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

Good afternoon. I'm Patrick Davitt, the U.S. asset manager analyst here at Autonomous. It's my pleasure to welcome KKR's Co-CEO, Scott Nuttall, back to the conference after having Joe here for the last couple of years. So welcome back, Scott.

It's great to be back.

As a reminder, if you want to try to get one of your questions in, I have the iPad right here. You can put them into Pigeonhole, and I'll try to work them in or at the end if we have time. So Scott, since we have most of the major large alternative managers here, I'm starting all of these discussions with some similar higher-level questions so we can compare and contrast easier across the group. It's obviously been a crazy couple of months. I think we all have a lot of whiplash. But I still sense there's still a lot of concern around sticky inflation, higher for longer rates, potential for slowing economic growth, even stagflation. What is your latest thinking on these concerns? And what's the kind of internal house view on inflation rates in the economy at this point?

Sure. Happy to share it. And thanks, everybody, for joining. And thanks again, Patrick, for having us back. Look, I think let's isolate that's a very -- I think, a U.S.-focused question. We're a very global firm, which I'll come back to. But in the U.S. context, in the first instance, I think our base case is likely inflation and rates a bit higher for longer. But for us, that doesn't strike us as a big surprise. KKR has been around 49 years. And if you look at the numbers over that 49-year period, average 10-year treasury yields have been high 5s, and average inflation has been 3.7%. We did this chart a few years ago at one of our investor conferences for our LPs and just showed the entire history from 1976 to then and what those 2 statistics look like. And the strange period was this 10-year period where rates and inflation were virtually 0. The rest of the time KKR has been around, it's been a very, very different space. So to some extent, I know it feels very different than what we all got used to, but it's almost kind of getting to a return to normalcy or closer to normal from our standpoint as you look at the history of the firm. So we build portfolios for the very long term, right? It is much easier to think 5, 10, 15 years out, especially right now than it is 5, 10, 15 weeks out. And so this is a period of time where we really enjoy that aspect of our business model, long-term locked up capital, $116 billion of dry powder. When you invest in companies or assets and you think you're going to be in them for 5 to 10 years plus, you think about how the world is going to evolve. So for the last several years, we've been investing with a view that we are going to own assets through a period of time where we're going to see rates go up and have higher inflation. Back to that chart where we circled that 10 years where it was 0. That was the strange period. We knew we weren't going to stay there. So we've been constructing portfolios with that mindset. And so from the U.S. standpoint, even though we think rates and inflation a bit higher for longer, it's entirely consistent with how we've been deploying. So we've been investing in companies that have more of an ability to protect their margins as you would if you thought inflation was going to go up. So there's a dynamic of this is not an unexpected outcome for us, and our portfolio is performing as expected through it. That is very much a U.S. answer. It's also a global answer. But as you know, 20 of our 28 offices are outside the United States, right? So a majority of our deployment this year outside the United States. And then we have tools that we've built that we've talked about in the past around how we create value post investment in companies and assets. So we have the ability to make our own luck and actually execute the investment thesis, and we're just plugging away doing that. So none of this is, I would put in the unexpected or concerning category from our standpoint.

Helpful. With that in mind, you noted on your earnings call, minimal direct exposure to tariffs and the trade war, but I think most people are more worried about second and third order impacts. What are you seeing real time in the portfolios? Any signs of contraction or stress emerging across.

Not really. We've seen very consistent trends. Part of that is because what I mentioned around portfolio construction. And we lived through Trump 1.0, so that got us trained as to how to think about tariffs. And we kept investing with that as part of the investment process, what would tariffs do to a business or an asset as we looked at it. And we also obviously experienced COVID. And so you get really smart, really fast on supply chains and diversifying your sourcing. And so we also kept applying those lessons. So as we look at our portfolio, we actually feel quite good. We haven't seen the sorts of things that you'd be more worried about, I think, like consumer pullback in the U.S., we have not seen that as of yet. It feels like people are hanging in there just fine. But part of that is how we constructed the portfolio. We're actually exposed to the trends and themes we want to be. I think this is going to be a period of time you're going to have a lot of dispersion. There's going to be some industries, some areas that do quite well and are reasonably well protected, and there's going to be some that are much more significantly impacted. We think we're on the right side of that, at least as we sit here right now.

One more on the macro track. I think KKR has been one of the more optimistic on the realization outlook of the other alts. Many more sounded a little bit more cautious. Obviously, things have improved since the earnings call. So what about your portfolio? Has you feeling seemingly more constructive than others? And secondly, given your visible pipeline of realizations, how has that evolved since the markets have recovered from Liberation Day?

No, we feel quite good. And again, it's a little bit backwe feel quite good. And again, it's a little bit back to the theme from the first answer is we have tried to be thoughtful about building portfolios and our firm to navigate through different cycles. And that is absolutely the case as we've built portfolios. I think most of this question is usually around private equity and infrastructure, where the monetization question comes up. So one of the things that we learned a long time ago was just if you have 5 years to invest a vehicle or a fund, do about 20% per year. Don't try to be too smart. It's not a good idea to try to time the market. We know that because candidly, we look back and we made mistakes pre-financial crisis. So we overdeployed in '06 and '07 and didn't have the dry powder we wanted to have as we headed into the GFC, right? So we changed the way we invest. We got much more of a macro portfolio construction overlay that's married with the micro work that we do. We're looking at what look-through risks are we actually taking. As a result of that, when it gets to a year like 2020, where our industry deploys very little because everyone's in COVID, we stayed on that linear line. Year like 2021, where the industry deployment went up dramatically in a high valuation environment, we stayed on that linear line. And in areas like private equity, deployment was flat that year relative to 2020. And we find it's a great discipline. So what that results in is a very mature, consistent portfolio. So as you look, for example, at our private equity portfolio right now, over 60% of it is marked at more than 1.5x our cost. Our public names on average are marked at 4x our cost. We have, as I mentioned before, a highly global portfolio. So we've been busy exiting investments in Japan. We've been selling infrastructure investments. We sold not long ago an industrials company in the U.S. So we have a mature portfolio, and that's why the line of sight is as strong for us as it is. I think what you pick up if you read the news, the business media, there is kind of this broader narrative around less monetizations, not as much money going back. I think there's probably some truth to that for the industry. But back to my dispersion point, there's a very, very different answer by firm. So just take our Americas private equity, which is usually the locus of where this question comes from is, can you get out of stuff in the U.S., especially right now? So for the last 8 years, we have given more money back than we've called in that business, every single one of those 8 years. And the ratio of money back to money called is 2:1. So the reason that we're very comfortable is we can see it in what we have today, and we've been delivering it for our LPs, which, of course, feeds through to fundraising conversations.

Maybe one last one. You have, to your point, a lot of large public positions with high MOICs. Do you think we need more visibility on the trade situation for the strategic side of the realization equation to get better?

No, I think it kind of depends on the strategic. Most strategics are in very good shape from a balance sheet standpoint. As we've seen and you noted, the markets recovered. So if they want to use their currency, those conversations are continuing.

Great. So obviously, people are always super focused on realizations with KKR, but strategic holdings is a newer part of your business that could theoretically create a lot more ballast to the volatility around realizations. So for those less familiar with KKR, can you explain how that segment came to be, why it's in your model and how it differs from what your peers are doing?

Absolutely. So like a lot of the way that KKR has evolved, it came out of observing opportunities that we could not action and that we were frustrated by. And so the back story there is we were finding that as we looked at opportunities, in particular in private equity, that there are a number of investments that probably had a little bit lower risk, but we thought really attractive reward for that risk. So think of businesses that are more recession-resistant, that could navigate a cycle, a lot of recurring revenue, but didn't model out to a 20-plus percent return because maybe there weren't enough improvement opportunities. So much of what we do is you got to create the value post investment. So these are really nice investments where if we all looked at it, you'd say, boy, if I could get a 15% compounded return on that risk profile, I would take that all day long. And so we kept having to pass on those because we didn't have a place to put them. And so that's where this came from. And we said this is kind of dumb because we realized that there's money waking up in the world, whether it's mezzanine or distressed, trying to find a mid-teens return. There wasn't change of control private equity investing targeting mid-teens in long hold assets. And so we looked at that and said, this doesn't make a lot of sense. We really like these. And this is also informed by the fact that when my co-CEO, Joe, and I got to KKR, Berkshire Hathaway's market cap was $41 billion. It's now, last I looked at $1.1 trillion, right? That's just 12.5% for 29 years, which is how long the 2 of us have been at the firm. So these businesses have those attributes. So what we said is, you know what, we really like this. We've already sourced it. Let's have an ability to say yes instead of keep saying no. That's where it came from. Then we're talking to a couple of friends, including Chubb, and we have a close relationship with Evan Greenberg and his senior team. And we're just talking about this observation of what we're doing. And they said, "Hey, can we do that with you?" It's like, great. So we worked with them, and they've been fantastic partners throughout, and we've been building this portfolio together with them and one other party. And so that's the portfolio that's now the 19 companies that we talk about as part of strategic holdings. And so we've been building this portfolio of companies that really have those attributes. So that's the back story. So what shows up in strategic holdings today is our balance sheet investment in those companies. And then what we have that shows up in our asset management business is the fact that we have third-party capital alongside us investing in those companies that pays us fee and carry. So that's how it's built. So it's got both elements to the business model.

You're not the only large alternative manager that you -- there's Berkshire out as a potential comparable model. But the market doesn't appear to be treating the alternative managers saying that the same. So what do you think is missing there in terms of closing that gap with how people perceive somebody like a Berkshire Hathaway and somebody like...

Yes. I think it's just performance. I mean this is a segment that we just started talking about and reporting separately starting last year at our Investor Day in April, okay? So this is relatively new. We started this effort 8 years ago, but we need to make the investments. They need to delever, perform, mature, right? And so those companies are now paying us dividends. So we had been talking about it for a long time. But as soon as we said, it's a segment, there's dividends attached. It's going into our earnings and people needed to put it in a model, the conversation changed.

For sure.

And so now people are spending more time thinking about it. But in fairness, it's a relatively small part of our earnings today. It will be dramatically more 5, 10 years from now. And I think that will continue to have the conversation evolve. So what we've said is next year, I think $350-plus million of dividends, going to $700 million plus by 2028, going to $1.1 billion plus by 2030. But to put even the next year $350 million in context, for Q2, it's probably mid-20s million just for the quarter. So it's going to go hockey stick up. And as that happens, I'm betting the discussion on this topic continues to increase and be more relevant.

And is there upside to these targets? Or are they pretty set in stone in your view?

Well, we put plus against them.

Got it.

We use the plus a lot.

We'll leave it there. You pointed to KKR's higher non-U.S. businesses as a potential ballast to U.S. stress and/or capital movement away from the U.S. Are you seeing any noticeable gapping in non-U.S. versus U.S. trends? And in particular, the client conversations, any change in like where LPs want to be allocated within your ecosystem?

No, not dramatically so. This is where it's really nice to be as global as we are. And I mentioned that more than half of our deployment this year outside the U.S. I mean, but take an asset class like infrastructure for us, more than 70% of our deployment the last 5 years in aggregate outside the United States. So we're able to have a very global conversation. I think in terms of how our investors are thinking about it, there's been a really dramatic shift. So if you went back to January, February, and pre-Liberation day, there was a conversation that was -- maybe I need even more U.S. If they were 60%, 65% exposed to the United States, maybe they want to take that number up. More anxiety about Europe, trying to think about where to get the right exposures in Asia. That was the sentiment in February. That's changed. So if they were thinking about putting more money in the United States, at a minimum, they've kind of said, you know what, I'm at a minimum, happy with where I am. And in some cases, in some places, thinking about actually, maybe Europe, I wasn't paying enough attention. Maybe there's more I can do there. And Asia, what are you doing in Japan, again? Like 40% of our portfolio in Asia is in Japan, which we think is a massive opportunity across virtually everything that we do. And so we're having a much more global conversation. It had become a little bit U.S.-centric. And we put it now in the category of more balanced in terms of the discussions we're having around the world.

Great. Let's move to retail and wealth, which has obviously been probably one of the biggest topics in alternative management over the last couple of years. Obviously, a big piece of your growth algorithm. Firstly, do you have any updated thoughts on how client demand and redemption requests have tracked through the post-Liberation Day volatility? As I sense a lot of investors are worried that, that piece of the puzzle could be more volatile than the institutional flows.

Well, on the redemption side, we haven't really seen much of anything. Part of it, it's early. And one of the things we built into a number of our structures was there's like a soft lock penalty. So if you want to leave early, you've got to pay a fee. Not to us, it goes to the people that stay in the vehicle. So I don't think we would expect to see anything at this stage, and we certainly haven't. We mentioned on our call that we were pleased. I think we got the numbers the night before our earnings call. Because we didn't quite know what to expect in April because this is, as you point out, relatively new for us. So just to orient everybody, I think the first 3 months of the year, we averaged about $1.3 billion in flows per month. April was $1.1 billion. So that surprised me to the upside because you would have thought on the margin, people would have been more hesitant given what was going on in the world. We just didn't see that. We're seeing very significant adoption in a bunch of these platforms. And remember, just take our private equity product as an example, we've only had that launched for 2 years. We're still getting on more platforms, then you got infrastructure, real estate, credit, U.S., Europe, Asia, 40% of our flows. This number usually surprises people coming from outside the United States. And so we focused on building a very global distribution effort to try to make sure that we approach this in the same manner we approach everything else we do.

Have you heard anecdotally from any of your distributors that wealthier people are looking at alternative products as a place to park money when things are more volatile, like pull your money out of the equity market and put it in these products? Or is it too early to kind of...

I think it's a little early. There is a beginning of a narrative of when the public markets dislocate and people see the volatility, especially in the traded equity markets, that private markets on the balance are probably going to have less volatility in terms of what they experience in terms of marks. So there's been a little bit of that, but I'm not sure there's been enough data to really tell you that, that's something that we think is going to have a big impact. We have heard that from people that have been allocating to our asset classes for a long while, though. So it wouldn't surprise me if high net worth had the same observation and perspective.

Now you said that the K suite of products, the more established K suite of products probably covers all the asset class or strategy bases you need to tackle the higher net worth channels, but have recently launched more products for the mass affluent channel with Capital Group. For those that are less familiar with KKR's story, I think it would be helpful to get a quick overview of how these newer products are structured and any early view of how distribution and client demand is tracking? I know it's early, but...

Yes, sure. So the background more broadly. So the K-Series, the K suite is, as we call it, that's in effect taking what we do every day at KKR across those 4 asset classes, PE, infra, real estate, credit. And think of it as those same deals that are going to institutional investors in fund or separate account format. This is just a wrapper that allows individual investors to invest in them. And in the U.S., it's $1 million plus of net worth. So it's accredited investors. And it's largely sold through platforms and increasingly RIAs. So wirehouses, RIAs and someday independent broker-dealers. That's what that is, okay? And so when we talk about the $22 billion or so we've raised, which we think has a lot of upside because keep in mind, that's $22 billion out of $650 billion plus of assets. So it's young and new, but growing rapidly. What we also observed, though, is there's something like 5% to 7% of U.S. households have $1 million-plus of net worth. So that K suite is getting to a very small percentage of individual investors and pick your market, but use the U.S. in this example. That means there's 93%, 95% of the investing universe that could not invest with us. That's where the Capital Group partnership comes in. And Capital Group has a significant relationship and platform that's the American funds. And so we're partnered with Capital. They have significant relationships with advisers all around the world, but in particular, in the United States. And just to size it, there's roughly 300,000 financial advisers in the United States. Capital has relationships, existing relationships with 219 of the 290,000. And so we have created a product with them, public-private solutions that, in effect, takes some of what they do, some of what we do, and we're able to sell this to the other 93%. That's the background. So we just launched the first 2 of those a few weeks ago, and then we're working on new products with them, and we're going to be out with an equity product that has private and public equity in one wrapper, and that will be followed by a real assets product.

And any early thoughts on the uptake or demand?

Wait. I mean it just got started. But it's the same program we're seeing with the K-Series. We're now getting on platforms, and they have an army of salespeople that we're spending time with and presented to talking about this. And so we're very optimistic, but it's going to take time. Don't ask me to size it because I don't know how to yet. This is all new.

On that, where do you think we are in terms of building the U.S. and global distribution base for all of these products?

For the firm itself?

Yes, for KKR, yes.

Yes. So I think we've made good headway, but we're still building. We're still hiring people, in particular, with a focus on the K suite in U.S., Europe and Asia. And this is a ground game. So you need to have people in the advisers' offices. We are running education sessions for advisers all around the world to explain to them what it is that we actually do, how these products are structured, and we're trying to make sure they have what they need to do the job for their client base. But underway -- I'd say we're more than halfway done, but I would -- not 3 quarters of the way yet.

Yes. Got it. Beyond the K-Series and these new capital products, is there a broader pipeline of new products for the wealth channel? Or do you think you're getting close to having the right?

Yes. I mentioned a few on the Capital Group. So I think that project pipeline is very, very clear. We're spending time also on other areas like are there things that we could be doing around asset-based finance as an example. So we're spending time thinking about what else could come down the road. But a lot of what we're doing is just executing what's in front of us. I also think there's an interesting nexus, and we've talked in the past about our insurance company and our insurance capabilities. Remember, we're issuing insurance policies every week, tens of billions of dollars a year, an insurance-wrapped K series, that type of solution sold through third-party distribution and our own, that's also another new product area that we're exploring.

Lastly, on this topic, I think one of the more interesting comments you made over the last year was that you were seeing K-Series demand on the institutional side. Can you update us on that trend? What kind of clients are you talking about here? And could this be a big incremental pool of AUM? Or is this just cannibalizing from existing wrappers you already have?

I think it's just expanding ways for people to work with us. So to be clear, I mean, we have some high net worth like family offices and even high net worth individuals. They like to invest in the traditional fund format. So they like to invest in what the institutions have historically invested in. So we also distribute our traditional flagship funds, as an example, and others through private wealth platforms. And individuals invest in that in size. There are also some of those individuals who are saying, well, wait a second. In the K-series, you guys manage the liquidity. And that's how it works, right? They can invest in an existing portfolio. The liquidity is managed inside the vehicle. So we manage it and they say, that's easier for me. I don't have to do the admin. The capital calls, the distributions, they don't have to worry about that. So some of them are saying, "You know what, I'll do that instead of the flagship." Some are saying, "I like the flagship, and I'm happy to take the admin burden myself." The comment that you're referring to is me saying that sometimes smaller institutions just don't have much of a staff. And so it may be hard for them to deal with the episodic funds. Remember, we have 8 or 9 strategies in private equity alone, right? And so what we're doing in the K-Series for PE is we're putting all of that in one easy-to-use product. And so some of those smaller institutions may say, "You know what, I don't have the ability to invest across everything you're doing, but I'll do that." And so we are starting to see that on the smaller institution side. But the real point of this is let's give people a choice and make it easier to invest in what we do. And then each individual investor can decide what's best for them. As an industry, as a company, we did not make it that easy to invest with us for a very long time. we did very little in product innovation. And a lot of this is catch-up. Making it easier for individuals to invest with KKR. It shouldn't be as new a concept as it is, but that's what's going on right now.

There's a question from the audience that I think dovetails with this kind of a broader question about allocations and how your clients are thinking about allocations. But pension funds, ultra-high net worth are said to be reducing direct private equity exposure. Do you think this is an example of lower performing funds getting removed? Or do you think there's a shift away from the asset class?

We're not seeing a shift away from the asset class. I think what we are seeing is consolidation. And so I think what happened is there was a period of time -- remember, you had 10 years, remember, the little chart I referenced when rates were virtually 0, inflation was virtually 0, multiples were expanding everything. Everybody looked smart. There was a while there that if you weren't making money investing in levered assets, there might be something wrong with you. So we kept telling our firm, do not confuse a bull market with brains, right? You got to be able to invest through cycles. And so I think during this period of time, there's some investors globally that diversified who they give their capital to. And now performance is starting to have more of a range to it. Instead of everybody winning together, there's some that are starting to stand out more than others. So what we're hearing really weekly is investors saying, "I want to do more with fewer partners." And so they are eliminating GPs that they work with from their list and telling them, "I'm not going to re-up in your next fund." And they're coming to folks like us and others where they're pleased with the performance and saying, "Can I do more with you? And can I do more across asset classes?" That is definitely happening. So that consolidation trend is something that we're seeing and feeling in our business. And that, I think, is really the big pools of capital. Most of them we talk to, if there's one trend theme that I would point to, that's the one that stands out.

Helpful. Let's move to private credit. The press seems to be kind of once again seemingly hyperfocused on that being the center of potential problems in the world for whatever reason. So I think it would be helpful to get an update on your thoughts on the trends there. To what extent you are seeing problematic pockets there across the various strategies that could be called private credit?

No, we're not seeing any credit deterioration as of yet. And I know people are worried about it. I think it's probably because it's grown so much during this period of this benign economic environment. We don't worry about that as a systemic risk, which sometimes people talk about. It's $1.7 trillion, $1.8 trillion market. In the grand scheme of things, it's not that big. But also these assets are match funded in terms of how the asset liability matching works, and they're senior in the capital structure. So there's no doubt you've had defaults probably below what I would call normal given the economic environment we've been in, but we're not losing a lot of sleep around that creating big issues for the industry. If we have a recession in the U.S., as an example, I'm sure there's going to be more defaults there to manage. But that's where actually having a private equity firm connected to a credit firm actually works out quite nicely because we're comfortable taking the keys. There just hasn't been much of that that's shown up as of yet. And for us, as a reminder, like the bigger part of that business for us is the asset-based finance business, not the direct lending business. The more gets written about direct lending, our ABF business is a lot bigger.

We'll get to that next. I have one quick one on direct lending. It feels like the broadly syndicated market is open again after being closed for a few weeks. Is that what you're seeing? And how is direct lending competing with this kind of stop and start of the BSL market being open and closed?

I think it's a pretty healthy market. When the leveraged credit -- the leverage syndication market closes, the private credit market is there and has available capital. When it opens back up, the private credit market is still there with available capital. So it's allowed, I think, the industry to get deals done even if the banks don't feel comfortable taking underwriting and syndication risk. I think we're -- it's really, I think, quite healthy, more healthy than it was when it was kind of more of an on-off market. So I think those 2 markets help each other. But you're right, this week, both are available.

Do you think that direct lending deployment can still be meaningfully better this year with the liquid markets kind of taking some share back?

Yes. I mean because what tends to happen is the pie gets bigger and the percentage of the pie that direct lending has gets smaller, but it's still more pie for us. So we deployed roughly $20 billion -- no, $16 billion last year in direct lending, $4.3 billion in the first quarter. So it's still tracking.

Great. So now to asset-based, obviously, a big part of your private credit growth story. KKR probably has among the broadest origination capabilities in the group. So first, could you update us on how that annual origination pie has tracked this year to what extent volume can start taking on more third-party insurance AUM versus just funding Global Atlantic growth?

Yes. We're funding both. So just to size it, let's do the credit business real quick. Credit, $250 billion of our $650 billion, give or take. You break that $250 billion down, $130 billion is going to be leveraged credit, so I think high yield and loans. You've got pushing $75 billion in asset-based finance and call it, low to mid-40s in direct lending. And then there's some other stuff, opportunistic investing, et cetera. And so that's how that business breaks down overall. And then within the asset-based finance business, that is a business where you need to have a lot of capabilities and the barriers to entry, I think, are quite high. So we have pushing 20 platforms, 7,500 employees in those platforms, and they're out originating for everything that KKR does. And to your question about insurance companies, our own and third party, so Global Atlantic, roughly $200 billion of assets now, that's our insurance company. Our third-party insurance clients, somewhere between $70 billion and $75 billion of AUM last I looked. We are growing both. And so the origination platforms in ABF and direct lending are feeding both GA and third-party insurers. We see a lot of opportunity to keep scaling the third-party business. When we announced the GA deal, the third-party AUM was something like $25 billion of AUM, and now we're pushing $75 billion. And so the fact that we are originating for ourselves has made us that much better partner for third parties.

Helpful. Then away from insurance, I've heard kind of counterintuitively from other alternative executives that the education process on ABF for pension funds, other institutional clients has been longer than it was for direct lending, which is I find interesting. So where do you think we are in that client education process on ABF at those other client bases?

Look, I think it's a really astute question. So we have -- if you think about the direct lending market, and I mentioned the $1.8 trillion or whatever the number is these days, just to put it in context, the asset-based finance market, we think, is close to $6 trillion, on its way to $9 trillion. And from our seats, one of the things you get to see is kind of how asset classes become asset classes. So we came out of the GFC, virtually nobody had an allocation to infrastructure, right? And then sure enough, now that's become regular way. Then private credit direct lending starts around the same time. And it was a new thing and now virtually everybody has an allocation. ABF is one of those up and comers. It's early innings. I think we are less than 50% of the way through the education process. And we've got some early adopters that have had a great experience, and that's going to lead to more flows. But it's still early, just in an absolute sense relative to direct lending. Relative to the size of the end market, it's very early. So we think there's a significant amount of opportunity here to scale.

I think that dovetails nicely with another concern we've been hearing on the deregulation front that the new administration plans for bank deregulation could derail particularly this ABF opportunity. What is your updated thinking on that opportunity through the lens of potential bank deregulation?

I don't think it's going to impact our business much. Yes, maybe there's some capital relief trades that are less necessary, but that's a pretty small amount of the activity, but we're not expecting that to have a big impact because some of the asset classes we're involved in because it's not just things the banks used to do. We don't think they're going to start kind of financing some of the railcars and airplanes and some of the things they used to do. But remember, we're also doing some of these larger scale deals like we did a big portfolio deal with Discover on the student lending side. We bought a big consumer receivables portfolio from PayPal. And so there's this theme of the public markets like companies that are capital light. So whenever a company that is supposed to be capital-light starts to accumulate assets, that tends to be an opportunity for us. So it's not just the bank angle that matters. It's also this move to capital-light that matters with corporates. And so I don't think it's going to have a big impact.

And I imagine a lot of -- particularly after the deposit crisis a couple of years ago, still don't want the stuff on their balance sheet regardless of what happens with the capital [indiscernible].

Correct. They don't.

All right. Let's move to insurance. On the 1Q call, you guided down on spread earnings growth this year. Could you help us better understand the moving parts in there? What's restraining the earnings growth at Global Atlantic and when you expect earnings growth to resume in that part of your earnings?

Sure. Just context for everybody. So we report in 3 segments. We've got asset management, we've got insurance, and then we have strategic holdings, which is that longer-term hold, discussion we had earlier. What you're referring to is the earnings that show up in the insurance segment themselves. So what we tried to lay out in this last call is actually how we look at it. So we don't look at it just as that one segment of earnings. We look at the totality of the impact that Global Atlantic has on KKR. And so that is part of it. So the earnings that we make in the insurance segment. But remember, Global Atlantic is a $200 billion AUM client to KKR in the asset management context. So you think about the management fees that we're able to be paid by Global Atlantic, that's meaningful. We also have a third-party business. So roughly speaking, GA has $140 billion, $150 billion of assets on its balance sheet. We also have third-party capital alongside that is the other $50 billion that gets to the $200 billion, okay? So we've created these sidecar structures. So we have funds that sit alongside the balance sheet investment in GA. Those funds pay us fee and carry. That fee and carry also shows up in asset management. Then we collect capital markets fees from activities and investments that we make in GA from time to time. That shows up. So there's a series of things that actually show up in asset management. We look at the total return on our insurance efforts as the combination of the 2 because we wouldn't have this if it wasn't for this. That's how we look at it. What we said on the call is the return on capital that we look at on that basis is approaching 20% already. And we're in the midst of transitioning the business model now that we own 100% of the business. And so we think there's upside to that approaching 20% combined number. Part of that will be raising more third-party capital. So you want to keep it simple. Today, we probably got roughly approaching $9 billion, $10 billion of equity in the business itself and probably $5 billion or so of third party. I think that's going to go from roughly 1/3 to more than half as we raise the third fund alongside GA, IV 3 plus other partnerships we've created, and we've talked in the past about Japan Post Insurance. So I think you're going to see the mix shift to continue, and that will continue to drive the ROE up in addition to what we're doing in terms of investing in alternatives and shifting to more long duration. So there's a lot happening with the story, but you're going to see the insurance earnings kind of continue to tick up. And you're also going to see the asset management implications of that go up as well. But we'll share the combined because that's how we think about it.

As we think about the various pipelines to kind of growing Global Atlantic specifically, M&A comes up a lot. There's obviously a well-reported large asset available for sale. Understanding you can't address that deal specifically, but what is your appetite for large-scale M&A at Global Atlantic?

We're in the market. So we're happy to look. I think the key for us is making sure we can understand the liability side. And that was one of the attractions of Global Atlantic is very straightforward, simple liabilities where we knew that we could add value on the asset side and you didn't have a big range of outcomes on the liability end of things. So we're looking all the time. I think for us, probably the first choice, though, Patrick, would be something outside the United States, if I had to guess.

Okay. That's helpful. One from the audience on the insurance model. There's obviously a lot of concern around the balance sheet heavy approach through the lens of credit going from benign to potentially not benign. How would you defend against those concerns, which appear to be kind of feeding into a discounted valuation for you and others?

In terms of -- is it a balance sheet question?

Yes. A balance sheet question. Yes, credit.

Yes. I don't have a lot of -- I think if you're worried about credit exposure in the context of a firm like ours, you probably shouldn't own the space, right? Because if you're worried about losing money in senior loans or investment grade, which is a lot of what sits on the balance sheet, then you should be really worried about the equity that sits below a highly levered capital structure, right? And so a lot of this comes down to what do you actually think is going to happen and the person that you're backing, do they know how to invest in different parts of the market in different asset classes in different places. But if you're worried about that, you probably shouldn't want to own us if it was all third-party AUM or if we have some on balance sheet. So if you think about what our job is, and Joe and I were really clear, right, we are focused on compounding long-term recurring earnings, right? We gave a 10-year EPS projection. I've been told that is fairly rare. But we said this was last April, we said we would get earnings per share to $15 plus inside of 10 years. I think we said 10 years or less. That's what we're focused on achieving. And so what we believe is with this combination of asset management plus insurance plus strategic holdings, we can do that. But because we have to create a lot of net income, and we have to have it continue to compound at a really attractive rate. And we're the biggest shareholders, right? People at KKR own 30% of the stock. So we're in it with you in a huge way. That's the path we're on. So as you think about how we're getting from here to there, it's really a bet on our own ability to perform through a cycle across asset classes. And then let's have an ability to monetize that origination in a bunch of different ways for all of us as shareholders participating in that. Asset Management, we get a fee and a carry for doing it. Insurance, we, in effect, have 100% carry over a fixed hurdle that we all own together. Strategic holdings, that's our capital that's compounding and earning cash dividends out of great companies with high market shares that you'd like to own for 10 to 20 years. That's the model, all of it monetizing the investment capability that we have as a firm. So that's how I look at that question in that context. If you don't feel good about our ability to originate and then actually make money through a cycle, then I'm sure there's other presentations that are interesting for you. But that's what we're focused on doing. And we're -- all of us have virtually all of our net worth and what I just said. That's the dynamic that we set up.

Let's move to FRE growth, fee-related earnings growth, for better or worse, kind of the core of how everyone values these stocks. Obviously, you talked about a lot of good stuff that feeds into your 20% fee-related earnings growth target. So for those that might not be as familiar with the story, could you quickly unpack what you think the biggest building blocks to that view?

Sure. Yes, we have been clear. We put out targets for next year's FRE per share. We said $4.50 plus per share and still feel really good about that. And so I'd say the building blocks are really simple. First is management fees. And if you go back to that Investor Day deck or virtually any deck we do, we show you kind of the aging. We have a bunch of businesses that are still maturing. And in our business, and I'm sure like yours, it takes 10 years to create a 10-year track record, right? But in our business, take infrastructure, Fund I is $1 billion, Fund II is $3 billion, then $7 billion, then $17 billion. So you have this asymptotic thing that happens in our business. We have a whole bunch of businesses that we started 2010 to 2015 that are just getting to that part of the curve. That's kind of the first answer to your question. Part of that will be insurance scaling, but this kind of maturation of a bunch of businesses we started post GFC is going to be the biggest contributor. Then you have the capital markets opportunity. That was $1 billion plus in revenues for us last year, we think can continue to grow both up what we're doing in terms of investing and more third party because there's a third-party element to that business as well. Then you get expense management. We think we can continue to scale our margins, right? We're focused on monetizing everything we do, which means we can do it with fewer people. And so I'd say there's OpEx and comp leverage that we expect to get over the long term as well. You put those together and that we see a lot of FRE growth.

On that, can you point to any areas you think this view might be overly conservative and through that lens, specific products that you think have the potential to suddenly start growing much faster than what you currently expect?

The first one that comes to mind is private wealth. I think that's definitely on the list. I think insurance, now that we own 100% monetizing that the machine we've built in a more thoughtful way now that we can use all of KKR despite the name Global Atlantic wasn't doing much outside the United States. We're going to remedy that. So there's quite a bit of opportunity there. I think infrastructure has a lot of room to run. It will be a much bigger asset class for us down the road. It's at $80 billion. Our private equity business is $200 billion. I don't see any reason that infrastructure can't be at least as big as private equity someday. Take Asia, where we have 9 offices and approaching 600 people, not a single expat. You got to be really local, $70 billion, $80 billion of AUM. I think that number is going to be dramatically bigger. So said another way, we got a lot of places we think we can grow very meaningfully. I'm not sure the market appreciates all of those the way that they might. And I think what the market doesn't appreciate really much at all, especially lately is the durability of everything I've just talked about because we also, remember, changed the way that we present ourselves, right? So we take fee-related earnings plus insurance plus strategic holdings. We created a new metric last year called total operating earnings, TOE. We love 3-letter acronyms at KKR. So TOE is meant to be those recurring, highly modelable forms of earnings that you can just count on and look to. And then below the line, you've got carry, which is going to be a little more volatile and then balance sheet gains and income. But the TOE line, we've said is going to be 70-plus percent of the pretax earnings of the firm, and it's been lately closer to 80%. We expect that number to continue to scale and will be more durable. And when you get to down markets and the R-squared in our space gets to like 96% because everybody gets scared at the same time and sells. I think this is a great opportunity for us as a firm to prove the durability point. And that's why you heard such optimism on the call the other day is that we see that as a big opportunity. To the monetization point, we said we have line of sight to $800 million of monetizations already, $250 million of that in the quarter, and we're only 4 weeks into the quarter at the time. So we're optimistic that we can kind of prove the durability point with performance.

Let's finish on capital, which is always a key focus for investors given your larger balance sheet. I sensed at Investor Day last day, one of the most exciting takeaways from investors was the idea that you have $25 billion of excess capital generation over the next 5 years. How do you see the priorities of deploying that $25 billion?

Yes. We're going to look at every dollar, probably the way all of you would. What's going to create the most significant bottom line per share impact? How are we going to allocate it so we can grow that durable earnings per share on a recurring basis at a really attractive rate. So it goes to 4 places, right? There's insurance, investing more into GA, so we can scale the insurance earnings plus critically the asset management earnings. There's strategic holdings. The core private equity, these long-term holds, I mentioned, paying us dividends with a lot of consistency and a lot of visibility. There's strategic M&A that we'll look at from time to time, and we've done some of that. I think the premium would be on perpetual capital. We don't like paying a multiple for things that run off, right? So perpetual capital, relatively few people, ability for us to monetize it by plugging it into everything that we do. And then we always have stock buybacks as another way that we could do it. We bought back, since we created our buyback program, 15% of the free float at a stock price last I looked somewhere between $28 and $29 per share. So that's another way that we can express views. So it would be those 4.

Just a quick follow-up on the M&A. What would be the white space from a strategy standpoint? I understand that you'd like more perpetual capital, but what strategies would you see the most white space?

I'd say insurance outside the U.S. could be something that we would think about. We spent time thinking about life sciences. So I think you could see us do something there over time. Maybe things in real assets, in particular, outside the U.S. It's hard to find opportunities that meet our criteria because we're so focused on keeping the culture of the firm intact and focused on this perpetual capital point because as you know, we like to have that number increase as a percentage of the total, just speaks to the durability of the business. So a few and far between, but those would be a few areas that come to mind.

Great. Thanks so much, Scott. Very helpful.

Thanks for having me. Thanks, everybody.