KKR & Co. Inc.

Good morning, everyone. Welcome to our first quarter 2022 earnings call. This morning, I'm joined by Scott Nuttall, our Co-Chief Executive Officer, and 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 KTR.com. And as a reminder, we report our segment numbers on an adjusted share basis. This call will contain forward-looking statements which do not guarantee future events or performance. Please refer to our earnings release and our SEC filings for cautionary factors about these statements. So we're pleased to be reporting strong results this morning. Fee-related earnings per share for the first quarter were 69 cents, up 66% year-over-year. And as high a quarterly figure as we've ever reported, And after tax, DE per share came in at $1.10. That's up almost 50% compared to the first quarter of 2021 and is the second highest quarterly figure we've reported. And when you look at the quarter, our results and our activities, you're seeing really four things. First, you're seeing the strength and resiliency of our model as well as our people. Despite all of the volatility and uncertainty, we're reporting strong results pretty much across every metric. Second, as businesses inside KKR are growing and scaling, they're inflecting, and they're having a real impact on our numbers. In private markets, for example, our infrastructure and our real estate platforms have scaled, so our real asset strategies comprised over half of both our fundraising and our deployment over the last four months. Third, we're finding creative ways to enhance our strategic positioning. Last week we closed on the previously announced acquisition of a Japanese REIT business. It's one of the largest real estate platforms in the second largest real estate market in the world. And finally, despite the volatility and increased uncertainty, our limited partners are continuing to entrust us with their capital. Strong investment performance has been a critical driver of all of the success that we've had here. Now looking at a few topics in more detail, let's begin with fundraising. New capital raised in Q1 totaled $26 billion and $132 billion over the last 12 months. Of note in private markets, both our Global Infrastructure IV Fund and North America Fund 13 held final closes in the first quarter. Including employee commitments, Infrastructure IV totaled $17 billion. That's over two times larger than Infra III. And North America 13 closed out at $19 billion, over 35% larger than its predecessor. Also, we're continuing to raise capital for our European private equity strategy. At this point, we are at $7.1 billion, already surpassing in size the prior European PE vintage. And it's worth highlighting the regional approach we've taken in our traditional private equity business. with individual funds across the Americas, Asia, and Europe, instead of having a single global fund. We think this allows us to maximize our fundraising potential. Committed capital across our three regional private equity funds currently exceeds 40 billion, and we're still raising capital for our European PE strategy. At the same time, it allows us to diversify our carry pools, reduces our vintage risk across these funds, And importantly, we're less susceptible to the tone of the fundraising environment at a single point in time. And in public markets, 9 billion of new capital raised is among the highest quarterly figures we reported. Activity here was widespread, including hedge funds and credit. In alternative credit, we raised capital across our asset-based finance, Asia credit and direct lending strategies, private credit strategies in Europe, and the next vintage of our opportunistic strategy, And in leveraged credit, we saw activity across a number of separately managed accounts and loan strategies, in addition to our CLO business, where we issued our 41st U.S. CLO in the quarter. Global Atlantic closed on a block transaction in the quarter, which contributed $3 billion. This is reflected in both private and public markets. And so these fundraising efforts helped bring AUM to $479 billion and fee-paying AUM to $371 billion both up approximately 30% year over year. Turning to investment activities, capital invested in the quarter totaled $21 billion. In private markets, our real assets platform invested $9 billion of capital, including $4.5 billion in real estate, driven by activity in our Americas and our European opportunistic equity strategies, as well as real estate credit. Our infrastructure platform invested over $3 billion of capital led by activity in the US and Asia, with $3.5 billion of PE deployment relatively evenly spread across geographies. In public markets, GA has really added to the pace of investment activity in private credit, most meaningfully in asset-based finance, as well as in direct lending. Spending a minute actually in asset-based finance We invested in ABF across a number of pools of capital that are all looking for different risk reward, all the way from our private credit funds and our BDC platform to Global Atlantic. So the addressable market for us and available investable capital has increased materially as our credit platform's grown. We're excited about this. And deployment here has become meaningful. In the quarter, total ABF deployment was a little over $5 billion. And we had 2.4 billion in direct lending activity in Q1 alongside of this. Now shifting to investment performance, you can see these details on page seven of the press release. The private equity portfolio was marked down 5% in the quarter, which was right in line with the decline of the MSCI world. While over the last 12 months, the PE portfolio is up 19%, 800 basis points ahead of the MSCI world. In real assets, our portfolios continue to perform. In real estate, the opportunistic portfolio feels well positioned given its focus on industrial and multifamily themes. You see the opportunistic real estate portfolio appreciated 11% in the quarter and is up 30% over the last 12 months. And in infrastructure, a strategy in our view that's also well positioned in an inflationary environment, you see the portfolio appreciated 6% in the quarter and it's up 11% over the last 12 months. On the credit side, leveraged credit was down two for the quarter and up three over the last 12 months, essentially in line with broad high yields and leveraged loan indices, while alternative credit was down one in the quarter and up 9% LTM. Circling back to the acquisition of the Japanese REIT, which is now known as KJRM, the acquisition adds AUM, but it really goes far beyond that. It's a wonderfully strategic transaction for us across a number of areas of focus, including real estate, Asia, perpetual capital, as well as private wealth. And one final note here, as a piece of the financing for the acquisition, in April we raised approximately $475 million equivalent of Japanese yen denominated notes across a range of maturities at a weighted average coupon of around 1.2%. And with that, I'll turn the call over to Rob.

Thanks a lot, Craig. I'll try and quickly step through our quarterly financials. Our management fees continue to scale at a really rapid pace, increasing by 46% in the LTM period to $2.3 billion and reaching $625 million just for the quarter alone. Our management fee growth this quarter was really driven by the fundraising activity that Craig ran through. Of note, Europe 6 entered its investment period in the quarter. and we had approximately $20 million of catch-up fees from the final closes of Americas 13 and Infra 4. Our capital raising success, alongside our investment activity, brought fee-paying AUN to $371 billion, which is up 29% year-on-year. Our net transaction and monitoring fees were $306 million for the quarter, driven primarily by our capital markets franchise, which earned $255 million, almost $1 billion for the LTN period. The quarter's transactions, consistent with past trends, were diversified across clients, strategies, as well as geographies. Our operating expenses totaled $126 million for the quarter. As discussed on previous calls, we would continue to expect modest increases here as we expand our footprint, invest in marketing and technology, and hopefully have our employees back out on the road and traveling. When you pull it all together, our fee-related earnings this quarter increased to $605 million. That's up 66% compared to just a year ago. Moving down our income statement, our realized carried interest totaled $580 million in the quarter, while realized investment income came in at $349 million. In any environment, we think these are very solid results. However, when you layer on the volatility in Q1, we were quite pleased in our ability to achieve this outcome and very much reflects the breadth and scale of our firm today. Turning to our insurance segment, we had a very solid quarter generating $116 million of operating earnings. In aggregate, our after-tax distributable earnings were $969 million for the first quarter, or $1.10 per share. I now want to turn to our balance sheet for a moment. During periods of market volatility, we'll hear from some who are concerned that the balance sheet increases our risk profile. That's not our perspective. It's actually quite the opposite. So we thought it'd be worthwhile explaining what we believe to be true, that having a balance sheet, especially one with the attributes of ours, is a meaningful differentiator and a real positive during periods of market dislocation. Let's begin with the liability side of our balance sheet, which we think is pretty unique and a real source of differentiation. We are very fortunate to have access to long-dated and low-cost liabilities. The average maturity of our recourse debt outstanding, including our recent yen issuance, is approximately 20 years, with a weighted average coupon of about 3.5%, and 100% of that coupon is fixed. So we have minimal duration risk, no exposure to margin calls, our after-tax cost of debt is less than 3%, and we have no risk around rising interest rates. In terms of the asset side of our balance sheet, as you'd expect, we have a very deep commitment to asset allocation and risk, which has helped deliver exceptional results for our shareholders. Over the last one, three, and five years, our annual returns have been 15%, 20%, and 16%, respectively. And as we go a layer deeper around KKR's investment portfolio, one of the key strategic decisions we made a number of years ago was to launch a core private equity business. It's a great example of how we used our balance sheet to help create what we believe is today the largest business of its kind and an important contributor to our management fees and fee-related earnings, as well as representing the largest allocation we have on the balance sheet today. Core private equity is a long-duration investment strategy. We expect to hold these investments for 10 to 15-plus years and believe they carry a more modest risk-return profile compared to traditional private equity. We're looking for mid to high teens gross IRRs that we can compound for north of a decade. These are businesses we believe have strong secular tailwinds with defensible market positions, solid cash flow dynamics, and as a result, benefit from a more stable earnings profile. And with equity and fixed income indices off five plus percent in the quarter, a key reason our balance sheet portfolio was flat in Q1 was the 3% appreciation in our core portfolio. This portfolio is performing extremely well, and we believe has many of the right attributes to outperform if we go through a period of volatility and real inflation, including having real pricing power. Today, core private equity accounts for 30% of our balance sheet investments, or $5.5 billion. Now, we entered core private equity not only because we thought it would be a stable long-term compounder for our balance sheet, but also because it's highly synergistic with our overall business model. We were confident that we had the ability to become a global leader in core PE asset management and that our capital markets business would be able to support these investments over time as they access both the debt and equity capital markets. So from a standing start five years ago, we've put together this incredible global portfolio, which now number over 15 companies and growing. And with $32 billion of AUM, that is third-party capital together with balance sheet capital, we believe we have the largest core PE asset management business in the world. And our returns since inception have been very strong, with a gross IRR of 26%, which gives us the confidence that we'll be able to continue to scale the franchise. And alongside the management fees we'll earn over the duration of these long-dated investments, we are also entitled to an annual allocation of carried interest from our clients, which we earn every Q1. For 2021 performance alone, we generate approximately $250 million of carry, which is reflected in Q1 results. So the opportunity for performance-related revenue can be a very significant one over time with continued compounding, deployment, and performance. Moreover, our core portfolio companies have generated approximately 10% of capital markets fees over the last couple of years. And as the portfolio grows, we'd expect transaction activity to grow alongside it. So to recap, we have created an exposure on our balance sheet that has performed extremely well and has more stable return characteristics. And we have been able to meaningfully augment our asset level return by becoming the leading asset manager in the space and therefore creating a combination of incremental management fees and carry as well as capital markets revenues. Given the increased scale and diversification of our balance sheet portfolio, we have decided to enhance our disclosure. In our 10Q, beginning this quarter, we will provide the 20 largest balance sheet positions with their cost and fair value, instead of just our five largest investments. We think this will enhance transparency, and with 13 of the top 20 positions as of March 31st being core private equity investments, it will help highlight the performance of this portfolio going forward. Now, turning back to our broader balance sheet strategy and the benefits it provides in periods of dislocation. We think this is the type of environment where our connected and collaborative business model excels. This was particularly evident in the first half of 2020, where I think we really outperformed. Having access to this additional source of capital when the market goes risk-off is hugely valuable. And we would bet all investment firms would love this additional source of liquidity in markets like these. And finally, there's obviously a huge advantage of this capital base as we pursue strategic acquisitions. The best example of that, there is really no way that we would have been able to pursue Global Atlantic in early 2020 when capital markets were severely dislocated without the benefit of our capital base. And as Craig mentioned, we recently announced a highly strategic acquisition of a Japanese REIT manager where we funded the entirety of the BillionAid purchase price without issuing any equity. We understand the value of that limited dilution to all shareholders, especially right now given our current trading price. Between these two transactions alone, we expect to generate well north of $300 million of fee-related earnings next year, with most coming from perpetual capital. And we required relatively little equity dilution to be able to achieve that. So we're using our balance sheet to generate really high ROEs while at the same time creating additional FRE. And while supporting all this business building and inorganic activity, we've used the balance sheet to buy back our own stock. Since 2015, we have used $2.2 billion to repurchase or retire 85 million shares at a weighted average price of $25.50. So hopefully that helps provide additional context around the balance sheet, including some examples of its strategic value and how that can enhance overall economic outcomes across different market environments. With that, let me hand it off to Scott.

Thank you, Rob. It's been a dynamic three months since our last call, and there's certainly more information to process and uncertainty to navigate. While environments like this are anxiety creating for most, it is exactly times like this when the strength of our culture and business model becomes more apparent. Our connected firm and culture is excellent at making sure information travels and opportunities find the right pool of capital. With valuations down and cost of capital up, more companies need solutions that are not readily apparent. And our clients want more information. The result is the investments we make during times like these have the potential for higher returns. And our clients develop an even better understanding of what makes us special. Said another way, when dislocation occurs, you get a real sense for culture, and investment acumen. And we feel incredibly well positioned for this environment. We have record dry powder. We have clients that trust us. We have multiple growing businesses globally. We have sustained our connected culture. And we feel ready for what's next. I'm sure we'll talk more today about the macro and what all this means. But regardless of speculation about near-term rates, inflation, and the economy, we remain focused on executing our strategy and confident we will achieve the five-year plan we shared with you in November. With that, we're happy to take your questions.