KKR & Co. Inc. — 2024 Q1

Craig, it's Craig. Thanks for the question. Why don't I start? I'm sure Scott will have a couple of thoughts also. First -- and thanks for beginning in the way that you did. I think as Rob noted in our prepared remarks, the $1.1 billion of deployment you saw this quarter is not representative as we look at our activity. We've got a really healthy backlog of announced transactions. And if anything, it was just a dynamic, where a pretty modest amount of that activity closed in the 90 days ended March 31.

Yes. The only thing I'd add, Craig, is we do think the M&A market is coming back. I think to your point, the leverage credit markets opened up in January. We are starting to see this impact all of our businesses, to Craig's comments. But I'd say, in particular, private equity pipeline, which is up significantly. There's a lot of activity. What we announced in Q1 is obviously backward looking given it takes some time for these deals to close. The Cotiviti deal that you mentioned actually closes today.

Great. And thanks a lot for the question, Alex. So you did mention this, I think the most important thing as it relates to capital allocation is to have a consistent framework, and we've had a really consistent framework for some time with one overriding objective, and that's to use our excess free cash flow to drive durable and recurring and growth-oriented earnings per share and to do so by leveraging our platform at really high ROEs. And I think the only thing that's really changed is, at our Investor Day, we outlined the opportunity to generate $25-plus billion of cash generation over the course of the next 5 years, and it's just a huge opportunity for us.

Bill, it's Craig, why don't I start. So I think there are a couple of things here. First probably worth highlighting investor interest in private credit as that continues to feel very good. So I think in direct lending, spreads have come in certainly. But if you look at a new direct lending deal, given where base rates are in 3 months so far, that's still a 10%-plus piece of paper. And in ABF, there's just a number of really positive macro tailwinds, as Chris Sheldon, again, walked through a handful of weeks ago. And within that part, we're active in both ABF -- in investment-grade ABF in addition to opportunistic.

Bill, it's Scott. The only thing I'd add is in addition to the organic fundraising that Craig ran through from third parties, we mentioned in the Investor Day the symbiotic relationship between Global Atlantic and our credit business in particular. We're definitely seeing that show up in the numbers as well. And it's also allowing us to see how our third-party insurance AUM as well at the same time. So it really does feed credit, and it has historically.

So just a 2-parter here on core private equity. So first, is the $20 million in net dividends in the first quarter a good quarterly baseline for the remainder of this year? Or should we expect some growth off of that? And then bigger picture, I'm curious if interest is picking up at all from LPs around the strategy, specifically as the portfolio continues to mature here while dividends are also set to increase notably in the coming years.

Brian, it's Rob. I'll start off. Plus or minus $20 million Strategic Holdings operating earnings, a pretty good level to model for the remainder of the year. As we move forward and get closer to $300-plus million by 2026, I think you'll see a little bit more stability in that line item quarter-to-quarter. Might bump around a little bit in 2024, but plus or minus $20 million is about right.

Yes. I think to the second question, Brian, we haven't been out actively marketing core private equity. We've got plenty of dry powder in the pools that we manage today. The next thing we'll be talking about with our investors on the PE side is going to be America's private equity. So we'll give you an update as those conversations come in.

Glenn, it's Rob. I'll start. I think you hit on it in your last remarks there. It is not a need-to-have for us. And so we want to be in businesses where there are large addressable markets, and we've got conviction, we can be a top 3 player. Of course, over time, we've looked at the secondary space. You could assume that most every M&A transaction that's happened in the secondary space, has come across our desk here. And either we determined it wasn't the right partner to be a top 3 player or we determined that we just weren't willing to pay the price that was a prevailing price in the market.

Yes, sure. Thanks for the question, Patrick. So I'd say that if you look at the flows at GA this quarter, probably about 75% from the institutional side of our business, give or take. Again, that's inclusive of the big block transaction that we did in the quarter with Manulife. We've had really good momentum on the individual side of our business as well, with very strong sales both in Q4 of '23 and again in Q1 of 2024.

Sure, Dan, it's Rob. I'll start. So what we're seeing in the GA business is really strong performance, really strong operating performance, and really an even stronger outlook for the future. What happened in Q1 or what transpired from a P&L perspective in Q1, very much by design. When you complete 2 very large block deals north of $20 billion of assets, you're going to take on the cost of those liabilities day one. But we really have a 12- to 18-month period where we've modeled redeployment of the assets into higher-yielding investments. And we're operating at higher levels of cash balance. That was point one.

Yes. The only thing I'd add, Dan, is that none of this is a surprise. I mean we closed on $23 billion worth of block transactions. And when we price these deals, we assume there's going to be a ramp period. So that's proceeding as we expected. And I think the business overall is performing incredibly well. Both on the institutional side and the individual parts of GA, we're seeing a significant amount of growth and a significant amount of opportunity.

Yes. Great. So starting on the cost of insurance, and I think you really hit on it. As you see the rotation in a higher interest rate environment, our crediting spreads have, of course, gone up so have the yields that we're able to generate on the investment side of the portfolio. So being able to generate that spread continues to really exist in the business. So you'll continue to see, I think, an upward draft on our crediting spreads for a little bit. And then ultimately, it would be a function of where interest rates shake out.

Why don't I start first. I think as it relates to SRTs, it is a market we are active in. It fits in our view, very well with our ABS strategy. We're knowledgeable across a host of assets, and we do like to partner with the banks. As you note, I think that activity has mainly been EU-focused. It does feel like we are starting to see more activity in the U.S. It also seems like the potential opportunity set could be expanding. I do think the most common underlying assets for SRTs have been in corporate loans, fund finance facilities, consumer term loans, does feel like banks are beginning to explore opportunities across other asset classes.

Part of the reason, Steven, that we spent so much time on this part of the business at the Investor Day is we do think this is a really interesting and sizable opportunity. Direct lending is really interesting as well in private credit, but asset-based finance is a much larger market, probably a $5 trillion market on its way to $7 trillion to $8 trillion. And it encompasses a significant number of asset classes, and you really need to have scale to be able to do it well.

Yes. Brian, a few thoughts. When you look back at 2022 and 2023, really tough operating conditions for our Capital Markets business. And for much of that time, Capital Markets on the equity side, on the leverage finance side, were largely shut. And our business generated ballpark $600 million of revenue in each of those 2 years. And so we're really proud of the durability of the franchise that we created. As I look at our pipelines today for the remainder of 2024, we get updated pipelines weekly, our pipelines are a lot better today than they were at this time last year. Now there's a lot to go execute on between now and the end of the year. But the forward indicators for our capital markets business sitting here in early May are definitely better than they were in May of 2023.

Yes. So Brian, we've been in this business since 2006. And over that period of time, what you see is that the revenue tends to be quite correlated with deployment and monetization, especially in private equity and infrastructure. So if you go back to the prior discussion around the fact that our pipelines have picked up significantly, especially in those areas, and we're seeing more activity on the monetization side as well as the markets open up and strategic buyers come back. I think that bodes well.

So why don't I start, Mike. I think you hit on a lot of the key points. I think that the asset-based finance business for us as a whole has just changed really dramatically post the Global Atlantic acquisition. And this is a business where scale begets scale. And so I think we've seen real advantages of partnering with GA, partnering with additional third-party clients. And then an important part of that have been all the platforms that Scott had mentioned and that Chris Sheldon had run through over the course of our Investor Day.

Michael, it's Scott. I think we're going to -- we'll add more platforms, probably not as many as we have. We will add resources to the existing platforms. But remember, these businesses are already out in the market sourcing investment opportunity. And so to some extent, the way I think about it is we're capital constrained, not opportunity constrained. So to the extent we continue to scale our capital base here, we can do more with the existing origination platforms we've already set up. And it's less about needing to add a lot of resources as opposed to just taking more advantage of the flow we're already seeing.

Great. Thanks for the follow-up, Patrick. So today, we've got north of $400 million of visible pipeline as it relates to monetization, call that roughly 60% carry, 40% investment income. As you noted, our pipelines are pretty healthy. As we look at that $400 million, I should be clear, it's not certain all if that's going to close in Q2. Some of that's got some regulatory approvals as part of that. But as we look at our pipelines, they are better on the monetization side that they've been at any point over the past 12 to 18 months.

Yes. Patrick, I'd say we -- I don't know why you're hearing a bit of a different tone. Maybe the markets themselves have a little bit of fragility. The geopolitical risk, there's a good amount of angst about the macro, that could be part of it. Our comments are based on kind of the environment continuing like we see it right now. But if something happened, exogenous shocks, then sure, it could change the environment. But it could be that our portfolio is maybe more global than some, maybe a bit more mature across aspects of what we invested in some. But we're seeing it. This isn't a speculation, we can see it and feel it in terms of the live discussions we're having.

And only part, Patrick, I'd add on to both of those comments really would relate to that investment performance aspect of this, you look at our gross unrealized carry, that number is up 50% year-over-year. That's a pretty big increase, recognizing both the value creation we've seen, together with the fact that we've been in a more modest realization environment. And I think when you look at some of the underlying statistics, as Scott said, we've got a healthy amount of the portfolio that's pretty seasoned. So roughly 50% of that would be 4 years or greater as we look at the maturity of the private equity portfolio.

I would just like to really thank everybody for the time that you've invested in KKR. When we think of the announcements we made in November and at the Investor Day just a few weeks ago, and then together with our Q4 and Q1 earnings, we've been very active in taking a lot of mind share from everyone. So thanks for your investment in understanding KKR better. And please follow up with us directly with any follow-on questions. Thanks so much.