momentous announcement for not only KKR but the industry at large. We put out a pretty big think piece on this just the other day. I think from talking with your team and just what we're reading, it's expected that you'll roll out products beginning in 2025. And first in credit and then the opportunity is to sort of have these co-branded hybrid vehicles go across your verticals, if you will. I was wondering if you could talk a little bit about the cadence of the launches and maybe the size of the TAM. And then I have a follow-up question on that, just -- maybe just at once here.

Sure. We're really excited about the partnership. Capital Group, the American funds, really a preeminent brand and actively managed funds with second to none distribution. So we're incredibly excited about the partnership. We also think it's additive, these hybrid products that we're going to be creating with them is additive to what we think we can do in the K-Series, and so it expands the TAM. And so we don't have forecast, Bill, in terms of what we think that this can be over time. But I think in both the Capital Group side and KKR side, we're not going to enter into this partnership if we didn't think it could be really sizable in the future. And one of the things, I think, as an organization we're really proud of is that Capital Group, of course, had options as it relates to who they wanted to choose as their partner. And I think they were attracted to us as a partner for a number of reasons. I went through a bunch of them, of course, around our brand, our track record, our ability to create investment return for the investment community that we're going to be servicing. I think they were also attracted to our one-firm culture. And they talked about that, very much aligns with their culture. And of course, I don't know this. But I'm sure we have some peers who would have very much like to have been partnered with the Capital Group in this space. And so we're quite excited for what this can mean for both of our organizations going forward.

We look forward to that. And just one clarification. Is this -- you said it's additive to the K-Series. Is this also additive to the $300 billion, 3-year gross inflow guide you provided at the Investor Day between '24 and '26? Or will be -- is that embedded inside that?

Yes. I had a feeling you might ask that, Bill. Listen, there's a lot of number of factors that's going to impact our distribution. I'd tell you, we felt confident in that $300-plus billion number in advance of getting the Capital Group partnership done. And when we introduced that guidance at our Investor Day several weeks back, the partnership was not yet named.

Okay. Terrific. We do have a question from the audience. It's a little more narrow than this big conversation, but I think it's an interesting one. The question is, could you give an update on capital market fees for the second quarter? And then maybe if you could just expand that to think about how you think the rest of the year might play through.

Yes. Of course, our capital market, it goes back a little bit to the question on -- we talked about around activity levels. Activity levels are up. Deployment's up. We're hopeful monetization will continue to trend up. And as a result, our pipelines and capital markets are strong. And I think I said this on our Q1 call as well, at this stage of the year, our pipelines and capital markets are a lot healthier than they were at this stage last year or at this stage in 2022. And so we've got a lot of work to do going forward. But if you look at 2022 and '23, we generated, on average, roughly $600 million of revenue across both those years in pretty challenged capital markets environments. And so we'll see how the rest of the year plays out. But as I mentioned, the best forward indicator we have is a pipeline report, and that feels better today than it felt at this stage in either of those years.

Terrific. All right. Thank you, and thanks for the question. All right. Maybe just diving into the other big area of interest is sort of credit. And maybe it's interwoven with the insurance opportunity, which I want to come back to as well. Actually, let me start with insurance. I think it may make more sense. So just, I think it ties back with the Investor Day a little bit, so I apologize for the back and forth. When -- at the Investor Day, I think you mentioned, you think you can double the AUM in Global Atlantic. I was wondering if you could help us understand some of the key drivers to that growth. I was wondering if you could maybe break it down between what you're able to do on the retail side and maybe the institutional side and then between the U.S. and maybe the more nascent but seemingly very large opportunity outside the United States.

I think our growth is going to come from really all of those areas. And I think our market position here is really strong. But maybe we could start with the attributes that I think really differentiate our insurance business in the market, which, of course, that then leads to the confidence we have at scale in AUM and doing so at high levels of ROE. And there's really 4 things that when taken together, differentiate our platform. We think we've got a best-in-class management team that's going to be able to continue to source predictable, low-cost liabilities at scale. I then take our investment platform, so investing those liabilities up against anybody's in the world. I think we really do have some unique access to third-party capital to help Global Atlantic grow in an accelerated fashion, in a capital-light way and also in a high ROE way because that third-party capital base fees then carry to Global Atlantic in their institutional business. If you look at our last 2 block deals, we were able to bring in 75% of the capital to fund into third-party capital. And then finally, I think that the fourth attribute we're about to talk about is really where we're differentiated. And we've got a lot of really good competitors out there and some of which can certainly feel like they can compete in those first 3 areas. But this fourth area is around taking Global Atlantic really global. And if you look at the opportunity set for us across Asia Pacific and you look at KKR's presence on the ground in Asia Pacific, which is multiples the size of our nearest competitors, we think that's going to allow us to scale our reinsurance business quicker through the relationships we have, our presence in the marketplace. And then importantly, we've got people on the ground that can source local denomination assets to match against those long-dated liabilities. These are a real competitive differentiator for a place in the world where we would expect a lot of growth going forward.

Great. So that leads me to my other question on insurance. You guided to a 14% to 15%. And this was actually -- we just got this question through the question board as well. So you've guided to a 14% to 15% pretax ROE. I was just sort of wondering if you could break down your key assumptions to that. And then maybe think about how should we be thinking about that against sort of interest rates and to the extent that interest rates were to potentially trend lower based on the forward curve?

Yes, I'm glad you asked the question. We continue to believe 14% to 15% is the right long-term ROE to target for Global Atlantic and our insurance segment. But it's -- I think it's good to be talking about ROE because it's not the perfect metric, and it's also, for sure, not the perfect metric quarter-to-quarter. It's a much better metric in the insurance business over a longer period of time, and let me explain why, I think really two principal reasons. Number one, GAAP book value, which is your denominator here, can fluctuate quarter-to-quarter based on things that don't necessarily relate to quarter-end performance. So that's the first thing. I think it's more structural. Second thing is more how we're positioning the business strategically. I think we've really done two things here that are going to put some pressure on near-term ROE, but we really believe will be for the benefit of long-term ROE. Bill, you've covered us for a long time. I think you know we're always going to make those trade-offs when they're available. The first is it relates to block activity. We've completed a couple of very large block deals, Q4 of '23, Q1 of '24, have brought on north of $20 billion of liabilities and assets through those block deals. When you bring in those block deals, you take the cost of liabilities, of course, through your P&L day 1. But we tend to model and underwrite 9 to 12 months of deployment or redeployment on the asset side. So in those early quarters, you're going to be running with elevated levels of liquidity until you've fully redeployed the asset side of the balance sheet, get all very much in line with what we've underwritten here, which are high levels of return in our institutional business. And the second piece is how we're positioning our balance sheet. And we are modestly shifting our balance sheet allocation to do more in the real estate space and infrastructure space. In particular, let's talk about core real estate, because I think that's a really attractive asset right now for us. And I think there's one obvious reason. There's just no core real estate capital available in the world. We know that. The funds that are out there have long lines of redemptions and not a lot of subscriptions. And so we're seeing a really interesting risk-adjusted return to create transactions for Global Atlantic on an unlevered basis to generate high levels of long-term ROE that we can also match against some of our longer-term liabilities. So a really attractive asset class in that respect. But if you look at core real estate, at least for the foreseeable future, some of the running yields are going to be either in line or lower than our cost of liabilities. So you could say it's dilutive to our near-term ROE but for the benefit of long-term ROE, and we're always going to make that trade-off. And so those are a couple of things that I think are important to understand as you think about how we're strategically positioned in Global Atlantic. And we could continue to see some near-term pressure on ROEs. You saw a little bit in Q1 relative to where we've operated historically but very much in line with where we're going. And I think the most important thing in ROE, measure Global Atlantic based on its historical performance over a long period of time and listen to us as a management team on what we're telling you around go-forward long-term ROEs. Some of the intra-quarter noise, that's going to happen for a variety of reasons that I just took you through.

And any way to think about interest rate sensitivity for a 100 basis point move, what it might mean in terms of the pressure or opportunity for ROE?

Yes, no, I apologize. I know you had asked that. I'd say roughly plus or minus, it could move around a little bit. 50% of the GA book is floating rate in nature, the way we look at it. That's come down actually a little bit, and so a little bit less susceptible. But I think in a modestly rising rate environment, GA is going to do a bit better. We've talked about it and in a modestly lower interest rate environment, GA is going to do a little bit worse. We think that number is relatively contained. It doesn't change today our 14% to 15% outlook around pretax ROEs.

Great. I did get a sort of a follow-up question on your comments around a bit of a tough backdrop to raising capital. You say allocation is softening. And the question is, can you just sort of refine your answer a little bit across the asset classes? Is it soft in private equity or real estate or credit? Where are you seeing some of those pressures?

Yes. So sorry, maybe I used the wrong word. What I was saying was we're seeing some of the challenges in the market from a fundraising perspective soften a little bit. So it feels a little bit better today on the fundraising side than it felt maybe 12 or 18 months ago. But we've got some big strategies that are in front of us, some big flagships, as you know. And so I think we'll have a much better idea of where the fundraising environment is at the end of '24. But I meant it more as a positive comment than a negative comment.

Okay. Thank you for clarifying that. Okay. Maybe just switching gears a little bit of credit, which I skipped ahead in my own head, I apologize. So maybe this is interwoven with your comments just in terms of the work you're doing with Global Atlantic. But where are you seeing the best opportunities for KKR to participate in the fixed income replacement theme? Maybe you could update us on direct lending. There's certainly a lot of focus on that in the last week or so, asset-based finance or maybe some other initiatives that is being cooked up inside KKR right now?

Sure. When you look at our private credit business, it's really split into two parts. You mentioned direct lending is roughly $40 billion of assets for us. Asset-based finance actually get larger at $55 billion of assets. Our private credit business is right around $95 billion of aggregate capital. If you look at some of our fundraising success on the credit side over the last number of quarters, you would have seen in areas like evergreen direct lending, across ABF, a number of SMAs. And we're starting to see some traction on the K suite of our products focused on credit as well. The ABF opportunity, where we're a real leader in this asset-based finance, I think we are still in the earliest of innings of that transition of ABF off of the regional bank balance sheets and into structures that have longer-dated liabilities. I think that's a trend our industry and KKR specifically, given our leadership position, is really well situated to come out as a winner on. Direct lending, direct lending could certainly ebb and flow based on a number of different factors. We're quite constructive on risk return right now on direct lending. But I think it's important to understand how we've situated our direct lending business inside of KKR. And so we have one origination team that faces the market that represents our private pools of capital, including direct lending and some of our junior closing capital. That same origination team represents our capital markets execution and distribution capabilities. So when we're talking to clients, we're saying to them, we can hold your capital structure through our private credit pools of capital. We can underwrite and distribute your capital structure through our Capital Markets business or we could do a hybrid of the two. And oh, by the way, if you plan to do a distributed offering to the market, we can roll across our liquid credit business, which is one of the biggest liquid credit businesses in the world to be able to take an anchor order in your distributed deal. And so we are facing the market with really 3 pools of capital or capabilities in a way that we just don't think anybody else in the marketplace does. And so what that creates, we think, is better deal flow, because we're servicing the client better, both for our private credit business and for our Capital Markets business. And we think that also lends itself to increasing market share with our client base because we're able to do more for them in a holistic fashion than we think many of our competitors out in the marketplace can...

Great. We're running a little tight on time. So maybe just skip down to real assets. We got a question this morning. There was a very large announced transaction offshore. I was wondering, you and your peers have talked about just a great opportunity in real assets, specifically in infrastructure. Just wondering how you could think about the opportunities for KKR. And maybe talk a little bit about the debt and/or the credit side of the opportunities.

Sure. If you look at our infrastructure business, Bill, we are roughly $60 billion of AUM. As my partner, Raj Agrawal, who runs our infrastructure business talked about at our Investor Day a few weeks back, we've got 3 large-scale businesses: that's global infrastructure; Asia infrastructure; and core infrastructure, all of which we see real growth in front of despite the fact that they're all risk scaled. We also have a new set of products in K suite focused on infrastructure and a new investing strategy in climate investing, both of which we feel provide lots of addressable market for us to accelerate the growth of our broader infrastructure platform. In a lot of ways, infrastructure is the fastest growing part of KKR. We've taken a lot of market share, we believe, over the past 5 to 7 years. And we think we could take more going forward, given how we've built out our team and capabilities. And so it's one of those areas that we think benefits from real meta themes in terms of need for significant capital investments that lines up really well with the capabilities that we've built up across the firm. So really constructive in this area.

Great. I think we have time for maybe one last question. I was wondering if you could address the one bear case we get quite a bit, is just the dividend yield payout is rather low. I was just wondering if you could talk a little bit about how we should be thinking about capital allocation.

Sure. And maybe the most important place to start, and I like to start in any conversation around our capital allocation policy framework is KKR employees own over 30% of KKR. So any decision that we take in this regard is very much aligned and focused on what we think can generate the most long-term shareholder value. We believe we're going to generate a lot of excess cash generation at KKR over the next 5 years. We've talked about over $25 billion of cash generation, huge opportunity for us to be able to increase our recurring earnings per share over a long period of time. We've talked about 4 areas of deployment we're really excited about. That's core private equity, insurance, strategic M&A and share buybacks. Common attributes because of our business model, our ecosystem, each one of those, we've got a long track record of delivering high ROEs and also recurring and growth-oriented earnings per share. Specifically on our dividend policy, Bill, we like our dividend policy a lot. We first introduced it when we became a C corp in 2018 at $0.50 annually. What we said then is we will step that up annually. Over time, we've continued to do that. Today, we're up to $0.70 of annual dividend distribution. And what we continue to say is our expectation is we're going to continue to step that up annually over time as well. But you've got to look at these things holistically. I'll come back to KKR employees owning a very significant amount of stock at KKR. So the decisions we make are aligned. And we just firmly believe, and I think you've started to really see this play out over the past few years that what we are building out across asset management, insurance and strategic holdings has given us the best visibility for some of that 10-year guidance that we've provided around where we could take our adjusted net income per share. And that's $3.40-ish last year, up to $15-plus per share. And it's because we believe in the model that we've employed.

Rob, look, I think we're out of time. I have questions for another hour at least. So I apologize for not getting to all of them, but thank you so much for joining today. Terrific conversation. Thank you for help kicking off day 2 of our conference. And this completes the presentation for today. Great to see you again, Rob.

Great to see you as well, Bill. And thank you again.