KKR & Co. Inc.

Ladies and gentlemen, thank you for standing by. Welcome to KKR's fourth quarter 2022 earnings conference call. During today's presentation, all parties will be in a listen-only mode, and 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. As a reminder, this conference call is being recorded. I will now hand the call over to Craig Larson, head of investor relations for KKR. Craig, please go ahead.

Thank you, operator. Good morning, everyone. Welcome to our fourth quarter 2022 earnings call. This morning, as usual, I'm joined by Rob Lewin, our chief financial officer, and Scott Nuttall, our co-chief executive officer. We'd like to remind everyone that we will 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. So this quarter, we're pleased to be reporting solid results with 63 cents of fee-related earnings per share and 92 cents of after-tax distributable earnings per share. I'll start by walking through the quarter. So beginning first with management fees, management fee growth continues to be a real bright spot for us. In Q4, management fees were $706 million. That's up 5% compared to last quarter and up 19% compared to Q4 of 2021. And comparing full year 2022 to 2021, management fees increased 28% from 2.1 to 2.7 billion. Growth in full year 2022 was greatest within our real assets business, where management fees increased over 50%. Net transaction and monitoring fees were 195 million, with our capital markets business generating 144 million of revenue in the quarter. Now to go through expenses, our fee related compensation margin for the quarter was 20%, which is at the low end of our 20 to 25% range. Rob is actually going to circle back on this topic in a moment. And other operating expenses for us were $177 million. The increase here compared to last quarter was driven by higher professional fees given activity levels across the firm, as well as increased expenses related to capital raising. So in total, Fee-related earnings for Q4 were $559 million, or 63 cents per share, with an FRE margin of 61%. Moving to realized performance income, we generated $339 million with realized carried interest driven by monetizations of Minnesota rubber and plastics, as well as a number of public positions, while realized incentive fees were driven by the crystallization of performance fees at Marshall Waste. realized investment income was $223 million for the quarter. Overall, our asset management operating earnings came in at $946 million. Now turning to our insurance segment, Global Atlantic had another strong quarter, generating $165 million of operating earnings. This quarter, the results were driven by an increase in invested assets from new business growth, alongside a continued rotation into higher-yielding assets. This resulted in after-tax DE for us of $822 million, or $0.92 per share. Now, turning to investment performance and pages 7 and 8 of our earnings release. Page 7 shows investment performance across our major asset classes for the fourth quarter, as well as the full year. Beginning first with traditional private equity, The portfolio was flat in Q4 and off 14% for the year. Those figures are below public indices for the quarter and ahead of public indices for 2022. In real estate in the quarter, the portfolio was marked down by 8%, driven by a widening of cap rates on unrealized investments, offset some by strong rent growth in the quarter. And for the year, the portfolio appreciated 3%, meaningfully ahead of public REITs, as well as broad real estate indices. The infrastructure portfolio was up 3% in the quarter and up 9% for the year. Very strong performance in infra, given broad volatility again across markets. And on the leveraged credit side, the portfolio was up 3% for the quarter and minus 3% for the year. And our alternative credit portfolio was up 1% in Q4 and up 2% for the year. Volatility in 2022, of course, was not limited to trust the equity markets. Investment grade in high yield indices declined 13% and 11% over the course of the year. Now, perhaps more important are the figures that you see on page eight of the earnings release. This page shows investment performance since inception across our recent funds that have been investing for two plus years. The figures you see here, of course, reflect any marks taken in Q4 or over the course of 2022. Looking at this page and taken together, we continue to feel very good about the returns we've been generating on behalf of our clients. In terms of our balance sheet investments, performance was flat in the quarter and down 5% for the year, again, against a volatile backdrop. Of note here, core private equity investments on the balance sheet have continued to perform. For the quarter and the year, the core PE portfolio appreciated 7%. excuse me, appreciated 5% and 7% respectively. Turning to capital metrics, we raised $16 billion in the quarter. This was driven by fundraising across our growth and traditional PE strategies, leveraged credit, a block transaction at Global Atlantic, alongside incremental flows at GA. This brings our full year 2022 total new capital raised to $81 billion. Our assets under management increased to $504 billion as of 1231, with fee-paying AUM coming in at $412 billion. We continue to find opportunities to invest, deploying $16 billion in the quarter. Infrastructure and traditional private equity accounted for about half of the Q4 deployment, with opportunities dispersed globally. And finally, before handing it to Rob, consistent with our historical approach, We're pleased to announce our intention to increase our annual dividend policy from $0.62 to $0.66 per share. This change will go into effect for the dividend announced alongside first quarter 2023 earnings. And at the same time, we've increased our stock repurchase authorization back up to $500 million. And with that, I'll turn it over to Rob.

Thanks a lot, Craig. And thank you, everyone, for joining our call this morning. I thought I'd begin by giving you a sense of our recent annual planning meetings. We got our senior team together earlier this year to review where we are as a firm, where we're going, and most importantly, what we need to get right to capture the opportunity that is in front of us. Listening and participating in these discussions was incredibly energizing. We've never had a stronger team and been more aligned around where we are going as a firm. We have a number of very clear avenues for long-term and sustainable growth, and more confidence than ever in our ability to achieve it. I'm going to step through some of these more material opportunities for growth in a minute, but before I do that, I first wanted to emphasize just a few points about 2022. Starting with our fundraising, we raised $81 billion of capital last year, the second most active year in our history, and of course, all against a much more complex market backdrop and without significant contributions from our flagship strategies. Over 70% of our fundraising last year came in our real assets and credit businesses, strategies that are often front of mind for our clients in rising interest rate as well as inflationary environments. Moving to deployment, we invested a healthy amount of capital over the last 12 months. Looking at private equity and real assets taken together, deployment here was approximately 20% greater in 2022 compared to 2021, as teams were able to find very creative ways to put capital to work. For example, across PE, growth, and infra, we announced or closed on 10 take private transactions over the course of the year. And as our footprint has scaled and become more diversified, so has our deployment. Real asset strategies were 16% of total firm deployment activity in 2020. That number totaled almost 40% in 2022. Over that same two-year period, credit deployment has increased approximately two and a half times as the business has expanded with Global Atlantic as a partner and new focus funds such as asset-based finance. And finally, I'd like to circle back to our compensation expense and the comp margins that you saw in Q4. Fee-related compensation was 20% of fee-related revenues. That is at the low end of the 20% to 25% range that we've articulated historically, while realized investment income comp was 10% of realized investment income, also at the low end, in this case of the outlined 10% to 20% range. Carried interest comp was at the midpoint for the quarter, which as a reminder is 65%. This had the impact of reducing our total compensation margin for the quarter, which, including equity-based comp, was 32%. Given realized carried interest generation across KKR over the course of 2022, we felt that we could move to the low end of our FRE and investment income compensation ranges and show some expense discipline in support of our operating earnings, while importantly, still ensuring that we have the capacity to recruit, retain, and incent world-class investment, distribution, and operations talent. As we think about levers that we have as a firm to generate long-term earnings growth from here, operating leverage is really a key component. As a reminder, KKR employees own approximately 30% of our stock, so we are very well aligned to drive margin improvement across the business. And before I switch gears, Let me give you an update on the outlook for Q1 monetization activity. Things have slowed a bit on the monetization side, but nothing that is surprising to us given the environment and how we're thinking about the timing of when we want to generate realization outcomes for our limited partners. So as we stand here today, we have visibility on approximately $250 million of monetization-related revenue for the first quarter. Now, turning the page and looking forward. We think there are really six key areas that are going to drive significant growth for KKR for several years to come. The first area is real assets, where we have seen meaningful growth across our platform. AUM at the end of Q4 stood at $119 billion. That's compared to just $28 billion at the end of 2019. So four times growth in three years. Growth in infrastructure? has been driven not only by our flagship fund, but also our extension into areas such as core, as well as Asia Pacific. The real estate platform continues to grow across a full suite of 10 plus products, further propelled by both Global Atlantic on the credit side and our acquisition of KJRM on the equity side. Our momentum across our real assets platform is obviously quite significant. and aligns well with a big area of current focus from our limited partners. The second area of meaningful growth for KKR is continuing to leverage our market-leading position in Asia Pacific. Looking at our progress in 2022, our Asia infrastructure strategy raised almost $6 billion, the largest in the geography, and we closed on our first Asia credit fund as well. Looking ahead, We expect our Asia real estate strategy to expand in 2023, as will our Asia tech growth franchise. And as I mentioned a moment ago, our acquisition of KJRM, which is our Japanese real estate business, is a great example of how we can use our balance sheet to strategically pursue inorganic growth, to both enhance our market position, as well as to access differentiated forms of capital. Looking at this progress altogether, Our Asia-focused AUM has now increased to $60 billion at the end of the year. That's up roughly three times since 2019. Our local presence, paired with our KKR toolkit, has created an industry-leading business against very compelling long-term macro fundamentals in the region. The third area for us is core private equity, which is just a massive opportunity, as the addressable market is very significant and the P&L impact can be positive across so many different parts of our financials. And most importantly, it is an area where we believe that we have the business model and culture that sets us up well to be the best global player in the asset class. As a quick reminder, core PE is a long-duration investment strategy, and we expect to hold these investments for 10 to 15 plus years. We currently have 19 businesses within our core portfolio. These businesses generally have lower leverage than traditional private equity investments, tend to be less cyclical, and are more cash generative. These traits do create a more stable earnings profile within the portfolio. Today, we manage roughly $18 billion of third-party capital, which I believe is the largest in our space. The AUM we manage positively impacts our management fees, transaction fees, as well as carried interest. But core PE now also accounts for over 30% of our balance sheet investments. Yet these investments only accounted for 1% of our after-tax distributable earnings in 2022 when you look at their flow-through impact to realized investment income. Looking at this another way, and to highlight this point even further, if you looked through our balance sheet to the core PE portfolio, Our portion of the company's EBITDA totals over $600 million. This is not accounted for in our distributable earnings. Make no mistake, this 30-plus percent allocation is purposeful. It is by design because we have a substantial opportunity to really compound our investments in an asset class where we know that we have differentiated capabilities. The fourth big macro driver for us is private wealth. We currently manage $67 billion of capital here, compared to $37 billion in 2019. Approximately 15% of new capital raised has historically been sourced from this investor cohort, mostly from high net worth clients and in traditional drawdown products. Over time, we expect all private wealth focused capital will account for 30 to 50% of the capital that we raise as a firm. And along this path, We will continue to expand our footprint in the democratized access vehicle space. Our ambitions and views of the long-term opportunities we see for KKR have not changed. Next, my fifth point is our continued focus on the insurance space. Going back to July 2020, at the announcement of the Global Atlantic acquisition, their AUM was $72 billion. Today, it's close to $140 billion. so it's grown about two times in the last two and a half years. Our thesis in buying GA was multifold. We believe that the combination of a leading life and annuity franchise with multiple ways to expand against compelling market fundamentals, combined with KKR's origination and capital capabilities, could lead to strong growth in AUM, operating earnings, and book value, while also delivering for policyholders. This has really played out, and looking ahead remains a key strategic priority for us. Not only is the $139 billion of GA capital itself perpetual, but the business has also helped us grow our third-party insurance client, AUM, to $56 billion. That's up from $26 billion at the time of the GA acquisition announcement, as we have continued to create products that are tailored to this unique investor base. And finally, The sixth high impact long-term growth driver for us is our balance sheet. I said the same thing last quarter as well. But there's really not a corporate that I know that doesn't wish they had more capital availability right now. The balance sheet has a clear competitive advantage in its continued ability to enable and accelerate growth in a way that is less dilutive for our public shareholders. To highlight this point, M&A, our investments in core private equity, our buildup in the insurance space, and share buybacks have all accounted for roughly 90% of our net balance sheet deployment over the past five years. And we expect that trend to continue over the coming several years as well. This is just another tool that we have to be able to drive earnings per share over time. To summarize, we continue to feel extremely positive about our future outlook. The six drivers that I just went through are particularly impactful for our long-term success. And we have real conviction across the entirety of our management team in our ability to build on our existing momentum. With that, let me hand it off to Scott.