M&A Announcement

Jul 8, 2020

Thank you, operator. We're excited to announce this morning that KKR has signed a definitive agreement to acquire Global Atlantic Financial Group or GA. On the call today, you'll hear remarks from Scott Nuttall, KKR's Co President and Co Chief Operating Officer and Rob Lewin, KKR's Chief Financial Officer. Please note that we've posted a presentation on our website that we'll be referring to over the course of the call. On our website at kkr.com, within the Investor Center section, you'll be able to find the presentation under the Events and Presentations tab. Before we begin, we'd like to remind everyone that this call will contain forward looking statements, which do not guarantee future events or performance. Please refer to our SEC filings and the accompanying presentation on our website for cautionary factors related to these statements. And we'll also refer to non GAAP measures on the call, which are reconciled to GAAP figures in the presentation. And finally, on our upcoming Q2 earnings call, we do expect to discuss Global Atlantic and the transaction in greater detail, including how we expect GA to be reflected within our financial reporting upon closing. That call is currently scheduled for Tuesday, August 4. So while more details will be forthcoming right around the corner, we're pleased to have the opportunity to introduce GA and the transactions you had of this. And with that, I'm pleased to turn things over to Scott. Thank you, Craig. Good morning, everybody, and thanks for joining our call on short notice. This morning, we announced that KKR has agreed to acquire Global Atlantic in an all cash transaction. We wanted to spend some time explaining why we're so excited about this development, introduce you to GA's business and also take your questions. In summary, this transaction is highly strategic for KKR. It meaningfully expands our base of permanent capital, further diversifies and scales our business and significantly grows our position within the insurance industry. All in a transaction that we expect will improve the quality and visibility of our earnings, while also being accretive on a per share basis across our key financial metrics. Rob will get into more of the transaction details in a few minutes. Now I know many of you know KKR quite well. But for those of you less familiar with us, please take a look at Page 2 of the presentation that Craig referenced. I think it's a good reminder for everyone and it helps highlight why GA fits so well for our firm. When we meet with investors for the first time, we hope they'll remember 4 things. 1st, we are in a secularly growing industry. Our clients are searching for return in a low rate world. Opportunities for the industry in areas like insurance and retail have been expanding. And in this growing industry, we have been taking share, growing faster than the industry itself. 2nd, our business model is different than our peers. We enhance our core asset management business when we invest our own capital alongside our partners' capital and bring opportunities to others through our capital markets business. We've built a business model that enables to generate significantly greater profitability from the opportunities we see. And our balance sheet gives us the opportunity to be opportunistic and aggressive when it makes sense. We can use it as a real strategic enabler. Through our approach, we can pursue opportunities we like in size and monetize our ideas to a much greater extent. GA is a great example of this. 3rd, we have a lot of ways to grow. The vast majority of our investment activities around the world were started in the last 10 years. Of our 24 investment strategies, 18 of them are less than 10 years old. And in our business, it takes 10 plus years to start to achieve scale. Said another way, the vast majority of what KKR is doing on a daily basis around the world is in this first 10 year period. We see massive growth opportunities ahead as we inflect and scale. And this scaling can be achieved in a number of ways, whether through marketing fund 3s and 4s instead of 1s and 2s or geographically as we take strategies like infrastructure to Asia or as we're further developing channels in areas like retail or insurance. And finally, given our significant level of employee ownership, we are very aligned with our shareholders and we have a collaborative culture that lends itself to our model and drives differentiated outcomes. So where does Global Atlantic fit into all of this? Let's move to Page 3 of the presentation. The global insurance industry is estimated to have over $30,000,000,000,000 of invested assets. It's an enormous end market. And in this low rate world, we've been finding that insurance companies are looking for alternative investments within their portfolios. So we have built a dedicated team that is focused on the specific needs of insurance LPs. And our insurance AUM has continued to grow. It was about $26,000,000,000 as of March 31. And as we work with these clients and as we built custom products that really address the specific needs of the insurance market, we've become more constructive about the long term opportunity for us within this vertical. You've heard us on our earnings calls talk about insurance as an important growth area. And while we have been scaling organically, we have also been looking at inorganic opportunities, searching for the right strategic partner that could take our platform to the next level. And that's what takes us to GA. As many of you know, KKR has been investing in the insurance industry since the 1990s. We've met with all types of insurance companies. And as a leadership team, when we've discussed the type of insurance company we'd love to find as a strategic partner, we've really been describing Global Atlantic. GA is a scale player focused in 2 areas, retirement and life insurance. And in those markets, they have a leading presence. They are focused on the fastest growing products and the fastest growing sales channels. A lot of this success can be credited to GA's management team. Led by Chairman and CEO, Alan Levine, Global Atlantic's strong and experienced team is a critical element of this transaction for us. We've found a great partner. GA has grown rapidly, both organically and through acquisitions. To give you a sense, GA's GAAP assets more than doubled from 2014 to 2019. And we do expect continued M and A in this space and believe GA is very well positioned to continue to be a consolidator. And we believe we can help GA grow even faster going forward through helping generate even better investment returns and using our network to access capital to fund more organic and inorganic growth. And in terms of KKR, we plan to become GA's investment manager, subject to regulatory approval. In doing so, we will create a mutually beneficial dynamic wherein KKR will bring its asset management and origination expertise to bear on behalf of Global Atlantic and its policyholders. GA already has a strong investment track record with assets managed by an accomplished team of investment professionals. We believe working with this team, we can further improve GA's risk adjusted return profile. And at the same time, with over $70,000,000,000 of invested assets, GA is going to bring additional scale to our businesses in a number of critical areas for us. Think real estate credit, principal finance, private credit and leverage credit to name a few. And longer term, we'll have opportunities to work together and leverage our collective strengths as it relates to product creation and distribution. This transaction will significantly accelerate our presence across insurance. Assets managed on behalf of insurance clients will increase from 12% of our total AUM today to 35%. Our relevance to the insurance industry will increase materially. And as Rob will explain, this transaction meaningfully accelerates our objective of increasing our permanent capital base and is financially very compelling for our shareholders. All of these factors combined increase the growth trajectory of our firm and the opportunity we have to increase equity value meaningfully for KKR shareholders over the long term. Hopefully, that gives you a sense of our enthusiasm. Now let me shift gears a bit and spend a few minutes on GA, its background and business. And if you could flip to Page 4 of the deck, we'd appreciate it. The business was founded within Goldman Sachs in 2004 and separated from Goldman in 2013 to become an independent company, renamed Global Atlantic. As G and A's business evolved, the team made a strategic choice to focus exclusively on only 2 areas: retirement and life insurance in the U. S. These markets and the products GA offers have attractive risk and return characteristics and have allowed GA to leverage its strengths in distribution and risk management. GA hasn't tried to be all things to all people. Instead, where they have a presence, they are focused on being a market leader. At this point, the company has 1100 employees with a senior team that brings a great deal of experience, about 20 years on average. 16 years in now, GA has a scaled and diversified business. It is a leader in its targeted markets with GAAP assets of about $90,000,000,000 You see GA's growth in these GAAP assets in the top right hand corner of the page. This growth has really been driven by the development of its individual and institutional sales channels in addition to strategic M and A. And now partnered alongside KKR, we think the company will be even better positioned to consider these opportunities. In the bottom right hand side of the page, you see an operating performance summary, both adjusted operating earnings and book value. GA has delivered mid teens annual growth in both metrics with an average adjusted operating ROE of 16%. Global Atlantic's retirement business is clearly its most significant business. So Page 5 is worth spending a few minutes on. In terms of product offering, GA focuses on fixed annuities. These are longer duration, stable liabilities with products that are simple and easy to understand and with favorable macroeconomic and demographic tailwinds. It's a spread based business that lends itself to high quality asset management opportunities quite naturally. Now at the same time, from a distribution standpoint, GA has been focused within the bank and broker dealer channel. The company has been established presence at this point at over 200 banks and broker dealers and its top 10 distribution partners are all blue chip financial institutions. We view GA's footprint in this channel as a real strategic advantage. It's difficult to establish a presence within these firms, let alone be embraced by these sales teams. Global Atlantic has been working at this for over 15 years now. So when you look at the bottom half of the page, you see that GA has been focused on the fastest growing products being sold through the fastest growing distribution channel. This combination has positioned the company solidly in the top 5 when you look at fixed annuity sales across the industry. And to be clear, there remains significant opportunities for growth. Fixed annuity sales for the industry were about $140,000,000,000 in 2019, so GA was about 5% of the market. And remember, the portion of the U. S. Population that is aged 55 and older is growing and an increase in the proportion of the retirement wealth in the U. S. Is being managed by individuals themselves, not through pensions. So the market is growing. And within that growing market, GA is positioned in the most attractive segments given its product and distribution focus with scale and distribution channel advantages. In its institutional business, GA has executed 20 reinsurance transactions since its founding covering about $27,000,000,000 in assets. We see tremendous potential for continued growth in the institutional channel, with the current market environment only increasing the opportunity as many insurers seek to refocus their businesses and release capital for other needs. Alongside all of this, we expect GA to benefit from KKR's asset management expertise and direct origination capabilities. This should help GA's organic growth while increasing its ROE. And it will have a larger capital base and access to our capital markets indication relationships as M and A situations are evaluated. And to be clear, all of these growth avenues for GA should further increase AUM and permanent capital for KKR. Let me now turn things over to Rob. Thanks a lot, Scott. We are planning to provide additional information on Global Atlantic and how it will fit within our financial reporting as part of our Q2 earnings call in a few weeks. So I'm going to be brief in my remarks today. If you flip to Page 6, we've agreed to a cash transaction that values GA at 1x at closing. So we haven't yet fixed the purchase price and are taking several months of risk off the table prior to us closing. At that point, it will be our responsibility to ensure strong performance of GA's investment portfolio. In addition, we've agreed to give certain existing holders in GA the opportunity to roll their investment into our transaction. And we are also planning to syndicate a portion of our investment to co investors. Importantly, our intention is to maintain a controlling position in GA with an initial economic ownership stake in the 60% range, but that could shift a bit between now and closing. In terms of funding our portion of the deal consideration, we currently have around $3,000,000,000 of cash on hand, an investment portfolio that was valued at 11.5 $1,000,000,000 at the end of March, which we expect to continue to generate meaningful liquidity, and we also have access to additional funding through the debt and equity capital markets. While there are still some moving pieces, we did want to give you a high level sense for why we're so excited about the potential impact of this transaction. To start, it's important to understand that GA is going to continue to operate as a standalone business, keeping its independent brand and management team. In terms of GA's impact on KKR's economics, there are really 2 distinct forms of contribution. The first is that we believe this is an excellent standalone investment opportunity. Global Atlantic will be KKR's largest balance sheet investment and a majority owned subsidiary. As a result of our ownership stake in GA, we'll recognize our share of their operating earnings in KKR's distributable earnings metric. The second way this transaction will impact our economics is through the assets we manage on GA's behalf. Our intention is to become GA's investment manager concurrent with the closing of the acquisition, subject to receipt of required regulatory approvals, which would add roughly $70,000,000,000 of assets under management. In addition, over time, we would expect to directly manage certain aspects of GA's investment portfolio where we have the expertise to deliver attractive risk adjusted returns. So the impact to our capital base here should be pretty straightforward. We would expect our AUM to increase by 35% from $207,000,000,000 as of threethirty 1 to $279,000,000,000 on a pro form a basis. And our fee paying AUM on that same basis would increase by 45%. The impact on the quality of our capital base though is even more significant. Our permanent capital will increase from $19,000,000,000 to 92,000,000,000 dollars And alongside of this capital, we believe we're already the industry leader in creating large investor partnerships, where we recycle capital for 20 to 30 years. So permanent capital together with long dated strategic partnerships will represent $118,000,000,000 or a little over 40% of our AUM. We expect to grow this component of our asset base over time given the opportunities at GA. As you saw earlier in the deck, GA has a history of book value growth with assets more than doubling from 2014 through 2019. Turning to the financial impact. Our expectation is that annual management fees will increase by approximately 200,000,000 dollars over the next couple of years as we ramp up our work with GA, both as their investment manager as well as increasing our direct asset management activities. Our distributable earnings will depend on our final ownership stake in GA, but our current expectation is that the transaction will add north of 500,000,000 dollars of annual after tax TDV. That reflects the incremental management fees I just went through as well as our share of GA's operating earnings. Even more important is the long term impact of this transaction. We expect the financial benefits will meaningfully accelerate over the next several years, primarily due to the expected organic growth of GA's investment portfolio, but also due to our ability to generate carried interest if our performance is strong. And as mentioned, there are a number of opportunities to grow GA inorganically as well. More holistically, this acquisition is very consistent with our strategy of long term book value compounding. When GA spun out of Goldman Sachs 7 years ago, they had a book value of 1,400,000,000 dollars which has grown organically to $4,400,000,000 today. We will follow-up with more specificity over time as some of the moving pieces related to this deal become more clear between signing and closing. And finally, looking at Page 7, you can see how we're summarizing our thoughts on this transaction. It meaningfully increases our AUM as well as the perpetual nature of our capital base. In addition, our management fees become even more visible as 85% of our pro form a AUM will now have a duration of at least 8 or more years at inception. We will meaningfully diversify our assets under management and achieve real scale quicker, especially across multiple credit related products. This is another example of KKR using its balance sheet in a way that is highly aligned with our strategy, investing behind a high quality asset that should compound over the long term, while also driving increased asset management economics. We are extremely excited by the strategic and financial benefits of this acquisition. The aggregate economics to KKR are very compelling, while increasing our earnings quality, stability and visibility. And with that, we'll be happy to take any of your questions. Thank you. Our first question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question. Great, thanks. Congrats everybody on the transaction. Good morning. Good morning. Scott, first question for you and then a follow-up for Rob. I guess starting with just a strategic rationale, we've seen the private markets industry increase its presence in the insurance space for quite some time. You guys obviously talked about that for a while as well. There are a variety of different kind of ways and deal structures. Can you talk a little bit about why owning an insurance company outright or I guess in this case 60% of an insurance company or so versus partnering with 1 like we've seen with some of your peers is a better way to do that for KKR? So it's the first question. Great. Thanks for the question, Alex. I appreciate you dialing in on short notice. Look, I think the way we've thought about this is this is a big space as we talk about tens of 1,000,000,000,000 of dollars of assets. As you know, we have been building presence in this space for the last several years, first on the sales side, then creating kind of customized products for insurers and then creating a strategic partnership off our balance sheet where we manage the alternatives portfolio a strategic partner. So we've been learning along the way. And as we did that work and we figured out how we could add value to an insurance partner and we look to figure out how to play more aggressive strategic offense, which is really how I think about this. And as we look at it, what we determined is that for these structures to really be aligned has real value. And the way that we think about this as a firm, as you know, we have a strategy where we invest our own capital and we're focused on capital that can compound over the long term. And attached to that capital, asset management economics. And that's how we analyze everything that we do as a firm strategically. So this approach fits really nicely with our existing strategy as a firm. It fits right down the middle of the fairway and has very attractive economics for the firm. So that's the first thing I would say. We do not think about this as acquiring an insurance company per se. We think about this as acquiring the majority of an insurance company where we can partner together and we can help increase their investment returns, which should in turn allow them to increase their growth. So this is not KKR becoming an insurance company. This is creating an aligned and durable partnership. The other thing I would say is, it's a bit different about how we're doing it, is that we expect GA to stay private and we expect to have control. As you noted, Rob said about 60% ownership is our expectation. We think with control, we can move faster and in scale, and we think there's a lot to do. We think this is the beginning of the story, not the story. So as we've talked about it and thought about it inside the firm, we really think it fits with how we operate. And we're excited to be in business with the team at GA because we think we can help make each other better. But that's some of the considerations that we had to your question. Great, great. That's helpful. Thanks for that. And then Rob, so a follow-up question for you. So I think towards Dan, I heard you say $500,000,000 of after tax contribution to distributable earnings. Can we just get a little bit more color on whether that assumes sort of the full run rate of management fees of $200,000,000 that you guys expect to get to over the next couple of years? Or is that kind of within the 1st year of the deal closing? And then as we think about the funding of the transaction, you highlighted various sources of funding opportunities. Obviously, you guys have liquidity on the balance sheet, etcetera. But help us better frame maybe how the purchase price will be broken down between cash and investments on the balance sheet, debt and prefs, and if there's any common equity you guys would need to issue for this? Thanks a lot, Alex. On your first part of your question, as it relates to our earnings, I think we probably get to that 500 plus number close to the end of the 1st year of our ownership. That's how we thought about that, so not the full couple of years. Then in terms of how we fund this deal, I mean the reality today is that there's a few different moving pieces on this deal. Our purchase price isn't set. So it's something that we negotiated for as part of our discussions with Globe Atlantic. We don't expect a ton of variability there, but there could be some. Obviously, our final ownership percentage, as Scott mentioned, could move around a bit. In terms of potential debt financing for this transaction, we've started the dialogue with the rating agencies. So I think it'd be premature to comment on the debt capacity available. And then finally, we need to see the degree to which our $11,500,000,000 investment portfolio monetizes over the next several months. And so there's a fair number of moving pieces as it relates to how we would fund this acquisition. And obviously, we believe there is access to the equity capital markets to the extent we think that's the right capital decision for us as we look at our overall financing package. Great. Thanks so much for the color. Thanks, Alex. Our next question is from the line of Glenn Schorr with Evercore. Please proceed with your question. Hi, thanks very much. So I think I definitely get all the benefits to both sides in terms of growth, profitability and everything you outlined. One of the things I'm just thinking about is, if you are successful and say GA doubles over the next 5 years, insurance becomes a big your balance sheet grows and insurance becomes a big part of both the balance sheet and the overall company. And as much as I get the benefits, insurance sector trades like crap last I checked and rates are expected to stay low for a while. So how do you balance on how big to be and that goes towards your ownership and then how much the fuel growth, how much the fuel M and A because this a half M and A led strategy? Thanks. Sorry for the rambling question. Sure. Thanks, Akane. So I think as we look at how this can scale over time for us, we see that in 2 ways. You're right, we see our investment in GA potentially scaling over time. Likewise, we see the rest of KKR and our balance sheet scaling over time in a roughly proportional way. In addition to that, as GA scales over time, the asset management economics to us scale. And so I think when you add it all up, you'd actually see that the rest of KKR on that basis is probably growing faster than the insurance component of our balance sheet, if that makes sense. And so that's how we thought about this transaction. Relative to the overall size of KKR, It's certainly meaningful, but it's certainly also not overwhelming in size. Very good point. Fair enough. Hey, go ahead. Just one thing. I think it is important though. I mean to be clear, we really think this is a pretty unique company. If you look at their historical ROEs, the consistency of the return profile, the way that they've managed risk, I mean, they've been able to generate mid teens ROEs for multiple years now. And so as we look at this, we think it's a really nice investment. We think it's a really nice compounder. And frankly, as we look at the look through valuation for KKR's balance sheet, our balance sheet is trading at a discount to book. And so our perspective is that this is a really interesting long term mid teens compounder in its own right. And it will be a meaningful investment off the balance sheet, but you know how big our balance sheet is. 60% of roughly $4,500,000,000 is going to be meaningful, but we're still going to have a lot of other ways to win on the balance sheet in addition to this. So we like it in the first instance because it's a really attractive compounder. On top of that, it has all the strategic benefits that we talked about. Permanent AUM that can grow, that generates fees and carry. So when we look at it, the ROE, you start with mid teens and then we get multiple hundreds of basis points of incremental ROE and permanency through that strategic alignment and we can help each other grow faster. That's how we thought about it. And so from our standpoint, it really is just a continuation of the strategy that we've developed as a firm, which is the compound book and be a big investor in everything that we do and that allows us to scale our AUM faster. This fits right in the middle of that story. I think those are important points. One quick follow-up is, who owns GA now and who owns the other roughly 40 post close? It's Scott. I'll take that Glenn. So VA today is owned by a combination of Goldman Sachs on their balance sheet. So Goldman Sachs Private Wealth Management Channel is actually the biggest owner. So you got Goldman Private Wealth, you got Goldman balance sheet and then you have a small group of institutional investors that own a minority piece. And so the nice thing about this frankly is we have a great relationship with Goldman, both KKR does and GA does of course. And so we expect to continue to partner with Goldman and their clients after this transaction. And in terms of your question about who's going to own the other roughly 40%, it's we'll see. We've offered to the existing shareholders to roll over into our deal. So some element of it will existing shareholders rolling over. They've had a great experience. They've made about 3 times their money in the last 7 years. So that's kind of part 1 of the rollover. Part 2 is we are going to run a co invest syndication and go out through our capital markets and CTG teams as we typically do to try to raise the capital. And we're seeing a lot of demand for private markets opportunities right now. So I think it's going to be a combination of rollover plus co invest. Thanks so much. Appreciate it. Thank you. The next question is from the line of Patrick Davitt with Autonomous Research. Please proceed with your question. Hey, good morning guys. Thank you. First question, so I appreciate the increased management fees like $200,000,000 over next few years. As we think about kind of the potential increase in fee earnings at close, is there any reason to think the fee agreement would be much different than the agreements we've seen from other alternative firms that have these relationships with insurance companies? Yes. Hi, Patrick. It's Pat. Thanks for the question. So as we think about how we will ultimately get paid and what's going to flow through our management fees, there's really going to be 2 ways. There's going to be the investment management agreement, which I think you flagged across all $70,000,000,000 of assets from Global GYNIC. We'll need to work through that arrangement with GA's regulators, but there's some clear precedent for us to look at there as you suggest. And then the second way is assets that we'll manage directly, which will charge VA the relevant fee rates for other similarly large investors in those strategies, including assets that could have performance related fees where appropriate. Those are really be the 2 ways that we will get paid. To your point, more immediately would be the IMA on the $70,000,000,000 And as you suggest, there's quite a precedent out there as to what appropriate level of fee rate is. But we'll need to work through the regulators on that question. Okay, cool. And follow-up with Scott, I think you said you're going to be bringing in scaling real estate credit, real estate finance, private credit, real estate. Should we take that to mean that you're actually bringing in origination teams to KKR with this deal? Did I misunderstand that? No, I think possibly is the answer, Patrick. So I think to be clear, so GA has really had very nice investment performance on their own. And frankly, they've had a core competency in investment management that's been a key driver of their success. So what we're trying to do here is bring the best of both organizations together. So we think that we can help them with broad strategies and all origination platforms, our global network. But we would also expect the G8 investment team to continue to be a critical driver of significant portions of the investment portfolio. So I think you can think of it frankly that we will be taking the best of both. And as a result of that, I think the short answer would be yes. We would be augmenting our origination capability by combining with the GAT. And so I think we can bring them a lot of what we're already doing and we can work together and they can bring us some of what they're doing and combined we'll be able to be even more powerful. And on top of that, it just gives us more scale and market presence in everything that we're doing. I listed those asset classes, but we think over time it's going to impact virtually every business of the firm. Great. Thank you. Thank you. Our next question is from the line of Devin Ryan with JMP Securities. Please proceed with your question. Great. Good morning and congratulations guys. Thanks, Devin. So just question here, following up a little bit on the economics, you appreciate the detail. But just looking for a little more perspective, if you can, just on the timeline of moving GA's assets into KKR funds and what that could look like, percentages that you think that could get to, the strategies that you are kind of looking at there? And then if possible, any way to think about kind of more of a pro form a fully baked financial impact? I get that there's kind of probably a range of outcomes here, but just trying to kind of think about what this looks like a few years down the road based on the assets today. Thanks, Devin. And so I think the primary way that management fees are going to flow through to us is going to be through that IMA. And we'll need to figure out over time in coordination with the GA team, which direct assets we're going to manage on their behalf and where we've got the core expertise to be able to deliver better risk adjusted returns than what their happen over the next several months between signing and closing. And then I'm sure over the happen over the next several months between signing and closing and then I'm sure over the next couple of years as we continue to get integrated. We'll certainly keep you updated as that progresses and where we ultimately end up shaking out. Yes. Okay. The only thing I would add, Devin, just one quick thing. I think the numbers that Rob gave me, which is the $200,000,000 annualized over the next couple of years incorporates our expectation in terms of that IMA plus direct, but we think there's meaningful upside to that number over time. Yes, exactly. I appreciate that. And then just a follow-up, I apologize if I missed this, but in terms of how the deal actually came together, I'm not sure if you can provide any more perspective around that. I'm sure others were potentially interested in these assets or in this business. So just curious if you can give any more detail around that piece. There's only so much I can share with you on that topic, Devin. I would just tell you that as we said in the prepared remarks, we've been looking for the right strategic partner in the insurance space for a long time and have been spending time with different players. And frankly, as we got to know Alan Levine and his management team, cultures clicked. It felt right and checked all the boxes we were looking for strategically. And so the conversations began several months ago and we're thrilled to be on the phone with you today talking about it. Okay, great. Thanks guys. Appreciate it. Thank you. The next question is from the line of Mike Carrier with Bank of America. Please proceed with your questions. Hi, good morning everyone. Thanks for taking the question. It makes a lot of strategic and financial sense. Just a question on how this changes the growth opportunity ahead in the insurance space. So it seems like GA's organic growth has already been strong, but any benefit there as part of KKR? Or do you see more opportunity either on the deal front with more capital? Or are there some benefit with your current strategy of managing money on behalf of insurance clients with increased scale? Thanks for the question, Mike. I think there's a lot of opportunities for growth. As you said, GA has been growing at a very attractive rate on their own, both organically in the individual business through blocks on the institutional business. They've been making acquisitions. They've been creating new products. So they've been doing a great job before you show up as a partner. And so our first rule, do no harm. And so they're going to continue to do that great work. Our job is to help them grow even faster and where possible even smarter. And I think that's going to come in a couple of ways. First is we believe working with their team, we can help them generate incremental investment returns. And if they have additional investment return, they should be able to be even more competitive in the market, for example, for the issuance of new annuities. And so that should allow them to enhance their market presence and drive their organic growth. So it's the investment return piece of it, I would say, is part 1. Part 2 is that we think that by virtue of our access to capital, we should be able to help them grow inorganically as well. And so there may be acquisitions, as an example, that we could pursue together. And with our access to institutional capital around the world, we think we can find the capital for attractive investment opportunities and invest more behind this great management team. So there's the inorganic opportunity on top of that. And then there's perhaps a little bit more of a nuanced opportunity. Mentioned in the prepared remarks that the institutional business has a lot of opportunity for growth and a lot of runoff blocks are coming to market. And working together, we believe we can be even more aggressive with GA in trying to compete for those blocks. And so what we would expect to do is be able to not only raise capital at the company level, but also company recently raised a sidecar fund in effect to allow it to scale its presence in that space. That fund looks a lot like a type of fund KKR raises. It has a fee, it has a carry and it allows them to have dry powder that they can use to be a more aggressive grower. And we think we can use our sales team to help raise more vehicles like that as well. So a lot of ways to grow. And Michael, I'll just point you back to Page 4 of the presentation, just to put some numbers around how successful the GA team has been on their own without our partnership. They've grown their assets since they spun out Goldman from $17,000,000,000 in middle of 2013 to roughly $90,000,000,000 today. So almost a 30% CAGR. They've done a really nice job on their own and hopefully we can complement that. Great. All right. Thanks, Ed. Thanks a lot. Thank you. Thank you. The next question is from the line of Chris Harris with Wells Fargo. Please proceed with your question. Thanks guys. Are there any regulatory or capital considerations that may affect KKR's financial flexibility once this transaction closes? I think the short answer, Chris, is no. Okay. And with respect to future M and A opportunities at GA, what is their excess capital position today? That's not something we're going to get into in terms of that level of detail on the call. Suffice it to say, they do have excess capital inside the company. They also have the sidecar fresh dry powder that I mentioned, and we believe that we can access more. They tend to run at a very conservative risk based capital ratio, which is higher than the rest of the industry, and we'd expect that to continue. So they do have excess capital that allows them to be opportunistic before whatever we can bring to the table. Okay. Appreciate it. Thank you. The next question is from the line of Robert Lee with KBW. Please proceed with your question. Great. Thanks and congratulations on the transactions. Thanks, Rob. Maybe just following up on the regulatory question. I mean, how far along are you in kind of getting the necessary regulatory approvals? Is that something that has been pushed out closing? Or do you feel like you've made pretty good progress on that to this point? Rob, we're at the beginning of the process. So why we expect this is going to close in the Q1 of 2021. So we've clearly reached out to the regulators ahead of this announcement today, but the process really begins now. This is well trodden ground in terms of a partnership like this between an insurer and an asset manager. So we expect it to be a normal course process and we'll keep you updated as appropriate, but it really starts today. Great. And maybe as a quick follow-up, and I think you maybe touched on this in some prior questions, but is there any kind of investment you need to be making as part of this? I mean kind of ramp up your own capabilities ahead of this that, at least in the short term, maybe more of a modeling question, kind of think about some incremental costs or whatnot that may to build up some credit capabilities or origination capabilities. Just trying to get a sense of this is kind of plug and play or some incremental investment you need to make. Yes. Thanks for the questions. Good one. So our expectation here is the revenue is going to come into KKR at a pretty high incremental margin. So the flow through here to our fee related earnings and our distributable earnings is going to be pretty high. We'll get into more detail as it relates to how we think about compensation on our Q2 earnings call. But we'll probably need to add some different resources and capabilities, but ultimately, I think the flow through margin there to our shareholders is going to be pretty good. Yes. I'd say it's going to be really modest, Rob. We can leverage a lot of what's already in the firm. The next question is from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your questions. Thank you. Good morning, everyone. So we have seen alternative asset managers, including KKR now acquire and form relationships with fixed index and fixed annuity underwriters. Do you see KCARE as eventually building a large business in other life markets or P and C? Thanks for the question, Craig. We have been looking at the insurance base, as I've mentioned, since the early '90s. And there's really very few models in insurance that where we believe it's an appropriate type of strategic partner for us. So for example, we've looked at P&C, and we believe we can and we have a number of P&C clients. We work with them. We help them through the asset allocation and we manage capital for them. But in terms of having a large strategic investment, frankly, what we found is a lot of those business models are not as ideal as the fixed annuity space. There's less leverage in the balance sheet, so the asset portfolios are smaller relative to the capital base. And by virtue of their exposure to different types of events, there's a higher degree of volatility. And so what we really like about GEA, it's got a really focused strategy, a lot of stability to its earnings profile, which allows us to have confidence and it's going to be a great compounder for our balance sheet. And critically, they have, we think, a nice moat. They've got real barriers to entry by virtue of what they've built in the broker dealer channel. It's higher growth, sticky. And so we really like those aspects. We have not found those types of attributes to the same degree in other parts of the insurance space. So we'll continue to look and we will find if there's other partners out there or ways that we can work with the GA team to expand where it makes sense. But we've had a really high bar, as I've said in prior calls, for inorganic moves like this. And very few things have cleared that bar, GA clearly does, which is why we've been so focused on playing strategic offense and getting to this outcome today. So never say never, but I don't think you're going to see us doing anything in P and C like this anytime soon. Thanks, Scott. And just given that this asset will be private, how often will it be revalued? And then as we think about our own sum of the parts valuations, is your recommendation to sort of value the DE from this Lifeco sort of separately as like a 4th stream? Or should we just add more value to balance sheet value as this goes up or down? Hey, Craig, it's Rob. Thanks for the question. Good morning. So this will be a majority owned operating subsidiary of the firm. Like any majority owned operating subsidiary, we wouldn't be revaluing it each quarter or at all. And so this is going to show up effectively in our book value, at its book value as that compounds over time. And then we'll get into some additional detail in terms of how we're thinking about presenting both GAAP and non GAAP numbers on our Q2 earnings call. But I think your lunch line is right that the incremental distributable earnings from this investment will be additive to our existing distributable earnings. Great. Thanks guys. Thank you. The next question is from the line of William Katz with Citi. Please proceed with your question. Okay. Thank you very much for taking the question. Congratulations. So a lot of my questions are answered. Just hypothetically, Hey, Bill, it's Rob. Thanks for the question. Hey, Bill, I'll drop. Thanks for the question. Honestly, Bill, I think we've always thought about this as something going to take 6 to 7 months to close. And there's a lot of, as I said, moving pieces and variables here. The first is purchase price and what our final stake is. And so we're focused on how best to finance this transaction when it closes in likely Q1 of 2021. Okay. And then just one big picture, actually two more questions. Just in terms of big picture, a number of your peers have similar type of arrangements as has been discussed. Keith and I recognize it's a very large market. Could you talk a little bit about how you sort of see the platform a bit differentiated and how to think about pricing on incremental growth? Sure. Happy to do that, though. So I'd say I think it's a few things. One, as we've mentioned, the management team, which we think is incredibly strong. They've got the risk taking mindset that we think is the right way to run an insurance company, coupled with a strategic vision that we're big believers in. As you can see, they've got the strategic and they've got the tactical, they're great executors as well. So that'd be number 1, I'd say, in terms of what's the differentiator. 2 is the focus. They are very focused on having a strategy where they have real competitive advantages. And so and that's a lot. You've heard us talk at KKR about how we only want to be in businesses where we can be or get to top 3. The GA team has that same focused approach. Their focus is on this U. S. Insurance market, which I think has a lot of opportunities. And so to that focus is another differentiator just be great at what you're great at. The third thing I would say is what I just mentioned about their differentiated distribution. These 200 plus points of distribution in the broker dealer channel, we think is a real differentiator. We have relationships with many of those partners and we do a lot of business with many of those broker dealers as well at KKR. And so we think combined we can build on those relationships. They're really sticky, they're hard to build and it's a real barrier to entry. Next thing I would say is their financial performance, incredibly stable results over the long term, just consistent performance quarter in, quarter out, year in, year out, which you don't often find in companies like this. And so a lot of differentiators from our standpoint that made us feel like this is exactly the right platform for us to partner with. And critically, I think we also have real confidence that we working together, we can help make them better and they can make us better. And so it's all of those together that provide the differentiation that got us to today. Great. And just one final one. Thanks for taking all the question this morning. And I may have missed this. I apologize, I did dial in a couple of minutes late. In terms of looking at the chart that shows the AUM growth from May of 13 to 2019, very impressive indeed. How much of that is net new assets versus market action or acquired blocks? It's really a combination of those three factors you laid out. So I think they've done a nice job growing all parts of their business. Great. Okay. Thank you very much. Yes. M and A has been about, if you look at the left hand side of the slide, Bill, dollars 56,000,000,000 or so of GAAP assets since inception. But that would go back prior to 2013, but it gives you a directional sense. It's really been a combination of organic growth, blocks and M and A. The next question is from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question. Hey, good morning. Thanks for taking the question. Just on the growth in assets, you guys have mentioned it doubled over the past 5 years. If it were to double again over the next 5 years, would you guys be disappointed with that, that it's not more or would you view that as successful? And can you also talk about the your expectations for ROE? I think they've been doing around 16% in the past couple of years. How do you think about that sort of evolving from here over the next couple of years on new capital that's deployed and think about the push pull dynamics there in terms of what would be driving it higher versus lower? Thanks for the question, Michael. So I'd say in terms of growth, you're right, it's kind of more than a double actually over the last 5 years in terms of how they've been growing. We believe and they've been able to do that without a partner like us. So I think it's you don't want to have growth as your goal. I think we should focus on risk management, taking smart risks in the market and an attractive return on equity as a big part of the goal while managing the balance sheet and the company in a prudent fashion. But we believe that partnering together and continuing to do that, there's an opportunity to grow at least as fast as the company has historically. And given our ability to access capital to drive M and A and to allow them to go up in size and be more aggressive in the block market, I personally think that there's more upside to the growth trajectory from here than what they've been able to do in the past because arguably they've been somewhat capital constrained relative to their presence in our market and the opportunities that are coming their way. And we think a big part of how we can add value is finding access to capital, largely from 3rd parties that would allow them to be more aggressive. So short answer is, we think they can keep growing at least as fast as they have been. But we're focused on working with the team to make sure they can continue to do it their way, which has been an incredibly smart way to do it. And on the ROE side, we do believe that there is likely going to be a bit of near term pressure just given what's going on in the markets and COVID. But we believe that this is a business that can get back to mid teens type ROEs as we get through the other side of this. And the business has held up remarkably well. It's been a very interesting time to do due diligence on an asset, especially an asset like this when you're in the middle of a global pandemic and the balance sheet is rock solid. The company has been managed incredibly well. The liability side is very clean. We have a lot of confidence in this book value, and we've seen it through an incredibly interesting period of time where it's all been tested. So we feel great about what the management team has built and its durability. Great. Thanks for that. And just a quick follow-up on the 500,000,000 of DE contribution, about what portion of that would you expect to be in cash and what portion, if any, would be mark to market? And does that drive any sort of rethinking around earnings presentation, entertaining maybe going back to more of a mark to market earnings approach and holistically for KKR? No, that's all a cash number effectively. And so operating income into KKR, whether that's through management fees directly or through the operating performance of GA. Great. Thanks for taking my questions. Thank you. The next question is from the line of Jeremy Campbell with Barclays. Please proceed with your question. Hey, thanks. So similar to Mike's question with you is that we just got a couple of questions from investors. So just want to clarify that last one on cash versus non cash. So if I'm thinking about it the right way, obviously, industry has moved to DE, which is next proxy for cash earnings. So is the way you guys are thinking about it, normal circumstances, you guys collect DE and make the election to deploy that via dividend or balance sheet. So since this is a wholly owned subsidiary, is the way you guys are thinking about it as a cash inflow to you and your DE and then you're kind of deploying it directly to fund insurance growth going forward? You got it. And so we have an aggregate amount of effectively aggregate operating earnings across KKR. We make the decision that today we're going to pay $0.54 of that as a dividend to our shareholders on an annual basis. And then the remainder we reinvest back into KKR, different parts of KKR and our insurance business will be one of those. Great. Thanks for the clarification. And then just sorry if I missed this one, but is the $500,000,000 DE contribution, is that based on the current book value or should we kind of prorate the growth till the 1Q closure for next year? Yes. Listen, I think ultimately, I think somebody asked this earlier, I think that 500 plus number is something that we probably get to towards the end of the 1st year of our ownership here. Great. Thanks for the clarification. Thank you. Thank you. At this time, we've reached the end of our call for question and answer session today. And I'll turn the floor back to management for closing remarks. Thanks everybody for your time this morning. Please follow-up with us directly if you have any additional questions. Again, thanks for your time with us shortly.