KKR & Co. Inc. (NYSE:KKR) Q4 2023 Earnings Call Transcript

KKR & Co. Inc. (NYSE:KKR) Q4 2023 Earnings Call Transcript February 6, 2024

KKR & Co. Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to KKR’s Fourth Quarter 2023 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the management’s prepared remarks, the conference will be opened for questions [Operator Instructions]. Please note this conference is being recorded. I’ll now turn the call over to Craig Larson, Partner, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson: Thank you, operator. Good morning, everyone. Welcome to our fourth quarter 2023 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’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 as well as our SEC filings for cautionary factors about these statements. And as a reminder, our earnings release in our financial reporting for Q4 is consistent with past quarters beginning in Q1 of 2024, our earnings release will reflect the segment and financial metric changes we announced on November the 29th.

Turning now to our numbers for the quarter, we’re pleased to be reporting strong fourth quarter results with fee-related earnings per share of $0.76. This is a record figure for KKR up 21% from Q3 2023 as well as Q4 of 2022. After tax distributable earnings came in at $1 per share. New capital raised in the quarter was $31 billion, which is also particularly strong. So overall, a really solid quarter for us. I’ll begin this morning by walking through our financials in a little more detail. So management fees in the quarter are 785 million. That’s up 3.4% compared to just last quarter, with growth across all of our business lines. And comparing full year ’23 to 2022, management fees grew 14%. We reported double-digit percentage annual growth in our management fees for several consecutive years now.

Net transaction and monitoring fees were 264 million in the quarter. Capital markets transaction fees in particular were quite strong in Q4 with 225 million in revenue that was driven by an increase in investment activity and financing transactions at several of our PE and core PE portfolio companies. So in total, fee-related revenues for the quarter were 1.1 billion, up 17% on a year-over-year basis compared to Q4 of 2022. Turning to expenses. Fee-related compensation, as usual was at the midpoint of our guided range at 22.5 a fee-related revenues for the quarter as well as for the year. Other operating expenses were 156 million. So in total, fee-related earnings were 675 million or $0.76 per share. As I mentioned just a moment ago, this was a record FRE quarter for us.

And this growth really highlights in our view the continued strength as well as the diversification that you’re seeing across the firm. Our FRE margin in the quarter came in at 63% and on a per share basis FRE was $2.68 for the year. Turning now to realization activity. For the quarter, we generated 411 million a realized performance income. This was driven by multiple successful sales across our traditional private equity and core businesses, with realized incentive fees driven by Marshall Wace in the fourth quarter. Realized investment income in the quarter was 147 million. So together monetizations were 558 million. In total asset management operating earnings were 970 million. Moving to our insurance segment, performance continued to be strong in the quarter with 231 million of pre tax earnings that’s up 10% quarter-over-quarter.

This was the result of stronger net inflows across both the institutional and individual channels, as well as variable investment income from the sale of a solar developer that generated 16 million of insurance segment pre tax operating earnings. So in total, after tax PE was 888 million or $1 per share. In comparison with the prior quarter, that figure was up 14%. Next, turning to investment performance, you can see this on page seven of the earnings release. The private equity portfolio appreciated 3% in the quarter and 16% in the year. In real assets, the opportunistic real estate portfolio was down one in the quarter and down two for the year. Infrastructure was up 5% in the quarter and up 18% for the year. So very strong broad performance across our infrastructure platforms.

And in credit, the leverage credit composite was up three and the alternative credit composite was up 2%. And over the year performance year was up 14% and 10% respectively. And finally, consistent with our historical practice, we are intending to increase our annual dividend from $0.66 to $0.70 per share, which we anticipate will go into effect alongside first quarter 2024 earnings. And with that, I’m pleased to turn the call over to Rob.

Rob Lewin: Thanks a lot, Craig. And good morning, everyone. First looking at our key operating metrics. New capital raised totaled 31 billion for the quarter. These results are quite strong and encouraging for us as we head into 2024. Credit and liquid strategies made up about two thirds of the capital we raised this quarter. As our business has grown with Global Atlantic as a significant partner. GA in particular had record inflows in the quarter, both overall and specifically from the individual channel. So activity here continues to be very strong. Block activity at GA is also active. As you know the MetLife block closed in the quarter and the Manulife block transactions is expected to close sometime in the first half of 2024.

And similar to prior blocks, GA continues to be very capital efficient here, contributing approximately 25% of the equity in both transactions with 75% of the capital coming from IV vehicles and additional CO investors. So 75% from third parties where we can earn management fees and have the opportunity for performance income as well. Over the past year, new capital raised totaled right around 70 billion. And looking post 12/31, we just announced the final closing in Asia Infrastructure 2 at approximately 6.4 billion over 65% larger than the previous fund. Of note, more than half of the capital came from new investors to the Asia Infrastructure platform. With this successful fundraise, we are clearly the largest infrastructure fund in the region, enhancing our Asia positioning more broadly.

And as we look out over the next 12 months and into 2025, a number of our flagship funds will be raising capital as well. So we continue to expect an acceleration our fundraising from here. Turning to capital invested, we deployed 16 billion in the quarter and 44 billion for the year. Capital invested was really diversified across private equity, real assets and credit and liquid strategies in the year, as U.S. private equity and core private equity deployment rebounded in the quarter. Of particular note, we made investments in three big private transactions in Q4. And with almost 100 billion of uncalled capital, we continue to be well positioned for the deployment opportunities that are ahead. I wanted to briefly shift now to a reflection on our progress through the course of 2023.

Our assets under management now total 553 billion that’s up 10% compared to the end of 2022. With sizable capital raised in the past year, fee paying AUM now stands at almost 450 billion. Given our consistent growth in fee paying AUM, management fees increased 14% in 2023, with line of sight of future growth from approximately 40 billion of committed capital that becomes fee paying asset invested or when it enters its investment period. And that’s at a weighted average rate of just over 90 basis points. And while realized performance and investment income was more muted in 2023, given the environment, our forward visibility has increased meaningfully year-over-year. Total embedded gains were 12.3 billion at year end that reflects embedded gains on our balance sheet plus gross unrealized carried interest.

This was up almost 40% compared to Q4 of 2022. The opportunity for future investing revenue remains robust. And strategically, we made a lot of progress in 2023. As you likely know, we announced 40 initiatives towards the end of November. As an update, on January 2, we closed on our acquisition of the remaining stake in Global Atlantic for approximately 2.6 billion in cash. We believe this acquisition will create more value for policyholders and shareholders and are excited to unlock future potential together. Concurrent with the closing of GA, we have created a new strategic holding segment, which you will see in our Q1 2024 earnings release. Here the segment operating earnings will be driven by cash dividends from our core PE portfolio. We also revised their compensation ratios, which similarly will be reflected in our Q1 financials, delivering more FRE to our shareholders, and driving even more alignment between our compensation model and the outcomes of our clients.

Combining these aspects, we will be introducing a new reporting framework that will better highlight our business model. This will include a new financial metric, total operating earnings, which represents our more recurring forms of income. Prior to our next earnings call, we will provide recap financials to help you further understand the various key metrics. As a reminder, we do expect these announcements to be accretive to all of our per share metrics. And together with the competence and current visibility we have, it is what allowed us to increase our 2026 FRE per share target to $4.50 plus cents per share. In 2023, we generate $2.68 per share of FRE. So our expectation is for a lot of growth from here. Given these four announcements paired with the existing growth engines we have, we believe that we are well set up to drive meaningful scale.

The opportunities we have across asset management, insurance and strategic holdings are multi-fold. Turning first to our asset management business. There remains a lot of upside here with multiple drivers of growth. We have a lot of younger strategies that are just beginning to scale. We started 25 or so investing businesses through the past decade alone, and many are now starting to inflect. We are an asset classes and geographies with massive end markets, Asia, infrastructure, including climate and credit are all great examples. And as a reminder, we only want to be competing in areas with large addressable markets and where we have conviction that we can be a top three player. We are in the early days of tapping into the private wealth end market.

We’ve had early success in our case theory suite of products with the tremendous amount of opportunity that is still in front of us. With these growth avenues, along with our strong track record count, and the trust that we’ve built with our clients, we feel that we could double our asset management business from here. And that’s without starting anything new. Second, we have a meaningful opportunity in insurance with our partnership with Global Atlantic. Insurance is a very powerful contributor to our business. GA has already created a lot of value, going from 72 billion of assets under management at our announcement of the initial transaction in July of 2020 to over 170 billion of assets under management today, including the pending Manulife block deal.

We have a strong opportunity to unlock even more value together in investing, product development, global expansion, private wealth distribution and capital markets. And we are still in the very early stages of our partnership. And finally, number three, strategic holdings, where our opportunity is highly differentiated. This segment leverages all of our people, capabilities and our collaborative culture. As a result, we are uniquely positioned to capitalize on what we believe is a huge addressable market. And that’s in addition to the current visibility we already have to drive net dividends in this segment of $300-plus million by 2026 and $600-plus million by 2028. In summary, we are incredibly well positioned as a firm. And we really don’t think there are many companies in our industry or others that have the type of visibility that we have for long-term growth.

We have a high level of confidence that we can meaningfully grow all 3 of our business segments; asset management, insurance and strategic holdings. With that, we are excited to announce we are going to host an Investor Day in New York on April 10. Given the November strategic announcements and all of the opportunities across our firm, we thought it would be timely for you to hear directly from our senior leaders. We will provide additional detail in the coming months, and hope that you will join our broader team as we discuss our outlook and these opportunities. With that, Scott, Craig and I are happy to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question today will be from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.

Craig Siegenthaler: We were looking for an update on funding raising for your 3 largest flagships. So we have global in for 5, with 4 that’s already 60% invested. It’s higher when you look at the committed. In Asia, 5 and North America 14, which are both over 40% now. So how should we think about the timing of these fundraises given the commitment levels and AUM targets given the size of prior funds, they’re all large funds. And more importantly, how should we think about the FRE ramp from these new funds less step-downs from the last exit?

Craig Larson: Good morning, Craig, it’s Craig, why don’t I start on that. First, look, one of the things that runs mind as it relates to the trajectory of new capital raised, and you would have heard this in the prepared remarks from Rob, relates to the topic exactly as it relates to our flagship strategies. So when you look at the largest fund complexes within our firm, so Americas, Europe, Asia PE, Core PE infrastructure, less than $1 billion of the capital that we raised last year, we raised $70 billion in total, less than $1 billion of that came from those strategies. And if you look over ’22 and ’23, we raised round numbers, $150 billion of new capital and around $6 billion came from those flagships. And so as we think about ’24 and ’25, we think that that’s going to look different.

And so we are actively fundraising for our infrastructure strategy and do expect to launch fundraising for our Americas private equity strategy later in the year, with Asia likely a 2025 initiative for us. On the deployment numbers, you mentioned, those numbers are always a little understated. I remember, if we have platform investments, et cetera, that capital is going to be spoken for, or if there happens to be capital drawn under the line, that’s going to be paid back inside of 180 days, again, that capital will be additive. So those deployment numbers always look a little more understated relative to how we think of that positioning. And then I think there’s a couple of other points here. The next one would relate to scaling. We mentioned in our press release that we had the final closes on our Next-Gen Tech 3 and Impact strategies.

We had nice scaling in those strategies compared to their prior vintages. Again, Rob talked about the good news as it relates to Asia infrastructure for us. We do expect scaling in our wealth strategies alongside of that. And then finally, we feel like we have a lot of momentum in Global Atlantic, both in the individual as well as the institutional channels. So I think the opportunities that we see for new capital raised and, in turn, management fee growth is really an attractive part of our positioning with the flagship certainly being an important part of that.

Rob Lewin: Good morning, Craig. It’s Rob. I’ll pick up as it relates to your question on FRE. When you look at some of these big flagships that will be in the market and their predecessor funds, they don’t have big step-downs in fee rates as they transition to post-investment period. In addition to that, when you think about the runoff, a lot of the runoff from investment is probably going to come from 2 funds prior and 3 funds prior, those funds close out. But maybe kicking it up a level, if you think about where we are today and where we’re going, and I hit this in the prepared remarks, we’re at $2.68 of FRE per share. And we’ve guided 3 years from now, we have an expectation of being at $4.50-plus per share. And so in order to get there, our expectation is we’re going to have a lot of management fee growth and the flagships, on a net basis, will be a part of that story.

Scott Nuttall: Yes. The only thing I would add, Craig, is I think our overall view on fundraising is quite optimistic. I mean, Craig Larson mentioned it, but the $150 billion we raised for 4% of that have come from flagships is a pretty low number speaks to how we’ve been scaling the diversification of the firm. And as you know, a number of our strategies are kind of in this nice part of the inflection curve Funds II, III, IV, where we can see a significant amount of growth. So you’re absolutely right to point out the flagships are coming back at what we think is going to be a really good time. But we also have 22 of our 30 strategies that are coming to market in the next 12 to 18 months, we put in that younger category. Fund I, II, III, open-ended these newer strategies.

And you can see it. Asia-Infra, up 66%, tech growth was up 30%. Our impact fund doubled even in the environment that we saw over the last couple of years. Yet, on top of that, private wealth, GA, Asia speaks to the optimism that we see kind of regardless of what’s happening with the backdrop.

Operator: Our next question is from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Alex Blostein: I was hoping you could start with just building on your prior comments around expansion in the wealth channel. You mentioned you’re seeing quite a bit of success early days, only a couple of quarters in some of these platforms. So maybe a little bit about what products you expect to be out in the market with over the course of this year, how many platforms you’re on, et cetera. But also, I guess more importantly, I believe in the past your targets for 2026 and FRE MD really did not include a whole lot of conception from these initiatives. So maybe just kind of confirm that and what do you think those initiatives could ultimately contribute over time?

Craig Larson: Hey, Alex, it’s Craig. Why don’t I start, thanks for that. And just stepping back and level setting for everyone. So as of 12/31, around $75 billion of our assets under management are from individuals. And that number does not include policyholders of Global Atlantic. So you could argue that, that $75 billion, if anything is understated as it relates to the presence and the activities we have with individuals broadly. Now most of that $75 billion are from high net worth and ultra-high net worth individuals as well as family offices that have invested in our funds and strategies. And in terms of our fundraising in total, a double-digit percentage of our new capital raised historically has typically gone from individuals.

So it’s been a healthy part of that fundraising activity. Now back to your question, most specifically, most recently, we’ve introduced what we call our K Series suite of products. And so these are funds and strategies that are really designed and tailored specifically for wealth investors. So K Infra and [KEF] [ph] are the U.S. and non-U.S. vehicles focused on infrastructure. K Prime and K Pec are the U.S. and non-U.S. vehicles focused on private equity. We launched both private equity and infrastructure only midway through 2023. And with those products in real estate and credit on top of that, as well as our private BDC soon to be launched of that $75 billion of wealth, around $6.5 billion of that is from these K Series suite of products.

Now a year ago, that was $2.4 billion. So we’re in the early days, but we feel really good about the progress from here. And as we look at some of the underlying statistics, that’s particularly true as it relates to infrastructure and private equity, which are newer asset classes for more mass affluent investors. As we’ve mentioned historically, we’re raising about $500 million a month as we look at the K Series suite. And so it feels like reception and interest in our momentum continues to feel really good. And to your point, we do expect to see an acceleration in the number of platforms in the first half of ’24. So it’s great progress. But I think to us, even the more interesting part is really that long-term secular dynamic because mass affluent individual investors historically have not had an easy way to access these types of products and strategies.

And so over the coming years, if we’re correct and you start to see allocations go from the low single digits to the mid-single digits, that literally is trillions of dollars that have the potential to move to alternative products. And when we think of how we’re positioned given our brand, our track record, the investments that we’ve made in distribution and marketing, our ability to product-innovate, we feel really well positioned to be a winner in the space over the long term.

Rob Lewin: Alex, just as it relates to your question on our 2026 targets. Historically, we haven’t included much of anything as it relates to private wealth. As we look forward, given some of the early success that Craig just went through, we do see some contribution coming over the next few years across the number of different investing businesses that we have. And Craig just hit on it at the end, the real opportunity we see as we do long-term financial modeling is really in that post-2026 area, between 2026, ’28, as we continue to ramp, that’s where you’re going to start to see a real inflection and much more material contribution to our P&L.

Operator: Our next question comes from the line of Glenn Schorr with Evercore. Please proceed with your question.