Kohlberg Kravis Roberts & Co.'s CEO Hosts 2013 Investor Day (Transcript)

May.24.13 | About: KKR (KKR)


2013 Investor Day

May 23, 2013 8:00 am ET


Craig Larson - Managing Director of Investor Relations

Henry R. Kravis - Co-Founder of KKR Management LLC, Co-Chairman of KKR Management LLC, Co-Chief Executive Officer of KKR Management LLC, Member of Nominating & Corporate Governance Committee, Member of Executive Committee, Member of Portfolio Management Committee and Member of PE Investment Committee

Henry H. McVey - Managing Director and Head of Global Macro & Asset Allocation

Alexander Navab - Member, Co-Head of Americas Private Equity, Head of Media & Communications Team, Global Co-Chair of Private Equity Investment Committee, Member of Management Committee, Member of Investment Committee and Member of Special Situations Investment Committee

Marc S. Lipschultz - Member and Global Head of Energy and Infrastructure, Member of Infrastructure Investment Committee and Member of Oil and Gas Investment Committee

Ralph F. Rosenberg - Member and Global Head of Real Estate

Scott C. Nuttall - Head of Global Capital and Asset Management Group, Principal and Member of the Management Committee

William Charles Sonneborn - Chief Executive Officer, Member of the Investment Committee, and Member of the Portfolio Management Committee

Girish Venkat Reddy - Chief Executive Officer, Member of the Investment Committee, Co-Founder, Managing Partner, and Director

Craig J. Farr - Member of KKR and Global Head of Capital Markets

Suzanne O. Donohoe - Member and Global Head of Client and Partner Group

William J. Janetschek - Chief Financial Officer of Kkr Management Llc, Member of Other Committee, Member of Risk Committee and Member of Valuation Committee


Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Mitch Rubin

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

M. Patrick Davitt - Autonomous Research LLP

Craig Larson


Okay. If I could ask everyone please to take their seats, we're going to get going. Thank you, everybody for joining us. We really appreciate all of you taking the time. My name is Craig Larson. I'm the head of Investor Relations for KKR. Thank you, also, everyone who's joining us through the live webcast feed.

Before we begin, in earnest, I do need to remind everybody that today's presentations will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our SEC filings for some cautionary factors. And we'll also refer to non-GAAP measures over the course of the day, which are reconciled to GAAP figures that are in the materials that are posted to our website. We are excited to be here. This is our second Investor Day. Our first Investor Day was held a little over 2 years ago in March of 2011 and it's been fun preparing for this event because it's given us an opportunity to look back and think about where we were 2 years ago and what we talked about relative to where we are and how we think we are poised for the future across all of our business segments.

You see on the screen, the agenda for today. Shortly, Henry Kravis is going to begin. Henry McVey is then going to follow with some macro-oriented thoughts and we're then going to walk through the key components first of our Private Markets segment. We'll talk to our Americas Private Equity business, our Energy and Infrastructure business and then our real estate platform. We'll then take a short break. And a little after 10:00 this morning, Scott Nuttall is going to take the stage to talk about our balance sheet as well as some strategy points and we'll then walk through our Public Markets segment. For the first time, Girish Reddy is going to present to this audience. Girish is the founder of Prisma. We'll talk about our Capital Markets business. Suzanne is going to walk through the client and partner group and then Bill and I will wrap up with some thoughts on our financial performance, as well as some perspective that I hear from unitholders.

One final logistical point. Instead of having each of the presenters answer a question or 2 after each of their segments, we'd ask that you hold your questions 'til the very end. We've actually allowed for a pretty lengthy period of time for a group Q&A discussion, so all the presenters are going to join us on stage here. And with that, I'm thrilled to turn the stage over to Henry Kravis.

Henry R. Kravis

Thank you, everyone, and good morning to you. I appreciate you joining us today and I'm also very pleased to [indiscernible] here because a lot has taken place since the last time we met.

The one thing that seems to have remained constant is that for whatever reason, we have a market disruption. 2 years ago, when we had our investor conference, Japan had the tsunami literally, that day. Today, we'll see what happens, given the market turmoil on the Bernanke [indiscernible]. I'll see what happens there.

What you're going to hear about today is a lot about where the strategy is for KKR, what are we focused on going forward, and how will we grow the firm? But the one thing you're going to hear is a consistent theme [indiscernible] is that we're focused very much in growth. We're focused on how we [indiscernible] disciplined in our approach. [indiscernible] franchise that we have remains [indiscernible] something [indiscernible] to focus on very much. And also, you're going to hear quite a bit about our balance sheet. This is a differentiator that we have and very important to the future growth for KKR.

You're also going to hear about our continued diversification and how we are disciplined in that approach.

The one thing we're always focused on is how can we best serve [indiscernible] investors and how can we serve companies. And we come at it, really looking at it as a solutions provider. We're solutions-oriented so everything we do at KKR is focused on can we offer a solution to a company or can we offer a solution to an investor that has a need for a particular type of investment. And this allows us the differentiation that we think is very important.

So what has really changed since the last meeting? Well, last time, I told you that there are 3 legs to the stool. We're in Private Markets, Public Markets and Capital Markets. That has remained very consistent.

But what you will see here is that we have grown out a number of these investments areas and you will hear about those as we go through the morning.

The private equity side continues to be core to KKR. That will continue to grow and we will continue to focus on it as it is central to everything that we do with the firm. Since the last meeting, we have raised quite a bit of money for our North American private equity fund, a China growth fund and quite a bit of money out in Asia for our second Asia fund in private equity.

Energy and infrastructure has grown tremendously and that is on a very fast trajectory right now. Money is coming in. We are investing that money, I think, quite intelligently and quite strategically as we're teaming with various operators here in the States, primarily and some overseas as well. You'll hear from Mark Lipschultz and talking about that. Our infrastructure business is also scaling quite nicely and we've made some terrific investments which you will hear about.

Real estate in the private market side is a new initiative. Ralph Rosenberg is here, who's joined us from previously, had been at Goldman Sachs where he was involved in the real estate operations there. White Hall, one of the early founders of that operation and then we were lucky enough to have him join us now about 2 years ago and we are scaling that business quite quickly and you'll hear about that.

Public Markets, very important. Our tradable credits will continue to scaling very nicely, both leverage loans, high yield. Our private credit is also scaling quite nicely. Direct lending is something that is taking quite a bit of attention now and offers us a real opportunity to be again, a solutions provider, along with Mezzanine. And of course, our special situation opens up a whole broad array of opportunities for investment for us.

In our hedge fund solution, since we last spoke, we have been fortunate to have Girish Reddy and his team at Prisma join us. You'll hear from Girish this morning and we also have estates that we have taken in hedge funds, for example in the filler [ph] which you'll hear about as well.

Capital Markets is very important and that actually spans the whole firm. Craig Farr is going to talk about that. It's a critical part of what we do and how we think about how it fits in. Of course, ties in to the balance sheet as well. But Capital Markets is scaling quite nicely. And the good part about that is that we have that focus both on our portfolio of companies that we have, which are well over 80 companies in the portfolio today, as well as our third-party business there.

The thing that you've seen is in the last roughly, 2 years now, are very good results. The fee paying assets, and I focus on fee paying because that's critical. Having assets for the sake of assets is not what we're all about. But really where are we generating fees and our fee paying assets as you can see, have grown from $46 billion to $62 billion as of our last reporting period. The total distributable earnings that we have, have grown quite nicely as well. They've doubled from $700 million to $1.4 billion and you also see that our book value has increased from $8.38 to $9.89. All moving in clearly, in the right direction.

But we could not have done this without building out our team. And the team has continued to grow significantly over the last 4 years. We put people through a pretty extensive interview process. So it's not hiring for the sake of hiring, but people that we feel could really fit in to the culture that we have at KKR, be good team players and also could play a very critical role as we're expanding into the different businesses.

The last Investor Day that we had, we had 787 people. Today, we have 1014 people at KKR. Many of them come to KKR with a big network of clients, a network of contacts for us, as well as a lot of expertise in their particular business that they have.

Second point that I'd like to say, we could not have done this without having enormous amount of patient capital, something we have focused on. And over 75% of the assets that we have under management today have a life of somewhere between 8 years and 18 years. And it's an important point to remember because that's not fleeting capital but rather, that's capital that will be with us for a long time.

And don't forget, the bottom line of this slide. It's very important that you pay attention to that because that's the balance sheet, and that is a real differentiator, and we're going to emphasize that today. We have a section on that when my partner Scott Nuttall comes up to talk to you. It's critical because the reason it's so important, it has today as of our last reporting period, about $7.1 billion, which is up from around $4.2 billion the last time that we met.

It's a differentiator for a number of reasons. One, keep in mind, our balance sheet are 100-cent dollars. KKR itself and all of you and unit holders of KKR own the balance sheet. And that's 100-cent dollars versus the funds that we have very important also to what we're doing, but the carried interest is somewhere between 10% carried interest depending on the type of fund and 20%. So there's a big difference and we are focusing on that.

It's also a very big differentiator in that it helps us have an alignment of interest, given that the KKR employees own about 64%, KKR in a fully diluted basis. What that means is we're the largest shareholders obviously, in KKR. In addition to that, KKR executives invest alongside the balance sheet in all of the different investments that we make. And as a result of that, that gives us -- we're eating our own cooking and that's very important for us as well.

We also mentioned on the last quarterly call, that we're going to pay out 40% of the earnings off the balance sheet going forward. And so you're going to be getting not only the earnings from carried interest and the fee paying and the fees that we have, but you'll also be getting it from the balance sheet, which is also going to, we think, hold us in very good stead.

Now, we're often ask, how are we different, how are we viewed? And well, this slide, I think, sort of says it all. We're One Firm. What does that mean? Of course, you're One Firm. Well, what it means is that every single person at KKR is paid on how well the firm does. We don't have silos. We work in teams. We work around the world, but every single firm is -- everyone in the firm works together to help make the firm a better place. And this is very important. So we're sharing ideas, we're sharing contacts, we're not afraid to say well, look, I'll get on a plane and I'll help you, I know it's not my deal, but I do you have some expertise so I'm happy to get on a plane or I'm happy to make that call and that's very important.

Another thing that has taken place in our One Firm approach is now that we have a focus on our global macro, as well as on stakeholder issues and public affairs. Brought over to KKR in the last few years, 2 terrific people, Ken Mehlman came with us, now about 4 years ago and heads our public affairs. That has made a huge difference and he has put together and lead for us in 6 different joint ventures we have with organizations like Transparency International, Environmental Defense fund and so forth. And that's made a huge difference and has made one, as better investors. It's made us aware as we invest around the world, of issues that we need to focus on and it also is quite good for all of our investors that are concerned about these issues as stakeholders as opposed to just how much money you're going to make. So it's very much rounded out what we have.

The area that we were missing the last time that we met with you and today, we have solved that problem very much so, is a focus on macro and asset allocation. We're very fortunate to be able to bring Henry McVey over from Morgan Stanley, where he headed Global Macro and Asset Allocation for Morgan Stanley, but he also brought his whole team to take our -- they're now here. You'll hear from him after I finish and that has also made us better investors and has helped us tremendously as opposed to just focusing on the one thing and being micro-focused because that's not what we're focused on today.

The one thing as you see in this one -- on the One Firm approach, which is very much ingrained in all of our DNA at KKR and that's our culture and our values. And I'm not going to go through each one of those. You can read what they are. But I'll just say to you that every firm meeting that we have, there's not a meeting goes by that George or I don't mention the culture and values to everyone at the firm. And we ask people to be -- to remind themselves, to pull out the sheets, to go online and take a look at what they are because that is very much what drives the business.

Another part that helps us a lot in our One Firm approach is our Capital Markets business. KCM today spans the firm and its used in almost every one of our businesses. Whether they be internal for our portfolio of companies or investments we have all the way from Special Situations, Private Equity or external now with the new venture that we have. You'll hear about from Craig Farr, MerchCap Solutions, which is a third-party initiative where we're now building that out and escrowing quite nicely.

I want to give you an example of the One Firm, what it means. A company called Sentinel. Sentinel is a plantation timber business down in Australia. In the end, our Asia fund made the investment in March of this year but it didn't start out that way. It actually started out as an idea that came out of special situations. It was a group out of London, was thinking about the timber industry as something that might make sense for special sits. They identified this company, spent a lot of time talking to them about asset-backed financing because the company needed the capital. And in the end, it turned out that they were actually much better off coming up with an equity solution. And it was the equity solution that drove our final outcome and it ended up being put into Asia Private Equity. It's a company that we now control in conjunction with the management team that had that.

Another example of that is a company called Yuralita [ph]. Yuralita is a Spanish building materials business. Just like Sanoto [ph], we ended up having people from the U.S. We had people from Europe. We had people from Asia who were involved in that because they brought a special expertise. We had people from special sits, private equity and infrastructure in the Yuralita situation, all come together. And again, no one raised their hand and said that's my idea or that's my deal.

Now, how do I measure progress as we go forward? One of the -- the 2 areas that I like to focus on. I like to focus on total distributable earnings and what is our distribution to all of our unitholders. To me, a successful outcome is more cash earnings and that's what we focus on. Long-term cash earnings and short-term cash earnings, both there.

Now as you can see from this slide, what we've been able to do is we've doubled our distributable earnings over the last couple of years. We've gone from $738 million to $1.449 billion, a very good number. Our cash component has also increased dramatically and that is in all of our companies with the exception of -- or our fund with the exception of our China growth fund and our European too. We are now in carry.

But another thing that I like to focus on, what is our distribution per unit? Well, our distribution per unit as you can see, has doubled also from $0.60 to $1.22 there.

Now there's a thing that I also want to focus on and that's on this slide. Investor Day in 2011, we only had 33% of our private equity investments that actually, we're in a position where we could payout cash carry.

Fast-forward to today and we have 84% of our assets in private equity that are now in carry mode, which means that as of the end of the first quarter, which we just finished or now into our second quarter, we have a greater than $30 billion that we are actually are in a position as we recognize the gains there, to pay out the cash carry. And that will make a very big difference as we go forward on the distributable earning. Now, what am I focused on in summation as I think about over the next several years and what am I watching?

There are really 4 areas. Performance being 1. If we don't have performance, all else doesn't really count. We're focused on that very strongly.

Secondly, people. It's one of the things we spend a lot of time. George and I spend enormous amount of time talking to our team, interviewing new people, thinking about how we can bring stronger people onboard to help us grow our business and that's very important to us.

Number three, how do we increase our balance sheet? That's also very important to us both from an organic standpoint and from an acquisition standpoint, and we're going to continue to be very disciplined in our approach to making acquisitions. We're seeing a lot of opportunities, people are coming to us and one thing actually helps another. For example, in Yuralita, a number of calls that we have gotten from people said we'd like to team up with KKR, we'd like to consider either joint venture or merging into KKR because we saw what you did there in Yuralita where you invested over $400 million across a number of your pockets. We can't do that in our organization, but we think teaming with you, that there will be a real benefit to both of us.

We also very much want to broaden our client base. Last time we met, we had a lot of clients, but not nearly the number of clients that we have today. And you're going to hear it from Suzanne Donohoe who will talk to you about how we have focused very strongly on improving our client base.

So when you sum all this up, it's people, it's culture, it's performance and it's our balance sheet that really is a differentiator. And thank you for listening to me this morning, and thank you for showing up so early to listen to what KKR has to say. With that, I'm going to turn it over to my partner, Henry McVey, who is going to talk to you about what we're focused on from a macro standpoint. Thank you.

Henry H. McVey

Thanks, Henry. So my name is Henry McVey. I had our macro in asset allocation effort, we came here about 2 years ago. And what do we do? We work with the deal times, the investment committee, the management committees, the Boards, as well as our portfolio of companies, thinking about how macro influences can invest -- can affect micro investment decisions. We process about 8 deal requests per week. I travel globally. I spend about a week per month on the road, trying to assess the competitive landscape. We also tried to mine all the data that we have out there in terms of our 82 portfolio companies, to make sure that we understand what's going on. So we're still a micro firm, but we want to have a macro overlay. And that's really what is incumbent upon us to do.

I also sit on the balance sheet committee of the firm. If somebody covers financials, actually, asset managers and brokers for 10 years plus, I can't emphasize how important that is in terms of what we're doing for the business model. And as you think about all the people that you hear about today, think about that balance sheet driving the ideas where we can put capital behind it.

So what do I want to talk to you about today? I want to talk to you about what we're seeing out there and how we are thinking about allocating our client's capital and how you should think about that in terms of where KKR is going to be driving the company.

Number one, there's a lot of money on the move right now. The opportunity to earn equity-like returns with credit-like risks that you could do in 2009, '10, '11 and '12, I think that trade is over. And that money is looking for a home. And it wants a solutions provider when it's looking for a home. Sometimes it wants equity, sometimes it wants debt, sometimes it wants bridge financing, sometimes real estate. We're helping our clients find a home for that capital as it's starting to move as spreads have come in.

Second, when you think about Wall Street, you have to have a view. Dealer inventories have dropped 80% since the Great Recession. That has created a tremendous illiquidity premium that's out there. Small and medium-sized businesses around the world can access capital the way they used to. That's driving our Mezzanine business, our Special Situations business, our Direct Lending business. And everyday, we think of a new opportunity or somebody approaches us about a new way to use our balance sheet, use our investor's capital to actually take advantage of this illiquidity premium in a world where real rate is around 0 in the developed market.

Third, I think you got to have a view on the central banks around the world. In my view, they're doing a very correct policy of trying to run nominal GDP above nominal interest rates.

When you think about how you get out of a de-leveraging cycle, you have 3 choices. You can raise taxes to the rich, that's not real popular; you can cut social benefits to the less wealthy, that's not a very popular option; or you can quietly try to make your debt go away by running nominal GDP above nominal interest rates.

We've got game on right now. ECB, Fed, Bank of Japan, Bank of England, they're all doing that. And in that type of environment, we want to find things that have yield growth and inflation hedging. We don't want to put investors in things like TIPS where you have to pay for the right to own inflation protection. When you hear from my colleagues Ralph Rosenberg and Mark Lipschultz, that's exactly what we're doing with the buildout of our real assets franchise. And I think we have one of the leadership positions in this business and you'll hear a lot more about that today. The other thing I would highlight is just in the emerging markets. Today, KKR is a 17-office, global firm. I'm impressed that somebody came from a large global industrial bank, we are in every part of the world right now, providing capital in a solutions-oriented manner to folks who need it.

And what I see out there though, is a world where I think we can all agree the consensus is that 60% to 70% of global growth comes from the emerging markets. The question is are you going to make money in the big public emerging markets? And my view is no. I think they're flawed indexes. I think they're stayed intervention into these companies now, where they're working on behalf of the citizens and not the shareholders. A lot of what we're doing in the private equity side helps to create alpha in that situation. We're going direct, getting consumer businesses and we're trying to create private enterprises that can actually get you leverage to the growth of the emerging markets consumer. And I think it's a very differentiated product and I think our Asia 2 raise is a testament to that.

And finally, I want to just tell you where I think we are in the economic cycle and our base views we're about midway through. And particularly in the U.S., we think some of the cyclical parts of the economy are starting to kick in.

So let's just run through the macro. This is pretty straightforward stuff, 10-year yields right now. On a nominal basis, just under 2%. It's not real hard to sit down and talk to a CIO of any pension or sovereign law fund and say your long-term expected returns given where the starting point is, are pretty dismal.

More importantly on the right-hand side, you see that spreads have stopped coming down with treasuries even with QE. And what does that tell you? It tells you that in the liquid market, there's an absolute rate of yield that investors will no longer accept because of the amount of risk that they're taking and that's where a lot of what we're trying to do, we see opportunity.

Second, I don't know if that happened, the last fall off of Wall Street balance sheets. That must've been the Japan crisis last night, but I think that's an incorrection in the chart.

But the point is still the same, which is dealer inventories have dropped 80%. You may not agree with the KKR view, but you should have a view as an investor. When dealer inventories come down 80%, what's happened? Illiquidity premiums have boomed. Investors were right during the great financial crisis, to run into deflation assets and liquid assets. But what happened is it overdiscounted what the high-yield spread was and then it created a massive illiquidity premium. If you're a pension and you're trying to get 7% in a 0 real rate environment, 2% nominal and we can get you 300 to 500 basis points on an illiquidity premium by using our underwriting expertise, that is an opportunity. And so, it may not be a double or a triple or an internet stock, but if you're looking for a good risk-adjusted return, that is where we're driving a lot of our business. But if in terms of special situations, mezz, direct lending and other opportunistic credit. And I think if somebody comes here and works with our clients a lot on this, people underestimate how much we're doing for our clients in terms of using our opportunistic approach to really generate alpha for our clients.

Okay, the Fed, the ECB, the Bank of England and the Bank of Japan. This is the relationship you want to focus on. I'm not an economist, I was a history major, but I do pay attention to this. Every time you run nominal GDP above nominal interest rates, you're trying to make your debt go away. And essentially, this is the opposite of what Volcker did. What did Volcker do? He raised nominal interest rates above nominal GDP. We're doing the exact opposite. 2005 the Fed did this. Nobody talks about it, but inflation shot up right after that. We're doing the same type of policy. We don't think you're going to get inflation today, but we want to be prepared. And if we can find yield growth and inflation hedging, along the way, that's very interesting to us.

Typically from a theoretical standpoint, about 3 years in, inflation starts to move up about 50 basis points per year. So we're not in the 1970s stag placing camp. We just think a couple of years out, you're going to see higher inflation and the premium paid to those type of assets is going to be quite compelling.

Emerging markets. On the left, I just showed you Chinese state-run enterprises versus non state-run. If you run a long short book, this is something to consider. But the base view here is everywhere I go whether it's Brazil, China, India, increased government intervention. That is a common theme that you need to think about.

The second thing you need to think about is -- as a CIO is if you want to get leverage to the emerging market consumer using China as an example, less than 3% of it is actually in the emerging market consumer index. And half of that is state-run. So out of $100, you get $1.5 actually allocated to the theme you want. That is why we have a big China business. It's why we're building a big Brazil business. That's why we have franchise in India. I just got back from Indonesia. That's why we're looking at things on the consumer side there. And it's just to me, it's just one of the great arbitrages in the market that is affirmed. We can do the right thing for our investors and hopefully, also grow our businesses along the way.

So where are we in the cycle? Our near term view is we're below consensus growth on China, Brazil, U.S. we're pretty much in line. But most importantly, we think 2013 is the mid-cycle slowdown. Our view will be 3 things that drive a re-acceleration of growth, housing prices, tighter credit spreads, lower gas prices. We expect an acceleration going into 2014. With the U.S., we have to keep in context, which is we are in a de-leveraging cycle. Think about we started 2000 Enron, WorldCom, Tyco, too much corporate leverage. They pass it to Wall Street and Main Street, Phase II. Phase III, the government had to pick up the pieces. Typically when you get government de-leveraging, you get more volatility along the way. This is exactly what we're showing you here. So as investors, this is called a gyration. Essentially does the market go up or down 10%, it's doubled essentially since the 1990s.

So what does that mean? it means we have to lean in. If you think about 2010, we leaned in, we deployed a lot of capital. When it has been a little frothier, we backed off. We also have to be global. You see dislocations at different times, we have to take advantage of that. That's what de-leveraging does. We spend a massive amount of time as a firm trying to understand it from an investment standpoint. We try to drive it to our investment committees and our deal teams and I think it's starting to pay dividends.

How do we think about growth? And this is why I think the U.S. is actually a pretty interesting place. Baseline 2%, housing prices, monetary stimulus, takes us to a private sector of almost 3%, that's the good news, offset by the government, taking it down about 1.2%. And so, what you end up with is a world where you have a very strong private sector, offset by government sector. The past 2 quarters, the government is contracted by annualized minus 5.5%. It's the worst since the Korean War. At the same time, the private sector has actually delivered pretty good returns, and we see -- our view is that things are going to start to pickup. We're trying to harness our data. We have a dashboard that we built. It's 200 variables and process every single thing that comes into KKR. I give the firm huge amount of credit, particularly the technology group, for building the infrastructure, for paying for it upfront. What we're seeing in spend trend, which is publicly available data, is we're starting to see a little bit of hookup in the data, that came out in mid May. And then we have other portfolio companies that lead durable goods orders. So our base view is we're not looking for a crazy recovery but we are looking for a recovery, and we're looking for a government dysfunction to be less of an influence on the overall GDP as we head into next year.

Asia. This is a big deal. China has been about 1/3 of global growth. In the past couple of years, we think that will be the same. But the China story is changing. I've been going to China since 1995 and I've never seen a time where you've seen such dramatic change in the economy. Henry Kravis and I were there in June of 2012. It was very clear the export economy started to shift. And at the same time, we saw properties come for sale in the private equity where U.S. firms were trying to sell their Chinese subsidiaries. Some people thought it was a buy the dip mentality, we didn't. We thought there's something more structural. We didn't -- we talked to our industrials team about this, we didn't step in. And you look at what's going on. Lack of demand is hurting Chinese exports, it's negative, Europe, Japan, U.S., Brazil, they're struggling. And that is part of this globalization phenomenon we're dealing with.

Second is wages are going up in China. We source a lot of our company stuff from China. What you're seeing is it's going to Vietnam, Laos, other places. So we expect China to be more volatile. We're not very excited about the export sector over there and we're not very excited about the fixed investment sector. And so that's the macro marrying with the micro.

But make no mistake, there's a lot of good things going on. Just got back from Indonesia as I mentioned, that is booming. We believe the Asian middle class consumer is one of the biggest investment themes.

But what we're trying to do as a firm is we want to invest in that in Asia, but we also want to find out ways to do that to Europe through exporters, or U.S. through tourism, other things. There are a lot of different ways to harness this without just the being in Asia or specifically in China. And so this is a big theme as a firm. How we monetize it, I think you'll see us do in a variety of fashions.

Europe, the story is pretty much the same. I think Alex will touch on this a little bit. Weak government, weak consumer. We haven't had the shift that we saw in the U.S. I talked to you in the U.S. about the cyclical parts of the economy recovering. This is our internal forecast for Europe. And what you sees is Dragee [ph] has done the right thing. Baseline GDP of 1%, increased benefit from spreads tightening but the offset is there's no transfer mechanism right now between the -- what the central bank is doing in the private sector. Cyclical part of Europe remains weak. So we're not trying to buy consumption stories. We're not trying to buy government-related stories. We're trying to focus on things, trade down, exports, substitutes. And you've seen, in terms of some of our investment dollars in Europe, it's exactly what we're doing. We're sticking with the playbook, trying to be disciplined.

There's also -- one thing I would just say about Europe is when people -- a lot of people don't want to -- they say oh, I don't want to invest in Europe right now. Everybody said the same thing about Asia and after the Asian financial crisis. But what happens? Companies and countries restructure. Spain is doing that. Henry Kravis just referred to a deal we did there. Look at wages in Spain, they're becoming competitive. They're exports, we think, can go from 35% of GDP to about 45% to 50%, that's a big deal.

If you look at trade finance. The French banks are pulling back. Think about the arsenal of capital that we have that we can commit to step in and provide a solution to small and medium-sized businesses, trade finance, that is a big deal. Just the French banks alone are shrinking their balance sheet and cross border flows by $50 billion per quarter. There's a lot of opportunity in that for us.

Latin America. What I would say about Latin America and Alex will touch more on this as he talks about private equity, we're going slow. We're largely in Brazil right now. We see opportunity, but it comes with its challenges. And we're trying to be smart.

I think one thing we want you to take away is we're trying to be disciplined in how we approach these new markets. And when you think about Brazil, last year, Brazil actually had negative productivity growth. They haven't done as much in infrastructure as a country like China. It doesn't mean it's not a great consumer market but you need to know how the government acts, you need to know what's going to be re-regulated and you need to know where is productivity above wage growth, so your margins don't get squeezed. So I think you'll see us grow our presence in Brazil but I think you'll see us do it in a measured fashion.

And one of the things that we've very much been keeping an eye on is even though the Central Bank has lowered rates from 11% to 7%, private credit growth has remained very, very weak. So there's some semblance that we don't want to engage ourselves in businesses where it's been just a credit play. We want to find things that have secular, consumer-oriented growth, not dependent on credit and not reliant on some type of government benefit to get that growth.

So I'll wrap up and just take you through what I think are the key points. One is I hope that you understand that when we think about an investment, we bring a lot to the party. We've got Ken Mehlman, what we're doing public affairs, we bring the Capstone group, we also have a macro overlay so that when we're thinking about an investment in the U.S., Europe, Asia as a, I would say, cohesive unit, we're leveraging all our information. So as a macro group, we are building a dashboard of information that is repeatable, processes that are repeatable. So that when we go through look at countries or sectors, we have all that. KKR didn't have that before and I think it's a nice addition to what we're doing, particularly as you think about all the interesting things that we think out there right now. This is not the 1990s where you could buy the U.S. This is not the early 2000s where you could buy BRIC. We've been doing this over 20 years and I've never seen a period where there is more opportunity in parts of the world, but every single place has a Achilles' heel and it's part of our job to understand that. But there's going to be a lot of money on the move, a lot of money went into credit as it should have post 2009, that's going to move and that's going to need to find a yield. It's going to need to find growth and we think we can help it take advantage of some of the things we see out there. The mezz, the special situation, the illiquidity premium. Second is, people want yield growth and inflation hedging. That's our core business and private equity, that's what we're doing in energy, that's what we're doing in real estate. In emerging markets, I think there's a firm we're all on the same page. 2/3 of global growth comes from emerging markets. But how do we harness that across the U.S., Asia, Latin America, as well as just being in Asia? And I think that, as you think about a global alternative asset manager, that's really our job. And given that we think we're in the mid-cycle, we expect more volatility along the way. We still think it's a pretty interesting environment to deploy capital. So with that, I'm going to turn it over to Alex Navab, my partner who heads the private equity in the Americas and he can give you a global view of that part of the business. Thanks.

Alexander Navab

Thank you. Good morning, everyone. [indiscernible] just to give everybody a sense of our global equity, global private equity franchise. As you know, we've been in the business for over 37 years. We've completed 250 investments, deployed $55 billion of capital. We're very fortunate to have a highly experienced, tenured team that has been working together through the variety of different cycles that we've all gone through. And today, we have very significant dry powder, over $12 billion of dry powder and more coming, in terms of ability to invest behind the themes that we think are attractive in global private equity.

We're very proud of our historical returns. As Henry mentioned, performance is the cornerstone of everything we do. Our fully invested funds have delivered over 2x multiple of invested capital, 26% gross returns. Our realized investments have returned almost 3x our invested capital and 26% gross returns.

Underpinning this performance, in addition to a strong and tenured team, we have a vast global sourcing network and that has just gotten enhanced with all of the different businesses that we're building and creating solutions for our investors and creating solutions for our investments. We have substantial resources in addition to our investment teams and Henry touched on that a bit in terms of KKR Capstone on the operations side, our Capital Markets business, our stakeholder management group and a group of very senior advisers that work with us in our portfolio. And what we say is we want to use our whole brain. We want to make sure that we're leveraging all of the intellectual capital, all of the resources of the firm to benefit our investors across all of our different businesses and I'll touch on a few examples, Henry already did that this morning but we think this is also a key differentiator for our Private Equity business, being able to leverage all of these different resources in addition to their relationships, intellectual capital and capabilities that we have in Private Equity.

And what's absolutely a hallmark of the firm and has been so since Henry and George founded the firm, we invest side-by-side with our investors. A significant amount of our own net worth, our own capital is invested side-by-side with our limited partners and our investors. So today, we have over $4.7 billion of capital committed to the Private Equity Fund and we continue to commit more capital, both personal capital and balance sheet capital to the variety of different private equity funds and strategies that we have.

Just a quick snapshot of the performance, our performance in Private Equity since our last Investor Day. If you focus on the global portfolio, we've increased value by almost 30% in the last 2 years. Henry mentioned a very important fact that really kicks in this quarter, which is cash pay carry assets going from $11 billion to $31 billion. And we think that's quite significant. And I'll illustrate some of that and what that means to all of us in a few slides.

We've raised over $14 billion of capital in the last 2 years in the Private Equity strategies, North America, Asia 2, China growth and we've not completed our fund raise but we certainly expect significant capital to be raised and we're very happy with the amount of capital that we have been able to raise in the last 2 years.

Significant efforts on monetization and getting cash back to our LPs where appropriate in terms of optimizing the value of our funds and our portfolio. We've delivered over $19 billion of cash back to our LPs since 2010 and that's translated to almost $1 of carry back to our unitholders. We've continued to expand our platforms in Asia. We opened up our office in Brazil as a foundation for our strategy in Latin America and we have now started looking at opportunities in Africa as well.

Just to give you a sense of our current portfolio and some of the hallmarks of it. 82 companies around the globe, over $200 billion of annual revenues, almost 1 million employees, diversified across 15 different industries and 19 different countries. What you'll notice, a lot of industry leaders and strong players in their particular industries. And why that's important. This collection of high-quality world-class franchises has been very, very resilient over the last several years as the markets have been dislocated, as economies have had their various different challenges that Henry McVey touched on well.

It also gives us global scale. It gives us the ability to understand the insights, trends and what's going on around the globe and we're trying to harness as much information and insight out of that as we possibly can for new investments, as well as making sure that we're improving our portfolio around the globe. It also allows us to be able to go into regions, have a very good understanding of the key trends in that region, key opportunities in the region and leverage existing platforms, leverage existing investments in the portfolio. So a global portfolio of high-quality companies. I think if I'm correct, the $200 billion revenue puts us somewhere between #3 or #4 in the Fortune 500 companies. And obviously, a significant amount of scale and firepower around the world.

We can't do this without a team. As Henry mentioned, our people, our culture, are absolutely critical to everything that we do, not only in Private Equity, but across the firm. And we're very proud about the team that we have been able to recruit, develop, nurture and retain at the firm.

Today, we have over 155 investment professionals across the globe, dedicated to private equity, 56 Capstone executives who are focused on operational improvements in our portfolio of companies. A very tenured team, not only at the most seasoned level in the private equity investment community where on average, we have 28 years of industry experience and almost 370 years of total experience. But also, the other 36 most senior PE executives have on average, 12 years with KKR and over 20 years in the industry, and what's absolutely important about that team is this is a team that's worked together for a very long time, for a variety of different cycles, good times, bad times, economic cycles, dislocations and we think that sort of teamwork, institutional knowledge and partnership will hold us in good stead as we continue to navigate through fairly uncertain times. Relationships. Relationships are a hallmark of everything we do at the firm. We're grateful for the commitment and the confidence that our investors have given us over the years. Our 10 largest investors have invested with us on average, over 18 years and we think that partnership speaks volumes and is absolutely critical to us, not only in our LP investor base but all the different investor bases that we have and the additional resources that we've touched on. So in addition to the dedicated teams, we have a significant amount of resources that everyday, spend a lot of their time helping the private equity business grow, find investment opportunities and improve the portfolio. You can look at the commitment we've had to growing our resources, more than doubling our resources in Global Private Equity from 2005 to 2012, that's both on the investment side and on the operational side that includes the growth in our Asia businesses, but also continued focus and investment in our European and Americas businesses. So we believe we have the scale, the resources, the talent, the experience to continue to capitalize on the opportunities around the globe. With that, we've been able to obviously, increase our assets under management. If you look over the last decade, since 2004, we've increased assets under management $14.5 billion to almost $60 billion if you pro forma the capital that we've raised this year as well. This includes all the private markets. So private equity, natural resources, energy and infrastructure, but quite a significant amount of growth in our assets under management and a significant amount of dry powder.

Just to touch on our performance. Again, we've outperformed the S&P by over 1,400 basis points on a gross basis, 700 basis points on a net basis. This is since the inception of the firm over 37 years and I'll touch on the regional performance that cuts across all the regions as well. Almost 3x our invested capital on the realized and partially realized investments and this is also absolutely important and critical for our investors, which is no fully realized fund has returned less than 2x gross multiple of capital to our investors, this is over 37 years. So that reliability, that performance, that outperformance has been a hallmark of why we've had significant investors come back to us again, and again, and why we're grateful for their support.

And we show down below, the amount of capital that has been invested in realized and partially realized transactions and also the total capital and the total amount of value created.

That performance really cuts across all the regions. North America, Europe and Asia and we've also shown the comparable public indices that we compare ourselves to across the same period and this also includes dividends and dividend reinvestment, the S&P, MSCI Europe and also Asia-Pacific MSCI. The underpinnings of the strategy and what we've tried over the last several years and certainly, over the last few years to continue to enhance, the following categories are really what we think are the underpinnings, the foundation of the global Private Equity business and what we believe is needed, not only to succeed in this environment but going forward. We have deep industry expertise, we have very rigorous oversight of the portfolio and monitoring of the portfolio and a lot of different resources dedicated to that. Our senior advisers, our investment teams, the portfolio management committee, the senior leadership of the firm, the regional leaders of each one of the businesses. KKR Capstone is integrally involved in everything we do from diligence at the appropriate time for a company that we think is very actionable or attractive, to developing 100-day plans and long-term plans for our portfolio of companies. And they work very, very closely with our management teams and our investment teams. They're not there to replace management. They're there to complement and work with management to improve the businesses and they work on a few key metrics to improve the business.

You heard from Henry McVey today, but -- and you saw the insights that he has and the amount of effort that he puts in around the globe. He's always on the road, finding insights and integrating that, more importantly. Integrating that into our thinking as investors and we think that sort of capability is an incredible differentiator for us around the globe. Henry touched on the Capital Markets team and what I would say in addition to being a great business in its own right, it has been an absolute differentiator and an absolute contributor to what we've been doing on the private equity side over the last several years. And in a market where we have significant dislocations and credit markets, equity markets, the need for capital, having access to capital beyond just Wall Street and being creative about how we raise that capital and how we optimize our balance sheets has been an absolute must and an absolute differentiator.

Over the last several years since 2010, we have refinanced, amended, extended over $165 billion of debt in our global portfolio. And we've done that through the investment teams, the management teams of our portfolio companies and the able partnership that we have with KKR Capital Markets, an absolute differentiator for us.

Henry touched on the importance of the public affairs team led by Ken Mehlman. Let me just emphasize that in an environment where private equity is becoming a more and more significant part of the economy as you saw, we have almost 1 million employees around the world, $200 billion of revenue. Being proactive and thoughtful and creating win-win solutions for all the stakeholders is absolutely critical. We think this is a real differentiator for us and we think this is a model that the industry will follow but we have a very strong start. And this is not just being reactive but being proactive on the regulatory front, the political front, environmental issues, labor issues and being able to identify those issues when we're making an investment so that we don't find issues once we make the investment and being proactive about it. But also, when we're in a portfolio, when we have an investment, knowing exactly what to do to create win-win solutions here.

The sourcing network, the relationships that we've developed over the years have really enabled us to develop a proprietary source of transactions around the globe. If you look at the investments that we've made, roughly 45% are proprietary. These are ideas that KKR generated and effectuated. We may have had partners but these are KKR generated ideas. 40% unlimited processes where there have been a few competitors and then 15% in auctions. People are typically surprised in a business that's been around for so long, how few investments that we have really come through auctions. They're important, we participate in auctions. Some great companies and great investment for us have come through auctions but all of the different capabilities that we've developed enable us to have a more proprietary sourcing network and the diversification of the firm and the ability to get ideas from all the different businesses that we have only enhance this ability. So 85% plus of the transactions that we do come through non-auctions.

Let me just touch on this funnel. I think this says a lot about the capabilities of the firm. So everybody in the firm, everyday, is looking for ideas. Good ideas for our investors. Finding solutions for the companies that we're investing in. And these ideas come from everywhere. All the different business lines, the private equity investment teams around the globe, our senior advisors, the relationships that we built over 37 years, the industry expertise that we've developed. And over the last several years, we've evaluated over 3,000 ideas in our Private Markets business, again, ideas that come across from all the different businesses that we have. We prioritized that through our industry teams and our regional teams, roughly 220 of those ideas went to our investment committees and the private equity business. These are ideas that we thought were actionable and attractive, and we completed 33 of those transactions. So very broad funnel across the globe, across all the businesses, in a very rigorous and disciplined and selective investment process that yielded the 33 investments.

Now the other 2,840 investment ideas weren't bad ideas. They're ideas that perhaps didn't fit the global private equity funds but they may have fit the special situations strategy. They may fit mezzanine, they may fit our credit business, infrastructure, public equities or real estate. And what we're seeing more and more today is all of the different businesses working together to generate ideas and deploying capital where appropriate, and finding solutions for companies and if they don't work in one business, they may work in another business. The examples Henry used this morning, Uralita is a very good example where it wasn't really an appropriate private equity investment, but it was a terrific special situations investment and the teams worked together to effectuate that.

So we think this is only going to get better and better as our businesses continued to scale in all the different areas and reinforce each other, and we think this is not only a key differentiator for the private equity business, but all the different businesses that we have in the firm.

The other thing that I know a lot of you have focused on and it's a misconception that we want to make sure we keep talking about. KKR gets a lot of headlines in the very, very large deals and we're proud of the fact that some of the more complex, large transactions we've been able to effectuate, and we have the credibility with Wall Street and with the corporations to be one of the go-to firms in very large transactions. But the reality is, only 6% of the transactions we've done in our entire history have been transactions over $5 billion. So 94% of the transactions we've done have been less than $5 billion and 80% of them less than $2 billion.

Why is that important? We think the sweet spot of our investing is in the $1 billion to $5 billion transaction range. You can deploy a significant amount of capital in that transaction range. All of the resources that we've developed in the firm have huge impact on companies of those size, not only on big companies. And quite honestly, in the environment we're in, for the next several years, we think that's the sweet spot of global private equity transactions. There will be large deals, there'll be $10-plus billion and we'll certainly have our fair shot at those, but we think the sweet spot will be in this $1 billion to $5 billion range, which is just really the sweet spot of the transactions we've done in the entire history of the firm.

Just a couple of thoughts, I know several of you participated in a Capstone teach-in a couple of months ago, where Dean Nelson, my partner, focused on exactly what Capstone does. I won't go through all of this today, but just to highlight that when Capstone and when our operational teams get involved, and these are 3 recent examples: Academy Sports+Outdoor, Capsugel and Go Daddy, they focus on key areas that can create value. In Academy, they focused on pricing, category management, SKU management, putting in place significant metrics that the business and the management could use. And then a huge amount of focus on vendor and cash management, improving profitability, as a result, improving cash flow.

In Capsugel, this is a division, an orphan division, but a very good business within Pfizer. Capstone and our operational team and our investment teams did everything to carve out that business and they needed to totally forklift that business out and make it an independent standalone business. We have tremendous experience in doing that. We think that will hold us in great stead, as the companies continue to sell divisions and carve out businesses, another great example of what Capstone and our teams have focused on.

And on Go Daddy, very focused on international expansion, putting in metrics, driving other savings through procurement. And that you see some of the outstanding results, as a result of those steps. So a lot of focus on top line, as well as bottom line and cash flow improvements, in individual companies. And then we asked ourselves, "Well, we have a huge amount of companies around the globe. We have all this scale, what are do we doing with all this scale?" And since 2007, Capstone and a lot of our other resources have been focused on how do we take advantage of the global scale that we have? And they've created over a billion dollars of run rate savings across the portfolio. So in addition to the individual portfolio of companies and what we're doing there, across the portfolio, trying to get savings through direct procurement, indirect procurement and other programs. And we think we're going to continue to accelerate that program and that's a benefit to the entire portfolio and, ultimately, to all of our investors.

Let me just touch on the performance of the overall portfolio on a global basis. These numbers are based on net asset value and a weighted growth basis across the globe. If you look at the performance on a revenue basis and on EBITDA basis in the economic environments that we've been in around the globe, we're pretty happy with these results and we're going to continue to drive performance across our portfolio in the Americas and Europe and in Asia, 9% revenue growth and 11% EBITDA growth.

Just to touch on a dashboard that we focus on quite a bit and give you a sense of everything that's been going on, in terms of dollars deployed in the private equity business across the globe, we've deployed over $11 billion of capital in the last 3 years. Year-to-date $400 million is closed, but there's another $2 billion of capital, fund capital, LP capital, that we have announced and committed to in 4 transactions. And I'll touch on those in a minute. So if you perform over that -- over $2.4 billion of equity committed to transactions. As I mentioned, we've returned over $19 billion year-to-date. And since the first quarter, we've had a number of other transactions as well. We've mentioned the improvement in our portfolio and as a result, the increase in the fund, the values of our funds across the globe and also the relative performance of our funds vis-a-vis the indices.

Let me just touch on the 4 transactions that I'm sure you focused on and read about, and just give you a couple of data points. ATG is a large off-highway tire manufacturer based in India, with a lot of sales focused on the European and North American markets, in the agricultural segment and construction segment. This is a business that we bought from Warburg Pincus. It's been a very good investment for us and, we think, for them. And we believe it will be a great investment for us as well. Partnering with the entrepreneur and the management team of the firm to grow the business from here.

Cognita, which today is the largest global K-12 educator and operation, significant operations in the U.K., but also significant operations in the emerging markets: in Singapore, Vietnam, Thailand, Brazil. This is roughly 50% of the EBITDA is in developed markets and 50% out in the emerging markets. And it touches on some of the themes that Henry McVey mentioned, which is we're investing in Europe in businesses that have high growth potential. They may not have all of their sales in the Eurozone and most likely outside the Eurozone, but maybe headquartered in Europe.

SMCP, Sandro, Maje a great apparel retailer in the affordable luxury segment. It is a company that's had 50% compounded EBITDA growth over the last 5 years in Europe. Based in France, significant amount of revenues coming out of France, but also a growing business in Europe, in the U.S. and in Asia. And again, here we've partnered with the management team and the founders. We own 65% of the business once the transaction is completed.

And I'm sure you heard about the recent transaction that we announced in the U.S., Gardner Denver, a company that's been around since 1859 and making highly engineered products, pumps, valves, compressors for the industrial segment, as well as the upstream and downstream energy segment. We were very, very excited about that transaction as we are with all of the other transactions.

So we've laid out some of the statistics here, which you can review and this, collectively, is another -- is about $2.2 billion of capital committed to these transactions and additional capital that may go into a number of these investments as we continue to grow this businesses around the globe.

Busy chart, but this just illustrates the amount of liquidity back to our LP's over $10.4 billion in 2012 alone and year-to-date, in 2013. And again, a busy chart, with all these bars, but what we're trying to convey is those monetizations and that liquidity is coming through a variety of different forms. Secondary sales of our shares and a number of our public companies, our strategic sales and many of our companies as well as refinancings and dividend recaps.

Why is that important? We think it's important to be able to tap the appropriate market, to get liquidity, to get value for our investors, where appropriate, and certainly over the last several years, we've had access to all of these different markets to be able to monetize our investments.

Just to touch on Henry McVey, and Henry Kravis mentioned some of this, so I won't go into a lot of detail. In North America, we have been big believers and continue to be big believers in an economic recovery. So we have been investing behind that theme, since 2010, in a variety of the different investments that we've made and we continue to have that thesis. My partner, Marc Lipschultz, will talk about the energy and infrastructure business. We continue to see a lot of opportunities as a result of the share revolution in the energy segment and we've had great success in capitalizing on a number of those opportunities.

Corporations are going to continue to think about divestitures and carve outs. And then another theme that is clear, the increase of shareholder activism is only going to create a bigger catalyst for private equity to be a solution provider for some of these companies. These may translate to selling of assets, recapitalizations, selling of the business, requiring capital for the business, but we think that trend is really here to stay and it will be a catalyst for private equity being able to get involved and we certainly think that's going to be very positive for our business. Gardner Denver, if you remember, really was encouraged to think about strategic sale options by ValueAct, one of the activist shareholders and, as a result, that translated into a sale process where we were able to effectuate that in terms of a buyout. And as Henry McVey mentioned, the housing recovery, the resurgence of U.S. manufacturing have been key themes that we've been focused on.

In Europe, while the macro outlook may not be as robust, we're trying to find dislocations. Henry mentioned the Uralita transaction, a great example where our special situations and our PE group worked together to find an opportunity, where we're providing rescue, capital rescue financing, to the business. That's not a private equity transaction but it's a transaction for the entire firm, nevertheless, and one that we believe is quite lucrative.

And then finding other opportunities, dislocations, in the capital markets, in the public to private arena and investing in businesses, like the 2 that I mentioned, where they may have their headquarters in Europe but a lot of their sales, a lot of their profitability is coming outside of Europe and in emerging markets or growth markets.

Asia, we obviously, have better fundamentals and better tailwinds but we're being quite selective. We actually do think Japan is quite attractive and, after today, got even cheaper. And so we're going to continue to have a pretty strong focus there. Henry mentioned the excitement we have around the Southeast Asia economies and we're very focused on finding opportunities there. And then playing the domestic consumption theme, not only in Asia, but across the world. But obviously, a powerful theme in Asia.

We've had a great record of building our business, growing our business. So going forward, what else can we do to grow our business? Clearly, we're going to continue to grow our core private equity funds across the regions. We're going to have numerous successor private equity funds, we've raised 3 Americas private equity funds since 1999; 2 Asian funds and 3 European funds. If you look at sector-specific or strategy-specific funds, we raised $1 billion for China growth. That was one of our fastest, if not our fastest fund-raising in KKR's history. $1 billion dedicated to Chinese investments that were smaller in size and what we could invest in, in our Asia platform.

And as was mentioned, we've established our footprint in Brazil and will expand in Latin America, and we're exploring opportunities in Africa. So multiple different ways to continue to grow our private equity business through successor funds, new funds, regional expansion.

So what does this all mean? And try to bring this down to distributable cash carry and distributable cash back to all of us as investors, and Henry mentioned the focus we have on that, obviously, cash carry, going forward, will be absolutely an important contributor to that. If you just look at the last 5 quarters of the first quarter of 2013 and the 4 quarters of 2010, on average, about $0.10 of cash carry distributed. As Henry mentioned, that's because we had only about $11 billion of assets that were eligible for cash carry. Today, we have over $31 billion, which we, obviously, think is quite exciting. And if you go a bit more granular and let me give the big caveats. I won't read all the skull and bones and disclosure language, but for illustration, and also in terms of overtime, we wanted to illustrate what the potential cash carry is from capital that's already invested in the ground in our existing funds, capital that we are investing in funds that haven't yet fully invested, and then capital that is committed to us, but not yet invested. So this does not include new funds that we haven't raised yet. This is only capital that we control, that is committed to us or invested in the ground.

And let me go through this a little bit, 2006 fund, we've deployed $16 billion of capital in the realized and partially realized transactions, we've realized 3x our invested capital. That fund today is marked at 1.5x. What we've told our limited partners in our discussions with them is that we've assumed 1.75x to 2x in terms of the ultimate realization of that fund, over time. The Millennium Fund, $6 billion again, that realize and partially realized investments have yielded 2.7x. That fund currently is marked at 2.1x or expected realization when the fund is fully realized. Again, we've talked about this and disclosed these to our LPs, this 2.3x to 2.5x. When you put that together, that's about $0.75 cents to $1.50 of distributable cash to the unitholders as a result of cash carry from these 2 funds.

We've also invested capital, obviously, across other funds. So the additional invested capital of $13.7 billion, those transactions have yielded 2.1x where we've had realizations or partial realizations. The collective capital there has been carried at 1.4x and we have assumed, we've not disclosed this publicly, but we've assumed a variety of different ranges of performance. If you assume that for the minute, $1 to $1.50 of cash carry coming from those funds that are invested in the ground.

And then the remainder of the capital, these are funds that have been raised and not spent, $17.1 billion. Again, if you assume our historical average, and I keep getting reminded, of histories no benchmark, for the future and that's in the footnotes. If you assume the historical multiple ranges that we've been able to deliver on a gross basis, that's another $2.75 to $4 of cash carry from the committed but not yet invested capital. This does not include capital in our energy business infrastructure business, carried in the credit business. This is just the private equity funds in the Americas, in Europe and in Asia. And if you look at that $4.50 to $7 of potential cash carry over time, we get excited about that and I hope you do too.

So let me just close by saying we really do think this is a great opportunity in private equity investing around the globe. We've all touched on the potential themes, the dislocation, the uncertainties that exists. That creates opportunity. That creates opportunity for us and we want to capitalize on that for all of our limited partners. We see a recovering economy. We have good credit markets. We have strengthened equity markets, which help us realize our investments. So all in all, we see attractive fundamentals for private equity around the globe and when I look at that and I match our resources and our capabilities across the firm, the history of innovation, the experienced team, the delivery of strong results, the differentiated approach that we have, the world-class portfolio and the dry powder that we have, we think we're very well positioned to take advantage and capitalize on what we think is a great opportunity for all of our investors and for all of our shareholders.

Thank you for your time and I'll introduce my partner, Marc Lipschultz, to walk you through our energy and infrastructure business.

Marc S. Lipschultz

Great. Thank you very much, Alex, appreciate it. I'm Marc Lipschultz, Global Head of Energy And Infrastructure. I've had the privilege of being a part of KKR for about 18 years now. It's a real pleasure to be here today to talk to you about the energy revolution, really the shale revolution, that is completely remaking the energy landscape in North America and globally. And how, at KKR, we've been able to build a really distinctive and comprehensive platform to capitalize on that revolutionary set of changes.

Now this term, revolution, gets used a lot. It gets overused, no doubt. So every product and TV commercial is revolutionary, every business model is revolutionary. But I think when we talk about the shale revolution, it's really hard to overstate it's significance.

Now just taking a step back, we've gone from a world, in 2008, where natural resources in North America were scarce and in decline. In just 5 years, we now have natural resources that are abundant and increasing. That's a really stunning delta in a period of just 5 years in something as large, as important and as pervasive as energy. So much like the Internet revolution, in fact, I would say, the shales are to energy, what the Internet was to technology. Fast, disruptive and pervasive. And through that, if you have the right capabilities, and I'll talk about what those capabilities are, you can capture tremendous opportunities.

But one of the big differences between the Internet revolution and the shale revolution is capital intensive. So there's a few things I want to highlight in this slide. So I'm going to spend a couple of minutes here. First and foremost, as I just said, the amount of capital it takes to go from the conventional world to the unconventional world. So from what was then to what is now. By some estimates, this is high as $15 trillion, to develop all those resources and all the related infrastructure to get it into market. So that is a really enormous amount of capital that has to be delivered, and that is a good match for KKR, because at the end of the day, we're in the business of delivering capital to these types of requirements.

Second, let me just talk about what we're talking about when we say a shale revolution. The shale revolution itself is a technology revolution. It's really not about rocks. We've always known the shale rocks are here. It's really about this horizontal drilling and frac-ing. So if you look to the sort of well, second tier upward to the right, you can see it's really about going down to that source rock, drilling into it, fracturing the rock and extracting the oil and gas. Now it's really actually quite important, when you contrast it to what's on the far left of the slide, that conventional or traditional oil and gas well. So historically, we would go around and we would of course, wait for millions of years for oil and gas to naturally seep up through the ground and, ultimately, it's some kind of trap, some impermeable barrier. And then we'd look around and hopefully find those traps. And when we thought we found one, we would drill into it and either would be right, in which case we'll have oil and gas, or we'd be wrong, in this case we'll have a dry hole. And you will all probably notice is the old wildcatting business. Sometimes you hit and sometimes you miss. A fundamental difference that has changed the whole nature of investing in oil and gas these days is that move from what was then the conventional hit or miss or wildcatting business to the now, which is a manufacturing business. Once we delineate these plays, and if you have the right technical understanding of what's happening beneath the surface, then it's about repetition and it's about efficiency, and it's actually about very statistically predictable outcomes. Once we have that, the nature of risk and reward in the development of upstream resources completely changes. And I'll come on to how you capitalize on that change because the market doesn't fully understand that change yet.

The last observation just about why this revolution has happened so much more quickly and so much more significantly in North America is, again, not about the rocks. The shale rocks exist in lots of places. It's actually the composition of indeed having the rocks, but also having a really vibrant entrepreneurial independent oil and gas sector. It's about having private mineral rights. And it's about having infrastructure or pipeline network that's really second to none and a great regulator and FERC that ensures open access to those pipelines. All of that, you need all of that to make this revolution work and it's why this revolution has happened in the U.S. and we've considered all those elements, they also expose really interesting areas for investment.

Now how much does this matter? How significant is this change, and lots of quotes here that you can read, I'm just going to highlight a few points. So first, within a few years, it is entirely plausible, perhaps even likely, that the U.S. will be the largest producer of oil in the world, larger than Saudi Arabia. Now if I come up here and said that 5 years ago, you'd think I have 2 heads. Today, that is a very likely outcome.

Jobs. The shale revolution, if embraced, has the prospect to deliver millions of high-quality jobs here in the United States. Those are jobs in the production and jobs in the downstream beneficiaries of all this newfound resource.

Energy independence and national security. Looking out a couple of decades. Again, if we continue on this trend, if we continue to develop these shales, we can develop and deliver, in North America, basically all the oil and gas we need, domestically. Today, we're already there with natural gas. The debate now is, how much of this natural gas should we export? Think about that alone, in contrast where we were 5 years ago, when we're building -- busy building infrastructure to import natural gas into the U.S. So this really is significant. This is the kind of stuff that happens once in a generation and when that happens, there's opportunities for people like all of us to deploy and invest capital.

So let me take us from that revolution to what we do about that revolution at KKR. So we had the good fortune of identifying this revolution very early. And setting about very methodically building a comprehensive platform so that we can really be a solutions provider to the sector. And when I say a solutions provider, I mean a solutions provider both to investors, on the one hand, and to company partners, on the other. So for investors, we want to deliver and be able to deliver to them a range of risks and returns, different kinds of rewards for different kinds of risks. Different durations, different forms of return, yield versus capital appreciation, so we can match their needs. In terms of solutions for the industry, we want to be able to meet their needs in multiple ways. We want to be able to listen to their challenges and meet their challenges with them as a good partner. To do that, you have to have a wide range of platforms and capabilities, and you have to have certain skills, and I'm going to talk about both.

So platforms and capabilities. Over the last 5 years, we have systematically built what we think are all the critical foundational blocks to be able to be that kind of comprehensive provider to both investors and to companies. So let's take the range. Starting with infrastructure, the very low end of risk. Lower rewards, much lower risk, much lower volatility. Things that are very insulated from cycles, insulated from commodities, insulated from economic variability. But present a really terrific part of portfolios that are long dated with long tail viabilities. Colonial Pipeline, would be a great example of investment in this area.

Adjacent to that, producing properties. So this is our K&R in our business. So here's another way we can help a company solve a problem. Companies have big capital requirements ahead of them to develop their shales. They can sell off some of their legacy production. We can then take our dedicated operating team, focus on optimizing that production, generate cash flow and generate yield for our investors. Again, a relatively low-risk business we're taking proved producing reserves in that context. Take the next step up. This is new, an unconventional asset strategy. This is working with industry, and I'm going to talk more about this as we go through the presentation, working with industry to take this valuable land, these great shales they've developed and turn them into producing properties, turn them to oil and gas wells that generate cash. That's Comstock, a partnership that I will talk about as a good example of that investment.

Private equity, of course, our bread-and-butter. My friend and partner, Alex, just talked to you about the expanse of that business. This has been a terrific business for us in energy, East Resources, Hilcorp, some of the highest return on investments in our 37-year history. Right in that sweet spot, that core of being a corporate partner and helping companies build their businesses successfully. But it goes beyond that, we can take it into places like capital markets. So if our pools of capital aren't the right answer, we still want to meet that need. We still want to deliver a solution to that company and so that we can deliver a third-party solution. Special situations. So let's say companies are very tailored and specific needs. Just for example, was us with Quicksilver, they needed to develop midstream and processing capabilities for their Horn River opportunity in Canada. We stepped in and helped build and finance that opportunity. And then it goes off this page. And that's the one firm approach that Henry talked about. It's bringing all the intellectual capital together and moving agile-y and opportunistically to capture opportunity. Ralph was going to come talk to you about the real estate business. We married the knowledge and skills of our real estate platform with our energy platform, and identified an opportunity to develop residential housing in the Williston Basin to service all those people that are moving to support the development of the Bakken Shale in North Dakota. So here's an opportunity that took that combination of intellectual capital and allowed us to capture an opportunity we wouldn't, otherwise, have done before.

Now with all these platforms you have to have the right capabilities. And in order to succeed in this business, we believe you have to have 3 core capabilities: number one, of course, investment skills. Now that is our 37-year history. That's our bread-and-butter, but we've continued to expand and grow that capability. So today we have 39 people around the world involved in the energy and infrastructure business and that's a range of people with operating backgrounds and investment backgrounds coming together to make those determinations about what we want to buy, when we want to buy it, why and when we want to exit it.

Number two, technical capabilities. We have built dedicated technical partners that work alongside us to assess, there is a very technical element to this business, to make those technical assessments in partnership with us. And so that technical, dedicated capability, very critical, particularly, if you're going to operate at the asset level.

And number three, finance. That is to say, you have to set yourself up like an oil and gas company to be able to deal with daily cash flows with financing, with hedging, with royalty payments, all the things that an oil and gas company does in a day, we need to be able to do, if we're going to be a good partner to them.

Taking that all together, that's exactly what we've built, over the last several years, in KKR. And then point of fact, it's a mini oil and gas company that we've built inside of our own institution. And that gives us very distinctive capabilities relative to our competitors.

Added to that, of course, is public affairs. This is a business, and we are duly sensitive to the impacts this revolution has. This impacts the communities that it serves and it impacts the environment. Now done right, it impacts those in a favorable way. It impacts them by creating more jobs. We can switch from coal to gas. By embracing best practices, which is something we've been a real advocate of, there's an opportunity to take the shale revolution and really turn it into an enormous benefit for the U.S. economy, for national security and for the environment. And that's something that Ken Mehlman and our public affairs team and the energy team and the whole firm really embraced working on together. And again, we see it as a competitive advantage.

So when we take all those capabilities and we take all those platforms and we stitch them together, what we're able to do is have a full spectrum offering to the companies that we go and work with everyday. So when we go see a CEO, or a CFO, we don't go in and say, "Let us tell you why you should do a private equity transaction." We go in and we say, "Let's share our knowledge about the industry and your knowledge, and let us listen to what your challenges are and what your opportunities are. And then across this whole spectrum, we can tailor a solution. And then we will match it with the right pool of capital." And that makes us a strategic partner, as opposed to just a financing partner to these companies. Because they can talk to us about 4 or 5 different ways to address their needs. And as you can see, it works. We've been able to find opportunities, good opportunities in all of these areas with that go-to-market approach.

Now with all that said about the shale revolution and all that said about the capital needs, it's not as if its universal. That is to say, there are parts of the sector that have plenty of capital addressing them and there are parts of the sector that are deficient in capital. Even though there's $15 trillion required, there's places where you get oversaturation. And we stand here today, private equity has been a wonderful place to do upstream energy over the last several years. So looking in the rear view mirror, that's been a real great place to be. But you have a lot of people looking in the rear view mirror making forward-looking decisions, and the proliferation of dedicated energy PE for funds, has been fairly stunning. So many generous firms have rushed out to play catch up and add a energy PE fund, $1 billion energy PE funds have become 3 billion-and-one-dollar funds, $3 billion have become $5 billion, and frankly, that upstream energy PE space looks very saturated to us.

We continue to see opportunities. We will continue to selectively invest in this area but, actually, the pivot looking forward is probably to more of the next order effects of this revolution and how, with PE, we can capture those energy businesses or those impacts.

On the other hand, at the asset level, as I've mentioned, we see a real dearth of capital available and an extraordinary demand for it. Now you can only access this market if you have investment capabilities, and technical capabilities, and finance capabilities. We've built all that and we're taking advantage of it. So we can go and partner, at the field level, to drill these wells, to develop these valuable assets that aren't producing cash, turn them into proved reserves and cash productive assets for the partners we work with. And here we see an enormous opportunity and a very disproportionate reward for the risks that we have to take.

And let me give you an example of that. Comstock Resources, a terrific independent oil and gas company, been around a long time. They had the foresight to make the transition from offshore gas production to the shales, shale gas, and then had the foresight to move from shale gas to shale oil. And that led them to developing a small, by global industry standards, but very valuable position in the Eagle Ford shale. Now we at KKR invested in the Eagle Ford shale 6 different times now. We have a very strong point of view, both from an investment and technical perspective, on this opportunity. When we came together with Comstock, they had already drilled 35 wells. With our dedicated technical team and their technical team working together, we have collective conviction that, that sample size gave us a high level of predictability about what would happen next. So we partnered and said, "You know what? You have great opportunities, you all are outstanding operators, if we can help you accelerate your program, that's value creating. It's going to allow you to demonstrate to the market what you've got, but equally importantly, net present value, if we can drill more wells sooner into a high oil price environment, that's real value that's been created. It's a win-win partnership." That's exactly what's happened.

So just since August, we have drilled 31 wells together. This company has executed outstandingly, just as expected, managing costs well, production has been just as our technical team and technical team expected, and we've benefited from strong oil price environment, including the fact that we can sell this oil at Louisiana Light Sweet prices, that's a premium to West Texas Intermediate. So we've been able to capture all that benefit, and capture quickly. The time from drilling a well to production, very short, in the world of shales, and very predictable, as I talked about on an earlier slide.

So that risk is not well understood, nor is that timeline well understood. We're not wildcatting, we're manufacturing oil and gas out of the ground. And as a result, we've been able to already take 2 quarterly distributions from this investment, yield an extremely strong cash-on-cash returns and we haven't been in this investment even a year yet. And we see a lot of that opportunity out there today.

Now none of this would be really doable if we didn't have the power of the balance sheet. And Henry talked about the balance sheet, but this has been such a key enabler, fits that same category if it's really hard to overstate how impactful this is. Now first and foremost, we've been able to deploy that balance sheet into what we think are really attractive investments. But secondly, we've been able to do that in a really nimble and natural way, and enables us to build businesses alongside these investment pools. So you'll see this North America unconventional strategy. We have been able to move quickly to capture the Comstock-like opportunities. Not spend one in 2 years talking about how to form the business, we can move into the business. And we've already committed $300 million in that area. That gives us a lot of flexibility to then say, "How do we want to build this strategy from here?" And that balance sheet is what enables that kind of nimbleness and that kind of agility. And it is very, very powerful.

So the roadmap. Let's now take this altogether. The capabilities and the platform I described, married to the shale revolution, we want to build a good business out of that. That's what you all in the room care about, that's what we care about and we can do that, and have done that. So if you look back to 2009, this is when we made our first investment in the shale revolution. We were very early participants in this revolution, that was the days of East Resources. But at that time, we only had a PE business and we had energy as part of our overall PE platform, which is where it is today and a wonderful place to have it.

We then added infrastructure and we added our K&R, our production business. The next year, we expanded all those businesses, and then we added the energy SMA, that is to say is a global platform to capture opportunities in all parts of the energy spectrum all around the globe. Get to where we are today, we've expanded and matured all of those platforms and we've added our unconventional oil and gas strategy. Now let's go '09 to '12. In '09, we had $1 billion energy PE business, today we have, what? Over $7 billion energy and infrastructure business, only $2 billion of which, is in PE. So we have over $5 billion of businesses in energy and infrastructure that are distinctive for many of our competitors, and didn't even exist in 2009. And as we look forward, we see the opportunity to really continue to build that platform. And primarily, just by maturing and growing the businesses that we've already got in place. So we feel like we've really got a distinctive position to participate in this extraordinary revolution. It is a time of incredible change. It's a time of incredible complexity, with the right capabilities, which we have spent years developing and with the right platform to be a real solutions provider to investors and to companies, there's real opportunities to win here. And we think we're positioned to do that. And we absolutely look forward to keeping you updated on our progress as we do.

Thank you very much, and with that, I'm going to turn it over to my partner, Ralph Rosenberg.

Ralph F. Rosenberg

Thank you. I'm Ralph Rosenberg and I'm responsible for the global real estate business at KKR. I'm going to spend the next 15 minutes walking you through the evolution of our real estate business.

Plain and simply, the mandate of me and my team is to leverage KKR's brand to source, use differentiated information inside the firm and differentiated operating capabilities to capitalize in real estate opportunities, primarily in United States and Western Europe.

For the most part, we are control and influence investors in real estate capital structures to the point that Mark made, Henry made, and Alex made. We have the benefit of having a balance sheet at our disposal to effectuate this strategy. To date, we've committed $300 million of KKR balance sheet to the real estate activities. We have a team of 12 dedicated professionals in the United States and in Europe, and we have the benefit, as Mark alluded to, to leveraging across all the different private equity vehicles and private equity industry verticals to capitalize in real estate related activities through cross-staffing. We also do that with capital markets and have with KAM as well.

Additionally, what Henry McVey alluded to is critical to the evolution of the real estate business at KKR, we get the benefit of taking advantage of the macro insights and intelligence from Henry and his team and, quite frankly, in every opportunity that we've invested in, we've had Henry's team going to the local markets and actually do our own bottom-up analysis of the demographics in the trade areas within which we are investing.

To date, we've committed approximately $650 million of equity to 10 transactions in the United States and in Western Europe. At a very high level, number one, we are leveraging the firm's brand. For 37 years, the firm effectively dabbled in real estate from time to time. When I joined the firm in March of 2011, we effectively started to turn on the faucet of KKR and to capitalize on all of the real estate related activities and opportunities that came out of turning on that faucet, which is a incredibly powerful sourcing engine for the real estate business.

As I mentioned, we're focused on the U.S. and Western Europe predominantly. And with a flexible balance sheet, we have the ability to invest across the capital structure and real estate activities. We're primarily focused on preferred equity and mezzanine investments, all the way down to taking pure equity risk. And lastly, with respect to our previous position in tackling the real estate investing universe, we basically are moderate to low leverage players. In the 10 investments that we've participated in so far, we've had a couple that literally are unleverage and the maximum amount of leverage we utilize about 68%. For the most part we're sort of 55% to 65% levered players.

I'm sure you guys have spent a lot of time thinking about the opportunities that have come out of the great recession and the market bubble. But just to capitalize on those observations, in the real estate context, I want to run through 5 very simple observations. Number one, in the financial crisis, a lot of access was buildup in real estate capital structures. All those capital structures have to unwind and delever over time, some of that has happened, but there's extraordinary amount of deleveraging that has to take place in the U.S. and Western Europe.

Secondly, as Henry McVey alluded to, the financial markets and the banks, in particular, have dramatically delevered and have reduced their balance sheet exposure to illiquid principal opportunities. That is a direct opportunity for KKR, in the real estate space, to take advantage of the fact that these players no longer exist. And secondly, the shadow banking industry, with respect to the CRE world, has dramatically shrunk in the last 10 full years, if you think about, for example, the CRE CVO market or the CRE mortgage REIT market and all the prop activity that was happening on the mortgage desks of the major banks and investment banks, all that activity is dramatically reduced. Players like us can be nimble and take advantage of filling that gap in the capital structure.

Thirdly, there are fewer private capital providers in the real estate space. So for example, the proliferation of private equity real estate firms that grew through the decade of the 1990s and into the first decade of the new millennium, many of those players are effectively zombies. They've got funds that are winding down, but they've had very little success in raising new capital. There are only a handful of players who are really dominant players in the space today.

Fourthly, we have the ability to leverage our brand and our relationships to really provide solutions to strategic partners in real estate space and we have the benefit of doing that with no legacy portfolio of problem assets. That's a huge competitive advantage for KKR, as I and the team are not distracted by cleaning up problems that were created during the crisis.

And lastly, I would observe that, unlike the real estate bubble, if you will, in the 1980s, this bubble was really a financial bubble and was not a supply driven bubble. So the supply demand in the real estate markets, for the most part in check, and so that means if you cam create differentiated opportunities to invest in real estate today, you can effectively do so in a market where the supply/demand balance is pretty stable and therefore, you could take advantage of an inflation protected hedge, which Henry McVey alluded to, where you own real assets into an inflationary environment and take advantage of mark-to-market of leasing activity and the ability to pass through operating expenses at the property level to your tenants.

Let's talk very simply about our core competencies in the real estate space. This pie chart, I'll start at the upper left. We, as a firm have a predisposition to looking at recapitalizing and repositioning assets and companies that are effectively mismanaged. There are lots of real estate opportunities out there, primarily driven by the fact that real estate assets and real estate platforms were capital starved coming out of the crisis.

Secondly, with respect to corporate activity, not surprisingly that sort of the bread-and-butter of the firm, we, and my team collaborate all the time with Alex and his teams across different parts of the firm, in the real estate private equity world, to create opportunities and platform-related investing opportunities at the private platform level and also in the public to private space. You might have read that we took private Sunrise in assisted living, which is a public to private we participated in, where we partnered with Health Care REIT. My team and Alex's team, in the health care space, collaborated to effectively take private the real estate management company, development company and the ownership interest in number of leasehold assets in the assisted living space, in the private pay health care space in the U.S.

Thirdly, from a structured credit investing standpoint, the firm, not surprisingly, has a lot of expertise as to the individuals on the real estate team and looking at investing in structured private activity, mez, pipes, converts that are also real estate-related and we've execute one of those transactions today.

Fourthly, at the bottom of the slide, distress for control. A lot of that has run its course in the United States through the deleveraging process. But as you would expect, in Europe, there's a whole host of deleveraging activity that needs to come to fruition, the banking sector there is about 20x levered, we know it's got to effectively reduce its leverage rate to about 10x and, therefore, through that deleveraging process, there's going to be lots of opportunities for us to distress for control investing. And one investment that we've made in Europe is indeed just that. We bought into a mezzanine loan, converted that mezzanine loan into common equity in a private hospitality platform.

And lastly, not to minimize the importance of the word opportunistic, there's a whole host of real estate-related activity that just comes out of the KKR brand. It really is the ability to turn on that faucet and see what that opportunity set looks like. One simple example is with what Mark alluded to, is connecting the dots from our energy team to the real estate team, to effectively be a developer of real estate in the Bakken oil shale.

From a thematic perspective, we'd like to break this down to 3 different buckets, if you will. From an industry perspective, retail hospitality and senior housing, all very natural adjacencies to our traditional private equity verticals. Retail, obviously, the ability to leverage off of our relationships with retailers that either we own directly or that we have direct calls into the executive suites of, make us a very differentiated investor in terms of controlling information flow when we're analyzing the real estate opportunity.

Secondly, hospitality. The firm actually had a tremendous success prior to my joining the firm in the hospitality space. Successfully built KSL, for example, and exited that platform with great economic success. The hospitality sector is an operationally intensive sector within the real estate space. It's a natural adjacency to Alex and the private equity teams that have operational expertise.

And lastly, as I mentioned, we've got a huge health care practice. There's a huge opportunity space in the health care commercial real estate market to take advantage of opportunities that demographically are consistent with the trends we're seeing in the marketplace with an aging population. And that's exemplified in my comment about Sunrise assisted living.

Overlay those direct industry thematic focus areas with macro themes, they're really 3 simple themes. Henry alluded to the most obvious, which is create a defensible portfolio of assets in a potentially very substantial inflationary environment. Secondly, I alluded to this earlier, take advantage of the fact that the shadow banking market in commercial real estate is a fraction of the size it used to be. And thirdly, capitalize on areas where there's a tremendous amount of infrastructure that was put into a geographic location where we can effectively buy commercial real estate that is a direct beneficiary of that infrastructure with effectively not paying for that infrastructure. I would say of the 10 deals we've done, in 3 or 4 of those deals, there's been a direct relationship between significant capital spend by either their prior owner or by municipality or state adjacent to the asset that we have purchased when we have a direct beneficiary of that spent. And then lastly, from an opportunistic perspective, again, taking advantage of our information flow, our relationships and our brand.

When we think about our pipeline, my team and I meet twice a week and we go through all the deal flow that we're seeing. And we effectively ask ourselves 3 simple questions: is there a sourcing advantage that we have through KKR? Is there an information advantage that we have in terms of analyzing an opportunity? Or is there an execution and operating advantage that we have in terms of creating value at the asset level or the platform level?

If we can't answer yes to at least one and typically 2 of these questions, effectively we're just buying the market. And you guys aren't paying us and investing with us to use our capital to "just to buy the market." And ultimately, third-party investors alongside of us aren't really interested in us just buying the market. This is all about how do you leverage the KKR franchise in a differentiated way to create opportunities in the real estate space.

These are all the deals that we've executed around to date. Everyone of them has a unique story as to how sourcing, information and operating capability made a huge difference in our success in making these investments.

Let's talk about the progress of our real estate franchise to date. So as I mentioned, I started here at the beginning of 2011. With the 12 professionals who worked alongside of me, we have been fortunate to have an allocation of $300 million of balance sheet from KKR and a partnership with KKR Financial, where they have dedicated $300 million of balance sheet to the real estate activities of the firm. And we have executed on 10 transactions, committing $650 million of equity to these transactions. Approximately $290 million of that $650 million of commitments is currently held in the KKR balance sheet. The majority of the difference is actually held on the balance sheet of KKR Financial and then there's one investment, that I alluded to, Sunrise assisted living, that is jointly held on the balance sheet and on the balance sheet of the North American Private Equity Fund.

We are looking to effectively expand our investment base over the next 12 months. One of our key limited partner relationships has committed $300 million to invest alongside of us as we continue to expand the real estate footprint of the firm. And we are continuing to take advantage of our balance sheet, our limited partnership relationships and the equity syndication capabilities of KCM to allow us to continue to scale the real estate business as we move forward.

With that, I'm going to offer you guys the benefit of a break and to the extent you have questions at the end of the day, I'm happy to answer them.

Craig Larson

Thank you, everybody. As Ralph said, we'll now take about 10 minutes. We'll get back at about 10:05. Thanks, so much.


Scott C. Nuttall

Well, good morning, my name a Scott Nuttall. I'm going to spend a little bit of time with you today talking about our balance sheet, business development and the strategy of the firm.

A couple of years ago, at this session, we spent time talking about how our strategy really evolved out of 4 major observations that we had about our business. I thought I'd start by giving you an update in how we're progressing against the strategy we laid out.

The first observation that we made is that we've been sourcing a lot of interesting investment ideas through the firm's work in the industry and our relationships, and we weren't really able to invest behind a lot of those ideas. We used to be just private equity, and we turned away a lot of interesting risk/reward opportunities. And it was that observation and frankly, frustration that led us to start thinking about building new investing businesses.

Well, in terms of an update, let me just give you a sense of where we were in 2009. Private Markets, it was really just private equity, North America, Europe, Asia. In the public market space, it was very liquid credit, bank loans and high yield. And in capital markets, we were really just focused on KKR's portfolio, specifically in private equity. So we were doing debt refinancings in our own companies and equity syndication upfront. In the last 4 years, we've meaningfully built out our investment capabilities, so we can now invest behind a much larger percentage of the ideas that we source, and the opportunities that we see. And if you look at where we are today, you can see we, obviously, continue to have strength in private equity, but we've expanded geographic funds like China Growth, you heard about the energy and infrastructure platform from Marc earlier this morning, and real estate from Ralph, we see opportunities to continue to scale, but we've meaningfully expanded our investment capabilities. Same thing in Public Markets. Bill Sonneborn and Girish Reddy are going to talk to you more about this in a few minutes, but we've also meaningfully expanded there.

We're still doing liquid credit and continue to expand that business, but we've also built out an originated credit platform across mezzanine, direct lending, special situations on a global basis, we started to build a direct hedge fund platform and now we're in the hedge fund solutions business through our acquisition of Prisma.

We also made our first hedge fund stakes investment, buying 25% of Nephila, which is a reinsurance risk hedge fund, and we've launched our mutual fund retail platform, and Suzanne is going to talk to you a bit more about that in a little bit.

In capital markets, we've expanded our capabilities quite a bit. We're continuing to work with KKR's private equity portfolio, but we're also doing equity underwriting, and we're doing third-party capital markets business. And we've also launched a non-bank finance company in India, through which we're executing capital markets underwriting. So a significant expansion of what we're doing. And if you look at what that means in terms of the businesses -- I mean, this is non-private equity, for just a minute, you can see that when we were last together, we had about $16 billion of assets that we were managing in those businesses. It's doubled to $32 billion. Commensurate increase in management fees, which have also almost doubled, and a lot of that capital has come online recently. So you'll see that continue to grow. And then economic net income from our non-private equity activities has also increased quite a bit. So it's starting to show up in the numbers.

The second observation that we made at the time and shared with you is that even in the deals we were doing, we had a lot of valuable content that we source that we weren't monetizing fully. And we wanted to be able to bring those opportunities to our own relationships. Our solution for that was to establish and build a global Capital Markets business. And so let's talk about how that's progress. My partner, Craig Farr, is going to give you more detail in a little while, but when we were last together, we were really a North American focused capital markets effort, who is largely just private equity, KKR only, and about 26 people. Today, it's global. So we have our Capital Markets teams working around the world with our investing teams. It's working across all strategies, so it's not just private equity. So when we sourced the Uralita transaction that we talked about several times today so far, Capital Markets is involved, helping to structure the deal and syndicate access that we can speak for the entire tranche. We're also now expanded into third-party efforts through the MerchCap Solutions joint venture, and we've increased the number of people in this business by 50%. And this is what's happened to the revenues. So you can see when we started the business, 2008 was really the first full year, $18 million. It expanded dramatically since. And the third-party component is really just starting to kick in. Critically because we're largely monetizing content we already have within KKR, this is a very high-margin business for us. So this business runs at about a 70% margin for the firm.

Third observation. We had too few investors who were participating with us. It historically had not been a big enough focus. We had underinvested in distribution for the first 3 decades of our existence. We figured that out. And we're playing catch-up. And so what we decided to do is to really spend a significant amount of time, effort and firm capital to build a broader, global distribution effort. Suzanne is going to take you through this in a little bit. But this is what we look like not that long ago. We were institutionally focused only. we were U.S.-centric and really just focused on private equity, and we only execute the business through episodic funds. We had 21 people in 2008 and 275 fund investors in everything that we did, a fraction of what others in our space have, and many of which have well over 1,000 investors. LTM organic capital raised last Investor Day for KKR was about $5 billion. Here's where we are today. We've got a much more diverse client base. We continue to build out our institutional capabilities around the world, much more fulsome fashion than we did before. We've also started spending a significant amount of time with individuals, high net worth, family offices, retail investors, registered investment advisors in a number of different product areas. We're now global, and the team works across all the strategies so that the client partner group works with all the different businesses across the firm and we're highly solutions oriented. Sometimes the fund is the answer, oftentimes it's not. And we're creating customized mandates, and because everybody at KKR gets paid off on P&L, we can actually marry a number of different products in one solution for investors just as we do when we go meet with companies. We don't walk in with the one size fits all. We listen and we figure out how to be helpful. We've invested in the team. The 21 people is now 74. And we're starting to pick up a number of investors quite a bit. It's now over 600, and that's translating into dollars raised. So last time we were together, LTM capital is about $5 billion in terms of what we raised organically. As we stand here today, just shy of $18 billion raised in the last 12 months. Starting to see some progress, a lot more to go.

The fourth observation was that we wanted to own more of what we did. If we had permanent capital, it would allow us to move more quickly. It would allow us to establish businesses in this pace that we thought was appropriate, and we wanted to be able to do that to really accelerate the growth of the firm and control our own destiny. That was a lot of the driving motivation on the combination with KPE.

Now I want spend a little bit of time with you on this because this is a really critical part of KKR and what makes us different. And our balance sheet is a real differentiator for us. It does several things for the firm, and I want to dig in here a little bit. It accelerates our growth strategy. It's allowed us to create a lot of the businesses you've been hearing about so far today and you'll hear about for the rest of the morning. It's a significant and growing part of earnings and cash flow, and we'll walk through that with you a little bit. And on its own, it generates very attractive returns on equity. And when you think about the KKR business model, we can generate attractive returns on equity off the balance sheet itself and use it to allow us to more quickly raise third-party capital that generates management fees and carry for us. It's the combination of those 2 things that generates a very attractive return on equity for the firm. And we'll talk a little bit about how we track progress and where we're going from here.

So this is what we've been doing with the balance sheet, okay? The last couple of years, there's been a lot of things going on. You can see the follow-on funds. We've been making commitments alongside our traditional private equity funds, Asia and North America. We've also used it to establish first-time funds. And you can see, there is 8 or so bullets next to that little heading there. Those have all been created in the last little while, last few years. And the balance sheet was really allowing us to do this very quickly. It would have been very hard as a private company with no balance sheet to do everything that we've done. Drop-down funds is kind of a new innovation. So when we talk about real estate or we talk about our energy income and growth fund, what we're really doing, and Ralph talked about this, we're investing off the balance sheet. We're just doing transactions. We're doing deals. We're putting them on the balance sheet, and then we're going to go out and talk to investors, and we're doing right now, about participating with us. But it's a very different conversation than a traditional first-time fund conversation because we're actually talking to them about the deals that we've already gone. We're dropping those transactions into the fund, so they're actually investing in a fund that's partly seeded, much less of a J-curve impact. So you're actually seeing the investments that you're going to be involved with, and they're diligencing those investments with proof-of-concept already completed, so allowing us to raise capital much more quickly.

We also use our balance sheet to support our Capital Markets business. It's a highly attractive business for us, high ROE, and we're now using it to also support the third-party Capital Markets business. We run at this [ph] capital-light effort, but it's helpful to be able to have the capital there to underwrite debt and equity. And you've seen that we we've started to use the balance sheet for strategic M&A. The Prisma transaction and the partnership with Girish and his team. Nephila earlier this year. And we're spending a significant amount of time looking at opportunities, both control and stakes.

And the last one is here is opportunistic investments. We like investing in this location. When the markets dislocate, there's oftentimes great opportunities to move quickly into that dislocation, and that's when you're going to make the best investments. Fund raising takes time. When the credit marks dislocate and you go out raise a third-party capital, no matter how hard you try, it's going to take 6 to 12 months. A significant amount of trade is played out. With our balance sheet, we can move into those dislocations quickly and generate those returns for you and us and shareholders.

So let's look at how we make money as a firm. This is last year. Economic net income was $2.1 billion. And you can see the 3 different components, fee-related earnings in carried interest, and the balance sheet was $1.1 billion of the $2.1 billion. So the balance sheet was 52% of the earnings of the firm last year.

Let me just talk about how we think about the business model, okay? We look at all of our earnings together. Balance sheet, few-related profits, carry net of the compensation load. And look at that in terms of return on equity. Last 3-year average return on equity for KKR was 30%, range from 13% to 43%. And the critical part of this, and I now a lot of you spend a significant amount of time with the financial services models, we generated a 30% average ROE with no net debt. And the balance sheet has been a big driver of that.

Let's also look at cash flow. This is the metric we focus on quite a bit. I know there's lot of metrics that we all put out as an industry. This is the one that we focus on a lot. Total distributable earnings last year, just shy of $1.45 billion. Again, let's look at the components. Fee-related earnings, just shy of $300 million; carry, $285 million; balance sheet, 60% of the cash flow of KKR last year.

Now let's look at the cash ROE of the firm. Keep in mind, as Alex mentioned, we are just starting to see the carry kick in. So the cash ROE of the last 3 years without carry really firing as of yet has been 18%, range from 14% to 23%. And if you look at the balance sheet, it's gone from 34% of the cash flow of the firm to 60% in the last few years.

So what's been happening? Well, when we combined KKR with KPE, the KPE legacy balance sheet was almost exclusively invested in our private equity funds and co-invested in our private equity deals, okay? So you can see on the left-hand side, diversification, it wasn't much. It's 4% non-private equity. And we're taking cash out of all this. So this is just looking at our invested assets on the slide. The 4% is now 30%. So it's starting to look more like the firm as a whole as opposed to just being private equity only. As that happened, the liquidity of the balance sheet has increased. So from 3% in liquid assets, we're now at about 19%, and that number continues to move up. And critically for all of us, the amount of those assets that are actually generating cash yield has increased significantly. It's gone from 4% generating in cash yield to 18%. That's really important because especially with our new distribution policy, as you know, we're going to pay out 40% of all of our realized gains off the balance sheet but also 40% of all the recurring investment income and dividends that we generate from the balance sheet. And as we continue to deploy the balance sheet into more yielding assets, it will have more of a recurring yield, which will generate more of a recurring distribution to all of us every quarter. The balance sheet also critically provides us the ability to move quickly into the dislocations and make the opportunistic investments that I mentioned and execute on our acquisition strategy and game plans, and just overall, we still feel highly confident that we can generate strong investment returns while still repositioning the balance sheet from a diversity, liquidity and yield standpoint.

So let's go back up. So the 4 things we are trying to accomplish. We wanted to invest behind more of our ideas and relationships. We wanted to make more money for all of us as shareholders and monetize our content. We wanted to find more investors to participate with us to allow us to grow. And we wanted to have more of our capital exposed to everything that we were doing. And our view was then, and our view remains now, that if we do all of those things well, if we make more money from what we're already doing and we do more of everything that we see, it's going to have a big multiplier effect on our ability to capture value for everybody in this room. And so how are we doing? This is total distributable earnings, 2010, about $740 million. You can see the components; fee-related earnings and cash carry, $500 million or so; balance sheet, $250 million or so. 2011, it's in progress, $738 million goes to $783 million. To the point about the multiplier effect and the momentum that we're starting to generate, this is what happened last year. $783 million went to $1.45 billion, and critically, we did that with $11 billion of carry paying private equity AUM. It's now $31 billion. So we've gone from $11 billion to $31 billion, and last year's numbers did not have the benefit of that going through the results yet.

So the title of this slide is Not All AUM is Created Equal. And I actually believe that AUM is a fairly dangerous metric. And we have assets that we manage that are 50-basis-point management fee, no carry, 30-day lockup. We have some assets that we manage that are 2 and 20, no hurdle, 10-plus-year lockup. Both of those show up as a dollar with AUM. Please do not use AUM to judge our business model.

On top of that, our business model is just different. Our balance sheet, and Craig Larson is going to talk you through this in a little bit, our balance sheet, we think of it as the equivalent of a $40-plus billion permanent capital and growing private equity fund. That does not show up in our AUM. But it's absolutely critical, as you've seen, to the earnings profile of our firm. Then think about the Capital Markets business, right? We're syndicating equity and debt and oftentimes retaining economics, either in upfront transaction fee, management fee, carry. None of that shows up in our AUM.

And so I want to spend a little bit of time with you on this slide just talking through how our model compares to the traditional model. And to do this -- just bear with me here, to do this I'm going to go through a transaction that we do together, okay? Let's assume we make a $1 billion investment, and let's assume now for a second that's a traditional model approach. It's a 20% carry fund with 1.25% management fee. And let's make life easy. Let's assume it's a 15% IRR and a 1 year hold. And let's go through how the traditional model makes money, okay?

Well, the first thing is we got $1 billion investment from 1.25% management fee fund. So in a year, we're going to make $12.5 million of gross management fee revenue. Given the margins we have in our fee-related earnings, about $6 million of that flows to the bottom line, pretax. Fee-related earnings get taxed in the publicly-traded partnership structure. So the after-tax fee-related earnings that we generate, about $4 million. Let's look at the carry. We generate about $30 million of gross carry through this investment. We have a 40% compensation load. So about $18 million of that flows down to the bottom line in terms of net post comp carry.

And these were the earnings that we report, okay? Economic net income would be $22 million, the sum of the $4 million and the $18 million, which is the same thing as our distributable earnings, same thing as our dividend. Distribution impact would be $22 million, and because we're paying out all the earnings that we generate under our distribution policy, no change to our book value. But critically on that left-hand side as well as is the consideration, is because we invested $1 billion and we monetized $1 billion investment, we now have to go raise another $1 billion to be able to replace the management fee revenue and have the opportunity to redeploy. So there's the treadmill-like nature to that capital.

Now let's talk about our business model. It's a little different. Same $1 billion investment coming out of the same fund in terms of the terms. But in the KKR model, we invested $500 million of that $1 billion from our fund. We're going to syndicate $250 million through our Capital Markets platform, and we're going to take $250 million on to our balance sheet. So let's go through the math. The management fees, not surprisingly, are half of what's on the left-hand side because we're investing half the amount of capital. So instead of $3 million -- $6 million for pretax and for after, it's $3 million and $2 million. Carry, same thing, half the amount on the left-hand side, half the amount of capital deployed.

Now let's look at our capital market's economics. So KCM, we make money a lot of different ways. In some cases, we will syndicate and we'll keep a management fee and a carry. In some cases, we'll just take an upfront transaction fee. To be conservative here, we're just assuming we keep an upfront transaction fee, typically about 3 pinots on the syndicated equity. So we've syndicated $250 million, that's $7.5 million. As I said, we run that business at about a 70% margin. So $5 million pretax, $3 million after tax. The balance sheet gain is about $38 million from this investment. Through our new distribution policy, we pay out 40% of that or $15 million. So under our model, we generated about $52 million of economic net income and $52 million of distributable earnings. Our dividend impact is about $29 million. And we've grown book value by $23 million.

So when you compare the left-hand and right-hand side, you can see why we say not all AUM is created equal, and we'd encourage you to think about our business model as quite different than other players. The punchline with all of this is that we've made a lot more money investing a lot less capital, and we have much less capital to go raise to replace the capital that we deployed from funds. And so our model generates more than 2x the cash flow plus book value growth using half of the AUM.

Okay. So let's talk about where we're going from here. It's pretty straightforward. As Henry said, we have to perform. As we perform, it will generate carry, balance sheet, cash flow and growth, and it will give us the opportunity to scale our newer businesses. We have, depending on how you measure it, 10 or so first-time funds we're investing or raising right now, okay? The expenses are largely already incurred to be able to invest that capital in our business when you can raise Fund 2 and 3, that can be multiples the size of fund [ph] as long as you have the performance. So we see a significant opportunity to scale these newer businesses.

Of the $32 billion that we manage in non-private equity today, the vast majority is in North America. The firm has a global footprint. We see a lot of opportunities to expand our non-private equity efforts to be more consistent with the firm's global footprint. As Alex said, we can grow private equity. We've grown that business through the cycle. We see a lot of opportunities to continue to grow our private equity business from here. We're looking at acquisitions. We've got a significant amount of opportunity in our client base, and the overall focus here is to drive firm profits and cash flow. That means fee, that means carry, that means balance sheet, and it means cash outcomes for all of us as shareholders, not just AUM.

So hopefully, you get a sense for why we're pretty excited about the future for KKR and where we're going. We feel like we're just beginning to unlock the potential in place. And we think we have a very unique mousetrap with which to do it and through which to capture economics for everybody. And the way we think about it, we're still in about the second inning of a 9 inning game.

So with that, I'm going to hand it over to my friend and partner, Bill Sonneborn, who's going to start to take you through our Public Markets platform. Thanks for the time.

William Charles Sonneborn

Thank you all. And it's great to be with you this morning to talk a little bit about the Public Markets segment. Let's start out first with a question, which is why does this matter? So 2 years ago, we had an Investor Day in the same room. At that time, the Public Markets segment was really immaterial in terms of the financial impact on the firm. Today, it generates in 2012, $155 million of fee income, $80 million of fee-related earnings and $103 million of ENI. It's $28 billion in assets across a diverse array of strategies. The numbers that I just mentioned only include one quarter results of Prisma. Really the 3 key areas or the 3 corners of that triangle up on the presentation are where we're expanding and growing the business: tradable credit in bank loans and high yield and opportunistic credit; alternative credit, which includes private originated credit such as bank private direct lending in the U.S. or Europe, mezzanine lending, as well as global distress and special situations investments; and finally, the newest addition to the triangle is our hedge fund solutions, both on a direct basis through stakes, as Scott mentioned, and with the combination of Prisma's capabilities to the firm in the platform.

At the center of the triangle is thinking about how repackage what we do historically for institutional investors and pension funds to a broader audience of potential investors, both through permanent capital vehicles, as well as through our new '40 Act Funds that we've launched over the course of the last year.

Now I'm going to strip for the next part of the presentation, for the next kind of 5 to 7 minutes, prisma out of the presentation and really focus on the organic, under the cover, what the engine looks like in the engine room of what we've been building over the course of the past 8.5 years. So organic growth. We're on our way for 9 consecutive years of growth in fee-paying AUM. In particular, that growth is happening not just on its own course, but it's also evolving in the context of how we're pursuing margin expansion. So as we've moved over business over the course of the last couple of years, you'll see on the left-hand side of your chart that more of the capital we're raising are in higher-scale fund strategies versus the customized separate accounts. When you look at the other side of the slide by strategy on the left-hand side, you'll see that the business mix has shifted into much higher-margin products, permanent capital, hedge funds, as well as private credit strategies, all which have much higher economics to the firm.

A lot of it has changed over the course of the past 2 years, and as you've heard from Henry and from all of my previous partners up here, one thing hasn't: the culture. I can't tell you how important this is to producing results and the growth that we've been able to achieve within the Public Markets segment. The ability to leverage intellectual capital in a one firm culture where everyone's collaborative, focusing on getting the right answer, the ability to originate unique investments.

You've heard about your Uralita, and I'm going to talk about it another time today to give you some specifics about that. That allows us to make better investment decisions. If we make better investment decisions, we're going to be a better solutions provider to our investors. So we're going to outperform. We're going to meet or exceed their objectives. If we do that, we'll grow. And if we grow, we can think about new areas we want to expand, and that brings additional intellectual capital in the firm that benefits the whole firm.

Let's talk for a second about Uralita. Uralita was a transaction that was really assisted in its sourcing by our country head of Spain who happens to also work with Mark as the Head of European infrastructure, sourcing and investment for our special situations strategy. But it didn't just go there. Given our special situations deal team working actively on the investment and Ron [ph] and Silke Scheiber, a partner in our European private equity business that focuses on industrials, to help think about diligence and structure and where's the right place to invest to help a company in need. So Uralita had a leverage problem and its parent company at the holding company. They needed about EUR 328 million in a relatively quick period of time. The team sat and worked with the company, partnered with the management team and its board to come up with a solution. That solution was investing $320 million of debt in a first lien security and one of its subsidiary is called URSA. She's the #2 player in insulation, manufacturing and distribution, pan-Europe, not just Spain, as well as Eastern Europe and in Russia. That subsidiary had no debt at the time of the investment. But we didn't just stop there. We partnered with our Capital Markets team to set and figure out how we take that EUR 320 million and tranche it into a first lien to be priced very tightly and continue to hold on to the second lien, which because of the arbitrage and the original secured debt was very widely priced, really enhanced the return of the investment we retained. So our Capital Markets team, through our MerchCap JV, went about syndicating approximately EUR 110 million of a first lien, really the tranche out of the investment we made in URSA. And we held EUR 220 million at a very attractive high teens expected rate of return. That's the power of the platform.

But it's not just what we take in the context of the Public Markets segment from our Private Markets colleagues and get in terms of support and help from our Capital Markets team. It's also how we give back. The team within Public Markets is sourced to private equity transaction in our European private equity fund, helped source one in our U.S. private equity fund and has done one in our Asia private equity fund. That is a unique aspect about the firm. But that teamwork, that one firm culture, the one comp that Scott just mentioned, doesn't just help on origination, doesn't just help on diligence. It helps the entire investment process. That means fewer mistakes.

So the chart in front of you shows over the history that we've been managing high-yield bonds since 2004. Default rates of the market, if you bought an ETF, you bought the high-yield index, it's represented by the gray bar, versus if you had held the high-yield bond positions we've held over the period of time. The high-yield market, over this period of time, experienced pretty heavy defaults, particularly in 2009. The average annualized default rate is about 2.61% over this period. KKR, through our Public Markets segment, had an annualized default rate of 5 basis points. You have to look at the aubergine here which you'll see a small amount in 2008, 40 basis points in that year. Truly represents the sort of default we've had in 9 years investing in high-yield. And that sort of default resulted in a recovery greater than par. It's not just in high-yield. We've been investing in mezzanine since 2005. That one default. With the recovery of par and a very high positive IRR. We're investing for many years in middle market direct lending transactions. We've had one default with a positive IRR. If you have really good origination, you can leverage the footprint in the firm from a multi-geographic perspective in how the firm works together. And you can leverage the intellectual cap of the firm to avoid mistakes, you will perform. And if you perform, you help our investors, which will then lead into future growth avenues. Starting with the original, kind of, part of the business, as Scott mentioned, a couple of years ago, really tradable credit is all we did, we've generated great performance. More recently, over the course of the past 3 years, we've extended into private credit, we're generating very good returns. I should note that on the private quarter investments, those are all generally Fund Is, as indicated on the presentation or the slide in front of you. With these type of returns, we think the ability to scale and leverage into Fund II and successor funds is quite extraordinary.

Even more recently, we started to expand in the hedge fund effort. Outside of having Prisma join us on the direct side, through KKR equity strategies, credit relative value, which is long/short credit, and the stake that Scott mentioned we acquired in Nephila, which is a catastrophe risk reinsurance hedge fund. All of these are very important in the risk-adjusted returns alpha being produced we're were very excited about. And why have we spent so much time over the course of the past 2 years thinking about hedge funds? Because we listen to our investors. It's a $2.5 trillion opportunity, and our investors are focused on how they create more low correlation in terms of their returns strips. How they isolate alpha, how they get access to unique investment capabilities, but also have the ability to have some liquidity. It's a very substantial market that we think we, at KKR, can do it differently and better. But we're not stuck and inflexible in how we think about this market opportunity. Yes, we can go after it direct by lifting out a team from Goldman for KKR equity strategies, or organically building our relative value of long/short credit strategy, or we can look at stakes like the 25% stake we acquired in Nephila.

But even more importantly, we're not just thinking about hedge funds as a growth avenue. And Suzanne Donohoe, my partner, will talk more about this. But we're also thinking about how we repackage what we do for different investors.

On the left-hand side of the chart in front of you, you will see the cumulative fee paying assets we are raising in a private and listed BDC, in partnership with CNL. We like to think of it as aspirational as to as we built out and we started to launch 40 [ph] Act mutual fund product, like alternate high yields and alternative corporate opportunities, at this type of growth rate those funds and future funds we launched through that distribution could obtain. The capital within BDC, on the left-hand side of the page, is also included on the right-hand side of the page, which is in permanent capital. We've had 40% compounded growth of permanent capital we manage. We spend an enormous amount of time trying to make sure that capital unearths the best returns for investors. But even more importantly, and more wonderful because that capital can't be redeemed, just like our balance sheet, assuming we take prudent care of it forever, it's a fact we've been able to double the size of it in the last 15 months.

I'm going to transition now to segment performance. So spent a lot of time on organic growth of the Public Markets segment, and this will include some of the statistics and data, including Prisma since I joined the firm in the fourth quarter of last year. Ultimately, investment performance, the returns we showed should help scale our platform and allow us to expand margins. So if you look here, we're showing over the course of the past couple of years, we've been able to grow total fee paying AUM by 56% per year, 22% organically and then the addition of Prisma in the fourth quarter of last year. But even more importantly than just growing fee paying AUM is the margin expansion that's enduring to the benefit of shareholders.

In 2012, with only one quarter of Prisma's contribution included, we added about $30 million of additional revenue. 70%, or $21 million of that, dropped to the bottom line and was distributed to each of you every quarter.

But it's not just about building enterprise value through growing fee-related earnings and expanding margins. It's also about building total value creation and distributable earnings for shareholders. Last time we were here in front of you, we had about $7.8 billion of fee paying AUM that produced some sort of skew in terms of its revenue, either through incentive fees or carried interest. Today, that's $21 billion. And as a result of that, we've been able to grow the contribution from either incentive fees, which go through fee related earnings, or carry, which comes through ENI, over 33% per year. And remember, I said that a lot of the private credit funds that we've launched over the past 3 years are still in their early stages. All of them are now cash-carry eligible, and they're still investing capital. And that does not reflect the ability and power of successor, potentially larger funds, in the future. Of note is the $80 million of incentive fees and carry produced in the latest 12 months and the first quarter is greater than total ENI in either 2010 or 2011.

I'm going to summarize by spending a little bit of the time talking about looking ahead. The Public Markets segment now includes a team of truly outstanding people, dedicated, hard-working and operating in this one-firm environment. When you combine that with the power of the balance sheet help seed and launch these businesses, support them to help them grow, new distribution channels or new avenues to grow and expand our hedge fund offering through stakes or organic development. You put that all in this culture that we've been talking about. I feel pretty good that we're going to generate good returns. And if you generate good returns, you become a solutions provider, matching being a solutions provider to companies to that of our investors. And if we were able to do that, you'll grow.

I want to thank you for your time today. I'm now looking forward to introducing my partner, Girish, to go in detail more specifically on Prisma. Thank you.

Girish Venkat Reddy

Thank you, Bill. Good morning. For those whom I haven't met, my name is Girish Reddy, I'm one of the cofounders of Prisma Capital Partners. Prior to starting the firm, I was at Goldman Sachs, a partner there based in Europe, managing our equity derivatives business. And after Goldman Sachs, with 2 of my partners, Gavyn Davies, who was our Global Head of Economic Research; and Tom Healy, who run our distribution business, we started Prisma 10 years ago.

So as the latest member of the KKR family, I'm really exited to be here to tell the Prisma story of how we've kind of built this business over the last 10 years.

First, I thought I'll give you a brief overview because this is the first time you're seeing some of our numbers, talk a little bit about our client base, the business model that we have built, which is consistent with the theme you heard today, which is customized solutions for our clients, our team, the stability of our team and how we've grown it, and finally, and most important, our performance. So today, we managed about $8.9 billion, primarily an institutionally focused business, over 90% of our assets are from pension funds, insurance companies, foundations endowments. The second thing we do, which is quite different, is we are a solutions provider. It's interesting you hear the same words, same thing from our private equity business, and you can see how our fits been pretty good, is that most of our business, about over 60%, are in a Fund I structure where we customize the portfolio for our clients. And it's not a packaged product that we try to sell to every client. So between 90% of our assets from being institutional clients and over 2/3, or about 2/3, of our business in customized solutions, what we are able to do is really match our asset liabilities of our clients and our portfolios. And so as a consequence, in 2008 -- or 2009, we did not have gating problem. We didn't suspend redemptions, we didn't gate our clients because we managed that asset liability very well. The third is really an experienced team, and I'll talk a little more about that, and what struck me was what Alex was describing the age and experience, et cetera, and it matches interestingly, I [indiscernible] on this slide. But our team has been very stable. In the last 7 years, we've had no departures in our portfolio or risk teams, and so the consistency and stability of our team have been very important, and we have added people every year, even through '08 and '09.

Finally, I think that performance, as I said, is quite important. We have the dubious distinction of being measured on 2 fronts: one, how were you doing in absolute return, well that's not good enough because how were you doing relative to the peer group, also. And even though the peer group risk characteristics may be different, we still have to compete on both fronts. So relative to the -- I'll give you more granularity on the performance, but relative to the risk-free rate, we have done 450 basis points better. And relative to our peer group, we have done about 330 basis points better. And this is net of all fees, the underlying hedge fund managers and including Prisma fees. And what's impressive is that when you are managing a 5-volatility portfolio, which has very little room for error, to be able to outperform by 330 basis points, you need to have a lot of alpha. If you're managing a 20 -- 18, 20-vol portfolios, you have a much better chance of generating that kind of alpha. So -- and you'll get a little better feel from where that comes from.

So now just to give you a good idea about our client breakdown, I alluded to that. So it's pretty broadly diversified. As you can see, U.S. corporate and public plans, a fairly important segment, there's also non-U.S. plans and insurance companies. The non-U.S. plans reflects -- part of the reason is, as I said myself and one of my partners, Gavyn Davies, we've worked in Europe for a long time, and so we've been able to have a pretty good footprint from European client base. So about a little over 1/3 of our assets are from Europe. Insurance companies are pretty important segment because we started off as a joint venture with AEGON in our early days, and so having insurance experience and managing insurance asset helped us get a lot of clients globally.

Family offices, high net worth teams are becoming an important part of our business because we're able to customize for them specific funds as they leave firms, like Goldman of Morgan Stanley, where they have been investing their own fund of funds, when they step out, they suddenly don't have a product, and they've asked us to customize something for them. So that's been an important driving growth for us. Endowments is not a big part of our business because, as most of you know, they try to do direct.

And finally, I guess, as I said earlier, geographically, it's been pretty consistent, the footprint that you see there, about 60% from U.S. and rest from outside, and with our new partnership with KKR, we continue to believe that Middle East, Europe and Asia should -- the size of that pie should continue to grow for us.

The next is really our team. I think this is really a big part of our story. The performance that we alluded to has come from 2 reasons. One is a very experienced team, very similar to what you've heard from Alex, 20 years of actual experience, 10 managing assets, 10 selecting hedge funds. When I saw Alex's statistics, he said 20 years of experience, 12 with KKR, and so very similar business model. The numbers next to our names, I wish that was my age, but that's the numbers of years we've been struggling to make money for our clients. And that's probably true for all of our subgroups too. It's just not Gavyn, myself and Tom, but all of our investment teams: portfolio, risk and operations, have 20 years of experience, on average. We've all managed or traded capital markets and risk, which I think is very important, because when we look at our peer group, most people have either come from relationship marketing side or accounting audit side, very few of them have actually capital markets experience. So one of the things we did when we built the business was we felt that people should actually trade and manage portfolios prior to selecting hedge funds. Slightly a different business model. And as a consequence, they tend to be much more experienced.

We have 3 independent teams which is portfolio, risk and operations. Prior to investing in a hedge fund, all 3 teams go independently, review the manager, have the independents to veto. We've had this from day 1, it's not something we tweaked, post made of, or post 2008, and we actually think a lot of our success is because of that seniority and independence. And now we obviously benefit substantially by being able to leverage the team, but more important, the global network that KKR offers us in the credit space, in the industry experts. Every time we're looking at an opportunity in Asia, being able to call somebody there to evaluate either a specific opportunity or a subsector opportunity, that leverage has been very powerful for us.

Now let met talk about -- a little bit about what is it that we do different. I think most of you are familiar with the fund of funds model, and so people constantly ask us, "What's your secret sauce?" And I wish there was one very clear, but it's not obvious. But one of the things I wanted to highlight is we do 5 things different, at least relative to our peer group. The first 3, we think of them as really our drivers of return, these are the reasons why our alpha has been so strong. And the last 2, really, our defense team to make sure we don't step on landmines. And as you know, in the fund of hedge funds, when you're running pretty low risk portfolios, you don't have much of a room to step on landmines. And so the last 2 are really very important drivers of making sure we don't make mistakes. So let me talk a little bit about our drivers of performance. So first thing we do, and quite differently, is a proactive strategy allocation of reallocating our portfolios between sub-strategies. With Gavyn Davies and, now, Henry McVey's input into our process, it's been enormously important for us because Henry gives us what he's seeing, bottom-up, from the companies as he goes around and talks to these companies, and Gavyn has got a much more of a top-down macro policy view. We take an 18- to 24-month view of the world, and we say, "Where is the best opportunity? Where is the dislocation happening?" and we want to be the marginal provider of capital because we believe that's the highest risk-reward situations. So relative to most, I would say this has been an important driver of our performance. So if I take you back to the number I talked about, which is 330 basis points of alpha, compared to our peer group, we think 1/3 of that comes from our strategy allocation. And our portfolio turnover is about 15% a year, about 1/3 of that portfolio -- 40% of that portfolio turnover comes because of our proactive strategy allocation.

Second thing we do different is we really focus on specialized managers. We want to identify the dislocation, we want to know who is the best of breed for us to leverage that. So we don't have large, multi-strategy managers in our portfolio, very successful ones, either like [indiscernible] or any one of these big names, primarily because: a, we don't want to abdicate strategy allocation to them; b, when we identify a dislocated opportunity, we really want to go to the specialist. And the other advantage of a specialist manager is we can then risk manage our portfolio a lot better because we know the liquidity characteristics, we know what's the sandbox that they play in, so when you put the portfolio together, it's very uncorrelated and very little overlap between these managers.

The third is our focus on early-stage managers. Because of the 3 due diligences, we're quite comfortable investing with early-stage managers. We don't take revenue shares with them, but we negotiate fees down for our clients, we negotiate capacity, transparency access to the portfolio and access to the risk takers. So these have been pretty important drivers of how we've generated the alpha. And as I said, the last 2 are more of a defense team. I alluded to the 3 due diligences we do, not only initially, when we invest with the managers, but more important, on an ongoing basis, we do 4 times re-underwriting a manager a year by the sending 3 independent teams. So this is probably the last 2 of the most underappreciated resource or underappreciated work that we have to do, in order to make sure we don't make mistakes or we don't fall in love with the hedge fund once we earn money with it. And the monitoring process, this is the last one, is we have built a lot of proprietary risk tools and we collect a fair amount of detailed information about these portfolios, upload them, integrate them and monitor them, and we believe we've had a lot of early warning signs in terms of identifying managers that are drifting away from what they're supposed to be doing. So these are the 5 things we think we do different, and it's been an important part of why our performance has been so strong.

Next, I thought I'd just spend a minute talking about the fund of funds industry and what's been the growth or lack of growth, and then what Prisma's experience has been. So if you read the press, you would have thought the whole industry has melted away by now, there's nothing left in the hedge fund of funds business. But the reality is, yes, it's come down from 2007, but it's kind of stabilizing, it's still a $580 billion to $600 billion business. It's quite a big chunk of the assets, still. And interestingly, if you look at our own growth, we kind of bottomed out in 2008, 2009, in 3 years somewhere about $3.5 billion, and have grown to about $9 billion. So in an industry that's been pretty flat, we've had a very strong growth. Obviously dictated from the performance, stability of team, risk, et cetera. But what's more striking is we are probably in the top 25 fund of fund providers, and we still have less than 2% of the assets. So the industry is still enormously fragmented, and we think it is getting more consolidated, and we've been the beneficiaries of that consolidation because a lot of our businesses also come from replacement slots, and we think that industry will continue to consolidate and should not be as fragmented as it is today.

Quick -- a little more detail on our performance. We talked about the 2 benchmarks, which is the absolute return than the peer group. But just a broader picture of how our portfolios have done, which is 6.5%, roughly, net of all fees again, both Prisma's and our underlying managers, and what the other asset classes have done since our -- since Prisma's inception. But what's more striking is clearly with much better sharps because our volatilities tend to be a lot lower, compared to any of the asset classes.

Finally, I just wanted to spend a little bit of time talking about customized solution, because we keep alluding to solution provider and it's starting to sound like a jargon, but I just wanted to give some examples of what we mean by that. And that is if you look at our core portfolio, typically tends to be a 30- to 40-manager portfolio across multi-strategy, that's still 60% to 65% of our business. Now we're seeing interesting trends. So we have 2 or 3 clients who have come to us very specifically and said, "As part of my equity portfolio, can you build a portfolio equity long/short strategies that will set in my long-only bucket, not just in my alternative bucket? Because I don't necessarily want to have the risk reward of a pure equity holding because the volatility is too much for me to sit on it. So my choice is either to get out of equities or can you give me a portfolio structure that gives me about 70% to 80% of the upside, but 20% to 30% of the downside?" And so we've been running those portfolios very successfully, typically, 15 to 20 managers, and have delivered those kinds of results. We have credit-specific portfolios. Again, we have a client who came to us and said, "I look at my fixed income portfolio and I basically have high-yield and duration risk. Can you do something to diversify our portfolio away from that?" And that sits actually in their fixed income portfolio, so we put together 10 to 15 hedge fund managers that cut across structured credit, long/short credit, convertible arbitrage, convert-type credit, and when we did structure it, obviously, we've got the mortgages, student loan, that kind of portfolios, each, individually, in a very specific defined sub-strategy, and we put together 10 to 15 managers. We've been running that for the last 4 years, and that actually sits, as I said, part of the fixed income portfolio.

Now, of course, the flavor of the last 2 years. As we've have become more risk-on mode, people want to have more concentrated portfolios. "Can you give us your best 10 managed portfolio, best 15 managed portfolio?" And that customization is because they basically want to move further up on the risk curve, and are willing to take a little more risk and have, hopefully, slightly higher returns. But fundamentally, for most of these strategies, the reality is our goal is to do 6%, 7%, 8% type of returns with a 5 [ph] to 6 [ph] wall, one-to-one in the quarter sharp, that's the objective. And the other benefit is the low correlation to the other asset classes.

So in summary, I guess, I see I've got 50 seconds left. So in summary, I think the way we've built the business is really to focus on institutional clients, to provide the solution that they are looking for whether it's complementing what they have in their long-only portfolios, whether it is complementing what they have in their direct portfolios, and being able to be more of an adviser consultant but didn't really actually manage their money by building the right portfolio for them.

With that, I think, I'll hand it over the mic. I think Craig's next coming up. Thank you.

Craig J. Farr

Thank you very much. As [indiscernible], who I haven't met, my name is Craig Farr and I run the firms at Capital Markets Group. And I'm going to walk you through -- you've heard a little bit already today about Capital Markets, about why we started it and why we've grown it, why it's become a central part, I think, of our overall growth strategy in the firm. And as you'll see, there really are 3 key reasons. I think the first is you've heard from a lot of different products today in terms of our product capabilities, that it's really become strategic to how every part of our firm whether it's private equity, whether it's real estate or whether it's credit, sources, capital, through acquisitions or through exits. It's really -- it's embedded in the fabric now across KKR.

Secondly, and I'll get to this slide in a second. Secondly, it enhances the productivity. You heard Scott talk through some slides where the fund, the balance sheet and the syndication capabilities. Unlike most start-up financial services businesses, this one actually enhances the productivity of the rest of the firm and enhances the productivity of our balance sheet. And then lastly, I think we've used the word a few times today, solutions. It is an additional set of tools in that toolbox to allow us to have more touch points in the market. What we're really doing is we're creating more reasons to go see corporations, to see sponsors, to see investors, to have reasons to do business with them and that just extends, again, our profit margin and our profitability.

So I want to spend a little bit of time on the evolution. I think a lot of people scratched their head a little bit when we started Capital Markets, thought we were going to build a scale business, thought we were trying to be an investment bank and it couldn't be further from the truth. I sat down with Scott, Henry and George when I first joined. And one thing we agreed on is we were going to essentially look for things where we saw cracks in the system. We weren't going to build for scale. We weren't going to build just for the sake of building. We are going to try to find the value add in the system. We weren't going to try to do what others were already doing and replicate it. There was a lot of great stuff already occurred in Wall Street.

Now when I got here, looking around, debt was free-flowing. In fact, it was essentially a commodity, CLOs were flowing, $40 billion capital structure over the weekends in our portfolio companies. So I said, I think you guys have that covered well. And we spent time expanding our equity base, looking for more sources of private equity capital. And so that's what we did. That has become really the way we do deals now. You heard from Scott. We have syndicated or arranged almost $12 billion of private equity since we started this effort and that's become a very profitable approach for us.

In 2008, the world changed. There was a financial crisis. We had a $200 billion portfolio [indiscernible] referenced in terms of debt. And so it was a great opportunity to start to hire talent on Wall Street. We got to hire Jeffrey Rowbottom from High Yield Capital Markets at Barclays, John Empson from leveraged loans at JPMorgan in Europe, and we really -- we've built that capability. And we weren't just looking to build out a capability to structure, we wanted to have that direct investor relationship. We didn't want to rely in the intermediaries. So at that point, it was unclear what was going to happen with the financial system. And we went direct. And as you heard from Alex, over $169 billion of debt has been extended with his team since 2010. So it's part of how we operate today as well.

In 2009, the market started to improve. We started to feel better about the world, but the banks were still replenishing their capital ratios. So we started to use these debt and these equity skills to go on the offense. We started to use them to win new transactions, working with Alex and his team to win tasks, working with Johannes to win Pets at Home and then later capital structures like Del Monte. And now, we are really getting excited about the Capital Markets business because now it wasn't just finding new source of capital, it was becoming strategic to how we did transactions. We also started to use our equity skills. I came from an equity background. I ran Equity Capital Markets at Citi before I came to KKR. So we started working with our portfolio companies, Dollar General, NXP. In 2009, the ad show market was very choppy. The friction cost and exit was huge. And so we spent a lot of time thinking about how to position our companies, how to get to the market. Everyone was very worried about KKR saying, "You guys can't exit these large companies. That's too much stock." We beg to differ. We felt that the large leading franchises were going to be franchises that could come to market first, and I think we've proven that with HCA, Nielsen, Dollar General. That's what the market we wanted to own in that stage.

We also started looking around the globe for opportunities and we were able to hire a talented team in India. Henry spends a lot of time personally in India, and we started this NBFC. We saw a real gap in the system there for promoter financing to start that opportunity.

We also started to think -- we believe in this Capital Markets' function. We believe it adds value for our portfolio companies, but will third parties really believe it? Are we fooling ourselves? So we said, "Let's go start to call on third parties. And where's the opportunity?" Well, Bill, at the time, was building up our mezzanine, our direct lending capabilities. So there was a natural synergy to put that balance sheet, put those mezzanine capabilities together and go into clients. And we did transactions for the likes of Madison Dearborn, Golden Gate, Veritas, and I think we got very encouraged that there was a real opportunity in the middle market, given where the banks were heading.

Coming out of that, we decided to create a new partnership. And we thought, how do we take this third-party business to a level? So we approached Canadian Pension Plan, a $183 billion pension fund that's been a long-standing LP relationship with Alex and many others in the firm, and we -- they wanted to get access to the middle market. We approached Stone Point, who wanted to back that leading financial services platform. And we created a joint venture that we're calling MCS. I would say that early dividends in that have been very strong. And we're now up to 39 professionals. But again, we're not looking to build for scale, as you can see. We're looking to find where we can leverage the rest of the firm to maintain that margin Scott referenced.

As we built the place, we've always said, let's think about these key pillars or key principles. I think it's important to stick to these because you can drift. As Gerry said some of the managers can drift. And the first is access to capital. We want to provide differentiated access to capital. So when Marc was starting the Energy business or Ralph was starting the Real Estate business, we want to punch above our weight. We want to be able to go in and win transactions that people don't expect us to win. You heard about, Uralita. It's a great example where we punched above our weight in that case because we used all the resources available.

Aligned advice, Henry and George talk about this all the time. This is critical for the Capital Markets Group. Having a group of professionals that are paid off the same compensation at the rest of the firm really drives a different type of advice. Our team thinks like owners. We're thinking more like Alex than thinking about transaction flow. That's critical. And I think it does lead to differentiated advice at the end of the day.

Best execution, we're always held to that standard. We've executed 275 capital markets transaction since 2008. It's really a team that can leverage across the globe. We're very centralized and we're always going to deliver that.

Holistic risk management. You heard from Henry McVey. Having Henry in the firm is incredibly valuable. He's got a view on interest rates. He's got a view on the equity markets. We also hired Phil Kim in our group from Morgan Stanley to focus on some of those derivative risks coming out of the financial crisis. We've -- and since Phil joined us a year ago, he's arranged over $7.5 billion of interest rate and currency derivatives into our portfolio of companies, really thinking about some of those long-term tail risks that you could see in a portfolio, and we'll apply that to our third-party business as well.

Product flow. This is critical. You're going to hear from Suzanne after me, but we can sit in front of Texas. We can sit in front of other strategic investors whether it's CPP, whether it's sovereign funds, and we can say to them, "We'll -- this group sees every syndicated product that leaves KKR." I don't think there's any other alternative manager that can say that. And because you see that consolidation going on with relationships, we believe this is helping us win that share effectively across all those different products.

And then lastly, idea generation. Henry is an idea guy, so is George. They're always challenging us to think, be entrepreneurial, be scrappy, think of the next opportunity. Our group is always trying to do the same thing. Last year, we've backed a single family home rental vehicle. We didn't have a pool in the firm that had made sense for. We partnered with Beazer. We put some of that seed capital up on the balance sheet. Right now, we're looking at financing oil -- offshore oil rig or a shipping finance. We're-- as Scott said, we want to able to move to those opportunities and we want to do that quickly, and our group is also charged with that.

Now when you look at our services, again, focus on high value-add. Hopefully, focus on higher-margin services, focus on services that fit with our investing businesses. We've got the acquisition finance services in terms of providing bridge capital, high-yield capital markets, we've got the ownership phase, we talked about all those extensions and we got the exit phase in terms of reducing that friction cost. People have asked us. We've been approached by a lot of firms around the sales and trading business. We certainly don't have any intention to turn ourselves into that. We made JV with some of these someday in terms of finding that extra distribution, but our focus will really be on this slide here.

We're always asked for case studies. I know you've heard about Dollar General a lot, but this continues to be a case study that's on top of the pile. And the reason for that is it demonstrates from start to finish, the power of having a very successful investment, a management team that wants help, a deal team that's highly aligned with us and the management team with the Capital Markets business. Put all those together, it can be very powerful. As you can see, in 2007, the markets were starting to get choppy. One of our competitors dropped from the transaction because we have the confidence as a firm that we could go find over $1 billion of equity in a short time frame, we can complete the transaction. That's -- so that's number one. It may not exist today if we couldn't do both. Secondly, once we started to execute, this management team did a flawless job executing on the business plan and they left the capital market strategy to us. That's the right division of labor in our view. And they're -- and the market was very focused on how would we exit all these shares? Would we do it in a thoughtful manner? And I think you can see we're almost out of the shares and 8 follow-ons later, it's been a very successful execution for the market and for the firm.

Scott talked about this earlier. The other power of the Dollar General case study is pretty stark. If you can see on the left side of the slide, just from the merits of the investment in our '06 fund, it was a very profitable transaction for all of you as shareholders, $752 million of economic net income. However, because we have the ability to syndicate equity, because we could do the additional capital markets advisory of services that the management team wanted, you can see we got to $996 million of economic net income. So that's 32% accretive in one of our most successful investments. We have over 90 portfolio companies in our private equity portfolio. Talk about a multiplier effects. This is pretty powerful if you think about it across all our asset classes. And that's why it makes sense, as you can imagine as we're building our energy capabilities and our real estate capabilities, our credit capabilities. Why wouldn't we want to have the same alignment with capital markets? So that's what we're doing. We're essentially building those capital markets capabilities, aligning them with what we're doing in the investing side. We're highly coordinated with Suzanne, who you're going to hear from. We can ensure that her team is seeing that direct product flow. It's important that the pension funds and mutual funds and others see that and see it in a systematic way. And then we're also starting to supplement our client coverage. The word client is unique for our group, and we go to -- and Suzanne's group, too. We go to the clients. We're going to mid-market sponsors. We hired Peter Glaser and we're trying to find other reasons for them to want to put principal capital into our funds, to do business with us in different ways. So there's a lot of reasons why we feel like we're kind of connecting the ecosystem across KKR.

Sorry, solutions again. So, Ken Mehlman did a good job of making us -- talk about solutions today. And our group has embraced this as well. We have a whole team. They're really a Navy SEAL team in my mind. They're '40 Act, they're tax specialist. They're M&A specialists, a small group of -- small team, but they look at 3 broad categories. They look at market opportunities so, when we see the banks retrenching because of Basel III or Dodd-Frank, they identify that. They let our special ship [ph] team know there could be a real opportunity in ship finance. They think of an issuer solutions. When Alex and others in the private equity business are going in to invest in the company. We need to be smart about that issuer solution, the equity content, tax, accounting. And then investor access. We talked about that earlier. Bill talked about the BDC. This is the team that works on all the permanent capital: KFN, KPE, BDC. We think this team will continue to add a lot of value by having them centralized in the middle of our group.

We talked about a balance sheet in capital markets. This is a great example of why we like the bridging of debt next to our private equity business or other asset classes. If you think about it, when we're buying Dollar General, we've already done an immense amount of diligence to get comfortable paying 8x EBITDA for a company. And then we're asking ourselves, are we comfortable bridging the senior loan commitment at 3.5x or 4x next to it? So clearly, we have a strong investing view already. Here's another way of monetizing that view. We have our own economy capital model, Rob Lewin is here, our Treasurer. And he assigned the 35% economic capital charge to the senior loan commitment. He asked us how quickly can we turn that commitment. It's usually 60 days, so we can turn that capital 5 times a year. So what you can see is as long as we're comfortable, we can understand the credit and we can syndicate that risk, we can turn that return on capital up to 47.6% and return on balance sheet of 16.7%. So I know a lot of you are always asking, what are we going to do with the capital in the balance sheet? The Capital Markets business is good flex business to provide that return on capital in the short term, and we'll continue to do it. I think since 2011, we've committed to $2.8 billion of bridges, syndicated them all successfully and over 30 issuers. So I think those relationships that Jeff Rowbottom and others have built on the team have really paid off.

We talked earlier about MCS. We're very excited about this new partnership. We think it brings together 3 strong partners that I think co-brand interesting partnerships for the clients we're talking to. We've got KKR's origination flows. We've got our Capital Markets team. We'll talk about how we leverage both. And then we've got Bill's principal capabilities side-by-side. That's very powerful. Stone Point has a long history of backing third-party financial services platforms. They help us create the new balance sheet. And then Canadian Pension Plan, as I mentioned, $183 million growing pension plan in Canada, looking to put long-duration assets to work. You think in 75-year increments, it's easy for me to sell that to clients, why they want them in our capital structure. And they also have a lot of relationships with other GPs that they can refer to us.

We're going into clients, and I've been on these roadshows at Dynasty, a number of middle-market sponsors and we're saying to them, "Think of us as someone who's product-agnostic. We're not -- just KKR trying to do a buyout." We can provide a principal solution through Bill's team. We can provide a balance sheet solution. We can provide an agency solution or we can provide a hybrid, but we're going to come at it in a more flexible manner than most who are coming at them as just a source of capital. So far that's been very well received, and our pipeline reflects that.

I mentioned how we're going to leverage the team. We didn't split the team between KKR internal business and KKR third-party. And once again, again, the KKR internal business does not run through MCS, so that is still 100% owned by KKR. This is only for third-party business. But we do leverage the professionals, Jeff Rowbottom and the others and that we think it's a very powerful pitch. We're essentially saying to the middle market, we have large cap, leverage finance experience through 275 transactions that we're bringing to you in the middle market. We think you deserve that service. And that's a pretty powerful statement.

We also have the capital to back it up. Today, clients don't really want to just hear your advice. They want to know, can you back it up? So through Kim, we have well over $4 billion of originated credit strategies. MCS now has a balance sheet of $350 million. CPP earmarked $2 billion for this venture and then Scott talked about our balance sheet of over $7 billion, so that's so powerful. We can really back up like in Uralita, the capital.

Scott showed you this slide. Only a few other points I'd make. Again, we didn't put a dollar of equity into this business, so it's been very accretive for all of you as shareholders, and we've essentially grown it to $129 million. Last year, when it's high as $170 million in 2011, and I'm sure many of you are asking what was that big blip up? And as you can see, there's a real correlation to syndicated capital. If we're doing more LBOs or more energy deals or more real estate deals, we're syndicating more equity and we're probably bridging more debt. That will drive more fee income, but we are trying to balance that revenue stream out, so that's why we've gotten our partner third-party revenue almost to 20%. Well, let's continue to try to balance that. As you can see, last year, I think it would surprise you that almost half of our transactions, while less profitable, were third-party transactions last year, over 100 transactions.

So in summary, we do like this business and we want you to take away from today, this isn't a traditional Capital Markets business. This is not an investment bank. That's not what we're aspiring to be. This really is a function that effectively pulls together all of KKR. It's strategic to how all of our investing businesses invest today in source capital. It's enhancing the profitability for all of you by maximizing that content Scott referred to. And it really is providing a broader toolbox and going to give us more touch points and more sourcing to drive more principal transactions. Thank you. Sue? Now I'll introduce my partner, Suzanne Donohoe.

Suzanne O. Donohoe

Thank you. I'm going to start with the last year, which is I was sitting at the table wondering if there was any water up here by the podium and for my partners, who have been up here today, they will smile with me at this. There are at least 25 bottles of Butterbeer [ph] behind this podium. So if get thristy I know I'm well equipped.

I'm Suzanne Donohoe, as Craig mentioned, I'm delighted to be up in front of you here today and to be back after a couple of years. I can remember speaking with all of you about -- at our Investor Day a couple of years ago, and we've made some great progress. I'm also delighted, by the way, that I've 2 very good pieces of information. One is that I'm the last person standing between you and the guy with the numbers, who is Bill Janetschek, and the second is that I have no intention of talking about Uralita, so -- but what I did think I'd talk about was I'm just going to spend a quick moment reviewing our progress since we were last together 2 years ago. I thought I'd review for you all landscape that I'm betting is familiar, but just a quick summary of the macro backdrop in which we're operating at our firm and in the client partner group. And then what I thought I'd do is give you an update on how our team has developed and how we're doing, progressing against our 3 major objectives as a business. So with that, let's start with a quick review.

You may remember we talked a little bit about the size our team a couple of years ago. We had 33 people focused on working with our investing clients around the world. That number has grown very significantly over the course of the past couple of years, and it's really been driven by the expansion of our client franchise. As you can see, we've also meaningfully increased the number of clients that we're addressing. We're very proud of that statistic. And importantly, it's also been driven by the evolution of our firm. The growth in number of investment strategies that we have to partner with our clients has really also driven the need for resources in -- within our team. Now what have we done with all of those people? What we have been able to do is really drive over $20 billion, $21 billion in new assets through our platform in just a couple of year periods since we last talked about this. And also importantly, it's really been in a variety of different areas, so we've continued to focus on driving assets and driving growth in the client franchise to our historical existing strategies, which are critically important to what we do, but also as important and as Scott alluded to earlier, we're seeding many new businesses and doing so in a way that we're finding the market is very receptive to.

So let's switch gears for a minute and talk a bit about the backdrop in which we're operating. The great news is we're in a wonderful space. As you all know, the institutional or sort of professionally managed asset management business is addressing about $40 trillion of assets today. Now that number hasn't moved so much in the last 5 or 6 years, up about 2%, which is really the consequence of the recession that we've all lived through. But importantly, the space that we occupy in the alternative sphere is up about 14% on a compound basis over the same time period. So we've got some tailwind here that we are very focused on profiting from. That today is a $6.5 trillion market that we're addressing. And so with our -- call it, roughly $80 billion in assets, we have plenty of room to grow.

Now why is that? If you think about the components of that growth, where is it really coming from? Maybe we'll start first with what is our oldest and longest and a critically important partner base, client base of ours, which is the U.S. pension plan universe. As you can see, over the last 5 years, this segment of the market has grown their share addressing the alternative segment from 12% to 22% of the typical asset allocation. If just to save you looking, nearly every line on this page is up meaningfully in that 5-year period. And why is that? If you just think about interest rate environment we're operating in, Henry hit it well this morning. Basically, the treasury trade is over. People are thinking about their liability profile and trying to figure out how they're going to plug that gap.

The growth isn't only at home here though. It's also around the world. And if we step back and think about the sovereign pools that have become a very meaningful factor in our markets in the past few years, they are an ideal client for what we do. So today, sovereign pools around the world aggregate to about $5 trillion in assets under management. There are new ones being formed almost every year it seems and they are very long term in their orientation. They typically have an undefined set of liabilities that are way out in the future. And so it stands to reason that their weight to alternatives is going to be very high over time, as they take advantage of that long-duration profile they have and really try to capture the illiquidity premium that the market affords them. So we're spending a lot of time thinking about this audience and making sure that what we're doing is addressing that needs that they have.

Another segment that's proving to be more and more interesting every day. We've made a few references to it. But as we look at the individual investor market, here, we're just capturing the retail segment of that market. In '40 Act assets alone, there are $13 trillion under management and as you can see, the alternative component of '40 Act assets is becoming a bigger and bigger factor every day. So today, it's probably somewhere between $1 trillion and $1.5 trillion that are focused on alternative strategies within the '40 Act sphere and this is really only in the United States. The same phenomenon of this data is only in the United States, but the same phenomenon applies around the world as individuals face exactly the same constraints and challenges that pensions that pensions and other institutions are thinking about. They're thinking about how do they save for retirement? How do they plug that gap and they're more open to alternative ways to do so in a very low-rate environment.

Now as you all know, this phenomenon is also true in the high net-worth space, which I think has been probably one of the longest-standing participants in the alternative asset class. And when we step back, we started to address that market just a couple of years ago. we're doing so, I would say, with a finite set of resources, pretty limited set and yet last year alone, almost 20% of the new capital we raised were sourced from individual investors. So either through individual investors making decisions on the back of a retail platform or a retail offering we had, or through our direct dialogue that we're having with wealthy individuals and with family offices. So the way I think about this is we're just -- Scott mentioned, we're in sort of the second inning of evolution as a business. I think of us as sort of in the top half of the first inning in this effort and yet, we're already seeing meaningful traction.

So let's switch gears for a minute, give you a bit more color on what we've been doing at home and then how that is translating into achieving our objectives? So first of all, we talked about growing our team pretty meaningfully. The growth has really been in a number of areas very importantly. We focused on building out relationship coverage of all the natural pools of capital and starting to specialize a little bit more in that effort to address particular types of clients and their needs. So for instance, addressing insurance companies, addressing the platform opportunity with individual investors or certainly addressing investors that are sitting in geographies beyond the U.S. We also have found that it's important to bring technical expertise and an understanding of what we're doing in our portfolios to our clients. And so we've expanded the -- what I think of as the client portfolio management function as the product management function, expanded that effort in order that we can deliver content to our clients. And then obviously, we've built the junior support that helps make all of these possible.

Importantly, we take a local view to how we address clients. And that's true across all businesses at KKR. We've talked about the fact that we have 17 offices around the world. We think it's very important to be local, to be able to understand the client mentality, to understand their risk, their concerns, the opportunities that they want to create and really make sure that we can build enduring relationships. Why does that matter? It really matters because it helps us to create like and trust. Actually, an irony for me today sitting here is that usually, when we get together as a firm, we talk an awful lot about like and trust. It's a phrase I think George Roberts coined it. Along time ago, he said -- we're at a partners meeting internally and he said, "People do business with those people that they like and trust." And it's just a very, very simple statement but there's nothing more true in our business and particularly in our part of the business than that. There are lots of other providers of capital or lots of other providers of investments, advice and solutions. So if you don't have that, if you don't have the basic foundation of a great relationship where people want to interact with you and they believe what you say and they know you're going to be there in a difficult environment, as well as in a good environment, then there are lots of other places they can go. So that's why we think like and trust really matters. And as we step back and think about if you can achieve like and trust and obviously, you've got to have the goods, you've got to have investment performance. But if you have those 3 things, then what are you able to do? You're able to open up new relationships, you're able to cross-sell into existing ones and most importantly, you're able to retain those historic relationships you've had and really drive increased profitability from those relationships over a very long period of time. So let's look at each of those 3 measures and see how we're doing.

First of all, if we step back and look just over the last 3 or 4 years, we've dramatically expanded the client base at KKR. So just since we were last together in this kind of setting, we've grown our number of clients by over 75%. And the great news is, we're just starting. We've got -- when we look at how we compare in this area relative to a number of our competitors, we think we've got a lot of room to run. We have a huge number of new relationships that we're in early phases with and where they wouldn't yet appear on this chart, but where I expect to see them appearing in the future.

Cross-selling. When we were last together, we talked about having an aspirational goal of having 2 mandates per client. Now I want to spend a minute and talk a bit about what I mean by that because Craig Larson tells me that we're very conservative relative to our competitors. That doesn't surprise me, by the way. But at that time, we have 1.5 mandates per client. The way we count that is we don't give ourselves credit if a client has re-upped in a strategy. So someone in 2006 fund and enter in our North America '11 Fund, that doesn't count. That just them continuing to do business with us in the same area. But if they've been an investor with us in private equity and then they become an investor with us in the infrastructure area, that would count. So that's the way we look at the world. We're making meaningful progress on this space, particularly if you think about all the new clients that we've added because it stands to reason that when you add a new relationship, you typically add it in 1 particular area first. So we're making meaningful headway and doing things with the relationships that we formed. And if you think about that, that's a very consistent theme with what you've heard about today, finding more ways to basically monetize the relationships that we're forming and make them more productive for the firm. By the way, just one other thought on this type of data. If we look at our largest relationships, and I'll define that for a moment as relationships where we have over $500 million from a particular client that they've ordered to us since 2000. So they could have been in one of our North America Funds, maybe the Millennium Fund and more recently, they're in our Asia Fund. If we look at just those top group of clients, let's call it 25 or 30 clients, on this measure, they had 2.7 mandates with us back in last Investor Day. Today, they have 3.4 on that measure, so our big relationships are growing, as well as adding new relationships. If I look at it on the other measure, the way Craig tells me, the comps look at it, that measure would've been over 4x growing to over 7x. So again we're pretty excited about the fact that people are entrusting us with more of their capital.

Now how are we able to do that. Obviously, we've got more stuff in our toolkit. We've got more ways to win and that really is enabling us to have a broader more holistic discussions with our clients and figure out how we can most ably assist them to put together something that makes sense for their portfolio. I'm avoiding the S word, by the way.

Now importantly, I want to spend a minute on our private equity business because that is critical to everything we do. It is the dominant part of our franchise. It serves as the sort of anchor of a lot of the intellectual capital at the firm and importantly, what we're finding is that we're retaining and growing our market share in this space. So you can see, over the years, we know it's a very episodic business where people raise capital and increments. But as you can see in the last couple of years, we've driven our market shares higher and we will continue to focus on that as a core objective for our team and our firm.

So how do our partners and our clients see us today? There's been a lot of change and a lot of evolution of our platform, how do they view us? What we hear from them is today, they see us as a leading provider of alternatives with deep roots in private equity. And that really connects to how we tell the story of the firm, how we talk about our advantage in investing, how we deliver edge into our portfolios and deliver strong returns over time in a repeatable way. We talk about low silo walls, sharing information, only in an appropriate way, of course, but sharing information, nonetheless, and really bringing those piece together in a way that benefits their portfolios whether it's low default rates in the credit business or it's real estate opportunities that we're diligencing through our energy platform or story after story, that's the way we pull it together for our clients. And what they're telling us, both through their -- the capital they are delivering and the relationships they are forming and also what they're telling us verbally is that they find that story very compelling and they're coming to the table to support us in our new activities. Now importantly, I think a big part of why they're also doing that is because we're putting our money where our mouth is. So the importance of the balance sheet as we've touched on in a few prior discussions is critical. I think it is an accelerator, helping us to build out our new investment strategies. Scott and I have said a few times, the first-time fund business in the absence of the balance sheet is a lot less fun. So we much prefer to do it the way we're doing it with Ralph as we go out and create client interest in everything we're doing in the real estate space or with Mark in the energy space, and they can really actually see us putting our own capital to work, generating an interesting return and deciding to align with us in doing that. So it's really a wonderful way to bring it all together for clients.

Finally, the last measure that we're focused on is both making new friends as we've talked about, but also keeping the old. As the saying says -- as the saying goes, "One is silver and one is gold." And we're very proud of the fact that we got a lot of gold in this page. We plan to continue to do that into the future and we look forward to updating you about that in years to come. Thank you. Oh, Bill Janetschek. Here he is, the man with the numbers.

William J. Janetschek

Good morning, everyone. I'm Bill Janetschek, the CFO. I will not talk about Uralita, but I will actually talk about several of the themes that have come up over the course of this morning. So what I'd really like to cover is really 3 main things: number one, go over how we're growing our business, new products and new geographies; number two, go through again the components of our earnings. And so that's fee-related earnings, that's carry and that's earnings off our balance sheet; and number three, is I want to go through information on our distribution and to make sure that everyone understands that for the most part, we're paying out a significant amount of what we earn. So let's talk about how we've grown our business.

As you can see, and this was covered by Henry and it was also covered by Alex on the private market side, we are private equity all the way up until 2010. In 2010, we launched natural resources and infrastructure. And in 2013, we hope to have a co-mingled fund for real estate. So again 3 of the 4 mandates are relatively new. When you look at Public Markets, tradable credit, we've been in since 2004 when we launched the KAM team. So from 2004 really to about 2010, we were particularly focused on tradable credit. But in 2010, we launched and closed on a mezzanine fund and we closed on several special situation mandates. 2012, we added direct lending.

On hedge funds, we launched KES in the latter part of 2011. And in 2012, we joined Prisma to the KKR team and now, are responsible for a significant platform in a hedge fund-to-fund business. But again, the point is a lot of these mandates were all launched in between 2010 and 2012. Craig talked earlier about Capital Markets. Capital Markets, we started in 2007. And for the most part, we were focused on KKR portfolio companies in the U.S. Here we are in 2012, and I will tell you that if you go back the numbers, more than 20% of the revenue came from non-U.S. and more than 20% of the revenue also came from third-party business. So again, we're continuing to expand our platform. When you look at our balance sheet. Our balance sheet has grown from $8.38 to $9.89, and increase of about 18% while we've been distributing about 40% of our earnings off our balance sheet to all of us as unitholders.

To go back into the first day of 2010 through the first quarter of 2013, we've actually distributed an excess of $550 million of earnings off our balance sheet, which is a pretty significant number and a number that I don't think or probably due to a fault of our own, we actually haven't been communicating this as well and I don't think you've been giving us as much credit as we deserve for those distributions off those balance sheet.

We look at our business really and have really 2 fee streams: number one is we're an asset management business. We receive fee-related earnings and cash carry from third-party capital that we manage. In addition to that, we have a very significant balance sheet. And Scott mentioned earlier, that over 50% of our earnings, ENI, came off of our balance sheet in 2012. And actually, if you go back to 2010 through 2012, almost about 50% of our earnings have come from our balance sheet.

So let's talk about some of the drivers of our earnings. So number one is fee-related earnings. And as you can see, we have a steady and an increasing management monitoring fee base. So from 2009 all the way through 2010 and that's the purple bar, you've seen a significant increase in fee-related earnings. That's the stable part of our business. What also drives our earnings is transaction fees and incentive fees. Higher transaction fees and incentive fees mean higher fee-related earnings and also higher margins. And you can see that other than 2011, we've done a pretty good job of really driving significant transaction and incentive fees. Now Henry had mentioned this earlier going back to our management fees, about 75% of the capital that we're managing right now is long-dated sticky capital. That means we get a committed dollar. And for the most part, that capital is with us from anywhere between 8 to 18 years. And so again, fee-related earnings, nice stable revenue.

So where is your growth going to be coming from? I mentioned this earlier. I just want to rehash. When you take a look at all of the platforms that are on this slide, most if it is in new platforms, and we are hoping to see significant growth in these platforms as we continue to grow the existing platforms plus what you're also interested in is, not only having a first-time fund, but a second-time fund. So let's walk through the impact of a first-time fund to a second-time fund.

We talked earlier about the Asia Fund. So we have an Asia Fund of $4 billion, hopefully, by June 30, we will hit our hard cap and close on a $6 million in Asia II Fund. So that means the fund has actually gone up by approximately 50%. Interestingly, with the way investment period fees work and post-investment period fees work, we will actually increase our management fees from Asia to Asia I and II by approximately 100%. So even though we're only raising about 50% more in capital, you see a significant amount of revenue that's going to be coming through our fee-related earnings. So let's touch on carried interest.

Carried interest. We have accrued carry and we have cash carry. What are the drivers are accrued carry? Managing more third-party capital and performance. And as you can see, if you take a look from 2010 through 2012, when you compare us against the S&P 500 and the MSCI World Index, we significantly outperformed both of those indices. When you take a look at cash carry, which I know is more near and dear to your hearts, there's only -- there really is 3 things that drive that: number one is investment performance; number two is realization activity; and lastly, is the closing of the netting holes. And we've talked about this a couple of times. Henry mentioned it earlier, Alex mentioned it as well. We've gone from now 33% to 84% of the fair value of the capital in our private equity funds in position to pay out cash carry. That happened in the early days of the second quarter of 2013. So that just happened. So at the end of the first quarter, we weren't actually paying cash carry out of our '06 Fund or our Europe III Fund. With the sale of BMG and one of the secondaries that Craig Farr mentioned about Dollar General, those 2 took both funds from non-carry paying, cash carry-paying to cash carry-paying. And so now, we are in the position to pay out cash carry on $31 billion of the $36 billion of fair value in our private equity portfolio.

So what does historical carry look like? I hope you find this slide as interesting as I did when we put this together. And remember, this is gross carry so this includes 40% of the carry pool that goes to KKR executives. You can see in 2004, we were north of $700 million. But what's more interesting is look where a AUM was. We were managing it at the time less than $20 billion of AUM. The credit crisis happened 2008 and 2009, there wasn't a lot of carry to go around. As you can see, we've worked our way out of market performance and netting holes. And in 2012, we actually crossed over that $700 million number again, but again focusing on where the AUM is. Now we're managing capital of over $70 billion of AUM. So if you roll forward over the next few years based upon where we are today and most of those netting holes that I mentioned being closed, there's significant upside as it relates to possible cash carry.

So where are we on accrued carry and where are we on cash carry? Of the $36 billion that I mentioned, $34.5 billion of that capital is in traditional mature private equity funds. Away from that, we've got about $12 billion of dry powder and it's important to note that away from NAXI and Asia II, all of these funds are not subject to a preferred return. And so when you take a look at where we are on accruing carry and that's the first column, all of our funds for China Growth are accruing carry right now. And more importantly, all but 2 of our funds are paying out cash carry. The 2 that aren't would be obviously China Growth but Europe, too. This is just private equity. What's not on here is in the public market sector. We have, in excess, a $3.5 billion of capital in carry-paying vehicles, which isn't again reflected here. And right now, as of March 31, we've actually already accrued about $40 million of accrued carry that we'll pay out to you as unitholders sometime in the future.

Turning to our balance sheet. What's going to drive the balance sheet earnings? Obviously, it's going to be based upon performance. And as Scott mentioned earlier and this is an important note, we are in 100% of the economics off of our balance sheet earnings. So we manage third-party capital and that's a very big part of our business but there, we only get 20% of the economics on appreciation. When we actually use our balance sheet strategically, we're garnering 100% of those economics. And keep in mind that we have a balance sheet that is far bigger than most of our peers, and we like to use this very strategically as we continue to grow the platforms. Like our private equity funds, you could see that in 2010, '11 and '12, we beat both benchmarks by a significant margin. As it relates to earnings off the balance sheet and realized earnings, the driver of that is going to be realizations. And as you could see, we have a significant realizations in 2012 of north up $850 million. So that works out to, on a realized basis, about $1.25 per unit. In the first quarter of 2013, that number was $150 million. And for the second quarter, as of today, we've had realizations on our balance sheet of an excess of $150 million. So again, that's for the second quarter, not for the first. So you would assume that right now as I stand today, the distribution off our balance sheet for the earnings in the second quarter right now is going to be similar to the distribution that we made in the first quarter.

So let's look at our distribution profile. The stability of our distribution is really from our fee-related earnings. That's the steadiest part of our distribution profile. For the most part, this number has got to be anywhere in between $0.30 to $0.40 in any particular year based upon the information we know today, but with significant outside to the extent that the transaction activity is robust in any particular year. Number two is cash carry. As you could see, we've gone from $0.19 in 2010 to $0.43 in 2012 and again to drive home the point, Henry mentioned it earlier, Alex mentioned it earlier, now we've got about 84% of our private equity portfolio on realizations in the position to pay out cash carry. So we see a significant amount of upside from the number as it was in 2012.

And then thirdly is earnings off our balance sheet. And what we had talked about traditionally is we were going to pay out all of our fee-related earnings, all of our cash carry and we had this anomaly where we told everyone we're going to make tax distributions in order to satisfy tax liabilities. Really, that wasn't articulated as well as it should have. Quite simply, what we were doing is we had earnings off our balance sheet and we were paying out a significant amount of those earnings. And so what we decided to do at the and of 2012 was change that policy because if you take a look in 2012, you can that $0.47 of $1.22 was paid out in the fourth quarter alone. And when you think about where we might go from here, that number is only going to get, hopefully, larger. And so we decided internally that A, based upon the communications to our investors, it wasn't as crisp as it should be; and B, from a liquidity point of view, we were comfortable on where we were on the balance sheet. We decided to change our policy and just go to whatever realized investment income is earned off the balance sheet, we're going to pay out 40% of those earnings and not on an annual basis, but on a quarterly basis. And so that's why you'll see that in the first quarter 2013, we paid $0.09 of earnings off our balance sheet.

So getting to my point earlier about paying out most of what we earned, what I did here is the top line is obviously the total distributable earnings that we reported. We've also assume that all of our units are public and so we subject the units to a corporate level tax on those assets that flow through the management company. And the third line is our after-tax distributable earnings. So that's actually what we could distribute. What we have distributed is in the top blue box. So those are our distributed earnings after tax. So as you could see the payout ratio, which is just taking distributed earnings over the total distributable earnings, is quite significant. A low of 60% to a high of 83%. And on an average basis, if you average from the beginning in 2010 to the first quarter 2013, we've actually distributed out 68% of all cash earnings, which I think is probably a lot higher than we should have and hope to get credit for. So where are we today? I feel pretty happy about where we are from several fronts. Number one, when you take a look at all of the new platforms we launched, we've got a great product mix. When you talk about the balance sheet and Scott talked the most of his presentation on the strategic advantage of that balance sheet, I feel good about where we are today. The balance sheet, it's $2 billion of cash. We've got liquidity and we're in the position to do a lot of good things. Number three and to deliver the point, as it comes to cash carry, we're on the cusp of now being in a position to pay out significant cash earnings from carry prospectively. We've got a strong distribution team in order to sell those products. But to be honest with you, nothing matters without what Henry had mentioned earlier, performance. So if we don't perform, the earnings aren't going to be there. However, if you take a look at where we were over the last 3 years and where the performance has been, if we have that same performance over the next 3 years and looking at the position where we are right now, I feel really good about where KKR is going to go from here. And so with that, I'm going to turn it back over to Craig Larson.

Craig Larson

Thanks, Bill. My name, again, is Craig Larson, I'm the Head of Investor Relations for KKR. And I have the pleasure of spending a lot of my time with the audience in this room, frankly, with the institutional investors, as well as the equity research community. And over the course of my job, I find myself in a lot of meetings talking about KKR, talking about the sector and often introducing our units. Over the course of 2012 and for those of you who know us well, you probably won't be surprised to understand we keep track of the statistics. But from an IR perspective, we had over 400 one-on-one meetings with institutional investors talking about KKR, and we think that's important. We think of ourselves as a young public company in a young sector and investor education is important. But with that framework and the amount of meetings that we've had, I've put together a list, if this was a full day event, it would be a top 10 list. But in the spirit of trying to be succinct, it's a top 4 list. And I tried to think of the top questions or really, the top misconceptions I hear from investors. So I'm going to jump around these topics, but I'm going to talk about our balance sheet. I'm going to talk about private equity transactions in the 2006 and the '07 era. I'm going to talk about private equity transactions in our performance post-2007, environmental, social, corporate governance issues and then finally, I'm going to touch on our units.

Now when I was thinking through this list, there really was no question that the balance sheet was going to be #1. Henry began this morning by saying that as we thought about 2 years ago, it wasn't clear to us if the people truthfully understood the power of the balance sheet. I think that's a very accurate statement. Now again, we've also heard the balance sheet mentioned in a lot of frames of reference here. I've had some investors tell me specifically that as -- actually people in this room, that as they think about the balance sheet, they think it provides an interesting level of downside protection, but it actually doesn't really factor in with their investment decision. And statements like that are also pretty frustrating for us. So again, what I thought I'd do is I thought I'd put up some anecdotal math. So if we all decided that in a specific year, let's pick 2012. If we decided that we would be interested in an asset that generated $1.1 billion of ENI, it also generated almost $900 million of total distributable earnings, that actually would apply to our balance sheet. This is what we generated in 2012. And as you think about the balance sheet again, it has minimal compensation load or SG&A allocation. We're in 100% of balance sheet gains, not at 20% participation rate, and you don't need to go raise another 1 every 4 and 5 years. So it's a pretty compelling economic proposition. We think of it, really, as permanent capital, where 60% of gains are effectively recycled.

Now you also could earn these types of returns that ENI level and the total level of total distributable earnings from a private equity fund, but it actually would have to be pretty large and it would have to be pretty successful. So let's run through what that would need to look like. If you had a hypothetical $45 billion private equity fund and the economics on that were pretty robust, 125-basis-point blended management fee, 20% carried interest. And if that fund was 50% invested and if you assume transaction and monitoring fees within that portfolio similar to how we perform currently within private equity. And if that portfolio actually performed pretty well. And in this year, it was actually marked up by 20%. And if you assume on the management fees, as well as on the transaction monitoring fees, if you had a 40% fee-related earnings margin, if you assumed all of those things and hit calc, you get about $1.1 billion of ENI, you can actually get a hair less than that.

Now in order to actually still generate the almost $900 million of total distributable earnings, you'd actually need a pretty good amount of realized cash carry to supplement the fee-related earnings to end up with that total distributable earnings number. So what type of exits? Well, if this fund invested $600 million of equity per transaction, you would need 8 full exits from that level of investment at a 2 times length in a fund that has no netting holes and no preferred return. So again, if you hit calc in that, you would end up with roughly $1.1 billion of ENI in almost $900 million of net realized gains. I do think, though, that the fund would be thought of as providing more than just an interesting level of downside protection.

Now I know we've already heard a lot about the balance sheet and we did want to emphasize how important to us, I don't need to belabor these points, Scott has a slide that showed that 50% of our ENI in 2012 came from the balance sheet, 60% of our total distributable earnings, again, came from the balance sheet, Bill just walked through our description policy, and we do think by having 40% of net realized gains in the distribution that, that provides a very direct linkage between balance sheet performance, as well as distributions. That 40% level is obviously more simple, more clear, we think, we hope at least we've made some progress on that point. And it's again a true strategic assets, you heard Ralph talk about the real estate business, that's a real-life example of the strategic importance of the balance sheet and how the balance sheet is important to us, as we look to build and grow a business like the real estate practice. And from a holistic standpoint, Scott again talked about the balance sheet in his presentation, and walked through how important the balance sheet is from a growth standpoint and, overall, how central it is really to how we make money. So hopefully, this morning we've done a better job on this topic.

Now the second topic I'm going to talk about is private equity and performance in the '06, '07 era, and when I'll speak with investors and they think about private equity, at that point in time, the couple of points of view that they bring is, one, that we in the industry, deployed a lot of capital in that timeframe, that certainly is accurate. But the second thing that I think there is often points of view on is they think that those investments were often, we paid too much money, we put too much leverage on them, and the performance actually hasn't been very strong. So let's look at that data.

Here, you see North American investments, these were all the investments we've made in North America in 2006 and 2007. And it's important to think of this data when you look at it, you have to think of it in a portfolio, so I'm not trying to suggest that our performance was all smooth sailing in this timeframe, and we do have investments that are marked well below costs. But when you think about the portfolio, it also includes investments like All General, which as of March 31 was valued at 5.6x our costs. It also includes HCA, which as of March 31, was valued at 3.6x our cost. And when you blend it all together, you see the performance on this page which is quite good. First, on a realized and partially realized basis, we've earned over 3x our money, with an IRR of 24.5% versus the broad market indices in the low single digits and importantly, we've been delivering material amounts of cash back to our LPs and closing netting holes.

And when you look on a total basis, total value of over $15 billion, 1.5x cost, with an IRR of 8% that is still several hundred basis points ahead of the broad market indices and importantly there, we're not done yet. One of the investments we've made in this era was in a trend -- or a company called Alliance Boots, that's actually in a handful of our funds, as well as a piece of our balance sheet 1 year ago, so in March of 2012, that was marked at 1.1x cost as of March 2013. So 1 year later, it was valued at 2.3x cost. We're not done.

Now this question is the most typically asked not with a specific focus on a geography, it's actually focused more on the benchmark funds that we are investing in this timeframe. So let's look at that data. This has the same information focused on the 2006, as well as the millennium funds. The 2006 fund began investing actually as a global fund. So if investment mandate change midway through the investment period. So you see from -- in terms of the number of investments, 26 deals are referenced in total on this page, it was a dozen on the prior page. But importantly, you see the -- a similar level of outperformance, first on a realized and partially realized basis, 2.7x our costs, an IRR again, of roughly 20% versus the broad market indices in the low single digits.

And looking at all investments again, the same 1.5x multiple of costs and IRR of 8.4%, several hundred basis points ahead of the S&P and the MSCI. And one final thought as you look at this slide, is actually focused on that total IRR number. So that 8.4% you see here, it was 8% on the prior page. It's important to remember that in our historical private equity funds, so including the 2006, as well as the millennium funds, there's no preferred return or hurdle feature as part of those funds, so we have the opportunity to begin earning carry at $1.1 [ph] of gain. And as I think as most know, that's a pretty unique aspect of our historical fund structures.

Now how about more recently? People will either ask about performance in different points in the cycle, are those AG [ph], I know about Dollar General, I know about HCA, how about investments you've made since the point in time? What's the performance on those? Well, this looks at the 2006 fund and all of the investments we've made post 2007 and, again, you see pretty strong performance in IRR across all these 30-some odd individual investments that's more than double the S&P and, again, it's also materially outperformed the MSCI World. And importantly, as you think about this number, this includes a number of pretty immature investments we were investing the 2006 fund through September of last year, we only turned on NAXI about 8 months ago, so a number of these investments are actually ones that were very early on in terms of the value creation process.

So now I'm going to switch gears, and let's look at the world a little differently. You've heard about our public affairs team in a number of the presentations, Henry, Alex, as well as in Marc. So KKR and friends like ours, obviously, aren't always portrayed in a manner in the press that we think completely are accurately describes our activities, and investors, particularly those that aren't familiar with us, will ask about ESG issues and if these issues are important to us. And the answer to that is, yes, you bet they are, they have to be. Again, you've heard very eloquently from some of the others for all of the reasons why this is critical to us. But having Ken Mehlman, who's here at the head of the room and his team help us think through and address all these ESG issues is an important part of the toolkit. We've highlighted couple of statistics here, again, the footprint, 80-some odd portfolio of companies, 980,000 employees, Ken and his team will work with our portfolio of companies to expand best practices, so whether that's through the Green Portfolio Program, whether that's through our sourcing initiatives, or whether that's through our Vets @ Work program where we've worked with a number of our portfolio companies, and last year hired 7,000 veterans.

But also knowing that this is a pretty bottom line focused audience, how well to think of it? Well, 4 things: And it's important because ultimately, we've found that doing the right thing can be important to the profitability of our companies, and it's important to the economic for all of us as unitholders. Number one, initiatives like this, they help us make money. So one of the best examples on the Green Portfolio Program in 2007, we instituted our recycling program with Dollar General. So Dollar General actually leased to [ph] throw out all of the corrugated cardboard across their footprint. And instead of throwing that out, we've now instituted with them in the management team a recycling program, this has help them reduce waste, it's help them avoid waste cost, and they've actually earned revenue from selling the recycled products as a result of that. And over the first 4 years of this program, it's helped the financial profile by over $120 million. And Dollar General, as you know, traded a pretty nice multiple. Looking at the 16 companies in total that were involved in this program, that never by the way is now in the mid-20s. We've helped achieve cumulative revenue enhancements, our cost savings over the first 4 years of this program by over $600 million, it's real money.

Number two, Ken and his team actively work with our industry teams to help identify and execute investment ideas. So Modern Dairy is an example of an investment that's in our Asia fund, where we were able to identify a resource-driven societal need of clean milk in China and invest behind it and execute against that. That's been a very successful investment for us. We took Modern Dairy public in 2010, and recently sold a large percentage of our interest for roughly 3x our cost. And more recently, the public affairs team actually worked with Marc Lipschultz and members of the infrastructure team, as we partnered with United Water and acquired a 40-year waste and wastewater concession from the city of Bayonne, New Jersey. This transaction is one of the first concessions of the municipal water utility asset in the U.S., and it was the result of months of collaboration both with city members, key stakeholders, as well as their advisors, and understanding those needs and addressing those needs in a matter with credibility, was a critical part of that transaction. Number three, Ken and his team can help us avoid mistakes and understanding potential pitfalls, again, regulatory and otherwise can be just as critical. And finally, there are ways and benefits that we see the results of Ken and his team's work that you wouldn't necessarily think it for a splash and fund raising is actually an example of these, another one of the trends that we see is there are an increasing number of socially conscious plans, that as they look to allocate capital, they are not only looking at investment performance but they are also awarding us capital because of our leadership in issues like this. When we look back to 2012, there was approximately $500 million of capital that was attracted to us by funds like this, because of the leadership we have in these issues. So it's an important tool in the toolkit, and we're all proud of the progress we've made across these items.

So what about the stock price? Well, again, I think we're in the early days. I think the Public Markets for a long time, were pretty cynical about cash carry and the ability for us to have cash carry in a meaningful way in the distribution, as well as the -- as well as having that on a consistent basis. I think with over the last several quarters with the progress that we've had, I think we've actually made progress in this topic. Similar, I think the Public Markets were skeptical but we managed to communicate poorly or both, around balance sheet gains and what the balance sheet gains meant in terms of the distribution, again, hopefully we've made some progress there. But we do look at charts like this and we think, on a relative basis, that there's room for improvement. So if you look at the top part of this page, we currently traded the PE multiple, that's south -- than 90% -- south of 90% of the companies that are in the S&P 500. On a yield basis, we actually trade at a yield that's higher than 95% of the company's in the S&P 500. If you put those 2 things combined and look at companies in the S&P with a yield or with a PE below 10 but with a yield about 4, you actually can count them on one hand.

There are about 70 companies, financial companies in the S&P, again, if you look at that statistics, PE of lower than 10 yield, above 4, none of those 70 financial companies which share those statistics. So we think there's opportunity for us. When we look at how we trade relative to some of the other broad financials. So I'd say again, whether it's the traditional asset management firms, the broad financials or even the banks and the brokerage firms, again, we trade at a material discount. I'm actually going to read a quote I read yesterday from Marc Irizarry, Marc's head I think, is just perk up a little bit. But this was in an article that was focused on the performance of the alternative asset management firms. "They're still show-me stories in the eyes of the market, Irizarry said. "There's some reluctance on the part of investors to ascribe higher valuations on these managers until they see how sustainable these businesses are, how sustainable these cash flows are." And again, I think that's a very true statement. The path towards continuing to create equity value is going to be through execution and it's going to be through performance, and that's where our focus is.

Now before I invite all of our partners to come up on the stage for our group Q&A discussion, I thought I'd wrap up, I've actually been taking copious notes here. I thought I'd offer some of the statements in the review and some of the things that I found particularly interesting as we run through things. Henry, in his opening remarks, highlighted since our last Investor Day, we've doubled total distributable earnings, we've doubled our total distribution. And again, that's all been with only now, are having the opportunity to have over 80% of our private equity assets and position that they carry. I think those are all pretty interesting statistics.

As a former, only in the second inning of a 9-inning game, and when you think about this, again reflecting back on our last Investor Day, we didn't have a real estate portion of the presentation. We didn't have a $9 billion hedge fund solution business to review with folks, and we didn't have a global macro team that's helping us to connect the dots and make us smarter.

In terms of some of the business where you are more familiar. Alex, from the private equity standpoint, highlighted the global platform, the performance we've delivered on a global basis, $14 billion in capital raised since our last Investor Day. Over $10 billion of liquidity to our LPs since the beginning of 2012. And in terms of what this means, the opportunity that we have to deliver carry over time, if we perform in a manner that we said we would, again, we have some pretty interesting statistics.

Marc talked about the energy revolution and a need for material amounts of capital and the approach we've taken to pursue this, and this has been both by working across the firm, with the real estate team, special situations business and has also by trading different pools of capital with different return characteristics to pursue these opportunities so the private equity as it relates to energy is not the only tool in the toolkit.

Suzanne gave an update with some pretty impressive statistics, $17.7 billion of organic capital raised in the last 12 months, impressive market share stats, growth in LPs, growth in product offerings, growth in the team. Last year alone, almost 20% of the capital resource came from individual investors.

Our capital markets business is one that investors actually asked me about quite a bit, because they see the margins, they see the performance and they try to understand what we do a little more clearly. I thought Craig did a very good job, highlighting how it's a central part of the ecosystem and the multiplier effect that we see, I like that term. Scott used that also. The tangible example of Dollar General and, again, in the framework of an investment, there's been a wonderful success for us how total economics for all of us increased by over 30% because of the efforts of Craig and his team. And the third-party opportunity being additional one that we're pursuing through a pretty creative approach in the formation of MerchCap.

Bill Sonneborn walk you through the growth in public markets, highlighted not only the growth we've seen in fee-paying AUM, but in particular, the meaning part of growth, the meaning component of that, that comes from higher margin incentive earning fee-paying AUM. And I think you also got a pretty clear sense from Bill, on the importance of performance by products, by strategy, and our focus on this as we look to scale all of these. The 2 slides from Bill's deck that I liked in particular, and he nailed it, as it relates to the gross cash carry over time. Again, it showed carry from 2000 through 2012, and how we've only now returned to precrisis level while AUM has scaled meaningfully. And the second one was Bill's final slide, because we think we have a pretty cash generative business and we're in a position where we return around 70% over time of cash back through all of us in terms of the distribution.

And in terms of the balance sheet and the strategy, again, I'd encourage everyone to go back and think about the return math on Scott's slide, this was Slide 86, that not all AUM is created equal. And the economics under a standard model versus the KKR model, it highlights the reason why the balance sheet is a differentiator, it highlights the multiplier effect, I told you I like that term, and how we can be a more valuable partner to our LPs. So hopefully, again, we've managed to articulate more clearly, how we use the balance sheet, how it helps our growth profile, why we do what we do, the 6 items that Scott touch on as we focus on performance, scaling new initiatives, growing private equity, opportunities through acquisition, growing our client base and finally, driving firm profits and cash flows, fee-related earnings, carry, as well as through balance sheet gains. And the other thing that I hope you found, as I did, is you heard every speaker, there's more to come. I think Bill said it nicely, we feel good about our progress but we think there's more to come. And with that, I'd like to welcome all of the presenters up to the stage, and we look forward to moderating a Q&A session with everybody.

Question-and-Answer Session

Craig Larson

So you'll see on the tables, there's a microphone on all of the tables, I guess, we would ask that if you can make sure you speak pretty clearly into the mic. And if you wouldn't mind, it's actually a little tough to see up here with the lights, but if you could just list your name and your firm affiliation, that would be great. Rob, I can see you, table 7.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Rob Lee, KBW. Thanks for everyone taking the time today, I appreciate it. Maybe my first question, is actually on Prisma, just maybe, it certainly seems like pretty interesting business with opportunities as a standalone entity, but could you maybe flesh out a little bit more how you see it creating more opportunities or product that you can bring to different market segments, whether it's 40 Act funds from your demand [ph] capabilities, how do you envision leveraging that market [ph] through the business?

Craig Larson

Scott, do you want to begin with that, or Suzanne?

Scott C. Nuttall

Suzanne, want to take a shot.

Suzanne O. Donohoe

Except that I don't have a mic. So maybe you want to start, and then you'll get me one. Thank you. Well, I guess, I'll start but I'm going to quickly turn it over to my partner, Girish, here, to comment. We're tremendously excited about our ability to take Prisma to the market that it really had spent less time focused on, and I think that had a lot to do with the strategic rationale that really combine our businesses. So Girish can comment a bit more about that. We've been focused on thinking about that, both geographically, since Prisma was a predominantly U.S. and London-based business, but limited presence in markets beyond that, at least from a client's standpoint. But then also thinking about different type of clients and where the reach that we have as a franchise can really help deliver the hedge fund solutions approach into other market. So to your question into the individual investor market, we have plans and thoughts in that area, we also are finding the high net worth space to be a pretty interesting space that are -- where the customization that we naturally do very easily at Prisma, is a very good fit for organizations that want some scale, they want sort of an extension of staff model, if you will, and want to do it with some -- with an organization that has a partnering approach. So I don't know what you might add there, Girish.

Girish Venkat Reddy

Sure. I think Suzanne talked about expanding a global footprint through cross-selling. Actually when we looked at our client base and KKR's client base, the overlap was shockingly low, and so we think there's a lot of potential for us to leverage that. But also, in terms of product capability, right, the world, for us, resided between 0- and 3-year type world, that's the hedge fund, fund-to-fund world. The private equity is the 5-, 8-year type model, and we actually think by combining our skill sets, the world between 3 and 5 looks very exciting. Back to Henry McVey's point about liquidity premium, how do you capture that, I think Prisma understands the managers, the opportunities that KKR has the infrastructure valuation, structuring capabilities, so if you can put those together, we really think we could really exploit that gap quite well.

Craig Larson

Table 3?

Mitch Rubin

Mitch Rubin from River Park. I'm wondering, it's an impressive presentation, especially the balance sheet side, and so given the importance of that to the model, your expertise with debt where the debt markets are, the ability to get long-duration, low-cost, low-covenant debt, shouldn't we grow the balance sheet a ton and grow the business even more?

Scott C. Nuttall

We have actually done 2 things [indiscernible]. We have thought about that a lot and if you look back at what we've done, we've done actually 2 debt offerings. So we did a $500 million 10-year deal, and we did a 30-year deal, for another $500 million as rates continued to drop. Today, we're A- rated S&P, A rated Fitch, and we run the balance sheet, as I said, with no net debt as we sit here today. However, I don't think you should expect us to lever up significantly, we kind of like running a reasonably unlevered balance sheet. If you think about the profile of the company's we're invested in, a lot of them are relatively levered. Clearly, as the yield component of the balance sheet evolves, it would give us the opportunity perhaps to think about, adding more leverage to the structure, so that's something that we'll think about over time. But as I said, we are focused on growing the balance sheet and so if there are ways to potentially acquire yielding asset with equity and debt, that's something that we'll think about as the strategy evolves.

Craig Larson

Sure. Michael, table 5.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Michael Kim, Sandler O'Neill. You spent a lot of time kind of talking about how you been able to build out the franchise in terms of strategies and geographic footprint and distribution, but it still seems like it's relatively early days to some of your points. So just curious how you see the mix evolving over time and what the implications are for deal flow, realization, fund raisings, or the trajectories of those, as well as ultimately the earnings power of the franchise.

Henry R. Kravis

I'm thinking about it, Michael, we will continue to grow all of the businesses. The emphasis has been to diversify away from private equity because at one point, obviously, we were 100% private equity, and then as our credit business started growing beginning in 2004, it still remained a very small part. You saw a slide earlier that talked about the last investor meeting, what the asset makeup look like. So we will continue to diversify as far as where we will put money, raise money, the world is open to us. And we will go where we find opportunities, if we happen to feel today, for example, that a lot of people are shying away from Europe. We've been pushing very hard for Europe because we think there is plenty of opportunity there. Europe is not going to be a disaster forever, it looks like it is today, but my -- our bet is that this will get better in the future. So we're looking at places like Spain, we're looking at other places within Europe of how we can be a solution provider. Asia is going to continue to be an important part for us. We're now believe that after having been out there for 7 years, Japan is looking -- that it might be a reasonable place to put some money. We've only made one investment there, we keep looking, we think we will find other opportunities there. Clearly, Southeast Asia will continue to be an area of a big growth for us. India continues to have opportunities, even though the governments in disarray right now, the economy is slowing down. We still believe that over a long term, if you plant some seeds today and you take a long view, that India is a very interesting place. You heard Henry McVey talk about Indonesia, that's a place that to date, we have not put any money but certainly, is on our radar and we're looking at that as well. So it will be a global area, we're looking at a few opportunities, once fairly sizable in Africa right now, that we think could make some sense for us. We hired somebody recently who has a lot of experience investing in Africa, who's a native of the continent and, again, another area. Latin America, which Alex the Bob oversees for us, again, a very area that we feel will be fertile. We're in conversations right now on 2 or 3 very serious opportunities, whether it will happen or not remains to be seen but again, we'll go where we feel there's opportunity.

Craig Larson


Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Chris Kotowski from Oppenheimer. Question for Ralph on the -- the first time we've kind of gotten a view of what you mean by drop-down funds and so -- and that you have a $300 million strategic investor, I'm curious, like -- are the economics, just like a traditional private equity fund there, 125 plus 20, and what is the vision for the rest of this fund, does this go on to a first close and then a final close somewhere 1 year or 2 down the line, or does this funds stay really small, see how it does, and then to fund to a couple of years out, or whatever division is?

Ralph F. Rosenberg

Sure. First, let me practice [ph] this by saying we're subject to that private placement rules and the security rules with respect to effective [ph] marketing. So to answer your question, the economics associated with the first $300 million of external capital you should think of as fee-paying economics in the real estate private equity sense. And I think the straight down the middle, real estate economics are pretty well known in the marketplace, that you can effectively access on your own. I think you should expect, not surprisingly, that the evolution of this business model is to take the power of the balance sheet and to methodically bring in external partners who are full fee-paying partners to participate in our deal flow that's been created today and to effectively partner with us on a go-forward basis to continue to scale the real estate franchise. Firstly, you asked a Western Europe, and then over time, the aspiration and the expectation is that franchise would scale methodically in other parts of the world. The beauty of the commercial real estate market, if you step back is that, on the one hand, it's a very mature asset class which people might think of it as a negative, but we actually think about that as a positive, because in any sophisticated asset allocation model, real estate is a real component of that typically between 5% and 7% or 8%. And so the amount of capital that needs to access the commercial real estate markets is very significant. And when you think about it from the other perspective in terms of the qualified and capable fund managers who are out there who are stewards of capital and are like-minded investors, and who are willing to put their own balance sheet at risk in a sizable way alongside of their investor clients, there aren't really that many who have that capability. And you later, on top of that, the brand and the reach of the firm and the ability to tap into all of the information that we discussed earlier in the presentation today, to our 90-plus portfolio companies and our industry teams, and our capital market teams, it's a very seductive and powerful hunting ground, if you will, for the firm to pretty rapidly, in my opinion, scale the franchise in the coming years.

Craig Larson

Jackie [ph]?

Unknown Analyst

Yes, Jackie Capital [ph] from Patnum [ph]. Just a question following up on one from a couple ago, do you think given the diversity of the platform and the way the footprint has changed, the trajectory of the fund-raising and the distribution is -- will be more steady going forward? So maybe not as episodic, not as volatile, but is the footprint broad enough now, that there's more visibility, I guess, going forward in your opinion?

Scott C. Nuttall

Jackie [ph], I would say that, that's our hope and expectation. If you think about it, we've been scaling the fee-related earnings of the firm with a lot of upfront expense on each of the business model in a way these are CapEx flows through your income statement. So as we've been establishing these newer businesses, the income statement has been burdened by the expenses of all these startup efforts. And as you saw with [indiscernible] example of Asia 1 going to Asia 2, we don't need to add a lot of expense to turn on that second fund, virtually none. So if we can have that effect across a lot of these newer businesses, that could be very powerful just from the fee-related earnings, which is already the steadiest component of our earnings profile. On top of that, if you think about what we discussed in terms of the carry and the fact that it's actually been pretty steady, if you look at the last several quarters. Now with the incremental $20 billion of AUM turning on from a cash carry paying standpoint, I don't think it is going to be less steady than it's been. So I think there just could be more ways for us to generate cash carry on a quarter-to-quarter basis. And on top of those 2 comments, I'd say the balance sheet itself, as I mentioned in my comments, having more of the balance sheet in a yielding instruments and having more velocity in the portfolio in terms of investments, whether they're energy or credit or real estate that are generating in a recurring yield, plus more exit activity in the private equity portfolio, there was going to be more recurring investment income, dividends and gains coming off that balance sheet as well. So I don't think we'll ever be at a point where you're going to be able to estimate it to the penny, but our expectation is that you're going to see an increasing profile with increasing predictability by virtue of all that playing out.

Craig Larson

Can't see who that is. Mike, Table 9.

Michael Carrier - BofA Merrill Lynch, Research Division

It's Mike Carrier at BofA Merrill. Just getting back to the balance sheet, I think, you guys provided a lot of color, that was helpful, the cash flow generation, you makes it ton [ph] on a sense, I think in asset management, when balance sheet is just -- you've seen a little abnormal, so you guys talked about it as a strategic asset, makes a ton of sense. Some firms in the past have tripped over their balance sheet, so the one big difference you mentioned is, the lack of leverage, so it's a huge differential. When you think about like asset quality, what you're using that, the balance sheet for, in terms of like the future, how does that differ versus firms that typically have a balance sheet? So it doesn't down the road, become more of an issue versus the strategic asset that you use it for today.

Scott C. Nuttall

I would say, Mike, the big difference about us is this is what we do. Our day job are investing in all of these assets, whether it's private equity, credit, real estate, energy, hedge funds, I mean, this is really why the $80 billion of third-party capital that we manage pays us the fees that they do. So it's really investing largely alongside what we're doing at our day jobs. And so we're not out-trying things that are off piece. We're actually just investing in the core capabilities and efforts of the firm. And so we think that the overall return profile and risk profile is going to be consistent, frankly, more or less with what we're doing for third parties. So there's nothing kind of off the beaten track for us. We're now trying to be all things to all people, we're not taking undue risk with the balance sheet, we altogether on all of that and KKR executives own almost 65% of the stock. If you think about our business model, I articulated it, that 30% ROE, if you look at the last 3 years, about 1/2 of that ROE has come from the balance sheet, and about 1/2 has come from fees and carry. And we kind of like that mix, I mean that's a pretty good business model to be able to generate 30% ROEs with no net debt. Our CFO has another saying, if pigs get fat, hogs get slaughtered. And so as we think about the prior question about how much leverage do we want on the balance sheet, we're pretty pleased if we can actually continue to generate mid-teens plus percent of returns off the balance sheet in another 500 to 1,500 basis points out of fees and carry from the third-party capital that we manage alongside the balance sheet, that feels us like a pretty good place to be, given that Rob participating in all the cash flow that all that activity generates.

Craig Larson

Sure. Please go ahead. Lee [ph], please.

Unknown Attendee

Let me say before I ask the question that I'm a large shareholder in both companies, KFN and KKR, and have enormous respect for what you've accomplished. But when I ask you a philosophical question which is very little to do with KKR. I have this view that management-led leverage buyout are joined case of inside trading by management against shareholders. I don't think you involve, for example, in the current Dell transaction, and maybe you don't want to comment for political reasons. But in the last decade, as an example, I think Dell stock has dropped about 50%, the computer hardware industry group is up 200%, the S&P's up 80-plus percent, so he's allowed, he being Dell, as the latter [ph] shows to write this thing down, and now he's leading the group to take the company private, and deprive the shareholders of the opportunity to write it back. And I think that's a typical thing in your era, I guess in the '70s, John Kluge took Metromedia private. 1 year later, he harvested $5 billion in gains from sale of assets, which in my opinion, were the property of the shareholders and not him. So I'm just curious, how do you see philosophically, give us a -- your presentation is so fabulous in terms of truck full of information, how do we resort to something philosophically?

William J. Janetschek

Well, Henry, pass me the microphone. That's why he's the boss. Look, I think I'm not sure what the question was in that statement but look, I think management-led buyouts and LBOs and obviously, management and people who are operating the company have a point of view. In many cases, we do partner with the management team. In other cases, the company gets sold and a new manager and teams brought in. I really don't want to comment on the Dell transaction. What I would say that what we look for are good companies that we can make a lot better. We would be delighted to partner with management teams, whether they're public companies going private or private companies or divisions of big companies. And we think on a perspective basis, having management be a partner and an owner in the business, is actually quite important to us. And so, again, I don't think it's our place to talk about specific transactions or specific deals, but we do think that having management as our partner is very important, and that's what we look for, and that's how we think creating value is a critical part of that component.

Henry R. Kravis

I might just add something else, Lee [ph]. I think it's an interesting question. If you think back to John Kluge and what he did at the time, I think there's a very large difference today with transparency amount of information that's available today to potential investors than there ever was before and the days that he did that with Multimedia (sic) [Metromedia], that it was -- a lot of stuff was almost done in the still of the night. That can't be done anymore, and I think it's totally different. I'd also say that the way we operate in, and I would say probably, the industry operates to a certain degree. What we're really looking for is finding a really good asset. If we get lucky and you find a great asset where we think we can do something meaningful to improve the operations because that's what we focus on. If one of our industry group people comes to the investment committee and they say, we can buy the XYZ company, it's a wonderful company, it's been run really well, there's not much we can do to fix it, but our bet is that the multiples are going to go up, probably not going to be an investment for us. What we're particularly good on and focused on as far as private equities is concerned, which is really what your question is addressing, is much more, how can we improve the operations? And in many cases, it will require changing out the top executive and that does happen and we'll move very quickly if we feel that a new management team can change the direction of the company and improve it. So we come at it as a neutral investor and one in which we like the business, we like the asset, we like the prospects, but with either the existing management or if it needs a new management, we can improve the operations and grow it significantly, we'll do it. A good example of that is Dollar General in our case. Dollar General was out there and had about 15 years of increased operations. Most people would look at it from afar and say, well they're not really -- they're doing fine, they're doing okay. We look at it and said, we don't think they're hitting in all cylinders at all, and so we changed out the management, brought in Rick Dreiling to improve the operation, and the rest is history. And what he's been able to do? A growth in the way the stores are run, et cetera, there. So I think information is out there, you have to dig for it, you have to be creative, you have to figure out, okay, what can you do to improve the operations? I'm not going to comment on whether Michael Dell was buying the company at the right price or at the wrong price, or whether he has some information others don't have, I doubt that he does. And so it's what it is.

Craig Larson

Marc, table 8.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Marc Irizarry, Goldman Sachs. Henry Kravis and maybe for you Alex as well as anyone else who wants to opine. The U.S. M&A environment sponsored-driven deals have seen an LBO seem to be a little disappointing relative to maybe what some would have thought at this point. Why is deal activity in the U.S. seemingly so slow right now, a bit of spread obviously is a part of it? And there's maybe, has some of the lemon been already squeezed, or some of the juice are already out of the lemon in terms of corporations we've been dealing with a sluggish top line environment, they've been already cutting costs and is that a challenge, maybe for you, Alex?

Alexander Navab

So good question, and we get that question certainly quite a bit these days. What I would say is, actually activity level discussions are fairly high across the industry. And as you know, these discussions don't start and the deal is announced in 2 days. These discussions have started quite a ways back, companies have been looking at pruning their portfolio or they've had acted the shareholders in their mix, suggesting certain things. So activity level and discussion, really across a lot of different industries continues to be high. Clearly, the market has moved up quite significantly. Just in the last 6 months and just in the last 3 months, putting aside momentarily dislocations like we've had today and a couple of times over the last couple of months. And obviously, if a transaction was on the bubble, the increase in price and increase in market value over the last couple of months may have put it on the other side of the bubble, and so some transactions may have been put on hold, other transactions are still being worked on. And as you know, it takes a while for these transactions to actually get executed. As we said, we like the environment we're in. We're not looking to have huge market share in transactions, we like the Gardner Denver transaction as a company that we've been following for quite some time. But from the time that company was available to be sold to the time we actually signed the deal almost took 9 months. And the fundamentals of the business we like, we look for investments with a horizon of over 5 years, and so we're looking around the bend, we're looking over the long-term in terms of what we could do with assets. And as Henry said, what more we can do to improve the businesses? So while valleys have moved up, we do see sectors and we do see valuations and a number of areas that are still fairly compelling. Obviously, the credit markets remain quite positive and quite supportive. And what we're trying to do across all of our different businesses is to really find where we can apply our intellectual capital all of the resources that we've developed to find unique opportunities, not only for private equity, but all the other businesses that we have. And so I'd say, the business continues to be robust, the pipeline continues to be very interesting, there may be some momentary dislocations in the marketplace, but the general fundamentals of what we think will lead to more transactions over the next several years continue to be there, a growing economy, a lot of the corporations trying to maximize shareholder value by looking at their portfolio, shareholder activism continues to be on the rise, and people are looking for different ways to create value, and we can be a solution provider, we can be a capitalist for that.

Henry R. Kravis

I'll just add a couple other things. One, with interest rates as low as they are, a lot of corporations, large corporations are saying, well, this really is a non-core asset but at least I'm getting a multiple on the earnings. So if I sell it today, what I'm going to do with the cash at a pretty low-interest rate environment? If I have a use for the money or a need for the money, then yes, this would be the first thing I would sell, and I think as you start to see rates up, if you see the overall M&A market pick up, which it seems to be somewhat, I think you'll start to see subsidiary sales of assets from the corporations. But there's another way to look at private equity. Don't look at private equity as just where KKR or any of us, for that matter, are buying 100% of the company. What private equity is today, is it comes back to the term that we all like to use and that's a solutions provider. So a lot of mid-sized companies oddly enough cannot get capital, a lot of the investment banks, and the banks have pulled back on coverage, they can't get capital so we can be a provider of capital, whether it be equity capital to solve the problem for them, or debt capital for that matter, again, all fitting into the private equity mold. So we have a quite a few investments that we've made around the world that are really -- we'll call them minority investments and equity, there are growth investments and yet, we'll play the same role that we would play, if we play the -- if we were buying 100% of the company, that is we -- we'll play a very active role on the board, our group at Capstone, will get involved, we'll help make the company a better company. So there's plenty of opportunities there, and that's sort of picking up where some of the slackest on the 100% subsidiary sales or 100% public market companies that want to go private.

Craig Larson

Patrick, right up front?

M. Patrick Davitt - Autonomous Research LLP

Patrick Davitt, Autonomous. A couple of question on the syndication of Equity 1. Is there a threshold of deal value that we would expect that to kick in, and what percentage of the deal typically would it be? And two, how concerned are you guys that, that will cannibalize the traditional fund business?

William J. Janetschek

It's a good question, and Alex and I can go back and forth on that. The first thing we do is we do size the right equity check [ph] in the private equity fund, just like a portfolio manager, that I see decides what's the right position hold. And so in our fund today, those position holds range anywhere from $200 million on the low-end to $500 million on the high-end, maybe $700 million in some cases, and that's in the U.S. fund, and that's based on industry concentration, that's based on risk-reward, all the things you would -- as you would as a PM. Once that decision has been made, then we decide we always want to see, if we can speak for the entire equity check [ph] as a firm for all the reason that I went through in terms of playing our model. Then, we have the conversation about where can we syndicate, we spend time with Suzanne's team and actually, we do worry about cannibalization, but the way we're doing it, that we think is in a way that avoid that, which is we're ensuring that our sovereign funds and pension funds appreciate that syndication and they continue to come back into our funds. They're our first stop in every case, and then we look for alternative sources of equity. So I think we're very focused on that issue and we keep track of who gets coinvestment and who's in our fund, and make sure that people to your point aren't getting free access but we think it works pretty well.

Craig Larson

Anybody else? Sure, Rob?

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Rob Lee, KBW again. I actually have a question on NAXI. I guess, it's on track to get to that $8 billion or so and you do have other firms out there who are fund raising in new North American funds or global funds, and this is maybe a play on Craig's number 2 bullet point, you're going to see -- you do sometimes get investors just say, well, you guys are, a, firm; Cs ,[ph] 10 firm, a sounds like a 10, 12. So what's kind of the perspective we should have on -- was it -- do you think it's timing when you started fund raising? I mean how do you think of -- how should we think of, or how would you respond to that if there are some issue, you raised or anything they can do 10 or 12?

Henry H. McVey

Well, let me maybe just put, and all of us can chime in, try to put something in perspective, and you all know this well. The 2006, 2007 fund-raising period was truly an exceptional period in the history of the industry. And so obviously, we raised a very large fund, $16 billion-plus of third-party capital. NAXI, assuming it's $8 billion or more, will be the second largest fund KKR has raised in its entire history. So just to try to put something in context, before the 2006 period for the first 18 [ph] years of the firm's existence, the largest funds were $6 billion, not only for KKR, but for the entire industry. And so just to give that context, the other thing is that our model has changed since 2006. Today, as Scott and Craig and others have gone through, $8 billion of fund capital translates into an economic value to the firm and to all of our investors in a very different way than even a $16 billion fund did in 2006. And obviously, more dollars is always better, but the firepower and the economic power of an $8 billion fund or more, is actually quite significant. And so if you want to apples-to-apples that with where we were several years ago, happy to go through that, but I think you understand the math that we went through. And I think our ability to syndicate equity, our ability to be a lot smarter and broader about raising capital outside of just our LP base, has grown measurably, given the start of our capital markets business and our client and partner groups. So today, $8 billion of capital and a fund can translate into $12 billion, $13 billion, $14 billion or more of true firepower with substantially better economics. And so I think that's what I would say and look, as Craig Larson showed, we actually do believe that the 2006 fund, which today is marked at 1.5x is actually superior to many of our competitors who are in the market raising funds, and I think again, that's still work in process. And if you look at our realized and partially realized transactions, at anywhere from 2.7x to 3.1x, again, we think that's actually quite good performance.

Scott C. Nuttall

The other thing is, that way we have our private equity funds we divided up into 3 regions as you know. So if you see with some other private equity group raised $10 billion, oh my God, KKR's not doing that well, there's our global funds. We, by design, years ago in 1999 raised our first European fund. We made a decision that we wanted to have a European fund, a U.S. fund and then we are now into Asia in 2006 to have a fund out there. So the fund you're talking about is pure, 100% the Americas. So that's what that fund is. Secondly, even if you had a fund that was call it double the size, go back to where we were, we would not put more than somewhere between $500 million and $1 billion into anyone transaction, no matter what the size is. So we have that capability, all that it means, if we end up presumably, with an $8 billion fund and we needed to put more equity into particular transaction, we'll syndicate it as we've talked a lot about. The second thing that it means is, okay, if a lot of those came along, we do them and then we go back to markets sooner. That just means we're back in the market sooner, it does not -- don't take the fact that we have a smaller fund, does that mean that KKR now cannot be competitive with a larger funds someone else has, absolutely not. It's no different than if we had a larger fund and combining that with a capability that we did not have in 2006, which is the syndication capability, it makes a huge difference.

William J. Janetschek

To underscore Henry's point about the global aspect of how we do this, Rob. I mean if you add up, let's just say, you pick your number 8 for North America, 6 for Asia, 6 last time in Europe, 1 for China growth, our synthetic global private equity fund before we get to capital markets, it's about $21 billion. And so when you see these different things out there, just make sure you're doing the apples-to-apples math. We like our model a lot because fund raising and private equity tends to be cyclical. So by virtue of having the approach, we're in the market more continuously, and more likely to be in the market when people are looking to put capital out.

Henry R. Kravis

I have one more thing to add, so just in terms of the global fund raise, so if we look at the last 3 years, we've raised $14 billion in 3 private equity funds, North America, Asia and China growth. And I think that dimensionalizes, whether it's $8 billion or $14 billion, but I think just take that as what we've been able to do. The other thing I would say is as we think about the appropriate size of a fund, and matching that with a market opportunity and the transaction structures, we actually think an $8 billion-plus fund, coupled with a syndication capabilities that we have, and the partnership capabilities we have, is absolutely more than adequate for the market environment we're in today. As I said, the sweet spot of the transactions we're seeing are between $1 billion and $5 billion. There will be occasional large deals, but we think that's a sweet spot and for that market opportunity, and even larger transactions, I think the fund size we have will be plenty of firepower when you think about our balance sheet, we'll co-invest with our private equity deals from time to time and also, the syndication capabilities that we have. So we want to make sure the firepower we have matches the market opportunity, and then what we've done is also driven more yields and more economics out of every dollar that we've raised in total for not only private equity, but our other businesses.

Craig Larson

Okay. Maybe one final question, E [ph]?

Unknown Analyst

Yes, a question for Scott. As I was looking at 3 slides, I started looking at Slide #158, where you are showing that your stock is trading at 5.3% dividend yield, as opposed to S&P financials trading between 1% and 2% dividend yield. I think this strikes me that the investors are struggling with putting on the right estimate for what's the true cycle distribution that a company like KKR could do, given that the group, as a whole, didn't have a very long [ph] in public trading history. And then I go to your Slide #47, and I look, at in first quarter, you already did $0.19 of distribution just between your few-related earnings and your balance sheet distribution. And I annualized that, that's $0.76. Then I look at sort of what's the true cycle capability or distribution capability from that cash carry from your portfolios. And I'm thinking your Slide 47, you've shown $4.50 to $7 of embedded potential net cash carry over time. And if I'm using a very conservative assumption to say that you're harvesting these gains over a period of 10 years which I think is pretty conservative. So that means on average every year, you'll get $0.45 to $0.70 of net cash carry from the PE portfolio, and that's not including your energy, your credit strategies and lots of your other strategies. So I add the $0.76 on to the $0.45 to $0.70. Just on the low end, I get to above 21 of average distribution, that's again, not giving credit to your other strategies such as infrastructure, energy and credit. And if the company trades at a 3% dividend yield on above 21 of average through cycle distribution, that means the stock should be a $40 stock. Your stock is $20 today, I think there is tremendous upside, am I missing anything here? Am I thinking about the math, correctly?

Scott C. Nuttall

No, I don't think you're missing anything. I mean if you think about it last year we paid out $1.22, that's before the carry really turned on, right? So I think your math, without getting into the specifics of your numbers, for fear of my General Counsel, I think your math and methodologies are very sensible.

Craig Larson

Thank you everybody for joining us. We do -- as you leave, we do have a lunch available for folks who would like to stay, for those who needs to eat and run, we also do have box lunch available. But thank you, again, everybody for your time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!