Okay. Good afternoon, everyone. I'm Patrick Davitt, the U.S. Asset Manager Analyst at Autonomous Research. It's my pleasure to welcome back KKR's Co-CEO, Scott Nuttall. As a reminder, if you want to try to ask a question, you can submit it through the Pigeonhole app and it'll show up on my iPad here, and I'll try to work those in. Scott, thanks for joining us again.
Thanks for having me back, Patrick.
It feels like every winter and spring, we have another crisis to deal with.
Doesn't it?
these things. This year, it has been another crazy few months, this time dealing with the Iran war, private credit concerns, sticky inflation, higher for longer rates. You can pick your poison. I guess through that lens, do you agree with the concern that this is kind of a tough mix for things like private equity, for levered risk assets? What is KKR's current thinking on inflation rates and the economy, and what you think KKR's positioning is through the lens of that mix?
Sure. Well, first off, thank you for having me back.
Yeah, of course.
again this year. This has become a nice annual event for the two of us. Thank you for the question. Look, sentiment is a very tricky thing, and there's periods of time in our business, and KKR has been around 50 years. My Co-CEO, Joseph Bae, and I have been around 30 of the 50 years.
There's periods of time where people are thinking everything's going to be great, and when they should be asking us hard questions about stuff, they don't. Then there's times when things are going really well, and everybody's just negative on everything.
Yeah.
We're definitely in one of those latter periods of time right now. From our seats, it does not at all feel like a tough environment. We just, last 12 months, reported record fee-related earnings, record net income , our management fee's up 23% in the last 12 months. Record visibility and our monetization-related revenue is up over 50% in the Q1 . All our operating metrics were up 20+% in the Q1 , but everybody's negative about everything.
We're in one of these periods of time.
Where the anxiety exceeds the reality as it relates to our business day to day. Now, we obviously need to make allowances for what people are worried about, to your point. There's no doubt to your question, inflation we expect to be a bit higher for longer. Same thing with rates. You cannot paint anything with one brush.
Yeah.
You can't paint our industry, you can't paint the economy, you can't paint markets. There's a tendency to want to make things simple, tidy sound bites.
This environment does not lend itself to that. We're finding that there's plenty to do all around the world, lots of investment opportunity for us across all of our asset classes, and so this is a very constructive and productive investment environment for us.
If you look at what average rates have been over the 50-year firm history, well above where we are right now. This feels strange relative to the 2010- 2020 period.
Yeah.
I would put this more in a normal operating environment. 2010- 2020 would be a little bit more the odd environment if you look through the lens of our entire history as a firm. We're super upbeat. I've never felt better about the firm or the ways we have to grow in front of us.
Staying on the macro track, KKR's been one of the more optimistic on portfolio realizations, which I think is reflective of your portfolio probably being a little bit stronger than the average portfolio. It feels like things have improved since you reported earnings, but we're still not seeing a ton of strategic activity for sponsor-backed transactions. Just curious to get an update on how you see realization opportunities trending this year after the recent volatility.
Oh, we feel great about it. Look, the background for everybody's benefit is, we learned a lot before the financial crisis.
Right.
We over-deployed in 2006 and the first part of 2007, that taught us a lot about linear pacing from a deployment standpoint, diversification, and portfolio construction. We've just been applying those learnings for the last, now, nearly 20 years. Part of the reason that we're having success with these exits is we have a very mature portfolio that's quite global and quite diversified.
There's a tendency sitting in the U.S. to just think about the U.S., but we have half our investment professionals outside the United States. Just more recently, I'll just rattle off a few things that we've announced, but we sold OneStream Software, a software company, just closed a couple months ago for 4.5x Our money. We sold a data center equipment company called CoolIT Systems.
For 15x our money. We did two 2021 exits. 2021 was a tough vintage year in our space. Atlantic Aviation, couple times our money. Another one in PE, 3x .
Hyundai Marine in Korea, 7x . Kokusai Electric, semiconductor equipment company in Japan, 20x .
Our money. We just announced the deal last week for the aerospace division of CIRCOR, sold it for $2.5 billion. The entire company we bought for $1.6 billion. That's just the last handful of weeks in terms of announcements. Back when I made the point about we have record monetization visibility, we announced that on our earnings call.
Yeah
We feel great about the forward from here. To your question, if you go through some of those seven or so exits that I rattled off, three of those were to financial sponsors.
Two of those were strategics.
Two were into the public markets.
Got it.
It's very broad-based and it's global.
The other bugaboo this year has been retail and wealth.
Sure.
Which is a growing piece of the algorithm for KKR, but not a huge piece of the back book, obviously. Given the noise and the increasing concern around the demand for those products, I guess firstly, do you have any updated thoughts on how that demand is tracking, how redemption requests are tracking, and more broadly, has it changed the distribution discussion at all with your partners?
It hasn't meaningfully changed. I think the punchline for everybody to understand the opportunity we see from here is exactly as what I would've said a year ago.
Yeah.
Maybe even better. I think there's some near-term noise, we'll talk about that. Just to size it for everybody, this wealth business, as it's talked about for us, is roughly 5%,
Yeah
Of the assets that we manage. That has grown 80% in the last 12 months. It's gone from kind of $21 billion to $38 billion over the last year. It's $38 billion out of $758 billion, just to put it in context. There's a lot of headlines on this topic. We manage eight different vehicles. Seven of the eight have had positive inflows in the Q1.
When you work your way through that, and the one that had outflows, it was -$12 million, and that was converting structure and converting strategy. The facts continue to be that we are growing in this space. We're a little different than others. 85% of the capital that we manage in this format is in private equity and infrastructure.
Actually, 15% would be credit and real estate. We're a little bit different in that regard. Our PE and infrastructure vehicles had something like 60 basis points of gross outflows.
In the Q1 . It's continuing to be a space for us that's growing net. The headlines are the headlines, but for us, as we look to the long term, hasn't changed our perspective.
Our view is we just got to perform. If we perform and partner well with advisors and clients and do a great job for them, we'll earn the right for this to be a more meaningful part of the firm over time. The trajectory is meaningful. The backdrop for everybody is, look, if you're a retired teacher in, pick your state in the U.S., you probably have 30% or 40% of your retirement wealth invested in private markets.
If you're a retired dentist, lawyer, fill in the blank, that lives next door, it's pretty close to zero. The vast majority of retirement wealth in this country and most developed countries are actually managed by the individual themselves, usually with the help of an advisor.
Our space did not innovate much for a very long time, now we're innovating and trying to bring what we're doing and make it easier to buy and easier to own for that individual. We're at the very early innings in that development of our space.
You have the K-Series to kind of attack this opportunity. I think you've said that you have all of the asset class and strategy bases for tackling higher net worth clients with that suite. The newer products, in conjunction with Capital Group, are for a lower net worth individual. For those that are less familiar with KKR and those products, I think it would be helpful to get a quick overview of how those products are structured.
Sure. You're right. Most of what we do in K-Series, think of that as accessing households that are largely $1 million and up in net worth, which is a small percentage of U.S. households. There's something like 90+% that those products do not touch.
Right.
We're very fortunate to have a wonderful partner in Capital Group that we're working with to get to the other 90% of U.S. households. Simple way to think about it. They're largely structured as interval funds, and so roughly think of it as the underlying 60% of them, of the dollars, are going to be invested in public markets, and Capital Group will manage that sleeve. 40% will be invested in private markets.
We'll manage that sleeve.
Capital Group is the distributor, given their footprint and the incredible relationships they have across the space. That's the high level.
The uptake has been slow, is it right to think about the adoption curve for these products to be more dependent on one or three-year performance numbers, kind of like what we've seen in the mutual fund world?
Yeah. I think for us, it's been entirely on track or maybe a bit ahead of what we would,
Okay.
Have expected, because maybe there's an education element to this.
Right.
That is absolutely critical.
Yeah.
There's 300,000 financial advisors in the U.S. Our partners at Capital Group work with 200,000 of them. Part of the reason we wanted the partners, obviously, that's an amazing footprint and set of relationships. There is work to be done in terms of making sure the advisors and the client community are educated on what this is and what it isn't.
We're in the midst of that. We're working on that together. I'd say that's very much on track. We started in credit, and very recently we launched a product together in private equity.
Okay. Beyond the K-Series and the new Capital products, how are you thinking about building the suite further? Is there a pipeline of new products, or do you feel like this is the right set?
I think we've got everything built out, in terms of the main product areas. ABF, asset-based finance, that's the one vehicle I mentioned that is just converting. That's just really starting now. One of the things we're thinking about, we just bought a company called Arctos, so maybe we could do something in the sports area.
Perhaps there's something to do in secondaries.
There's discussions being had, could you have something that actually has all the aspects of alternatives in one wrapper? There's different product ideas that we're still working our way through.
it's obviously not just a U.S. opportunity, so where are we in building out this suite to non-U.S. investors?
Yeah. About 40% of the assets that we manage in K-Series are outside the United States.
Okay, wow.
60% in the U.S. I would say our distribution footprint, in terms of the build outside the U.S., is behind where we are in the U.S. We're probably 80%, 90% of the build done in the U.S., probably more like 50%.
Okay.
Europe and Asia. We're continuing to hire, we're continuing to build relationships, and then once you get on these platforms, you've got to go through the onboarding process, the education process. This just takes time.
Yeah.
We think there's a ton of growth ahead of us.
That's great. Last one on these. Last year we talked a bit about the K-Series potentially seeing more institutional demand as well. Has the redemption noise changed that trend at all? If not, what kind of clients are inquiring, and you still see that as a new incremental pool of AUM, or does that cannibalize existing wrappers?
No. If anything, all the media noise has increased a dialogue with institutions, in particular about things like direct lending and private credit. I think institutions had actually shifted a bit from direct lending to asset-based finance. Our ABF business the last three years has gone from $42 billion- $92 billion.
Very short period of time. Some of that was institutions saying, "Okay, with all this money going to direct lending, I actually like this ABF idea.
I'm going to pull back from direct lending a bit." With all the headlines and some of the redemption noise and spreads going out, leverage coming down, institutions are coming back and saying, "Actually, we think the risk-reward is coming back our direction." If anything, it's increased as we've seen all this media noise tick up.
Since you brought it up, we'll talk about direct lending.
Sure.
A bit. I feel like we're talking about it.
Shocked you want to cover that.
I feel like we're talking about it every year at this point. Obviously, the press is hyper-focused on this and BDCs specifically, and your public BDC specifically.
Sure.
I think it'd be helpful to get an update on your view of the trends there. Maybe unpack the FS KKR issues a bit for people that are less familiar.
Yeah, happy to. Let's just step back for a minute and try to size what we're talking about. If we manage a bit over $750 billion, I'm going to use rounding, makes life easier, there's about $300 billion of that that's in credit. About half of that would be in leveraged credit, about half would be in private credit. It's actually $149 billion is the number, is what we manage in private credit.
Of that $149 billion, $92 billion is in Asset-Backed Finance. Direct lending is $39 billion. Okay? $39 billion in direct lending. Of the $39 billion, you still with me? $39 billion, you got $12 billion-$13 billion is in the public BDC FSK. One way to think about it's about a third of 5% of our assets, just to put it in context.
What you're reading about in the headlines is the NAV of that third of the 5% has been written down on the back of some performance issues within that portfolio, in particular around a couple deals in 2021. That's what you're reading about. There's very little overlap between that vehicle, which has a broader mandate, and our institutional funds. We actually put out disclosure in the IR deck that's on our website, showing all of our institutional fund performance.
You can see all of the data. That's just to size it for you, that's the math.
You mentioned the institutional demand dynamics, which I think echo what we've heard from other companies. This is sticking on direct lending. It also sounded like, coming out of the one Q calls, the new deployment trends in that asset class could be getting better, wider spreads, higher base rates, better docs. Are you still seeing that trend continue through May?
We are. I would say spreads out 50, 75, 100 basis points, something along those lines. Fees are up, leverage down half a turn to a turn. And to your point, the docs are tighter.
Yeah.
Absolutely remains the case.
Awesome. You mentioned ABF as well. We've heard some pretty punchy TAMs thrown out there by you and some of your competitors in the $ tens of trillions. It feels like it might be the more important part of the private credit growth story now. You have among the broadest origination capabilities there. Update us on how your annual origination machine is tracking in that business, and how you balance that origination for your insurance affiliate versus third-party client.
A simple way to think about it, the insurance affiliate is a client.
Yeah.
It's treated like a third-party client in terms of how the waterfalls work.
Okay.
Everybody eats together. It's relatively straightforward. The last 12 months, origination, the high grade ABF origination, about $40 billion, give or take. As we've been originating for our own insurance company, that's allowed us to continue to scale our third-party insurance AUM. When we announced Global Atlantic, we managed about $20 billion, $25 billion in third-party insurance AUM. That number's around $85 billion now.
It's allowed us to continue to scale third-party capital as well. I think you're right. It's just a comparison. $92 billion of is ABF versus $39 billion direct lending. We've seen more growth. We think that's a market with higher barriers to entry.
Yep.
We have 19 platforms, 7,500 employees.
Across those platforms out finding opportunities.
Mm-hmm. We've heard from a lot of other executives, I think including yourselves, that the education process for this, outside of insurance for traditional institutional clients, has been a bit longer than, say, for things like direct lending. Where do you think we are in that client education process? Has the noise around fraud issues like First Brands Group, Tricolor changed that client conversation at all?
It has not changed the conversation. I'd say we're probably at third inning.
Yeah.
Which is a pleasing place to be. It's probably at least a $6 trillion market,
Yeah.
On its way to nine.
Yeah.
Direct lending's probably $1.8 trillion, so it's a much larger, deeper market. It's pleasing to be at over $90 billion of AUM and still feel like it's relatively early in the development.
Mm-hmm. Great. I think that dovetails nicely to a more recent concern I'm hearing, that the new administration plans for bank deregulation could derail this broader kind of ABF private credit opportunity. What is your updated thinking on the bank disintermediation opportunity, and does this shift from the government change that outlook at all? Yeah.
We haven't seen a material shift in behavior. We're partnering with the banks across a lot of these vehicles, and they're actually financing several of the vehicles, almost all of them.
It's been a good partnership for us, but no, it hasn't really shifted things. I think if you think about it, these are long-dated assets, and so you want to have long-dated funding against it.
You pointed out to KKR's higher exposure to non-U.S. business as adding ballast or offsetting ballast to any kind of indigestion, as some people call it, in the U.S. Are you seeing any noticeable gapping in non-U.S. versus U.S. trends, and any significant change in client geographic allocations from the U.S. to the non-U.S.?
No. Look, I think, and I've said this before, I do think the industry is shifting a bit, and we're moving to much more of a K-shaped industry. The 2010 through 2020 period where rates were low, inflation was low, multiples were up, performance was relatively uniform across our space. People were performing well, and if you bought levered assets during that period of time, you tended to have pretty good results.
Yeah.
That's where we told the firm, do not confuse a bull market with brains. You got to be able to do this through cycles.
To prove that you're good at it. We have not had a normal recession in the United States for 16 or 17 years. This is a very strange period of time.
Yeah.
Right? The last five or six years, if you think about it, COVID, war, rates up, inflation up, tariffs, more war. Right? What's starting to show up in the U.S. context first is we're starting to see some people have developments in their portfolio that are tougher,
On the back of all this stuff starting to flow through.
That's what you're talking about. What the media's picking up, in particular, the tougher stories, of course, as you'd expect. Part of the reason we're raising record-sized private equity funds is we're turning a lot of cash, and we've had really strong performance.
Management fees in private equity are up 21% last 12 months.
Yep.
We've seen a significant amount of growth. On top of all of that, in the U.S., where we think we're taking share on the back of performance, to your point, we have a significant global footprint.
Majority of offices outside the U.S., half the investment professionals outside the United States. I'd say investors want to continue to diversify their portfolios globally as well.
We've been fortunate enough to partner with many of them. If anything, we're seeing more interest in Asia, for an example right now. A lot happening in Japan and Korea in particular. Continued activity in India, no doubt.
Yeah.
Plenty to do all across the European continent. If anything, that's across asset classes. That's PE, infra, credit, real estate, insurance.
Yeah
You name it.
On the PE kind of dry powder issue, there's obviously you have a lot of dry powder, the industry has a lot of dry powder. Feels like particularly direct lenders have been kind of talking about that coming out for years at this point.
What is the key impediment to seeing that? I know you're more of a steady deployer, but why do you think that dry powder is getting so stale and we haven't seen that big surge? Do you think there needs to be kind of a resetting of exit value expectations for that to really pick up?
I think there's going to be some resetting. I don't think what you're seeing right now in terms of this monetization delay is necessarily because there's not an exit market. As I said with us-
Yeah
We have plenty of things that we're selling right now at big multiples of our cost.
This is more about when did you create your portfolio?
Right.
If you had deployed a lot in 2021 and the first half of 2022, which means you probably priced the deal before Ukraine. Right? You may have, some chance, you may have overpaid for some assets.
Yeah.
Right? You are going to end up owning those assets longer. I say this with a lot of humility. We did the same thing before the GFC.
Yeah.
What it does, it elongates your hold period because you need to increase your earnings-
For a longer period of time to overcome the fact that you may have paid too high a multiple.
Right.
Okay? That's part of the reason you see these monetization delays. That's why linear pacing, as simple as it sounds, is very powerful. In years like 2020, when human nature says, "Don't deploy," if you say, "You know what? I'm going to deploy 20% of a five-year fund in 2020,
Then it pushes everybody to kind of deploy and get money out the door. Then 2021, where deployment in our industry went up 60%-70%.
Yeah
Our deployment was flat.
You stay on that linear line. Right? It sounds very simple and very straightforward, but in our experience, it's incredibly powerful.
You need to be diversified from a portfolio construction standpoint. I think it's more that's what's going on.
Okay.
When did you create your portfolio? Have you created real value in that portfolio? Do you have profits?
That you can monetize for the people that you work for? If you don't, you just want to elongate your hold period to basically have your option extend out further so you can create that value.
That dovetails into a question that I have on the pad from the audience.
Please
That's clearly from someone that's cynical about private equity. What do you see as the value proposition for private equity specifically in the next five to 10 years? Is the asset class on the decline with opportunities becoming more scarce and markets, companies more efficient?
That's a really good question.
Yeah.
The short answer is, we do not see that. You'll be shocked to know that's my answer. I don't think how we conduct private equity is that well understood. When I got to KKR, we had 15 investment professionals when Joseph Bae and I joined. You would go buy a company with two or three people.
You try to find the best company with the best margins, with the best management team, and you put on a sensible capital structure. If you find that company, there is not enough value to be created. You cannot buy that company anymore. Right? The markets are too efficient.
What you have to be able to do is to show up and buy a good company or a good asset and make it great.
You need to show up as a strategic buyer. You need to have a strategic mindset. We'll sometimes have 30, 40 people on deal teams now, because you need operations professionals in capital markets and macro and asset allocation and geopolitics. You need the ability to actually look at these companies from all angles and then materially improve their profitability.
Employee ownership is something that we have used to really good effect. We give all employees shares in our companies now. That's how we do it. Through that lens, if you can show up and try to make a good company great, there's a ton to do.
If you're just doing financial engineering and you think that there's going to be value to be created on a systematic basis, that's a very difficult business. If you're trying to do that, I think the answer to your question is no. If you have the ability to make businesses and assets better, there's a lot to do all around the world.
I imagine to your point on these kind of stale portfolios that are out there, we could see some consolidation around the more mediocre portfolios kind of getting phased out as people consolidate with the largest players.
I think there could be a lot of change in the industry over time.
Yeah. Okay. Let's pivot to insurance, where earnings have been more range bound the last couple of years. Could you expand on the moving parts that's restraining that earnings growth? When do you expect to see more meaningful progress on the targets you've laid out there?
Sure. Background, so in insurance, we make money multiple different ways. We have the insurance earnings themselves, and then we manage assets for the insurance company. There's also capital markets opportunities that come from that. We have a sidecar, third-party Asset Management business called Ivy that sits alongside our insurance balance sheet. Everybody's benefit that don't know us as well, we're a bit different. We report in three segments.
We've got Asset Management, Insurance, and then something we call Strategic Holdings, which I'm sure we'll come back to. We have about $6 billion of third-party capital now that sits alongside that insurance balance sheet capital. That $6 billion of dry powder probably results in $60 billion-$75 billion of AUM. Simple way to think about it. We manage what all that capital will turn into. You mentioned the range bound.
The comment's probably around the IOE, the insurance operating earnings themselves. The combined earnings just the last 12 months are up 14% year-over-year. That still understates it, because there's a couple things going on with our business. One is we are rotating, the company we own is called Global Atlantic. We're rotating Global Atlantic's portfolio in two ways. One, to longer duration liabilities, think more seven-year and on the margin, less three-year product.
We're starting to invest more in private markets.
Underlying assets. It's a bit ironic, but GA did not really invest in what KKR does in the more private equity infra end of the spectrum.
We're now starting to do that in a modest way. We decided to report our results from that effort differently. Other people report it on a mark-to-market basis.
Yep.
We decided, because we report KKR largely on a cash basis, we were just going to report on a cash basis.
What flows through our earnings virtually has zero coming from.
Yep
That alternatives portfolio that we're building. What will happen over the course of the next couple few years, which is probably the timeframe in the answer to your questions.
Two things will occur. One, that alternatives book will start to have exits.
Yeah.
It'll turn into cash earnings, where it's virtually none today. Two, that third party Ivy dry powder will actually start to get invested.
Fee and carry will start to get generated.
Got it.
The way I would think about it is less runoff.
Yeah
Longer duration liabilities and more earnings coming from the investment portfolio plus the third-party capital alongside. All of that we think increases earnings power and the ROE.
I think there's a perception in the marketplace that competition and new annuity riding is part of the equation or part of the headwind there. To what extent are you seeing all the new entrants kind of squeeze the spreads you can earn in that business going forward?
There's no doubt competition's ticked up. When we announced the Global Atlantic transaction in July 2020, it's a bit of a question, how would the market process it.
Yeah.
As you know, it was received reasonably well.
Yep.
That's good news and bad news. The bad news part of it is that more competition showed up. We've gone from a handful of players with this type of partnership to something like 25- 30.
There is more competition. Having said that, we think that it's harder to necessarily be able to replicate the investment origination capabilities, and we have something a little bit different in that we have a retail business and an institutional business. Over half of the business is actually institutional.
We shall see. Part of the reason we bought back more stock in the Q1 is on a relative basis, we saw better returns in Q1 buying back our own stock.
Right.
tThan probably we saw on the margin on incremental annuity retail pricing.
Okay. We talked about higher for longer and steeper yield curves, things of that nature potentially being a headwind for parts of the business, but you could argue those are good things for an insurance balance sheet. Is that something that we should be thinking about given the current?
I would. I think it's a nice balance.
Yeah
To the business.
Yeah. Cool. All right. Summing up all of the big growth drivers we've talked about, you're still talking about 20%+ fee-related earnings growth this year. For those that might not be as familiar with the story, could you quickly unpack the key building blocks to maintaining that strong growth outlook, despite what continues to be a volatile world?
Sure. Back to the point, just ask everybody to ignore the sentiment and the noise you're hearing for a minute. It is absolutely the case, we are seeing continued organic management fee growth in the low 20s%. 23% last 12 months. Q1 metrics, all of our operating metrics were 20+% year-over-year growth.
If you look at the makeup of the management fees, to your question on fee-related earnings, it's about a third, a third, a third. Private equity, real assets, credit. It's a very balanced business and it's quite global.
As we talked about before. That's part one. Part two is we think the capital markets business will continue to grow as the firm grows, and there's more to do with our capital markets business alongside our insurance business, as we talked about before, which fees will also kick in Ivy and otherwise.
There's plenty to do there. And then the other thing that doesn't get as much attention as it might is just take a look at the last three years. Our management fees have grown 50%.
Our operating expenses have grown less than 25%. We have a different type of business model. Part of the reason we have the three segments I mentioned is it allows us to create more earnings growth with fewer people.
An investment firm, keeping your culture intact is absolutely paramount. It also tends to lead to higher margins. We already have the highest margins in the industry. We think they can increase.
If you look at most people in our space, they would have the inverse. Their OpEx is growing faster than their management fees.
That's not the case for us. We think we can continue to put up those kinds of numbers, and we feel really optimistic about the forward based on all the conversations we're having with investors, and frankly, the investment performance we've been generating.
Yep. As you look across all the drivers and some of the newer products you have in the market, can you point to any areas where you think your view might be overly conservative and/or specific products that you think have the potential to suddenly start growing much faster than the current run rates?
I think we've been surprised the last several years. Infrastructure continues to probably be our fastest growing business across the firm. I'd say Infrastructure and the Asset-Backed Finance would definitely be up there. Asia, we manage $85 billion in Asia today, $85 out of $758 billion.
If you go back to 2019, 90% of the $21 billion we managed then was in private equity. Now roughly 40% of the $85 billion we manage today is in private equity. Asia will continue to grow at a really rapid clip across all different asset categories, and we think that that's likely going to be the fastest growing region we have globally.
Okay. You mentioned infrastructure. There's been obviously a lot of reporting on AI and to what extent all of the CapEx that's being spent is needed. How are you, when you develop your investment portfolio in AI, specifically protecting yourself from the obsolescence risk, the idea that there's?
Sure.
Too much being spent and the revenue opportunity isn't there?
Well, I think you got to look at it through a few lenses. One is the investment opportunity itself.
Yeah.
Which everybody, it's interesting, depending on where you are in the world, either AI is a good thing or a bad thing. In the U.S., people usually ask it as a bad thing. Let's look at it from an investment opportunity first.
Yeah.
All right? We've deployed $40 billion, $45 billion across digitalization, data centers, fiber to the home, towers, all around the world. There's plenty of interesting things to do in that space, and we think that $40 billion, $45 billion is going to go up quite a bit.
Power on top of that. We had to put an additional $25 billion-$30 billion so far,
In power. There's a ton to do, and there's a lot on the equipment side as well. Back to CoolIT. Kokusai, which is the semiconductor equipment company mentioned in Japan, part of the reason we made 20x our money is on the back of the AI demand opportunity. There's a lot of positives that come out of this.
We have meaningful equity interest in 220 companies. 150 of them are running AI labs and sharing with each other what they're doing to increase productivity and find ways to run the businesses better. There's a lot of good things coming out of that as well.
To the negative side, because disruption risk is real.
Yep.
If you're talking about it now, you're too late. We started with this work four or five years ago.
Yep.
What we did is we went through everything we owned, because we knew this was coming.
Yeah.
It was just a matter of when, and said, well, is AI net an opportunity, a threat, or a question mark?
Yeah.
If it was a threat or a question mark, we sold it.
You can't get out of the way of the train.
Mm. Mm
If you're still standing in front of it when it's this close.
Yeah. As we've seen this year.
As we've seen.
Yeah.
We sold some assets several years ago where we had a little bit of doubt in terms of that net answer. We've got a lot of great things that we're doing with AI in the firm and in the portfolio. At the highest level, I think that's probably what's most relevant.
On that last point you made, though, where do you and KKR stand on the broader software debate? The idea that the industry has been painted with one brush and there actually are a lot of companies that will win through all this.
Oh, it clearly has been painted with one brush.
Yeah.
That's what tends to happen when people have anxiety, and that tends to lead to some really interesting investment opportunities in our experience. That's where it's really nice.
You would be in the market for software still?
It depends. I think it depends on the asset, depends on the moat around the business, depends on the management team ability to use AI to actually run themselves better.
Yeah
In a differentiated fashion. Depends on the multiple.
Some of these businesses are amazing businesses at 15x, but not at 25.
Right. Makes sense. So the other angle to AI and technology more broadly is obviously what you can do with it internally. What is your current investment in internal technology, AI infrastructure? What specific processes have you already integrated, and materially automated or augmented through the use of AI and technology?
The way we're doing it, and this is very early, I'm not sure we're going to have anything all that differentiated to most other folks you'd have on the stage. We've got an applied AI group that sits in the middle of the firm.
We don't think it should be separate from the businesses. We actually have all of the businesses putting in place their own processes using AI, and we're basically using KKR and running at different labs all across our firm.
Everything from how do we source better and faster? How do we actually handle client requests differently? How do we analyze their investment portfolios that are more in the traded side and come up with new trade ideas?
There's a variety of different use cases, and we get a list every weekend, kind of fun to read, of all the different ways that teams around the firm are using AI to do their jobs better, different, faster, and do a better job for everybody counting on us.
The other angle is obviously your portfolio. I think you have over 100 portfolio companies across multiple sectors. How is AI being used to drive operational improvements at the portfolio company level? Is that now a formal part of the value creation?
It is. It's part of the diligence process up front.
Yeah.
We actually go through every single new investment through an AI lens, and have, let's say, a 19-point checklist and all sorts of things that we're working through. We have a Capstone operations team, sits in the middle of the firm, that is helping to make sure that work is uniform. It's part of the value creation plans of every new investment that we make, and then we can monitor it and share ideas across the different companies.
My last question on this is kind of your information moats. Does kind of AI-driven quantitative strategies becoming more accessible create a democratization risk for your kind of private equity alpha? Can it better identify and price middle market buyout opportunities, or does your information advantage, kind of create a moat around that risk?
Yeah. I think, go back to what I said before about what we need to do to make these businesses better.
Yeah.
You can't replace the judgment element and that kind of pattern recognition. You can't replace the fact that in our business you need to build like and trust with management teams because it's private equity and infrastructure.
These are kind of relatively intimate transactions where you work together for a very long period of time. I think AI can help us do a more thoughtful job around screening for opportunities or kicking out ideas or things that maybe the teams hadn't generated on their own.
The job on the ground,
Yeah.
Hasn't really changed.
Okay. Before I get to my last question, I have a few from the audience that I think are good. Would you consider putting private credit loans on exchange for price discovery through the lens of what Apollo has been talking about? What are the benefits and drawbacks of providing more liquidity in the private credit world?
Well, I think the benefits are probably clear. It'd probably attract more capital over time. I think more transparency tends to be a good thing.
Yeah.
What you worry about today, for example, I think part of the reason you create the excess spread is because you're getting paid an illiquidity premium.
If the private credit market just therefore turns into the traded credit market, you probably won't get paid the same,
Yeah.
Illiquidity premium, I would guess, over time.
Yeah. Okay. Like, where do you stand on the debate?
I think that it's likely to happen over time for some types of private credit loans.
Okay.
I don't know about the ABF space and some of these areas I'm not so sure. Maybe direct lending could lend itself to it, but it's early.
Okay. I'm not sure you'll answer this one, but I'll try. You've announced, and you pointed to these earlier, you've announced a few large realizations since the earnings call. Do you have an updated signed and/or closed realization pipeline number?
I don't.
Yeah, okay.
I don't. It's more.
It's more, yeah. Clearly. Last one from the audience. There's been a lot of concern that Middle Eastern investors could pull back on alternative allocations given local CapEx needs after the Iran war. I guess firstly, can you remind us how much AUM comes from that constituency, and how are discussions with those clients evolving?
It's a single digit, more or less, % of our capital. We haven't seen a shift.
Yeah.
If anything, it's been business as usual.
to date with our partners in the Middle East.
Okay.
No change.
Okay. Last one from me is on capital. It felt like there was a little bit of a pivot towards leaning into more share repurchases given the stock drawdown. Was that a fair takeaway? Should we expect the share count to actually decline now?
I think the way we look at it, look, as a reminder for everybody, people at KKR are the largest shareholders of KKR, so we own roughly 30% of the stock. The way that we look at it is you all would, which is what is the highest return on incremental dollar of capital we're investing?
That's how we do the math. Is it insurance? Is it strategic holdings? Is it buybacks? Is it M&A? That's the screen through which we tend to look at everything. We look at it relative to what we think the earnings power of the firm is.
To your point, given we seem to be in the have-not bucket right now, along with software and a couple other things, we have taken the view that the market is mispricing KKR stock. We bought some back in the Q1 . You also saw my Co-CEO and I bought some. Multiple members of our boards bought some.
Expressing the same view. If that continues to be the case, you'll continue to see us buy back stock. If those other uses of capital, and we're really fortunate because all of these numbers that I'm talking about when you look at what the return on capital is, are quite high.
Yeah.
If those other uses of capital start to be more competitive, then we'll put the money there.
Yeah.
That's kind of how we run the firm, and we allocate the capital of the firm. It's really across those areas: insurance, strategic holdings, acquisitions, and buybacks. That's where we've been spending the time. Part of the reason we bought Arctos is because that was a very attractive use of incremental capital and gives us another couple of ways to grow the firm that we didn't have before.
Strategic holdings is obviously a part of the capital framework. I think it's less understood by the market.
Sure.
Compared to other parts of your business, maybe walk us through what that is, your thinking around that business, and what the path to the kind of $350 million of operating earnings you've been talking about there is.
Sure. Let me just give everybody the background on what this is, because I know this is a bit of a different part of our business model. There's a couple different things for you to understand. One, when my partner Joe and I got to KKR, Berkshire Hathaway's market cap was $41 billion. It's now $1.1 trillion.
That's just 12%, 13% for 29, 30 years. There's not many companies that have been able to compound their market cap for decades and actually get it into the hundreds of billions of dollars. Okay. Part of what we think about as we think about growing the firm is how are we going to continue to scale the market value of KKR, not for just for the next few years, but for the next 10, 20, 30 years and beyond.
Okay. The job is different when your market cap is $80 billion or $90 billion than when it was $10 billion. If you're operating the same way you did when it was $10 billion, you're not doing your job properly. That's kind of mindset part number one. Okay.
Background part number two is we were noticing that when we were looking at some investments that we really liked, but think big market share, branded companies, more recession resistant, these were lower risk opportunities, and they probably you'd be pleased to get a mid-teens return. You don't need 20+% to own those types of businesses.
Of course, if you show up with 20% cost of capital, you're going to lose every time because the owner's too smart to sell you that business at a 20% cost of capital. We were sourcing all these companies that we really like. We didn't have any way to actually be relevant. One day we stopped, and we said, "This is dumb.
These are companies we might want to own for 10 or 20 years and longer. We stepped back and looked at our industry and said, there's $ trillions that wakes up every day trying to find a 20% change in control equity return. There really wasn't any money waking up to try to find a mid-teens lower risk change in control return. That's more the space for mezz distressed in our business.
That's odd. We said, "Why don't we just have an ability to say yes?" By the way, we really like the idea of investing our own capital in these types of franchises. That's what we started to do roughly eight or nine years ago, quietly off the balance sheet. We invited a couple partners to come along with us. One of those is Chubb. For those of you that are invested in Chubb, you'll know they'll talk about strategic holdings.
They're one of our partners in this, and we have a third who's a sovereign. That's what we've been up to. We've now created this portfolio. It's kind of 18 or so companies. They are maturing. We've been doing this for the last many years, so we've seen them perform through COVID, through rising rates, through rising inflation, and through all the different dynamics that we talked about prior.
They've just been ticking along. Just our own share, forget the fee and the carry that we get on the third-party capital. That shows up in the asset management business. Just our share of the dividends these companies are now paying out, that's what shows up as earnings in our Strategic Holdings segment. Think of these as the companies themselves pay taxes, then they're paying dividends because they've delevered. We take our share of those dividends.
That's the $350 million you're talking about this year. Going to 2028, we said $700+, and 2030, we said $1.1+.
We have a lot of visibility on the growth coming out of this. The very simple way of thinking about it, couple things. One is if you like fee-related earnings and the recurring nature of those earnings, contracted nature, we think you should like strategic holdings dividends at least as much.
As you like fee-related earnings. Okay? Ton of visibility, great franchises. We own 1-800 Contacts. We own Arnott's, which is like the Oreo cookie of Australia. There's a bunch of really nice long-term branded businesses in there that are just trucking along.
Our share alone of the revenues of those now is $4.5 billion, and our share of the EBITDA is $1.1 billion even today.
We're not reporting that. We're just reporting the dividends that we get. What's critical, we didn't hire a single person at KKR to create this business, which now has roughly $40 billion of AUM and is creating these earnings, because these are deals that we were already looking at and discarding. It's the same origination teams, same value creation teams. We didn't have to hire anybody. Back to the point about trying to work to increase our operating margins.
Keep our culture. That's what strategic holdings is. As we continue to execute on that, you'll see both FRE and strategic holdings grow at very fast rates with insurance growing quickly as well.
Yeah. Great. I think that dovetails nicely into a good high-level question I just got in from the audience. You've hit on this a few times, this idea that the market is clearly treating your stock or lumping your stock in with the SaaSpocalypse and AI concerns. When you look at everything that's written and how the stock is reacting, what are the one or two kind of big disconnects you'd point out or address here?
Oh, boy.
Maybe it's more than one or two.
I think it's hard to get it down to one or two.
Yeah.
Let's just go back to where we started. If you weren't looking at the media-
Yeah
Right now, and I walked in and I said, Look, we've got record fee-related earnings, record net income growth. Our management fees are up 23% organically in the last 12 months. We announced record visibility on monetizations.
We raised $127 billion in the last 12 months. Our record, by the way, is 129, so we're within $2 billion of our all-time record in fundraising. We've had record deployment, and we feel more optimistic about the forward than we've ever felt.
Yeah
With a lot of growth avenues all around the world and a lot of wind at our back and the megatrends on our side.
Yeah.
That's how you should feel. Then you can go look at what everybody says if you'd like, but that's how it feels to us.
Okay.
The thing that's different this time, and I'll wrap up here, there's always been a perception cycle as it relates to our space. It's kind of a genius-idiot perception cycle. 2006, we can do no wrong. 2008, we can do no right. 2021, we can do no wrong. 2026, we can do no right. That's how the perception moves in our space. Okay?
Yeah.
The difference now is last time we had this perception cycle, the space was probably $2 trillion or less. If you take out hedge funds, it's now $15 trillion.
It's a more relevant part of the space, so it's getting more attention.
I would resist the temptation to paint everybody with the same brush, because you're going to see people that perform extraordinarily well through this period of time, and you're going to see some that struggle to a greater extent.
Yeah.
We have the opportunity to learn some lessons. We think that we're going to be on the right side of that.
Yeah. Okay. That's a great finale. Thank you.
Thanks for coming, everybody.
That was great.