KKR & Co. Inc. ($KKR)

Okay. Good afternoon everyone the asset made analyst at Tono's research. -- as a reminder, want to try to ask a question, you can submit it through the Pigeonhole app, and it will show up on my iPad here, and I'll try to work those in. So Scott, thanks for joining us again.

Thanks for having me back, Patrick.

It feels like every winter and spring, we have another crisis to deal with things -- this year, it has been another crazy few months this time dealing with the Iran War, private credit concerns, sticky inflation higher for longer rates, you can pick your poison. I guess, through that lens, do you agree with the concern that this is kind of a tough mix for things like private equity for levered risk assets? And then what is KKR's current thinking on inflation rates in the economy and what do you think KKR siting is through the lens of that mix?

Sure. Well, first off, thank you for having me back again this year. This has become a nice annual event for the 2 of us and thank you for the question. Look, sentiment is a very tricky thing. And there's periods of time in our business, and KKR has been around 50 years, my co-CEO, Joe Bay, and I have been around 30 of the 50 years. And there's periods of time where People are thinking everything is going to be great. And when they should be asking us card questions about stuff, they don't. And then there's times when things are going really well, and everybody is just negative on everything. And we're definitely in one of those latter periods of time right now. From our seats, it does not at all feel like a tough environment. I mean we just -- last 12 months reported record fee-related earnings record net income. Our management fees up 23% in the last 12 months. Record visibility and our monetization related revenue was up over 50% in the first quarter and all our operating metrics were up 20-plus percent in the first quarter, but everybody is negative about everything. So we're in there in these periods of time where the anxiety exceeds the reality as it relates to our business day-to-day. Now we obviously need to make allowances for what people are worried about, to your point. So there's no doubt to your question, inflation, we expect to be a bit higher for longer. Same thing with rates. You cannot paint anything with one brush. You can't paint our industry, you can't paint the economy, you can't paint markets. There's a tendency to want to make things simple, tidy sound bites. -- this environment does not lend itself to that. So we're finding that there's plenty to do all around the world, lots of investment opportunity for us across all of our asset classes. And so this is a very constructive and productive investment environment for us. If you look at kind of what average rates have been over the 50-year firm history, well above where we are right now. So this feel strange relative to the 2010 to 2020 period, but I would put this more in a normal operating environment, 2010 to '20 would be a little bit more of the odd environment. And if you look through the lens of our entire history as a firm. So we're super upbeat. I never felt better about the firm or the ways we have to grow in front of us.

Staying on the macro track, KKR has been 1 of the more optimistic on portfolio realizations, which I think is reflective of your portfolio probably being a little bit stronger than the average portfolio. It feels like things have improved since you reported our earnings, but we're still not seeing a ton of strategic activity for sponsor-backed transactions. So curious to get an update on how you see realization opportunities trending this year after the recent volatility?

We feel great about it. I mean look, the background for everybody's benefit is we learned a lot before the financial crisis. We over-deployed in 2006 and the first part of 2007. And -- and that taught us a lot about linear pacing from a deployment standpoint, diversification and portfolio construction. And so we've just been applying those learnings for the last now nearly 20 years. And part of the reason that we're having success with these exits is we have a very mature portfolio that's quite global and quite diversified. There's a tendency sitting in the U.S. to just think about the U.S., but we have half our investment professionals outside the United States. So just more recently, I'll just rattle off a few things that we've announced, but we sold one stream a software company just closed a couple of months ago for 4.5x our money. We sold the data center equipment company called Cool IT for 15x our money. We did two, 2021 exits. 2021 was a tough vintage year in our space. Atlantic Aviation, a couple of times our money and another 1 in PE the Hyundai Marine in Korea 7x. Kokusai Electric semiconductor equipment company in Japan, 20x our money. And then we just announced the deal last week for the Aerospace division of CIRCOR, sold it for $2.5 billion, the entire company we bought for $1.6 billion. That's just the last handful of weeks in terms of announcements. And so when I made the point about we have record monetization visibility. We announced that on our earnings call, we feel great about the forward from here. And to your question, if you go through some of those 7 or so exits that I rattled off, Three of those were to financial sponsors -- 2 of those were strategics and 2 were into the public markets. So it's very broad-based, and it's global.

The other Bugaboo this year has been retail and wealth, which is a growing piece of the algorithm for KKR, but not a huge piece of the back book, obviously. Given the noise and the increasing concern around the demand for those products, I guess, firstly, do you have any updated thoughts on how that demand is tracking, how redemption requests are tracking? And more broadly, has it changed the distribution discussion at all with your partner?

It hasn't meaningfully changed. I think the overall -- I think the punchline for everybody understand the opportunity we see from here is exactly what I said a year ago, maybe even better. I think there's some near-term noise. We'll talk about that. But just to size it for everybody, this wealth business, as it's talked about, for us, is roughly 5% of the asset that we manage. That has grown 80% in the last 12 months. So it's gone from kind of $21 billion to $38 billion over the last year, but it's $38 billion out of $758 billion, just to put it in context. There's a lot of headlines on this topic. We manage 8 different vehicles. 7 of the 8 have had positive inflows in the first quarter. And so -- we kind of work your way through that and the one that had net outflows, it was negative $12 million, and that was converting structure and converting strategy. Facts continue to be that we are growing in this space. We're a little different than others. 85% of the capital that we manage in this format is in private equity and infrastructure. actually 15% would be credit and real estate. So we're a little bit different in that regard. Our PE and infrastructure vehicles had something like 60 basis points of gross outflows, something like that in the first quarter. So it's -- it's continuing to be a space for us that's growing net. The headlines are the headlines, but for us, as we look to the long term hasn't changed our perspective. Our view is we just got to perform. If we perform and partner well with advisers and clients and do a great job for them, we'll earn the right for this to be a more meaningful part of the firm over time, but the trajectory is meaningful. And the backdrop for everybody is, look, if you're a retired teacher and pick your state in the United States, you probably have 30% or 40% of your retirement wealth invested in private markets. If you're a retired dentist, lawyer, fill in the blank that lives next door, it's pretty close to 0. And the vast majority of retirement wealth in this country in most developed countries are actually managed by the individual themselves usually with the help of an adviser. Our space did not innovate much for a very long time. And now we're innovating and trying to bring what we're doing and make it easier to buy and easier to own for that individual. But we're at the very early innings in that development of our space.

So you have the case suite of products to kind of attack this opportunity. I think you've said that you kind of have all of the asset class and strategy basis for tackling higher net worth clients with that suite. The newer products in conjunction with Capital Group are for a lower net worth individual. So for those that are less familiar with KKR and those products, I think it would be helpful to get a quick overview of how those products are structured.

Sure. You're right. Most of what we're doing in K Series, think of that as accessing households that are largely $1 million and up in net worth, which is a small percentage of U.S. households. So there's something like 90-plus percent that those products do not touch. And so we're very fortunate to have a wonderful partner in capital group that we're working with to get to the other 90% of U.S. households. Simple way to think about it. They're largely structured as interval funds. And so roughly, think of it as the underlying, 60% of them are going to be -- if the dollars are going to be invested in public markets and Capital Group will manage that sleeve. 40% will be invested in private markets. We'll manage that, sleeve. Capital Group is the distributor given their footprint and the incredible relationships they have across the space. That's the high level.

The uptake has been slow. So is it right to think about kind of the adoption curve for these products to be more dependent on 1- or 3-year performance numbers kind of like what we've seen in mutual fund world.

Yes. I think for us, it's been entirely on track or maybe a bit ahead of what we would have expected. Because we view this is an education element to this that is absolutely critical. There's 300,000 financial advisers in the United States, our partners at Capital Group work with 200,000 of them. Part of the reason we wanted the partner is, obviously, that's an amazing footprint and set of relationships. But there is work to be done in terms of making sure the advisers and the client community are educated on what this is and what it isn't. So we're in the midst of that. We're working on that together. I'd say that's very much on track. So we started in credit and very recently, we launched a product together in private equity.

So beyond the K series and the new capital products, how are you thinking about building the suite further? Is there a pipeline of new products? Or do you feel like this is the right set.

I think we've got everything built out in terms of the main product areas. ABF, asset-based finance. That's the 1 vehicle I mentioned that is just converting. That's just really starting now. One of the things we're thinking about, we just bought a company called Arc dose. So maybe we could do something in the sports area, perhaps there's something to do in secondaries. There's discussions being -- could you have something that actually has all the aspects of alternatives in 1 wrapper. So there's different product ideas that we're still working our way through.

And it's obviously not just a U.S. opportunity. So where are we in building out this suite to non-U.S. investors.

Yes. So about 40% of the assets that we manage in K Series are outside the United State 60% in the U.S. I would say our distribution footprint in terms of the build outside the U.S. is behind where we are in the U.S. We're probably 80%, 90% of the build done in the U.S., probably more like 50%. Europe and Asia. So we're continuing to hire. We're continuing to build relationships. And then once you get on these platforms, you got to go through the onboarding process, the education process. So this just takes time. We think there's a ton of growth out of.

Last 1 on these. Last year, we talked a bit about the case here, you potentially seeing more institutional demand as well. Has the redemption as changed that trend at all? And if not, what kind of clients are acquiring and you still see that as kind of a new incremental pool of AUM -- or does that existing wrappers.

No, if anything, all the media noise has increased a dialogue with institutions in particular about things like direct lending and private credit. So I think institutions had actually shifted a bit from direct lending to asset-based finance. So our ABF business the last 3 years has gone from $42 billion to $92 million, a very short period of time. And that -- some of that was institutions saying, okay, with all this money going to direct lending, I actually like this ABF idea. . So I'm going to pull back from direct lending a bit. Now with all the headlines and some of the redemption noise and spreads going out, leverage coming down, institutions are coming back and saying, actually, we think the risk or is coming back our direction. So if anything, it's increased as we've seen how this media and noise tick up.

Since you brought it up, we'll talk about direct lending a bit. I feel like we're talking about a going to cover that. I feel like we're talking about it every year at this point. obviously, the press is kind of hyper focused on this and BDCs, specifically and your public BDC specifically. So I think it would be helpful to get an update on your view of the trends there. maybe unpack the FS KKR issues a bit for people that are less familiar?

Yes, happy to. So let's just kind of step back for a minute and try to size what we're talking about. So if we manage a bit over $750 billion, I'm going to use rounding, makes life easier. There's about $300 million of that that's in credit. About half of that would be in leveraged credit, about half would be in private credit. So it's actually $149 billion is the number is what we manage in private credit. Of that $149 million, $92 million is in asset-based finance. Direct lending is 39, okay? So $39 billion in direct lending. Of the $39 million, you still with me, 39, you got 12 to 13 is in the public BDC FSK. So 1 way to think about it, it's about 1/3 of 5% of our assets. Just to put it in context. And so what you're reading about in the headlines is the NAV of that 1/3 of the 5% has been written down on the back of some performance issues within that portfolio, in particular, around a couple of deals in 2021. That's what you're reading about. There's very little overlap between that vehicle, which has a broader mandate and our institutional funds. And we actually put a disclosure in the IR deck that's on our website showing all of our institutional fund performance. So you can see all of the data. But that's just to size it for you, that's the math.

You mentioned kind of the institutional demand dynamics, which I think echo what we've heard from other companies. This is sticking on direct lending. It also sounded like coming out of the 1Q calls, the new deployment trends in that asset class could be getting better wider spreads, higher base rates, better docs. Are you still seeing that trend continue through May?

We are. I would say spreads out 50, 75, 100 basis points, something along those lines. Fees are up, leverage down half a turn to a turn -- so -- and to your point, the docs are tighter. So absolutely remains the case. .

You mentioned ABS as well. We've heard some pretty punchy TAMs thrown out there by you and some of your competitors in the tens of trillions dollars. It feels like it might be the more important part of the private credit growth story now? and you have among the broadest origination capabilities there -- so update on how your kind of annual origination machine is tracking that business and how you balance that origination for your insurance affiliate versus third-party client.

A simple way to think about it. So the insurance affiliate is a client -- it's treated like a third-party client in terms of how the waterfalls work. So everybody eats together. It's really relatively straightforward. And so the last 12 months, origination, the high-grade ABF origination about $40 billion, give or take. And as we've been originating for our own insurance company, that's allowed us to continue to scale our third-party insurance AUM. So when we announced Global Atlantic, we managed about $20 billion, $25 billion in third-party insurance AUM. That number is around $85 million now. So it's allowed us to continue to scale third-party capital as well. So I think you're right. It is the comparison. $92 billion is ABF versus 39 in direct lending. We've seen more growth. We think that's a market with higher barriers to entry -- so we have 19 platforms, 7,500 employees across those platforms out funding opportunities.

And we've heard from a lot of other executives, I think, including yourselves, that the education process for this outside of insurance for traditional institutional clients has been a bit longer than, say, for things like direct lending. Where do you think we are in that client education process and has the noise around fraud issues like first color -- first brands Tricolor change that client conversation at all?

It has not changed the conversation. I'd say we're probably third inning. -- which is a pleasing place to be. It's probably at least a $6 trillion market, on its way to 9. Direct lending is probably $1.2 trillion. So it's a much larger, deeper market. But it's pleasing to be at over $90 billion of AUM and still feel like it's relatively early in the development. .

Great. I think that dovetails nicely to a more recent concern I'm hearing that the new administration plans for bank deregulation could derail this broader kind of ABF private credit opportunity. What is your updated thinking on the bank disintermediation opportunity? And does the shift from the government kind of change that outlook at all?

We haven't seen a material shift in behavior. We're partnering with the banks across a lot of these vehicles, and they're actually financing several of the vehicles, almost all of them. So it's been a good partnership for us, but it hasn't really shifted things. I think to think about it, these are long-dated assets. And so you want to have long-dated funding against it. .

You pointed out to KKR's higher exposure to non-U.S. business as adding ballast or offsetting ballast to any kind of indigestion as some people call it in the U.S. Are you seeing any noticeable gapping in non-U.S. versus U.S. trends? And any significant change in client geographic allocations from the U.S. in that?

No. I mean, look, I think -- and I've said this before, I do think the industry is shifting a bit, and we're moving to much more of a K-shaped industry. And the 2010 through 2020 period where rates were low, inflation was low, multiples were up performance was relatively uniform across our space. People were performing well. And if you bought levered assets during that period of time, you tended to have pretty good results and that's where we told the firm do not confuse a bull market with brains. -- you got to be able to do this through cycles to prove that you're good at it. We have not had a normal recession in the United States for 16 or 17 years. This is a very strange period of time, right? The last 5 or 6 years, if you think about it, COVID or rates up, inflation up, tariffs, more war right? So what's starting to show up in the U.S. context. First, is we're starting to see some people have developments in their portfolio that are tougher on the back of all this stuff starting to flow through. And so that's what you're talking about. So with the media is picking up, in particular, the tougher stories, of course, as you'd expect. Part of the reason we're raising record-sized private equity funds is we're turning a lot of cash, and we've had really strong performance. Management fees in private equity are up 21% last 12 months. So we've seen a significant amount of growth. On top of all of that in the U.S., we think we're taking share on the back of performance. To your point, we have a significant global footprint. Majority offices outside the U.S., half the investment professionals outside the United States. I'd say investors want to continue to diversify their portfolios globally as well. And we've been fortunate enough to partner with many of them. So if anything, we're seeing more interest in Asia for an example, right now, a lot happening in Japan and Korea, in particular, continued activity in India, no doubt. plenty to do all across the European continent. So if anything, and that's across asset classes, that's PE, intra credit, real estate insurance you name it.

On the PE dry powder issue, there's obviously -- you have a lot of dry powder. The industry has a lot of dry powder. It feels like particularly direct lenders have been kind of talking about that coming out for years at this point. What is the key impediment to seeing -- I know you're more of a steady deployer, but why do you think that dry powder is getting so stale and we haven't seen that big surge -- and do think kind of a resetting of exit value expectations for that to really pick up?

I think there's going to be some resetting. I don't think what you're seeing right now in terms of this monetization delay is necessarily because there's not an exit market. As I said with us, we have plenty of things that we're selling right now at big multiples of our cost. This is more about when did you create your portfolio, so if you deployed a lot in 2021 and the first half of 2022, which means you probably price the deal before Ukraine, right? You may have some chance you may have overpaid for some assets, right? So you're going to end up owning those assets longer. And I say this with a lot of humility, we did the same thing before the GFC -- so what it does, it elongates your hold period because you need to increase your earnings for a longer period of time to overcome the fact that you may have paid too high a multiple okay? So that is part of the reason you see these monetization delays. That's why linear pacing as simple as it sounds, is very powerful. Because in years like 2020 when human nature says don't deploy, if you say, you know what, I'm going to deploy 20% of a 5-year fund in 2020, then it pushes everybody to kind of deploy and get money out the door. And then '21, where deployment in our industry went up 60% to 70%. Our deployment was flat because you stay on that linear line, right? It sounds very simple and very straightforward. But in our experience, it's incredibly powerful. And then you need to be diversified from a portfolio construction standpoint, so I think it's more of that's what's going on -- when did you create your portfolio. Have you created real value in that portfolio? And do you have profits that you can monetize for the people that you work for? If you don't, then you just want to elongate your hold period to basically take your -- have your option to extend out further so you can create that value.

That dovetails into a question that I have on the pad from the audience -- that's clearly from someone that's cynical about private equity. What do you see as the value proposition for private equity specifically in the next 5 to 10 years? And is the asset class on the decline with opportunities becoming more scarce in markets, companies more efficient.

That's a really good question. The short answer is we do not see that. You'll be shocked to know that's my answer. Look, I don't think how we conduct private equity is that well understood. So when I got to KKR, we would -- we had 15 investment professionals when Joe Bay and I joined. And so you would go buy a company with 2 or 3 people. You try to find the best company with the best margins with the best management team. and you put on a sense of capital structure. Now if you find that company, there is not enough value to be created. You cannot buy that company anymore, right? The markets are too efficient. So what you have to be able to do is to show up and buy a good company or a good asset and make it great. So you need to show up as a strategic buyer. You need to have a strategic mindset. So we'll sometimes have 30, 40 people on deal teams now because you need operations professionals and capital markets and macro and asset allocation and geopolitics. You need the ability to actually look at these companies from all angles and then materially improve their profitability, employee ownership is something that we have used to really good effect. We give all employees shares in our companies now. And so that's how we do it. So through that lens, if you can show up and try to make a good company, great, there's a ton to do. If you're just doing financial engineering and you think that there's going to be value to be created on a systematic basis, that's a very difficult business. So if you're trying to do that, I think the answer to your question is no. If you have the ability to make businesses and assets better, it can -- there's a lot to do all around the world.

And I imagine, to your point on these kind of stale portfolios that are out there, we could see some consolidation around the more mediocre portfolio is kind of getting phased out as people consolidate with the largest players.

I think there could be a lot of change in the industry over time. .

Let's pivot to insurance, where earnings have been more range bound the last couple of years. Could you expand on the moving parts that's restraining that earnings growth -- and when do you expect to see more meaningful progress on the targets you've laid out there?

Sure. Just -- so background. So in insurance, we make money in multiple different ways. We have the insurance earnings themselves and then we manage assets for the insurance company. There's also capital markets opportunities that come from that. We have a sidecar third-party asset management business called the IV that sits alongside our insurance balance sheet. And so everybody's benefit that don't know us as well, we're a bit different. So we report in 3 segments. We've got asset management, insurance and then something we call strategic holdings, which I'm sure we'll come back to. And so we have about $6 billion of third-party capital now that sits alongside that insurance balance sheet capital. That $6 billion of dry powder probably results in $60 billion to $75 billion of AUM simple way to think about it. And so we manage what all that capital will turn into. And so you mentioned the range bound. The comment is probably around the IOE, the insurance operating earnings themselves. If the combined earnings just the last 12 months are up 14% year-over-year. However, that still understates it because there's a couple of things going on. with our business. One is we are rotating the company we own called Global Atlantic. We're rotating Global Atlantic's portfolio in 2 ways: one, to longer duration liabilities. So think more 7 year and on the margin less 3-year product. And we're starting to invest more in private markets, underlying assets. It's a bit ironic, but that GA did not really invest in what KKR does in the more private equity infra end of the spectrum. We're now starting to do that in a modest way. We decided to report our results from that effort differently. Other people reported on a mark-to-market basis. We decided because we report KKR largely on a cash basis, we were just going to report on a cash basis. And so what flows through our earnings virtually has 0 coming from that alternatives portfolio that we're building. So what will happen over the course of the next couple of few years, which is probably the time frame and the answer to your questions, 2 things will occur. One, those -- that alternatives book will start to have exits. So we'll turn into cash earnings, where it's virtually none today. And two, that third-party IV dry powder will actually start to get invested. And fee and carry will start to get generated. So the way I would think about it is less runoff because longer duration liabilities and more earnings coming from the investment portfolio plus the third-party capital along side. All of that, we think, increases earnings power and the ROE.

There's a -- I think there's a perception in the marketplace that like competition --

The Global Atlantic transaction in July 2020, it's a bit of a question, how would the market process it. And as you know, it was received reasonably well. That's good news and bad news. The bad news part of it is that more competition showed up. So we've kind of gone from a handful of players with this type of partnership to something like 25% to 30%. So there is more competition. Having said that, we think it's harder to necessarily be able to replicate the investment origination capabilities. And we have something a little bit different in that we have a retail business and an institutional business. Over half of the business is actually institutional -- and so we shall see. But part of the reason we bought back more stock in the first quarter is on a relative basis, we saw better returns in Q1, buying back our own stock. Then probably saw on the margin on incremental annuity retail pricing.

Okay. We talked about kind of higher for longer and steeper yield curves, things of that nature, potentially being a headwind parts of the business. But you could argue those are good things for an insurance balance sheet. Is that something that we should be thinking about given the current...

I wouldn't. I think it's a nice balance to the business.

So summing up kind of all of the big growth drivers we've talked about, you're still talking about 20% plus fee-related earnings growth this year. So for those that might not be as familiar with the sorry, could you kind of quickly unpack the key building blocks to maintaining that strong growth outlook despite what continues to be a volatile world.

Sure. Back to point, just ask everybody to kind of ignore the sentiment and the noise you're having for a minute. But it is absolutely the case. We are seeing continued organic management fee growth in the low 20s percent, 23% last 12 months. first quarter metrics. All of our operating metrics were kind of 20-plus percent year-over-year growth. If you look at the makeup of the management fees, to your question on fee-related earnings, it's about 1/3, 1/3, 1/3. Private equity, real assets, credit. It's a very balanced business, and it's global as we talked about before. So that's kind of part 1. Part 2 is we think the capital markets business will continue to grow as the firm grows. And there's more to do with our capital markets business alongside our insurance business, as we talked about before, which fees will also kick in IV and otherwise. So there's plenty to do there. And then the other thing doesn't get as much attention as it might is just take a look at the last 3 years, right? So our management fees have grown 50%. Our operating expenses have grown less than 20% we have a different type of business model. Part of the reason we have the 3 segments I mentioned is it allows us to create more earnings growth with fewer people. And an investment firm, keeping your culture intact is absolutely paramount. It also tends to lead to higher margins. So we already have the highest margins in the industry. We think they can increase. If you look at most people in our space, they would have the inverse. Their OpEx is growing faster than their management fees. That's not the case for us. We think we can continue to put up those kinds of numbers. And we feel really optimistic about the forward based on all the conversations we're having with investors a and, frankly, the investment performance we've been generating.

So as you look across all the drivers and some of the newer products you have in the market can you point to areas where you think your view might be overly conservative and/or specific products that you think have the potential to suddenly start growing much faster than the current.

I think we've been surprised the last several years, infrastructure continues to probably be our fastest-growing business across the firm. I'd say Infra and the asset-based finance would definitely be up there. Asia, we managed $85 billion in the Asia Day, $85 billion out of $758 million. So if you go back to 2019, like 90% of the $21 billion we manage then was in private equity. Now roughly 40% of the $85 billion we manage today is in private equity. So Asia will continue to grow at a really rapid clip across all different asset categories. And we think that, that's likely going to be the fastest-growing region we have globally.

Okay. You mentioned infrastructure, and there's been obviously a lot of reporting on AI and to what extent all of the CapEx that's being spent as needed. How are you -- when you kind of develop your investment portfolio and AI specifically protecting yourself from the obsolescence risk, the idea that there's pretty much being spent in the revenue opportunity.

Well, I think look at it through a few lenses. One is the investment opportunity itself, which everybody is interesting, depending on where you are in the world, either AI is a good thing or about it. In the U.S., people usually ask it as a bad thing. But let's look at it from an investment opportunity first, right? We've deployed $40 billion, $45 billion across digitalization, data centers, fiber-to-the-home towers all around the world. right? So there's plenty of interesting things to do in that space, and we think that $40 billion, $45 billion is going to go up quite a bit, then power on top of that. We have deployed an additional $25 billion to $30 billion so far in power, there's a ton to do. And there's a lot on the equipment side as well, back to CoOlITCokasi, which is the semiconductor equipment company mentioned in Japan, Part of the reason we made 20x our money is on the back of the AI demand opportunity. So there's a lot of positives that come out of this. Then we have meaningful equity interest in 220 companies. 150 of them are running AI labs and sharing with each other what they're doing to increase productivity and find ways to run the businesses better. There's a lot of good things coming out of that as well. To the negative side because disruption risk is real. But if you're talking about it now, you're too late, right? So we started with this work kind of 4, 5 years ago and we went through everything we owned because you knew this was coming. It was just a matter of when and said, well, is AI net an opportunity, a threat or a question mark. If it was a threat or a question mark -- we saw it. Because you can't get out of the way of the train if you're still standing in front of it when it's this closed.

As we've as we've seen this year.

So we sold some assets several years ago where we had a little bit of doubt in terms of that net answer. And so we've got a lot of great things that we're doing with AI in the firm and in the portfolio. But at the highest level, I think that's probably what's most relevant.

On that last point you made, though, where does -- where do you and KKR stand on the broader software debate, the idea that the industry has been painted with one brush, and there actually are a lot of companies that will win through all this.

Clearly, it's been painted with 1 brush. But that's what tends to happen when people have anxiety. And that tends to lead to some really interesting investment opportunities in our experience. And that's really nice for.

Software still.

It depends. I mean I think it depends on the asset, depends on the moat around the business. It depends on the management team, ability to use AI to actually run themselves better in a differentiated fashion. It depends on the multiple -- some of these businesses are amazing businesses at 15x, but not at 25%.

Right. Makes sense. So the other angle to AI and technology more broadly is obviously what you can do that internally -- so what is your current investment in internal technology, AI infrastructure? What specific processes have you already integrated and materially automated or augmented through the use of AI and technology.

So the way we're doing -- and this is very early. So I'm not sure we're going to have anything all that differentiated to most other folks you'd have on the stage. But we've got an applied AI group that sits in the middle of the firm. We don't think it should be separate from the businesses. We actually have all of the businesses putting in place their own process using AI. And we're basically using KKR and running at different labs all across our firm. everything, how do we source better and faster, how do we actually handle client requests differently? How do we analyze our investment portfolios that are more in the traded side and come up with new trade ideas. There's a variety of different use cases, and we get a list every weekend to kind of fund the read of all the different ways the teams around the firm are using AI to do their jobs better, different, faster and do a better job for everybody counting us.

So the other angle is obviously your portfolio. I think you have over 100 portfolio companies across multiple sectors. So how is AI being used to drive operational improvements at the portfolio company level is that now a formal part of the value creation.

It is. It's part of the diligence process upfront. So we actually go through every single new investment through an AI lens. -- and let's say, 19-point checklist and all the sorts of things that we're working through. We have a Capstone operations team sits in the middle of the firm that is helping to make sure that work is uniform. It's part of the value creation plans of every new investment that we make and then we can monitor it and share ideas across the different companies.

And then my last question on this is kind of your information moats. -- does kind of AI-driven quantitative strategy is becoming more accessible, create a democratization risk for your kind of private equity alpha. Can it better identify and price middle-market buyout opportunities? Or does your information advantage kind of create a moat around that risk?

I think it -- I would go back to what I said before about what we need to do to make these businesses better. You can't replace the judgment element and that kind of pattern recognition. You can't replace the fact that in our business, you need to build like and trust with management teams because it's private equity and infrastructure. These are kind of relatively intimate transactions where you work together for a very, very long period of time. And so I think AI can help us do more thoughtful job around screening opportunities or kicking out ideas or things that maybe the teams hadn't generated on their own. But the job on the ground hasn't really changed.

Before I get to my last question, I have a few from the audience that I think are good. Would you consider putting private credit loans on exchange for price discovery through the lens of what Apollo has been talking about what are the benefits and drawbacks of providing more liquidity in the private credit world?

Well, I think the benefits are probably clear. It probably attract more capital over time. I think more transparency tends to be a good thing. What you worry about today, for example, I think part of the reason you create the excess spread is because you're getting paid an illiquidity premium. So if the private credit market just then turns into the traded credit market, you probably won't get paid the same liquidity premium, I would guess, over time. .

What do you think about like where do you stand on the debate.

I think that it's likely to happen over time for some types of private credit loan. I don't know about the ABF space. Some of these areas, I'm not so sure maybe direct lending could lend itself to it, but it's early. .

I'm not sure you'll answer this one, but I'll try. You've announced and you pointed to these earlier, you've announced a few large realizations since the earnings call. Do you have an updated signed and/or closed realization pipeline?

I don't, I don't -- it's more -- it's more.

Last 1 from the audience. There's been a lot of concern that Middle Eastern investors could pull back on alternative allocations given local CapEx needs after the ran or I guess, firstly, can you remind us how much AUM comes from that constituency. And how are discussions with those clients evolving?

It's a single digit, more or less percentage of our capital. We haven't seen a shift. If anything, it's been business as usual to date with our partners in the Middle East. Okay. So no change . .

Last 1 for me is on capital. It felt like -- there was a little bit of a pivot towards leaning into more share repurchases in the stock draw down. So is that a fair takeaway? And should we expect the share count to actually decline now?

I think the way we look at it, and look, as a reminder for everybody, people KKR are the largest shareholders of KKR. So we own roughly 30% of the stock. So the way that we look at it is you all would, which is what is the highest return on incremental dollar of capital we're investing. And so that's how we do the math. Is it insurance? Is it strategic holding -- is it buybacks? Is it M&A? And that's the screen through which we tend to look at everything. And we look at it relative to what we think a erosion the firm is. . To your point, given we seem to be in the have-not bucket right now, along with software and a couple of other things. We have taken the view that the market is mispricing KKR stock, and we bought some back in the first quarter. You also saw my co-CEO and I bought some and multiple members of our Board bought some expressing the same view. So if that continues to be the case, you'll continue to see us buy back stock. If there's other uses of capital and we're really fortunate because all of these numbers that I'm talking about, when you look at what the return on capital are quite high. If those other uses of capital start to be more competitive, then we'll put the money there. And that's kind of how we run the firm and we allocate the capital to the firm. But it's really across those areas, insurance, strategic holdings, acquisitions and buybacks. And so that's where we've been spending the time. And part of the reason we bought Arc Dose is because that was a very attractive use of incremental capital and gives us another way to grow the firm that we didn't have before.

Strategic Holdings is obviously a part of the capital framework. So I think it's less understood by the market compared to other parts of your business. So maybe walk us through what that is, your thinking around that business and what the path to the kind of $350 million of operating earnings you've been talking about there.

Sure. Let me just give everybody the background on what this is because I know this is a bit of a different part of our business model. So there's a couple of different things for you to understand. One, when my partner, Joe and I got to KKR Berkshire Hathaway's market cap was $41 billion. It's now $1.1 trillion. So that's just 12%, 13% for 20 and 30 years. But there's not many companies that have been able to compound their market cap for decades and actually added into the hundreds of billions of dollars. okay? So part of what we think about as we think about growing the firm is how are we going to continue to scale the market value of KKR, not just for the next few years. but for the next 10, 20, 30 years and beyond, okay? So the job is different when your market cap is $80 million or $90 billion then when it was $10 billion because if you're operating the same way you did when it was 10, you're not doing your job properly. That's kind of mindset part #1, okay? Background part number two is we were noticing that when we were looking at some investments that we really liked, but think big market share, branded companies, more recession resistant. These are lower risk opportunities. And they probably you'd be pleased to get a mid-teens return. You don't need 20-plus percent to own those types of businesses. So of course, if you show up with 20% cost of capital, you're going to lose every time because the owner is too smart to sell you that business at a 20% cost of capital. So we were sourcing all these companies that we really like. We didn't have any way to actually be relevant and 1 day we stopped and we said, "This is dumb. These are companies we might want to own for 10 or 20 years and longer. And then we step back and looked at our industry. And so there's trillions of dollars that wakes up every day trying to find a 20% change in control equity return but there really wasn't any money waking up to try to mid-kind of mid-teens lower risk change in control return. That's more of the space for mezz distressed in our business. So that's odd. So we said, why don't we just have ability to say yes. And by the way, we really like the idea of investing our own capital in these types of franchises. And so that's what we started to do, roughly 8 or 9 years ago. quietly off the balance sheet. We invited a couple of partners to come along with us. One of those is Chubb. So for those of you that are invested in Chubb, they'll talk about strategic holdings. They're one of our partners in this. And we have a third who's a sovereign. So that's what we've been up to. We've now created this portfolio. It's kind of 18 or so companies. They are maturing. We've been doing this for the last many years. So we've seen them perform through COVID through rising rates, rising inflation and through all the different dynamics that we talked about prior. And they've just been taken along. So just our own share. Forget the fee and the carry that we get on the third-party capital, that shows up in the asset management business. Just our share of the dividends these companies are now paying out, that's what shows up as earnings in our Strategic Holdings segment. So think of these as the companies themselves pay taxes, then they're paying dividends because they've delevered we take our share of those dividends. That's the $350 million you're talking about this year. Going to 2028, you said 700 plus. In 2030, we said $1.1 billion plus. We have a lot of visibility on the growth coming out of this. And the very simple way of thinking about it, a couple of things. One is if you like fee-related earnings and the recurring nature of those earnings contracted nature, we think you should like strategic holdings dividends, at least as much as you like fee-related earnings. Okay? A ton of visibility, great franchise. We own 1800 contacts. We own Arnet, which is like the Oreo cookie of Australia. There's a bunch of really nice long-term branded businesses in there. that are just trucking along. Our share alone of the revenues of those now is $4.5 billion, and our share of the EBITDA is $1.1 billion even today. But we're not reporting that. We're just showing -- we're just reporting the dividends that we get. And what's critical we didn't hire a single person at KKR to create this business, which now has roughly $40 billion of AUM and is creating these earnings because these are deals that we were already looking at and discarding. So it's the same origination teams, same value creation teams. We didn't have to hire anybody. Back to the point about trying to work to increase our operating margins and keep our culture. That's what strategic holdings is. So as we continue to execute on that, you'll see both FRE and strategic holdings grow at very fast rates with insurance growing quickly as well.

I think it dovetails nicely into a good high-level question I just got in from the audience. And you hit on this a few times this idea that the market is clearly truing your stock or lumping your stock in with the SaaS an AI concerns. So when you look at everything that's written and how the stock is reacting, what are the 1 or 2 kind of big disconnects you'd point out or address here? Maybe it's more than one.

Let's just go back to where we started. If you weren't looking at the media right now, and I walked in and I said, look, we've got record fee-related earnings record net income growth. Our management fees are up 23% organically in the last 12 months. We announced record visibility on monetizations. We raised $127 billion in the last 12 months. Our record, by the way, is $129 million. So within $2 billion of our all-time record in fundraising. We've had record deployment and we feel more optimistic about the than we've ever felt with a lot of growth avenues all around the world, and a lot of wind at our back and the mega trends on our side -- then that's how you should feel. And then you can go look at what everybody says, if you'd like, but that's kind of how we -- it feels to us. The thing that's different this time, and I'll wrap up here. There's always been a perception cycle as it relates to our space. as kind of a genius idiot perception cycle. 2006, we can do no wrong. 2008, we can do no right. 2021, we can do no wrong. 2026, We can do no right. That's how the perception moves in our space, okay? The difference now is last time we had this perception cycle, the space was probably $2 trillion or less. If you take out hedge funds, it's now $15 million. So it's a more relevant part of the space, so it's getting more attention. But I would resist the temptation to paint everybody with the same brush because you're going to see people that perform extraordinarily well through this period of time, and you're going to be some -- you're going to see some that struggle to a greater extent and have the opportunity to learn some lessons. We think that we're going to be on the right side of that.

That's a great. Thank you.