Jul 09, 2018


Suzanne Donohoe, Head of the Client and Partner Group, covers the fundraising environment and how the team is extending the duration and scale of the capital we raise.

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Client & Partner Group: Observations from the Marketplace

Suzanne Donohoe
Head of Client & Partner Group, KKR


Introductory Remarks

Good morning everybody. My name is Suzanne Donohoe and I have the pleasure of leading the Client & Partner Group here at KKR. I am a partner in the New York office and I have just begun my tenth year at the firm after spending close to 17 years at Goldman Sachs. It is nice to be back with you; I think there are quite a number of you that may have joined us in 2013. We have a very good next chapter to our story and even more importantly, lots of room to run.

What I thought I would do in our time together is really cover two broad areas. First of all, we are going to focus on some quick industry backdrop points, some of which will echo what you heard from Joe and from Scott this morning, but I think will really feed well into understanding the environment in which we are competing. Then I will turn to some KKR specifics.

We Are in a Vibrant Fundraising Environment

First of all, for those of you that have not been watching, we are operating in an ebullient fundraising environment. Normally I might hesitate to put a slide like this up in front of you. I do not know about you guys but any time I see something where the last bar on the page is surpassing the earliest bars on the chart, it makes me a little bit worried.

But the reality is what has driven this growth in fundraising in the alternative space is both an incredibly supportive macro backdrop but also, importantly, some very durable trends that we are going to talk through here in the next few minutes, which will help you understand why we think this is not a near‑term trend but a longer‑term trend supporting our industry.

Returns from Private Equity have been Strong

First of all, as we all know because you all serve many of the same clients that we serve, the client organizations, the institutional and high‑net‑worth pools of capital that are out there have a thirst for return. We are operating in the asset classes that have delivered that return for them most clearly over the last ten years.

What is happening as a result of that is investors are allocating increasing proportions of their asset allocation to the spaces in which we compete. They have to do that, as you know, because the state of the funding gaps that pervade these organizations is startling.

If you look at this number, you can see they are now facing in the aggregate close to $4 trillion of deficits globally. So people are having to get much more creative about their sources of return and thinking about how they arrange their assets in that quest to plug the gap. Old solutions are not working anymore. With 30‑year treasury yields around 3% and a liability profile still close to 8%, there is a big problem to fix. So we find the clients that we serve are really looking in all sorts of places for sources of return that they believe can deliver for them for the future.

Sovereign Wealth Funds Continue to Grow

Importantly, not all the pools of capital are facing these trends. Some are newer and just beginning to allocate but operating in that same low‑return environment. So if we focus on the sovereign space for a moment, where today, there are $7.5 trillion of investable assets, up almost $1 trillion from just one year earlier. And where over 25% of the pools in this space were just established within the last decade. This is a very large and growing pool of capital that in many cases is just beginning to allocate to alternatives.

Meaningful Opportunities for Growth

As you can see if you focus on the bottom part of the chart, you have several very established institutional pools of capital, names that are familiar to you all. You can see what they have done over time to take advantage of the illiquidity premium and the attractive returns offered in the space in which we compete.

Now focus on the top part of the chart and look at some of these pools of capital that in many cases are multiples bigger, where they are really just beginning this journey. This is one good example of a positive tailwind that we are benefiting from.

Overall High‑Net‑Worth Market is Large and Growing

A second is the high‑net‑worth market. Todd Builione mentioned a few minutes ago the focus on retail, but if I broaden the landscape for a minute and talk about it as the individual investor market, what we see here is a huge and growing pool of capital. In many cases, particularly in the high‑net‑worth space, there is a predisposition to think about locking up capital to take advantage of long‑term returns to really, again, access that illiquidity premium.

When I look at this pool of capital, at $60 trillion growing faster than pension pools around the world, this is a very exciting space and one where we are really just scratching the surface.

Insurance Companies' Allocations to Alternatives are Scaling

Insurance companies as well are finding that increasing their exposure to alternatives is really one of the most important things they can be doing to plug their own funding gaps. which look not dissimilar, in some cases, from what we see in the pension space.

Today the global insurance market is something like $27 trillion. We surveyed a group of these insurers, particularly those that have been more forward‑thinking, just recently, in a paper that we did together with our Insurance Group and our global Macro & Asset Allocation team. What we found is that they are moving apace. They are recognizing the return opportunities available in the alternatives space and readjusting their balance sheets in order to take advantage of this.

Alternative Asset Management Industry Continues to Grow

What does all of this add up to? Joe talked about it this morning. Today we are competing in a $10 trillion alternatives market that is set to double by 2025, growing historically at a rate over 12% compound annual growth rate.

When I step back and think about the competitive landscape and think about the many different industries in which we invest, very few of them have growth rates that look like this. This is really the landscape in which we are operating.

The Largest, Global Firms are Best Positioned

Importantly, it is also a highly fragmented market. This is also a point that we touched on this morning. This is just one small illustration of it. What we see is that even the big are not that big, at market shares of, call it, 2–6%, depending on which number you want to focus on, on this page, and then they are gaining share from others around them.

As I step back and think about that $10 trillion alternatives market and I think about us at $190 billion in capital and still one of the larger providers in our space, we have a ton of room to run.


Client & Partner Group: Our Client Effort


Client & Partner Group Today

Now I thought I would pivot to a bit more of a conversation about we have been doing at KKR. I will really try to touch quickly on four key areas: our team; our performance in generating growth in assets under management; the build‑out of our franchise, probably most importantly and then, finally, what are a handful of the areas we are focusing on.

First of all, on our team we have about 80 people who wake up every day at KKR thinking about clients, thinking about how we raise capital, how do we ensure we are listening to our partners, understanding what they need, what we can do for them and how we can help them to access all the intellectual capital of KKR and to deliver return for them in the process.

That team is increasingly experienced and tenured at KKR. As you can see we have about half a dozen years of experience, on average, at the firm and somewhere between 15–20 years of experience at the senior levels of the team in the industry.

AUM Growth Across Asset Classes

Why does this matter? I think it matters because it is becoming a very important accelerant of growth for us. We just talked about the industry growing at 12% a year. We have been growing at almost 20% a year over similar time periods and importantly doing it across the board. So not just been gathering private equity capital where the firm clearly has our longest track records, but really helping to seed so many of those new businesses that we have touched on previously, and in the process diversifying the toolkit that we are able to offer to clients and really solidifying the depth of relationships that we have.

Gross New Capital Raised

What does that look like on a gross capital raised basis? Because what you just saw included the effect not only the new capital we brought in but also the impact of all those monetizations that have been going on over the past few years in very healthy capital markets.

This is the gross capital raised over the last several years. You will note that if you look over the last 3–4 years, we have raised about $100 billion over the last four years, or in excess of that and really look forward to continuing that pattern.

Investor Base Growth Across Platforms

How are we doing that? I think it is exciting to pivot from a conversation about asset growth to one about franchise growth. This really may be the page that I am most proud of as the leader of this team. When we look here what we are really doing is laying the foundation to support all the growth that we have been talking about all morning.

As I compare progress from 2011, we have grown the number of Private Equity investors more than double in just a short period of time. In Credit, we have grown the number of investors over nine times; in Real Assets somewhere between five and six times; and in growth equity we are really just getting started. So it is exciting to step back and think about when we go back with fund IIs and fund IIIs and fund IVs, that we start with a much more broadened investor base and really a variety of different organizations that know us from different vantage points.

One Team, One Dream

Another way that you can see the franchise impact of what we have been building is to take you back to Capital Markets for a moment. Adam did a great job of talking through the growth in the Capital Markets franchise. We are a very proud partner of the Capital Markets business in helping to drive that acceleration of growth.

You can see the CPG contribution to the equity syndications that have been done over the past few years. Importantly, as you evaluate the question of is 2017 a repeatable number, the reality is it is much more repeatable today because the breadth of the client franchise has extended by so much.

We are Reaching More Investors

So Tara's illustration, I did not even know this stat until she delivered it, but 11 of 18 of the co‑investors in Q‑Park coming into Infrastructure Three that had not been investors previously. That is a great illustration of the power of our model. So finding ways to both use the model to enhance the profitability for the firm, but more importantly to enhance the relationship with a client and in the process cement what they are doing with us, do more with them and make it a durable and lasting relationship.

Maybe stepping back, what does this mean when we look across? Obviously the page we were looking at a few minutes ago showed some examples of clients that invest with us in multiple franchises. Today, even by very conservative measures, we have over 900 clients of KKR and we have on average two mandates per client. These are both metrics that we track religiously, that we incentivize our team to focus on and that we plan to continue to develop over time.

I say these are conservative measures. It may help you to understand them a little bit more as you compare us to our peer set. First of all, the 920 gives no credit for any of the relationships that sit in any of our hedge fund stakes partnerships. So no Marshall Wace clients, no PAAMCO Prisma clients, no Nephila clients, no BlackGold clients are really being counted in this number unless they are also clients of KKR.

Secondly, in terms of the cross‑sell count or the number of mandates per client, we only give ourselves credit for a cross‑sell if a mandate is sold into a completely new platform of the firm. In other words, no counting re‑ups in the math here. Even on the basis of this conservative approach, we have seen very significant improvement in the efficiency of what we are doing and as I said, in growing the depth of our franchise.


Client & Partner Group: Current Areas of Focus for CPG


Extend the Duration and Scale of our Capital Base

What I thought I would do in the last couple of minutes is just share with you three or four of the areas where we are spending a lot of time and a lot of focus right now. The first, again, will be a recurring theme from this morning; I guess we like to repeat ourselves a little bit. We are highly focused on extending the duration and the scale of the capital that we raise. We talked in earlier discussions today about permanent capital, but maybe just to spend another minute on the strategic investor partnerships with recycling that Scott alluded to this morning.

These are very, very long‑duration, multi‑asset‑class partnerships where a client will award us a very significant mandate to begin. The typical size has been around $3 billion at a clip. And where we have an extended duration to manage those assets, we have a lot of discretion in how those assets are deployed, with a lot of input, of course, from the client. Then we have, typically, recycling rights of all of the capital and a very good portion of the profits.

The net impact of these types of partnerships is that, if they begin at $3 billion, they are typically 2.5–3 times that size by the time we reach the conclusion of the investment period of these mandates. Then we will end up with another, call it, 5–10 year harvesting period.

These are very significant mandates where is a great deal of customization with the client and I would say a great depth to the relationship, and certainly wonderful examples of an area where we are increasingly differentiating ourselves in the market.

Continue to Add New Clients and Cross‑Sell

A second focus is, to me, a little bit like motherhood and apple pie. We plan to continue to grow the franchise, adding dozens and dozens of new clients a year. We have typically been adding about 100 a year, and to continue to cross‑sell.

You can see this is another way to view the progress that has been made on these measures over the last several years. Importantly, though, you can also see how many of our clients are now entrusting us with multiple mandates. It is over a third of the total client count, which I think is impressive when you think about how many of these relationships are actually still quite new to us. If we are layering 100 or so a year on, we have probably 300 clients in this count that have really only joined the party in the last couple of years.

Importantly, as these mandates expand what we hope to do is achieve an even greater proportion of clients at the so‑called platinum level, which we would identify as those who have given more than $500 million in capital to manage. Those clients typically have about 4.5 mandates with us, if you will, per client.

Drive Insurance Penetration

We plan to continue to drive those two franchise builders. We also will keep focusing on the insurance space. Today we have a dedicated team in this space that is small but very focused on differentiating ourselves through research, through building custom products that really address the specific needs of the insurance market, and we feel like that hard work is paying off. We are showing a 35% growth rate in this segment and today enjoy relationships with about 90 different insurers across a wider range of asset classes.

Keep Growing Individual Investor Business

And finally, we want to keep focusing on the individual investor market. When I think about that $60 trillion of AUM that I showed you just a few minutes ago and think about our share, at $27 billion, we have plenty of room to run and it is a space where our brand tends to resonate incredibly well. Where people are interested in how do they access the intellectual capital of KKR, and where we are really just getting started.

Where Does CPG Go From Here?

Medium-term objectives

So, what does all of this mean for CPG? I think it means we are up and to the right. Is that to the right, sort of to the right? When I look at our medium-term objectives that are here on this page that we have had out there for a little while, I am highly confident that we can achieve or surpass these objectives in the requisite time that we have laid out, and I am really excited about the chapters to come.

Active components

And really it is very basic from where I sit. I look at all the different components that we have working for us. Between the seasoning of our team, their tenure at the firm, the fact that we have been able to broaden the investor base as much as we have, deliver on the cross-selling promise, where I think we are really only in very early innings. We are benefitting from the fabulous performance that my partners are putting up across the board; really across pretty much every investment area at KKR, we have strong performance to sell. And then we have these macro tail winds, whether in sovereigns, in insurance, in high net worth, and I look at all of that and say, this is a great story yet to tell.

So I would like to thank you all for your time and I am going to hand it over to my partner, Bill Janetschek.



Investor 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.