KKR & Co. Inc.

Ladies and gentlemen, thank you for standing by and welcome to KKR's fourth quarter and full year 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. To ask a question during the session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I will now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Thank you, Crystal. Welcome to our fourth quarter 2019 earnings call. I'm joined this morning by Scott Nuttall, our co-president and co-COO. And for the first time on one of these calls, I'm pleased to be joined by Rob Liu and our CFO. As you know, Rob was named CFO in connection with Bill Janicek's retirement. 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. The call will contain forward-looking statements, which do not guarantee future events or performance, so please refer to our FTC filings for cautionary factors related to these statements. And like previous quarters, we've also posted a supplementary deck on our website that we'll be referring to over the course of the call, and I'm going to begin by referencing pages 2 and 3 of that deck. Focusing first on page 2. Most importantly, the earnings power of the firm continues to grow nicely, as you can see from the charts on the left-hand side of the page. Our AUM is at $218 billion, while book value is $19.24 per adjusted share. As you know, we're big believers in the power of compounding, and we've been seeing that power through our book value. Over the last year, book value per share grew 24%. That's one of the largest increases we've seen over any 12-month period as a public company. And over the last three years, we've compounded book value per share 17% each year. And remember, in addition to this compounding, dividends are being paid out alongside. Looking at the right-hand chart of page two, Management fees have been growing steadily, up 15% year-over-year given our asset growth. And after-tax distributable earnings totaled $1.4 billion for the trailing 12 months, down from last year, partly due to realized gains being lower in 2019. Rob and Scott are both going to talk about our visibility here in a few minutes. Page 3 of the supplementary deck provides a snapshot of some of our headline numbers for the quarter as well as for the year. After-tax distributable earnings came in at $375 million for the quarter, or $0.44, on a per-adjusted share basis. Fee-related earnings for the quarter were $271 million, and on a full-year basis were just over $1 billion. Year-over-year, our AUM and fee-paying AUM were up 12% and 14%, and both increased 5% compared to 930%. Looking at organic fundraising activity, we had our most active fundraising quarter of the year in Q4 driven by a number of our younger platforms and strategies in private markets. We held the first close in our Asia infrastructure strategy and had inflows across four real estate strategies. We also raised capital for the second iteration of our next generation technology growth strategy. And with our final close here early in 2020, this second fund is over three times the size of the first. In public markets, we raised an Australian-listed permanent capital vehicle and saw inflows into several credit products, including our leveraged credit and CLO businesses. And also of note during the quarter, we closed on the final 5% of our partnership with Marshall Waste, bringing our total ownership to 40%. Since we announced the first step of our partnership here in September 2015, AUM and Marshall Waste has increased from $22 billion to $45 billion. And from an investing standpoint, Q4 was our most active deployment quarter of 2019, as we invested over $4 billion in both private and public markets. In private markets, investment activity reflects really two things, the global nature of our footprint, as well as the increasing diversification across our strategies. Private equity investment activity was mostly out of Europe and Asia, This was true in the fourth quarter as well as for the year. Investment activity outside of private equity continues to grow in significance. PE represented a little less than half of the $4.5 billion of capital invested in private markets for the quarter and a little more than half of the $14 billion of capital invested over the year. As our core equity, infrastructure, real estate, and growth equity platforms are scaling, you're seeing the impact of this through the deployment figures. Public markets investment activity also exceeded $4 billion in the quarter, with activity here driven by opportunities in our private credit business in the U.S. as well as Europe. And for the year, public markets deployment was $10 billion, an increase of 45%. As with private markets, as our credit platform is scaling, you're seeing the impact of that through these deployment statistics. And with that, I'm pleased to introduce everyone to Rob Lewin. Rob joined KKR 16 years ago, and for the first half of his career, worked in our private equity business as an investment professional both here in the U.S. as well as in Asia. And for the second half of his career, when Rob and his family returned to the U.S., he's held a series of positions across our other businesses, co-heading KKR Credit and Capital Markets, and also serving as our treasurer and head of corporate development. Most recently, Rob was head of human capital and strategic talent for us. Rob? Rob?

Thanks a lot, Craig, and hello, everyone. It's a pleasure to be on the call this morning, and I hope to have the opportunity to meet and get to know many of you over the months and quarters ahead. I'd also like to thank Bill for his leadership of KPR's finance function over the last 20 years. Our finance team has a tradition of operational excellence and first-rate controls. I have every intention of continuing that focus and tradition. Turning to our financials for the quarter. Management fees, as Craig noted, continued to trend very well, up 13% compared to the fourth quarter of 2018 and up 15% for the year. In capital markets, transaction fees for the quarter totaled $107 million and $410 million for the full year. These are very dull results for us, but both numbers are down from our record results in Q4 2018 and full year 2018. I will circle back to our capital markets business in a moment. Turning to monetization activity in the quarter, we had 245 million of realized performance income and 226 million of total realized investment income. CAUI generating exit activity this quarter was driven by a number of European and Asian investments. These exits were accomplished at a blended multiple of approximately 2.8 times our costs. Moving to our expenses. Compensation and benefits, which includes equity-based comp, came in at 358 million for the quarter, or 37% of our total revenue. For the year, total compensation was 39% of revenue. Both figures are below our low 40s compensation ratio target. Occupancy, taken together with other operating expenses, came in at 122 million. Other operating expenses were more elevated in the fourth quarter, primarily due to $20 million of non-recurring expense related to the Australian-listed permanent capital vehicle that Craig mentioned earlier on the call. Putting this all together, including a 12% tax rate for the quarter, after-tax distributable earnings were $375 million, or $0.44 per share. I thought I would pause here and spend a minute on our capital markets business. We have worked very hard over the last decade to diversify this business from a small U.S.-based team that was focused primarily on KKR private equity deals. Today, our capital markets business has meaningful breadth across asset class, product, and . That diversification resulted in over 60% of our capital markets revenue coming from outside the U.S. in 2019 and around a quarter of our revenue coming from non-KKR clients. As a result of this increased threat, we now have the business to a point where baseline quarterly revenue should be in the $50 to $70 million range. This is driven by ordinary course financing and refinancing activities, assuming reasonable capital market conditions. In addition to that baseline revenue, we have also positioned ourselves to be a meaningful participant in several large transactions a year, which is why the business has exceeded $100 million of revenue in six of the last eight quarters, and also averaged almost $500 million of revenue over the last three years. In short, our business now has a more baseline revenue component, which we think we can grow over time, together with upside from larger deal activity. As we look forward to Q1 2020, we don't have any of those large transactions in the pipeline. So the expectation from here is that our capital markets revenue in Q1 is more likely in that $50 to $70 million range. which is consistent with Q1 of 2019. Now, most important, as we think about the growth of our distributable earnings over the next several years, really all of the core fundamentals in our business are at record levels. Our fee-paying assets under management, they're up 14% this year and currently stand at $161 billion. That's the highest it has ever been. and that is in advance of some of our larger strategies that are set to raise funds over the next 12 to 18 months. Our net on real-life carried interest is up 62% year-over-year. This is driven by both robust performance across our various strategies and the significant increase in our carry-eligible AUM that is above its respective hurdle. You can see this on page four of the supplemental deck. Two years ago, around half of our carry eligible AUM was in a position to pay carry, as over $55 billion was seasoning and still working its way through preferred returns. Fast forward two years, the amount of capital in a position to pay carry has now increased 60% to $93 billion. And finally, our balance sheet is stronger today than it has ever been. Over the last several years, our balance sheet has been accruing significant gains. which you're clearly seeing come through in book value compounding. But we're not yet realizing those gains through distributable earnings. If you look at the last three years, our balance sheet investments have averaged a 15% return, but our realized performance has averaged 7%. In 2019, this difference was even more extreme, as we generated a 25% return, but our realized performance was just 6%. This has generated a record $2 billion of embedded gains on our balance sheet, which creates significant visibility for us around our long-term distributable earnings trajectory. Let me now pivot from the numbers themselves and spend some time on our investment performance. We saw very strong performance across our major investing platforms in 2019. Looking at page five of the supplemental presentation, our recent private equity flagship funds appreciated by 29% this year, and the PE portfolio in its entirety appreciated by 27%. Our flagship real estate and infrastructure funds appreciated 24% and 13% respectively. Energy income and growth did decline for the year, given the volatility in the asset class, but this is a relatively small strategy for us today, at about 1% of our assets under management. Our credit business had solid performance, with our alternative and leveraged credit strategies returning 8% and 9% on a blended basis. And finally, as you've likely seen in the press release, we've announced an increase in our dividend. We set our current annual dividend to 50 cents per share when we converted to a corporation in the middle of 2018. For 2020, we have increased our dividend to 54 cents for the year, an 8% increase. This is consistent with our stated intention to grow the dividend over time while still retaining most of our earnings to invest back into the firm and also to support our share buyback activities. Focusing on buybacks, since we initiated our share repurchase program, in total we've used over $1 billion to retire shares at a weighted average cost of just under $18 per share. That's $1.30 below our current book value per share. And with that, let me turn it over to Scott.

Thank you, Rob, and thank you, everybody, for joining our call today. I'm going to touch on three topics this morning. The first is 2019. As you heard from Craig and Rob, we finished the year well. Most important is the progress we made over the course of the year. Management fees were up 15% while book value per share grew 24%. And our return on equity, which we look at on a marked basis, was 24% for the year. Our model of third-party assets plus capital markets plus our balance sheet is working. And in 2019, we grew virtually all our businesses and launched several new platforms, including a number of strategies in Asia, as well as our global impact effort. So we're pleased with the year and view our progress as an important bridge to the opportunity we have ahead of us. This brings me to my second topic, visibility. Visibility. We have more visibility now than I can recall in our 10 years as a public company. As introduced on this call last quarter, we expect to launch fundraising for our three largest flagship funds over the next several months. And over the next three years, we expect to be fundraising for over 20 additional strategies, many of which are now between Fund 2 and Fund 5, with strong track records on top of a growing investor base. In addition, our unrealized carried interest is up 62% over the last 12 months, and our cash carry eligible AUM is up 60% over the last two years. Given all this visibility, our confidence is high. Assuming the fundraising environment continues to cooperate and with continued investment performance, we believe we can grow our management fees by at least 50% over the next three years. And about 18 months ago, at our July 2018 investor day, we shared with assumptions more conservative than our actual experience. We felt we could double pre-tax distributable earnings and book value per share over the next five years, and then roughly do it again over the subsequent five. Given our progress and visibility, our conviction in being able to exceed these numbers is higher today than it was 18 months ago. Finally, I want to discuss our shareholder base. As you know, we converted to a C-corp about 18 months ago. We felt changing our corporate structure would make our stock easier to buy and easier to own, greatly expanding the universe of investors that could own our stock. That has proven to be the case. We've seen a significant change in our investor base. with many more mutual fund and index funds owning our stock, and we've been added to several indices. We're still introducing ourselves to investors that are new to the space and new to KKR. So the full impact of C-Corp conversion, we believe, is not yet in our stock. As we've been out meeting new investors, we have learned that many are benchmarked to indices that we are not in today. and they are less likely to be shareholders of ours as a result. One of the largest index families where we are not included is the Russell. We believe being part of Russell's indices would allow us to further our goal of broadening our shareholder base. And it's a sensible next step on our journey to getting proper price discovery and a proper valuation for our stock. So we're discussing with our board taking the steps necessary to be included in the Russell indices when they rebalance this spring. We will keep you posted on the details. We thank you for your partnership, and we're happy to take your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star followed by the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question, please press star and then one now.

And, Crystal, if we could ask everybody, I was just going to say ask everyone in the queue if they wouldn't mind asking one question in a follow-up. That would just let us to make sure we work our way all through the queue. Thanks in advance.

Thank you. And we will take our first question from Craig Siegenthaler from Credit Suisse. Your line is open.

Thanks.

Good morning, everyone.

Good morning, Craig. So, Scott, I really appreciate the commentary around the Russell 1000 ad. You know, we think you'll get a nice benefit from that in terms of the shareholder base and valuation. But, you know, as you look at what you need to do in terms of corporate governance and moving a small amount of voting rights in the float, from your side of things, what really is the big thing you have to give up? Like, why wouldn't you do it?

Let me just take the first part of that and let Scott add. Craig is Craig. Look, you know, first we'd actually like to thank you for your thoughts and persistence on this issue. I know you've asked us as well as our peers about this for a few earnings cycles in a row now. But, look, I think overall as it relates to incremental buying, that can come from two places. First are ETFs and strategies that are linked directly to the wealth of $1,000, $3,000. And the math for that is pretty straightforward. I know you and most of your peers have done that. And the second piece really relates to mutual funds that are benchmarked to those indices and our ability to market ourselves through to those institutions and increase our mind share. And so as we've looked at it, it's really this second piece that, to us, we think should even be more powerful than the first. Now, it's not going to be immediate. It's going to take some elbow grease and some fortitude, but that's okay. So as we put those two pieces together and gained conviction, it just felt like that was a sensible next step for us in trying to get proper valuation.

Yeah, Craig, Scott, look, I think what you should take from this is that we're working with our board to take the steps required for Russell, including. So the answer to your question is that we are in that process right now, and that's our expectation.

Thank you.

Thank you. Thank you.

Thank you. Our next question comes from Patrick Davitt from Autonomous Research. Your line is open.

Hey, guys. Good morning. Sorry if I missed this, but did you give the pipeline of announced but not closed carry and investment income?

No, it's Rob. Yeah, sure. So based on where we are today, we have either closed or signed approximately – $700 million worth of deals across our realized carried interest and realized investment income. We would expect that $700 million to be realized through the first half of 2020. As a point of comparison, it's probably helpful, this number was roughly $400 million at this time last year, so we feel pretty good at this stage of the year as it relates to what our exit profile looks like.

Awesome, thank you. And then It gets widely known that KCARE is more exposed to China than some of your comps. Could you please update us on the PE portfolio's exposure there and any broader thoughts you have on your view of the exposure to the coronavirus?

Yeah, thanks, Patrick. It's Craig. And we have been asked by a number of folks if we could quantify our direct presence in China. So, you know, the largest part of our business in China is within private equity. And when you look at the fair value of investments of companies based in China as a percentage of our AUM, it's a low single-digit percentage of our AUM, so it's between a percent and a percent and a half, just to answer. Now, again, there's obviously a very large human element as it relates to what everyone is experiencing, but in terms of the specific question, that's the exposure.

Thank you.

Thank you.

Thank you. Our next question comes from Jerry O'Hara from Jefferies. Your line is open.

Great. Thanks. Maybe one for Scott. You touched on sort of those 20 strategies that are coming to the market over the next 12 to 18 months, perhaps even sooner. But I think, you know, kind of going back to the Investor Day comments, you talked about some of them being perhaps closer or coming up on respective inflection points. I don't know if there are some that have made, you know, more progress since then than others or some that you perhaps would highlight as kind of nearing that, quote, unquote, inflection point that might be worth highlighting. Thank you.

Thanks, Jerry. I'm going to ask Craig to do the first part, and I'll give some thoughts on the back end.

Yeah, sure. So, and, Jerry, thanks for the question. So last quarter, as I know you'll remember, you know, we highlighted the three benchmark strategies that we expect to be launched over the coming 12 months. That's Asia P.E., America's P.E., and global infra, and we're fundraising for our Asia PE strategy currently. Now, alongside of that, we also had noted that there were over 20 additional strategies that we expect to be fundraising over the next three years. So I think overall from a scaling aspect, there are actually a few prongs to this. You know, the first is that, you know, moving from fund one to fund two to three to four, I think that piece is pretty easy to understand. You know, this quarter, the growth that we've seen in our next-gen tech fund with its final close this quarter being three times the first is a great example. Second part would be geographic expansion. Again, we talked to the first close this quarter of our global infrastructure strategy relative – or, excuse me, our Asia infrastructure strategy as a geographic expansion alongside of our global infrastructure presence. Third would be adjacencies or fundraising for a core real estate strategy that fits nicely within – the suite of strategies we have within real estate. And that's alongside of the growth and scaling we have from our distribution channels, insurance and retail are both topics we've touched on historically as well as LP expansion. So I think you combine all of those things and we see certainly a lot of upside. And as Scott had referenced on the call, the conviction that we have in our ability to at least see management fees grow at least by 50%. again, over the next three years. Now, in terms of your question on scaling and timing, we don't have any specific guidance on when you would see that. You know, again, we've launched fundraising for one of those three benchmark strategies. We haven't launched fundraising for the other two benchmark strategies. So I think in that three-year timeframe, reasonable to think that that, again, that run rate number really, you know, you would see the back end of that period. But we feel very good about the opportunity we have and the first steps we've taken.

Yeah, I'd say, Jerry, the only thing I'd add is at the investor day and subsequent, we've shared slides kind of showing where we are for some of these platforms relative to where the largest player is. And as a reminder, we only want to be in businesses where we think we are or are on a path to be top three. And so the point we've been trying to make is there's a ton of opportunity for us to meaningfully scale a number of these businesses that we've started. I think the short answer to your question is we are on track or ahead today of where we thought we would be when we put that slide up for the first time in 2018. And that's everything from infrastructure, real estate equity and credit, growth, core equity, and then our broader corporate credit business, which we're focused on doubling again from here. So I feel really good about it. And several of those are right in that inflection point today. or nearing it. So that's one of the reasons you hear us speaking with such conviction on the visibility that we have for the firm.

Great. That's actually very helpful. And then just a follow-up around the dividend and the decision to increase it, perhaps some of the inputs or metrics that you kind of look to. Clearly, FRE is probably one of them. But kind of just if you could help us understand how you got comfortable increasing that dividend I think it's 8% in the coming year. Thank you.

No problem. There's not one specific metric that we take a look at. Really, we're focused on what the overall growth of our business profile looks like. What we have said and continue to believe is that we want to increase our dividend over time as our business scales. but we also want to ensure that we're retaining a significant amount of our capital to reinvest back into our business where we continue to see a ton of opportunity and also have additional capital available for share buyback activity.

Okay, that's helpful. Thanks for taking my questions.

Thank you. Thank you. Our next question comes from Mike Carrier from Bank of America. Your line is open.

Good morning, and thanks for taking the questions. Scott, first, just on the visibility, so you went through fundraising. You know, that makes sense. The net accrued, you know, and the realizations, tough to predict, but it sounds like, you know, the outlook's pretty good there. I guess just your comments on the balance sheet, like how should we be thinking about, you know, the appreciation that we've seen relative to the realization pace and, you know, how does that maybe shift or pick up? Like will it just be in line with, you know, realization activity, anything that's more nuanced there?

Hey, thanks, Mike. Look, I think the message on the balance sheet is that it's been performing really well. As you can see from the charts in the deck, you know, we've continued to see very attractive compounding over the course of the last year, which is just continuing what we've seen since we changed the dividend policy at the end of 2015. So the message is that we're really pleased with the underlying performance of the balance sheet. I think we've I've been very happy with the repositioning that we've made, and we're getting closer to our asset allocation targets. So it's all going according to plan. In terms of how do you think about how much of that we're going to realize, that is going to be very hard to give you any specific guidance. But what I will tell you is what we watch is what is the embedded unrealized gain that we have within that balance sheet. And the point that we're trying to make, if you look at – if you look at some of the slides and you look at, you know, slide six in particular in the deck, is the unrealized gain continues to increase. We're now at a record level. So embedded within that $22 billion of balance sheet assets is a $2 billion unrealized gain that we think will be realized over the next several years. And that's on top of the regular way dividends and other investment income that we receive through the balance sheet. So what I would tell you is, you know, expect to see a general upward bias as we continue to – to execute our balance sheet strategy. So that upward bias would not only be on book value per share, but also over time on realized gains in investment income.

Okay, that's helpful. And then just on the follow-up, Rob, you mentioned the comp ratio, you know, coming in a little bit better the quarter and then even the full year below that 40. Just trying to understand, like, should we read something into this in terms of You've seen that trend down. Have you continued to scale the business, or is it a little too early to be thinking that the corporation is heading lower?

Sure. As a starting point, I focus on the annual numbers and less the quarterly numbers. And so we were at 39% this year and 40% last year. What we've communicated, as you know, is that we're targeting a low 40% level. That is still the target, but we certainly hope to continue to scale our revenue and be in a position where we can bring that number down over time. And as we think about comp margin, we also do keep a close eye on overall operating margins, which were at 50% for the year, another target for us. And I do think it's fair to say that as we thought about our Q4 comp margin, we certainly had an eye towards that 50% overall margin and wanted to try and achieve that. Got it. All right. Thanks a lot. Thank you. Thank you.

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

Hi. Thanks. So I'm thinking about your capital markets comments, and they're a little lower than the last time I think you talked to us. And what's interesting is your commentary about the forward pipeline and the the $700 million worth of deals up from $400 million. Those two things don't have to be mutually exclusive, but they're interesting to me. So I guess the question is, it feels like you're confident in your capital raising and your exits and your realizations, but yet the capital market keeps coming down. Is it just a few less big, chunky deals, or is there anything to be said about pricing and what you capture on those deals? I'm just trying to square those two.

Yeah, thanks for the question, Glenn. I appreciate you clarifying. So let's take it in pieces. To be clear, the $700 million of unrealized gains, or gains that we expect to be coming through, sorry, in terms of carry and realized gains on the balance sheet, that's on the exit side. So those are things that we are exiting from the portfolio. And for the most part, exits don't result in capital market fees. Where the capital market fees tend to come from is exits that may be related to things like IPOs or secondaries, but the vast majority of the capital market fees are probably going to be from newer transactions or refinancings or activities in the portfolio on a regular way basis. So that's the first distinction I want to make. The second thing I want to make clear is we are not guiding you down on capital markets. What we're trying to do is make sure that you understand how we see the capital markets business from quarter to quarter. And a lot of that is going to be driven by that new deal activity or that refinancing activity level that I referenced. And so it's purely us just trying to give you a sense for what we see in terms of how the business is beginning to function, which is a baseline that even without large new deal activity, we see a significant amount of confidence in. And that's that 50 to 70 range that Rob mentioned. And then on top of that, when we have large transactions like we did in Q4, you will see some potentially meaningful upsides. And that's how you get to this kind of 100 million plus kind of number that we've been reporting six out of the last eight quarters. And that's why we've been averaging about, you know, 450, $500 million a year for the last few years. So we're just trying to do the buildup with you so that we have a way of talking about it with you going forward. and hopefully can help you understand why the results are coming out the way they are.

Okay, that is helpful. Thank you. One more quickie. The press has somehow gotten a hold of the notion that the private equity business is starting to get more activist in nature and taking minority pieces in public companies and being more aggressive on that front. I'm just – they used one of your investments in one of the articles, so I'm just curious to get your thoughts on if you feel like there's anything different at all going on in terms of how you go about your PE business.

Short answer is no. And we saw the articles, too. I think this should be real clear on elaborating. So I think this is a Dave & Buster's investment that we made that got some attention. I think, frankly, it got quite a bit of attention because of its consumer service's But to be clear, there's nothing new here from our standpoint. We've made 40 investments over the last several years in public companies, $3 billion. We're not activists in the traditional sense. We're working with the management teams of those companies in a constructive manner. I think the press ran with it a bit, frankly.

Cool. I appreciate it. Thank you. Thank you.

Thank you. Thank you. Our next question comes from Alex Glostein from Goldman Sachs. Your line is open.

Great. Thanks. Good morning, everybody, and welcome to the call. A follow-up question on capital market – sorry, capital management, I guess. So, Scott, you underscored significant visibility in your growth, both for management fees and carry as well as balance sheet realizations, and I appreciate the dividend increase of 8%, but the dividend yield is – Around 2%, that's obviously below your peers and below financials broadly. I guess given the confidence in the business, what would it take for you guys to pursue a more aggressive capital return strategy, whether it's a bigger buyback given comments around valuation or a higher dividend? Thanks.

Alex, I think we're really happy with our strategy. So I think the way we think about it is when we change the dividend policy at the end of 2015 – we basically were targeting a level that was at about the S&P 500 or S&P Financial's dividend yield. And not to say that's a hard and fast rule, but, you know, we've been in and around there since we made that change to a bit below. And as you can see, you know, what's been happening since we made that change is the book value per share has been compounding, and we bought back quite a bit of stock along the way. I think you should expect us to continue that general capital management policy which is a steady annual increase in the dividend, and then buybacks that really are used to, at a minimum, offset share dilution from compensation. And so those two elements of our strategy we're very pleased with. We think that will allow us to compound book value per share at a very attractive rate and also give us the capital we need to invest in growth.

Got it. Thanks. And then my follow-up around management fee growth, if we look at this quarter sequential growth, it was up modestly, but if you look at fee-paying ULM, it's actually quite up a bit quarter-by-quarter. I think it's up about 5%. Can you help reconcile, I guess, and just walk us through any timing dynamics that may have delayed some of the management fee recognition in Q4 that would help you guys out into Q1, starting off obviously a higher base share? Thanks.

Yeah, hi, Alex. It's Rob. You hit it. It's a timing issue. We had a couple of fund strategies that closed at the end of the quarter, one that was meaningful in size, and so it shows up in our fee-paying assets under management, but we're not going to start collecting management fees until T1. Awesome.

Thanks very much.

Thank you.

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

Great, thanks. Thanks for taking my questions, and Rob, good luck in your new role. First question, I guess, kind of maybe a little more kind of how you think of running the business. I mean, expanded, as you pointed out, a lot over the last couple of years. I have 20 strategies you're raising for, most of which are comparatively newer to the firm, at least over the last five-plus years. So I'm just curious how you've had to change or alter your investment strategy process, how your kind of decision-making is happening, and then with that, are you seeing any kind of pressure to change what's your somewhat unique kind of comp structure compared to some of your peers?

I'll take that. Thanks, Robert. So high level, you know, you're right. We have created a number of new strategies over the course of the last several years, and As we've talked about in the past, about 18 of the 22 investment strategies we have as a firm are new in the last decade. But, you know, a number of those businesses were started now multiple years ago. So five, six, seven, eight years ago, you know, it probably felt like there was a much higher percentage of brand new. As we sit here today, as we're getting on to fund two, fund three for a number of these strategies, You know, we actually don't feel as new as an enterprise as we did at that point internally. And so in terms of the running of the business, the investment process, the short answer is we haven't had to change it. You know, what we have done is we've created investment committees that are relevant to each of those strategies and portfolio committees that are relevant to each of those strategies, which is how we've run the firm for a very long time. We have hired people into the firm to help us build those businesses. alongside existing KKR executives. And everyone was hired into the firm's one firm comp structure. So everyone signed up for the culture and the compensation structure that we've always operated under. So there's no change there either. And so as we built both around the world and across strategies, we've been very purposeful in trying to make sure that we do it the way we built all KKR businesses. And so it really hasn't been the case that we've had pressure on changing our process or changing our comp structure away from what you would normally expect, given some of these businesses are a little bit more market-facing than some others.

Great. And maybe as a follow-up, you've clearly highlighted the potential for realizations, you know, over time, you know, with the building capacity there. But clearly as, you know, you know, investors that seem to be on a kind of, you know, concerned about the potential for you and your peers to kind of get those realizations over the, what's called the intermediate term. So understanding you can't predict, you know, specifics and you gave the color on what you have in the can so far. But is there any color you could give on how we should be thinking about where you think most likely realizations is the U.S., Asia, kind of any kind of sense of, you know, for thinking of your potential the next, say, you know, year or two, where you think that what may drive that on a high level?

I think it's pretty broad-based. What we're seeing inside the firm is that a number of the businesses that we just talked about that were created over the last five to ten years, and you understand that the management fees show up before the carry, but a number of those businesses are now maturing, and a number of those pools of capital are getting into their carry earning and carry paying years. And that's part of the reason you see slide four of the deck that Rob walked through, that $58 billion of cash carry paying AUM going to $93 billion. That is very broad-based when you look beneath it. It's Asia, Europe, and the U.S., and it is across multiple different businesses and strategies. And so when we think about the latent earnings power of the firm, Part of the reason we have this confidence is we have been watching these investments mature and now these funds being above their hurdle rate and getting to the cash carry paying phase. And so it is really broad-based. There's no specific theme I would call out for you, and that's part of the reason that we continue to see our carry diversifying and continuing to increase.

Rob, one thing, it's Craig, one thing I'd add. It is interesting when you look at the overall P.E., Performance in 2019, the portfolio as a whole was up 27%. Our privates were up 17%, so certainly strong performance as relates to the private part of the portfolio. Our publics were up over 60%. And so often as it relates to those companies that are public, those often are more mature investments for us. And you've seen some of the benefits of that even in the second half of the year with investments and monetizations we've seen in companies like SoftwareOne and Trendline. So just, you know, again, I think that's another interesting data point.

Yeah, so I guess what I would say, Rob, is I wouldn't get too worried about what happens in any one quarter. What we keep an eye on is the embedded gains on the balance sheet, as we referenced, and then the unrealized carry within our underlying AUM. And both of those are at record levels and up significantly over the last 12 months. And so that's what we're keeping an eye on for both the near term and the intermediate term.

Great. Thanks for taking my question.

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

Thanks, guys. A few questions on your incentives. I guess the first part is why were Marshall Waste incentives so low this quarter? It sounds like the growth has been pretty good over there. And then also, I think that line item is being impacted by lower BDC fees. So how much revenue is attributable to that, and what needs to occur for the BDC incentive fees to be recovered?

Hey, Chris, it's Craig. Let me take the first crack at that. So, you know, as it relates to incentive fees, you know, they were about 1.5% of our total revenues in 2019, a little less than that in terms of Q4 revenue. and the answer to the first part of your question does really relate principally to timing. So our largest hedge fund partnership incentive fees crystallize on 930, and we report those results on a one-quarter lag. So we see those through our financials in Q4. So in broad markets, you can think back to the fourth quarter of last year, as I'm sure you remember, was a very volatile one. The S&P was down about 14%. So the impact of this actually had no bearing on the incentive fee we recognized in Q4 a year ago. And instead, we felt that impact in our Q4 results this year, given the timing of when that incentive fee crystallizes. So that's what you see as it relates to that dynamic. And then overall, in terms of where we get incentive fees, you're right. We get incentive fees from our hedge fund partnerships, Those do tend to crystallize annually, and you will tend to see that in the fourth quarter. And then the second place we see incentives is from a handful of credit-oriented strategies and platforms, the largest of which is the BDC platform. Now, in terms of the BDC platform, we actually need to be a little cautious in terms of how we talk about this because, again, this line item is a small topic for KKR. Again, it's a percent and a half of our total revenues here. it's a more significant topic for a publicly listed BDC that hasn't reported their results yet. But in terms of that entity, FSK, FSK did state on their last earnings call that they expect incentive fees over the next few quarters to be muted. And I think really consistent with that disclosure, that's what you saw in Q4, as about 80% of the incentive fees for KKR in Q4 were driven by those hedge fund partnerships. Does that make sense?

Yes, it does. Thank you.

Great. Thank you. Our next question comes from Brian Bedell from Deutsche Bank. Your line is open.

Great. Thanks. Good morning, folks. A lot of my questions were asked and answered, but maybe just to zone in a little bit more on the capital markets and the 50 to 75 million quarterly run rate. I think you mentioned, I think, Rob, you mentioned 25% of the revenue from the capital markets businesses outside of KKR. Just wondering if that also applies to that 50 to 75 million core run rate, and then maybe talk about the efforts to grow that revenue stream outside of KKR, or is the 50 to 75 really just a KKR basis?

No, Brian. That 50 to 70 range that we gave would include our third-party capital markets business, and we think a decent rule of thumb for right now is that's going to be roughly a quarter of our business going forward. In terms of being able to grow that baseline, I think that comes from two areas. I think that comes from a continued growth of the KKR platform across different asset classes and continued penetration of of our third-party capital markets business that has a lot of momentum right now. So those would be the two areas that we think will help get that baseline number up over time. Okay.

Yeah, just to be really clear, Brian, just to jump in. So the 50 to 70, again, excludes what we see in terms of larger transactions. Last two years, we've deployed and syndicated a sum total of about $30 billion per year. Okay, so... We expect to have large transactions over the course of any given year. The message is in some quarters they close, in some quarters they don't, and that's what we're trying to clarify. But to be clear, the 50 to 70 is without those, and something like Q4, which was the $107 million, we had one of those close. So we're just trying to be transparent with you.

Yeah, no, totally. And it could be lumpy within KKR's – And with third-party as well. In other words, the lumpy part, that would be in addition to the 50 to 70, you really could be anywhere. Or is that also much more heavily skewed just to KKR deals?

I'd say the larger deals are going to be likely more skewed, especially the ones where we make 30 to 70 million per transaction. They tend to have an equity and debt syndication element. You can have larger third-party deals as well. but they tend to top out in the $10 million to $20 million range, just to give you a sense.

Got it. That's a great color. And then maybe, Scott, just if you want to comment a little bit on the deployment environment, given obviously markets have moved quite nicely this year and valuations broadly are stretched, where do you guys see better opportunities? Where are you more cautious? Are you focused? in general about the deployment environment, you know, more cautious overall, or continue to see plenty of opportunities given your breadth of investment capability?

Yeah, let me just give the high level, and I'll let Craig run through kind of what we're seeing around the world. I'd say on the whole, the average is light. So when you're looking at a market multiple, we're finding that that really can be a very misleading statistic. because the markets are incredibly bifurcated. And so we're seeing significant dispersion in multiples. It's the have-have-not dynamic we talked about the last few quarters, where if you've got growth and simplicity, valuation multiples are incredibly high. If you've got complexity or less growth, you can be left behind by the market. So we're really seeing this dynamic around the world of a bifurcated market, and in the U.S. certainly, and in other parts of the world, a bifurcated economy. And so within all of that, you have a lot of complexity, and we're finding a lot to do, but it is not stuff that would be apparent reading the popular press. It's very much on-the-ground type work, and the overall theme, I would say, is we're continuing to buy that complexity and sell into what the markets want, which is that simplicity. And so with all that as kind of a global overarching kind of all-product area statement, Craig, why don't you run through what some of the themes are most focused on?

Yeah, I'd say, Brian, let me touch on private markets first. A few things to note. First, as it relates to private equity, we have been seeing more opportunity, better risk-reward outside of the U.S., and part of that is valuation-related. If you look at total returns over the last five years, returns of the S&P have exceeded the MSCI Asia-Pacific by almost 2x. So I think we have been seeing that risk-reward, and you see that in some of the deployment figures. And some of that is secular. So we've talked on these calls for some time of the drivers of our activity in Japan, and that continues. Activity in Europe almost has three prongs. So there are corporate partnerships. There are growth and tech opportunities. And we're making investments alongside of families. We've done this recently in Germany as well as Sweden. Asia, again, we talked about the partnerships in Japan. We acquired Campbell's International. It's a carve-out from Campbell's Soup Company for our core strategy, another example of a carve-out transaction. And I think in an area like infrastructure, we've been leaning into midstream. So over the course of the year, we closed on a Western Canadian midstream joint venture and oil pipeline investment in Abu Dhabi. So that's been an active area for us. And again, as I think as it relates to public markets, And I think what – and we touched on this in the prepared remarks. You know, the activity that we saw in private credit, both here and in Europe, was interesting. You know, the syndicated market in the second half of last year was very unfriendly to new issuers. And if something wasn't well known to the market, reception was very poor. It, again, goes back to Scott Tavenham's comments. Now, this backdrop can be great for private credit solutions, and that's really what you saw in the back half from a deployment standpoint.

Great. That's great, Colin. Thank you.

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

Yeah, good morning. This was the second quarter in a row where your interest and dividend income was over $180 million, and that line used to run like $60 million, $70 million. So I assume it's either some kind of dividend recap or margin loan, and I'm wondering, does that relate just to your balance sheet investment, or can you have margin loans against the carried interest receivable as well? Or does it?

So that number specifically around our balance sheet, in both cases, we did a dividend, a large dividend in both Q3 and Q4 out of Pfizer. I'd say on a run rate basis, while we're not going to guide a specific number, but, you know, run rate interest and dividend line item is going to be closer and more in the ballpark of what it was in Q4 of 2018 than what it's been in Q3 or Q4 of 2019.

Okay, when you say you did a dividend out of Fiserv?

Basically what we did, Chris, is we did a second, you know, draw on the margin loan that we talked about last quarter against our Fiserv position.

Oh, okay.

It shows up as a dividend as opposed to, you know, some kind of sale. That's all.

Okay. And it relates only to the balance sheet position, not to anything in the carried interest receivable that you've got accrued.

That's correct, yeah.

Right. And when you referenced the $700 million before, that is in terms of carry or in terms of – I assume that's in terms of carry, not in terms of transaction value.

So, yes, that's right. That's both a carry – that's a realized carry and a realized balance sheet investment income in, you know, we think the first half of 2020.

That we can see today, and it's the end of January, I think is the important point. So there's – That's why we've got a lot of visibility and not even February yet.

Right. Okay. Got it. Thank you so much.

Thank you.

Thanks, Chris. Thank you. Our next question comes from Michael Cypress from Morgan Stanley. Your line is open.

Hey, good morning. Thanks for taking the question. Just wanted to circle back on the deployment levels. They were up nicely year on year, especially in the public market segments. I'm just curious how you would characterize the pace of deployment – And 2019, is this elevated in your view at all and how to think about the right pacing and run rate of deployment into 2020?

I don't think, Michael, I would call it elevated. I'd say one place we probably did see it elevated over the course of the year is what Craig mentioned around private credit in the fourth quarter, which, you know, if you look at our alternative credit strategies, we deployed $4 billion in that's a big number. If you were to annualize that, I think that would be a bit misleading. But when I look at the year as a whole, as I kind of mentioned over the last couple of years, we've been in and around $30 billion of deployment and syndicated capital. And given our growing capital base and the growing activity we have all around the world, I think all else equal, you would expect to see that number continue to go up.

Great. And just to follow up maybe – just on retail initiatives. Maybe you could just update us on how much you raised in 2019 versus 2018 and maybe talk about some of the new strategies you're introducing, the overall sort of approach to the retail channel. And there's been some recent regulatory proposals out there. I guess just how meaningful are you thinking about that for growth?

Hey, Mike, it's Craig. Let me take the first part. Sure, on the retail and high net worth side, high net worth, excuse me, look, we've gone from about $9 billion of AUM in 2015 to $37 billion today. And so that CAGR is approaching 50%. And on the one hand, while those numbers are significant and that dollar value is significant, it still feels to us like we're just getting started. But when you look at the capital that we raised from individuals, that's high net worth, ultra high net worth platforms, that number was about 20% of new capital raised in 2019. It was actually a little higher than that. So it's a significant number And I think as we think about the opportunities in this channel, we do think our brand is something that is really impactful for us. It's a great asset. Now, in terms of the end of the question as it relates to the definition of an accredited investor, a couple of thoughts there. Look, I think we're encouraged by the SEC's efforts to expand that definition in standards. Now, in terms of our activity to date, almost all of our structures are private 3C7 funds, which can only be offered to qualified purchasers as opposed to credited investors. So the impact of this in terms of what we've been doing is actually a little muted. However, looking forward, we have several initiatives for retail high net worth and development that would focus on this space. And so I think the proposed amendment, if it's adopted, would expand that pool of investors.

Yeah, the only thing I would add, Michael, is at a high level, we're going to be introducing multiple products into the retail space, and we're hiring more people. And so we're staffing up to do even more in retail over the next several years. And so you'll continue to hear us talk about that. And my expectation is over time, the number Craig mentioned, which has been 20% of last year's capital raised, that 20% I think is going to keep going up.

Great. Thanks so much. Thank you.

Thank you. Our next question comes from Bill Tett from Citi. Your line is open.

Okay. Thank you very much for getting on, and a lot of congratulations on the promotion. Just maybe to follow up on, and I think maybe some of this might have been embedded in your discussion about the outlook over the next couple of years, but how do you think about the interplanetary margins from here? Obviously, there are a lot of things you're investing in, but at the same time, you're scaling something very significantly. Can you continue to migrate that margin up from here, or is it more just to sort of tie it back in and sort of hold where you are as the assets scale?

Hey, Bill. It's Scott. Our expectation is you're right. We're going to be continuing to scale our businesses, and that will allow us to bring margins up. We're going to be reinvesting. some of that back into growth and distribution, technology, a number of other areas. Our view is the net of all that will allow us to increase our margins over the next several years. And so that should be your general expectations, that you will see that margin gravitate upward. We're not going to give, you know, any guidance per se by period, but that is what we're working to do net of the reinvestment.

Great. That's helpful. And just one more conceptual coming back to, like, what you might look like a couple years from now. So if you continue to scale your platform, part of your balance sheet strategy has been to accelerate that scaling. But as you ultimately scale to where you think you can get to, does the balance sheet just in general become a little less salient and that longer term you might look to reconsider your payout ratio and that was then the fact that you said in the near term no major changes?

I think your expectation should be that we continue to grow our balance sheet while we continue to grow our fee-paying AUM. I think that should be your general expectation. From a capital management standpoint, I think our investors should expect that we're going to continue to compound book value while we compound AUM.

Craig, the only thing I'd add on that is, remember, employees own roughly 40% of the stock. So there is great alignment in terms of the stock price, and that is something that from an IR standpoint we feel every day when we go to the lunchroom. So, again, just keep that in mind at the same time.

Excellent. Thank you very much for taking the questions today.

Thanks, Bill. Thanks, Bill.

Thank you. And we do have a follow-up from Michael Cypress from Morgan Stanley. Your line is open.

Oh, great. Thanks for taking that quick follow-up here. Just wondered on the balance sheet, wondered how much was deployed and realized off the balance sheet in the quarter?

Sure. We deployed off the balance sheet roughly a billion dollars of capital through the year. And then we monetized roughly $350 million of capital through the quarter. So there's a billion of deployment and 350 and monetization.

And that's for the quarter, right?

Yes.

Okay. Thank you.

Thank you.

Thank you. And that does conclude our question and answer session from today's conference. I'd now like to turn the conference back over to Craig Larson for any closing remarks.

Thank you, Crystal. Thank you, everybody, for joining the call. Please, of course, follow up with us with any additional questions. We look forward to chatting next quarter.

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