Okay. Welcome, everybody, to the TD Cowen Inaugural Financial Services and Fintech Summit. My name is Bill Katz. I'm thankful very much for everybody to join today. For those of you that are listening in, you can ask questions via your panel. I will be monitoring that as we go along. Before we get started, just, for those of you that are able to vote in II, we would ask that you vote five stars for me in the asset manager, brokers, and exchanges section. I am thrilled to be kicking off day two of our conference, with a discussion with KKR, which continues to be our top alternatives pick. Joining us today from KKR is Rob Lewin, who is the Chief Financial Officer.
Rob joined KKR back in 2004, and since joining the firm, has held a variety of positions, including, running its private equity or participating in private equity, co-leading the firm's credit and capital markets businesses, serving as treasurer, head of capital corporate development, and, most recently, head of human capital and strategic talent. And for those of you with long memory, Rob was also instrumental in building out the Asia platform, which is one of the fastest areas of growth as well. KKR sits on about $580 billion of assets under management and is well-diversified. So Bob-Rob, first of all, thank you very much for joining today. We appreciate you participating, and welcome to the conference.
Great, Bill. Thank you. Thank you so much, to you and TD Cowen for having us here this morning.
Sure, our pleasure. So I thought maybe just to warm up the conversation a little bit, maybe a couple of big-picture questions, then we can dive into some more of the aspects of the business in particular. Just from a big-picture down, first, as you look around in your conversation with investors, obviously, KKR has a very wide net of relationships, whether it be retail, institutional, or the insurance side. I was wondering if you could talk a little bit about how the conversation is going around allocations, and maybe you can answer that through the prism of both in the U.S. as well as maybe abroad.
Yeah, sure. I, I think, Again, thanks for having me, and, and, this is exciting for us to be able to, talk about our strategy with, the investors and shareholders, that you have on the line, today. So when you, when you think about our distribution, platform at KKR, and you compare it even to as recently as five years ago, we're just a lot more diversified. And, and you mentioned institutional. We've also built out a lot of resources in the insurance space, and of course, a big build-out on private wealth, which I'm sure we're getting to. But it's also not just U.S. We spend a lot of time and resources being thoughtful about how we extend our distribution to Europe and Asia as well.
In a lot of ways, we are always in the market, and different parts of the market are gonna ebb and flow and be stronger or weaker. And if you look at the past two plus years, so from the beginning of 2022 through Q1 of 2024, we've raised about $180 billion of capital. It's a pretty healthy number for us. And especially when you juxtapose that against what has been a challenging fundraising environment, you know, we're quite proud of that outcome, and I think speaks to the investment we've made across different channels and region on the distribution side. I think we're starting to see allocations soften a little bit.
It's been a tough couple of years for our space, but I think there's a lot more to prove out, and I think we'll have a much better idea where the capital-raising landscape, or what that looks like, towards the end of 2024, especially as we have some big flagships coming to the market.
Great. In April, at your Investor Day, you laid out a number of very impressive KPIs in terms of $1 trillion of assets under management, the opportunity to get to $15 of adjusted net income inside of 10 years, and I think the base year was 2023, and that you expect to get to more, sort of annuitized business model, including 70% of earnings, from asset management, insurance, as well as Strategic Holdings. As you look ahead from the management side of things, how do you sort of see the opportunities and challenges for the team as you further scale along sort of multiple dimensions here?
Well, I think the most important thing as you think about some of the financial targets that we laid out at our Investor Day, is that we now today have all of the pieces in place to be able to achieve those targets. And so from a management team's perspective, the opportunity, and of course, as you mentioned, the challenge, too, is really all about execution. But we are singularly focused as a management team on executing. And if we're able to be successful at that, we've got a high degree of confidence in being able to achieve the targets that we laid out, 'cause we don't need to create anything new. And so when you look at our business model today, it's been very much purpose-built over many decades.
So we have an asset management business, an insurance business, and now Strategic Holdings, and when they all work synergistically together, we believe we generate much better outcomes. And they all take advantage of the things that we think we're uniquely really good at: investing acumen, taking advantage of our collaborative culture, and also capital allocation. So just if you stick with our asset management business for a second, lots of different ways for us to be able to exceed $1 trillion of AUM over the next five years. That's the target that we've laid out. I think we're just situated differently in our insurance business. Again, a lot of different ways for us to be able to double AUM there and to do so at a high level of ROE.
Then in Strategic Holdings, our newest segment, really an unconstrained market opportunity for us in an area where we feel like we've got a real right to win and takes advantage of things that we're really good at, at KKR. So back to where the conversation started, the pieces are built out. We're focused on the execution component, and we don't need to create anything new in order to be able to achieve some of the targets we lay out, which includes taking our adjusted net income from $3.40 last year to $15+ per share in 10 years or less.
Okay. Maybe one more big-picture question. Just in terms of, and I know this has been coming up over the last couple of weeks through the conference season, but how would you categorize today in terms of, in terms of some of the key flywheel for the industry, in terms of deployment? and net realizations as we look out maybe deeper into this quarter, or even into the second half of the year, should investors be anticipating a continued pickup in activity levels as we look out maybe the second half of the year into next year? Or will it take longer than that, just given the mixed macro backdrop?
Based on what we see, I think we do see a pickup that is coming. I think anytime you start with this question, I think you gotta start with the building blocks, which start with the capital markets. And to me, the thing I always look at, in terms of the best leading indicator for activity, is the health of the leveraged finance markets. And we've seen more sustained strength in the leveraged finance markets over the past number of months than we have at any point in the last few years. The equity markets are certainly very strong right now. Some of the equity capital markets around IPOs and secondaries, a little bit less so. But if you move on to what that means for deployment for us or for the industry, we're seeing a real pickup. We're really active across infrastructure, KKR, all regions.
Private equity deployment have been a bit slower, but we've got a number of announced and not yet closed transactions that are coming. Just in a far different place as it relates to credit deployment at KKR over the last 12 months, we've put to work over $20 billion of capital and credit. And while we had been more active on the real estate credit side as the market's dislocated, we're starting to get very active, especially with deals of scale in real estate equity. Our pipeline there has grown quite a bit. So we're quite, optimistic about what the deployment landscape will look like. Monetizations have lagged. At the same time, and I said this on our Q1 call, you know, we look at our pipelines on monetizations, and they're definitely better today than they were 12 or 18 months ago.
A good example of something that we've been able to get done in the markets. We partially monetized a U.S. private equity portfolio company called AppLovin earlier in Q2 through a secondary trade in the equity markets. We were able to do that at roughly 20x our invested cost on that tranche. And so we were able to get done, obviously, a really healthy monetization in this market. And so we're encouraged around what Q2 and the back half of the year could look like, but of course, things still need to come together in order to be able to achieve what I would expect to be higher levels of activity.
Okay, terrific. Maybe we can dive into Yeah, for those of you that are online listening in, if you want to ask a question, I think there's just a keyboard at the bottom. You can just punch in your question. I'll try and multitask, keep us on time, and also take the question. Maybe diving into now some of the businesses, if you will, I'd like to start in the sort of the wealth management retail area. By any calculation, this seems like a massive global opportunity, whether it be your management team guesses or others.
I think one of your competitors at a recent investor day had, had a very interesting statistic that 50% of semi-liquid product sales in 2023 went to top two-three top two-six players, and that's up from, like, I think 70% just a couple of years ago. And then almost about the same time, Schwab, their investor day, had indicated that they want to curate an alternative platform, across five different vectors and only use about eight-10 manufacturers, along the way, right? one-two per vertical. So as you see the industry evolving, I was wondering whether you could talk about how do you see the industry evolving? And then how should investors be bullish on KKR within that evolution?
Yeah. I think, and we've talked about this a lot, we think the long-term opportunity here is very substantial for our space, and we as a management team are very focused on making sure that we develop products and vehicles that we can be really proud of from a client experience perspective for the next decade plus. That's our goal. And if we're able to do that, we think AUM will follow. But we really believe, Bill, we're gonna be a winner in this space as it continues to evolve, and we think there's a number of things that will dictate who the winners will be. Certainly, brand in this marketplace is really important, as is track record, and we think we've got an almost 50-year track record of doing right by our clients. And we think we've provided lots of
or have the capabilities inside of our firm to generate investment returns from here and scale that are able to to be in line with our historical track records. We think scale is really important, scale in terms of relationship with intermediaries, but also, of course, this channel requires a massive upfront investment, which we have largely already made. And then the last point, I think this gets glossed over sometimes, is around product innovation. And we've spent two plus years really innovating vehicles and products for this market. So we feel really good about the long-term opportunity. Now, to take a step back, maybe I think it's worth just framing where we are today with individual investors. Roughly $70 billion of our $580 billion of capital come from individual investors.
This is predominantly ultra-high net worth and family offices who have invested in our traditional fund products. And to date, we've been raising anywhere around 10%-20% of our capital from individual investors. We believe over time, that number could be 30%-50%. And one of the ways that we think we can grow in this space is through our K-Series of products. These are the products we spent a couple of years incubating that are really tailored for the private wealth community. We now have big products up and running in private equity, infrastructure, real estate, and credit. It's very early days for us, but the momentum has been strong. You know, if you look, this time last year, we had roughly $2 billion of assets in our K-Series. Today, or as of April 1st, that number is roughly $9 billion.
So a lot of growth, but of course, we're cognizant of the fact that it's $9 billion out of $580 billion. So we've got a lot of work to do to be able to achieve our ambitions, but we feel like we're having this conversation three, five, seven years from now, we're going to be talking about a part of our firm that's a lot bigger than what it is today.
Great. And then maybe related to that, and first off, congratulations on the alliance with Capital Group. We think this is a particularly momentous announcement for not only KKR, but the industry at large, and we put out a pretty big think piece on this just the other day. I think from talking with your team and just what we're reading, it's expected that you'll roll out products beginning in 2025, I think first in credit, and then the opportunity is to sort of have these co-branded hybrid vehicles go across your verticals, if you will. I was wondering if you could talk a little bit about the cadence of the launches?
Yeah
A nd maybe the size of the TAM, and then I'll have a follow-up question on that. Just maybe just two, two, two at once here.
All right. You know, we're really excited about the partnership. You know, Capital Group and their American Funds, really preeminent brand and actively managed funds, with second-to-none distribution, so we're incredibly excited about the partnership. We also think it's additive. These hybrid products that we're gonna be creating with them is additive to what we think we can do in the K-Series, and so it expands the TAM. And so we don't have forecast, Bill, in terms of what we think that this can be over time, but I think in both the Capital Group side and KKR side, we're not gonna enter into this partnership if we didn't think it could be really sizable in the future.
You know, one of the things I think as an organization we're really proud of is that, you know, Capital Group, of course, had options as it relates to who they wanted to choose as their partner. And I think they were attracted to us as a partner for a number of reasons. I went through, you know, a bunch of them, of course, around our brand, our track record, our ability to create investment return for the investment community that we're gonna be servicing. I think they were also attracted to our one firm culture, and they talked about that very much aligns with their culture. You know, of course, I don't know this, but I'm sure we have some peers who would've very much liked to have been partnered with the Capital Group in this space.
We're quite excited for what this can mean for both of our organizations going forward.
We look forward to that. Just one clarification, is this. You said it's additive to the K-Series. Is this also additive to the $300 billion, three-year gross inflow guide you provided the Investor Day between 2024 and 2026, or is that embedded inside that?
Yeah, I had a feeling you might ask that, Bill. You know, listen, there's a number of factors that's gonna impact, you know, our distribution. I tell you, we felt confident in that $300+ billion number, in advance of getting the Capital Group partnership done, and when we introduced that guidance at our Investor Day several weeks back, the partnership was not yet inked.
Okay. Terrific. We do have a question from the audience. It's a little more narrow than this big conversation, but I think it's an interesting one. The question is: could you give an update on capital market fees for the second quarter? And then maybe if you could expand that to think about how you think the rest of the year might play through.
Yeah. Of course, our capital markets, it goes back a little bit to the question on we talked about around activity levels. Activity levels are up, deployment's up, we're hopeful monetization will continue to trend up, and as a result, our pipelines and capital markets are strong. And I think I said this on our Q1 call as well, at this stage of the year, our pipelines and capital markets are a lot healthier than they were at this stage last year or at this stage in 2022. And so we've got a lot of work to do going forward, but if you look at 2022 and 2023, you know, we generated, you know, on average, roughly $600 million of revenue across both those years in pretty challenged capital markets environments.
And so we'll see how the rest of the year plays out, but as I mentioned, the best forward indicator we have is a pipeline report, and that feels better today than it felt at this stage in either of those years.
Terrific. All right, thank you, and thanks for the question. All right, maybe just diving into another big area of interest is sort of credit. And it's, maybe it's interwoven with the insurance opportunity, which I wanna come back to as well. Actually, let me, let me start with insurance. I think it make, make more sense. So, just I think it ties back with the Investor Day a little bit, so I apologize for back and forth. At the Investor Day, I think you mentioned you think you can double the AUM in Global Atlantic.
Yeah.
I was wondering if you could help us understand some of the key drivers to that growth. I was wondering if you could maybe break it down between what you're able to do on the retail side and maybe the institutional side, and then between the U.S. and maybe the more nascent, but seemingly very large opportunity outside the United States.
I think our growth is gonna come from really all of those areas, and I think where our market position here is really strong. But maybe we could start with the attributes that I think really differentiate our insurance business in the market, which of course, that then leads to the confidence we have in scaling AUM and doing so at high levels of borrowing. I think there's really four things that, when taken together, differentiate our platform. We think we've got a best-in-class management team that's gonna be able to continue to source, you know, predictable and low-cost liabilities at scale. I would then take our investment platform, so investing those liabilities up against anybody's in the world.
I think we really do have some unique access to third-party capital to help Global Atlantic grow in an accelerated fashion, in a capital-light way, and also in a high ROE way, because that third-party capital pays fees and carry to Global Atlantic in their institutional business. You look at our last two block deals. We were able to bring in 75% of the capital to fund it with third-party capital. And then finally, I think that the fourth attribute that I'm about to talk about is really where we're differentiated, and we've got a lot of really good competitors out there, and some of which can certainly feel like they can compete in those first three areas. But this fourth area is around taking Global Atlantic really global.
If you look at the opportunity set for us across Asia-Pacific, and you look at KKR's presence on the ground in Asia-Pacific, which is multiples the size of our nearest competitors, we think that's gonna allow us to scale our reinsurance business quicker through the relationships we have, our presence in the marketplace. And then importantly, we've got people on the ground that could source local denomination assets to match against those long-dated liabilities. I think it's a real competitive differentiator for a place in the world where we would expect a lot of growth going forward.
Great. So that leads me to my other question on insurance. You guided to a 14%-15%. This was actually, we just got this question through the question board as well. So, you've guided to a 14%-15% pre-tax ROE. I was just sort of wondering if you could break down your key assumptions to that, and then maybe think about how should we be thinking about that against sort of interest rates, and to the extent that interest rates were to potentially trend lower based on the forward curve?
Yeah, I'm glad you asked the question. We continue to believe 14%-15% is the right long-term ROE to target for Global Atlantic and our insurance segment. But I think it's good to be talking about ROE because it's not the perfect metric, and it's also for sure not the perfect metric quarter to quarter. It's a much better metric in the insurance business over a longer period of time, and let me explain why. I think really two principal reasons. Number one, GAAP book value, which is your denominator here, can fluctuate quarter to quarter based on things that don't necessarily relate to quarter-end performance. So that's the first thing I think that's more structural. Second thing is more how we're positioning the business strategically.
I think we've really done two things here that are gonna put some pressure on near-term ROE, but we really believe will be for the benefit of long-term ROE. Bill, you, you've covered us for a long time. I think you know we're always gonna make those trade-offs when they're available. The first, as it relates to block activity. We've completed a couple of very large block deals, Q4 of 2023, Q1 of 2024, have brought on north of $20 billion of liabilities and assets through those block deals. When you bring in those block deals, you take the cost of liabilities, of course, through your P&L day one. But we tend to model and underwrite nine-12 months of deployment or redeployment on the asset side.
So in those early quarters, you're gonna be running with elevated levels of liquidity until you've fully redeployed the asset side of the balance sheet. Again, all very much in line with what we've underwritten here, which are high levels of return in our institutional business. Then the second piece is how we're positioning our balance sheet, and we are modestly shifting our balance sheet allocation to do more in the real estate space and infrastructure space. In particular, let's talk about core real estate, 'cause I think that's a really attractive asset right now for us, and, like, there's one obvious reason: there's just no core real estate capital available in the world. We know that. The funds that are out there have long lines of redemptions and not a lot of subscriptions.
And so we're seeing a really interesting risk-adjusted return to create transactions for Global Atlantic on an unlevered basis to generate high levels of long-term ROE that we can also match against some of our longer-term liabilities. So a really attractive asset class in that respect. But if you look at core real estate, at least for the foreseeable future, some of the running yields are going to be either in line or lower than our cost of liability. So you could say it's dilutive to our near-term ROE, but for the benefit of long-term ROE, and we're always gonna make that trade-off. And so those are a couple of things that I think are important to understand as you think about how we're strategically positioning Global Atlantic, and we could continue to see some near-term pressure on ROEs.
We saw a little bit in Q1 relative to where we've operated historically, but very much in line with where we're going. And I think the most important thing on ROE: measure Global Atlantic based on its historical performance over a long period of time, and listen to us as a management team and what we're telling you around go-forward long-term ROEs. Some of the intra-quarter noise. That's gonna happen for a variety of reasons that I just took you through.
Thank you. Any way to think about interest rate sensitivity for a 100 basis point move, what it might mean in terms of the pressure or opportunity for ROE?
Yeah. No, I apologize. I know you had asked that. I'd say roughly, plus or minus, it could move around a little bit, 50% of the GA book is floating rate in nature, the way we look at it. You know, that's come down actually a little bit, and so a little bit less susceptible. But I think in a modestly rising rate environment, GA is gonna do a bit better. We've talked about it. And in a modestly lower interest rate environment, GA is gonna do a little bit worse. We think that number is relatively contained. It doesn't change today our 14%-15% outlook around pre-tax ROEs.
Great. Did you get— I did get a sort of a follow-up question on your comments around a bit of a tough backdrop to raising capital. You said allocation is softening, and the question is: Can you just sort of refine your answer a little bit across the asset classes? Is it soft in private equity or real estate or credit? Where are you seeing some of those pressures?
Yeah, so sorry, maybe I used the wrong word. What I was saying was, we're seeing some of the challenges in the market from a fundraising perspective soften a little bit. So it feels a little bit better today on the fundraising side than it felt maybe 12 or 18 months ago. But we've got some big strategies that are out in front of us, some big flagships, as you know. And so I think we'll have a much better idea of where the fundraising environment is at the end of 2024. But I meant it more as a positive comment than a negative comment.
Okay. Thank you for clarifying that. Okay, maybe just switching gears a little bit on credit, which I skipped ahead in my own head, I apologize. So, and maybe this is interwoven with your comments just in terms of the work you're doing on with with Global Atlantic. But where are you seeing the best opportunities for KKR to participate in the fixed income replacement theme? Maybe you could update us on direct lending. There's certainly a lot of focus on that in the last week or so, asset-based finance or maybe some other initiatives that is being cooked up inside KKR right now.
Sure. When you look at our private credit business, it's really split into two parts. You mentioned that direct lending is roughly $40 billion of assets for us. Asset-based finance is actually a bit larger, at $55 billion of assets. So our private credit business is right around $95 billion of aggregate capital. If you look at some of our fundraising success on the credit side over the last number of quarters, you would've seen it in areas like evergreen direct lending, across ABF, a number of SMAs, and we're starting to see some traction on the K-Series of our products focused on credit as well. The ABF opportunity, where we're a real leader, is asset-based finance.
I think we are still in the earliest of innings of that transition of ABF off of the regional bank balance sheets, and into structures that have longer-dated liabilities. I think that's a trend our industry, and KKR specifically, given our leadership position, is really well situated to come out as a winner on. You know, direct lending can certainly ebb and flow based on a number of different factors. We're quite constructive on risk return right now on direct lending, but I think it's important to understand how we've situated our direct lending business inside of KKR. And so we have one origination team that faces the market, that represents our private pools of capital through direct lending and some of our junior pools of capital. That same origination team represents our capital markets, execution, and distribution capabilities.
So when we're out talking to clients, you know, we're saying to them, "We can hold your capital structure through our private credit pools of capital. We can underwrite and distribute your capital structure through our capital markets business, or we could do a hybrid of the two. And oh, by the way, if you plan to do a distributed offering to the market, we can walk across our liquid credit business," which is one of the biggest liquid credit businesses in the world, "to be able to take an anchor order in your distributed deal." And so we are facing the market with really three pools of capital or capabilities in a way that we just don't think anybody else in the marketplace does.
And so what that creates, we think, is better deal flow, because we're servicing the client better, both for our private credit business and for our capital markets business. And we think that also lends itself to increasing market share with our client base, because we're able to do more for them, in a holistic fashion than we think many of our competitors out in the marketplace can do for them.
Great. I know we're running a little tight on time, so maybe just skip down to real assets. We got a question this morning. There was a very large, announced transaction, offshore. I was wondering, you and your peers have talked about just your great opportunity in real assets, specifically in infrastructure. Just wondering how you could think about the opportunities for KKR, and maybe talk a little bit about the debt and/or the credit side of the opportunities.
Sure. If you look at our infrastructure business, Bill, we are roughly $60 billion of AUM. As my partner, Raj Agrawal, who runs our infrastructure business, talked about at our Investor Day a few weeks back, you know, we've got three large-scale businesses. That's global infrastructure, Asian infrastructure, and core infrastructure, all of which we see real growth in front of, despite the fact that they're already scaled. We also have a new set of products in K-Series focused on infrastructure and a new investing strategy in climate investing, both of which we feel provide lots of addressable market for us to accelerate the growth of our broader infrastructure platform. In a lot of ways, infrastructure is the fastest-growing part of KKR.
We've taken a lot of market share, we believe, over the past five-seven years, and we think we could take more going forward, given how we've built out our team and capabilities. And so it's one of those areas that we think benefits from real meta themes, in terms of need for significant capital investments. That lines up really well with the capabilities that we've built up across the firm, so we're really constructive in this area.
Great. I think we have time for maybe one last question.
Sure.
I was wondering if you could address the one bear case we hear quite a bit is, just the dividend yield payout is, is rather low. I just wondering if you could talk a little bit about how we should be thinking about capital allocation?
Sure. Maybe the most important place to start, and I like to start in any conversation around our capital allocation policy framework, is KKR employees own over 30% of KKR. So any decision that we take in this regard is very much aligned and focused on what we think can generate the most long-term shareholder value. We believe we're gonna generate a lot of excess cash generation at KKR over the next five y ears. We've talked about over $25 billion of cash generation. Huge opportunity for us to be able to increase our recurring earnings per share over a long period of time. We've talked about 4 areas of deployment we're really excited about. That's core private equity, insurance, strategic M&A, and share buybacks.
Common attributes: because of our business model, our ecosystem, each one of those, we've got a long track record of delivering high ROEs and also recurring and growth-oriented earnings per share. Specifically on our dividend policy, Bill, we like our dividend policy a lot. We first introduced it when we became a C corp in 2018 at $0.50 annually. What we said then is we will step that up annually over time. We've continued to do that. Today, we're up to $0.70 of annual dividend distribution, and what we continue to say is our expectation is we're gonna continue to step that up annually over time as well. But you've got to look at these things holistically.
I come back to KKR employees owning a very significant amount of stock at KKR, so the decisions we make are aligned, and we just firmly believe, and I think you've started to really see this play out over the past few years, that what we are building out across asset management, insurance, and strategic holdings, has given us the best visibility for some of that ten-year guidance that we've provided around where we could take our adjusted net income per share. And, you know, that's $3.40-ish last year, up to 15-plus dollars per share, and it's because we believe of the model that we've employed.
All right, Rob, well, look, I think we're out of time. I have questions for another hour at least, so I apologize for not getting to all of them, but thank you so much for joining today. Terrific conversation. Thank you for your help kicking off day two of our conference, and this completes the presentation for today. Great to see you again, Rob.
Great to see you as well, Bill, and thank you again.