Good afternoon, my name is Patrick Davitt. I'm the US asset manager analyst here at Autonomous. It's my pleasure to welcome KKR's co-CEO, Joe Bae. Thanks for coming, Joe.
Thanks, Patrick.
As a quick reminder, if you want to ask any questions, you can submit them through Pigeonhole, and I'll get them on my pad here and try to, try to work them in. So maybe to start, since, since we have most of the large alternative manager CEOs here, I'm starting these discussions with some higher-level macro questions so we can, we can compare and contrast. I sense there's increasing concern that sticky inflation, higher for longer, slower economic growth, could be particularly bad for levered risk assets. So do you agree with that view? And through that lens, what is your outlook for inflation rates in the economy?
Sure. I mean, I feel like we've all been talking about sticky inflation and higher rates for longer for the last 24 months now, so not a new topic. You know, I guess our fundamental house view in terms of rates is Fed is clearly done raising rates, we think.
Mm.
We don't expect any rate cuts in the back half of this year by the Fed, and probably 4 rate cuts into 2025, with kind of a long-term 10-year Treasury rate around 4%.
Mm-hmm.
That's pretty normal. If you look back the last 20 years in the U.S., that's not abnormally high or low. Quite frankly, that's a pretty reasonable rate. I think what's important to know is we're a pretty diversified business, not just in terms of asset classes, but in terms of geographies.
Mm-hmm.
So when we're talking about these macro factors, we have businesses like our $177 billion insurance business in Global Atlantic, our private credit business, that actually do reasonably well and enjoy higher rates-
Mm
... in terms of their ability to make an absolute return. In our private equity businesses, our infrastructure businesses, we're able to factor in these macro risks that we see-
Mm
... going forward and how we price deals.
Mm.
Right? So if financing costs are gonna be higher or more constrained, we price that in.
Mm.
The key is really around the stuff you've done in the last three to five years, right? And that's more a question, I think, of refinancing and capital structures-
Right
... and making sure you're always on your front foot, managing risk, managing those capital structures in a proactive way. I would say, you know, our firm, two-thirds of our offices are outside the United States. So while the U.S. is our biggest market, we spend a lot of our time outside of the U.S. as we think about where to invest, where to allocate capital, which asset classes to lean into.
Mm-hmm.
I know we'll talk about Asia a little bit later, but, you know, I just came back two weeks ago from a ten-day trip to China and to Tokyo. I would tell you, you know, what's happening in Japan is pretty exciting right now, and we've talked about this in the past. Coming out of two and a half decades of deflation, where you have now positive wage growth, you have small positive interest rates, you have relatively low inflation, but you have this incredible country that has saved so much money in the last 30 years of deflation, right? $10 trillion in deposits in the banking system, $3 trillion in the annuity market in Japan. The biggest savings market, potentially in the world-
Mm
... in terms of those types of assets. That will slowly start rotating into risk assets over time-
Mm
... as the economy's coming out of this deflationary period. It's an incredible backdrop, actually, for potential investing and growth in the asset classes that we participate in. You know, we talk about China. I think China, we expect to have a pretty muted recovery.
Mm.
There are some enormous structural things that are holding back the economy beyond the geopolitical tension that's in the headlines every day. You've got a real estate overhang in the country. Real estate and construction represents 20%-25% of their GDP, so when the real estate market is sick or slow, it's gonna have real implications for growth in China. You don't have a lot of leverage at the central government or at the household level in China, but you have a significant amount of debt, whether it's non-bank debt or shadow debt, at the local government level. So they've got a balance sheet issue to clean up at that part of their economy. That's gonna constrain growth, and that's where a lot of the economic activity takes place.
But we think, you know, the big debate still in China is whether they pivot back to domestic consumption versus export-led growth, right? I think that's the big question mark that a lot of foreign investors have, and a lot of private entrepreneurs in China have, is: Where is the government gonna try to stimulate at this point in the cycle? But, you know, China's probably gonna be 4%-5% type-ish growth, for the next three-four years, you know-
Mm
... as they start working through all these issues.
As we think about what you're seeing real time in your portfolios, and we probably had the same discussion at this time last year, it feels like stress keeps getting pushed out.
Yeah.
Are there any signs of significant slowing in any of the asset classes or particular exposures or stress emerging more broadly that you're seeing?
Yeah, listen, when the capital markets were frozen over the last couple of years, I would say in our traditional flagship private equity business, the risk was really around refinancing extended capital structures. Like, the markets need to be functioning for you to de-risk-
Mm
... capital structures. I think the positive signal, and the reason why we are optimistic at this moment in time, is in the first quarter of this year, you have really seen the capital markets start to open up for the first time in a couple years.
Mm.
Right? So leveraged loan issuances in the first quarter were approximately $150 billion. That's a higher quarterly number than we've seen in the last two years in any quarter, right? IPO window, equity markets are reasonably healthy, at least in the United States. So you've seen IPO issuances up 170% versus a year ago.
Mm.
You've seen follow-on offerings and secondary offerings up 130% versus a year ago. So the capital markets are healing, they're open. Capital is starting to flow back into the system, which is the foundational condition you need for the deal market to start picking up again, for M&A activity to start picking up again, for refinancing activity to pick up again.
Mm-hmm.
That's really where we are, I think, coming out of the first quarter, is that early signals, you know, that the market activity levels, the pipelines, are really starting to build in a way that would lead you to believe 2024 is gonna be much more active than 2023.
Mm.
Certainly, hopefully, 2025 will be a strong year as well. But to your question about portfolio specifically, you know, if you, if you go back a couple years, you know, the bite inflation had in 2022 was real. That's when we first started seeing inflation spiking. So we had, across our 200+ portfolio companies around the world in private equity, we saw low double-digit top-line growth, 11%-12% revenue growth in 2022 across all those companies on average.
Mm-hmm.
But we saw EBITDA growth of probably 6%-7%, right? So there was clearly margin pressure because of inflation in 2022. In 2023, we started to see that inflation pressure starting to ease off, and we actually saw a reversal of those trends. So global growth started to slow in 2023.
Mm.
So we saw top line growing at 8%-9% versus 11%-12%, but we saw EBITDA grow across our portfolio in 2023 at around 15%.
Mm.
So, you know, companies were able to adjust cost structures, they were able to fix supply chain constraints, they were able to take price more aggressively where they needed to, and they were able to protect and grow EBITDA in 2023. And that's, again, across a large, diverse portfolio of companies we have globally in private equity. So our portfolio is in great shape. The capital structures are in great shape. Like everyone, we have a handful of issues. They're much more idiosyncratic-
Mm
... to the company, but kind of, the big picture is our portfolio is in very good shape right now.
You mentioned your Asia exposure, and I think that feeds into what seems like, you know, relatively more optimism than we're hearing from some others. And your positioning in that region was a common theme throughout your recent Investor Day. I think you were the architect of KKR strategy there. You mentioned you were recently in Japan. I think you met with the Prime Minister. So this is obviously a big part of that theme, right? Japan. So can you talk us through the opportunities emerging in Asia broadly, Japan more specifically, and are there any businesses you think will be particularly strong growers, or is it really just every asset class?
Sure, yeah. Asia, there's a lot to unpack, but the big picture for us is, you know, we've been in Asia now for a little over 18 years as a firm. We have, by far, the largest alternatives investment platform in the region today, the dominant private equity business in the region, the largest infrastructure investment franchise in the region, and a pretty strong, rapidly growing private credit and real estate business in Asia. Our footprint is across eight local offices in the region. I think we have two expats on the ground out of 570 employees in Asia today, so it's a very localized-
Mm
... business for us across these eight offices. And we manage close to $70 billion today in region, in Asia. The opportunity set is very different across the region, and I'll talk about Japan in a second, but, you know, when you take a big step back, the reason we're so bullish on Asia long term, you know, we are very long-term investors. The GDP growth in that part of the world is clearly gonna be better long term than most other parts of the world. You've got 1.1 billion millennials, you've got massive tech penetration in terms of mobility and tech adoption across a lot of these economies. You know, coming back from China, I would say the Chinese, on average, are more tech-savvy than U.S. citizens-
Mm
... in terms of their use of e-commerce and home delivery, and all these other things. So, like, the backdrop for growth is, especially in the consumer and services sectors-
Mm
... which is really where we're spending a lot of our time, is really extraordinary, even in China today. But India, Southeast Asia, Korea, Japan are very different economies. Obviously, much more mature, huge conglomerate structures, trade at a massive discount to fair value because of these conglomerate structures-
Mm
... so some of the cheapest markets in the world. You know, in Japan today, we have around $20 billion of capital invested in the ground right now, so twice as much as any other country in Asia.
Mm.
We shared at our Investor Day that in our private equity business since 2010, it's been the best performing market for KKR globally in terms of buyouts. Around 40% returns since 2010 in Japan. It's the combination of low valuations, non-core businesses that are being acquired that are sub-optimally managed, so massive operational improvement potential. Probably the lowest financing costs we see anywhere for-
Mm
... you know, transactions in the Japanese context, and a market that's not very heavily competed right on. It's really hard-
Mm
... to establish yourself in Japan reputationally, relationships with banks, relationships with these companies, to be a trusted partner for them. So that cocktail of things leads to really extraordinary private equity opportunities.
Mm.
We're at a moment in time again, where Japan's coming out of this deflation. There's more of a risk appetite. Corporate CEOs are seeing their stocks go up by selling non-core assets.
Mm.
There's more shareholder activism in the marketplace. So Japan is gonna be a hugely important market for us going forward, and it's busy today. You know, one of our strategic acquisitions a couple years ago is called KJRM. It's one of the largest, public REIT complexes in Japan. We bought it from Mitsubishi and UBS. It's around $15 billion of AUM today, and as a lot of these corporates in Japan think about improving ROE, the easiest thing for them to do is sell non-core real estate.
Mm.
Right? So we now have a permanent capital vehicle at scale in Japan, where we can be a solutions provider. We could talk about buying non-core assets, non-core subsidiaries, non-core real estate. It just makes us that much more relevant in the Japanese context. You know, and private equity holistically in the region is, or all the alt space, is massively under-penetrated. You know, as a percent of GDP, alts in Asia is 9% penetrated. In the U.S., it's 26% penetrated, and in Europe, it's 16% penetrated.
Mm.
So just a ton of running room for the alts to grow. And like anything in our industry, you know, the sources of capital, you're competing with a lot of different sources.... In Asia, the primary source of capital is traditional commercial banks. Almost all the lending activity in Japan is done by three of the big mega banks, right? They don't have a high-yield market in Japan. They don't have a private credit market in Japan. That's the opportunity for firms like ours to go there and help develop those asset classes and those elements of the capital markets.
Makes sense. Another big emphasis at Investor Day was your broader business model of asset management, plus insurance, plus Strategic Holdings on the balance sheet, which is obviously the newest piece. I guess some people call it core plus-
Yep.
-private equity. Could you maybe explain what exactly that is for tho.e that aren't as familiar, and the impact it could have on the business going forward?
Sure. So when you take a big step back, this is what Scott and I debate all the time, and we talk about as a partnership all the time, is: How do we put together a business model that's not dependent on doubling our third-party AUM and asset management to $1 trillion, to $2 trillion, to $4 trillion to grow the firm? We're obviously gonna grow our third-party asset management business. We think we'll get to $1 trillion reasonably soon, but we need multiple engines, multiple levers to create value for our shareholders. So the three big engines today are our third-party asset management business, $580 billion across all these things we talked about. It's 100% ownership now of Global Atlantic, our insurance subsidiary, $177 billion of AUM.
Then the third piece, we introduced a new segment of our business in November of 2023, called Strategic Holdings. Now, while this is a new segment from an accounting standpoint, we've been incubating this strategy for nearly a decade now. And the best way to describe this, and I talked about this at Investor Day, is, you know, Scott and I, when we joined KKR back in 1996 together, you know, Berkshire Hathaway had a market cap of $41 billion. Today, it's over $900 billion. So that's 28 years of compounding at a little north of 12%, right? So the magic in Berkshire Hathaway, I think, for us, is a couple of lessons. It's obviously the power of compounding.
Mm-hmm.
It's the power of long-duration holds of great businesses and your ability to create a portfolio of world-class companies, right? If you get that right, you can compound and create a massive amount of shareholder value over a long period of time. That is what Strategic Holdings is for KKR today. We've been buying businesses with our balance sheet capital and side by side with a couple of large partners of ours, that we expect to hold for 10, 15, 20, maybe forever, years. These are large businesses that we control. They're defensive in nature, really unique market positions, and businesses that we think can continue to grow and compound in a mid-teens kind of rate of equity return.
Mm.
We now have 19 companies in this portfolio, and the guidance we gave is, like... You know, these were all buyouts when we started. So some of these older buyouts that we did are at a point in time where now we have a lot of visibility in terms of the recurring dividend stream that we can get out of these companies as they continue to grow.
Mm.
Right? So what we told the Street is, this year, the dividends are gonna be relatively modest. 2026, it's gonna be $300+ million of dividends coming to KKR for our proportionate ownership of these companies. By 2028, that'll be $600 million of dividends. By 2030, we feel very good about $1+ billion of annual dividend flow. So this will be a meaningful part of our operational cash flow at KKR. It's probably the most visible, the fastest-growing, and the most stable piece of our cash flow long term.
Mm.
If we could replicate even a portion of what, you know, Berkshire has created with their model... We're a different business, a different model, but it's gonna be a super important part of how shareholders should think about value creation at KKR long term.
Makes sense. It's a good segue to capital more broadly, which is always a key focus for investors in KKR, given things like strategic holdings, given the larger balance sheet. And I sensed the CFO's comments highlighting $25 billion of excess capital generation over the next five years as something many investors I talked to were most excited about coming out of Investor Day. So how do you see the priorities for the deployment of that $25 billion evolving over the years?
Sure. I mean, listen, KKR, the partners and employees at KKR own 30% of the stock, so this is something we are also very excited about and focused on in terms of allocation of capital. So our CFO, Rob Lewin, shared at the Investor Day that, you know, we think we'll generate $25 billion of free cash flow in the next five years, relative to close to $15 billion in the last five years at KKR.
Mm.
So how we allocate that capital is gonna be hugely impactful on shareholder value creation over time and our own value creation over time. We think there are really four categories of things that we're gonna use that cash for. The first is gonna be to support the continued growth of Global Atlantic and our Insurance business. Right, so when we bought GA in 2020, it had roughly $70 billion of AUM. Four years later, $177 billion of AUM. So the synergies between our origination investment business and the insurance subsidiary are very, very powerful in scaling that.
Mm.
But that's a business that's capital consumptive. We're gonna need to-
Right
... continue to invest in that. The second area is strategic M&A. So when you think about this Japanese REIT complex, for instance, that I described, KJRM, that's a strategic acquisition. It's permanent capital. It's accelerating our expansion in real estate in the region. It's synergistic with our private equity teams in unlocking deal flow in Japan.
Mm.
That's a great example of what we consider to be strategic M&A at our firm. The third area is really this core PE, Strategic Holdings.
Mm.
We have 19 companies in that portfolio. We're gonna continue to add businesses, great businesses around the world as we find them, and that'll be a big destination of capital, and the fourth is obviously share buybacks at the right time, at the right price.
You mentioned strategic M&A, but KKR is already among the most well-balanced managers in the alts space. So where do you see the most white space for inorganic transactions?
Yeah, I would start by saying, you know, we feel great about what we have today, the pieces, the three pillars of our strategy. I don't think we need to do anything more in terms of strategic M&A. We're not sitting here saying we're missing a piece of the puzzle right now. But if there was an opportunity to scale an international insurance platform, similar to what GA is for us domestically-
Mm-hmm.
that could be very interesting and strategic for us. If there are some very niche areas like life sciences and biotech, that we could go buy a small platform or boutique, we could certainly think about that. We've built and invested behind a number of origination channels for our credit business-
Mm.
- asset-backed finance, et cetera. If there are acquisitions that we can make in terms of origination capabilities for some of our products, that's something we potentially would use capital for, but there's no big bang acquisition or strategic hole that we think we have in our business model today.
Makes sense. With that said, you, you didn't really change your earnings targets that much. Should we assume the deployment of this $25 billion is already accounted for in those targets?
Yeah. You're right. So for those of you who weren't at Investor Day, our near-term targets, for FRE is $4.50-plus per share by 2026, total operating earnings of $7-plus, and adjusted, net income of $7-$8 per share. So those are the near-term targets we laid out for the street. You're right, those include our ability to reinvest capital, I would say everything other than strategic M&A.
Got it.
Right. We have not factored in any strategic M&A, M&A incoming to those earnings levels.
Thanks. Let's move to Retail. Obviously another thing that had a heavy emphasis at your Investor Day, but still, you know, it's fairly small relative to other players, obviously seeing a pretty big ramp in growth so far this year. Let's start with the announcement you made last week. You made a fairly splashy announcement-
Yeah
... that you're partnering with Capital Group to build retail products with both liquid traditional sleeves and illiquid private credit sleeves, which should allow you to better address the mass affluent market.
Yeah.
Just firstly, maybe help us understand, as much as you can, obviously it's not all public, you know, how the economics of this could work going forward?
Mm-hmm.
And then, why you think this is the best path forward versus doing things yourself?
Sure. I think it's important to both frame and understand this Capital Group announcement relative to everything else we're doing in private wealth. So just to level set, you know, we manage $580 billion of AUM today across our asset management business. $70 billion of that AUM today already comes from the individual channel. Okay, so we have been working with very sophisticated family offices, ultra-high-net-worth individuals, for a long period of time. That group of investors traditionally comes directly into our fund products. So they are sophisticated enough that they are investing directly into our US private equity fund, our global infrastructure fund, our credit funds, as part of their alts allocation.
Mm.
Right? So they've been with us for a decade-plus, and that channel continues to grow. We've launched, in the past couple of years, specific products that we have created for the next tier of investors, right? So these are Qualified Purchasers, the QP market, and Accredited Investors. So QP is 5 million of investable assets or above, Accredited Investors is $1 million or above in households. So that's the K-Series.
Mm.
We have private equity, we have infrastructure, we have real estate, and credit.
Mm.
We've been launching those products across platforms around the world in the last two years. We're on 70 platforms globally today, and we've raised around $9 billion through those K-Series products. Of the $70 billion, $9 billion is that. That number was $2.4 billion a year ago, so tremendous amount of momentum. We feel great about the launch of these K-Series products, and again, we are targeting million-plus wealth households at this point.
Mm-hmm.
Right? So that's around 5% of the U.S. household base, called 6-7 million homes, are kind of in that category. The Capital Group announcement is really an opportunity for us to go even further down-
Mm
... to the mass affluent in this country, below the accredited investor, below that $1 million threshold. So Capital Group is obviously one of the best mutual fund companies in the world, $2.6 trillion of AUM. Six out of the 10 largest mutual funds in the country are their products.
Mm.
You know, there's 290,000 financial advisors in the country today. 220,000 of those 290,000 work with Capital Group-
Mm
...and sell their products. You should reach... They've got incredible brand presence in that channel, and what we announced was a partnership. My partner, Scott, said a marriage, a Capital Group- ...but small M marriage, not the big M marriage.
Not the big M.
To co-brand, co-create product, to market to the mass affluent universe. So distinct from our K-Series, distinct from, you know, big family offices that invest in our funds directly. We think long term, this is gonna be a massive, massive opportunity. We're starting this partnership in the credit space because we think that's the easiest product for mass affluent to understand. So they already have a number of mutual funds that are in the fixed income space, that are super successful in the marketplace. We're creating two hybrid funds with them to launch in 2025, which will be a combination of what they do a great job of, is public credit, liquid credit already... and we will manage a large private credit sleeve.
Mm-hmm.
So they'll be responsible for public credit, we'll be responsible for private credit, all the stuff that we're originating anyway through direct lending.
Mm.
asset-based finance. And on a combined basis, that's gonna be like a core plus fixed income product, right? Should have a higher return than what they are doing by themselves-
Mm.
'Cause they get the benefit of the alpha in private credit.
Mm-hmm.
We're gonna start with private credit, and then, you know, the vision is to create products like that.
Mm
... across all of our major asset classes: private equity, real estate, infrastructure, et cetera.
Wow!
But we're at the early stages still.
Exciting. So more broadly, where do you think you are in terms of building out the U.S. and international distribution base for all these products, and where are you seeing the most demand broadly?
Yeah. Again, in the K-Series, we're on 70+ platforms today.
Mm.
We've got a lot of room to grow in that channel. We haven't really even gotten to markets like Japan in terms of distribution-
Mm
... of that retail product. So there's a lot of upside. And you know, I know you had John Gray on here earlier. The scale of what they've done in just real estate, right, is pretty amazing.
Yeah.
But you think about the opportunity for private equity, for infrastructure, for credit for us, and real estate, we think this is, you know, a decades-long opportunity for us. The way we talk about it at a high level is, you know, historically, around 15% of the capital we've raised has come from the individual channel, these super high-net-worth families and family offices. We're layering on the K- Series, we're gonna be layering on, Capital Group. We think over time, 30%-50% of our total fundraising will be coming from the individual channel, right? So we're, it's not that institutional is shrinking.
Mm-hmm.
Institutional is absolutely growing-
Right
... in terms of allocations and dollars into the alts. We're just tapping into a completely new segment-
Mm-hmm
... of savers and investors that we historically have not had access to.
Makes sense. One of the more interesting comments, at least to me, from Investor Day, was that you're seeing institutional demand for the K- Series, which I don't think I've heard from any of the other-
Mm
... large alternative managers. Can you expand on that a bit more? What kind of clients are interested in the K- Series, and-
Yeah
... could this actually be a big incremental pool of AUM, or is it just gonna cannibalize existing wrappers?
You know, I don't think it's gonna cannibalize, but it's worth explaining what we meant. If you are a small endowment, if you are a small pension fund-
Mm
... or even a small family office-
Right
... that doesn't have a big staff, does not have a team that could go diligence and allocate to the alts in a sophisticated way, or if, if you're one of those institutions that really requires more of a liquidity option than being locked up for 10-12 years in a fund, those smaller institutions are taking a look at the K-Series and saying it's a way to get exposure to the alts without a huge infrastructure and team on their side, and get the benefit of higher return in the alts.
Mm-hmm.
I think that's the target universe that could consider going to the K- Series, but it's not gonna be the majority of the capital.
Right.
It's really geared toward retail investors.
Got it. All right, so let's move to Fundraising. It feels challenged in some regards, but still quite strong in others. And you introduced a $300 billion fundraising target for the next two years at Investor Day. So what, what are you hearing from LPs as you, as you look to raise some of your larger funds, in particular, the flagship infrastructure and traditional private equity funds?
Yeah. So just to recall, we said $300+ billion of new capital raised between now and 2026.
It's not gonna-
... I give myself an extra year there. So three years. Listen, it's been well reported that in the last couple of years, the fundraising market has been pretty constrained for everybody, and I think there are a couple of factors happening. One is this denominator effect, right? When the markets, when the stock markets were not that strong-
Mm-hmm
... you had people who had large allocations to the alts who felt like they were hitting those- hitting up against those allocations. But I think equally importantly, and maybe more importantly, you had a material slowdown in monetizations and distributions back to LPs in the last couple of years, right? There was less exit activity happening in the last 18 months, and that's put constraints, I think, in new allocations. So the macro has been more challenged in the last two years than in prior periods of time. What that's doing in the marketplace right now is, it's a bifurcation of results, right? There are gonna be some clear winners in the fundraising world, and there are gonna be some firms that have a really hard time raising capital or a successor fund, or a fund that's the same size or bigger than the last fund.
Mm.
We've raised a lot of capital in the last two years, and every one of our private market funds has been bigger than their predecessor fund. 2/3 of the new funds we've raised in the last two years have been 50% bigger than their prior funds. But these were not our flagships. What's exciting about this moment in time is our flagship U.S. private equity fund, right? We've been in business for 48 years with this product-
Mm-hmm
... and have the best track record, we think, there. Our Asia private equity fund and our global infrastructure fund are all gonna be in the market in the next 18 months.
Mm-hmm.
We have 30 other fund products: real estate, credit, you know, specialized product, growth products, that'll also be in the market side by side in the next three years, and that's what gives us the confidence around the $300 billion.
Mm-hmm.
We also have made a massive investment in distribution capabilities, right? We have... Our fundraising teams are probably 2.5 times bigger today than they were five years ago. We have a lot more institutional relationships, a lot more retail relationships-
Mm
... and platforms, so, we feel very good about that opportunity.
Makes sense. There's a very specific question on this in the Pigeonhole from the audience: "Have Korea's Value Up program or Japan's efforts successfully driven increased interest in domestic equity markets, and does any of that translate to demand for more alternative investments?
... For sure. Listen, I think it's probably more pronounced in Japan. Again, the psychology in Japan is so, so fascinating, 'cause the safest place to put your money for the last 25 years has been in the bank earning 0 interest. You just didn't want the value of your money to go down, right? And we're now exiting that deflationary period where a lot of households and investors are now saying, "You know, I want a positive return," right? And they're pretty risk-averse, so they're not gonna jump into private equity day one.
Mm-hmm.
But they will start rotating capital into places like the REIT market, where they can get a cash yield. It's hard assets. The property market has stabilized, and it's starting to go up in Japan. It's gonna be in the domestic stock market, eventually, and it's gonna be in credit products, potentially yield-oriented products. But we, we think there's gonna be a huge rotation in the next five, 10, 15 years of capital in Japan to risk assets, broadly defined. And our footprint in Japan, our presence, and the products we have in Japan, we think we're gonna get a lot of demand for those.
Mm.
I mean, one good example of that is in real estate right now, given KJRM, you know, we're one of the biggest, probably one of the top two biggest foreign real estate owners in Japan right now. We're raising our flagship, not our flagship, but our Asia Real Estate Opportunistic Fund right now. We're getting a lot of inbound interest from Japanese investors saying, "Can we do a sleeve for just for Japan, for Japanese real estate?" Side by side with our regional fund.
Mm.
Those types of ideas are starting to percolate because there is more of this risk-on mentality in Japan.
Makes sense. Thanks. So let's move to the Investment Environment and Deployment. KKR has a lot of dry powder. Your competitors have a lot of dry powder. There are signs that the deal volumes are starting to pick back up, and many observers have pointed to, you know, $600 billion-$1 trillion+ of that powder that needs to be put to work over the next 12+ months. So through that lens, how close do you think we are to seeing a more meaningful pickup in deployment broadly? And how does KKR avoid overpaying with that much money being forced to work in such a brief period of time?
Yeah. Listen, we don't have any funds that we think we have a risk of not being able to invest the money.
Right.
And as I mentioned previously, our three biggest flagship vehicles are basically back in the market 'cause they are almost fully invested, right? So we don't have that problem of sitting on a lot of-
Right
... excess dry powder that we're worried about. The most important discipline, I think, that we learned coming out of the GFC was around pacing, around portfolio construction, not over-deploying at, you know, a frothy point of the market, and forcing ourselves to continue to deploy when things look a little bit shakier, right? In the dips. That's really hard to do, across a large organization like ours, with so many different people at different ranges of investment experience. But the best way, I think, to explain it is, you know, in 2020, when COVID was amongst us, you know, industry deal volumes kinda collapsed in the U.S. private equity world. We increased our deployment in 2020 by 40%-
Mm-hmm
... over 2019 into that downturn, right? We- globally, we did, in private equity. In 2021, when the Fed intervened and rates went to 0 and capital markets were, like, crazy, frothy, you know, private equity deal volume snapped back. They were up across the industry by 60% in 2021. We kept our deployment flat-
Mm
... in 2021, right? So I think a big part of what we're focused on, on the deployment question, is this disciplined, linear pacing, being very conscious not to over-deploy in, you know, when things are too frothy.
Mm-hmm.
Continuing to push ourselves to deploy when markets are more volatile. That consistency of return over a cycle, I think, is what our investors really appreciate about our approach.
That's a good segue to the other side of the coin. And perhaps all that money that needs to be put to work helps this story, but you were probably the most optimistic on realizations on the first quarter earnings calls. And many of your competitors are seemingly much more cautious on that slice of the pie. So, firstly, what do you think about your portfolio that has you seemingly more constructive than others? And secondly, given your visible pipeline on the last call seemed a little light versus consensus, do you still think that's something that can play out this year, or is it increasingly being pushed to next year?
Yeah, no, we feel very good about what we're seeing in our pipeline around monetizations. I think it's a combination of a lot of things that kinda leads us to this confidence. The first is just the strength of the underlying portfolio itself. If you have good businesses that are performing well, those are the businesses you can monetize. If you have mediocre positions or companies that are not performing great in a tough market, very hard to monetize those at a value you wanna monetize. So you've gotta start with having a really strong underlying portfolio of investments. If you have that, you have a lot more degrees of freedom on how to exit and when to exit.
The second is the signal around the capital markets we talked about, whether it's IPOs, whether it's your ability to finance exits, like, you know, you go to launch an M&A process for one of your companies-
Mm.
If the capital markets are open, the high-yield markets are open, the CLO market is there, you're gonna be able to get, you know, much stronger bids for those businesses, more sponsors showing up. So we think the capital markets opening up is a huge part of our conviction around the monetization environment. You know, I'll give you a good example. Last year in Japan, we took a business called Kokusai public, semiconductor equipment business.
Mm.
Second-largest IPO in Japanese history, right? Incredible performance, given the semi cycle we're in right now, but not the obvious place in Japan where you'd think they'd be one of the biggest IPOs globally. This year, in the first quarter, you know, we took a subsidiary of Hyundai Marine, the largest marine engine maintenance and service organization public. Again, the second-largest IPO in Korea in the last decade.
Mm.
If you have good businesses, right? That are really scarce assets in some of these markets, you will be able to access capital and get good valuations for those. So when I'm sitting here looking at both our public positions that we have, that we can do secondary trades, when I look at our private companies, where I know there's a lot of interest in buying our portfolio companies, we think the back half of this year is gonna be strong.
Mm-hmm.
We think going into 2025, it'll be strong.
Great, thanks. Let's move to insurance. Obviously, 1Q was the first quarter with KKR owning 100% of Global Atlantic. Understanding it's still early, but any early thoughts or anecdotes you can share on incremental positives emerging from owning 100% versus 63?
Yeah, listen, it is early days. We just closed that transaction in January, but I think there are probably some, some tangible green shoots that should give all of us a lot of comfort. I think the first is, you know, by owning 100%, we're able to bring all of our investment teams at KKR, the origination platforms we have, closer to Global Atlantic. When we owned 63%, almost all the origination, quite frankly, was in the credit space for GA, which makes sense as an insurance company. What we've been doing really in the first quarter of this year is finding other asset classes that we are very good at, that could make sense for the GA balance sheet, and getting those teams fully integrated. So think about infrastructure, as in terms of insurance, capital financing, infrastructure.
That's been a really interesting space and an area of collaboration. You think about core real estate equity, really safe, core, prime real estate. That's an asset class that, again, in this environment with the scarcity of capital, is an interesting place for GA to start leaning into. So there's been those tangible opportunities. There's clearly Asia, right? We've done block reinsurance trades, a big one in Japan. We've done now one in Singapore, one in Hong Kong. So leveraging our global franchise as we bring our two organizations fully together, has been a very tangible benefit in the last six months. And then you think about you know, just all the capital markets activity. You know, one of the big things we do with our origination businesses is we're sourcing large deals, large financings that we're doing.
Whether that's direct lending, asset-backed financing, we are feeding the GA balance sheet-
Mm-hmm.
Right, and the liabilities that they're originating, but we often have a lot of excess capacity, right? These are really big cap structures we're underwriting, and we're able to show those cap structures to other insurance players or other investors in the marketplace, right? So our capital markets capabilities, I think this is an incredible tool, having that GA balance sheet to anchor and underwrite with. And that could be a very meaningful addition to our existing capital market business. You know, hundreds of millions of dollars of incremental revenue over time.
That's helpful. And then moving to the insurance earnings and spread earnings, more specifically, you guys pointed to some timing mismatches last quarter as weighing on those spread earnings, as some big transactions that came in take some time to get those redeployed. So how should we think about that mismatch correcting and the timing of getting the portfolio redeployed and earning-
Yeah.
the target ROE you underwrite to?
Yeah. I think the best way to think about it is, you know, at a high level, we are very, very confident that GA will generate a 14%-15% consistent pre-tax ROE.
Mm-hmm.
That's how we're managing the business and the growth of the business, to make sure we can achieve those metrics in terms of ROE. Whether we're at the low end of that range or at the very high end of the range, depends a little bit on timing. So in the first quarter of this year and the fourth quarter of last year, GA completed two of their largest blocks ever: MetLife and Manulife. So when those liabilities come on our balance sheet, we need to, you know, reset the, the balance sheet allocation, put them in new assets, the assets that KKR is originating. That usually takes nine-12 months. So there is that piece of the J Curve in terms of ROE.
As we get the liabilities, and we have to reinvest them in the assets that KKR is originating, that takes some time, especially at the scale of the size of these blocks. And that's what we're referring to in terms of, like, some short-term pressure on the ROE until we get them reinvested in the stuff we want them to be invested in.
Got it. So asset-backed finance is obviously a big part-
Yep
... of that theme. And I think KKR probably has among the broadest suite of origination platforms out there. So, please update us on how you see those originations tracking this year, and to what extent that volume can start taking on more third-party insurance AUM?
Yeah, it's, it's a good question. So when you think about one of the key benefits for our credit business is having this large balance sheet at GA that's looking for a certain level of risk and return profile in the fixed income investments they do. Asset-backed financing is a particularly good asset class for insurance companies to invest in. So our private credit franchise globally today is around $93 billion in size, AUM. $54 billion of that is in asset-backed finance. The majority of that is GA, but we also have private funds, we have SMAs with other insurance companies.
Mm-hmm.
So that whole complex is $54 billion in asset-backed financing. We have now 19 origination and servicing platforms for different segments of the ABF market, whether it's aircraft leasing, equipment leasing, credit card... I mean, a lot of different areas of ABF, all feeding origination flow.
Mm-hmm.
To put that into perspective, that $54 billion of AUM in asset-backed today was $6 billion four years ago, right? So we've seen dramatic growth on the back of Global Atlantic, in our presence, our relevance, our footprint in that asset-backed market.
Mm-hmm. Got it. In that vein, the balance sheet light players argue that owning the insurance company is an impediment to sourcing third-party AUM.
Mm.
Have you experienced that with any of the mandates you've been going after?... and are there any anecdotes you can share refuting that view?
I'm shocked that they're saying that. Absolutely shocked. No, but listen, it's quite the contrary. You know, when we invested and acquired Global Atlantic, the first 63%, I would say for our credit and our real estate credit teams, our direct lending teams, the biggest learning was: what makes sense for an insurance company balance sheet? What types of assets do they want? What kind of risk, what kind of duration do they want, right? So it took us a while to go figure out, like, what should we be sourcing-
Mm.
For the GA balance sheet. We're really good at that now. You know, the growth in ABF from $6 billion in 2020 to $54 billion today is because we kind of figured out that mousetrap.
Mm-hmm.
Right? We've got the origination channels, we know the risk, we know the duration, we know the pricing, we know the regulatory capital charge that GA has on that, and we're able to go source now at scale.
Mm
... in that marketplace. Our understanding of insurance allows us to be a much better partner with other insurance companies now. So since we bought GA, we now manage $60 billion of capital for third-party insurance companies. That's increased 2x in the last four years. We have 150 different insurance companies around the world that we are re-originating for and do business with now-
Mm-hmm
... either through SMAs or syndicating product to them. That 150 was 54 years ago. So our direct connectivity, our ability to partner, our ability to understand what insurance companies around the world are looking for, has been massively enhanced-
Mm
... by owning Global Atlantic. You know, quite frankly, in a way that we, I don't think you could do if you didn't own an insurance company and you weren't talking to their CIO every day-
Mm
... you weren't talking to all the various risk managers in their business every day, to really get a nuanced sense of what are they looking for-
Mm
... to supplement their portfolio.
I think that feeds nicely, and I think that answers it pretty well. But it also feeds more broadly into, you know, the guidance you gave for Global Atlantic more broadly, the doubling of assets. What channels do you find most interested, and how do you see the cadence and drivers of building to that doubling of GA assets?
Yeah, we feel very, very confident we can double the size of GA in the next five years again. Again, they have an incredible track record of originating both individual and institutional liabilities, right, at low cost. So this is the retail annuity market that they're very active participants in, and these big block trades-
Mm
... which are complicated, sophisticated transactions with sophisticated counterparties. Very few people in the world are doing that kind of block trade activity, but they're active in both. You have to have that married to a great credit and investment origination team.
Mm.
Right? And I will put our credit folks and our origination teams head-to-head with anyone in the marketplace in that metric. And then you need new growth avenues to grow. Asia, for us, is probably this untouched potential, and we think we could build a business as big as GA outside of the United States over time. It may take us a decade to do that, but, like, there's a huge growth opportunity for insurance outside of the core footprint in the U.S. that we have right now.
Mm-hmm.
Right? So we feel great about all those metrics, which is why we think we should be able to double in the next five years.
That makes sense, and we didn't get too much into CRE and real estate more broadly, but one concern I hear most often from investors on the insurance theme is the exposure to, you know, multifamily mortgage, CRE mortgage, on the insurance balance sheet. So how should we think about that risk as people are concerned that that pain is spreading away from office, and how the capital position is it looks in a more severe stress scenario?
Yeah. So, you know, insurance balance sheets, obviously, commercial mortgages fit, you know, from a capital charge, the kind of risk they're looking for. GA today, 99% of all of their real estate credit exposure is senior investment grade first lien exposure.
Mm.
90% of that portfolio is rated CM 1 or 2, the highest regulatory categories for capital, right? So super safe, downside-protected, senior positions as a lender. What's really interesting is, as GA continues to grow, there's a real mismatch of supply and demand of capital-
Mm
... in the real estate credit market today.
Mm.
Landlords, real estate owners are looking to refinance their capital structures, extend maturities. The terms you're getting today as a lender in real estate are better than they've been in the last five-10 years.
Mm.
It's a great time to have capital in this space, right? So this is gonna be a big opportunity for GA. It is a big opportunity, but it's gonna be a growing opportunity for GA.
Mm.
We obviously stress test... You know what? The thing we loved about the GA management team when we were diligencing them in 2020, what they're great at is risk management, and we saw them. Like, we literally lived through COVID during diligence with these guys to see how they managed the risk in their book. And then we bought 63%, and then we lived with them as the Fed raised interest rates 11 times-
Mm
... in two years, right? And understood how they manage risk in a massively rising interest rate environment that's been kind of unprecedented in our lifetime.
Mm.
You know, that's what gives us the comfort that the skill set that this team has is really exceptional in terms of risk management. So they do so many different stress test scenarios across all their books, not just real estate, but their direct lending book, across everything that they invest in. They take the appropriate provisions, and we sleep well-
Okay
... in terms of the risk.
Fair enough. Perhaps to conclude, KKR obviously has a great story, very clear paths to significant growth, but the stock has almost doubled in just a few months.
Yeah.
So what would you say is, you know, the pitch for investors to keep buying KKR stock or, or buy KKR stock for the first time, given that already significant move in the shares?
Yeah. Listen, I would say the fundamental argument would be, we talked about this at Investor Day. We're very proud of the significant share price growth in the stock, but when you look at our multiple, that share price movement was not based on multiple expansion. It was based entirely on earnings growth at KKR.
Mm.
So if you understand the business model, how we're trying to drive more recurring earnings in our business across asset management, insurance, and now strategic holdings, earnings growth is gonna be the primary metric. This is not, "Our stock price has gone up and doubled because-
Mm
... you know, the multiple has doubled." The multiple's been flat during this period of time. We're still trading at a pretty meaningful discount to the S&P 500, and a meaningful discount to many of our peers in the asset management industry.
Mm-hmm.
I think, you know, as we continue to execute, as we continue to build on these three drivers of value creation, I think our stock's gonna get rerated over time. We think there's a lot more upside in the stock and a lot more fundamental earnings growth.
Mm-hmm.
Right? So our ability to double earnings to $7-$8 per share, and then double it again by 2030 to $15 a share plus, you don't see a lot of management teams going out publicly saying that at Investor Day, but we really feel very good about the built-in inherent growth and earnings momentum we have in the business today.
Makes sense. Thanks, Joe.
All right.
Yeah.
Perfect. Thank you.