KKR & Co. Inc.

Ladies and gentlemen, please stand by. Your conference call will begin momentarily. Once again, thank you for your patience, and please stand by. Ladies and gentlemen, thank you for standing by. Welcome to KKR's first quarter 2019 earnings conference call. During today's presentation, all partners will be in a listen-only mode. Following management's prepared remarks, the conference will open for questions. I would now like to hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead, sir.

Thanks, Justin. Welcome to our first quarter 2019 earnings call. Thanks for joining us. As usual, I'm joined by Bill Janicek, our CFO, and Scott Nuttall, our co-president and co-CEO. 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 of KKR.com. The call will also contain forward-looking statements which do not guarantee future events or performance, And please refer to our SEC filings for cautionary factors related to these statements. And like previous quarters, we've also posted a supplementary presentation on our website that we'll be referring to over the course of the call. And I'm going to begin by referencing pages two and three of the supplementary deck. Page two shows the summary of our four key metrics and the strength of our underlying fundamentals are evident in our results and the trends that you see on this page. Perhaps most importantly, the earnings power of the firm continues to grow nicely, as can be seen by the charts on the left-hand side. Our AUM is now at $200 billion, and book value of $16.99 per share has increased 17% over the last 12 months. Alongside of this, you see the management fees have grown steadily, and on an LCM basis, our distributable earnings have increased 29% compared to a year ago. Page 3 shows our results with just a little more granularity. We reported after-tax distributable earnings of $314 million for the quarter, or $0.38 on a per adjusted share basis. And please remember that we report our distributable earnings after equity-based compensation charges. Fee-related earnings for the quarter were $222 million, and fee-paying AUM on a year-over-year basis has increased 23% to $148 billion, reflecting our Year 5 fund entering its investment period. And finally, looking at these metrics on a trailing 12-month basis, you see strong growth across the page with LTM year-over-year growth ranging between 13 and 29 percent. Now, before I turn things over to Bill to talk about our results, I'm going to spend a few minutes on our ownership profile and the transformation we've begun to see in our shareholder base since we changed our corporate structure. As you likely remember, as a partnership, we concluded that our stock had become challenging to buy and challenging to own, so on this call a year ago, we announced a series of changes. Most significantly, to make the stock easier to buy, we converted from a partnership to a corporation, and this was effective on July 1st of last year. As a corporation, we became eligible for more ETS and indices and broadened the opportunity for us to appeal to longer-term oriented institutions. And from a tax standpoint, all of our public shareholders have just gone through the final time that they'll receive a K-1. To make our stock easier to own, we made some additional changes, all focused on simplification. We simplified our public reporting with a focus on distributable earnings instead of E&I as our primary earnings metric. And we've given updates on our monetization activities during the quarter to help make DE easier to model. we felt that with both the simplification changes and the conversion, we'd have the opportunity to appeal to a broader universe of investors. So what are we seeing as a result? Well, at this point, we've seen a significant increase in institutional sponsorship and positive trends as we look at the composition of our ownership. Page 4 summarizes our ownership as of December 31, 2018, which is the most recent information that's available to us, compared to our ownership profile a year ago. And you see a few things from this. First, looking at the bottom part of the page, you see an increase in overall institutional ownership. The total number of shares owned by institutions that file 13Fs has increased by almost 50 million. Most interesting to us, though, is the composition of those 13F filers. You see a sizable increase in the investment management piece, with increased ownership both for mutual funds and passive strategies, with a meaningful decline in shares owned by hedge funds and broker dealers that are largely hedge funds that own us on swap. We feel that the composition of our ownership has improved significantly, and the dialogue we're having with our shareholders, as we've talked about on prior calls, tends to be more focused on our opportunities over three to five years instead of over a number of months. And perhaps most importantly, it still feels like we have a long way to go before this transition will be completed. we're still introducing ourselves to new firms and new investors. In summary, if we can continue to perform the way that we have over the last 12 months and at the same time see continued progress in the transition of our shareholder base, we think that combination really has the opportunity to be powerful for all of us. And with that, I'll turn things over to Bill. Thanks, Craig.

Let's start with investment performance. Please take a look at page five of the supplement, where we summarize gross investment performance across strategies for the trailing 12 months. In private equity, our flagship funds appreciated 10%, and our private equity portfolio as a whole appreciated 15%. These statistics compare favorably to the MSCI world, which was up 5% on a total return basis. Our real asset strategies are performing. with our more mature real estate, infrastructure, and energy flagship funds up 8%, 11%, and 8% respectively. And in credit, our alternative and leveraged credit strategies have appreciated 7% and 4% respectively on a blended basis. On the heels of this investment performance, let's turn to page six and review overall where our funds stand today. Of the $123 billion of carry-eligible AOM that we manage, the lion's share, or 99%, is at or above cost. And roughly 71% of that AOM, or $88 billion, is above its respective hurdle and is either paying or in position to pay cash carried today. One of the most interesting aspects of this page is that this $88 billion figure increased from $57 billion a year ago, a 54% increase. So when you look out over the next few years, as our younger funds and strategies continue to season and work their way through their preferred returns, we have a significant opportunity to see realized carry generation across a much more diverse number of funds and strategies in addition to traditional private equity. Let's turn to monetization activity in the quarter and carry generation. As reported in our modernization update earlier this month, activity this quarter was driven primarily by strategic exits, including the sales of Sedgwick and United Group, as well as a secondary GoDaddy. On a blended basis, the PE exits were done at three times our cost. And with the GoDaddy transaction, we have now exited this successful investment. In aggregate, over its whole period, GoDaddy returned 5.6 times our cost. Turning to fundraising and the AUM roll forward, capital inflows totaled $6.3 billion in the quarter and $30 billion over the last 12 months. Activity in the quarter was diverse, with inflows across multiple strategies, including private market SMAs, real estate credit, Europe PE, and a number of credit strategies, including CLOs, leveraged credit, private credit, and BDC capitals. Capital inflows over the trailing 12 months contributed to $58 billion of dry powder a quarter end. Importantly, we also have $20 billion of capital commitments that become fee-paying when they are invested at a weighted average rate of 100 basis points, providing direct line of sight towards future management fees. In terms of new investment opportunities, this was an active deployment quarter for us. We invested $5.5 billion across businesses and geographies, Public markets deployment was $2.2 billion, coming primarily from investments made in direct lending and private credit. And in private markets, we invested $3.3 billion. Approximately one-third of that deployment was in Asia, across a handful of private equity opportunities, as well as our first core investment in that region. We invested $700 million in both infrastructure and America PE, with the remainder falling across Europe PE, real estate, and growth equity strategies. Moving to capital markets, transaction fees for the quarter totaled $60 million. Unlike the third and fourth quarter of 2018, we did not close on any large investment opportunities with meaningful equity syndication, so transaction fees in the quarter moderated. The fourth quarter for context happened to be a record syndication quarter for us, and activity in Q4 was very concentrated. with the three largest transactions driving 75% of capital markets revenue. The underlying trends, though, in capital markets remain consistent with what we've now discussed for some time. The business is global, with a healthy component coming from non-KKR-related transactions. This quarter, 30% of revenues came from outside the U.S., and it was a particularly active quarter working with third parties. Over half of our revenue this quarter came from non-KQR-affiliated transactions, and our pipeline in the second quarter is quite active. In terms of book value, book value per share increased to $16.99 as of March 31st, a 17% increase over the last 12 months. Our largest balance sheet holdings first data showed stock price rise 55% in the quarter. Our book value benefited not only from the GP interest we have in the 2006 fund, but also through the direct co-investment that the balance sheet made alongside our fund investment. So bringing it all together, our after-tax DE came in at $314 million, or $0.38 per share, as Craig noted. We continued to operate with an attractive 50% segment operating margin, and we maintained our low 40% comp ratio. coming in at the low end of the range at 40% this quarter. Before I turn it over to Scott, there are three additional things I'd like to touch on. The first relates to E5, where we've closed a $5.3 billion amount, including $4.9 billion of third-party capital. The fund positively impacted fee-paying AUM as of March 31st and will contribute to management fees in the second quarter, Based on third-party capital rates to date, Euro 5 will add about $45 million to annual management fees on a run rate basis. The second point is on taxes and relates to our conversion from a partnership to a corporation. The tax basis step-up that resulted from the conversion depended on the basis of our shareholders at the time of conversion, information that was confirmed as part of the K1 process that was just completed. I'm happy to report that the total tax basis step-up came in at about $2.9 billion, ahead of the $2 billion we discussed at our investor day. In total, if you assume a 23% tax rate, this will result in approximately $700 million of tax savings over 5 to 15 years, $200 million more than previously discussed. These savings are split pretty evenly between tax-deductible goodwill that you'll see over 15 years and a step up in the basis of balance sheet assets and accrued carry at the time of conversion that will reduce cash taxes as those assets are sold. And finally, we increased our share repurchase authorization back up to $500 million and have used $50 million of that authorization in April. And with that, I'll turn it over to Scott.