Glenn Schorr: So the question relates to the banks, and I see 2-way activity. I see right now, I see a little bit more banks coming back into the leveraged loan space, and you see some movement and them getting into providing some services in private credit. Yet at the same time, we know capital requirements are going up in private credit world and more asset-backed opportunities are coming your way. So I just wonder if you could talk a little bit about that dynamic and what specifically you’re doing on the asset-backed side to position for what we all think is a lot of growth ahead. Thanks.
Craig Larson: So Glenn, why don’t I start. And thanks for asking, because these are really important secular drivers really as it relates to both businesses. So as a reminder as of year-end, we had around $90 billion of private credit AUM, almost 50 of that was in asset-based finance and $38 billion in direct lending. So these are big businesses for us. I think probably larger than someone might expect in the framework of KKR. And you touched on two things. I think first, as it relates to direct lending and overall activity, we are seeing a lot more activity in the leveraged loan, in the high-yield market and CLO issuance feels like it’s picking up. We actually look at all of that as really good for our businesses. And as it relates, now a lot of that has been refinancing related, so it’s been less new dollars in.
But as it relates to new deals, we think that’s going to be helpful for mid-market M&A. And if the private credit markets end up having a lower market share but of a bigger pie. We think that dynamic is one that can still work really well in the framework of our firm. And in terms of private credit, I think there are lots of advantages that are going to lead to people to continue to use that market. The point on ABF is a really, really important one, and it relates to the dynamics that you’re talking about. So I think as banks pull back from many types of lending and divest noncore loan portfolios, our opportunity set, we think, is just going to continue to expand. And you’ve actually seen this in recent announcements from us. So two weeks ago, we announced an accounts receivable financing for our barbecue business.
I remember you actually sent me an e-mail on this. As I know you were hoping that could lead to nice little trinkets at our next Investor Day. In December, we announced a partnership with BMO focused on a $7 billion portfolio of RV loans. In October, Goldman announced the sale of the GreenSky platform to a handful of buyers of which we were part of that consortium. And in August and September, we announced the acquisition of a portfolio of prime auto loans from a regional bank in the Southeast. So I think you’re seeing lots of opportunities to firms like ours to participate in asset-based finance in a way that you didn’t see 5 years ago, and it’s a really important tailwind as we think about the growth and opportunities that we see ahead.
Scott Nuttall: Yes. The only thing I would add, Glenn, is we see a lot written about the direct lending market, rightly so, it’s become a very large and important market. I think Craig is right. M&A volumes have been down. Private credits had a larger share of a smaller amount of volume. And so as the banks come back, our expectation is you’ll see M&A volume pick up, and there’ll still be plenty for the private credit market to participate in. But this ABF business, I don’t think is that well understood yet, whereas the direct lending market is probably roughly $1.5 trillion, the ABS market is probably closer to $5 trillion, on its way to $7 trillion. And it is kind of my view, becoming an asset class for institutional investors to understand a little bit.
Like 10, 12 years ago, infrastructure and direct lending were very new concepts for most investors. We’re having more dialogue on asset-based finance, seeing more investors start to create an allocation or a sub-allocation on private credit. It’s obviously incredibly synergistic with what we’re building at Global Atlantic, and we’re seeing interest from third-party insurers as well. And I do think there’s a significant amount of growth ahead for that business. We have 20 or so origination platforms around asset-based finance so far, and I’d expect that number to continue to go up. I would guess in April when we’re together for the Investor Day, we’ll go deeper on that topic.
Operator: Our next question is from the line of Bill Katz with TD Cowen. Please proceed with your question.
Bill Katz: So maybe just flipping over to the insurance platform and just sort of adjusting for the solar gain in the quarter. I mean how we should be thinking about the ROE for the platform given sort of, two parts, one, and now you have 100% of the platform. And two, if interest rates were to go lower, is there enough growth in the business to offset any kind of degradation in net spreads? Thank you.
Rob Lewin: Hey, Bill, all great questions. Thank you. First thing, I guess we look at Q4 and we look at 2023, a very strong performance from the Global Atlantic business. Management team has done a great job, and it’s a big reason why we’re excited to own 100% of the business. You are right that in Q4, as well as through 2023, that the P&L did have some tailwinds, some variable investment income on a gross basis, about $35 million in Q4. At the beginning of the year, we’re at about 20% of our book on a net basis exposed to floating rate. Team did a good job making that adjustment, and so got the benefit of rising rates through much of ’23. We ended the year at about 16%. And so as we think about interest rates going down in 2024, we’re conscious of that.
In Q4, too, specifically, we made a modest adjustment to our comp. So effectively had over-accrued a little bit through the course of Q1, Q2 and Q3. So all things that positively impacted the quarter and all things front of mind as it relates to how we plan for 2024. So as we look at Q4, not necessarily replicable in the near term. But as you said, we have so many levers to be able to grow the GA franchise that our expectation even in a reducing rate environment is that GA is going to continue to perform. As it relates to ROE targets, we continue to think the right level to model the business at that 14% to 15% pretax ROE. The team has done a nice job being able to beat that and beat that by a healthy margin over the past couple of years. But we are going into an environment here that could be lower interest rates and put a little bit of pressure on the P&L.
Operator: Our next question is from the line of Brian McKenna with JMP. Please proceed with your question.
Brian Mckenna: So just a question on the capital markets business. I’m curious, how did activity trend throughout the fourth quarter? I’m assuming November and December were better months just as broader markets rallied quite a bit into year-end and then has this momentum carried into the new year? And I’m just trying to get a sense of the jumping off point for capital markets activity levels to start 2024.
Rob Lewin: Yes. Great. Thanks for the question. Obviously, we’re really pleased with the performance of our capital markets business in Q4 and really for all of 2023. If you look at Q4 specifically, great quarter did benefit maybe from a bit of deferrals, some fees that could have been that ended up in Q4. You’re right, as the markets picked up in November and December, that definitely helped as well. But I think the more important point on our capital markets business, really, if you look at 2022 and 2023, through much of both of those years, debt capital markets, equity capital markets were largely shut. And our business still was able to generate, on average, close to $600 million of annual revenue in both of those years.
So we’re quite proud of the resilience of the business model, the durability of the business model. So it wasn’t that long ago in a very healthy market environments, our capital markets business was generating roughly $400 million a year. And as you also point out, we’ve got a business that can generate really outsized outcomes when the markets come back. It wasn’t that long ago, 2021, where our capital markets business in very healthy markets generated $840 million of revenue. Now despite the strong Q4, we’re not back to those healthy levels of capital markets deployments. It’s still relatively muted across the space. Leverage finance market feels better, but the CLO market is continuing to get healthy. IPO markets, secondary markets, they continue to trend in an upward way, but not back anywhere close to where we were in 2021.
Now as we think about pipelines going into 2024, we’re quite constructive. As it relates to Q1, still very early in the quarter to give you a read. But our pipeline as we’re going into the year just across the firm from deployment, the engagement we’re having with our third-party clients, we’re expecting a constructive 2024.
Operator: Our next question is from the line of Finian O’Shea with Wells Fargo Securities. Please proceed with your question.
Finian O’Shea: Going back to ABF, a lot of color you provided there. Recently in a presentation, you outlined the ABF origination growth in recent years, seeing if you can touch on the potential for improvement into 2024. And then what that can mean for the credit fee rate and potentially the capital markets opportunity. Thank you.
Craig Larson: Finian, it’s Craig, why don’t I start there. So we noted in that presentation that if you look 2018 to 2020, so before the GA acquisition, average annual asset origination was in that $9 billion a year. And if you look post acquisition, we’ve averaged $25 billion. Now that is not just ABF, that includes direct lending, that includes mortgage loans, et cetera. So I think as we look how we’re positioned in growth in activity from here, we think the opportunity for that is one that’s going to be able to expand as it relates from an ABF standpoint, both the insurance relationships that we have in addition to the capital that we have, that’s more opportunistic in nature. So I think again, that outlook for us is one, as we’ve continued to grow and expand, that we’re very positive on and could be a real growth engine within the credit business broadly.
