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Kohlberg Kravis Roberts & Co. L.P. (NYSE:KKR)

Q3 2013 Earnings Call

October 24, 2013 11:00 am ET

Executives

Craig Larson - Managing Director of Investor Relations

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

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

Analysts

William R. Katz - Citigroup Inc, Research Division

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

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

Howard Chen - Crédit Suisse AG, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

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

M. Patrick Davitt - Autonomous Research LLP

Christopher Harris - Wells Fargo Securities, LLC, Research Division

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the KKR's Third Quarter 2013 Earnings Conference Call. [Operator Instructions]

I would now like to hand over the call to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson

Thank you, Catherine. Welcome to our third quarter 2013 earnings call. Thank you for joining us. As usual, I'm joined by Bill Janetschek, our CFO; and Scott Nuttall, Global Head of Capital and Asset Management.

We'd like to remind everyone that this call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our SEC filings for cautionary factors related to these statements. And we'll also refer to non-GAAP measures on the call, which are reconciled to GAAP figures in the back of our press release.

We're pleased to give this update, and I've been looking forward to this call. It's been quite an active quarter for us. As you will hear, we reported record AUM and fee paying AUM this morning. We raised over $6 billion of fee paying AUM this quarter on an organic basis, and over the last 12 months, our total fee paying assets under management have increased by $23 billion or 46%.

Second we've been particularly active on the investment front. Within Private Markets, we invested $1.8 billion of fund capital this quarter, the largest figure for any quarter in almost 2 years and essentially equal to the amount we invested over the first 9 months of 2012. And in addition, we have announced several investments that have yet to close. Scott shortly is going to walk through with you some of the drivers of this activity.

And finally, we're continuing to build out our franchise as evidenced by the announcement last week of our agreement to acquire Avoca Capital, a leading European credit investment manager with about $8 billion in assets under management.

Turning to our financial results. We reported economic net income of $614 million this quarter, which equates to $0.84 of after tax ENI per unit, 22% higher than the $0.69 per unit we reported for the third quarter of last year. Fee-related earnings were $106 million, up 8% quarter-over-quarter and 25% year-to-date. And we've also reported total distributable earnings of $251 million for the quarter and almost $950 million for the first 9 months of 2013.

Finally we have announced a $0.23 distribution per unit for the third quarter, which brings our year-to-date distribution figure to $0.92 per unit.

And with that, I'll now turn it over to Bill to discuss our financial performance in more depth.

William J. Janetschek

Thanks, Craig. We ended the third quarter with assets under management of $90 billion, up 8% from last quarter and 36% from the same time last year. The majority of AUM growth was due to the $4.7 billion of new capital we raised in our Private Market segment, which includes an incremental $800 million of NAXI commitments as well as $1.8 billion of new capital raised in public markets.

As of September 30, our fee paying assets under management were $74 billion, an increase of 8% from last quarter and 46% from last year.

Similar to AUM, the new capital raised in the quarter positively impacted our fee paying assets under management. Keep in mind, these figures do not include approximately $3 billion of committed capital that will be included once it's invested.

To underscore how this fee paying AUM growth is translating into higher fee streams, we've reported record management fees for both the quarter and 9-month period. Third quarter management fees are almost 40% greater in 2013 than 2012. In addition, both fee paying AUM growth and increased transaction activity have led to record fee revenue for both the quarter and the first 9 months of 2013. To give you a sense, total fee revenue in the third quarter of 2013 is over 25% higher than the same time last year.

Turning to our segment results. In Private Markets, fee related earnings were $44 million, up 4% from the second quarter, driven by greater transaction fees related to heightened deal activity. The 6% appreciation in our private equity portfolio, combined with higher fee related earnings in the quarter translated into ENI of $245 million, an increase from the $72 million we recorded last quarter. Our Publics went up 17% in the third quarter, which compares favorably to the 8% increase in the MSCI World. While the private fee portfolio companies were up about 3.5%.

Touching on Public Markets, fee related earnings were $20 million, down from both last quarter and last year, which was primarily driven by lower incentive fees. As a reminder, Prisma incentive fees crystallized generally on June 30 and December 31. We also incurred a 1-time $10 million expense associated with the closed-end fund we raised in the third quarter, which hurt our fee related earnings. Before this 1-time expense, fee related earnings would have been about $30 million, up over 25% from the third quarter of last year.

Third quarter ENI in this segment was $28 million for the quarter, which included $8 million of net accrued carry, and we now have an excess of $50 million in accrued carry on our balance sheet from our Public Market mandate.

Moving to Capital Markets and Principal Activities. Fee related earnings were $41 million, almost double the $21 million we reported last quarter. This 95% increase was driven by $700 million of Syndicated Capital, which resulted in higher transaction fees in the quarter. We reported third quarter ENI of $340 million in this segment, up meaningfully from the $32 million we reported last quarter. This increase was driven by the performance of our balance sheet investments, which appreciated by about 7%, in particular, our balance sheet increase from significant appreciation in some of our large public holdings like ProSieben, ACA and NXP, where the balance sheet has the additional exposure through its co-investments. Today our balance sheet has nearly 40% of its asset to marketable securities, which compares to about 23% on our private equity funds.

The increase in the carrying value of our balance sheet investments resulted in September 30 book value of over $10 per unit, which is up 4% from last quarter and includes a 19% increase in unrealized carry, bringing that total figure to close to $1 billion. 2013 units state [ph], we generated $750 million of fee and carry. In addition, our balance sheet generated about $650 million of earnings, including about $400 million of realized income. In total, this is $1.4 billion of earnings on an average book value of $7.1 billion or a 20% unannualized return on average equity in 9 months.

Turning to our Distribution. Total distributable earnings were $251 million for the quarter. As Craig mentioned earlier, our third quarter distribution of $0.23 per unit is comprised of the traditional fee related earnings in cash carry of $0.10 and $0.7 and $0.06 of realized balance sheet income. Our year-to-date distribution of $0.92 is up 77% from last year or 31% apples-to-apples including only the fee and carry components.

Before I move on, I want to give you an update on netting. The Europe II Fund continues to accrue carry and is currently marked at 1.4x cost. As of September 30, our netting hole in E2 decreased from $625 million to about $150 million. This progress is due largely to the cash gains from the NXP and TDC secondaries that we executed in September as well as the share class merger and subsequent stock appreciation in ProSieben.

As of today, all we need is 1 significant realization out of E2 and that fund should be in position to pay out cash carry, which will mean that all of our mature private equity funds would be in position to pay cash carry.

And with that, I'll turn it over to Scott.

Scott C. Nuttall

Thanks, Bill. When we think about the third quarter, we see 4 main things of note: fundraising, investment activity, monetizations, and Avoca.

I'm going to start with fundraising. So we raised $6.5 billion of capital organically in the third quarter and $20 billion over the last 12 months. Focusing on the quarter, the $6.5 billion expands a number of accounts and strategies in both the Private and Public Market segments and gives us comfort that we're gaining some traction as we grow and diversify our product offerings as well as our investor base.

In Private Markets, the $4.7 billion raised includes 3 main strategies: first, we held a close on our Energy Income and Growth Fund for $1.4 billion, including a $250 million GP commitment from our balance sheet for this first-time strategy.

Second we closed on an additional $200 million of third-party capital for our Real Estate Fund, which together with our GP capital brings the total fund size to $700 million, and when you include KFN's commitment, $900 million.

Third we raised an incremental $800 million of capital since June 30 for our North American private equity fund, which brings NAXI's total to about $8.3 billion, including employee capital as of September 30. While we expect a handful of final commitments prior to year end. This $8.3 billion is above the $7 million to $8 billion expected range that we first communicated a year ago. So what does this means for our Private Equity business? Well when you look at the buying power of our Asia II, NAXI, China Growth and Europe III funds, it equates to a $21 billion global private equity fund. And if you look across all of our private equity funds and co-investment vehicles, we now have over $17 billion in dry powder.

The other $1.8 billion or 30% of the capital raised in the quarter was in Public Markets. About half of this amount was in permanent capital vehicles, including corporate capital trust or BDC and KKR Income Opportunities, our first closed-end credit fund. We also closed on an additional $450 million of capital for our Special Situations fund.

Now let me discuss investment activity for a few minutes. As Craig mentioned earlier, we are encouraged by the firm's pace of capital deployment. In Private Markets, we put $1.8 billion of fund equity to work in the quarter. Approximately 85% of this was in Private Equity and includes the capital we invested in large North American buyouts like Gardner Denver and PRA International. It also includes RigNet, which is an investment out of our Europe III Fund as well as investment out of our Real Estate and Energy Infrastructure platforms. But we've also announced several new deals recently, which have yet to close, for an additional $2.5 billion of committed equity capital. We've seen broad-based activity across Asia, Europe and the U.S.

In Asia, we announced the partnership with Panasonic Healthcare in Japan and an investment in Haier, the leading Chinese home appliance manufacturer.

In Europe, we announced an investment in SBB/Telemach, the leading Southeast European broadband operator. And in the U.S., we announced 2 investments that will be made out of NAXI, Mitchell International and Crosby and Acco. When these 2 deals close, NAXI will be 30% invested. So when you add all this up, we have invested or committed $4.3 billion in private equity since June 30 and over $6 billion since the beginning of the year. Double the $3 billion we invested for all of 2012.

If you look at recent deal activity, we've been able to use our experience from prior successful transactions to source and execute new investments behind themes we believe in. Our investment in Asia Dairy, a JV that helps build new dairy farms in China is patterned on our investment in Modern Dairy, which we largely exited earlier this year at 3x cost and an IRR over 30%.

Our investment in Crosby had similarities to Capital Safety. One of our 2012 industrial deals that's marked at 1.6x cost, also with an IRR over 30%. And we just closed our investment in Weststar, a helicopter services business in the same industry as our Europe 3 investment in Avincis, which is currently marked at 1.6x cost.

We've also been active in Public Markets. To give you a sense, if you look at Mezzanine in special situations, we deployed $700 million of capital in the third quarter, up over 50% from the same time last year. In direct lending, you'll see a similar trend. We deployed about $800 million in the third quarter or more than 2.5x as last year's figure. And year-to-date, we've invested a total of $2.7 billion in these 3 strategies, up 70% from last year. And the investments continued to perform. Our Mezzanine, Direct Lending and Special Situations Vehicles have IRR's in the range of 14% to 19% year-to-date.

MerchCap, our third-party Capital Markets business, has also been quite active recently. Since its inception in January, our origination team has sourced nearly 300 client opportunities. These efforts have yielded over 40 completed transactions, significant fees and about $2.5 billion in originated credit investments for the firm.

The third area I want to touch on briefly is monetization activity. While we've been active making new investments, we've also been busy selling. We have returned over $15 billion of cash to our fund investors since the beginning of 2012, $6 billion of which occurred in the first 9 months of this year. As Bill mentioned, about 23% of our private equity portfolio is in public securities. And if Walgreens elects to exercise its options to acquire the remaining interest in Alliance Boots, that figure would effectively jump to 33% or $12 billion.

The last topic I want to focus on is the Avoca transaction, which we expect to close in Q1 of 2014. With this transaction, our global credit business will go from $20 billion to $28 billion in AUM. Our dedicated credit professionals in Europe will increase from 11 to about 80. And 180 investors will join the KKR franchise, of which very few are investors with KKR.

Most importantly, we'll now have a platform in Europe that can pursue liquid and illiquid investments. The pro forma footprint and capabilities of our European credit business will mirror those we have in the U.S., and we believe, this will lead to even more deal sourcing for our Private Credit and Special Situations efforts. We're particularly excited about this transaction, as we believe the European credit markets offer significant opportunities for us as bank deleverage and to take time to rebuild the capital basis.

Our balance sheet continues to afford us the flexibility to pursue strategic and inorganic growth opportunities like Avoca, which we view as a good way to deploy capital at a high return.

In summary, when you think about our activities over the last 12 months, we have announced or closed the Prisma, Nephila and Avoca transactions. Our fee paying AUM has increased 46%. We have invested or committed over $7 billion out of our private equity funds and over $3 billion out of our private credit vehicles. We've significantly increased fee related earnings and cash carry, and we've generated attractive returns on our balance sheet. This has translated into meaningful distributions and a higher return on equity for all of us as shareholders. So we've been investing a lot of money, generating attractive returns, raising a lot of capital and generating significant distributions. We're also pleased with the strong early progress of Prisma and Nephila and look forward to our new partnership with Avoca, which will bring us more scale in European credit at an opportune time.

Thanks for joining our call. Operator, can you please open the line for any questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bill Katz.

William R. Katz - Citigroup Inc, Research Division

Just a follow-up on the realization opportunities you said, maybe a big picture question, with the Avoca transaction you mentioned, Scott, reviewed a couple of big ones now. Where are you in terms of your footprint, if you will, as you think about the core businesses you need to gain traction on. And I guess the ultimate question is, are we at a point now, given the strong ROE that's being generated off the balance sheet, that instead of funding some of this growth that could actually start to turn to real-time realizations?

Scott C. Nuttall

Sure. Thanks, Bill. I think, in terms of where we are with respect to our core businesses, I think we still see a lot of growth ahead. If you look at, as we've discussed, I mean, private equity arguably is our 1 scale business, and we've got a number of other businesses that are at the earlier stages of their life cycle. If you look pre-Avoca, at $35 billion or $36 billion that we manage in nonprivate equity assets, the vast majority of that is in North America. And if you look at the Fund's global footprint, we continue to see an opportunity to expand those businesses globally. So as we've discussed, I mean, the assets that we manage in European credit will go from $3 billion to about $11 billion. That's just as a result of the Avoca transaction alone, and we see more opportunities in credit to expand geographically. See those same opportunities in energy, real estate, hedge funds. And so we think there's a significant amount left to deal in terms of continuing to build the franchise organically and inorganically. And even in Private Equity, we're spending time in places like Latin America, which is relatively new to the firm. So we could grow there, both organically and inorganically as well, too. So I think we continue to see opportunities to expand the footprint across the firm. As it relates to the balance sheet question, look, I think the way that we think about it is, we're quite pleased with the ROE that we've been able to generate. Last year, as you know, the return on equity for the firm is as a whole was over 30%. We're 20% unannualized for the first 9 months of this year. So we've been pleased in terms of how we've been able to deploy the capital off the balance sheet and get it to work at attractive returns, and we think of our business a bit differently. We think the balance sheet really gives us an opportunity to generate very attractive returns in its own right, investing in what we do both acquisitions and on our own investments. And then the Asset Management Businesses, with the fee related earnings and the carry augment that return on equity quite meaningfully with very little capital requirement. That's how you get to 20%, 30% ROEs with no net leverage at the hold cup [ph]. So we see a lot of opportunities ahead.

William R. Katz - Citigroup Inc, Research Division

Just a follow-up question. When you think about -- you know that dry powder being deployed, I guess, the natural question is, you sort of highlight some returns on the capital -- private -- public market side, excuse me. On the Private Equity side, what are you underwriting as a target IRR -- the dry powder?

Craig Larson

Sure. It kind of varies a bit by region. And we think about reward relative to the risk we're taking. So if you look at where we're underwriting in terms of, for example, some of the more emerging markets like we're investing in, in Asia has left less leverage in the balance sheet but arguably more underlying risk in terms of the emerging markets in which we are investing or more company risk. So the returns vary region-to-region, Bill. But in terms of what we've been generating as of late kind of 20-plus percent kind of returns in that part of the world and maybe high-teens to 20% in the more developed parts of the world.

Operator

Our next question comes from Chris Kotowski from Oppenheimer & Co.

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

You've made a number of investments this quarter where you took minority stakes, like RigNet 27% and Haier, I think, was 10%, and TPSF was 9.5%. And that seems like it's a departure for you, where you used to take control of the positions. And I wonder, can you discuss what the rationale and logic and strategy is there?

Scott C. Nuttall

Sure, Chris. It's Scott. I'd say, a couple of things. If you actually look at how our Asian private equity business has developed since inception, the majority of what we've done had been in minority investments. And so, that's how we frankly found the best opportunities to invest in that part of the world. So they'd be a bit different on how you think about our traditional private equity business in North America and Europe. So the Asia investments, minority, very little leverage, if any leverage, in the capital structures. And that's been the predominant strategy to date. If you look though at -- of all the other investments we've made, we've made several in the U.S., virtually all of those would have been in the more traditional format of control buyout investing. In Europe, the investment we just made in SBB/Telemach is also in that vein. RigNet was a minority stake but a meaningful minority stake. And the stocks traded well, thankfully. So that was out of the European Fund. So that's how we bifurcate. Asian, more minority, rest of the world is probably more used to what you're seeing from us.

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

Okay. And just in general, you highlighted how much more active you are this year than last year. The $6 billion this year. Just given how far the public equity markets have moved over the last 2, 3 years, I get the sense a lot of other private equity companies are becoming more cautious on acquisitions and deploying less capital, and I guess, what is driving your kind of contrarian stance relative to that?

William J. Janetschek

Sure, I'd say, let's sort it out by region, okay? So if you look at where the capital has been deployed, relative to our historical activity level, Asia has been extremely active. We put $1.8 billion of investments in the ground. We're committed to them since the beginning of the year, which is our highest level of activity since we began our Asian business. And there I tell you what we're really seeing, Chris, is the equity markets in Asia pulled back. And so, we've been capitalizing on that emerging market volatility. There've been concerns around slowing growth. We think it's a bit overdone. So we're actually seeing valuations be quite cheap, especially places like China, where the valuations are more attractive than they have been in the last 5 years. And as we said, we don't use much leverage there. So we got an attractive equity point, and the valuations aren't being moved up by the credit market. So we're really leaning into that opportunity. So Asia would be one thing I would point you to. The second thing would be Europe. We've seen a number of our competitors pull back from Europe. We actually think the competitive environment is a bit better; deal flow starting to pick up. Our pipeline there is quite good. So we've actually been expanding our European private equity presence and efforts and so, I don't know if that's contrarian. But we think it's actually a pretty interesting time to buy in Europe ahead of what we think will be a recovery over the next several years. So North America valuations have been moving up. And it's been harder to find value, but what we have found is if you've got longer term horizon, and it's conviction around themes. That's why I went through kind of how some of the investments are patterned on prior successful investments. If we can bring our operational capabilities to bear, we think there are opportunities to really make some interesting investments, and those are the ones we've been making. But it's been highly selective. Out of hundreds of opportunities, there are maybe 1 or 2 that are worth pursuing. And so we're seeing opportunities in the more targeted set of areas like healthcare, technology, parts of energy and industrials. So I'd say, Asia and Europe, leaning in while the markets are a little bit afraid and the U.S. being selective and highly value conscious.

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

Okay. And then last thing for me is, obviously, KFN reported results that were somewhat short of market expectations last night. And we're seeing the incentive income come down there. Is there any kind of forward outlook that you can give us on that line?

Scott C. Nuttall

Unfortunately, I can't really talk to that too much, Chris. I think we'll -- as we said, our Public Markets businesses have incentive fees that come from several of our strategies, including Prisma, our underlying liquid investments. KFN is one of those. But we're not going to be able to give you any forward guidance, unfortunately.

Operator

Our next question comes from Michael Kim from Sandler O'Neill.

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

Just first in terms of fundraising, it does seem like demand is picking up a bit with some firms upsizing some sizes more recently. So just curious if you could give us some color on what you're seeing from a fundraising standpoint as you're out there meeting with potential LPs.

William J. Janetschek

Sure, I'd say, it's -- the backdrop's pretty good, Michael. We're seeing more interest in alternatives, and we've talked in the past about how a number of institutional investors globally have increased their allocations to alternatives and so there's been 2 things that I think we have all been benefiting from. One is that during the downturn, the percentage allocation alternatives was increased. And now the denominator, by virtue of what's happening with the Public Markets is increasing. So you've got a higher percentage applied to a bigger denominator. And that's creating an opportunity for these firms to look at and say, "well, we need to put more money to work to actually meet the alternative asset allocations that we've now created for ourselves." So that backdrop is healthy because there's an interest in putting capital to work. And I think we have now swung largely, not completely, but largely from the fear part of the spectrum to march to the greedy part, which is good from a fundraising standpoint. The second set of contributing factors would be returns in cashback. Returns across the alternative asset space have been quite strong. You can see even in our private credit strategies, we're generating mid- to high-teens. And there's been a lot of cashback, probably more so than institutional investors have modeled, if you go back a couple of years. And that's helping the dynamic quite a bit as well. The third thing I would tell you is, the fundraising sources have become much more broad-based. And we've talked specifically to KKR, we have invested meaningfully in distribution and building relationships over the last few years. I think that's starting to bear some fruit. 1 interesting statistic that we track is that we've been spending more time raising money from individuals. Year-to-date, of the $17 billion or so that we've raised in the last 9 months, 25% of that figure came from individual investors. And that's high-net worth platforms, direct high-net worth efforts, et cetera. And so, that is another interesting element to it. So it's really quite broad based, and encouraging in terms of the traction that we're just starting to see.

William J. Janetschek

And Michael, this is Bill. If I could just add, we mentioned on the call earlier that just in the quarter we raised $6 billion. And over the last 12 months, we raised over $20 billion. We have now significant platforms that we're raising capital for. And so by way of example, in private markets, the capital that we raised in that segment is from 6 different broad mandates, and more importantly on the public market side, we actually have 9 platforms, which we raised capital on to. As we continue to grow our platform base, hopefully, we're going to be able to see continued AUM and more importantly, fee paying AUM growth.

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

Okay. Maybe if I could just kind of follow-up on those comments in terms of thinking about the trajectory for growth playing out. Looking ahead, obviously, you're wrapping up fundraising for NAXI, and you just closed Asia II. So just wondering, how you're thinking about, maybe the transition from raising some of those legacy funds to building out your newer businesses and how that could impact the trajectory for growth?

Scott C. Nuttall

Sure. Look, I think -- just to run through it quickly. We've got several vehicles that we're finishing fundraising for in the coming quarters. You mentioned NAXI, but we also have our Special Situations Vehicle, Real Estate, the Energy Income and Growth Fund that I mentioned. That $1.4 billion I talked about with the first close and will continue to be raising capital there. So there's probably those 4, so episodic strategies that we'll be finishing up. If we look into the forward calendar, Michael, our European Private Equity business is going to be launching the E4 fund raise here shortly. We're starting to run low on capital in our infrastructure business. So you'll see an Infra II Fund in the not too distant future. And by virtue of just how much activity we've had in the Private capital space in the Mezzanine, in direct lending in particular. I think we're likely to pursue capital raising in the not too distant future in the Mezzanine and direct lending spaces as well. And then, keep in mind, we do have a larger and larger aspect of our business where we're raising capital continuously. Obviously with strategies like High Yield, leverage loans, CLOs, Prisma, our hedge fund strategies, both Fact [ph] and Nephila. And so, I think, that just hopefully gives you a flavor. There's a lot of things coming. There is no doubt that the $20 billion we raised in the last 12 months benefited in part from the fact that we're out with both Asia and NAXI. But to just give you a sense, of that $20 billion in terms of what it has included in those numbers, it's probably $8 billion or $8.5 billion of the $20 billion. But -- so there's a lot coming. And we clearly benefited from those 2. But we continue to see a very full pipeline.

Operator

Our next version comes from Howard Chen with Crédit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

I was hoping to follow up on Avoca, given that they're just new to the family, I was hoping, you just could discuss, Scott, why this fit made sense versus other firms you may have looked at? What's performance been like on an absolute and relative basis? And what's the fee model been like?

Scott C. Nuttall

Sure. So I guess first with respect to the firm and the fit. As we headed in to this year, one of the strategic objectives we had was to have a greater presence in European credit. And if you looked at how we built our European credit business organically, it had really been just on of the private credit side. So largely Special Situations and Mezzanine, in particular. But we did not have a liquid credit capability. And if you can trust that that's the way we built the North American business, we haven't -- where we had both, there is clearly a disconnect there. And the way that we run our credit business is that we actually have the liquid and illiquid teams working together and cross staff. So feeding ideas to one another. So if we're invested in a liquid credit that underperforms that creates the calling opportunity for the illiquid origination team, as an example. And so we set out to find a platform that would be complementary to what we had already built organically in Europe. And frankly, Avoca fit the bill perfectly. Minimal overlap and a significant amount of synergy, we believe, because their business had really been formed on leverage loans, CLOs, liquid opportunistic credit. They have a long/short credit capability in Europe, and they have a convertible bond capability in Europe. We had none of those capabilities. We are very active in private credit. They do not have a private credit capability. So by putting the 2 efforts together, we actually have a footprint now that is very consistent with the business that we've created in the U.S. Critically, as we think about these things, the cultural fit is great. The team is wired the same way we are. And we spend a significant amount of time with them happily. Our Capital Markets team in Europe had known the people at Avoca for several years, so there has been a long history. The performance has been very strong. They've beaten benchmarks across all their strategies since inception. And so we feel like we really have a best-in-class partner. The performance of the CLOs have been very strong. And to your last question about the fee model, because it is more focused on liquid credit, you'll find that the majority of their strategies are going to be more consistent with the economics that we get on our liquid credit business. So very little of what they do today will have a carry component and then largely be a fee-only component, similar to what we have seen in our loan and High Yield business. I think, if they scale the hedge fund platform and some of the other platforms, that would change over time.

Howard Chen - Crédit Suisse AG, Research Division

That's really helpful. And my follow-up question, just switching gears a bit, I was hoping you could talk a bit more about the steady transaction fee generation. I know it's been a product of some of the initiatives that you're working on. So could you drill into that a bit and provide a bit more color on how those fees breakdown among the various components, whether it be all of what you're doing with syndication, the moderating fees, et cetera. That'd be helpful.

William J. Janetschek

Howard, this is Bill. As it relates to monitoring fees, you could see that monitoring fee number is pretty stable. It's up a little this quarter. I mean, the run rate number on that is anywhere in between $30 million, $31 million. And so as we sell some portfolio companies, we are taking on new companies through acquisitions and so we would see that to be pretty steady. On the transaction fee side, that ebbs and flows. What happened this particular quarter is that, with Gardner Denver, it was a very big equity check, and so we placed a good amount of that equity in our traditional private equity fund. But we also had our Private Markets group as well as our Capital Markets Group syndicate out a halfway decent amount of that equity. And so that's why you saw the transaction fees on the Capital Market side double from last quarter. I would say that, in the fourth quarter, based upon the transactions that we've announced, you will see the transaction fees be pretty robust on the Private Market side. But because of the size and the equity checks, we will be syndicating some of that capital in Capital Markets but not as much as you're seeing here in the third quarter.

Howard Chen - Crédit Suisse AG, Research Division

And then my final question. Scott, you provide some really helpful color on deployment. Just given the consistency of themes you noted and the pipeline you're looking at, I know you guys look at a lot of things all the time. Is there still a glide path that you see that you can continue this pace for a while, or should we anticipate that you go into a bit of a digestion phase?

Scott C. Nuttall

Sure, it's a great question, Howard. It's a -- as you know, it's very hard to predict especially on the private side what deal flow is going to look like. We've announced over $4 billion of new equity investments since June 30. I would be loathe to tell you that we're going to see that level of activity continue, so hard to predict. But the good news is, the pipeline continues to be full, and this is very hard to predict how many things will actually get done. So I certainly wouldn't annualize the last few months.

Operator

Our next question comes from Matt Kelley with Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

I wanted to ask just about coming back to the deal pipeline and also what you think in terms of exits. Anything notable you think in kind of our economic or legislative political environment that could make exits pick up and deployment pick up? Is the debt ceiling more of a talking point that you guys might see from a kind of corporate revenue with cash on balance sheet to buy assets perspective.

Scott C. Nuttall

I'm not sure, Matt, it's Scott. I'm not sure that you could really extrapolate much on what's going on in Washington to our deal pipeline or our exits. I think, as a general color matter, we have seen some strategic M&A dialogue pick up across our portfolio. Obviously if there's uncertainty in the environment, it's harder for CEOs to have the confidence to follow through on that. So on the margin, that may move to more public market exits than strategic. But I'm not sure I can tell you that we could extrapolate much from the behaviors in Washington to our own pipeline. But what I will tell you is, we do see some underlying strength over time potentially in different parts of the economy in the U.S. and Europe. We're seeing things pick up in China a little bit. And so, we're kind of investing through the noise and kind of extrapolating to what we think the next several years can look like. And that's perhaps why we've been a little bit more active as of late.

Matthew Kelley - Morgan Stanley, Research Division

Okay, that's helpful. And then, if I can ask kind of a 2-part question on your real assets. First, I noticed on your balance sheet, the seed of the Real Estate fund went actually down versus prior quarter, unless I'm looking at this wrong. So I want to ask about that, if there's kind of one-timer in there or anything. And then separately, just as real assets becomes a bigger part of what you're doing. Are you starting to think about that, a little bit as a different segment as you got more scale there, or how are you kind of thinking about the business from an internal perspective there?

William J. Janetschek

Matt, this is Bill. I'll take the first question, and then I'll pass the second over to Scott. Remember that the Real Estate Fund as well as the Energy Income; these are drop-down funds. In Real Estate, we actually have purchased and put all of those assets on our balance sheet. When we had a first close, we are in essence selling a portion of the invested capital in that fund to new LPs as they're coming in. What you saw in the third quarter is that we had a second close. And so what we ended up doing is rebalance that fund, and we in essence sold part of the invested assets that we had as the GP over to new LPs coming in, and you'll see that number go down. So likewise, in the fourth quarter, you can see that the royalties in drilling number, that's what we put on our balance sheet to date. Energy income closed in the latter days of September, and so, you'll see 50% of those assets, being sold off to that fund. And so you'll actually see a drop-down in the invested assets. But remember, keep in mind that our commitment to the Energy Income Strategy is still going to be about $550 million.

Scott C. Nuttall

And Matt, on the second question, with respect to how we think about it, I mean, if you look at Page 16 of the press release, you can see the breakdown. I think over time, you'll see real assets and the Public Markets strategies continue to increase as a percentage of the whole. And we have talked about this in the past, but we continue to focus on having our balance sheet generating more recurring cash flow and so the real assets strategies generate quite a bit of current cash return, as do the credit strategies. And by virtue of the distribution policy that we have over paying income right off the balance sheet every quarter, we think over time, that will lead to a distribution that is more of recurring in its makeup, augmented by the carry and balance sheet gains. And so you will see those percentages pick up over time would be my guess.

Operator

Our next question comes from Mike Carrier with Merrill Lynch

Michael Carrier - BofA Merrill Lynch, Research Division

First question, just on the exit, your outlook. If you look at the portion of the private equity business, the capital that's in the ground that's not public yet. If we aren't -- and this is more of an industry question, but if we don't see much of the pickup on the M&A side, and given where those investments are, in terms of maturity of them, where your returns are sitting, will we expect to see more exits through the IPO channel? Just trying to figure out when you guys look at the opportunities before you in terms of the different exit strategies, what we could see sort of over the next 12, 24 months?

Scott C. Nuttall

Hey Mike, it's Scott. I think, first let’s just do a little bit of level setting. So we mentioned the $15 billion that we've given back since the beginning of 2012, just to give you a sense of the breakdown. About 60% of that was public company secondaries. So it's been -- majority of it, about 30%, give or take, was strategic exits. And the rest was kind of dividend recaps and other dividends that we received. So that gives you a sense for the breakdown. We do think that we have a number of our companies that are getting into the more mature phase, so there's more of an opportunity potentially for an exit. But the way that we look at it today, as I mentioned, if you include Boots, about $12 billion of the $36 billion or so of Private equity fair value is already public. And I know there's a lot of focus on IPOs, but we actually focus on how those companies are trading and how much value we've created in those public positions because that's a more readily available monetization opportunity, whereas IPOs are traditionally more primary or mostly primary in construct. From a strategic exit standpoint, the environment's been a little open and shut. But we're having at least as much dialogue today as we have had in any time in the last few years. So I'd say that, we're hopeful there but very hard to predict what will actually come to fruition. But if you think about it, 30% of the $15 billion was strategics. We're not relying on that as the exit opportunity. And the other way that we look at it is that, the real question is how are we doing creating value in the portfolio? How many of our companies are trading valued up significantly relative to the cost and getting closer to that time where it makes sense to start to consider monetizing them. And on that score, we actually feel quite good. Because a number of the investments that we've got in the portfolio are now marked up to 1.5x to 2x cost-plus and you're starting to get more into that life cycle where you can think about monetizations recognizing that we don't want to leave too much on the table either.

William J. Janetschek

In addition, another opportunity to have realization is doing recapitalizations of our companies, to Scott's point, a lot of the portfolio companies that are mature but not fully mature. There is a position where due to company performance, that company is actually delevered, and so we have an opportunity to maybe take advantage of where the fixed income market is today and do a recapitalization. So case in point, we did a recap on Pets. We recently did a recap on Prisma. And so there's always that opportunity as well.

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

Okay, that's helpful color. And then, well maybe just on a few items -- just on the P&L. I think that the first one, just on the fee credits, it seemed a little elevated this quarter, not sure exactly what drove that. And on the expenses, you guys flag into the $10 million I think on the public side. Anything on the Private side, you seem maybe a little elevated. It might have just been correlated with the transaction fees. Just wanted to get a little color on that. And then on the incentive fees, I get the seasonality, but any way to size up maybe the number of products now or the amount of assets, given some of the transactions that you have guys have done with, either Prisma or Nephila. In terms of trying to gauge whether it's the fourth quarter or the second quarter of what the range or what the potential is there?

William J. Janetschek

Sure. As it relates to fee credits, when you take into account and if you look at Page 7, where we're talking about Private Markets. You take the monitoring fees and the transaction fees. The fee credit in this quarter was about 53%. In the prior quarter it was about 54%. And so the way to think about this from a modeling perspective is that that's a probably a good number to use. To the extent that we're going to be investing a lot of the capital through our traditional funds, we do have fee sharing arrangements with each one of those mandates, and so that's probably the best estimate to use. As far as incentive fees, that is something that we were just talking about earlier today. When you think about the incentive fees for Prisma, generally speaking, they have about 50% of their funds which have incentive fee that crystallized June 30 and another 50% that will crystallize in December. So when you're looking at our financials quarter-to-quarter, you shouldn't see or expect any sort of incentive fees come through in the first quarter or the third quarter. You'll see that in the second quarter and the fourth quarter for Prisma. Nephila, to the extent that there is [indiscernible] an incentive fee, their funds crystallize in December. And so if we're going to see an incentive fee from Nephila, you'll see that come through in December. Same old shoe for KES. And so, our hedge fund -- even though we might be accruing some sort of incentive fee, the crystallization in those funds don't take place until December, and that's when you'll see that come through. So as we do launch and raise additional hedge funds, that will be something that you'll see not come through the first 9 months, but you'll see come through in the fourth quarter.

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

Okay. And anything on the expense side, in banks?

William J. Janetschek

On the expense side, one thing to note is the expense number was up pretty significantly from the second quarter to third quarter. we did put a footnote in on the Public Market side. We raised the closed-end fund, and for that, we actually paid a 3% underwriting fees/expense number for the $300 million that we raised in that mandate. And so that amounts to $9.7 million of the increase in expenses. But that closed-end fund is still a product that we're very interested in because it's permanent capital. And once we raise that capital, we're going to receive an ongoing management fee of a little bit north of 1% on gross assets, not just the invested capital. So to the extent that there is a little bit of leverage in that particular closed-end fund, we are receiving 1.1% fee on a higher amount. The other expense number that ticked up this quarter was on the Private Market side. The broken deal expense was about $5 million higher than in the prior quarter. Reason being is, we've seen a lot of opportunities, some of those, we've either signed and closed on or will close on. But some we just end up being unsuccessful. And so what ends up happening is we look at a lot of deals in the second and third quarter and some of that expense is coming through our P&L.

Operator

Our next question comes from Patrick Davitt from Autonomous.

M. Patrick Davitt - Autonomous Research LLP

Could you talk a little bit about what you're seeing within kind of the portfolio, in terms of economic growth kind of globally and by sector. And within that question, to what extent your CEOs have seen a change in business around the shenanigans in D.C. over the last few weeks?

Scott C. Nuttall

Sure, Patrick. It's Scott. I'd say, if you look at the portfolio of company growth and you kind of normalize for mix. Because obviously with new companies entering the portfolio and some exiting, not a big change, maybe a little bit of a tick down in the last few months but not a big change in terms of revenue and EBITDA growth figures. Nothing that I would point you to as anything to draw a message from. Probably the more interesting aspect to the second part of your question is, we do have a number of our companies that are facing the consumer. And we did see during the period of the government shutdown a pull -- bit of a pullback by the consumer during that period, which we expect will have some impact on kind of GDP in the U.S. in the second half. Hard to know how big that will be, but clearly there was a bit of a correlation between what's going on in Washington and what the consumer decided to do for that period of time. In terms of what we're seeing though, it is an interesting period, as we look especially at the U.S. economy because we're seeing strength in autos, energy, housing, some parts of the manufacturing space. And we're seeing consumers away from the Washington shutdown spend money kind of on more big-ticket items like cars. But having said that, we're not seeing as much pull-through as we would normally expect, given the indicators that we look to on housing, credit spreads, et cetera, moving in the right direction. So it's an interesting time. We do see the private sector kind of improving a bit, and the real question's, what's the consumer is going to do? But nothing too much to take from the portfolio, which continues to perform nicely. And then just it'll be interesting to see if the consumer comes back now that Washington is back in business.

M. Patrick Davitt - Autonomous Research LLP

Okay, great. And then, on the retail effort you mentioned how much fundraising is going to come from individual investors? Is there a conflict in terms of your fundraising with your more traditional LPs there like -- as you and your competitors ramp up this retail distribution effort, do you get the sense that your more traditional LPs are concerned that they're getting opportunities that they aren't, or they're taking opportunity away from those more traditional pools of money?

Scott C. Nuttall

I have not run into that, Patrick. And it's really because what we're offering -- the terms we're offering individuals are the same as what we're offering institutions for the same product. And as we discussed in the past, that institutions are investing in size, they tend to get a fee break relative to the smaller investors. So the easiest way to handle that is to make sure that people have the same terms, and institutions are going to be more able to invest in the longer-dated illiquid products than individuals. So a lot of the fundraising for individuals will be more short-dated, institutions will be longer-dated. And as we package the longer-dated products for institutional channels like high-net worth platforms, basically then what we're doing is we're -- we will have the same fee construct as we do for institutions, which mitigates any potential conflict.

Operator

Our next question comes from Chris Harris of Wells Fargo.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Just a few quick follow-ups here on Avoca. Can you guys share with us what the margin of that business is like? And then, I know as part of the deal you issued a little bit of equity. Pro forma for that, is it still an accretive deal for you guys, out-of-the-box?

Scott C. Nuttall

Hey, Chris, it's Scott. I'd say first on the margin, we're not going to be able to disclose that. The overall margin of the business is pretty consistent with the margin of our Public Markets business so it's not dramatically different. And in terms of the accretion, we'd expect it to be accretive day 1.

Operator

Our next question comes from Robert Lee with KBW.

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

But I'm just trying to -- the strong capital formation in Private Markets, the $4 billion, the $4.4 billion in fee paying. Could you just kind of quickly walk through what that was, in other words the energy, real estate, another $800 million from NAXI. But I'm still kind of coming up a little short, so maybe what else was in there?

William J. Janetschek

Just to give you a breakdown, so you're referring to the -- in Private Markets $4.7 billion. As Scott and I mentioned earlier, NAXI was at $800 million. We also raised another $200 million. Energy income was $1.4 billion. And so that's been what I'll say from our more traditional co-mingled funds. In addition, we raised about $2.3 billion of capital in Private Markets. $1.1 billion of that is committed and will show up actually on the table, and $1.2 billion of that is capital that we're managing but isn't in a committed pool, it's just capital that we're going to be managing. Both of these are in separately managed accounts. Both were entitled to a management fee, and one of them was actually receiving a carry, no different than our traditional private equity funds. And so that gives you the full round out of that $4.7 billion.

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

Okay, great. That's helpful. I'm just curious, you've periodically given us an update on kind of progress of your LP base in terms of how it's been growing and expanding. I'm just wondering if we could -- then maybe get some update now, kind of where you feel you stand with the number of LPs you have. And maybe an update on kind of the U.S. versus non-U.S. complexion of it. And again, and also maybe some color on how that's -- does that continue to change for some of these recent fundraisers?

Scott C. Nuttall

Sure, Robert. It's Scott. I think in terms of the number, I think last time we talked about it was in the mid-600 range, it's probably somewhere between 650 and 700 today. And continues to creep up as we've been closing these funds. We don't count the individuals on a per-individual-basis. Otherwise the number would be a lot bigger. So you can think of that as the more institutional number just continues to march up. In terms of the overall complexion of the investor base, this year, we've been quite busy, U.S., Europe and Asia. So we've been able to open a number of new investor relationships in all 3 regions, continue to gain traction with the Sovereign Wealth Funds. Now that we have a focused effort on insurance, getting some traction there, but we're continuing to have broad-based success, I would say. The numbers that I'm talking about by the way, in terms of the number of investors exclude Avoca, because that will bring part more investors to us, but just apples-to-apples, I'd say we are probably better part of 700 now relative to where we were in the mid-600 range.

Operator

Our last question comes from Marc Irizarry from Goldman Sachs.

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

Actually, I had a question related to capital formations this year, Scott, and what you see in terms of the mix of LPs. Or maybe you -- can you just talk about the co-mingled funds in terms of, maybe, new asset formation from existing LPs versus new LPs versus the rest of the products. Are you seeing sort of a shift in sort of more than new investors coming into new products and maybe the reoperates [ph] in some of the fundraising on the co-mingle side?

Scott C. Nuttall

Sure, Mark. I'd say, if you look at the figures, in terms of just to take a couple of vehicles for a second. If you look at the Asia Fund, as an example. In terms of new clients, probably by 45% of the number of investors in the Asia Fund are new clients for KKR. It's about 24% of the dollars but somewhere between 40% and 50% of the number of clients. Just to give you a sense. But the North American Fund, you're going to be probably more 10-ish percent of the capital as opposed to 23%, 24% and instead of 45% probably, 30% or so in terms of the number of investors are new. So it's not surprising when someone is new to us, they're going to be a smaller then the incumbents who are usually growing capital and profits back in. But we're encouraged to see that 30%, 40-plus percent of the number of clients, just in those 2 vehicles are new to the firm. And if you look at the breakdown, by region, if you look across those 2 vehicles, just to give you a general sense. We're probably seeing about 60% of the number of investors and about kind of 45% by dollars from North America. and you stick with dollars for a second, you're seeing numbers coming out of the Middle East in the 20%-or-so range. And then, Asia and Europe make up the rest.

Operator

I'm showing no further questions. I would like to turn the call back to Craig Larson for any further remarks.

Craig Larson

Well, thank you, everybody, for joining the call. If you have any follow-up questions, please feel free to follow up with Alistair [ph] or myself. Speak to you next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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