KKR & Co. Inc. ($KKR)

All right. Good morning, everyone. We're going to get started. I'll come back to day 2 of Morgan Stanley's flagship Financials Conference. I'm Michael Cyprys, equity analyst covering brokers, asset managers and exchanges. And for our next session here this morning, we're excited to have with us Raj Agrawal, who's a partner and Global Head of Real Assets at KKR. Thanks so much for joining us.

Thank you, Mike, for having me.

And as you know, KKR is a global investment firm that offers Alternative Asset Management, Capital Markets and Insurance Solutions and today manages over $750 billion of assets under management. So Raj is going to go ahead and present for maybe 5, 10 minutes, and then we're going to have a fireside chat. Great. Raj, over to you.

Thank you. And thank you all for joining this morning. Good to see you all. plenty of time to have discussion, but I thought I'd just lay the land a little bit. Infrastructure today is a very diverse sector. If you go back 20 years, people thought of infrastructure as being ports and toll roads, that's vastly underestimating what it is. It's incredibly diverse. So think of it as being essentials for modern living. So today, an essential for modern living is digital infrastructure, web access, fiber, data centers, towers, cell phone usage mobility. People today vastly in a survey, they would rather not pay their heating bill than their power bill or fiber bill, right? This is an absolute essential. So like that, you've got power digital infrastructure, social infrastructure, industrial, of course, transportation as well. When you put that all together, you have an incredibly large market, the $100 trillion of need through 2040 and a fast-growing market. The two of the fastest-growing sectors in the entire economy are absolutely infrastructure, digital infrastructure as well as power and power generation, energy generally. And when you put all the -- why has this business grown essential assets, contracted revenues, strong market positions, it's a great defensive sector for sure. That defensiveness, when you're in an economy, in a world where you're worried about high inflation, high interest rates, geopolitical issues, equity volatility or value is too high or value is going to run, given productivity? Is AI going to eat entire sectors? When you have all those concerns being in the real physical world providing essential things is a pretty interesting place to be from a relative risk return perspective. If you can protect capital but still expose capital to sectors like digital and power that have a lot of growth with them, you have the potential for really exceptional risk return, particularly in this time when you're worried about these things on the left. And hence, even in the last 7 years, allocations to infrastructure have doubled. So if you look at our -- this is an institutional investor survey, and if you look at what part of their 100% of portfolio are they allocating to private infrastructure. That's gone from 3.3% to 6.4% this year. That's a record high. In 20 years ago, this was near 0. So [ Alt ] is absolutely a growing sector. This is perhaps the fastest-growing sector within [ Alts ], and it's for what infrastructure does particularly at a time like this. Within the infrastructure space, we have a leadership position. I would tell you our leadership position comes from two things: One is we have protected capital extraordinarily well. When you're worried about everything I talked about on the last page, number -- job #1 is protect capital. Don't screw it up. And so we've protected capital incredibly well. So 80% of our investments, we started our business in the [ GFC ] in '08, and so job #1 for us was protect capital, 80% our investments are underpinned by long-term contracts or regulations. So 10 years or greater. Mike is how we typically think about long-term contracts. We made about 120 investments. We've exited roughly half of them. So out of our 60 exits, only three have we impaired any capital at all. And in those three, we got 70% to 90% of our money back in each one of the three. And so really consistent underwriting around protection of capital. It is in part helped by a low leverage strategy. So typically, investment-grade or just a notch below investment grade, roughly 45% leverage on an enterprise value basis. So job #1, protect capital well, it's not sufficient. We protect capital. The second thing we do is try to add value in everything that we do, sourcing structuring, operational value add, stakeholder relations, portfolio management, exit, asset allocation. When you put it all together, we've been able to protect capital while delivering largely mid-teens returns in everything that we do. And you can see Fund I is a complete fund. This is in our flagship largest strategy. Fund II is nearly complete. Fund III, very much still in the process of maturing. Historically, as you can see, as time goes on, we tend to have higher and higher returns as we mature and get exits. Fund IV, that's the -- we're currently investing Fund V. So Fund IV is the last fund where we've completed investing. And to date, that's a 3-year market, it's our highest performing fund ever. And we -- if anything, our performance has gotten better with time, better with size. And so that putting together a track record of protecting capital, plus delivering at or above our targeted returns, that is really what has led to the growth in infrastructure for KKR. And you can see it here, I'll explain the chart, and I'll tell you when I'm really excited by it. Each color of our is a different product or a different strategy that we have. The one we started with back in -- goes back to 2008 is the purple global infrastructure. That's where we have our Fund IV was our last one that we finished in about $17 billion fund, and you can see the AUM over time as it grows. I would say that's really our only mature business and infrastructure, and I would tell you it's still growing. And here's what I love about it is that as we bring on new funds, we're currently in the market raising Fund V. As we bring on new funds and let's say, their order of magnitude where Fund IV was in the $17 billion level or greater, the funds that are rolling off are $1 billion, $3 billion, $7 billion funds. And so even if you believe this is mature in terms of size, there's still a lot of running room in terms of AUM growth as you bring on funds that are 2x, 3x, 4x the size of the funds that are rolling off. So if you think that's our most mature business, I would tell you there's still a lot of running room. And then you look at the other ones here, our Asia business, our core infrastructure business our climate business, K-Series is really our private wealth product that invest in all the above. On average, these are 3 or 4 years old. Our purple bar is 15 years old. And so there is a ton of running room even in growing fund sizes in the others. And so really, if we added nothing else to this, I would tell you, I'm excited about the prospects. And that's why this chart excites me. I think the last thing I'll say is I touched upon early, you can protect capital but still expose yourself to some of the greatest growth dynamics in the industry. I'll just focus on one, so digital and power. These are two sectors that given all the capital and growth in these sectors, these may actually help drive inflation in the economy, right? That's how meaningful they are. Digital infrastructure, just to give you a sense, I'll talk about -- when we talk about the slowest growing and the fastest-growing hyperscalers that we meet with. These are these largely who we're serving when we do data centers here. the slowest growing hyperscaler, if you take their inception-to-date capacity that they've brought online in data centers, they would tell you that in the next 2 years, they're going to double capacity in the next 2 years, relative to the aggregate capacity they brought online since inception. And the fastest-growing hyperscaler that we've met with would tell you, since inception through 2025, in 2026, they will double all their capacity they brought online from 2025 through inception. And in 2027, they'll double again. And so these are just massive and very fast-growing themes that present a tremendous opportunity to protect capital and do well. So with that, maybe Mike will take it over to questions.

Yes. Great. Well, thank you for that color there and perspective on the business. Why don't we start with the macro, so first half of the year has been characterized by some geopolitical volatility, higher for longer rates. Growing questions around AI-related capital spend. I guess what's changed the most, would you say, in your macro perspective and outlook over the last 6 months? And where do you think investors are maybe still misreading the opportunity set as you think about real assets?

Yes. Look, I think the misread tends to be people think of infrastructure either in one of two extremes. First of all, I'll step back and say, I don't think there's a whole lot of misread, right? And I think that's why you've seen allocations in 2026 being at the highest level ever. I think people are flocking to this sector because of what it can do at a time when there's a tremendous volatility. I want to protect capital but I want schmuck insurance in case markets continue to run in case there's a lot of growth from here, I want to participate. So I think people get the joke and largely understand what it can do. If there are misconceptions and people on the sidelines, I think they're on the sidelines for two reasons or one of two reasons. One is a simplistic understanding of infrastructure that is 20 years old being ports and toll roads and just not exciting. I'd rather participate in an area of the economy where I can generate interesting equity returns, ports and toll roads, that ain't it, they're not interesting, not interested. I think the other reason to be on the sidelines that will sometimes hear is, geez, a lot of exposure to AI, data centers, risky, not getting paid for it, I'm going to stay on the sidelines. And I would tell you, if you really spend the time to understand the sector, you would say, hey, these are not good reasons to stay on the sidelines, right? I think as we've talked about, infrastructure is much more dynamic today than ports and toll roads and airports. And absolutely, there's unpredictability on what may happen with AI. But from a picks and shovels perspective, and frankly, selling the right picks and shovels because I think there's definitely frothiness out there, and so you can make bad decisions even in infrastructure to serve digital infrastructure. But there's a tremendous opportunity if you can protect capital in that sector. There's tremendous opportunity to have an exceptional risk return profile. I think that's what's being missed. It's the -- if there's an overbuild, if AI doesn't have as much penetration as people expect, yes, there might be a meaningful contraction in companies that are targeted towards utilization and software and penetration. But if you have an underlying 15-year contract with an A-rated hyperscale counterparty, you might be fine just throughout all that. And so that's really what's being missed.

And has anything materially changed in your outlook here, say, versus 6 months ago? Anything more attractive or less attractive? You mentioned maybe some areas of overbuild. I guess what do you think is more attractive versus less attractive relative to what you ran during the year?

Yes. I think renewables is probably the biggest area that we think is more attractive. Energy, power generation, generally more attractive than we would have thought and may be renewables, in particular. Renewables tends to be less fashionable today. In the lexicon and the importance, I think the popular sentiment is we need power, but we don't need renewable power. We don't need to be green, et cetera, et cetera. And so just to tell you, like 3 years ago, 4 years ago, if we wanted to buy a renewables company and let's say the value of that company is $100, probably $50 of that was in the operating assets value and $50 of that value is in the prospect for new growth. Today, I would tell you, if we buy a company for $100, it's probably $90 to $95 of value in the operating assets and you're only paying $5 or $10 for the prospect of new growth. That's a much better entry point, right? You can protect capital much better. If you're paying $50 for growth, you better grow or you want to impair capital. And so we did very little in the renewable sector in 2022, 2023. Today, we love it because they can protect capital even if there's no growth, but I will tell you, even though renewables is not fashionable, we believe in growth, right? There's a massive power shortage. If we -- if these hyperscalers get anything close to doubling capacity in the next 2 years, which is the slowest projection, we will need all of the above in terms of capacity. It doesn't matter if being green is not fashionable, we will need a ton of renewables capacity and we have -- and frankly, growth will accelerate. And so I think that's probably the most interesting underappreciated.

And within renewables, are there certain areas that you find more attractive versus less?

I probably would stay away from offshore wind, given what's happened regulatorily we've been very big in solar from a renewables perspective. We own 10 renewables platforms globally, including one of the largest in the U.S. and in many places, actually, solar is cheaper on an all-in cost basis without any subsidy or contract.

And today, KKR's real asset platform spans infrastructure, energy, real estate, digital infrastructure, including increasingly adjacent asset-backed opportunities. So what do you believe is most differentiated about the platform today? Relative to peers as you look across the globe. And where does KKR have the strongest right to win?

Right, so our platform collectively is about a $200 billion platform. So that puts us depending on the sector or the cut, #1, #2 or #3 in the business. And so if you're trying to solve large complicated problems that require a lot of capital, there's only a handful of players that you can go to. This is a sector, if you take infrastructure as one example within real assets, 2/3 of the capital sits in the top 10 players. And the top 3 players have most of them. And so large, complicated, this is really only a handful of us that can compete. And so that's distinctive. I think even amongst the large players, I think culturally, probably the biggest asset we have is a combination of a tool set right? A team that's focused on operations, a team that's focused on capital markets team that's focused day in, day out on stakeholder relations, government relations, a team that's compensated globally to help each other out. Our private equity colleagues, our colleagues from Asia always sourcing. So a tool set that's tremendous and then a culture, which is we want to win, but we want to win as a team. And the two of those together has been tremendous to unlock to find, unlock and execute on large complicated opportunities. The 120 deals that referenced that we've done, I would tell you we probably could have done five of them as an infrastructure team. There's 115 of them where we needed. We may have had four people on an infrastructure team working on it, but we had 20 people as a firm coming together to make it happen. That's something that's hard to replicate. You can't do if you're just an infrastructure firm. And that's that tends to lead to a large size. It tends to lead to complexity, it tends to be the corporate partnerships, and that's a meaningful barrier to execution. And I think that's what we really lean on across sectors and geographies.

Oftentimes, when there's a big opportunity across industries that attracts others to enter to try and replicate, emulate success of others and to move into opportunities. I guess when you think about your business, what do you think is the hardest thing for others to replicate? And how do you think about the moat surrounding your platform?

Yes. let's tell you dive into our Asia infrastructure business as an example. So we have -- today, we have -- our Asian business is the largest by a factor of 2. So the second player is half our size, the third player is probably half the size of the second player. So there's a capital note right off the start. Our business in Asia, we have offices staffed by locals who have been around for 20 years in each key market. So we've got an India team full of Indian nationals in India. Same in Japan, same in Korea, same in Hong Kong, same in Australia, irreplaceable. Most of our peer set is covering all of Asia out of Singapore or out of Hong Kong. If you're trying to do a deal in India and you're just relying on what's the contracts say, good luck to you. You need a contract that's good, but then you need partner, a corporate partner that actually honors the contract. You don't want to be dragged in the courts. And so who do you trust? You need people on the ground. You need to go to the entrepreneurs, daughters or sons wedding, you need to be very well connected in the market, a huge sourcing advantage, a huge execution advantage, a huge advantage around, okay, where am I going to invest? Where am I not going to invest? We have built out over the last 20 years, an operations team dedicated to our portfolio in Asia. We've built out in the last 20 years of Capital Markets team. We built out a Stakeholder Relations team. And so we are -- we've had a great run in building a good business in Asia, but we are -- like we have an unfair advantage, if you will. We have to run hard. We have to -- we talk about staying hungry in our group because to your point, everyone is trying to replicate and come in. There's probably six firms that have launched efforts or about to launch efforts knock on wood, to date, each one of those firms is probably 1/6 to 1/8 of the size that we have. And I think that, that gap will widen not shrink in the next 3 to 5 years if we can execute. But they're coming, and it won't be this way forever. So I think we need to just run hard to keep building our capabilities. Frankly, there's not a lot of talent in the market, like we are creating the market there. And so if we retain, motivate, excite our talent, that's going to be a big barrier to entry as well. And I would tell you, I think, culture and track record. If you want to do -- if you're a corporate that wants to JV or sell part of your business in Japan and not be embarrassed and know that it will be executed well, why not go to the leading company that has done that, 5, 6, 7 [indiscernible] that's a big barrier as well. So just -- I think these kinds of barriers exist everywhere. We can't just rely on these barriers, but they're real, and I think they will be helpful to us.

Now corporate partnerships and carve-outs have historically been a significant source of differentiated deal flow for KKR. Talk about some of the opportunities you're seeing today as corporates are rationalizing assets, balance sheets, what sectors are generating some of the most interesting opportunities, would you say?

So we're another tool, if I kind of for a minute, it used to be the case, right? When we were just a private equity buyout firm, we would knock on corporate stores and say, "Hey, interested in going private or we're interested in selling the company". And if there is something to do great, if not, we would go away. Our model has evolved. And so we have sector specialties and competencies, but we approach the companies now and say, do you need growth capital, what are you trying to do strategically, maybe year for sale, maybe you need some structured capital because the debt markets are closed. There are many, many solutions that we can provide across credit, private equity, infrastructure, high growth, low growth, many, many solutions. And so we enter discussions really as a strategic partner, what's important to you, what your constraint, how can we help relieve those constraints. So in that context, I think if you look at our deal flow, we probably half of what we've done has been corporate partnership in some way, shape or form. And so big source. And when you're doing a corporate partnership, a lot of things matter beyond just price, right? There's an ongoing relationship and so capabilities, flexibility, relationship, ability to be flexible, change things over time, these all matter. I think the most untapped area of opportunity, specifically in real assets is probably industrial companies. If you look at infrastructure, largely it's been digital or renewables, energy, transportation, I think industrial is not very well tapped. They look at the largest 500 companies in the world, are the largest 2,000 companies in the world, and you look at the embedded transportation, logistics, processing, storage, feedstock, they don't need to be on balance sheet. If you're a corporate and the highest value-add things you do is branding and research and development, marketing, you don't need to have the basic undifferentiated processing logistics on your balance sheet. And so that's, I think, a meaningful source. And we've done a couple of deals like this, but I think we're just getting started. So we -- just as an example, we own in Asia, one of the largest pharmaceutical manufacturing businesses, long-term contracted with global pharmaceutical companies but the manufacturing is not the highest value add. So it's a great business for us to own, steady demand regardless of the economy under long-term contracts, but it's a way to get capital back to the pharma companies to put into marketing and R&D and whatnot. So we've just scratched the surface of this. KKR, given our 50-year history in working with corporate should be particularly well positioned to do this, but I think it's probably the next big growth area.

And then I guess maybe more broadly, as your scale has increased, how do you think about the sourcing model and evolving that over the next 5 years as you look forward, what steps might you take over the next couple of years to expand your sourcing funnel?

Yes, leaning more into solutions provider strategic partner as opposed to deal door. I would tell you, I think 95% of the [ Alt ] investing market and trying to create investment opportunities going on saying, here's my pool of capital. Let me go find an opportunity that matches this pool of capital. And I think what really, really good and differentiated looks like is saying, what are your strategic objectives company? And what can we do to help you along your strategic objectives? And that becomes the motivation. That builds stronger relationships that leads to unique deals that are difficult to replicate.

And one of the biggest themes and you were talking about this before is around the intersection of AI, electrification, power infrastructure. Ultimately, where do you see economic value ultimately accruing within the sort of transactions? And where do you see some of the most attractive risk-adjusted returns as you think about some of the biggest themes? And what do you think the market sort of overestimating or underestimating today, you think about bottlenecks?

Yes. So I'll share just on the overestimating, underestimating. I'll tell you for a moment, we're trying to not take a view as to how fast this will all grow. We're trying to invest in a way that we'll be successful if growth outpaces expectations or if there's like an overbuilt? And I'll come back to how do we do that. But for a moment, if you think about our potential underestimating of how big this could be. So one data point. The average iPhone user today uses about 500x more data than the average BlackBerry user used, okay? That's verifiable. What I would posit to you is that we are so early in how we are using AI as companies. We are so early in how we're using AIs individuals. We're just scratching the surface. And the brain exercise I want you to go through is imagine not in 20 years, but in 5 or 10 years, as we become more pro at using AI, I think the delta of how we can use AI versus how we're doing it today. I think we're just scratching the surface. And the delta is probably analogous to how do we use BlackBerries versus how we use iPhones. And so one of the hyperscaler CEOs was quoted to saying, we think we got to need 1,000x more power than we do today. I would tell you it's not crazy, right? And so and immediately, the constraints become the physical world and power, and we're going to need technological breakthrough to do this. But I just want to say that to open our minds, we may be meaningfully underestimating what the growth potential is here. We're not investing meeting that, but we may be meaningfully underestimating it. And so I think the highest value add, again, from a real assets perspective, when there's that much growth out there, it's very, very hard, like the key customers that are trying to build this capacity, they don't have the manpower to coordinate, land, power, right? There might be 20 people that had, "Hey, I have this plot of land" or 20 companies providing power, five or seven large data center companies. It takes a lot of coordination ability to bring that all together. And so what we are increasingly trying to do in the sector, and we hired someone to help us lead us effort with our investment team, [ Adam Selipsky ] used to be CEO of AWS. What we're increasingly trying to do is to bring the capabilities under one roof. If you can bring together land data center capability, power capability, fiber connectivity, capital under one roof, you now have a massive advantage. You can go to the customer and say, not only can I deliver, I can deliver without you having to dedicate your manpower to bring this all together, hugely valuable. If you can do that, you can win more business, you can win better economics and you can win the better kind of business. And I think that it's in line with the theme of being a solutions provider, a strategic partner as opposed to just a capital provider. And I think therein lies a tremendous opportunity.

Great. I want to pivot to a number of other topics we want to get to, one of which is real estate, which is arguably maybe one of the more interesting cyclical opportunities here within the private markets. So a question, where do you think we are in the recovery cycle for real estate today. What gives you confidence we're closer to the beginning of that recovery versus the end? And what parts of the market do you think still require more price discovery?

Yes. So maybe I'll put aside for a moment kind of the latter part of the price discovery, let's put aside the office sector in the retail sector, where I think structurally, globally, it's a very local market, of course. But structurally, globally, there's still too much capacity. And then given how our work habits have evolved and given online shopping, there's too much retail square footage, there's too much office care. There are exceptions in markets, there's exceptions in sub markets. But largely, let's put those aside and say, "I'm not ready to go to back up the truck" into those sectors right now. But now let's go to the other sectors, multifamily, so living beds, generally multifamily, student housing, senior living, industrial infrastructure, especially as they're reshoring, hospitality, these are all sectors where they're still very, very healthy demand. And that healthy demand comes at a time when -- because of very high interest rates, acquisition prices for assets are low on a historical basis. And in fact, given high interest rates and given inflation, you can buy below replacement cost as inflation is pushed up, replacement cost. So healthy demand, I can buy below replacement cost. The outlook for supply, construction activity in these sectors is down about 60%. So the outlook for supply is actually quite muted. And so you can imagine, as demand continues to grow or it's healthy. At some point, you need new supply. And at some point, pricing and valuation of these assets has to be strong enough to incentivize new supply. And so you're playing for that recovery. You're also playing -- I'd much rather put capital to work in a 4.5%, 5% 10-year treasury environment than a 2% treasury environment because I have the potential, the risk return around if rates fall and I get multiple expansion, that's some upside potential that you probably didn't have when treasuries were 1% or 2%. And so there's no doubt there's more cyclicality in real estate than in infrastructure. And so they're not perfect substitutes with each other. But if there's some appetite for cyclicality, some appetite for volatility, there's a tremendous cyclical opportunity to get into real estate right now.

Great. Let's talk about private wealth, which is top of mind for a lot of investors and clearly a big opportunity for the private markets, KKR's K-Series has successfully broadened across the private market. So how important would you say is private wealth as a distribution channel for real assets? And are there certain assets profiles that are better suited for the wealth channel than others as you think about it. And we have seen a little bit of slowdown in flows in recent months. What's your sense of scope for that to recover in real assets? .

Yes. Look, I think it's very important to us because it's another tremendous growth opportunity. You look at that AUM growth, we're just getting started. And so I think it's a great engine for growth. When you look at the wealth market, in the private wealth market in general, we see penetration still of those who are allocated infrastructure, [ Alts ] is maybe 0% to 1% to 5% of penetration, and infrastructure is typically 0 of the [ Alts ]. And so if you get anywhere near like let's say, a 30% allocation to [ Alts ] that we see in the institutional market, and a 6% or 7% to allocation to infrastructure. It's a huge potential market. And it's a market where today, it's not in real estate, but in infrastructure, we have the leadership, the leading position. And that's in part because of the platform that we have and the performance that we've had, we've been able to get the slots and been able to deliver the performance for investors. And so it's a really big part of our growth story. It's not the only part of our growth story, but a really, really important but the growth story. I think for the same reasons that I talked about institutions and increasing their allocation, it's a very, very compelling sell right now to the individual investor. And so we are seeing, despite the issues in private credit, we're seeing very strong flows continuing in the infrastructure space in the wealth market.

So not much of a slowdown?

I mean there's ups and downs, but it's hard to when you're launching on a platform now there's a big spike and then there's seasonality. So it's hard to -- I would say, structurally, has it been -- I don't see any structural reason for this to slow down. We're not seeing evidence of that.

Okay. Great. And almost out of time. So final question, if we look out another 10 years across the real assets business, what do you think are the key drivers behind the next doubling of maybe sooner than 10 years probably for you guys?

Sorely disappointed we only doubled in 10 years.

All right. So let's change the time frame here, and I'll leave the time frame to be moot. What do you think are the key drivers behind the earnings and AUM across the real assets franchise? And what do you think investors most underestimate about your real assets franchise?

Yes. SP1 I think there'll be three key drivers. So one is the dynamic that we talked about, which is just maturing of what we have in the ground. Even our most mature product, I would say, has substantial growth and then climate, Asia, core infrastructure, all have a ton of running room. That's number one. Number two, wealth, another massive key driver. And then number three is potential for new product. So for example, the digital infrastructure space, we feel undercapitalized in. If you think about all the capital required -- today, our pools of capital were maybe putting $2.5 billion, $3 billion a year in the digital space. The opportunity set that we're generating is probably 10x that. And so as we think about whether it's digital or other new product, that will be meaningfully enhancing to the growth potential as well. I think what might be not understood or when you have a healthy market, and a leadership position. We're #1, #2 or #3 in everything that we do in infrastructure. We're now in the latest survey #2 overall. And you have a team and culture that's been together for a while, I think there's a tremendous amount that you can do, as long as we continue to stay hungry.

Great. I'm pay have to leave it there. We're out of time. Raj, thank you.

I appreciate it. Thank you all.