KKR & Co. Inc. Q4 2023 Earnings Report

Ladies and gentlemen, thank you for standing by. Welcome to KKR's 4th Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following management's prepared remarks, the conference will be open for questions. So that we may address questions from as many participants as possible, we ask that you limit yourself to one question.

If you have additional questions, you may re queue and time permitting, those questions Please note this conference is being recorded. I'll now hand the call over to Craig Larson, Partner at Investor Relations for KKR. Craig, please go ahead.

Craig, and good morning, everyone. First, looking at our key operating metrics. New capital raise totaled $31,000,000,000 for the quarter. These results are quite strong and encouraging for us as we head into 2024. Credit and liquid strategies made up about 2 thirds of the capital we raised this quarter.

As our business has grown with Global Atlantic as a significant partner, GA in particular had record inflows in the quarter, both overall and specifically from the individual channel. So activity here continues to be very strong. Block activity at GA is also active. As you know, the MetLife block closed in the quarter and the Manulife block transaction is expected to close sometime in the first half of twenty twenty four. And similar to prior blocks, Jay continues to be very capital efficient here, Contributing approximately 25% of the equity in both transactions with 75% of the capital coming from Ivy vehicles and additional co investors.

So 75% from 3rd parties where we can earn management fees and have the opportunity for performance income as well. Over the past year, new capital raised totaled right around $70,000,000,000 And looking post twelvethirty one, we just announced the final close Asia Infrastructure 2 at approximately $6,400,000,000 over 65% larger than the previous fund. Of note, More than half of the capital came from new investors to the Asia infrastructure platform. With this successful fundraise, we are clearly the largest infrastructure fund in the region, enhancing our Asia positioning more broadly. And as we look out over the next 12 months and into 2025, A number of our flagship funds will be raising capital as well.

So we continue to expect an acceleration in our fundraising from here. Turning to capital invested, we've deployed $16,000,000,000 in the quarter $44,000,000,000 for the year. Capital invested was really diversified across private equity, real assets and credit and liquid strategies in the year as U. S. Private equity and core private equity deployment rebounded the quarter.

Of particular note, we made investments in 3 take private transactions in Q4. And with almost $100,000,000,000 of uncalled capital, We continue to be well positioned for the deployment opportunities that are ahead. I wanted to briefly shift now to a reflection on our progress through the course of 2023. Our assets under management now totaled $553,000,000,000 That's up 10% compared to the end of 2022 with sizable capital raised in the past year. Fee paying AUM now stands at almost 450,000,000,000 Given our consistent growth in fee paying AUM, management fees increased 14% in 2023 with line of sight of future growth from approximately $40,000,000,000 of committed capital that becomes fee paying as it's invested or when it enters its investment period.

And that's at a weighted average rate of just over 90 basis points. And while realized performance and investment income was more muted in 2023, Given the environment, our forward visibility has increased meaningfully year over year. Total embedded gains were $12,300,000,000 at year end. That reflects embedded gains on our balance sheet plus gross unrealized carried interest. This was up almost 40% compared to Q4 of 2022.

The opportunity for future investing revenue remains robust. And strategically, we made a lot of progress in 2023. As you likely know, we announced 4 key initiatives towards the end of November. As an update, On January 2, we closed our acquisition of the remaining stake in Global Atlantic for approximately $2,600,000,000 in cash. We believe this acquisition will create more value for policyholders and shareholders and are excited to unlock future potential together.

Concurrent with the closing of GA, we have created a new strategic holding segment, which you will see in our Q1 2024 earnings release. Here, the segment operating earnings will be driven by cash dividends from our core PE portfolio. We also revised our compensation ratios, which similarly will be reflected in our Q1 financials, delivering more FRE to our shareholders and driving even more alignment between our compensation model and the outcomes of our clients. Combining these aspects, we will be introducing a new reporting framework that will better highlight our business model. This will include a new financial metric, total operating earnings, which represents our more recurring forms of income.

Prior to our next earnings call, we will provide recast financials to help you further understand the various key metrics. As a reminder, we do expect these announcements to be accretive to all of our per share metrics. And together with the confidence and current visibility we have, is what allowed us to increase our 20 26 FRE per share target to $4.50 plus per share. In 2023, we generated $2.68 per share of FRE. So our expectation is for a lot of growth from here.

Given these four announcements, paired with the existing growth engines we have, we believe that we are well set up to drive meaningful scale. The opportunities we have across asset management, insurance and strategic holdings are multifold. Turning first to our asset management business. There remains a lot of upside here with multiple drivers of growth. We have a lot of younger strategies that are just beginning to scale.

We started 25 or so investing businesses through the past decade alone and many are now starting to inflect. We are in asset classes and geographies with massive end markets. Asia, infrastructure, including climate and credit are all great examples. And as a reminder, we only want to be competing in areas with large addressable markets and where we have conviction that we can be a top 3 player. We are in the early days of tapping into the private wealth end market.

We've had early success in our K Series suite of products with a tremendous amount of opportunity that is still in front of us. With these growth avenues, along with our strong track record, talent and the trust that we've built with our clients, we feel that we could double our asset management business from here and that's without starting anything new. 2nd, we have a meaningful opportunity in insurance with our partnership with Global Atlantic. Insurance is a very powerful contributor to our business. GA has already created a lot of value, going from $72,000,000,000 of assets under management at our announcement of the initial transaction in July of 2020 to over $170,000,000,000 of assets under management today, including the pending Manulife Block deal.

We have a strong opportunity to unlock even more value together in investing, product development, global expansion, Private Wealth Distribution and Capital Markets. And we are still in the very early stages of our partnership. And finally, number 3, strategic holdings, where our opportunity is highly differentiated. This segment leverages all of our people, capabilities and our collaborative culture. As a result, we are uniquely positioned to capitalize on what we believe is a huge addressable market.

And that's in addition to the current visibility we already have to drive net dividends in this segment of $300,000,000 plus by 2026 and $600,000,000 plus by 2028. In summary, we are incredibly well positioned as a firm And we really don't think there are many companies in our industry or others that have the type of visibility that we have for long term growth. We have a high level of confidence that we can meaningfully grow all three of our business segments, Asset Management, Insurance and Strategic Holdings. With that, we are excited to announce we are going to host an Investor Day in New York on April 10. Given the November strategic announcements and all of the opportunities across our firm, we thought it'd be timely for you to hear directly from our senior leaders.

We will provide additional detail in the coming months and hope that you will join our broader team as we discuss our outlook and these opportunities. With that, Scott Craig and I are happy to take your questions.

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

Hey, Alex, it's Craig. Why don't I start? Thanks for that. And just stepping back in level setting for everyone. So as of twelvethirty one, around $75,000,000,000 of our assets under management are from individuals.

And that number does not include policyholders of Global Atlantic. So you could argue that that $75,000,000,000 if anything is understated as it relates to the presence and the activities we have with individuals broadly. Now most of that $75,000,000,000 are from high net worth and ultra high net worth individuals as well as family offices that have invested in our funds and strategies. And in terms of our fundraising, in total, A double digit percentage of our new capital raise historically has typically come from individuals. So it's been a healthy part of that fundraising activity.

Now back to your question most specifically, most recently we've introduced what we call our K Series suite of products. And so these are funds and strategies that are really designed and tailored specifically for wealth investors. So K Infra and KIF are the U. S. And non U.

S. Vehicles focused on infrastructure. K Prime and K PAK are the U. S. And non U.

S. Vehicles focused on private equity. We launched both private equity and infrastructure only midway through 2023. And with those products in real estate and credit on top of that, as well as our private BDC soon to be launched, of around of that 75 $1,000,000,000 of wealth, around $6,500,000,000 of that is from these K Series suite of products. Now a year ago that was $2,400,000,000 So we're in the early days, but we feel really good about the progress from here.

And as we look at some of the underlying statistics, that's particularly true as it relates to infrastructure and private equity, which are newer asset classes For more mass affluent investors, as we've mentioned historically, we're raising about $500,000,000 a month as we look at the K Series suite. So it feels like reception and interest in our momentum continues to feel really good. And to your point, we do expect to see and acceleration in a number of platforms in the first half of twenty twenty four. So it's great progress, but I think to us, Even the more interesting part is really that long term secular dynamic, because mass affluent individual investors historically have not had an easy way to access these types of products and strategies. And so over the coming years, if we're correct and you start to see allocations go from the low single digits to the mid single digits that literally is 1,000,000,000,000 of dollars that have the potential to move to alternative products.

And when we think of how we're positioned given our brand, our track record, the investments that we've made in distribution and marketing, our ability to product innovate, We feel really well positioned to be a winner in this space over the long term. Yes.

Thank you.

Our next question is from the line of Bill Katz with TD Cowen. Please proceed with your question.

Yes. Hey, Bill, all great questions. Thank you. First thing is we look at Q4 and we look at 2023, very strong performance from the Global Atlantic business. Management team has done a great job and it's a big reason We're excited to own 100% of the business.

You are right that in Q4 as well as through 2023 that the P and L did have some tailwinds, some variable investment income on a gross basis by $35,000,000 in Q4. At the beginning of the year, we had about 20% of our book on a net basis exposed to floating rate. The team did a good job making that adjustment. So we got the benefit of rising rates through much of 2023. We ended the year at about 16%.

And so as we think about interest rates going down in 2024, We're conscious of that. In Q4, 2 specifically, we made a modest adjustment to our comp, So effectively had over accrued a little bit through the course of Q1, Q2 and Q3. So all things that positively impacted The quarter and all things front of mind as it relates to how we plan for 2024. So as we look at Q4, not necessarily replicable in the near term, But as you said, we have so many levers to be able to grow the GA franchise that our expectation even in a reducing rate environment is that JEA is going to continue to perform. As it relates to ROE targets, we continue to think the right level to model the business is at that 14% to 15% Pre tax ROE, the team has done a nice job being able to beat that and beat that by a healthy margin, over the past couple of years.

But we are going into an environment here that could be lower interest rates and put a little bit of pressure on the P and L.

Our next question is from the line of Steven Chubak with Wolfe Research. Please proceed with your question.

It's Craig. Why don't I start? Look, I think again as it relates to the deployment capacity, the numbers are going to be understated given platforms platform investments we've made, etcetera. So I don't think the dynamic is 1 as it relates to deployment. I think in particular as we look at Our pipelines, which are building and actually expect across the industry to see deployment increase in 2024 as it relates to 2023.

I think as it relates to your first question in terms of overall tone, look, I think it's As a starting point, we've seen a nice increase in public markets. We've seen broad markets improve since mid October to say the least. Hi, Yulin, Cesar up, LSTA is up. And I think in addition to that, we've also seen the increase in the capital markets. And so I think given that backdrop as it relates to fundraising and tone, I think like if anything on balance, it feels like clients are more front footed.

And again, it's tough to draw broad conclusions from 1 month of activity and we'll see how things continue to play out from here. But Given our track records, the performance that we've had in particular in our business for us like America's Private Equity over a long, long period of time, I think we feel very good about the opportunities that we see as we embark upon fundraising for that strategy.

It's great color. Thanks for taking my question.

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

not to put a number

Yes. Hi, Brian. It's Rob. I'll start off. So we really like our business model and our approach to market with our Capital Markets business and think it's a big reason why there's a lot of upside.

And the way we face the market really is with one team that represents our private credit pools of capital, where we're one of the largest providers in the world. Our capital markets expertise, it's that same team when they're facing a client that can walk across our liquid credit business, which is one of the biggest liquid credit businesses in the world. And so we combine 3 very large aspects of our business, and we think that's a real benefit to our clients. And there's not a lot of Firms out there that can match what we do, from a coordination perspective. I like our ability to co compete for talent in the Capital Markets space.

We've been able to recruit and retain over the past number of years, some really talented people and what they do and especially as we've expanded in product and geography, that's a big part of our story and I can see more of that. You referenced what types of upside we have. I think if you look back to 2021, Of course, we had a boy in Capital Markets at the time. But KKR does a lot more as a firm today, both from a product perspective, deployment perspective and geographically than we did then. We think we're going to continue to be able to take share with 3rd party clients.

And Scott just touched on the opportunity to coordinate with Global Atlantic and the opportunity that, that can create on the ABF side. And so no specific numbers excuse me, on the ABF side of KCM. No specific numbers, Of course, as it relates to 2026, but we think this is a growth oriented business and we think in a really good capital markets environment we're going to be able to grow off of that $840,000,000 revenue number that we put up in 2021.

That's helpful. Thank you.

Our next question is from the line of Benjamin Budish with Barclays. Please proceed with your question.

Hey, Ben. So we have a pretty healthy pipeline as we're coming into 2024 from a monetization perspective. But what I'd say is timing is a little bit less certain given some regulatory approvals that are required around some of these monetizations. But taken together, We have somewhere around $500,000,000 of very high visibility monetization related revenue, but we currently don't expect all that to hit in Q1. Obviously, still a couple of months to go in the quarter as well.

And as usual, at the end of Q1, we'll provide our standard press release that gives more detail around the monetization related revenue for the quarter. Maybe while we're on the topic of monetization, one other thing that I think is worth calling out, Given the growth across a number of our businesses and also the strategic announcements that we made in November, including moving our down on fees and up on carry. This

a much smaller part of our business than it used to be at KKR. As part of the reason why you'll see us introduce this new metric in Q1, total operating earnings, our expectation going forward is north of 70% of our earnings is going to come from total operating earnings. So of course, monetization related revenue is going to be a big part of of where we're going as a firm, it's just a lot smaller on a relative basis than it used to be.

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

where are

Why don't I begin Mike, thanks for the question. Why don't I begin first just as it relates to the overall framework of the infrastructure platform because you're right, we've seen wonderful growth. So If we look back 3 years ago, AUM was $17,000,000,000 and at twelvethirty one we're at about 60. So, we've gone from $17,000,000,000 to $60,000,000,000 all organic. And that's As we're again, our infrastructure strategy is a front burner topic for us as it relates to fundraising.

We're also fundraising for a climate strategy. And we also have the wealth products that we've also launched midway through last year that we expect to continue to build and scale. So I think the growth has been really attractive and a lot of momentum, but there's a lot more for us to do, which is exciting. I think as it relates to Asia, And why don't I touch on that for a moment. And it's again interesting to see the statistics there because I think what you're seeing there is reflects the growth as well as the diversification you're seeing across the platform.

So at the end of 2019, we're looking at these stats over the weekend. We had about $21,000,000,000 of AUM in Asia. At the end of 2021, we were up to $42,000,000 and at the end of 2023, we're at 65,000,000 And so again, if you kind of step back at the end of 2019, we had $21,000,000,000 of AUM, almost 90% of that was in private equity. At the end of 2023, we're at $65,000,000,000 51 percent of that is in private equity. So you've seen meaningful growth for us in the region, as well as meaningful diversification across the footprint.

And I think just as it relates to broad investment performance, I think It's something that the team is really proud of and we all love to see obviously because you've seen strong consistent results Across the flagships in particular, we're seeking mid teens gross, low teens net returns with 4% to 6% target annualized yield. INFRA 1 and 2 are mature funds with performance that exceeds those targets. And then for 34 are both earlier in their value creation, but are tracking very nicely. I think our most recent fund is actually ahead of 1, 23. When you look at the returns in that fund relative to when we made that first investment.

So I think the team has been wonderfully disciplined as it relates to investments we've made. We talk a lot about thematic approaches, renewables, digital infrastructure, data centers, fiber networks, All great examples of large critical growing markets where we think we can bring differentiated resources to bear. So again, a lot of progress, but a lot of opportunity ahead for us the same time.

Thank you both for all the great color.

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

Thanks for the question, Mike. Why don't I start? So over the last few years, our individual business has done on average around $10,000,000,000 of production. And you're right, you've seen a step up across the industry given, I think higher rates, but I don't think that tells the full story. I think what we're seeing is a real trend towards retirement products.

It's probably somewhat agnostic to where interest rates are. And as we think about Global Atlantic and how we're situated Specifically in the individual markets, I think there's a lot of share that we can continue to take there, getting ramped up on some new platforms as you suggested. Also historically, Global Atlantic hasn't been as active in the more longer duration, fixed annuity market, the 7 to 10 year product. We think there's some market share gains that we can have there. And we do have an expectation that we could take the individual business over time from $10,000,000,000 of production to $15,000,000,000 to 20 $1,000,000,000 of production.

Then on the institutional side of our business, there's 3 components of it. It's not just the block business where we've had a lot of success Over the last couple of quarters, clearly with NetLife closing in Q4, the Manulife Block closing in the first half of the year and a really strong pipeline of opportunity, both domestically and especially internationally. But there's a couple of other aspects of our institutional business that we're really excited about. We've become a real leader in flow reinsurance in the marketplace. Again, that's both domestic and international.

And to date, we have very little market share in the pension risk transfer market, where we think the capabilities of our team, will really resonate in that market as well. So it's an opportunity for us to take share in what is a large and growing end market. And so we take it together, it's what gives us the confidence that you would have heard in our November call, really working as one firm to be able to accelerate the growth of the Global Atlantic platform over the next several years. Now an important part of that growth, and I referenced it in our prepared remarks, relates to our ability to also be able to 3rd party capital. And so our Ivy funds and strategies is a big part of where we're going as an organization.

We've got a lot of momentum there. So I mentioned earlier, 75% of the capital required in the 2 block deals that we've got in flight right now, the MetLife one that just closed and Manulife is going to be funded by 3rd parties, by outside investors. And We think that combination of GA balance sheet capital and third party investors is really what the optimal structure looks like especially for the institutional side of our business going forward. Great. Thank you.

Thank you. We've reached the end of our question and answer session. And I'll turn the call over to Craig Larson for closing remarks.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.