Jul 09, 2018
Continuing their presentation, Scott Nuttall and Joe Bae walk the audience at Investor Day through the last ten years and how KKR built the tools, the capabilities and the strategy to position us today for future growth.
The Last 10 Years – Building the Foundation
Joseph Bae: Thank you, Scott. As Scott mentioned, it is an important perspective, I think, to understand where the firm’s focus was in the last ten years in building the tools, the capabilities and the strategy to position us today for future growth. The last ten years has been extraordinary busy and productive period of time for KKR. So we are going to walk you through a handful of the key priorities that we have been focused on in getting to this point.
The first is around globalization of our business and expanding the capabilities and the toolkit that we bring to the table every day.
The Last 10 Years – Global Expansion
Back in 2008, again a decade ago, we had ten offices, we were in six countries, primarily in the US and Europe, and 43% of our investment professionals were outside the US, 57% were in the US. One of the most important things we have done is we have made a big forward investment in the globalization of the platform. Today, we have 20 global offices, we are in 14 countries and the majority of our work force today resides outside of the United States. It may seem obvious to everyone today but if you do not have a global platform, a global perspective, it is impossible to think you are going to be a top quartile investor consistently. You need to understand the macro flows, not only capital but the economic activity around the world, the key demographic, technology shifts happening around the world. That perspective informs our investments in all the different strategies that we are making investments behind.
So this investment in the last decade of globalization, building out a substantial Asia footprint, European footprint has been absolutely critical.
We’ve Expanded the KKR Toolkit
I think the other thing that we have spent a lot of time thinking about this last decade is how do we create a competitive moat around our business? How do we create capabilities, how do we evolve as a firm and as a franchise in a way that it is harder for competitors to catch up with us? For KKR, I am not going to go through everything in a lot of detail but strategically what we have been trying to do is build unique capabilities, value added capabilities that not only make us better investors in everything we do but creates real differentiation in our approach to investing. So it is deep industry expertise. It is a capital markets capabilities, as Scott mentioned. It is building a dedicated global macro team inside of KKR led by Henry McVey. It is a dedicated operations team, over 50 executives that work full time on our portfolio companies around the world. It is expanding distribution and client relationships. You are going to hear from General Petraeus at lunch today, who is Chairman of the KKR Global Institute. It is having expertise around key geo-political risks, especially as we start investing in newer markets around the world. It is developing a real DNA inside the firm around public affairs and stakeholder management. These are reputational issues, it is environmental issues, social issues, the whole ESG complex that we are incredibly focused on at KKR. Importantly, within our firm, it is building internal capabilities in finance, in risk, compliance, HR, IT to help us scale faster and be better in everything that we are trying to do.
Growth & Diversification of AUM and Fee Revenue
The second key building block, as we have talked about already, is how we have diversified our business and how we are trying to scale these platforms. In 2007, 77% of our total AUM was in our traditional flagship private equity strategies and 23% was in the public markets. Today, less than half of our AUM is in private equity. There has been a significant growth in our public markets assets and we have a relatively young but rapidly growing real assets business in real estate, energy and infrastructure. That shift in diversification in our business is also reflected in the management fee and capital markets. Historically, 83% of that entire economic activity came from private equity and today, as you can see, we have a much more diversified fee stream at KKR, 35% being driven by private equity, 25% by our public market and credit businesses and incredibly, 33% by our capital markets business today.
Scaling Faster Than Peers
We are proud, not only with the diversification and the scaling, but I think it is important to note that we are scaling and growing our businesses faster than our peers. So what we have laid out here is our historical growth rates, both in AUM and I will talk about management fees in a second, compared to the five largest listed competitors we have. So that is Blackstone, Carlyle, Apollo, Ares and OakTree. Over the last year, we have organically grown our AUM by 28%. With the acquisition of Franklin Square, which is FS, we actually grew AUM by 38% this past year versus a peer average of 17%. On a three-year basis, we have grown twice as fast as our listed peers and again, on a five-year basis, meaningful out performance in terms of our ability to attract capital and scale these newer businesses. That has mirrored our growth in management fees at the firm. Again, meaningfully higher growth rates on a one, three year and five-year basis relative to our listed peers in the industry.
Organic New Capital Raised Last Twelve Months – Diverse and Attractive
When we talk about diversification and scaling, this is one of the most exciting charts, I think, if you really understand the composition of where the capital is coming and where the firm is growing today. In the past 12 months alone, our firm has raised $41 billion organically in AUM. $4 billion, so just shy of 10% of that number, was raised in our flagship private equity strategies. In this case, our Asia private equity fund. $37 billion in the last 12 months has been raised around the newer strategies that we will be talking around today. Whether that is in the public markets, in credit and in some of the newer growth strategies on the private side around growth, around infrastructure, around energy and real estate. What is important is we are not chasing AUM for the sake of AUM. We are focused on those segments in our industry which we think are the most profitable dollars. 81% of all the capital that we have raised is performance fee or carry eligible and only 19% is not.
Current AUM Profile
So what that leads us to today, as KKR, is $190 billion of assets, very well diversified both geographically, by product line, in the private markets and public markets and again, we are focused on profitable dollars. 88% of our total AUM at the firm today is carry eligible, performance fee eligible. This is something we spent a lot of time focused on. We are just not trying to grow that AUM line, we are focused on making sure we raise dollars that have meaningful economic potential for us.
On a comparable metric, if you look at our peers, they are less than 50% carry eligible on average for their mix of business in terms of carry.
Went Public & Created Permanent Capital
Scott Nuttall: The third thing we did was to go public and create permanent capital. Now as a reminder, we came public in a non-conventional way. So we actually merged a then private KKR asset management business into a closed-end fund that we had created in Europe and then we moved the listing of that then combined company from the Euronext exchange to the New York Stock Exchange in 2010. So we never actually did a proper IPO. We never did an IPO roadshow. We have never actually raised a dollar of cash by issuing equity as a firm in our history.
Our Balance Sheet
So, what happened as part of that merger is it gave us a balance sheet back to the point at the beginning about having a desire to have permanent capital inside the firm. That balance sheet has now grown to about $16 billion of total assets and you can see the break down on the slide. This is very purposeful. We have a bit of a different business model than others. Our balance sheet is bigger than others in our space. If you look at the cash and investments part of the balance sheet, $12.4 billion, it is bigger than Apollo, Blackstone and Carlyle combined. We use the balance sheet in a number of different ways. We get asked a lot, ‘well why do you have balance sheet? Why do you not just have a fee business and keep it really simple?’ There are lots of reasons we have the balance sheet, but the most important reason is it allows us to grow our AUM fees and fee related earnings faster. This is not well understood. A lot of what we used the balance sheet for is to allow us to grow our AUM more rapidly. The metrics that Joe just took you through that we are the fastest grower in our space is as a result of the balance sheet helping to accelerate the growth of a number of our businesses.
The second reason we have a balance sheet is we really like our investments. All of us personally, historically would take our personal capital and invest in our own funds and investments and we did pretty well by doing that. So we all own 40% of the stock and we believe we are making very attractive investments around the world. Why would we not want to own more of those investments in that upside as well? It also allows us to support our capital markets business, which has grown rapidly and is highly lucrative for the firm.
The third reason we have a balance sheet is it allows us to invest for strategic growth. Marshall Wace, Franklin Square, our acquisition of Avoca, which was a European credit manager, would not have happened without our balance sheet. Lastly, it creates a direct alignment of interest with our limited partners. When you can walk into a meeting and talk to someone and say we are the largest investor in everything that we are doing, do you want to come along with us, you are talking to them as a partner as opposed to an agent. I think it is another reason we have been able to scale our AUM more rapidly than the rest of the space.
The balance sheet investments, as shown in the press release we issued, is on the left-hand side. This is about how it is broken down today and we are getting close to our targeted asset allocation. We have got nearly 40% in private equity and you can see the split amongst the rest. The performance based on this pure definition of balance sheet investments has been quite good. Since inception, over 14% meeting the MSCR world and our own custom benchmark. But to be clear, these reported balance sheet results only tell a small part of the story because these are just the pure balance sheet investments. It does not incorporate all the things we are doing with the balance sheet that allows us to generate fee and carry opportunity, which do not show up on this slide.
How We Use the Balance Sheet
So we use the balance sheet in a number of different ways. We invested in follow-on funds for our more mature businesses, we create first time funds and a number of different strategies. We will seed new strategies on the balance sheet. So real estate is a good example of this. We started that business by actually making investments on the balance sheet and then dropping those investments into a fund, significantly accelerating the path to AUM. We support our capital markets business. We will do strategic M&A, as I mentioned. Then periodically there is opportunistic investments that we find very attractive, WMI holdings is a good example of this. It is basically a tax advantaged SPAC in the public space that was a bit of an orphan and we decided to sponsor it and in the process of creating what we think will be a very attractive acquisition.
But this slide is not well understood on the screen. If you look at all of the businesses we have created where the balance sheet has been critical to their creation, it is $106 billion of $190 billion of our AUM. So it is about 56% of our AUM is businesses the balance sheet has been an important part of creating. The important thing from our standpoint is we see even more opportunity to have the balance sheet help us create new businesses and accelerate our growth.
So the balance sheet is an important part of our effort around permanent capital, but it is not the only effort. If you look at the breakdown of our AUM in 2010, you can see it was $62 billion. Virtually all of it was eight-plus year duration capital. So think of that as more private equity style funds committed capital locked up. Then we had a small public markets business for about 7%. In the last eight or so years, the 62 has gone to $190 billion and you can see we have still a significant part of our capital, 59%, over eight–plus-year duration, but there is two pieces of the chart that is growing quite rapidly. That 10% in permanent capital and the 12% in the strategic investor partnerships. The permanent capital, think about it as capital outside the firm that pays us a fee in carry forever and the strategic investor partnerships are very long dated relationships that we have created where we are able to recycle capital plus a percentage of the profits for a long period of time. These are partnerships that tend to have a 20 to 30-year duration. So we are focused on not only scaling the balance sheet with performance but also the permanent capital and recycling capital we have outside the firm. So we have even more visibility on our revenues than we even to do today and we have a lot today. On top of this, of course, the balance sheet will continue to grow.
Built a Unique Business Model
The fourth thing we did in this foundation building phase of the last decade is to build a unique business model. We really have three ways we monetize ideas. It is third-party capital plus balance sheet plus capital markets. The blue circles on the page, those are businesses we own 100% of. As Joe said, we want to be top three in every business we are in. We do not want to be all things to all people, but where we are, we want to be top three. Then the green circles on the page are relationships we have where we believe we can partner with others who are top three in what they do but we do not have to have it fully inside the firm. We are better off creating partnerships. The strategy is very straightforward. We want a scale where we can be differentiated, and we want to partner with others who are differentiated where we can help them or they can help us.
An important part of this business model is our capital markets business, which really sits in the middle of the firm and helps us access equity and debt capital for everything that we are doing and for third parties. You can see on this slide the growth of this business since 2008 has been significant and a big step up over the course of the last 15 months or so. This business has become much more diversified. We are doing a much better job using the model that we have built and that is part of the reason you have seen such growth. To be clear, we think we can grow this business from here. We do not think the last 15 months has been a fluke. We think we are on a new trajectory.
So if you put these four elements of foundation building together, you get the KKR that exists today. The numbers that have come out of that have been quite good. $47 billion to $190 billion of AUM, fees have grown, our number of limited partners has grown, and you will hear from Suzanne Donohoe later, we did not really have an organized sales force in 2007. We have made a lot of investment in distribution since, so that 920 number we think we can meaningfully grow from here and our headcount has grown around the world but our AUM and revenues and profits have grown at a much faster pace.
So we have made good progress. This slide is compelling. But from our seats, we are just getting started. So there is so many more things we can do now that the foundation is built and that is really our focus, which is looking forward to what can we do with this foundation.
DisclaimerInvestor Day podcasts and corresponding transcripts have been prepared for KKR & Co. Inc. (NYSE:KKR) for the benefit of its public stockholders and is not intended to be a solicitation or sale of any of the securities, funds or services that they may discuss. Please find a copy of the presentation here.