KKR & Co. Inc.

Good morning, everyone. Welcome to our third quarter 2022 earnings call. This morning, as usual, I'm joined by Rob Lewin, our Chief Financial Officer, and Scott Nuttles, our Co-Chief Executive Officer. 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. 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. I'm going to begin the call by spending a few minutes walking through the quarter. So we look at our results. and think they really highlight the resiliency of our business model. Our management fees for the quarter were $671 million. That's up 20% compared to Q3 of last year. Management fee growth for the quarter, as well as over the last 12 months, has been most meaningful within our real assets business, which as you'll recall, we began reporting separately last quarter. Net transaction and monitoring fees were $168 million for the quarter, with capital markets contributing $116 million. To go through our expenses, our fee-related compensation margin, consistent with prior quarters, was 22.5%, and other operating expenses increased modestly from last quarter, coming in at $146 million. In total, our fee-related earnings grew to $542 million, or 61 cents per share, with an FRE margin of 61%. This is now the eighth consecutive quarter that our FRE margin has exceeded 60%. Next, realized performance income was $498 million, with realized carried interest driven by monetizations of CHI overhead doors, Fiserv, as well as MaxHealthcare. Realized investment income was $285 million driven by similar monetization events. Adding these two lines together, so looking at realized performance income together with realized investment income really to get a complete picture of our monetization activities, total realized gains for the first nine months of the year are 10% ahead of last year. Given all of the volatility experienced across markets in 2022, With it, we think this speaks to the breadth of our platform, and again, the resiliency of our business model. So overall, our asset management operating earnings were $959 million, and our insurance segment had another very strong quarter, generating $127 million of operating earnings. Together, this resulted in after-tax distributable earnings of $824 million, or $0.93 per share. Turning to investment performance, you can see the details of the quarter and the LTM period on page 7 of the press release. Just looking at this page, the traditional private equity portfolio was down 4% in the quarter compared to broad indices that were down 5% to 6%. And over the last 12 months, the PE portfolio was minus 8%. compared to the S&P 500 and MSCI world indices that were down 15% and 19%, respectively. In real assets, our portfolios continue to perform again in a quarter with a lot of volatility. The opportunistic real estate portfolio was minus one in the quarter and plus 11 over the last 12 months, while the infra portfolio was up one in the quarter and is plus five LTM. On the leveraged credit side, the portfolio is up one in the quarter and down 5% over the last 12 months. And our alternative credit portfolio was down one for the quarter and up three in the LTM. There's been meaningful volatility in the credit markets over these periods as well. The high yield index declined 1% of the quarter and is off 15% over the last 12 months, just as a point of comparison. In terms of our balance sheet investments, Investment performance was flat in the quarter and down 5% over the last 12 months. Core private equity, which Rob will touch on in a moment and is still our largest allocation, was up 2% in the quarter, and it's up 8% over the LTM. Turning to fundraising in the quarter, we raised $13 billion, bringing new capital raised to $65 billion year-to-date. With that, our assets under management increased to $496 billion and fee-paying AUM now totals $398 billion. To help put these figures into perspective, over the past two years, both our AUM and our fee-paying AUM have more than doubled. We also continue to deploy capital with $16 billion invested in Q3. Credit strategies invested $7 billion in the quarter. with the remainder of the quarter's deployment roughly split between real assets and private equity. And with that, I'm pleased to turn the call over to Rob.

Thanks a lot, Craig, and good morning, everyone. Let me start by saying a few words on the operating environment. As you know, the third quarter and really the first nine months of 2022 were very challenging across markets. High levels of inflation are clearly impacting global consumers, while the sharp increase in interest rates has had multiple knock-on effects that will invariably slow much of the global economy. In turn, equity and bond indices have been very volatile, and virtually all of them are down significantly year to date. And capital markets activity has meaningfully slowed. Global equity and credit issuance is significantly below historical norms. Now, despite all of this volatility and uncertainty, the overall mood and sentiment across KKR is quite positive. And we thought it would be worthwhile this morning to go through five key reasons why we feel the way we do. First, let me remind you why our business model positions us well for periods like this one. There are a few key reasons why. About 90% of our capital is perpetual or committed for an average of eight years or more from inception. Our management fees are largely calculated on committed or invested capital. and, as a result, are more insulated from fluctuating NAVs of our funds. Therefore, much of our management fees are highly predictable, and that visibility in turn provides us with the continued ability to invest back into the firm for growth. We also have $43 billion of committed capital yet to turn on that has a weighted average management fee rate of about 100 basis points. And maybe most critical in moments like these, we have 113 billion of uncalled capital from our investors that we can use to invest into the current dislocation. While those statistics are all meaningful in their own right, I think it's also helpful when viewed in comparison to where we were as a firm even a short while back. Two and a half years ago, March 31, 2020, so right as we entered COVID, we had 57 billion of dry powder, with $19 billion of committed capital yet to earn management fees. That compares to the $113 billion and $43 billion I mentioned a moment ago. So both of these figures have doubled more or less over the last two and a half years. And when you consider our relative positioning as a firm, those numbers don't account for the significant increase we have had in perpetual capital, largely due to our partnership with Global Atlantic and our acquisition of KJRM, well as the meaningful increase in the diversification of our business both by geography and strategy this brings me to my second reason for optimism we're fortunate due to our fundraising success and definitely a bit of luck on timing that we are in a position to deploy a significant amount of dry powder with asset prices more dislocated and while capital is quite scarce as a result we are starting to become a lot more constructive on our opportunity sets. We are already finding opportunities across the credit landscape. Our real estate and corporate credit teams are all very active. But more exciting is our outlook for the coming 12 to 18 months across all asset classes and geographies. We are mobilizing our teams and resources against what we see as a growing opportunity to put our client capital to work. Take for example in private equity. Oftentimes, our best vintages result from investments made during periods of market distress. Think the early 2000s, the GFC, or what we went through a couple of years ago. We think 2023 could present such an opportunity. And the key here is that we have really set ourselves up to be able to outperform in this environment given our expertise and breadth across geographies, industries, and asset classes. And most importantly, our culture really incentivizes our people to work across the firm to ensure that both information and capability travel and that we can make each other better. As a result, we are uniquely positioned to find creative and attractive investment opportunities. Turning now to performance, which is my third point, Please turn to page 8 of the earnings release. As Craig went through, every quarter we report our investment performance for the quarter and trailing 12-month period across our major asset classes. This really, though, only tells part of the story as it doesn't capture investment returns since inception. These funds all continue to outperform their comparable public indices. Our clients, really in all channels, relying on us to produce differentiated outcomes compared to what they can achieve in traditional asset classes. And that is just what we've been doing. Now to be clear, we certainly have today, and will in the future, a handful of more difficult situations to manage. But our thematic approach, which we have talked about many times, and our focus on portfolio construction are two critical reasons why you see this kind of outperformance. Which brings me to my fourth point. The strength of our fund performance continues to allow us to raise capital from our investors. Q3 new capital raised of $13 billion brings year-to-date fundraising to $65 billion. To put that number in perspective, that's already our second best year of fundraising ever, and we still have a quarter to go. Even more notably, This was against a much more challenging fundraising backdrop than the past few years and without many of our largest flagships in the market. And looking ahead over the next 12 to 18 months, we continue to have a really active calendar and remain constructive about the outlook for scaling our strategies that are coming to market. And finally, I want to turn to my fifth point and focus on the competitive differentiation that our balance sheet creates in periods like these. There's not a corporate that I know that doesn't wish they had more capital availability right now. And we are very confident in our ability to deploy our excess capital in opportunities that can both generate compelling investment returns and also help build and scale the firm at the same time. Part of what generates this confidence is the strength of our existing investment portfolio. Our focus on asset allocation and really where the puck is going has served us well. While the S&P 500 declined 15% over the last 12 months, our balance sheet was off only 4.7%. And over the last three and five years, our annual returns have been 16% and 14%, also several hundred basis points ahead of the S&P over these periods. One of the key drivers of this outperformance is the shift that we made a few years ago to increase our exposure to real assets. The fair value of our real assets investments have increased from $2.4 billion two years ago to $4.2 billion as of 9-30, and today represent almost a quarter of our investment portfolio. Our largest allocation on the balance sheet remains core private equity, and this really gets into business building and how the balance sheet allows us to play offense. As a reminder, core PE is a long-duration investment strategy. where we expect to hold these investments for 10 to 15 plus years. I believe they carry a more modest risk return profile compared to our traditional private equity model. 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. So from a standing start six years ago, we've put together this really incredible global portfolio of 17 companies with $32 billion of AUM that is both third-party capital together with balance sheet capital. We believe we have the largest core PE asset management business in the world. And as shareholders, we are all participating in core PE through the compounding of value on our balance sheet alongside the management fees, capital markets revenue, fee-related earnings, and carried interest that is generated over time. That combination is incredibly powerful. Our acquisition of Global Atlantic in July 2020, right on the heels of COVID, is perhaps the best example of how our balance sheet positioned us to play offense when others could not during that period of severe dislocation. We have deep conviction that GA can be a long-term compounder of capital, much like core private equity. And we are partnered here with a first rate management team. So far, GA has been performing exceptionally well. Over the last 12 months, they have generated an ROE of about 21%, well ahead of our expectations. While AUM has increased from approximately $70 billion at announcement to over $130 billion as of 9-30, really helping to also drive our asset management economics. Core Private Equity and Global Atlantic are great examples. but they're just two of many. We know that our model will continue to allow us to find ways to use the balance sheet where we can simultaneously generate compelling investment returns and also use it to grow and scale the firm at the same time. We have also created a liability structure on our balance sheet that allows for playing real offense in this environment. We have very intentionally funded ourselves with long-dated liabilities that have fixed cost of capital. The average maturity of our recourse debt is around 20 years, and it is a weighted average fixed coupon of approximately 3% after tax. Obviously, that just isn't replicable today and represents a huge asset for us right now. With all of this, hopefully it's clear why we remain so excited about our long-term opportunities. So in summary, number one, our model is durable and diverse with significant recurring revenues. Two, the next 12 to 18 months should present great deployment opportunities, and we are extremely well positioned to invest into them. Number three, we are generating excellent investment performance on behalf of our clients. And four, our fundraising success has been notable, especially given the backdrop, and we remain very well positioned to achieve growth from here. And finally, number five, Our balance sheet is a strategic differentiator whose value is even more meaningful in moments like these. The opportunity set in front of us over the next five to 10 years is immense, and we have never felt better positioned competitively. That's why the tone inside the firm is so constructive right now. Our long-term goals that we have articulated for 2026 are unchanged, and we have a great deal of confidence in our ability to achieve them. And with that, Scott Craig and I are happy to take any questions that you have.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation phone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that all analysts limit themselves to one question. You may re-enter the queue by pressing star one if you would like to ask a follow up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment please while we poll for questions. Our first question is from Alex Bolstein with Goldman Sachs. Please proceed with your question.