KKR & Co. Inc.

Ladies and gentlemen, thank you for standing by. Welcome to KKR's second quarter 2019 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. If anyone should require assistance, please press star then zero to reach an operator. This call is being recorded. I will now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig? Craig? Please go ahead.

Thanks, Michelle. Welcome to our second 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-COO. 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. This call will contain forward-looking statements which do not guarantee future events or performance, so please refer to our SEC filings for cautionary factors related to these statements. And like previous quarters, we've 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 deck. So, page two shows a summary of our four key metrics. The strength of our underlying fundamentals are evident in the trends that you see on the 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 $206 billion, and book value per share is $17.81. Spending a minute on book value, we've seen attractive returns really across asset classes in this performance, combined with the power of compounding has driven the 14% year-over-year increase in our book value per share. This 14% figure compares favorably to broad market indices like the MSCI World, which is up 7% over this timeframe, as well as fixed income indices like the LSTA that's up about 4% over the last 12 months. Highlighting the strong performance we've seen, unrealized carried interest, one of the key components of our book, is up 21 percent since last quarter, and it's increased 45 percent since the beginning of the year. Looking at the right-hand side of the page, alongside of this, management fees have grown steadily, and distributable earnings on an LTM basis have increased 12 percent. Turning to page three, you'll see some additional details. We reported after-tax distributable earnings of $327 million for the quarter, or 39 cents on a per adjusted share basis. And as a reminder, as you look at these figures, we do report our distributed earnings after taking into account equity-based charges. Management fees for the quarter came in at $303 million, up 16% compared to Q2 2018, and 17% comparing the year-over-year LTM periods. Fee-related earnings for the quarter are $287 million, and on an LTM basis are $1.1 billion. This is a record fee-related earnings figure for us on a trailing 12-month basis of 28% compared to the LTM figure as of a year ago. Now, as we've reviewed historically, there are five things we need to do well as we evaluate our performance. We need to generate investment performance. We need to raise capital, find attractive new investments, monetize existing investments, and use our model to capture more economics from everything that we do. I'm going to update you on the progress on the first two, and Bill's going to cover the remaining three. In terms of our investment performance, please take a look at page four of the deck, which shows the trailing 12-month performance across our flagship funds. In private equity, our three flagship funds appreciated 12 percent on a blended basis, and the private equity portfolio as a whole appreciated 15%. Both of these figures compare favorably to the 7% total return of the MSCI world mentioned a minute ago. Our real asset strategies are performing as well with our more mature real estate and infrastructure flagship funds up 7% and 13%. While our flagship energy fund is flat over the last 12 months, compared to a 36 percent decline in S&P's oil and gas E&P select index. And in credit, our composite performance compares favorably relative to the LSTA and the HFRX special assist indices, which are plus 4 and minus 8.7 percent, respectively, over the last 12 months. In terms of fundraising, we raised $6.5 billion of new capital in the quarter. We held an initial close in our new Asia real estate strategy. We priced new CLOs in the U.S. and Europe and had inflows into leveraged credit SMAs as well as various alternative credit products. Additionally, we progressed in our goal of raising long-duration capital. As of quarter end, we now have $43 billion in permanent and strategic capital that has either recycling or a very long expected life of 15-plus years or more at inception. In total, inflows in the quarter contributed to $56 billion of dry powder quarter end, and included in this is $18 billion of capital commitments that become fee-paying on an as-invested basis at a weighted average rate of just over 100 basis points. And with that, I'll turn it over to Bill.

Thanks, Craig. I'll start with the third thing we need to do well, which is find new investment opportunities. We invested $5.8 billion across businesses and geographies in the second quarter. Public market deployment was $1.8 billion, coming primarily from our private credit and direct lending strategies. On the private market side, we invested $4 billion. The largest contributors were our newest core investment coming out of Europe and a Middle Eastern midstream investment from our infrastructure fund. Other notable investments were a handful of Asia private equity investments and a European private equity investment. Shifting to modernization activity, we completed a number of secondaries, including our final exit from hire. We also completed multiple strategic sales that positively impacted both our fund and the balance sheet. On a blended basis, the PE exits were done at four times our cost. For the quarter, it was $358 million of gross total realized carried interest and total realized investment income. This compares to $600 million that, as we stand here today, has closed or has been signed and is expected to close in 2019 or 2020, of which, at this point, we expect $250 million to close in Q3. And it's only the end of July. And finally, the last thing we need to do well is use our model of AUM, capital markets, and balance sheet to capture greater economics for our investors and the firm from all of our activities. Focusing first on capital markets, KCM had a strong quarter with 158 million of transaction fees. The market environment in Q2 certainly improved compared to Q1 of this year. Performance in this quarter highlighted the geographic breadth of the business as capital markets revenues out of Asia and Europe both outpaced revenues in North America. And if you turn to page five of this supplement, I'm going to spend a minute on our core investing strategy as we've seen core begin to impact our balance sheet investment performance and our book value compounding. We introduced the core strategy on this call two years ago with a focus on investments that have a lower target return profile than private equity but are solid businesses and we want to own for 10 plus years. We chose to commit significant balance sheet capital alongside a handful of partners. We currently have $10.5 billion of AOM focused on this strategy, including $3.5 billion we've committed of our own capital. Now, two years in, looking at LP capital together with balance sheet capital, we've invested a total of $4 billion through transactions across the U.S., Europe, and Asia, with a gross IRR of 21%. And in terms of the investment line on the segment balance sheet, CORE has a fair value of $1.9 billion as of quarter end. Keep in mind, the 21% IR has not run through our total distributor earnings yet. That is all unrealized gain. However, CORE has contributed approximately $425 million of balance sheet value since we began investing in the strategy. We feel we're off to a good start, and we'll keep you posted along the way. There are two other points I'd like to make in relation to the balance sheet. The first thing I want to point out is you'll see Bridge Bio, a Bio Farmer investment, is now our third-largest balance sheet holding. Following its Q2 IPO and strong trading post-IPO, fair value as of June 30th was $395 million, and it's marked at five times our costs. Given its significance, we wanted to provide that additional color. The second thing I'd like to call out relates to our debt obligations. We recently priced two bond offerings, a Euro-denominated offering and a U.S. dollar-denominated refinancing of the 2020 maturity, both at attractive rates. Putting aside any premium associated with taking out the 2020 notes, we will have added approximately $725 million in liquidity to the balance sheet with effectively no increase in interest expense. And with that, I'll turn it over to Scott.

Thanks, Bill, and thanks, everybody, for joining our call. I want to focus today on how we've been scaling and how we think about the trajectory for our business from here. I mentioned on our last call that despite our 43-year history, we're a young firm. Eighteen of our 22 strategies were launched in the last decade. And in our business, it takes about a decade to start to achieve scale. So we have a lot of growth ahead of us as we go from fund one or two to fund three, four, and five across a majority of the firm's investing activities. We think that upside is dramatic. But for us, this growth opportunity is compounded by the fact that while we've been launching new investing businesses, we've also been making large investments in distributions. We were late to building out our distribution efforts. Remember, 10 years ago, we had about a dozen people on our fundraising team and 275 investors. We now have 90 people on the team and nearly 1,000 investors, but we still have a long way to go. Our investor count has been growing, and our cross-sell stats have been improving over but we still see an opportunity to meaningfully expand both of those numbers. As a result, going forward, we expect to see our AUM compound significantly from the powerful combination of more mature track records and a growing investor base. Page six of the deck gives you a good sense of what's been happening on this front over the last seven years. We report in our press release the gross new capital raised every quarter. That number can be lumpy, given the timing of closings and when our funds come to market, especially the larger funds. To give a better sense for what we're experiencing, this chart looks at the new capital raised and acquired on a trailing three-year basis. You can see from the chart that despite the youth of many of our strategies and relationships, the trailing three-year number has grown from $18 billion in 2012 to $95 billion today. And with acquisitions, the number is over $100 billion. As you can see from the chart, PE has grown from about $8 billion to $20 to $30 billion as our three regional PE funds have scaled. What's more dramatic, however, is our non-PE funds, which on this trailing three-year basis have gone from $9 billion of capital raised to $73 billion. As you look at this chart and think about these numbers, please keep in mind what I said. This has all happened with a lot of fund ones and a lot of new relationships. So while we're pleased with the progress we've made, we feel like the last 10 years of building track records and relationships position us to really scale from here. We see growth from creating new investment platforms, scaling our existing platforms with existing relationships, and doing more with those existing investors. And we see even more upside from creating new relationships across channels and around the world. And on top of these points, it's important to recognize that in the next six to 18 months, we'll be in the market for our largest three funds, Asia P.E., America's P.E., and infrastructure. So the long-term opportunity is large, and the near-term visibility is high. Thank you for joining our call. We're happy to take your questions.

Ladies and gentlemen, if you'd like to ask a question, please press star, then 1. If your question has been answered and you'd like to remove yourself from the queue, you may press the pound key. Once again, to ask a question, please press star, then 1.

And, Michelle, we'd like to ask everyone, if they wouldn't mind, to please ask one question and then one follow-up if necessary to just allow us to work our way through the queue. Thank you.

And our first question comes from Michael Carria of Bank of America. Your line is open.

Good morning, and thanks for taking the questions. Maybe the first question, Scott, you mentioned sort of the fundraising outlook, focus on distribution, some of the opportunities there. I guess just given the pace of deployment and then the performance relative to whether it's the peers or the benchmarks, how should we be thinking about it? I think we have a pretty good view maybe in the second half in terms of what's out there. But as you're thinking about 20 and 21, both on the distribution with the flagships, how meaningful can it be over that time frame?

Craig, why don't you kick us off and talk about what we see coming to market over the next couple of years, and then I'll give some color.

Yeah, sure. So, Mike, in terms of where we're fundraising currently, why don't we start there? That would include fundraising for a number of European strategies, so that's private equity, opportunistic real estate, and direct lending. In Asia, we're fundraising for strategies outside of private equity, including infrastructure and real estate. And we're also fundraising across our impact, real estate credit, special situations, and our next generation technology growth strategy. And at the same time, we have areas where we look to raise capital on a more continuous basis. That includes the CLO business, leveraged credit platforms in the U.S. and Europe, as well as our BDC and hedge fund partnerships.

Yeah, so I'd say it just doesn't overlay, Michael. I'd say the opportunity to scale from here, we think, is dramatic. we mentioned the three large funds coming to market in the next six to 18 months because those do tend to be a little bit more sizable when they do come. But as you can tell from the chart on page six of the deck, it's much more than just the larger episodic funds coming to market that's showing up in the numbers. And so the way we look at it is we have these 18 other businesses of the 22 that we're in, that are starting to work their way through kind of the fund one, fund two dynamic. And as we've talked about in the past, we think successor funds can be multiples of the prior. And we just happen to have that in a lot of different places across the firm. And so the opportunity to scale is something that we're quite optimistic about. And at the same time, the reason we mentioned that we have been building out distribution is we see opportunity everywhere. more institutional relationships, insurance, retail, high net worth, structured products. We believe we're just scratching the surface, and there's a lot of incremental relationships we can create and a lot of relationships we can build from a good start. So a long way of saying we see a lot of upside, and this chart's been created during a period of time where we're just creating a lot of things.

All right, that's helpful. And then just a quick follow-up. You guys talk about ROE as a metric, just given the balance sheet. But you mentioned core on this call and the growth in that area. When you think about how that impacts the balance sheet, meaning the mark-to-market more immediately versus, say, the benefits on the realizations flowing through DE, but that can take years for that to play out. How do you think about that, and especially relative to ROE and that being a metric?

Yeah, Mike, thanks for asking about it. And it's actually a very good question precisely for the reason you mentioned, and CORE is a great example of this dynamic. So, you know, as we look at our ROE and we evaluate our performance, we do look at ROE on a marked basis in order to really focus on total value creation. And I think to us that aspect is critical. So for the numerator, We'll look at the change in book value over the last 12 months. And as you know, we mark to market investments in our book. And we'll add the dividend to that to really look at the total value that's been created, whether that's paid out in the dividend or retained on the balance sheet. And we'll look at that versus the average book over that period. So if you do that over the last 12 months, you'd get 16.5%. And I think as we... Think about an after-tax ROE, 16.5% with really low net leverage as a firm is very attractive versus broad financials. So that's how we focus on ROE, and again, I think most importantly, reflecting market-to-market in the numerator and the denominator is a critical piece of that.

Okay, thanks a lot.

Thank you.

Our next question comes from Craig. Stiegenthaler of Credit Suisse, your line is open.

Thanks. Good morning.

Good morning.

Last quarter, you had a slide that provided us an update on the KKR shareholder base following the C-Corp conversion, and I didn't see it this quarter, but I'm wondering if you had any fresh data points that you can share with us in terms of how your investor base has evolved over the last three months.

Craig, thanks for asking about. You know, the answer is actually a good one. So, Thinking back to what we had last quarter, if I could have you jot down three numbers and then let me walk through what they represent. So, the three numbers are 177, 291, and then 332. So, as you pointed out, last quarter within the supplement, we had a slide that highlighted the evolution in our shareholder base since conversion. And what it showed most significantly was an increase in the mutual fund, the index fund, and the other institutional components. So if you were to go back and look at that slide, as of year end 2017, so pre-conversion, that group combined to own 177 million units, that first number. And as of year end 18, so post-conversion, that group combined to own 291. So over 2018, we saw an increase of 114 million shares looking at that part of our shareholder base. So to help put some numbers around that update, as of March 31st, that group owned 332 million shares. So in that three-month period, we saw an increase of 41 million, or about 14%, with increases across all three categories. And, you know, the other statistic that we look at is the number of institutions that file 13Fs gives a sense of breadth. So we saw a double-digit percentage increase in the institutions that filed 13S. It was a 12% increase. And when you look at, again, just over that time period. So we've seen a continued improvement across all these statistics, as you probably gave a sense. We follow them pretty closely to help gauge the progress. And I think, you know, two other final thoughts. One, when we look at these stats as best as we can, against other large financials and C-Corps, both those that are inside the S&P 500 and outside, it looks like we still have a lot of room to grow. So I think we've seen continued progress, which is great, but importantly, still feels like there's a lot to do.

Thanks, Craig.

Our next question comes from Patrick Davitt of Optimus Research. Your line is open.

Hey, guys. Good morning. Good morning. On the capital markets revenue, I think it came in a lot better than anyone was expecting given the lack of kind of large visible deals. Could you walk through maybe the key drivers of the increase in syndicated capital and the surge in revenue there?

Sure, Patrick. This is Bill. Remember, when we mentioned the number in the first quarter was only about $60 million, we said that capital markets was quote-unquote shut for probably – half of the quarter. Capital markets is rebounding, and we saw a nice activity in the second quarter. The interesting thing this quarter, and that's why I highlighted and prepared remarks is, you know, we've always talked about the geographic breadth. And this quarter, the fees generated from Europe and from Asia were actually in excess of the fee generation from the U.S. And so that is, you know, positive as far as the geographic expansion that we talked about. But more importantly, you know, from a revenue point of view, we have KQR portfolio companies, plus we also have our third-party business. And when you look at the activity during the quarter, about 70 percent of the revenue was generated from debt issuances and about 30 percent from equity issuances. And the mandates were in excess of 35. So, that means this came from over 35 separate and distinct clients that actually use KKR and capital markets in their business. And lastly, when you think about those 35 mandates, there were only two mandates that were in excess of $20 million. And so, again, this is, again, the broad breadth of the activity in capital markets this quarter.

Did you get the percent that was third-party?

I did not, but this quarter it was roughly about 15%.

Fifteen. Okay. Thank you.

Thank you.

Our next question comes from Gerald O'Hara of Jefferies. Your line is open.

Great. Thanks. Bill, maybe staying with you for a minute, just kind of looking at the income taxes in the quarter, And thinking about how to kind of model that going forward, is this a reasonable run rate to sort of begin that sort of linear increase over the next several years? I know you've kind of given some guidance previously on a steady increase to sort of the low 20s in 2023. Any kind of change in how that progression might play out, or should we still kind of think about it as somewhat linear in nature? Sure.

As you know, we talked about this every single quarter since we actually did convert to C-Corp and trying to give you better guidance as to how to model this. But what we did say was that when we did go C-Corp, about half of the step up was towards goodwill and we'd be amortized over 15 years. And so that's pretty linear and that could be modeled. The other 50% was actually tied to specific assets or specific funds and carry. And as we sold those investments, we would get the benefit of that shelter of tax. What's happened in this quarter, so we're talking about second quarter 2019, is there were a couple of investments which weren't written up much as of June 30th, 2018, when we did go C-Corp. A lot of the appreciation occurred after that time, and so when those investments were monetized, we didn't have any shelter as far as against that income. That being said, we still have a heavily decent amount of shelter to provide to investments that, when we went C-Corp, had a lower cost than value, and so we were able to allocate to those investments. If those investments are sold, we'll get the benefit of that tax reduction. But as I mentioned, A year ago, it is very hard to predict. We, to try to keep things simple, said that it was going to roughly go up a few percentage points every single year on a walk from roughly 9% up to the 22%. And so, long-winded way of telling you that it's pretty hard to model. I wouldn't hardwire a 15% rate, which is the rate this quarter. Next quarter, it could be, depending on the mix of assets, could be 11%. Or it could very well be that if all the assets that are sold in the third quarter weren't written up at all when we went C-Corp, the tax rate on that will be 22%. Okay.

Thanks for the call. I appreciate it.

Our next question comes from Bill Katz of Citi. Your line is open.

Okay. Thank you very much for taking the questions this morning. And I certainly appreciate page six of the supplement. It's very, very helpful. So big picture question, as you continue to scale your business and diversify, talk a little bit about maybe the dividend policy and how important does the book value strategy remain?

I'd say the book value compounding remains a critical priority and focus for us, Bill. As we talked about in the past in particular, got into in good detail when we changed our distribution policy several years ago we're big believers in the power of long-term compounding. And if you flip back to page two of the deck and look at the bottom left-hand side, you can see over the last few years since the distribution policy was changed, we've started to see meaningful compounding in our book from $12 or so to the better part of $18 in a relatively short period of time. So book value compounding, continues to be a big part of our story, as does AUM compounding and fee-related earnings compounding. So we're focused on all of the above. Dividend policy is something that we'll revisit on an annual basis, but we're going to continue to invest in our own growth and bet on ourselves, and that will show up in our book value per share. So I think you should expect all else equal to have the dividend policy, you know, move up the dividend over time. So we do expect it to grow. but we'll largely be focused on compounding book as we compound the rest of our metrics.

Okay, and a bit more of a tactical question. Just coming back to the FRE drivers sequentially, just given the very strong activity on the transaction line, is there a way to think about the incremental impact of that activity on FRE?

Well, Bill, when you focus on FRE, The transaction fees, you have to break it down between KCM and KKR proper. As you know, in private markets, you see transaction fees, and they were quite robust, but there also was a big increase in fee credits. Because remember, on the private market side, we have a sharing arrangement with our LPs, and roughly speaking, that's 80 to the LPs and 20 to us. So if you see a transaction fee go up on the private market side, that's good news. but the fee credit is going to be adjusted in the economics to us roughly be about that 20%. Again, to belabor the point, if you go back to capital markets, any sort of transaction fee report there is going to be 100%. Interestingly, though, you saw pretty robust activity in the second quarter compared to the first, and if you take the transaction monitoring fees and net it against fee credit, you actually saw an increase of roughly about $23 million. And keep in mind, if you look at the capital investment line, we went from investing $3.3 billion to almost $4 billion, and so you should expect that that transaction fee would be higher this quarter.

Okay. I was just trying to get toward the incremental FRE contribution, but we can follow up offline. Okay. Thank you very much for taking the question this morning.

Thanks, Bill. Our next question comes from Alex Boateng of Goldman Sachs. Your line is open.

Hey, good morning, everyone. Thanks. Scott, to follow up your discussion around scaling the business and the fact that maybe you guys were late in some of the distribution initiatives but maybe have been catching up over the last couple of years, as you look out and especially as we look at the flagship funds that are on the horizon here, how should we think about the comp rate being in that 40-ish percent range for now? How much flexibility do you guys have to bring that down over the next couple of years?

I think the guidance we've given you is that we expect the comp ratio to be in the low 40s. Alex, I think that's what we suggest is still the right assumption to use. As we scale our businesses, and in particular as we see carried interest be generated from a number of these fund ones and twos that have been invested but not yet realized, and as our AUM and fees continue to scale from all the good work the teams have been doing in terms of creating very attractive track records, We would have more flexibility over time to potentially bring that down, but in the next couple of years, I wouldn't guide you any differently than the low 40s.

Okay, fair enough. And then just a quick follow-up, Bill, to your kind of State of the Union sort of update on where realized incentive income investments stand for the next couple of quarters, so that $600 million number. I just want to make sure, does that contemplate any disposition of First Data, FIS, or kind of the related transaction there, or any of your other public holdings?

Good question. To be clear, it does not contemplate any secondaries. So these are transactions that have closed or strategic sales that have been signed and have yet to close. And the reference was that the 250, which we expect in the third quarter, and the headline number was 600. That's because there are a couple of strategic sales that have taken place. We have signed documentation, and we expect those to close in the early part of 2020. Great.

Thanks so much. Thank you.

Our next question comes from Glenn Shore of Evercore. Your line is open.

Thanks very much. Let's see what I can get out of this one. We hear all the growth, the scaling, the distribution will get it, and it's working great. If you look at the proposal out of Elizabeth Warren recently, it would suggest something other than we all believe is taking place. So I guess I'd love to give you a shot to either A, and or B, talk about how the business would adapt if some of those proposals are put in place.

Thank you, Glenn, for the question. I always appreciate being given an opportunity. I'm not going to take you up on it today.

Okay, no problem.

We're not going to comment. I think we're obviously at the beginning of probably January a season of a number of different things that will be in the media and we'll watch it as will you and we'll let you know as these things develop if and how it impacts our business. I would tell you that we have been focused for the last decade plus on making sure that we have a robust effort around all things ESG and making sure that we're being thoughtful about all the stakeholders to whom we're responsible and so we'll continue to focus on that endeavor and then adjust as the environment adjusts.

Okay. Maybe a business-related one. There seems to be a rising public-to-private trend. Curious if you're seeing that to the same degree I am, if it's just a function of differential in valuations and think of it as a seasonal thing.

We're seeing it, too, and I think it is providing opportunities to us. You know, I think the market, Glenn, has become a bit of a have-not market. I think if a company has real growth or is in certain sectors and has a really simple story, they tend to get a high multiple, and a lot of capital goes that direction. If there's some complexity, if it's lower growth, if there's more explaining needs to be done, there's a lot of companies that get left behind. And so we are seeing this bifurcated market develop, and I do think that is leading to more interest on the part of management teams to consider going private transactions. So that's clearly creating opportunities for us. I'd say the market's focus on simple stories is also creating opportunities insofar as a number of companies are selling non-core subsidiaries, and we've been particularly active around corporate carve-outs all around the world. and I think that's a derivative of this public-to-private trend. It's more of a simplified trend that we're benefiting from, but we're seeing the same thing you are.

Okay. Thanks very much.

Our next question comes from Chris Katowski of Oppenheimer & Company. Your line is open.

Yeah, good morning, and thanks. I noticed the carried interest receivable was up 21% late quarter, and that just seemed like a big number in kind of a ho-hum market. Is there any particular story behind that?

Hey, Chris, this is Bill. No particular story other than we manage a lot of capital, and the appreciation was quite robust during the quarter. For example, our private equity portfolio was up 6.4%. So if you manage a lot of capital and you see that appreciation, you'll see that come through in the accrued carry number.

The only thing I'd add, Chris, is it's also coming from non-PE, and we mentioned a number of these younger funds are now getting invested. The dollars in the ground are growing, and the accrued carry is starting to tick up for non-PE as well. And we've shared that we think there's significant upside to our carried interest line over time as that continues to play out, and those investments are exited. So, you know, all else equal, we hope to see that crude carry from non-PE continue to grow. Right.

And to highlight that point, we actually had a slide in the supplemental deck last quarter, and of the $123 billion of eligible carry eligible funds that we managed, that number was $88 billion. So, again, to Scott's point, as we continue to grow the business, not only in PE, but continue to add different mandates, and they've walk their way through the preferred returns, and then are carry eligible, you're going to see that number go up.

Okay. And then as a follow-up, is Bridge Bio also in the healthcare growth fund, or is it just a balance sheet investment?

Good question, and it's not a straightforward answer. The answer is that it was originally on our balance sheets, Again, the beauty of our balance sheet is we have the ability to use some of that balance sheet capital to prove concept, and then we go raise capital with a third-party mandate attached. RiskBio, we invested over four separate tranches. The first two were made specifically just on the balance sheet. And then as we raised a fund and the fund was eligible to participate in that investment, the fund participated. So that $395 million is is balance sheet capital plus a sliver of the GP interest in a health care growth fund. But more importantly, you've got $395 million of value, but it's only $75 million of cost. And we've made that investment over the last two and a half years.

Well, I guess what I was also wondering about is, you know, obviously it's nice. It would be nice to have a five-banger in your first time investment. I mean, did that help boost the performance of the fund by a similar amount as to what we see on your balance sheet?

And it certainly has, and that's a very good point. And when you take into account, we're just talking about the $395 million, which is our investment on our balance sheet, embedded in there is also some accrued carry because the health care growth fund, because of the IRR that it has, Right now, healthcare growth fund is right now. Remember, it's an early fund, and we had some big write-ups. So the growth IR is, I think, over 100%. And so you're going to see that big bang that you talk about.

Okay. All righty. Thank you.

Thanks, Chris.

Our next question comes from Deb Ryan of J&P Securities. Your line is open. Thank you.

Okay, great. Good morning, everyone. Most of my questions have been asked, but maybe just one here for Scott. You had mentioned a lot of visibility into the business near term, and you'd given some longer-term perspective on fee-related earnings and the trajectory at the Investor Day. But since then, we've gotten some pretty specific FRE guidance for the next few years from some of your peers, just given this transparency, which I think has been helpful to the market. And so, You know, if possible, is it possible to give us anything more granular on where you see fee-related earnings maybe over the next, you know, two to three years or a range of growth rates from here just based on, you know, that level of visibility you have into the business and some of the moving parts like fundraising or deployment?

Great question, Devin, and appreciate this opportunity as well, but also not going to take you up on it. I think we're not comfortable giving – FRE guidance per se. I think what we are comfortable doing is just sharing with you the trends that we're seeing in the business. And as you can tell from the narrative and the significant growth we've had in management fees, you know, 16%, give or take, plus the opportunities we see to continue to scale our capital markets businesses, you know, we'll share with you what we're seeing. But, you know, we do see meaningful upside and the opportunity to create operating leverage as well. But no specific guidance, but I tell you the The overall sentiment here is we've put in a lot of hard work in the last decade, getting ourselves to this point in terms of creating track records and new relationships. And if we can create page six with fund ones and new relationships, we're kind of in a mode of being very optimistic around what we can do as we scale from this point forward. So upbeat, but no specifics for you.

And just to give you a little bit of color, very short term, remember, when you take a look at fee-paying AUM, year over year, it's up 9%. And we have talked about shadow fee-paying AUM. That number is roughly $18 billion at over 100 basis points of the income attached to that. So as that capital is invested over the next couple of years, you're certainly going to be able to see management fees increase because of that.

Okay, well, I figured I'd give it a shot, but I appreciate it, guys.

Nice try.

Appreciate it.

Our next question comes from Chris Harris of Wells Fargo. Your line is open.

So there's a lot of negative yielding debt in Europe, as you guys know. How is this impacting your business or your approach to investing in that region, if at all?

Oh, it's a great question. What we're finding in Europe is that the opportunity in the private markets and the opportunity to generate return from capturing the illiquidity premium, Chris, is significant. And so it's not impacting our investment approach per se, but we are finding that when we talk to investors around the world today, especially those in Europe or with big European components of their portfolio, they are looking to do more with us because they are focused on figuring out how to capture that illiquidity premium for them. So it hasn't really changed how we're investing per se, but what it has done is allowed us to create a series of discussions with investors that are trying to figure out how to position their portfolio in a negative yielding environment. So we're seeing more flows into things like private credit, infrastructure, real estate, anything that has a yield coming from the illiquid or private markets. We're finding a lot of interest. Got it. Thank you. Thank you.

Our next question comes from Michael Cypress of Morgan Stanley. Your line is open.

Hey, good morning. Thanks for taking the question. Just hoping you could talk a little bit about some of the newer product initiatives that you're introducing targeted toward insurance companies. And in particular, I saw you recently had a return-enhanced structured note that I think invests across a number of your strategies, but pays a fixed distribution. So I guess, what sort of market opportunities do you see for these sort of innovative solutions? And how are you able to structure such a high-coupon solution that pays out on this sort of structured note? Are you evolving the return streams and payouts on your private equity funds to match? If you could just help us understand that. Thank you.

Thank you, Michael. Yeah, I think this question brings together a few different themes we've covered in the past. One is that we're focused on how we can continue to raise capital that is longer duration. As you know, we're focused on kind of generating more permanent capital and recycling long-term, you know, 15-plus-year lockup-type capital. And so that's one thing we've been very focused on. Another thing we've been very focused on is building our relationships out in the insurance space. And over the course of the last four or so years, we've seen our AUM from insurance companies go from $8 billion to north of $25 billion. And as we've been spending time across those two themes, we have found an opportunity in a number of different respects to innovate, to create products that achieve both objectives, you know, raise longer-term capital for us to invest and compound for our partners and do it in a format that is attractive for insurers and easier for them to invest in. And so the product that you're talking about is just one example of many that we have been working on. And a number of them have actually been completed. The answer to your higher level question around how can you generate yield on a private markets portfolio is relatively straightforward. You know, if you think about what we do, you know, private equity and growth equity, it's true, traditionally do not generate much, you know, current return. But if you think about it, basically everything else we're doing does. Private credit, infrastructure, real estate equity, real estate credit, energy as just some examples. And so we're finding that you can create a more diversified portfolio of alternatives that does have recurring yield. And I think it's a combination of that recurring yield plus upside of private and growth equity and other asset classes that we think is an opportunity to create hybrid products that are attractive both on the run and then also in terms of long-term upside.

Great. Thanks. I'll get back in the queue to ask a follow-up.

Thank you. Our next question comes from Robert Lee of KBW. Your line is open.

Great. Good morning. Thanks for taking my questions. I apologize if you maybe went over this because I got on the call a little bit late. Just going back to capital management and the dividend, about a year anniversary since you converted, reset the dividend. How should we think about your view about dividend growth from here since we're a year in at this point? The second question really relates kind of more to comp ratio and the carry pool. I think you guys are somewhat unique in that you pay everyone pretty much out of one big carry pool, I believe, as opposed to points on a specific fund. But as you get bigger, as you have many more strategies, is that a model that, either becomes easier to execute on or is there pressure to change it as kind of the firm becomes more diverse?

Hey, Rob. This is Bill. We did cover both of these points earlier on, but so the punchline is as it relates to the change in dividend policy, it's something that we'll address annually and it's probably something that will be discussed on the fourth quarter call. As it relates to that one comp pool, what we – mentioned earlier is that we're targeting that comp pool to be in the low 40s. And remember, we pay everyone off of one P&L, and we don't break down specifically how that income is generated, whether or not it's fee income or whether or not it's carrier or balance sheet earnings. We look at everything more holistically. But you've got to believe that as we continue to scale our business and grow that business, you should see over time margin improvement, but that's not going to happen next quarter per se. And so when we went to the C-Corp conversion and we only reported one comp number, we said that we were going to target that number in the low 40s to make sure that the operating margins would be roughly that 50%, and so there's not going to be any change anytime soon.

And I think on the last part of your question, Rob, the pressure to change it, no, we don't see any pressure to change that. This has been a part of how KCARE has operated from inception. that everybody's always participated in the global carry pool. It's a critical part of our culture and allows us to make sure we connect the dots across the firm and everybody works together, and so we expect that to continue to be the case.

Great. Thanks for taking my question.

Thank you.

Our next question is a follow-up from Michael Cypress of Oregon Stanley. Your line is open. Thank you.

call line lending, just how you're seeing that used across the industry today in terms of order of magnitude and size, and to what extent does KKR use capital call lending when you're making deployments, delaying capital calls, using leverage, and then drawing down on that?

You know, Mike, you actually just cut in halfway through your question. Would you mind just repeating it? We didn't catch you were silent for the first part.

Oh, sure. I was just asking about capital call line lending. So when you're buying an asset in a fund, using leverage initially to buy and then drawing down on the line to it and then repaying it off in the future. Just curious, you know, what you're seeing across the industry in terms of usage of this form of leverage. You know, what sort of magnitude and size do you see for that part of the industry? And to what extent is KKR using this form of leverage?

Hey, Michael, this is Bill. I'll take that one. When you think about the administrative ease by having a subscription facility in each one of the funds, we've been doing that for the past few years. And so that line is not kept open much at all. It's, again, more for administrative ease as opposed to anything. As it relates maybe to a question that you might be asking as far as to the extent that you use a facility, do you actually increase the return profile of that particular fund because of the delayed draw. But I just want to let you know that as we report to our LPs, we report the IRR because of us having the ability to use that subscription line. We also report a return as if we didn't use the subscription line. So we actually have these transparency reports where, again, we report both of those numbers.

Great. And what would be the typical duration of a draw on that?

Typically, on average, we have a facility, we draw in a facility, and it usually gets paid down every six months.

Got it. Okay, so six months. Thanks so much. Thank you. You're welcome.

If there are no further questions, I'd like to turn the call back over to Craig Larson for any closing remarks.

Michelle, thanks for your help, and thank you, everybody, for joining our call. Please, of course, follow up directly with anything else, and we look forward to chatting next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.