Scott Nuttall: Yes. The only thing I would add, Fin, is that you’re right to ask about the KCM opportunity. As a reminder, when we spoke at the end of November, we talked about all the different positive opportunities we had to unlock more value with GA, including across the rest of the firm from an investing standpoint, creating new product, private wealth distribution, Ivy, which is our third-party fund strategy, and then global in particular, Asia. And as part of that list, we did talk about the capital markets opportunity and we do think that, that can be quite meaningful for us. So think of it as, in effect using the model we’ve already built with KCM, but more across this ABF platform. We really haven’t gotten to that yet.
And when we had 37% ownership from third parties, it was a little bit more challenged to get after that. We think over time, that could be a significant opportunity, call it, in the hundreds of millions of dollars if we can get that right. It’s going to take time. We’ll keep you posted on it, but we do think that is the next big legged growth across all things structured finance, structured credit, asset-based finance for KCM.
Operator: Our next question is from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Patrick Davitt: Questions on margin. The FRE margin came in much better than consensus. So firstly, is that mostly a function of the much better capital markets results? And secondly, if so, if this continues into 2024, as you suggest, should we expect a similar incremental positive operating leverage impact as that line item recovers? Thank you.
Rob Lewin: Hey, Patrick. For quite some time, and we’ve guided that we feel like we’ve got a business model that could operate in the low 60s from an FRE margin perspective, which drove the FRE margin beat in the quarter is a combination of a few things: healthy management, fee growth, clearly very strong capital markets quarter for us. And then also some operating expense leverage as well. As we move into 2024, with our already announced shift in how we’re going to form our compensation pool at ATR and reducing the compensation load against our fee-related revenue, our expectation is, going forward, we’re going to be sustainably able to operate in the mid-60% FRE margin zip code as a firm. And I think I said this last call or the call before, I don’t think that mid-60% level is a cap for us given the business model that we’re employing.
We’re trying to scale things that we’ve already started here. And if we’re right and are able to execute on that, we’re going to be able to drive revenue growth, fee revenue growth, at a level that’s well in excess of expense growth over the next several years. So I do think we should be able to, absent a really draconian type of market environment, operate at that mid-60% FRE margin quarter in, quarter out, with the potential to be able to drive that up over time, assuming we’re able to execute as a management team like we think we can.
Operator: Next question is from the line of Steven Chubak with Wolfe Research. Please proceed with your question.
Steven Chubak: So two-parter for me just on the PE fundraising outlook. The closings for the next-gen tech fund, the third Global Impact Fund, certainly encouraging. Meaningful step-ups versus the prior vintages. Does that momentum increase or inform your confidence for the upcoming PE flagship fund raise? Or are these simply too niche and sector specific to offer any sort of read across? And when do you expect to go to market with the funds given the significant amount of deployment capacity that you still have to work through?
Craig Larson: Hey. It’s Craig, why don’t I start. Look, I think, again, as it relates to the deployment capacity, the numbers are going to be understated given platforms or platform investments we’ve made, et cetera. So I don’t think the dynamic is, one, as it relates to deployment, I think in particular as we look at our pipelines which are building and actually expect across the industry to see deployment increase in ’24 as it relates to ’23. And I think as it relates to your first question in terms of overall tone, look, I think as a starting point. We’ve seen a nice increase in public markets. We’ve seen broad markets improve since mid-October, to say the least. High yield and fees are up, LSD’s up. And I think in addition to that, we’ve all seen the increase in the capital markets.
And so I think given that backdrop as it relates to fundraising and tone, I think like if anything, on balance, it feels like clients are more front-footed. And again, it’s tough to draw broad conclusions from one-month of activity, and we’ll see how things continue to play out from here. But given our track records, the performance that we’ve had, in particular, in a business for us, like Americas private equity over a long, long period of time, I think we feel very good about the opportunities that we see as we embark upon fundraising for that strategy.
Scott Nuttall: Steven, it’s Scott. To your question about read across. I don’t think it’s a stretch to say that it does inform our broader perspective. Much of the funds that you mentioned were raised at a period of time where the capital markets were nearly as robust. And what we’ve seen is that investors are re-upping the funds where they’ve seen strong performance. Also, the color from the dialogue we’re having is, I think, even more mature programs out there understand these are going to be very good vintage years and don’t want to miss out. I think in the past, if you go back to the financial crisis, there are some institutions that pulled back and then had regret. And so I think there’s an understanding of that in the market.
And that’s on the more mature programs, which I would say the minority of the people that we talk to. If you think about how the industry has expanded across sovereign wealth funds, insurance companies, family offices, obviously, we talked about the private wealth channel, we’re optimistic. Some part are based on those discussions and in large part based on the great work our team has been doing in terms of keeping the investment performance very strong.
Operator: Our next question is from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Brian Bedell: Maybe just to focus back on capital markets and maybe more of the longer-term view. So if you think about it from more of a structural basis in terms of your current dry powder, but also the deployment pipeline over the next few years from your flagship fundraising cycle, and then you mentioned the ABF opportunity as well over the long term. So as we think about that and building out to 2026, not to put a number on it, but is it fair to assume you could easily be well over $1 billion in capital markets fees by then even without a particularly robust capital markets environment? And in terms of your $4.50 per share cost target, should we be thinking of maybe a more robust environment as you’re driving the plus in that equation as opposed to the baseline of $4.50?
Rob Lewin: Hi, Brian. It’s Rob. I’ll start off. So we really like our business model and our approach to market with our capital markets business and I think that’s a big reason why there’s a lot of upside. And the way we face the market really is with one team that represents our private credit pools of capital, where we’re one of the largest providers in the world. Our capital markets expertise, it’s that same team when they’re facing a client, that can well across our liquid credit business, which is one of the biggest liquid credit businesses in the world. And so we combined 3 very large aspects of our business, and we think that’s a real benefit to our clients. And there’s not a lot of firms out there that can match what we do from a coordination perspective.
I like our ability to go compete for talent in the capital market space. We’ve been able to recruit and retain, over the past number of years, some really talented people at what they do. And especially as we’ve expanded in product and geography that’s a big part of our story and I can see more of that. You referenced what types of upside we have. I think if you look back to 2021, of course, we had a buoyant capital markets at the time. But KKR does a lot more as a firm today, both from a product perspective, deployment perspective and geographically than we did then. We think we’re going to continue to be able to take share with third-party clients. And Scott just touched on the opportunity to coordinate with Global Atlantic and the opportunity that, that can create on the ABF side.
And so no specific numbers — excuse me, on the ABF side of KCM. Those specific numbers of course, as it relates to 2026, but we think this is a growth-oriented business and we think in a really good capital markets environment, we’re going to be able to grow off of that $840 million revenue number that we put up in 2021.
Scott Nuttall: Brian, it’s Scott. Look, I think we’ll go deeper on this in April when we’re together. But the way we think about it, if you look back 5 years, it’s really not very representative of what KCM is today and where it’s going to be, to your point. So we’ve been globalizing the business across more of what KKR is doing around the world. We’ve been penetrating more of our own strategies and efforts. So for example, if you go back several years, infrastructure wasn’t a very big part of the Capital Markets business, now it’s a very large part of that business. And that informs our perspective on the ABF opportunity, candidly, the real estate opportunity over time. And then on top of that, our portfolio is larger. So there’s more refinancing.
