KKR & Co. Inc.

Ladies and gentlemen, thank you for standing by. Welcome to KKR's second quarter 2020 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 operator assistance during the conference, please press star zero on your telephone keypad. I will now hand the call over to Craig Larson, head of investor relations for KKR. Craig, please go ahead.

Thank you, Operator. Welcome to our second quarter 2020 earnings call. As usual, I'm joined this morning by Scott Nuttall, our co-president and co-CUO, and by Rob Lewin, our CFO. We would 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. please refer to our SEC filings for cautionary factors related to these statements. 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 we hope that you and your families, of course, are safe and healthy. To begin, as a reminder, in early July, KKR signed a definitive agreement to acquire Global Atlantic Financial Group, or GA. The acquisition is subject to regulatory approvals and closing conditions and isn't expected to close until early 2021. So while Scott's going to touch on GA in a few minutes, the quarterly results we're going to discuss on this call exclude the results of Global Atlantic. The presentation and transcript from our investor call that introduces GA and all of the opportunities that we see resulting from the acquisition are both available on the Investor Center section of our website. Also of note in the quarter before I turn to the supplement, on June 26th, we were pleased to be added to the Russell Index family, including the benchmark Russell 1000 and 3000 indices. This is just the most recent step in the evolution of our structure and our shareholder base. Since we announced our conversion from a partnership to a traditional corporation in May 2018, we've seen a meaningful increase in our mutual fund and index ownership, And our stock is up over 70% on a total return basis over this timeframe compared to negative 7% for the S&P 500 financials index. Alongside our fundamental performance, the changes we've made to our structure and reporting have played an important part in this. And we continue to meet with new potential investors who haven't evaluated our sector or KKR before. Let's turn to page two of the supplement to go over our key metrics. Looking at the top half of the page, you can see AUM this quarter grew to $222 billion. With global equity indices up modestly over the last 12 months and high-yield and leveraged loan indices down over this period, our AUM has increased 8% year-over-year. Alongside investment performance in Q2, we had a strong fundraising quarter with $16 billion of new capital raised. Driven by fundraising and capital deployed, management fees over the last 12 months were $1.3 billion, up 13%. Looking at the bottom half of the page, our book value per share this quarter came in at $17.73 per share. This is up 7% from the $16.52 we reported last quarter. And as you can see, even amidst significant volatility over the last 12 months, Our book values remain relatively steady compared to the $17.81 per share reported a year ago. And finally, our after-tax distributable earnings came in at $326 million for the quarter, or $0.39 on an adjusted per-share basis flat from Q2 last year. That brings us to $0.80 per share for the first half of the year, up 5% compared to the first half of 2019, and over $1.4 billion of after-tax DE over the last 12 months. And one additional point when you look at the bottom right-hand chart. The top part of the bars, the lighter shaded portion, reflects realized balance sheet gains, which can be more episodic in nature, as we're also going to look to compound value on the balance sheet. So where we've seen more consistent growth is reflected in the bottom, darker portion of the bars, our fees and carry, in addition to interest, income, and dividends. Turning to our summary financial results, please look at page three of the supplements. Focusing on our results for the second quarter of 2020, management fees were $333 million, up 10% compared to the second quarter of 2019. Our realized performance income totaled $355 million. Despite all of the volatility, it was a good realized carried interest quarter for us with carry generated across the firm. Over 90% of the carry came from investments outside the U.S., with over half coming from non-private equity strategies. The largest exits in the quarter were accomplished in a blended multiple of approximately three and a half times our cost. With $90 million of realized investment income, our total revenues were $892 million this quarter. Now looking at our expenses. Compensation, including equity-based comp, totaled $357 million, with our comp ratio once again this quarter coming in at 40%. We noted last quarter that even with market volatility and an uncertain monetization backdrop, that we would maintain our expected comp ratio, low 40s as a percentage of total revenues, for the remainder of 2020. So this quarter is at the low end of that guidance. Non-compensation expense totaled $86 million in the quarter, which is down from the $99 million reported in the second quarter of 2019 due to prudent cost management. All of these results lead us to an operating margin of 50% and after-tax distributable earnings of $326 million, which again translates to that $0.39 per share figure. And with that, I'd like to turn it over to Rob.

Thanks a lot, Craig, and hello, everyone. I'm going to begin with some thoughts on our financial performance over the first half of 2020, and then we'll spend some time on our investment performance before reviewing our fundraising and deployment activities. To start, please take a look at the right-hand side of page three of the deck. We've all clearly experienced significant market volatility year to date. Recognizing that dynamic, I think the resiliency of our business model is best highlighted by our results in the first half of 2020 compared to 2019. One of the key financial metrics that we utilize as a management team and we know is a critical focus for our investors is after-tax distributable earnings per share. We were flat in Q2, and for the first half of 2020, our after-tax DE per share is up 5% relative to the same period last year. To be up 5% in such an important profitability metric does represent, we believe, differentiated performance relative to a broad set of comparables and speaks to the resilience of our model. I thought it would be helpful to spend a minute on this call walking through some of the drivers of our performance. Let's start with revenues. which totaled $1.8 billion for the first half of the year and are up 4% year over year. Our revenue contributions have really been broad-based. Our most stable form of revenue, management fees, are up 12% over the first six months of the year. Our carried interest has also been a meaningful contributor this year, as we have benefited from both strong investment performance and monetizations in several funds. Importantly, this across different geographies and products. which has resulted in over $700 million of realized performance revenue year-to-date. That is up 25% relative to last year. And finally, our balance sheet continues to be a meaningful source of realized revenue, contributing $235 million in the first half of 2020. As it relates to our expense base, as Craig mentioned, last quarter on this same call, we committed to run KKR at a low 40% variable call margin, even through the volatility. Given our performance year to date, we are accruing total compensation, which includes equity-based comp, at a 40% margin, roughly flat to the same period last year. Moving to our non-compensation-related expense. Like many corporates, we have benefited from the reduced operating spend of having most of our employees working remotely. In addition, our management team has been very focused on trying to reduce our cost footprint. Wherever we are able to do so responsibly, and without jeopardizing future growth. While you can see this reduced operating cost on a year-to-date basis, it's most pronounced in Q2, where operating expenses are down approximately 13%. As a result of both our revenue and cost performance, our distributable operating margin has increased by approximately 100 basis points year-to-date and is tracking right around 50%. All of this results in after-tax VE per share of 80 cents for the first six months of 2020 compared to 77 cents for the same period in 2019. So our revenues are up, our margins have improved, and most importantly, our distributable earnings per share are up 5%. In addition to some of the P&L metrics, fundraising has also meaningfully accelerated through the first half of the year. Our new capital raised is up almost two times in 2020, relative to the same period in 2019. Looking at our results in full, our model is proving that it can hold up quite well during periods of market uncertainty. Turning to investment performance, please take a look at page 4 of the supplement. Generally, we tend to focus on the trailing 12 months, but on this page you'll also see we have included performance figures for the quarter given how volatile markets have been. Our private equity flagship funds returned 14% over the trailing 12 months. That compares to the total return for the S&P 500 and MSCI World indices of 7% and 3%. Our flagship real estate and infrastructure strategies returned 13% and 30%, respectively, over the last 12 months. The sale of Deutsche Glasfaser closed in the quarter, which was a very meaningful monetization for our infra business and is a big driver of our LTM performance. In credit, we had a very positive quarter. Leveraged credit, the largest of our credit businesses by AUM, was up 11% in Q2 and flat over the LTM period. Alternative credit was up 2% in the quarter and down 10% LTM. Alternative credit is a combination of our private performing credit strategies, which had good relative performance, and our distressed portfolio, which took some marks LTM. This all compares to the LSPA index over the 12 months, which declined by about 2%. In terms of our balance sheet, our investment portfolio appreciated 8% this quarter, driving the increase in our book value per share to $17.73. Of note, our net accrued carry balance increased 27% in the quarter. Turning to fundraising, please flip to page five of the supplement. As mentioned earlier, we're finding this a good environment to raise capital. On this page, we show the quarterly capital raised over the past five years, where we have averaged around $7.3 billion per quarter. This compares to the $16 plus billion we raised in Q2, which is a record quarter for us as a public company in both private and public markets. In the bar on the far right, you can see how this $16 billion breaks down. The largest component is the capital raised so far for our Asia private equity strategy, one of our flagship raises. Including capital from initial closings through July, our Asia IV fund is currently at approximately $11 billion, which is already 20% larger than its previous vintage and the largest Pan-Asian private equity fund in the world. We will provide further updates on the fundraise as it continues to progress. The second component, $4.2 billion, encompasses first-time funds and adjacent strategies. As we have talked previously about increasing our management fees by at least 50% over the coming three years, Flagship funds are definitely important, but scaling up these newer strategies are also critical to achieving that goal. You're now starting to see the impact as new capital is raised in areas like Asia Infra, which now totals $2.5 billion, as well as Asia Real Estate, Core Plus Real Estate, and our dislocation strategy. And finally, in the quarter, we raised capital within leverage credit, we issued two European CLOs, and earned our pro rata portion of inflows at Marshall Waste, all of which show up in the additional components. Turning to page six, I want to spend a few minutes on one aspect of our business that we believe is very differentiated. We've spoken frequently about the significant growth opportunities we have ahead. Maybe our biggest is in Asia. Over the past 15 years, we've created the leading private equity franchise in the region. In addition, for a number of years now, we've been hiring local talent and building integrated teams across many non-private equity strategies. As a result, you're starting to see our asset management footprint across Asia really start to scale. We are the clear leader in private equity, and we're benefiting from the direct expansion of some of our non-PE strategies, with capital raised in infrastructure and real estate, with more to come over time in areas like alternative credit and growth equity. As you can see on the page, over the past 12 months, AUM has increased from $19 billion to $30 billion, with a lot of running room still ahead of us. Looking at the right-hand side of the page, you see the current run rate pro forma management fee impact of this new capital raised. With Asia Forward now turning on in July, the net impact of this collective fundraising has added approximately $100 million of run rate management fees. Between the continued economic growth in Asia, secular tailwinds for the alternative space in the region, and our differentiated track record as well as best-in-class local teams, we really believe our Asia business can be as big as our North America franchise in the coming years. Finally, turning to deployment on page seven. Last quarter, we talked about the global financial crisis and how it was formative for our firm and drove us to meaningfully expand our business in the post-crisis years. We wanted to better position ourselves to play offense during periods of dislocation. And we've done just that, having really been on our front foot from a deployment perspective. As you can see on this page, we've invested or committed approximately $30 billion so far this year. This has been pretty evenly split between public and private markets. Our public markets activity includes our traded credit as well as our alternative credit deployment. Mid-February through April was an exceptionally active period for this business when the market saw significant dislocation. Given our recent fundraising, we now have over $4 billion of AUM for our dislocation strategy. Approximately 30% of this capital has already been invested or committed. Focusing on private markets, which includes closed as well as pending investment activity, deployment has been across a wide range of strategies and geographies and is reasonably split between U.S., Europe, and Asia. Our global infrastructure team has also been active, with approximately 10% of our investment activity coming from this asset class. And with that, let me hand it over to Scott.