Earnings Call: Q1 2021

May 3, 2021

Good morning, everyone. Welcome to our Q1 2021 Earnings Call. I'm joined this morning by Scott Nuttall, our Co President and Co COO and by Rob Lewin, our CFO. We would like to remind everyone that we'll refer to non GAAP measures on the call, which are reconciled to GAAP figures in our press release, which is available on the Investor Center section at kkr.com. This call will contain forward looking statements to compare to future events or performance. Please refer to our press release and our SEC filings for Concerning factors related to these statements. Earlier this morning, we posted our earnings release presentation. You'll likely have noticed a few changes. First, recognizing this is the Q1 post the closing of the Global Atlantic acquisition, We're now reporting our results with 2 segments, our Asset Management segment, in addition to a new Insurance segment, which reflects our approximate 60% interest in GA's financial results. In addition, given the changes we made to our compensation framework that we introduced last quarter, A number of the line items on our segment income statement have changed. We ran through this on our Q4 call as well as at Investor Day. Now to help with comparability, we posted a presentation on our website in early April with 3 years of recast financial information on a quarterly basis. That presentation, of course, is still available on the Investor Center section of our website, and it could be helpful for you to as you consider our results compared to prior periods. And finally, we've changed the framework of the earnings release itself to make the results easier to digest, while improving our disclosure and transparency at the same time. We trust that you will find the new framework as well as the additional disclosure to be helpful. Now I expect many of you joined us at our Investor Day only 3 weeks ago. For those of you that didn't have the opportunity, We would encourage you to watch a replay of the event and review the accompanying presentation, both of which can be found on our website. We really feel that the event helps everyone gain a better understanding of where we are now as a firm and importantly, all of the opportunities we have to continue to grow in Scale Premier. And right on the heels of this event, we're pleased to be reporting an excellent quarter. After tax distributable earnings came in at $0.75 per share. Fee related earnings are $0.41 per share. Management fees increased 31% year over year, driving the 36% increase in our FRE per share compared to the Q1 of 2020. Our assets under management are now $367,000,000,000 This reflects the closing of Global Atlantic, strong investment performance, in addition to continued fundraising momentum. And our book value per share, which is mark to market every quarter is now $25.84 This is up over 50% from the $16.52 we reported 1 year ago and is 12% ahead of the figure we reported just last quarter. The continued growth in our book value was really a testament to the strong investment performance we're seeing across the firm. And finally, as we announced last quarter, we increased our dividend beginning with this quarter, So our annualized dividend per share is now $0.58 In terms of today's call, I will kick things off with an overview of investment performance and fundraising before turning it over to Rob to walk through this quarter's financials. And at the end, Scott will provide a few closing remarks and we'll head into Q and A. So to begin, we've continued to have very strong investment performance. Beginning first with Private Equity, the portfolio as a whole appreciated 19% in the quarter and is up 56% over the last 12 months. And performance in our flagship fund has been even stronger, up 28% for the quarter and up almost 80% over the last 12 months. At our Investor Day, one of the themes we discussed was the importance of winning in tech and the significance of the investments we've made in tech. Remember that 38% of our private equity deployment over 2018 to 2020 was in companies with tech and digital theme. And you're seeing the impact of these investments within our performance figures. Applovin, a mobile technology investment in our America's Wealth Fund, went public earlier this quarter and is currently trading at about 15 times our cost. And Darktrace and KnowBe4, 2 cybersecurity businesses also both went public over the last couple of weeks and are trading well north of cost. These were 3 of our 6 portfolio companies that went public in April. And alongside of this IPO activity, we've seen strong performance at private tech oriented investments like Internet Brands, OneStream Software, ByteDance, RB Media, Kokusai Electric and Calabrio, a software business that we exited earlier in Q2. We've seen continued performance across our real asset strategies. Over the past 12 months, our opportunistic real estate funds withstood all the market volatility, appreciating 13%, while in Infrastructure, the portfolio appreciated 18%. Turning to credit. Our alternative credit composite appreciated 7% in the quarter and 19% over the last 12 months. We've seen differentiated investment performance within our dislocation strategy and performance in the quarter and LTF periods were strong within Lending Partners 3 and Specialists 2. And our leverage credit composite appreciated 2% in the quarter and 25% over the last 12 months. And looking at our performance here over a broader timeframe, both our standalone high yield and bank loan track records continue to rank as top quartile over 1, 3, 5 7 year timeframes. And reflecting the strong investment performance across strategies, our balance sheet investment portfolio appreciated 12% in the quarter and is up 52% on a trailing 12 month basis. Now on the heels of strong investment performance, we're seeing continued momentum in fundraising with $15,000,000,000 of new capital raised in Q1 $51,000,000,000 over the trailing 12 months. Notably in the Q1, We held the final close on our Asia 4 fundraise at $15,000,000,000 Building on our differentiated investment track record, Asia 4 is the largest private equity fund dedicated to investing in the Asia Pacific region. And Asia 4 really continues the momentum across our Asia Pacific platform given the final closings held just last quarter for our inaugural Asia Infrastructure and Real Estate Funds. Fundraising activity in the quarter also included new capital raised in our healthcare strategic growth strategy, core infrastructure and our opportunistic Americas Real Estate Strategy. We also raised our first SPAC and we're active in the CLO markets, raising new CLOs in the quarter both in the U. S. As well as Europe. And our fundraising was not only strong for the quarter itself, but also diversified across many strategies. We have a lot of conviction in our fundraising momentum going forward as we remain focused on our over 20 strategies that we expect to come to And with that, let me turn it over to Rob. Thanks a lot, Craig. I'm going to begin this morning by reviewing our segment financial results Our fee revenues totaled $586,000,000 in Q1. Of particular note here, Our management fees continued their robust growth and came in at $440,000,000 which is 31% ahead of last year. And adding to our strong management fee quarter, our Capital Markets business generated $112,000,000 of transaction fees, which saw nice contributions across the board. We remain very encouraged by the forward pipeline in our Capital Markets business as well as opportunities here for continued growth. Fee related compensation came in at $132,000,000 or 22.5 percent of fee related revenues, Right in the midpoint of that 20% to 25% annual range we introduced last quarter. And our other operating expenses totaled $90,000,000 Putting those pieces together, our fee related earnings were $364,000,000 or $0.41 per share And our FRE margin was 62% for the quarter. We continue to be very confident that our FRE will comfortably exceed $2 per share next year. Our fundraising momentum is as good as it has ever been. The asset base at Global Atlantic continues to grow and we have very good line of sight to larger pools of capital Moving to our realized performance income. We generated $170,000,000 of revenue for the quarter And our realized investment income was $460,000,000 which is a high point for us as a firm. The sum of these revenue line items is approximately 6 and $30,000,000 for the quarter. Our only cost associated with our realized performance and realized investment income is compensation, which came in right at the end of the respective annual ranges we indicated earlier this year. So in total, Our asset management operating earnings came in at $817,000,000 for the quarter. On top of that, our share of Global Atlantic's earnings added an incremental COO. $63,000,000 for the months of February March, bringing total distributable operating earnings to $880,000,000 which is up 68% year on year. And finally, our after tax distributable earnings came in at $660,000,000 or $0.75 per share. One additional note here. Our tax rate in the quarter was a bit elevated. The driver of this was a large exit that was structured in a way that resulted in the recognition of 100% of our tax liability, while only realizing approximately 50% of the investment income. Absent this, our after tax DE would have been $0.81 for the quarter versus COO. Looking forward, we do expect we'll benefit from the reverse of this as that investment is monetized and those gains become realized without the burden of the tax expense. Turning to deployment. Coming off a record year in 2020, our total capital investment came in at $7,000,000,000 for the quarter $31,000,000,000 over the last 12 months, which is up over 30% from the prior period. Importantly, when you dig a layer deeper, our private markets COO. Which is generally longer dated and has higher profit potential was up 77% versus the prior LTM period. That figure is really the best representation for how we leaned in as an organization over the last 12 months, with much of that capital having been deployed COO. We do think our activity levels here are relatively distinguished across our many peers, where deployment across private market strategies tended to be flat to down year over year. At the same time, we've never deployed more capital in our 45 year history. We are very confident that this elevated level of deployment will serve us well for years to come as those investments mature. And finally, turning to our balance sheet. Our book value per share is currently $25.84 which is up 12% from last quarter And up more than 50% versus March of 2020. Even if you compare this performance to pre pandemic levels, our book value per share is up almost 35 COO. And it's another tangible example of our business model's ability to compound capital. Moving away from the specifics of the quarter, as I look at our overall performance, I think there are really four things worth noting. First, we had a really strong quarter. We reported $0.41 of FRE per share and $0.75 of after tax E per share. And as you know from our guidance, we expect an acceleration in both of these figures. The second relates to the strong investment performance We've continued to deliver on behalf of our limited partners. Craig ran you through the performance statistics for the quarter as well as the last 12 months Really do stand out. But I think even more telling and differentiating our platform versus others is our investment performance over a multiyear period of time. As just one example, our current flagship Americas, Europe and Asia PE funds have gross returns of 49%, 26% and 44% from inception. This has directly led to the high levels of fundraising momentum that we are currently benefiting from. And this framework is not limited to private equity. At our Investor Day, we detailed the strength of our investment performance across our core Growth and Real Estate and Credit Platforms. As a firm, we have a 45 year history of investment excellence And we're continuing to build on this long track record of success. 3rd point is the significant amount of latent earnings inside of That we expect to flow through our operating earnings over the next number of years. At our Investor Day, one of the statistics we discussed With the $9,100,000,000 of total unrealized gains in our balance sheet at the end of 2020. Those are embedded gains from our investments as well as gross unrealized carry. That $9,100,000,000 increased to $12,300,000,000 as of the end of March. That number can obviously move around a bit and will in part be driven by the overall tone in the markets. However, the $3 plus 1,000,000,000 move in only 3 months And in a quarter with a heavy level of realized activity, I think really illustrates the strength of the underlying investments And also what it means for our ability to generate realized profitability over the next number of years. And finally, We're off to a really great start with GA, and we've really just begun to see the impact of how Global Atlantic can flow through our financial results. There's a lot more for us to do here. I will keep you abreast of our progress in the quarters ahead. All of this really does support why we COO. Significant acceleration of after tax DE to the $4 to $5 range by the 2023, 2024 timeframe. Remember, this earnings power is largely already in our firm today. We have a lot of conviction that we'll be able to execute on our strategy and continue to deliver really meaningful results for our LPs, shareholders, employees and all of the communities that we operate in. And with that, let me hand it off to Scott for some closing thoughts. Thank you, Rob, and thank you everyone for joining our call today. Given the recent Investor Day, I'm going to be very brief. As a firm, we have never had a stronger team, better connectivity, Stronger investment results, higher unrealized gains in carry, more businesses scaling and reaching their inflection points And more funds in and coming from us. As a result, we have never had more ways to grow, More visibility on that growth and more confidence in our future. And all of that is before Global Atlantic, which gives us even more perpetual capital, even more visibility, Even more ways to grow and a fantastic management team that will make us even stronger and faster. We are hopeful all that came through during the Investor Day, and we are looking forward to keeping you updated on our progress. With that, we're happy to take your questions. Thank you. At this time, we'll be conducting a question and answer session. COO. COO. COO. Question will be coming from the line of Glenn Schorr with Evercore ISI. Please proceed with your question. Hi. I appreciate the call Question. I guess I would just like maybe a little follow-up on a few things that we didn't Fully covered during Investor Day or today and just like maybe if you're still on pursuing long dated COO. And maybe just comment on thoughts around where you're at in building this COO. Hey Glenn, Scott, thanks for the questions. First, with respect to elongated partnerships, We are still pursuing those. So these for everybody's benefit are the oftentimes multi decade recycling strategic partnerships that will Create with institutional investors largely, they're invested across asset classes And have some component of recycling to them. And so we continue to pursue those. They take a long time to structure, But we continue to have an active pipeline. So don't take any message from the Investor Day lack of commentary. It just continues to be something that we're focused on. We'll have update for you over time because there's a couple that are getting close. On the secondary side, As we've mentioned in the past, we continue to look at the space. We're analyzing whether we want to build or whether there's something that might make sense to buy. Really hard to have to buy work from a cultural standpoint at times, but we are looking and We'll have more to share with you over time, but nothing more to share today except that we continue to pursue it. Thank you. Our next question is coming from the line of Alex Blostein with Goldman Sachs. Please proceed with your question. Great. Good morning, everybody. Thanks for taking the question. So Clearly, it looks like momentum in the business is very strong, lots of LP demand, and your guys' performance continues to be really good. Has this backdrop changed the capacity COO. For some of the flagship funds that you're currently in the market with. And if the demand sort of exceeds the capacity appetite you have in those flagship vehicles, Any other ways you're thinking you could sort of monetize on that demand? Thanks. Thanks for the question, Alex. As you noted, it's really been a Great fundraising environment by the best we've seen in a long time. We're seeing increased engagement from investors across the board Across different asset classes. And we do find ourselves in some situations in the happy circumstance where a fund might be capacity Constrained. And we're able to talk to them about different things that we're doing. So for example, as you know, we raise our private equity flagship funds in a bit of a different way than COO. We have 3 regional funds as opposed to 1 global fund. And we just closed Asia. We're in the market right now with Americas. Europe will COO. Come relatively quickly on the back of the Americas fundraise. There's core, there's growth. There's a lot of different ways we can talk to investors across just private Before you get to real assets and credit. And so that incremental potential demand that we oftentimes will see, especially lately, We're able to pivot some of that unmet demand into some of these other asset classes and strategies that are adjacent and that's really the focus right now. Thank you. Our next question will be coming from the line of Greg Siegenthaler with Credit Suisse. Please proceed with your question. Thank you and good morning everyone. My question is on Global Atlantic. I noticed on slide or Page 17, the press release had $12,000,000,000 of Global Atlantic AUM sits in private markets, while the rest is in public markets. What strategies or assets does the $12,000,000,000 in private markets invest in? And are these KKR strategies Today or is there an opportunity to rotate this AUM into KKR strategies in the future? Hey, Craig, it's Ralph. A really good question. And so a couple of things. As we thought about our IMA and how to apportion that across our strategy, we really looked at where the underlying investments We're at Global Atlantic. Most of those are credit oriented and will fit in our public markets business, but there are a number that are in the real estate space, principally real estate credit. And so we put those across our real estate business. As it relates to, rotating the Global Atlantic balance COO. We are in the very early innings of that. We think there's a lot of opportunity both for the Global Atlantic balance sheet as well as our asset management businesses Being able to get that rotation done, but we're just a couple of months in here and that's going to take some time to make sure that we get ramped up. We'll provide additional updates over time, but we're not really seeing the benefits of that during Global Atlantic Gas or at KKR. Thank you. Our next question is from the line of Devin Ryan with JMP Securities. Please proceed. Great. Good morning, everyone. A question just on the outlook for monetizing some of the embedded gains on the balance sheet just given recent performance. And I guess I want to Maybe tied into proposals around capital gains rates potentially changing and if that might accelerate potentially the thought around Some of the balance sheet gains and just bigger picture kind of any views around tax changes on the portfolio. I appreciate we don't have too much detail yet, But any color would be helpful. Thanks. Yes. Thanks a lot, Devin. I'll answer the second part of your question first. Yes. Potential pending tax legislation will have no impact on how we monetize our portfolio. It is really about Making sure that we're a fiduciary for our clients and exiting at the appropriate time. In terms of outlook from monetizing the portfolio, As you noted, there's a very significant amount of embedded gains. Our expectation here is that we've got a number of assets, particularly on the core side that for A number of years can compound in capital, but we also have a fairly mature portfolio that we think can get realized over the coming quarters and years. I know one of the questions that we get a lot in this form and so answered as part of this overall question is what our forward visibility looks like In terms of monetizing our revenue from an investment perspective and a performance perspective, as it relates to Q2 specifically, We already have visibility in a very substantial amount of revenue there. As of now, that line of sight is $700 plus 1,000,000 of performance and investment income. So as a reminder, this is from deals that are already closed or have been signed up and that we expect to close in Q2. In terms of split, as I know that's important now, especially with how we're articulating competition, I'd say it's probably 60 to 2 thirds Carried interest and the remainder in investment income. Next question is coming from the line of Mike Carrier with Bank of America. Please proceed with your question. Hi, good morning. Thanks for taking the question. You guys mentioned being very active in Point capital last year, which has positioned you well and we're seeing it in the performance. But just maybe how are you thinking about deployment at this point given Yes. On one hand, you've got rising valuations, yet the outlook for economic growth is fairly robust. Just an update there. Hey, Mike, it's Craig. Why don't I start there? I think you're right. The first part of the answer does relate to the overall market where you're seeing tremendous activity And you really do see this in broad M and A stats. So global announced M and A volumes in Q1 were 2x what they were last year And it's actually been the most active start to the year, in terms of broad M and A. Now in terms of us in a market like this where you have a lot of activity and a lot of interested sellers given valuations and that activity, discipline is critical. And alongside of that, we think that a Strong thematic approach is also critical. And so it is important to really pick your spots, where to lean in And you want to really need to have deep expertise in addition to real conviction. And so you're right, you've heard us talk about our focus for some time now, for instance, on some of the tech and digital themes. Joe ran through that at Investor Day, Almost 40% of our deployment in private markets again were investments with tech and digital themes over the last 3 years. And I think we're still very busy on opportunities that fit this framework. Now I think the ones that we're attracted to are going to be companies that need capital for primary growth and we do view that a little differently versus someone is simply looking to monetize an asset or an asset, if you will. But again, discipline is an important part of the equation. There's no question about it. Our next question is coming from the line of Chris Harris with Wells Fargo. Please proceed with your question. Great, thanks. There's a little bit of moving parts to the P and L, but you got G and A coming in for a partial quarter. Beginning in the Q2 guys, how should we be thinking about the weighted average blended fee rate for KKR as an organization. Yes. It's a good question. Obviously, you're right. You've got That 2 months of D. A. As opposed to 3 months, I think on that basis, You'd certainly be able to look at it in a cleaner way on the quarter. Of course, COO. Given where our IMA is set and we talked about it last call that that's maximum 30 basis points that's going to have downward pressure on overall COO. See margin, but I think Q1 could be a good indication, probably with a little bit more Downward pressure because you have the extra month offset by the fact that we've got a really good and healthy outlook up in fundraising across a number of our private strategies That have higher fee rates associated with them. So a bit of a challenging question to fully answer Chris, but hopefully that gives you a little bit of a flavor Around where blended fee rates can go across the enterprise. Thank you. Our next question will be coming from the line of Gerry O'Hara with Jefferies. Please proceed with your question. Great, thanks. I was hoping we might be able to get a little bit more color as it relates to the performance fee revenue line item that I think he's new this quarter, but is there any sort of seasonality to that line item, anniversaries perhaps of product and what products in particular we might be tracking or looking at to get a sense of how that line item might grow? Thank you. Yes. Thanks a lot for the question, Jerry. It is new this quarter and really reflects how we've tried to Revamp our P and L to make it in a lot of ways, we think easier to understand and also more comparable with a number of our peers. And so what you'd expect to see in that line item, really, our incentive fees more from our perpetual capital vehicles, Where the incentive fees that we generate are based on the underlying yield of the portfolio as opposed to mark to market. So things that are more stable in nature, the types of products that you're going to see in there are going to be type 1 incentive fees across our BDC platform. Some of the core vehicles that we're raising across infrastructure and credit. We've got a couple of SMAs that have comparable type of fee arrangements. So those are the types of fees you're going to see. We see a big opportunity over the next number of years to really scale that line item for the firm and we thought it made sense to break it out as distinct From incentives based off of mark to market performance, like a number of our peers have done in the past. COO. Thank you. COO. The next question today will be coming from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question. Hey, good morning. Thanks for taking the question. My question is a little bit more of a follow-up from Investor Day just on the origination platforms. I was hoping you could maybe elaborate around some of the origination platforms that you've been building out in partnership with a number of different specialty finance companies. I believe these are mostly partnerships. So just how do you think about the trade offs of partnering versus owning when it comes to these origination platforms? And what situation do you think it might make sense to own? And maybe you could just talk about some of the capabilities that you think could make sense to add over the next couple of years? Thanks for the very good question, Michael. It's Scott. As we mentioned at Investor Day, we have Created or been partnered with others on probably about 16 or so origination platforms. And they're getting to be quite substantial, 4,000 employees, 100 plus 1,000,000,000 of AUM or balance sheet across the entire group. Just by way of background, these were largely created out of our private credit business, in particular, our private credit opportunities vehicles, Where we saw an opportunity in asset based finance on the back of banks pulling back from a number of different asset classes. We thought the risk reward was really pretty interesting. That effort was started clearly before the Global Atlantic transaction. And so what we're doing right now is we're in the process of thinking about how do we want to pivot the strategy and how do we want to evolve what we're doing there In light of the significant demand that Global Atlantic has for those underlying asset classes and that origination. And so think of it this way, we started really just Funding entirely out of the funds. And then we started to move a little bit more of a hybrid approach. So we created an aircraft leasing business as an example called Altavair That was created as almost like a joint venture between our infrastructure business, our private credit business and our balance sheet. And so we've been moving in a direction of actually trying to think about the answer to your question, this owned versus partner. And I think what you'll find and we'll Our thinking with you going forward is that we are going to have some of these that will be more transitory and we own for a while and then Move on and sell as fiduciaries for our funds. And we may have some that over time move into more of the AltaVair type approach, which is a bit of a hybrid. But with the addition of Global Atlantic, it really broadens how we can think about investing in this space and some of this stuff that might make sense to make more permanent Either on the KKR balance sheet or the Global Atlantic balance sheet or both. Thank you. Our next question will be coming from the line of Robert Lee of KBW. Please proceed with your question. Great. Thanks. Good morning. Thanks for taking my questions. I know, Bob, this is covered on Investor Day, but I think it would be just a helpful kind of refresher on Global Atlantic, really a maybe 2 parter. Can you just To refresh us on the amount of capital available for their growth right now. I mean, I know you injected when you I think it's $250,000,000 there's a sidecar vehicle I believe too, but updating maybe an update on Their growth capacity as it stands today would be helpful. And then also maybe GA kind of standalone, what was It's organic growth in the quarter, kind of separate from this, how it appears being added to your income statement COO. Hey, Rob. I'll take a first shot at that. So, that's a good question. And obviously, one of the big COO. Opportunities for us as to really be able to work with the GA management to go get the scale, which they believe COO. It's out there in the industry and Alan at our Investor Day as you noted did a really good job articulating the different $1,000,000,000 plus growth opportunities that are available. And so we've got a couple of different ways to be able to go after that and do feel like we're well set up. 1, we raised $250,000,000 of primary capital at COO. At the time of closing couple of months ago, it's the first primary capital raise that the company has done. So that's very meaningful in terms of our ability to scale up the platform. Number 2, you noted the sidecar And we think there's a real opportunity from the Sidecar Finance perspective going forward that can set us up to be able to go after these growth opportunities. And the last thing I'd say, Rob, is one of the big strategic attractions of this transaction, I think Both for the GA management team and also as we evaluated this deal was our ability to help them access capital when really meaningful growth opportunities I became available. And so we're very focused on that. And I do think that there's a real opportunity here For us to be able to go attain additional capital if it's required for things that make a ton of sense from a growth perspective for GA. Thank you. Our next question will be coming from the line of Chris Harris, Wells Fargo. Please proceed with your question. Thanks. Hey, Rob. I know this is really tough to estimate, but how should we be thinking about like a normalized Tax rate for KKR now going forward. I know there was some noise in the Q1. And then related to that, I just want to confirm that the insurance earnings are Coming in to P and L post tax. Yes. Thanks, Chris. Good question. So yes, Our Insurance segment, we thought the right way to illustrate a post tax basis and so that's fully tax number that you're seeing for our Insurance segment. As it relates to our blended tax rate, I would say our guidance here really hasn't changed since we became C Corp and we benefit from a step up in basis that we had at the time of the C Corp conversion. That's why you see our tax rate For the time being that has trended below the statutory rate. Obviously, this quarter, in particular, you had some noise Upward pressure that I mentioned. But I think a mid to high teens type tax rate That's going up over time and landing in the low 20s at the statutory rate over time as our step up comes down over time is the right way to think about Taxes at KKR. And so not too dissimilar from what you've heard for us over the years other than the fact that the step up We'll continue to come down over time and our tax rate will slowly migrate up. Thank you. At this time, I'll turn the floor back to management for any additional comments. Okay, great. Rob, thank you very much. Thank you everybody for your continued interest in KKR. We know that with the Investor Day in our earnings, the amount of time that you've spent focused on us has been considerable this quarter. We're of course available for any additional follow-up questions. And otherwise, we'll look forward to reviewing our Q2 results in 3 months. Thank you so much.