Jul 09, 2018
Henry Kravis recaps Investor Day, speaks more about KKR’s people and culture and why we have a proactive focus on ESG issues.
Co-Chairman, Co-CEO, KKR
Great, thanks very much. Before I get started I have to say I learned something today, and this was really important to me, and that is that Bill Janetschek, our CFO, actually listens to me. So Bill, thanks for raising that.
I want to just thank everyone for being with us today. We have given you a lot of information. We tried to take you through what we feel are the important points to KKR. So I am going to focus on three things that are the, as I wrap up: the significant growth opportunity that we see ahead of us, our differentiated business model and the two things that are vital to our success, which I talked about earlier, which is our culture and our values.
Positioned for Continued Growth
Now, first, a consistent theme that we have heard across the presentations this morning is our focus on growth. Clearly, the company is not going to perform well if we do not focus and innovate constantly, and there is a huge focus throughout the organization on this growth initiative.
We have had meaningful growth across the firm, and we have invested extensively in our businesses to expand into new platforms. That will continue. We are going to build out what we have and we will continue innovating. In fact, that is the one thing that is great about our firm is that everyone and anyone at the firm can come up with an idea and we are going to test it. We will see if it makes sense for a future growth platform for the firm.
And as you can see on this slide, when we first listed on the New York Stock Exchange we were very much a private equity-centric firm; now you have seen that before. Since then our private equity business has grown and it has grown fine from $45 billion to $70 billion. But where you are seeing a significant scaling in our business is really in the newer businesses from $17 to $120 billion.
We have grown and we have diversified into a number of new businesses since 2010 and our non-private equity business has increased more than sevenfold. And that has been done by a combination of new businesses and new geographies as we have expanded globally.
Although we have expanded and we have diversified significantly, today we still only have in our view one business that is really at scale and that is our legacy private equity business that we have been in since 1976. All of our other businesses are young. We tried to show you all of that. We tried to show you how much potential there is in each of these businesses and the opportunity to be multiples of their current size.
Our share in markets such as infrastructure and real estate is quite low, quite frankly, relative to a number of our competitors and certainly low relative to where we are in our private equity. So we see a significant amount of opportunity for growth across the firm.
Scott and Joe showed you what all of this growth can potentially mean in terms of our earning power over the next five and ten years. And we believe strongly that we really are at an inflection point at the firm. George and I often talk about, where do we feel we are? How do we feel about the firm? What do we feel about the future? What do we feel about all of our people that we have, which is the main asset that this firm has?
And I have to say standing up here, I feel as strongly about KKR today as I have ever felt. The people are the best people that we have had collectively, and I think we are as well positioned today for the future as we have ever been.
Differentiated business model
Now secondly, our model of third-party assets under management, plus the balance sheet, plus our capital markets is a true differentiator for us. Now for some of you in the room, I have heard this question at the break, you know, not fully understanding the difference between what our balance sheet does and what our assets under management does.
Assets under management are basically third-party assets that we collect, people give us those assets to invest, and as you saw the large propensity of those assets are eight plus years in length as far as the duration that we have.
The balance sheet is the shareholders. That is permanent capital. That is about $16 billion of assets today. And we use that balance sheet to help fund our new businesses, as you have seen in infrastructure. You saw it in real estate, you have seen it in some of our other products. And we use the balance sheet to basically be one of the largest investors in all of our own funds that we have.
In addition, we use the balance sheet to grow our business by possibly making acquisitions or investments like Marshall Wace and we use it as a way to attract and retain people that we have at the firm. So it is a real differentiator for us, the balance sheet, and when you combine that together with our assets under management, which are third party assets for the most part, we happen to be the largest investor in almost all of our product categories, which comes from the balance sheet, and then our capital markets business. We feel that we are in a very strong position to take advantage of almost any situation and be a real solutions provider.
Our model certainly gives us a competitive advantage and the ability to earn greater economics relative to the fund only approach. And you heard Scott and Joe take you through that and explain how that works and why it is a real multiplier of what we could do if we had funds only and did not have the capability of our capital markets.
It allows us to create new businesses quickly, using the balance sheet capital, like we did in order to start several of our businesses. And it certainly gives us an opportunity on our core investing where we are putting up large dollars from the balance sheet alongside several other large core investors that just multiply the capability that the balance sheet has.
And it allows us to scale those businesses rapidly by using the balance sheet and syndication capabilities to win attractive investment opportunities and act like a much larger player in the marketplace than otherwise we would be able to do. Example – and you saw when Tara talked about that – was our Q-Park investment and how that enabled us to get that transaction done and earn significantly larger economics off that one transaction alone.
The balance sheet and the combination of the model we have allows us to supply co-invest opportunities to many people; many of you in this room, and others, to our limited partners, helping expand our limited partner base and increasing our exposure to the different teams within KKR. It allows us to make General Partner commitments to our funds, which align our interest with our LPs. There is no better alignment than our putting up as much money and as much capital as we do in each of the investments that we are in.
Then, it allows us to do all this while creating high-margin fee revenues for the firm, which are increasingly global and driven by us and by the third parties. Now, remember, capital markets and the balance sheet do not show up in assets under management. They do, however, allow us to scale all of our businesses more rapidly while generating significant economics for the firm.
Our People and our Culture
Finally, the key to achieving our potential is really our people and our culture. This is what makes KKR so special. That is why I mentioned that when I was up here to kick off the program, and that is why I want to mention it again.
We are a solution provider
First, and most importantly, we are one firm. We work together. We collaborate. We relentlessly try to do what we can to create the right solution for a company. Think of us as a solution provider. We have come so far from where we used to walk into a company when all we had was Private Equity and, basically, a second sentence that we would make would be, 'Is your company for sale?' Once that was over, we had nothing more to talk about if he said no and we would walk out.
Today, we can invest anywhere in the capital structure, whether it be through the debt stack from bank loans all the way through special situations. We can invest in equity – majority or minority equity. But, we are one firm and we work closely together to create this right solution. That is really important.
Attracting and retaining the right people with the right culture
Second: we care deeply about our people. We want to attract diverse professionals who are team-oriented, innovative, entrepreneurial self-starters. We spend a lot of time on our interview process. People sometimes wonder if it is not too onerous, too lengthy. We do not think so because we do not lose the people we want to keep for the most part.
The one thing that I am most proud of about when it comes to our people is we have been able to take from every single competitor we have out there – and we have taken some senior people – we have never lost one senior person to a competitor in 42 years. Now, one of the reasons for that is, I think, is that you rarely hear anybody at KKR use the words 'me' or 'I'. Nobody is raising their hands to say, 'That is my idea. That is my deal.' It is a team effort.
This is by design. Having the right people with the right culture and values is critical for us when we think about the integrated business model that we have at the firm. Today, you have met just a small part of the 1,200 employees that we have at the firm. I have got to tell you, I am really proud of the team that we have: the people that have chosen to work with us and to be part of this very special place.
Our Goal in 2018: Generate Attractive Risk-Adjusted Returns for our Fund Investors
Our goal is to generate attractive risk-adjusted returns for our fund investors and to use our business model to maximize the economics from these returns. I hope you have seen that today. I hope that came through, loud and clear, clearly to you.
To do this, we know we all need to work together. We need to think creatively and collaborate together so our 'One Firm' culture with no silos certainly facilitates what we are able to do at the firm.
We Have to be a Responsible Investor
Finally, we have to be a responsible investor. We have been this way for many, many years. We do not make a big deal out of it. We are not out there crowing and writing a lot of op-eds and so forth, but we do. We have been doing this because it is critical for us and it should be critical for every one of you in this room.
Creating value for our employees
When I look across our portfolio companies, just a few things jump out at me. Number one, and not in any particular order, we have hired 62,500 veterans and their spouses that come out of the military, cannot get jobs; many of them. We put them in our portfolio companies.
We prioritized and supported our employees' health, wellness and safety. We have created programs to ensure best practices when it comes to ethical supply chain management. I do not know if any of that came through to you in some of the things that Pete Stavros talked about, but it is embedded not only in our industrial sector. It is embedded in every single company that we have in our portfolio. This is a high priority for us.
58 KKR investments to date have had a partnership with the Environmental Defense Fund. That has helped us optimize each of those companies' environmental footprints. Now, you heard from Pete earlier about that. We are proud of the employee engagement that we have. Being able to say that every single person at CHI or at any of our other companies in our industrials sector and many of our other companies in other sectors are owners, not just employees: that makes a huge difference. We want to do that. We are going to continue doing that by making everyone an owner, by granting them the opportunity to participate in the equity returns directly alongside us.
It is a model of alignment that we know works. We have done it for years. That is how we started the Private Equity industry, which we did not know was going to be an industry back in the 1960s, and then started KKR in 1976. We know it works. Thousands of employees have benefited from this ownership model, and we are going to continue that.
Proactive Focus on ESG Issues
Since 2008, when we began proactively focusing on ESG issues across the investment lifecycle of our various companies, we have seen a significant increase in global challenges facing our companies and the communities in which they operate. Our approach and commitment to responsible investment has also become a sourcing and deal-making advantage for KKR.
Let me give you an example. Last year, we were in a very competitive bidding process to acquire the spreads business – that is margarine – of Unilever. Now, as many of you probably know, Unilever is in an enviable position, as a company, that has really been an industry leader when it comes to sustainability and being a force for good in the business world. When they decided to sell the business, they were not just looking for somebody with capital, but rather they wanted a buyer who would continue their commitment to ethical sourcing practices.
We happened to be just that group. We were able to do that by working toward and ensuring them that we are going to continue working toward the goal of sourcing 100% of sustainable palm oil by 2019. That is just around the corner. It was one of the reasons our team was selected to lead the division on its journey as a standalone company.
It is not just in our companies, we are doing the same thing at KKR itself with all of our employees in our communities and we are making a huge impact. At KKR, we believe we can make a difference by integrating our performance-focused investing philosophy with our ESG initiatives. It is our responsibility not only to serve our investors through strong investment returns, but also to support them by investing in their communities and the companies in which we invest. This is critical for us.
KKR: Connecting the Dots and Using the Whole Brain of the Firm
Let me just say, in closing, I am proud to stand up here. I am proud to have been a co‑leader of this great firm along with my partner George Roberts and the many wonderful employees that we have at KKR. KKR is not about one person, but about an entire team. It only works if we continue to connect the dots, as Scott likes to say, and use the whole brain of the firm.
Well positioned for success
But we believe we are as well positioned today to connect the dots. We are doing it. It is working. You are seeing the growth out of that. We are so convinced that by doing so, we can continue to grow the firm. We are using our model well. We are scaling the new businesses. We are raising a lot of capital, much of it on a permanent or very long-term basis.
This is what many institutions want today. They do not want to just be number 64 in a fund. What they really want is to build a closer relationship on a longer-term basis, recycle the capital, and that is exactly what we can do for them. That is why we are seeing a big growth in these longer-term, separate-managed accounts that are coming our way.
And so we will continue to do all of the things I just summarized for you, and along with that: performance, execution within the growth avenues which are open to us for a third-party business now and the power of compounding. Think balance sheet, again. Think the fact that it has a fixed dividend, and that money that we are not paying out can be used to reinvest. We will have more capital to turn into more value for all of us in this room and others that are listening to us on the webcast.
Our objective is simple. We want to be the most profitable, valuable company in the industry by leveraging our unique business model and culture to deliver superior returns for all of you and for our limited partners who provide enormous amount of capital to us and have put a lot of trust into all of us at KKR. I just want to thank you all, once again.
You spent almost four hours with us so far. We are not through yet. We are going to get to Q&A. But I want to thank you. I want to thank you for at least having some trust in us and being willing to listen to our story. Those of you that have been with us either recently or for a longer time, thank you for the trust and confidence you have shown us. We are not going to let you down.
With that, let me ask my Co-Presidents, Scott and Joe, to come up along with Craig Larson, and we will answer your questions.
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.