KKR & Co. Inc. Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2023

There are 13 speakers on the call.

Operator

And gentlemen, thank you for standing by. Welcome to KKR's Second Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in listen only mode. Following management's prepared remarks, the conference will be open for questions. I will now hand the call over to Craig Larson, Partner and Head of Investor Relations for KKR.

Operator

Greg, please go ahead.

Speaker 1

Good morning, everyone. Welcome to our Q2 2023 earnings call. As usual, I'm joined by Rob Lewin, our Chief Financial Officer and Scott Nuttall, our Co Chief Executive Officer. We'd 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. And as a reminder, we report our segment numbers on an adjusted share basis.

Speaker 1

This call will contain forward looking statements, which do not guarantee future events or performance. Please refer to our earnings release and our SEC filings for cautionary factors about these statements. Turning now to the quarter, we're pleased to be reporting fee related earnings per share of $0.67 and after tax distributable earnings of $0.73 I'm going to begin by walking through the financials. Management

Speaker 2

fees in

Speaker 1

the quarter came in at 749,000,000 net transaction and monitoring fees were $190,000,000 in Q2 with Capital Markets generating $150,000,000 of revenues. Capital markets activity was most pronounced in our infrastructure business, which contributed approximately 45% of revenues in the quarter. And along with core private equity, these two strategies generated over 60% of capital markets transaction fees in the quarter, reflecting the continued diversification of the business. So in total, fee related revenues were 967,000,000 this was up 7% from last quarter and it's up 25% year over year. Fee related compensation was right at the midpoint of our guided range at 22.5% of fee related revenues and other operating expenses were $147,000,000 Putting this together, fee related earnings came in at $602,000,000 or we expect to be a strong year over year increase in the year.

Speaker 1

And for the quarter FRE improved 10% from last quarter and on a year over year basis, so this is compared to the Q2 of 2022, FRE is up 31%. Moving to realized performance income. Realization activity as we discussed last quarter was more muted against the slower transaction environment. So for the quarter, we generated $149,000,000 of realized performance income, while realized investment income came in at $115,000,000 In total, our asset management operating earnings were 752,000,000 our Insurance segment generated $170,000,000 of pretax earnings in the quarter as Global Atlantic continues to operate at a high level. As a reminder, we expect pretax ROE to be in that 14% to 15% range, so performance this quarter was just above the top end of that range.

Speaker 1

In aggregate, this resulted in after tax distributable earnings of 653,000,000 or the $0.73 per share figure that I mentioned a minute ago. Next, moving to investment performance. The traditional private equity portfolio was up 5% in the quarter and over the last 12 months appreciated 2%. Importantly here, inception to date IRRs for our blended flagship funds, South America's 12, Europe 5 and Asia 4, remains strong at 22%, which is meaningfully ahead of the corresponding 9% figure for the MSCI World. In real assets, the real estate portfolio was flat for the quarter and down 11% over the last 12 months.

Speaker 1

Our portfolio continues to be heavily weighted towards those assets and themes where you're seeing strong fundamentals and cash flow growth. So think industrial assets, data centers, rental housing, student housing and self storage. However, as cap rates have increased over the last 12 months, that more than offset the underlying NOI growth and that's what's leading to the decline you've seen over the LTM period. Infrastructure was up 2% in the quarter and up 10% over the last 12 months, reflecting the strength of the portfolio really on a global basis. And with higher interest rates, we've strategically leaned into more inflation protected assets.

Speaker 1

And in credit, the leverage in alternative composites were up 3% and 2%, respectively, for the quarter and 12% and 5%, respectively, over the last 12 months. Moving next to capital metrics, we raised $13,000,000,000 in the quarter. Fundraising activity was actually quite diverse, driven by our middle market private equity strategy, our K Series suite of products focused on private wealth, which Rob is going to touch further on in a moment, our core infrastructure strategy and real estate across all geographies. And this is in addition to inflows from Global Atlantic as well as capital raised for our Ivy Reinsurance Sidecar Fund, which held its final close in the quarter. With that, our assets under management increased to $519,000,000,000 and fee paying AUM to 420,000,000,000 And finally, we've continued to deploy capital.

Speaker 1

In the quarter, we invested approximately $10,000,000,000 pretty evenly spread across private equity, real assets and credit. Deployment within private equity was largely driven by core PE, while real estate deployment was most focused on credit in the U. S. As well as Equity Investments in Asia. And in our credit business, deployment was relatively diversified across Asset Based Finance and Direct Lending.

Speaker 1

Now before turning it over to Rob, we want to spend a minute or 2 on our work to create and protect value through sustainability, which we detailed in our 12th Annual Sustainability Report that we published in June and is also available on our website. Now one of the areas where we've shown real leadership is our work around broad based employee ownership in our portfolio companies. And billing off of the CHI overhead doors and Minnesota Rubber and Plastics examples discussed previously, we have another case study in RB Media. RB Media is one of the largest audiobook publishers in the world. And in connection with our investment, we introduced a broad equity ownership program across the company.

Speaker 1

And by partnering with the workforce and through all of their great work, wonderful things have happened, including a 22% CAGR in its core publishing business EBITDA over the life of our investment. So we announced the sale of RB Media in late July, this will be a very successful outcome for its employees. All RV Media colleagues will earn significant cash payouts with non management employees receiving 100 percent of annual income on average and the most tenured employees receiving 2 years of their annual income. This outcome can be a financial game changer for people and it's driving real value. Over these three recent exits, we've averaged approximately a 6x multiple of costs on behalf of our clients.

Speaker 1

So at this point, we've introduced broad based employee ownership programs at over 35 companies and we've touched over 60,000 employees. And we expect these numbers to continue to grow from here and open expect we'll have more stories like RB Media to share with you in the quarters years ahead. And with that, I'll turn it over to Rob.

Speaker 2

Great. Thanks a lot, Craig. The operating backdrop has begun to improve. And as Craig just ran through, our model continues to deliver consistent results. With that, let's shift the focus of the conversation to the future.

Speaker 2

Our model, growth trajectory and culture are differentiated within our industry. I thought it would be beneficial to go through 3 of the foundational building blocks that have driven much of our differentiation and more importantly, the key driver of KKR's future earnings quality and growth. We have taken very deliberate steps to build a business that benefits from several different growth engines, providing both greater earnings stability we have significant long term earnings power. Number 1, we built a business that has meaningfully increased the durability and recurring nature of our revenues and we expect that trend to continue. Page 4 of the earnings release highlights this point very well.

Speaker 2

On the left hand side of the page, you see that over just the past two and a half years, we have doubled our management fees, our most recurring revenue stream from $1,400,000,000 in 2020 to $2,900,000,000 over the last 12 months. And fee related earnings in turn have also increased meaningfully from $1,300,000,000 in 2020 to approximately $2,300,000,000 over the prior 12 months. Alongside this growth, the quality of these earnings has significantly improved as we've become much more diversified by strategy and by geography. In addition, the form of our capital base has also evolved with our perpetual capital increasing from $22,000,000,000 at the end of 2020 to $200,000,000,000 today. Our perpetual capital now accounts for roughly 50% of our fee paying AUM relative to approximately 10% at the end of 2020.

Speaker 2

We will continue this focus of increasing both our recurring revenue and profitability as well as diversifying the form of our fundraising and capital base. The second building block are the multiple identifiable growth avenues across our business. We have discussed a number of these drivers over the last couple of earnings calls, but today I'm going to focus on just 2 areas that have been more notable in the quarter, insurance and Private Wealth. Global Atlantic has continued to be a fantastic acquisition for us. Looking at the past few months, we would highlight 2 very important initiatives.

Speaker 2

In May, GA announced the reinsurance agreement with MetLife, funded by GA's balance sheet,

Speaker 3

our IV platform and co investors.

Speaker 2

With this transaction AUM will increase by $13,000,000,000 upon closing and the transaction will be beneficial to both management fees as well as insurance operating earnings. And in June, KKR and GA together formed a strategic partnership with Japan Post Insurance. This partnership allows us to pursue additional growth opportunities through our collaboration with a key player in the Japanese insurance market. And as part of this, Japan Post committed meaningfully to IV2, which as Craig mentioned, held its final close in the quarter. Overall GA has continued to demonstrate significant momentum with $144,000,000,000 of AUM as of Q2.

Speaker 2

This has doubled since we announced the acquisition in 2020, a further proof point of our acquisition and a demonstration of how the alignment we've created can drive real success. A specific area where GA has really helped we will accelerate the growth of one of our businesses as private credit. Today, we manage $78,000,000,000 of private credit with $45,000,000,000 of that in asset based finance. We are a leader in the ABF space encompassing both our high grade and higher yielding strategies. And with recent regional bank retrenchment, the already 5 plus 1,000,000,000,000 ABF addressable market has even more structural tailwinds for us, as those seeking capital look to KKR as a real solutions provider with scale.

Speaker 2

The multiyear relationship announced in the quarter with PayPal is just one recent example. And now turning to Private Wealth. We've touched on this topic a number of times given the market opportunity alongside the significant investments we have made in order to launch and distribute a number of new products. In Q2, we started fundraising for 2 new private wealth strategies focused on private equity and infrastructure. The launch of these products was a critical step in addressing the massive Private Wealth End Market and introducing on a global scale products that traditionally have not been accessible to non institutional clients.

Speaker 2

We're off to a really good start here. In total, including capital that was raised in Q2 and so far in Q3, we've raised $1,900,000,000 across these two strategies. While we are still in the very early days, these initial results are ahead of our expectations. We have also launched in just a handful of platforms so far and we would expect that to increase over the coming quarters. In our credit business, we look forward to the launch of a new private BDC later this year.

Speaker 2

In addition to direct lending, the strategy incorporates a specific allocation to asset based finance, which we think will be viewed as a real differentiator. So at this point, we have a full suite of private wealth solutions strategically aligned with our 4 key investment verticals across the firm. Our focus here remains very much long term oriented and ensuring that we are a real winner in the space over the next 5 to 10 plus years. Our conviction around success is high and is driven by a number of factors, including our brand, investment track record, our significantly expanded distribution and marketing teams and our scale to be able to invest into the opportunity set. And importantly, each one of our core products across PE, infra, real estate and credit have aspects that are unique and a real testament to the innovation capabilities of our team.

Speaker 2

Now turning to building block number 3. We continue to achieve substantial growth in our earnings power because of both an increase in our fee paying AUM and capital deployment. We currently have $10,000,000,000 of embedded gains that sit on our balance sheet. That's the fair value of our carry on investment portfolio relative to the underlying cost. That's up from $3,700,000,000 just a few years ago.

Speaker 2

This provides a real lens into our ability to create meaningful revenue outcomes in the future. And over the next few years with continued investment performance and further capital deployment, that number is biased to increase, even as we expect to monetize more as the environment hopefully becomes more constructive. A

Speaker 1

reminder for how

Speaker 2

we think about earnings power. Distributable earnings is largely a cash metric. So in times like these, when we sell less through the monetization environment, we are under earning that intrinsic earnings power. Embedded gains are only one piece of that equation. Our expectation here is for continued scaling of our more recurring revenue businesses as well.

Speaker 2

Just looking at management fees alone, without raising another dollar, we currently have $38,000,000,000 of AUM we have a weighted average management fee rate of almost 100 basis points that is not yet turned on. This capital, once activated, would directly flow into management fees and be additive to earnings, but is not reflected today in our FRE or after tax DE. We also have $100,000,000,000 of dry powder, 96% of which is carry eligible. When we invest that capital, it creates the potential for more embedded gains and therefore revenue over time. These are the main reasons why we are so constructive around the potential for further significant and sustainable growth in our earnings per share over time.

Speaker 2

We have never been more confident around our model and our prospects, which is one of the reasons that you saw us buy back some stock in the quarter. Since the end of Q1, we have bought back or canceled approximately 6,000,000 shares at an average price per share of less than $50 share repurchases have historically been and will continue to be an important driver of value creation for our shareholders. As a reminder, since we initiated our buyback program in 2015, we have bought back or canceled approximately 92,000,000 shares at an average price per share of just over $27 This represents more than 10% of KKR shares outstanding today and almost 15% of our free float. And with our recent acquisitions such as KKRM, our Japanese REIT Manager and Global Atlantic, we have completed almost $5,000,000,000 of purchase price M and A with limited share issuance. We remain as a management team the largest owners of stock we are highly aligned with shareholders in our focus on equity value creation.

Speaker 2

So to summarize, our earnings growth will continue to be supported by more stable forms of income, including our diversified high quality and growing management fee business, underpinned by our $200,000,000,000 of perpetual capital. Number 2, we have several differentiated growth avenues, including Insurance and Private Wealth, amongst many others. And finally, our embedded gains and more broadly our earnings power is expected continue to increase. These compounding pieces are why we continue to feel more confident than ever our 2026 targets of $4 plus of FRE and $7 plus of after tax DE per share. With that, Scott Craig and

Speaker 3

I are happy to take your questions.

Operator

Thank you. We'll now be conducting a question and answer session. So that we may address questions for as many participants as possible, we ask you to please limit yourself to one question. If you have additional questions, you may re queue and time permitting those questions we'll be addressed. Thank you.

Operator

Our first question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.

Speaker 1

Good morning, everyone. Hope you're all doing well. My focus is on the next fundraising cycle. When do you expect to have the first close for Global Infrastructure Investors 5? And do you believe this will be your first of the flagship run rate?

Speaker 1

Hey, Craig. It's Craig. Why don't I start? Thanks for the question. I think as we look forward, we continue to see a really active amount of funds and strategies that we expect to be in the market with, we talked historically about having 30 plus strategies in the market over the coming 12 to 18 months.

Speaker 1

I think if anything, that number probably would have increased relative to what we would have talked about 6 or 12 3 or 6 months ago. So I think the level of activity and the number of strategies remains at a high level. We don't have any guidance or specificity as it relates specifically to our infrastructure strategy, but I think when you look at the back of the tables and you look at invested and committed capital relative to the size of the fund, I think fair to assume that that's something that is becoming a front of mind topic for us, but nothing to announce specifically as it relates to individual timings, let alone closings

Speaker 2

our

Operator

next question is from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Speaker 4

Hey, good morning, everybody. Rob, I wanted to go back to some of the points you made at the end of your prepared remarks around the buyback and just capital Definitely nice to see a little bit of pickup in repurchases here. Just curious that whether we are at a point now where you feel like the balance sheet has enough sort of scale to recycle capital for what you guys need and the buybacks could become a bigger part of the story going forward where M and A aside, we could actually expect the total share count to start to decline in absolute terms. Thanks.

Speaker 3

Yes, great. Good morning, Alex, and thanks a lot for the question. So taking a step back just more broadly as it relates to capital allocation. The most important thing for us and you've heard me say this and us as a management team say this before, most important thing is to have a consistent approach. And ours is one that I think is really maniacally focused on driving ROE and the highest per share earnings that we can with the lowest per unit of risk.

Speaker 3

And we talked about 4 strategic areas of deployment that we think can accomplish that. And so that's core private equity, investing, continuing to invest across the insurance space, you mentioned strategic M and A and the 4th one is share buybacks. And we think a real core competency of our management team is being able to move that marginal dollar of liquidity around to the highest return opportunity and the thing that's going to drive the most earnings per share over time. And maybe the final point here, is we're highly aligned in that decision making process, as you know, KKR Management owns close to 30% of KKR stock. And so back to your specific question on share buybacks, as you mentioned, I noted on the prepared remarks, we bought back over 90,000,000 shares that represents almost 15 of our free float since we initiated our buyback program 7, 8 years ago and just over $27 per share.

Speaker 3

So we really like the body of work that's been accomplished over a long period of time. And so all to say, share buyback is

Speaker 1

going to continue to be

Speaker 3

a very important part of our go forward capital we're going to continue to look at other ways of driving growth in earnings per share over time as well, including in areas like core private equity insurance and M and A. Hope that's a helpful overview.

Speaker 4

The only thing I'd add, Alex, if you look at what we've been doing in the last several years, as you know, we've deployed several $1,000,000,000 to M and A that's been quite additive to our fee paying AUM, our FRE, our TDE. So to Rob's point, we look at it holistically, look at the relative trade offs. It's less about needing to invest in the business to start new strategies or seed new businesses, it's more about what's going to give us that highest marginal return on capital as Rob mentioned. Got it. Okay.

Speaker 4

All makes sense. Thanks. Thank you.

Operator

Our next question is from the line of Glenn Schorr with Evercore. Please proceed with your question.

Speaker 5

Hi, thank you. I'm curious to get a little more color on CapEx. I know it's early. I know it's on one platform in a short period of time in a slow PE backdrop, but you raised a couple of 100,000,000. So I'm curious what you learned from that one platform in that short period of time, maybe the timing of the other platform adds.

Speaker 5

And then sidebar question, is this structure able to be included in 401s if and when we get there? Thanks so much.

Speaker 1

Hey, Glenn, it's Craig. Why don't I start? Look, I think let's take a step back for a moment and I know that you I'll know all of this very well, but I think when we look at this opportunity, it's a real long term secular opportunity that we have ahead of us. So Individual investors have not had an easy way to access the AltSpace historically. I think that is certainly true as it relates to private equity most specifically.

Speaker 1

And so if individual investors have 1% of their assets invested in ALF today and that goes to 5% over the next several years, that's $8,000,000,000,000 to $10,000,000,000,000 of additional capital that has the potential to flow into alternative products. And as it relates to a number of the points that Rob mentioned in terms of the strength of our brands, relationships that we have, the track record that we bring, all the investments we've made in terms of distribution, all of these things are super positive. And then you layer on top of that, the product creation and creativity that we think that we've brought to a number of these products. So in our last earnings call, we noted that we had launched our PE vehicle as you'd indicated outside of the U. S.

Speaker 1

It closed on just over $400,000,000 with distribution expected to increase and infrastructure also soon to be accepting capital. And so 90 days later, here we are with $1,900,000,000 race across both PE and infrastructure, which is great. So it's ahead of our expectations. I think in terms of lessons learned, I guess I'd point to 3. 1, brand again is super important.

Speaker 1

I think number 2, I'd emphasize the product creation point starting with Crest and as you then see that expansion. And then finally, I think that we have the ability to leverage the relationships that we've earned through Crest as we continue to expand into new distribution channels in Private Equity and Infrastructure, so hopefully that gives you a sense on that.

Speaker 3

And Glenn, just a quick follow-up on the 401 ks point. No plans in the immediate future as it relates to that, I do think it's worth noting though that CapEx is structured in a way that can be distributed through to the accredited investor and not just qualified purchasers. It's one of those points of innovation that I highlighted in our prepared remarks.

Operator

Thank you so much. Our next question comes from the line of Ben Budish with Barclays. Please proceed with your question.

Speaker 6

Hey, good morning and thanks for taking the question. I wanted to ask about the performance in the insurance business. Sounds like a lot of things kind of firing well over there. But just when we look at the reported ROE, which is still ahead of your target, it looks like the decline from Q4 to Q1 to Q2 was a bit steeper than we would have expected. So just curious if there's any other color you can share there in terms of the kind of sequential growth in cost of G and A versus the investment income and how we should think about those various pieces going forward.

Speaker 6

Thanks.

Speaker 3

Yes, great. Thanks a lot for the question. As you noted, GA continues to perform at a really high level and in Q2 was ahead of our targeted returns for GA at a 15 plus percent pretax ROE. In terms of the operating earnings in the quarter and why you saw that quarter on quarter decline that you referenced, really a function of a strategic decision at the GA level to position our book with more liquid securities at the beginning of Q2, more cash, more liquid fixed income, if you think back to early part of Q2, we were still in that regional bank crisis timeframe. And I think we made the right decision to reposition the book at that point in time, gave up a little bit of ROE in the quarter as you noted, but I think the right decision for the business.

Speaker 6

Got it. That's very helpful. Thanks, Rob.

Operator

The next question is from the line of Brian McKenna with JMP Securities. Please proceed with your question.

Speaker 7

Thanks. Good morning, everyone. So core private equity continues to be a great story. Fair value now totals over $6,000,000,000 with about $3,000,000,000 in gains on the balance sheet and it's generated a 20% return. It also looks like core private equity AUMs totals $34,000,000,000 today.

Speaker 7

So could you talk about demand for this product specifically from 3rd party? And then is there a way to think about the absolute level of 3rd party fundraising for the strategy over time?

Speaker 1

Hey, Ron, it's Craig. Why don't I start? First, thanks for all of the detail and noticing core PE. Again, it's one of the reasons we'd added that page in our press release focused on the asset class and the strategy. So a lot of innovation in our firm happens when we can't find a home for great investments.

Speaker 1

And that's what happens with Core Private Equity, it's a long duration strategy where we expect to hold investments in compound value for 10 to 15 years, But the risk reward is fundamentally different than our relative to our opportunistic PE funds. And so at this point, we put together what we think is a really great portfolio of companies diversified across the world. As you noted, since inception returns have been very positive. That $34,000,000,000 of AUM was $12,000,000,000 3 years ago. That's all organic growth.

Speaker 1

And I think another point just as it relates to this in our model because you're right, we've got the $6,200,000,000 of fair value relative to the $3,000,000,000 of cost. So with shareholders, we're participating in the economics both in terms of the management fees and performance fees on the 3rd party piece, the compounding you see on the balance sheet. And then on top of that, we'd expect capital markets revenues to continue to grow alongside. Capital markets revenues in the quarter were between $25,000,000 $30,000,000 So we've got a number of ways to win. I think from an LP standpoint, The types of LPs who find this asset class most interesting are those I think probably larger plans with longer dated liabilities and are interested in the matching aspects related to the asset class.

Speaker 1

So I think that the opportunity for us to continue to grow both the 3rd party piece as well as on the balance sheet is one we're going to be talking about, have an opportunity to talk about for a long period of time.

Speaker 4

Hey, Brian, it's Scott. Just a couple of incremental thoughts for you. When it is a younger part of the private equity asset class, so to some extent there is a bit of an education still happening. As you noted, we do have a significant amount of AUM. We have a lot of dry powder as we sit here today, but we've been out talking to investors are on the world about why we like it so much and how aligned we are, and we're having some really good conversations.

Speaker 4

In addition to the larger plans that Craig referenced and those may be focused on 10, 15, 20 year compounding, we're also seeing interest from large scale family offices that tend to think a bit like we do in terms of the power of long term compounding, probably a greater appreciation for reinvestment risk. And as the portfolio continues to mature and we spend the dry powder we have, we'll be back to market before too long. I'd be happy to share more color then.

Speaker 7

Great. Thank you, guys.

Speaker 4

Thank you.

Operator

Next question is from the line of Mike Brown with KBW. Please proceed with your question.

Speaker 8

Hey, good morning, everyone. I just wanted to ask on the capital markets environment. Clearly, there's been some green shoots recently, and I just wanted to get your take on how that it translates into a broader recovery and just get your thoughts on maybe the next 6 to 12 months. And then I know it's early in the quarter, but any quick color on the monetization of that quarter to date or expectations for the full quarter?

Speaker 3

Sure. Thanks a lot for the question, Mike. If you look at our Capital Markets business, year to date, we've generated $250,000,000 of revenue. If you look back over the past 4 quarters, we've averaged $110,000,000 to $115,000,000 of revenue. And so we're really proud of that performance in an environment where the Capital Markets, but debt and equity were largely shut for most of that period of time.

Speaker 3

So we feel like we've built a business model that is quite durable and in tough operating conditions. In terms of the back half of the year, you've noted some green shoots and we've certainly seen some signs of life in the leverage finance market, a little bit in the IPO market, maybe the secondary market follows. I think it's a little early to call that we're out of it. But we do really think that we're positioned in an environment where the capital markets come back to generate really outsized outcomes, hopefully that environment it really persists and we can generate those types of outcomes for our shareholders in 2024 and beyond. I'll I'll remind you that in 2021, our Capital Markets business in a really up market generated $850,000,000 of revenue.

Speaker 3

So we feel like we've built this model that protects in the downside, but really offers the opportunity for outsized outcomes when the markets are open. I think we're doing much more as a firm today than we did in 2021. So I think the opportunity is greater as we go forward here with that business. Monetization. Yes.

Speaker 3

Thank you. And then on your question on the monetization side, it's a bit of an odd quarter for us. We've got a couple of pretty meaningful monetizations that sit on the bubble between Q3 and Q4. So instead of providing just a Q3 number and isolation, what I can let you know is that we have at least $350,000,000 of visibility around monetization related revenue over the second half of the year. As usual, as we get to the end of this quarter, we'll provide that specific press release, which details we'll continue to see our performance through the quarter.

Speaker 3

And so while we're seeing a bit of an uptick here for sure, I think consistent with the overall tone and what we're all feeling is a bit more of a constructive environment. I'd still say that we're in the part of the cycle where we are under earning our intrinsic earnings power. So hopefully more to come here, but a little bit of upside relative to where we've been.

Speaker 4

Hey, Mike, it's Scott. Just maybe a little bit more color for me and away from just the capital markets specificity of your question, I'd just Overall firm activity, as Rob said, it's far too early to declare a return to normalcy. But there's no doubt that over the last several weeks, it feels like the markets are thawing a bit. The new deal pipeline and activity is up. Some monetization discussions are up.

Speaker 4

If that continues and if the public markets continue to perform, then we'd expect carry through to the fundraising environment over the next few quarters. But all that could reverse again with bad news. We've seen a couple of head takes from this market, but overall, there's no doubt that activity is up and the tone's improved. It will be interesting to see if this carries through post Labor Day.

Speaker 8

Great color. Thank you.

Operator

Our next question is from the line of Ahmad Kuglak with BNP. Please proceed with your question.

Speaker 9

Yes, good morning. I was just wondering wanting to come back on your development of your wealth strategies. I was wondering if we could focus in a bit more on the development of your retail strategy globally. Have you had any meaningful conversations with new distributors in Europe and in Asia, I'm just wanting to get a bit more color there. Thank you.

Speaker 1

Thanks for the question. I think the answer is yes. Distribution continues to expand. If you think of this as a funnel, I think from our standpoint, the funnel continues to grow at the very top end and that's global. So as we talk about, for instance, private equity and infrastructure, those are vehicles where we specifically had created vehicles focused on individual markets in the U.

Speaker 1

S. And outside of the U. S, that opportunity again is one that's global and we're pursuing along those lines. So nothing specific in terms of number of platforms today versus a year ago or anything along those lines. But I think the broader point again is just when we look at the opportunity we have ahead of us, trillions of opportunity of dollars that can move over into the alts and we think we're really well positioned to take a healthy piece of that.

Speaker 4

Hey, Arnaud, it's Scott. Just a little bit, color from my standpoint is Joe and I have been traveling around the world. We're definitely spending time with other distribution partners. As a reminder, 18 of our 23 offices at KKR are outside the United States. And maybe behind your question, we agree with the sentiment that this is not just a U.

Speaker 4

S. Opportunity in Private Wealth, we very much look at it as a global one and have built teams in Europe and Asia and are developing partnerships in both places in addition to the U. S.

Speaker 9

Great. Thank you.

Operator

Thank you. Our our next question is from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Speaker 10

Great. Thanks. Good morning, guys. Hope you're doing well. The question beyond the deployment versus monetization backdrop.

Speaker 10

So the monetizations were actually running a little bit more ahead of our forecast than the deployment has been in the last couple of quarters. And just wanted to get your sense of if we are in a better market environment, you say soft landing or no landing, does that create more monetization opportunities over the next few quarters relative to deployment? Or are you still seeing the deployment backdrop as attractive here? And then maybe if you can comment on a couple of areas within that, particularly Infrastructure and then I guess even within credit.

Speaker 1

Hey, Brian, it's Craig. Why don't I start and then Rob will pick up as it relates the monetization piece, I think specifically, so a couple of observations. If you think and let's start with private equity and real assets and then as you know, we'll switch to credit. I think over the last 18 months, a lot of the primary markets have effectively been shut. The IPO market has been pretty much shut over this period of time.

Speaker 1

This indicated that markets have been dislocated for the majority of that period and capital has been quite precious. There's no question. Now those from a deployment standpoint, those are all things that are good for us. And so that's why I think on a number of these calls you've heard us, actually be quite constructive on risk reward, I think as it relates to private equity and real assets, we're value focused. We're looking for those opportunities where we can bring our operational resources to bear and where those can really move the needle.

Speaker 1

We love corporate carve outs, we've also been very active on pursuing public to privates. At this point, we've announced or closed on 14 take private transactions since the beginning of 2022. The most recent of those, you probably would have seen some articles this morning. So I think that's been an area for us where we've been as active as anybody. I think as it relates to credit, and again, this is a big business for us.

Speaker 1

We've detailed in our press release, you see it on Page 11, the composition of that overall amount of AUM, dollars 227,000,000 of that we have $80,000,000,000 in private credit really broken into those two pieces, Asset Based Finance, real secular drivers, as Rob had mentioned in his prepared remarks. And I think in direct lending, we remain very constructive on the risk reward, but you've seen overall transaction volumes be pretty modest within direct lending. So I'd think of that asset class as one that has been taking greater share, but of a smaller piece of the pie. But on overall risk reward, we remain very constructive on regular way direct lending at the same time. Yes.

Speaker 3

Thanks for the question, Brian. And I think you could separate a little bit deployment and monetization. As Craig went through, there's a lot going on in the deployment side, and we've done our best as we will be focused on linear deployment of the dry powder and our strategies. Of course, when the capital markets are open, it makes deployment a little bit easier. But there is no doubt when the capital markets are open and the overall level of volatility comes down for some period of time that it's going to open up real drivers to be able to generate monetization related revenue.

Speaker 3

I mentioned on the call, we've got $10,000,000,000 on our balance sheet today of effective embedded gains between carried interest and our balance sheet investments. So we're very well positioned to be able to take advantage of the market opening. And again, we hope that some of the green shoots we've seen here persist post Labor Day Annette presents some really good opportunities for us to deliver outsized outcomes in 2024 and beyond.

Speaker 4

Hey, Brian, it's Scott. I'd say, I would expect both deployment and monetizations to increase if the capital markets open up. As a reminder, we've got $100,000,000,000 of dry powder. And so that's great news from a deployment standpoint. When markets are shut, it's harder to get deals done.

Speaker 4

We've been more active especially recently, but there's no doubt if the capital markets open, there'll be more overall M and A activity, which will accrue to our benefit, and you will also see more monetizations. And that will run across asset classes, including to your question infrastructure.

Speaker 10

That's great color. Thank you so much.

Speaker 4

Thank you.

Operator

Our next question is from the line of Binnie Ann O'Shea with Wells Fargo. Please proceed with your question.

Speaker 11

Hi, everyone. Good morning. Another question on wealth. For the non traded BDC you mentioned, are you going accredited only or does the And relatedly, what do you think that means for the potential for eventual monthly flows compared to what your peers are doing. Thank you.

Speaker 1

Hey, Fin. It's Craig. Why don't I start? And again, I think the product creation part is an important component as it relates to this. So across all four as it relates to real estate, private equity, infrastructure, as well as the private BDC, we're focused on having the opportunity, to launch those vehicles and fundraise across both of those markets.

Speaker 1

So the entire K Suite is again allowing us to look to raise capital both through accredited investors and not just through qualified purchasers. And that's meaningful in our view. Like I think the accredited investor market is multiples the size of the qualified purchasers market. So again that pie or the top of that funnel is one that is in our view very broad and helps just increase that long term opportunity that we see.

Operator

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Speaker 1

Hey, good morning. I was

Speaker 3

hoping you could spend

Speaker 12

a moment just on infrastructure, which is a real differentiator for KKR. So just how are you thinking about driving the next leg of growth for infrastructure, what sort of steps might you take over the next couple of years and how are you expanding your capacity to deploy capital into infrastructure. And then just a housekeeping question for Rob, just on how much was invested and deployed off the balance sheet in the quarter?

Speaker 1

Hey, Mike, it's Craig. Why don't I start on Infra? So again, thank you for asking about. So 2.5 years ago, at our 2021 Investor Day, it was April of 2021, we walked through Infra as a case study for us is really how we look to build platforms we will be looking at over the long term and it begins with strong performance of the flagship strategy and then that really is what allows you to earn the right to both scale those flagships and innovate into new adjacencies. And so today, our infrastructure platform is built out with 4 distinct segments, we have our Global Infra Fund Series, Asia Infra, Diversified Core and then most recently, the infrastructure vehicles customized for Private Wealth And so to give you a sense of how that's grown, AUM at that Investor Day was $17,000,000,000 At June 30, we were at 54,000,000 so that's $17,000,000,000 to $54,000,000,000 all organic.

Speaker 1

The growth in innovation hasn't stopped. Again, I think we're in the earliest of days as it relates to infrastructure and private wealth. It's an asset class that we think lends itself very nicely in this marketplace. Ann's look, the renewables space is an area where we also think we can do more. So more to come here, over time.

Speaker 1

And as it relates to deployment, logically, as you've seen the increase in our footprint, you've seen the step function increase in overall deployment stats for us. So infra deployment in 2019 was a little over $2,000,000,000 it was 2,100,000,000 2020 is $2,200,000,000 Over the last 12 months, we've invested $12,000,000,000 in the asset class. So and again, as you would have seen in as Robert touched on Capital Markets, there are flow through opportunities for us at the same point in time. So more to come, but it continues to feel like we're wonderfully well positioned.

Speaker 3

And then Mike, very quickly, your second part of your question. In the quarter, we deployed approximately $850,000,000 off the balance sheet, a good chunk of that, most of it is in core private equity and then our realizations were a little under $250,000,000 in the quarter.

Speaker 2

Great. Thanks. Thank you. The

Operator

next question is from the line of Rupesh Thome with BMO Capital Markets, please proceed with your question.

Speaker 3

Great. Good morning. Thanks very much. Maybe if you could spend a minute giving an update on your Asia business. You've now owned the KJRM business for a little over a year.

Speaker 3

It would

Speaker 10

be great to hear more about

Speaker 3

how that acquisition is performing and whether you see any more opportunities to consolidate your position in the region inorganically? And also what the near term outlook is for fundraising? Great. Rivas, thanks a lot for the question. Asia remains a core part of our growth story at KKR, and we've talked about this in the past for a number of reasons.

Speaker 3

We feel really good that our Asia business one day will be as big as our U. S. Business. So we've got a great competitive position in the marketplace plus private equity and infrastructure, both of which are the largest in the region in terms of fund sizes, we've got real growing businesses across real estate as well as credit as well, in terms of the KJRM acquisition, it's off to a great start. And from a strategic standpoint, we're really doing what we wanted it to accomplish, which is to generate very consistent returns for their existing investor base, which translates into a very predictable management fees for us at KKR, but much more importantly, in terms of what it does for the rest of our opportunistic strategy and core plus strategy in the Japan market just markedly changed our approach to what we're able to do in Japan.

Speaker 3

And really in terms of one of our big growth engines within Asia is the Japanese market, and our competitive position there is in particular Really strong and KJRM really helped cement that.

Speaker 4

Hey, Ruvit, it's Scott. I'd say to your question on would we do more M and A in the region and consolidate in that way, we'd be open to it. We're always looking. So definitely open minded. The only other thing I would add is Global Atlantic it's also now growing with partnerships in Asia, something that we've been able to do now that we're together.

Speaker 4

We announced Block with AXA in Hong Kong. We, of course, announced the Japan Post partnership this past quarter. We've announced some flow partnerships in Singapore, it's just one more example, and there's other discussions along those lines. Some are between organic and inorganic, we do see opportunities to expand our insurance efforts in Asia as well. Thank you.

Speaker 4

Thank you.

Operator

We'll return to queue for any additional questions. The next question is from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Speaker 4

Hey, thank you guys for taking the follow-up. I appreciate it. I wanted to touch on your credit business, specifically Asset Backed Finance. It's a place where you spend a little bit more time just communicating to the street of sort of how big it's gotten over the years and you've got a number of origination platforms that are supporting it. So as you think about raising capital for those type of strategies outside of Global Atlantic, so whether it's 3rd party insurance companies or maybe other institutional piece, what does that look like over the next couple of years?

Speaker 4

And maybe just remind us what the fee rates are? I'm assuming it's generally a lower

Speaker 1

Why don't I start, Alex? 1st, glad that you asked about again back to the detail we provided on Page 11. So we've got $227,000,000,000 of AUM in credit and liquid strategies. A key component of that is the $80,000,000,000 in private credit. Two big pieces here, the $45,000,000,000 in Asset Based Finance alongside of the $33,000,000,000 of direct lending.

Speaker 1

These are big businesses for us. And so back to your question, ABF is a massive end market, dollars 5 plus 1,000,000,000,000,000. You have high barriers to entry, in our view, a lack of scale capital against this end market and we have and we continue to see it many traditional providers leaving the market and in our view, creating a void. And so we're finding attractive risk reward. We'd say that's true in terms of the high grade ABF strategy, which today has been led really in partnership, with everything that Global Atlantic is doing and that's going to increase opportunity for us to continue to be more relevant to the broad insurance landscape as well as within our traditional asset based finance strategy where we have funds in separately managed accounts, focused on a mid teens gross IRR opportunity, those would be the strategies, for instance, that I had pursued the PayPal transaction.

Speaker 1

And so deployment has been healthy. I think over the trailing 12 months, it's been about dollars 11,000,000,000 for us. So it's been a place where we've been active. And in addition to the PayPal partnership that we announced in June, the team does continue to be active on the regional front. I think our most recent portfolio acquisition here closed about 2 weeks ago.

Speaker 1

And in terms of fee rates, we haven't really gone into detail in terms of the separation between the high grade and the asset based finance strategy. But fair to say that commensurate with that risk return that you're correct, the high grade would be in a different area as it relates to blended fee rate relative to the Asset Based finance fund itself.

Speaker 4

Hey, Alex, it's Scott. Just maybe a little bit more color on the types of capital raising. This is going to be a bunch of different formats. So you're not going to see a large flag Chip Fund would be my guess, but we do have an ABF fund. We have our BDCs.

Speaker 4

We have leveraged separate accounts. We have unleveraged separate accounts. We have a high grade ABF strategy, which also tends to be in separate account format and there's other things that we're working on. So it all aggregates up to the $45,000,000,000 or so that Craig mentioned, I'd say you're right. The initial interest over the last several years has been from a number of different places, but if there's a thematic to it, we now manage roughly $200,000,000,000 for insurance companies, dollars 140,000,000 to $150,000,000 give or take from GA, the rest from 3rd parties and we have 150 insurance companies that invest with us on a 3rd party basis, but also increasingly we're seeing interest from institutions.

Speaker 4

This asset class reminds me a little bit of infrastructure 10 plus years ago. There's a lot of education in the early days, Growing market, not a lot of people understood what it was. We are finding that there's increased interest in it as the focus on private credit it has continued to broaden and go global. So we're optimistic. Perfect.

Speaker 4

Thanks for all that. Thank you.

Operator

Thank you. At this time, I appreciate the end of our question and answer session. I'll hand the call back to Craig Larson for closing remarks.

Speaker 1

Rob, thank you for your help and thank you everybody for your continued interest in KKR. Please feel free, of course, to follow-up with me or the IR team post this call. Otherwise, we look forward to speaking to everybody in 90 days or so. Thank you so much.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect your

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Earnings Conference Call
KKR & Co. Inc. Q2 2023
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