KKR & Co. Inc.

Good afternoon, everyone. Welcome to our first quarter 2023 earnings call. As usual for the call, I'm joined by Scott Nuttall, our co-chief executive officer, and Rob Lewin, our chief financial 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. This quarter, fee-related earnings per share came in at $0.62, and after-tax distributable earnings came in at $0.81 per share. I'm going to begin the call by walking through the details for the quarter before turning things over to Rob. So beginning with management fees, management fee growth continues to be a real bright spot for us. In Q1, management fees were $738 million. That's up 18% year over year. And looking over the last 12 months, management fees are up 23%. Looking a little deeper, over the last 12 months, management fees in private equity and credit both increased 18%. While in real assets, management fees are up 40%. Net transaction and monitoring fees were $142 million for the quarter, $102 million of which came from our capital markets business. Our fee-related compensation margin was at the midpoint for the quarter at 22.5%, and other operating expenses were $150 million. So putting that together, fee-related earnings were $549 million for the quarter, or $0.62 per share, which I mentioned a moment ago, and that's with an FRE margin of 61%. This is now the 10th consecutive quarter where you've seen our FRE margin at or above that 60% level. Walking further down the income statement, realized performance income totaled $175 million driven by our traditional and core private equity businesses, and realized investment income was $198 million for the quarter driven by activity and growth equity. Both realized performance and investment income compensation margins were at their midpoints for the quarter. Our asset management operating earnings were $778 million, and our insurance segment generated $205 million of pre-tax operating earnings, which I'll spend another minute on shortly. So in aggregate, this resulted in after-tax distributable earnings of $719 million, or $0.81 per share. Now turning to investment performance. The traditional private equity business was up 2% for the quarter, and over the last 12 months was down 9%. Importantly here, inception-to-date IRRs for our blended flagship funds, so America's 12, Europe 5, and Asia 4, remain strong at 22%, which is meaningfully ahead of the corresponding 7% figure for the MSCI world. In real assets, the real estate portfolio was down 3% in Q1. While we are all seeing a difficult market for a handful of areas within real estate, our portfolio continues to be heavily weighted towards those assets and themes where you're seeing strong fundamentals and cash flow growth. So think industrial assets, data centers, rental housing, student housing, and storage. However, as cap rates increased in the quarter, that more than offset NOI growth leading to the modest decline in the portfolio for the quarter. Infrastructure was up 7% in the quarter. This performance reflects the strength of our infrastructure portfolio on a global basis, and with higher interest rates, we've strategically leaned into more inflation-protected assets. On the leveraged credit side, the portfolio was up 4% in the quarter, outperforming its index, while the alternative credit portfolio was up 2%. And for the balance sheet, investment performance was flat in Q1. Now, in addition, we have two new updates that can be seen through the earnings release. First, I briefly mentioned our insurance results this quarter. Turning back to this topic, we expect you saw the recast financials we posted last week on our website and also filed through an 8K. These changes reflected two things. First, per FASB guidance and as required for all SEC filers, we implemented the accounting principles of LDTI within KKR's insurance segment to reflect the new accounting standards for long-duration contracts such as life insurance and annuities. Overall, the impacts here on our segment financials are quite modest. There was a $1 million positive impact to 2021 pre-tax insurance segment operating earnings and a $74 million positive impact to 2022 pre-tax insurance segment operating earnings. And in terms of 1231 book value, there is an increase of $480 million. And second, to conform to other alternative asset management companies and enhance comparability, we're reporting our insurance segment operating earnings on a pre-tax, not an after-tax basis. So as you look at page three of the earnings release, income taxes attributable to KKR's asset management and our insurance segment are now captured within that single line item titled income taxes on operating earnings. The 8K reference a moment ago recast our financials reflecting all of these changes for 2021, as well as on a quarterly basis for 2022, to help everyone look at our results on a comparable basis. And the second change within our press release you'll see on page 25. We've included additional disclosure on our core private equity strategy. With $34 billion of AUM, we believe we have the largest core PE asset management business in the world. And core PE remains the largest allocation we have on our balance sheet. So we thought the additional disclosure and context would be helpful for investors this quarter as well as in quarters to come. As a reminder, this is a long duration investment strategy for us where we expect to hold investments for 10 to 15 plus years and believe these investments carry a more modest risk return profile compared to traditional PE. And as you can see on the page, our core PE balance sheet investments have increased steadily from 1.4 billion in 2018 to over 5.7 billion of fair value today. The 5.7 of fair value compares to the 2.7 billion of costs or 2.1 multiple of costs currently, a strong return over approximately five years. In total, Core comprises approximately 32% of total balance sheet investments and consists of 19 companies across multiple industries and geographies. And with a little over 20% of total PE capital invested in the last 12 months into Core PE, we remain very active in this And one final note, consistent with historical practice, we increased our dividends to 16.5 cents per share per quarter, or 66 cents on an annualized basis. This is now the fourth consecutive year we've increased our dividends since we changed our corporate structure. And with that, I'm pleased to turn the call over to Rob.

Thanks a lot, Greg. The past few months have certainly continued to be dynamic on the macro front. However, different backdrops do create opportunities. especially for firms like ours that have substantial locked up capital, a significant amount of dry powder, and a global and highly coordinated investment team with expertise that spans multiple different asset classes. I thought it would be helpful this morning to go through what we are experiencing day to day across the firm. Let's start with fundraising. We raised $12 billion of capital in the quarter. In private equity, Activity this quarter included the final close on European Fund 6 at $8 billion, which is approximately 20% larger than its predecessor. It's a really great outcome in what is the most challenged part of the fundraising market and now gives us $40 billion of committed capital in total looking at our active traditional PE funds across Asia, North America, and Europe. We believe this is the largest active capital base for traditional private equity by a wide margin. In credit and liquid strategies, we raised almost $9 billion in Q1, which is just above what we raised on average per quarter in 2022. In total, though, the $12 billion of new capital raised is a little bit on the lighter side for us. That is going to follow up with a little more color on the fundraising environment in a few minutes. Now, against this backdrop, we still do feel incredibly fortunate for a few reasons. First, since 2020, we've raised approximately $60 billion of capital for our traditional private equity and core private equity franchises. Given all the flagships raised over this period, 2023 was never going to be an outsized fundraising year for us. So our focus in private equity is on investing the capital that we have previously raised. And we have almost as dry powder as we've ever had as a firm to invest into this dislocated environment. Now to be clear, We are still in the market fundraising for 30 plus strategies, largely in real assets and credit over the next 12 to 18 months. And our fundraising teams remain highly engaged with our clients. Second, we continue to make progress against our strategic priorities. As an example, we've talked to private wealth and democratized products several times on these calls. And we are pleased that since our last earnings call, our democratized private equity vehicle outside the U.S. raised over $400 million on just one platform at its first close, which will show up in our Q2 results. It's a great start for us, and we hope to build on this momentum with the wirehouses as the domestic vehicle comes online in the second half of the year. And in terms of our democratized infrastructure strategy, our U.S. vehicle is expecting a first close over the summer, while its international counterpart is right on its heels, with a first close expected soon thereafter. We are really excited about both of these strategies. And while we're in the earlier days, we're pleased with initial reception and enthusiasm. The launch of these products is a critical step in addressing the huge private wealth end market and bringing products that traditionally have largely not been accessible to non-institutional clients on a global scale. And third, on the insurance front, momentum really does continue at Global Lanning. AUM at GA has almost doubled since we announced the acquisition in July 2020, from $72 billion to $142 billion today. And since the transaction closed in early 2021, our share of book value has increased from $2.9 billion to $4.4 billion. In terms of Q1, financial performance continued to run ahead of our expectations, and capital raising remains robust. While GA did not announce any block transactions in Q1, our pipeline here of compelling opportunities remains quite strong, and we would expect greater activity over time. Turning now to deployment, we have $106 billion of dry powder, which is close to a record figure for us, and feel really excited about the investing environment that we are currently in. So we remain incredibly well positioned to build a portfolio for the future. And looking at what our teams have done more recently, we continue to be pretty creative at putting that capital to work. In European private equity, we announced the acquisition of FGS Global, a leading strategic communications advisory firm. This is the latest example of the team's focus on proprietary opportunities where we can provide long-term capital and a global network of resources to help an entrepreneurial, world-class management team that we've known and worked with for over a decade. In infrastructure, We closed on the acquisition of Vantage Towers in partnership with Vodafone. Vantage is our latest take private transaction. We have announced or closed on 10 take privates since the beginning of 2022. An investment largely from our diversified core infra fund, Vantage is the second largest telecom tower company in Europe. And in our credit business, we are very constructive on the risk reward we're seeing today in the market. As the syndicated loan markets have remained choppy, new issue volumes are down over 50% year-to-date. Companies looking for debt capital continue to increasingly look to the private credit markets, where base rates are up, spreads are wider, and lender protections are more significant. We believe that we are in the best direct lending environment that we have seen for the past 10 plus years. Now, with interesting deployments, which largely comes from higher volatility, does come a more challenged monetization environment. The environment here continues to be quiet, and our expectation is that it will remain soft for much of 2023. However, as we've discussed in prior calls, our business model has multiple advantages. And one of them is that 90 plus percent of our capital is locked up for the long term or is perpetual in nature. So we are not poor sellers, and we won't look to aggressively monetize our portfolio unless it's into a window that maximizes outcomes for our investors. Even with the volatility and markdowns we have appropriately taken over the last 12 to 15 months, we maintain over $9 billion of embedded gains on our balance sheet. So if we never made another investment and created no additional value or returns, we are positioned to generate $9 plus billion of monetization-related revenue. The key message you're hearing from us today is that we remain highly confident in our portfolio and will optimize the monetization outcome when it is most advantageous to our investors. So to summarize, while the past several months have presented a more challenging operating environment, it has not changed our long-term outlook. We continue to have more conviction in our ability to meet our goal. FRE of $4 plus per share and after-tax DE of $7 plus per share by 2026 than we did when we first issued that guidance in late 2021. In our teaching materials posted at the beginning of this year, we introduced six very significant drivers of value creation for KKR. These areas, real assets, Asia Pacific, core private equity, private wealth, insurance, as well as the opportunities afforded to us through our balance sheet, continue to position us for substantial growth, and that is why we have the confidence that we do in our long-term fundamentals. With that, let me hand it off to Scott.

Thank you, Rob. And thank you, everybody, for joining our call today. I thought today I'd talk about what we're seeing near-term and how we're feeling longer-term. Near-term, the market volatility is doing three things. It's causing some institutional asset allocators to be more cautious and delay decisions. It's making us want to sell less of our portfolio and it's creating some very attractive investment opportunities for us. On the fundraising front, we are seeing some investors pause as they get their bearings. This is in particular true in some US and European institutions. It has not been the case in other areas. Until this changes, it will likely slow down capital formation in the near term for some of our efforts. We don't expect this to have a big impact on the firm for a couple reasons. First, as Rob noted, we are not in the market with our flagship PE funds this year. We expect those to come back to market in 2024 and 2025. Frankly, we're fortunate with that timing. We have been actively raising capital, however, for our non-private equity businesses. To put some numbers to this, new capital raised over the last 12 months totaled $67 billion. $63 billion, or 95% of that number, was raised in strategies outside of traditional private equity funds. Given the growth and scaling across our credit and real asset platforms, we are meaningfully more diversified across strategies than someone less familiar with KKR would likely expect. Second, we are seeing the benefit of increased diversification across our distribution channels and are less reliant on any one type of investor than we used to be. As background, a handful of years ago, we sold almost exclusively to institutions. Today, we sell to institutions, insurance, and private wealth. Taking those in turn, While some institutions are pulling back or delaying a bit, others, like sovereign wealth funds, are not. And we are having a number of productive dialogues globally, in particular around private credit and real assets. Our insurance efforts are also scaling meaningfully. You heard the $142 billion number from Global Atlantic. If you include the $56 billion we have from third party insurers, we now manage nearly $200 billion for insurance companies globally. That number is up nearly 50% from two years ago. Also, as Rob referenced, we're now live with our democratized PE and infrastructure strategies. Our democratized real estate product has been raising capital since mid 2021 and is adding more platforms. And we have another private credit vehicle for the wealth channel in the pipeline for later this year. So we will have all four of our major asset classes in democratized format available globally and being added to multiple new platforms over the course of the next several quarters. Candidly, we don't yet know what all this will yield, but we do know it will be upside for us relative to what we've been doing to date. And we know that the private wealth opportunity is significant for the firm. So we are diversifying KKR, not just in how we invest, but in how we access capital. And we see all this lining up really well for us over the next couple of years, as we expect to be back in the market with our flagship funds at a more hospitable time, which will coincide with us continuing to scale our insurance efforts, which are proving counter-cyclical and benefiting from a higher rate environment At which point, we will also be more mature in private wealth with our products on multiple platforms and multiple geographies. All while our recently expanded sales force, up from 100 to 280 people in the last couple years, is hitting their stride. So despite the near-term fundraising environment, we feel good about the progress we're making and now have multiple ways to win with more momentum coming. So that all bodes well. On the monetization front, we will likely sell less in an environment like this. But we are seeing the value of the portfolio continue to grow, so this is really just a timing question. And on the investing front, the great news is times like these tend to generate some of our best investments. We expect the next couple years to be strong vintage years for returns across asset classes. So we expect our earnings down the road to be higher as we monetize the investments we're making in this environment. Putting this all together, while the near term may feel harder to interpret and the next couple of quarters may stay bumpy in markets, we actually feel great about how we are building the firm and executing our plan. Now switching to the longer term. Last quarter, I referenced the market volatility. and suggested it's important to separate the signal from the noise and that we remain focused on what we can control. That continues to be the case. The market noise has not changed our bottom line. We feel even more convicted in hitting the FRE and after-tax DE targets we've shared with you. Let me explain why. In January, we shared how the earnings power of the firm has evolved. we are in a fundamentally different place than we were even a few years ago. Because we report DE largely on a cash basis, there will be times we are over-earning that earnings power and times we are under-earning. In times like this, when we are selling less, we are under-earning. But we look at how that earnings power is trending and our progress has been significant. Our ability to create forward-looking financial outcomes is well ahead of where we were just a few years ago. The capital we're raising is increasing the amount of dry powder we have, already a near record $106 billion. And we have a lot of management fee growth visibility with $37 billion of committed capital where fees turn on when the capital is invested. Our carry-bearing invested capital, up three times over the last five or so years, is continuing to scale. with a great investing environment in front of us as we deploy our dry powder. And our embedded gains continue to increase from 2 billion to 9 billion over the last three years. Putting all this together and stepping back, our run rate earnings power has doubled over the last three years at KKR. That's a metric we think matters, especially when the noise is loud. So thank you for taking the time to understand our business. And hopefully it's clear why we are so optimistic about the path and growth ahead. With that, we're happy to take your questions.