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

Q4 2013 Earnings Call

February 06, 2014 10:00 am ET

Executives

Craig Larson - Managing Director of Investor Relations

William J. Janetschek - Chief Financial Officer of KKR Management LLC, Member of Balance Sheet Committee, Member of Risk Committee and Member of Valuation Committee

Scott C. Nuttall - Head of Global Capital & Asset Management Group and Principal

Analysts

William R. Katz - Citigroup Inc, Research Division

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

Michael Carrier - BofA Merrill Lynch, Research Division

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

Brian Bedell - Deutsche Bank AG, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

M. Patrick Davitt - Autonomous Research LLP

Operator

Ladies and gentlemen, thank you for standing by. Welcome to KKR's Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, today's conference is being recorded. I now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson

Thank you, Karen. Good morning, and welcome to our fourth 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 we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release. This call will also 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.

As well, we will be providing estimates on cash carry and its impact on future distributions on the call. These estimates are based on December 31 valuations and share counts prior to the KFN closing. And on the KFN transaction, please refer to the proxy statement and other SEC filings that KFN and KKR may make because they'll contain important information about the transaction.

On to our results. This morning, we reported fourth quarter and full year 2013 results. For the quarter, economic net income was $790 million, which equates to $1.08 of after tax net income per unit, 29% higher than the $0.84 we reported for the third quarter of 2013 and over twice what we reported for the fourth quarter of 2012. Total distributable earnings were $510 million for the quarter and $1.5 billion for the year.

Before we move on, I'd like to highlight some new disclosures in our press release on Pages 7 and 15. By way of backdrop, with over $7 billion of cash and investments on our balance sheet and our Capital Markets business, in addition to our third-party business model -- third-party business, we have a differentiated business model. Our objectives are to deliver excellent results on behalf of our LPs and, at the same time, generate significant cash flow from the ideas that we generate across all 3 of our segments. When we find something that we like, our goal is to capture as much value as possible for our fund investors and shareholders.

We can achieve this goal through 3 main avenues, all of which contribute to our overall revenue: one, investing third-party pools of capital, like our funds in separately managed accounts; two, investing in our own balance sheet; and three, syndicating and underwriting through our Capital Markets business. We don't manage our business focused on only one earnings stream, rather we're focused on leveraging all of our people and infrastructure and minimizing costs to drive the highest amount of revenue for the firm, whether that comes in the form of fees, carry or balance sheet income.

We're continuing to work through our reporting to ensure that we provide the most representative metrics to understand our profitability, particularly as we work towards the closing of the KFN transaction. In advance though, to better help frame this, we've introduced a new page in our press release on Page 7 that realigns the historical figures in our press release into 2 main buckets, total segment revenues and total segment expenses, and highlights our ROE on the bottom of the page. As well, we've also realigned our total distributable earnings disclosure on Page 15 and also disclosed, specifically, our payout ratio, which for the fourth quarter and the year 2013 was around 70%. We believe these changes provide even more clarity around how we measure our financial progress.

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

William J. Janetschek

Thanks, Craig. Before I review our fourth quarter and full year results, I want to highlight 4 aspects of our performance. The first is fund-raising and organic growth. Scott is going to walk through our inorganic activity later, but we raised over $21 billion of new capital organically in 2013, increasing our fee-paying AUM by 27%. And if you focus on our newer businesses, excluding private equity, the growth is even higher, up 48% for the year. This scaling of our fee-paying assets drove a 25% increase in both management fees and total fee revenue, which exceeded $1 billion for all of 2013.

Second is cash carry. We reported $150 million of net cash carry for the quarter and over $400 million for the year, a 45% year-over-year increase in 2013. And these figures exclude pending transactions like U.S. Food and Oriental Brewery. A year ago, 32% of the remaining fair value in our mature private equity funds was in position to pay cash carry. That figure has increased over 90% today.

Third is performance. Our business has had a strong fourth quarter and the $790 million of E&I we reported in the fourth quarter is a record for us since we went public.

And finally, our distribution. We announced a quarterly distribution per unit of $0.48, which is comprised of the traditional fee-related earnings and cash carry components of $0.12 and $0.22 and includes $0.14 of realized balance sheet income, bringing our total distribution per unit for the year to $1.40, up 15% from the $1.22 distributed for 2012.

Now let me turn to the fourth quarter results. We ended the fourth quarter with assets under management of $94 billion, up 5% from last quarter and 25% on a year-over-year basis. Our fee-paying assets under management was $77 billion, also an increase of 5% from last quarter and 27% from last year. Here, the majority of our fee-paying assets under management growth was due to the $3.5 billion of new capital we raised in our Public Markets segment, which includes the final close of special sits, bringing that total fund size to $2 billion. We also raised $1.5 billion in new capital in Private Market, and the majority of this amount came from the $9 billion final close on NAXI and $1.5 billion final close in our real estate strategy.

Fee-related earnings were $120 million, up 13% from last quarter. We saw a meaningful increase in fourth quarter incentive fees, largely from Prisma and Nephila, which offset lower monitoring and transaction fees. Total distributable earnings were $510 million for the quarter, more than double the $250 million we reported in third quarter.

Turning to our segment results. In Private Markets, ENI was $369 million, up 50% from the third quarter. Our private equity portfolio appreciated about 8.5% in the quarter, which compares favorably to the MSCI World, which was up about 8%.

Touching on Public Markets. Fourth quarter ENI in this segment was $73 million, more than 2.5x the $28 million we reported last quarter. The quarter-over-quarter growth was driven primarily by higher incentive fees at both Prisma and Nephila that I mentioned earlier. We also had $17 million of gross carry in the fourth quarter, primarily from mezz and special sit funds. We now have unrealized carry on our balance sheet from Public Markets in excess of $60 million.

Moving to Capital Markets and Principal Activities. ENI was $348 million, up slightly from the third quarter ENI of $340 million, as our balance sheet appreciated 7% in the fourth quarter. The increase in the carrying value of our balance sheet investments resulted in the December 31 book value of $10.83 per unit, which is up 10% from last year and includes a 55% increase in unrealized carry, bringing that total figure to about $1.2 billion.

Finally, I want to give you a peek at the first quarter distribution based upon where we stand today. Since December 31, we had 3 monetization events that we estimate will contribute a total of about $0.10 to the first quarter distribution, $0.06 of cash carry and $0.04 of net realized balance sheet income. These events include secondary to KION and ProSieben and the IPO of Santander Consumer, or SCUSA. In January, through the IPO, we sold over 80% of our interest in SCUSA at approximately 3x cost at a gross IRR in excess of 70%.

We also recently announced the sale of Oriental Brewery, and we expect to receive proceeds from this sale in the second quarter. 2009, we invested $360 million in OB. And assuming the sale closes, we expect to receive about $1.9 billion or over 5x our money. We expect OB alone will contribute about $0.25 per unit to the second quarter distribution.

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

Scott C. Nuttall

Thanks, Bill. Looking back on our fourth quarter and our full year results, there's 3 areas I'd like to focus on with you: the first is investing across all phases, deployment, creating value and exiting; second, fund-raising, as Q4 capped a particularly active year for us; and finally, our strategic initiatives, notably in Nephila and Prisma, as well as the pending Avoca and KFN transactions.

I'm going to start with investing. On the capital deployment front, we maintained our active investment pace in both Private and Public Markets. In Private Markets, we invested over $2 billion of fund equity in the fourth quarter with about 85% of this coming from private equity investments in the U.S. and Asia. We also have several investments that have been announced but not yet closed, for an additional $2.5 billion of committed equity capital. Since the beginning of 2013, we invested or committed over $8 billion in Private Markets, more than 2.5x the $3 billion we invested for all of 2012.

In Public Markets, if we look at the gross assets invested all -- across all of our accounts, in special sits, mezzanine and direct lending, we deployed $1.5 billion of capital in the quarter and over $4 billion in 2013 or 2.5x the $1.7 billion invested in 2012. And more importantly, these strategies continue to perform. To give you a sense, in 2013, our mezzanine and direct lending funds had 23% gross IRRs and our special situations fund had a 40% gross IRR in its first year. Performance in Private Markets have also been strong, as our private equity funds appreciated over 20% during the year.

Additionally, we've been active on the monetization front. Last year, we participated in 30 liquidity events, distributing over $9 billion of cash to our fund investors, including $3 billion in the fourth quarter alone. The majority of the $3 billion came from the 6 secondaries we completed in the quarter, including Dollar General, Tarkett, ProSieben and HCA, and we're done it at blended multiple of 2.2x our cost. This is the second year in a row we've realized over $9 billion, returning a total of $19 billion since the beginning of 2012.

We've also seen an increase in strategic exits. In December, we announced the sale of U.S. Foods to Sysco, and more recently, we announced the sale of Oriental Brewery to AB InBev. Strategic exits are highly efficient. As Bill mentioned, the sale of Oriental Brewery alone is expected to generate $0.25 of cash carry in the second quarter distribution. So it's a good year for both capital deployment and monetizations.

The second area that contributed to our results last year was fund-raising. We raised $5 billion of fee-paying capital organically in the fourth quarter across our Private and Public Markets businesses. Over 30% of this came from the final closes in our NAXI, real estate and special situations funds, which are now investing a total of $12 billion. The other $3.5 billion of capital raised in Q4 came from a number of our accounts and strategies, mainly Prisma, CLOs, Public Markets separate accounts and Corporate Capital Trust, our BDC, which is now managing over $2 billion. Over the course of the year, we raised $21 billion of fee-paying assets organically with over half of the capital coming from our non-private equity products. And for the year, total fee-paying AUM was up 27% and non-private equity fee-paying AUM, 48%.

Now let's turn to our strategic initiatives. 2013 was our first full year with Nephila and Prisma as part of the KKR franchise, and the year went better than we'd anticipated. For example, Nephila accounted for about 25% of our fourth quarter incentive fees and Prisma raised over $1.5 billion of new capital in 2013, increasing fee-paying assets under management to over $10 billion as of December 31. Profits grew significantly, integration went smoothly and the businesses contributed to the origination and investment capabilities of the firm as a whole.

Next in line is Avoca, the European credit management that we're in the process of acquiring. Avoca ended the year with $8.4 billion of assets under management, and we look forward to adding their capabilities to our European credit platform at an opportune time.

So last here you want touch on is KFN. We announced the KFN transaction last December, and we're on track for a Q2 close. KFN brings us more permanent capital, more recurring balance sheet income and more net cash flow to invest behind our ideas and continue to build our firm.

Over the last 12 months, we earned $3.4 billion in total revenue across our 3 main earnings streams: fees, carried interest and balance sheet. We incurred $1.3 billion of operating expenses. So net, we generated $2.1 billion of earnings on an average $7.4 billion of book value or a 27% return on average equity for the year. And all this is translated into 2013 total distributable earnings of $1.5 billion and an annual distribution per unit of $1.40, up 15% from the $1.22 we paid in 2012.

As Craig mentioned, our business model is different. We're marrying third-party capital with our balance sheet and capital markets capabilities to capture maximum economics from the opportunities we see and the returns we generate. In short, we want to make more money for our investors and shareholders from everything we see and do. In 2013, we expanded our payout ratio, balance sheet, investment capabilities and our participation in the economics we generate for the benefit of all of us as shareholders. And the great news is there's even more to do.

So 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 the line of the Bill Katz from Citigroup.

William R. Katz - Citigroup Inc, Research Division

Maybe, Scott, so starting with you. First off, you talked about the strategic initiatives. Can you give us a sense of where you might be in terms of fully maximizing either Prisma or Nephila? It seems like there's a lot of momentum there. What percentage of your clients might be an access to that? And what's the pipeline been looking like?

Scott C. Nuttall

Sure. Thanks, Bill. I'd say it's, frankly, still early innings on both. Prisma closed in October, year before last. Nephila was a bit over a year ago. As I said, the integration has gone really very well. The fund-raising teams have been working together. We're starting to see the pipelines continue to build in terms of jointly sourced opportunities. So I'd say it's still quite early days. And the good news is when you look at the backlog of potential fund-raising opportunities and you look at the product development ideas, I think there's a lot of good things ahead.

William R. Katz - Citigroup Inc, Research Division

Okay, it's helpful. And then you mentioned that -- so I'm curious what you meant by this and so the undertone the statement, that the strategic exit are "quite efficient." Is that in terms of a MOIC? Is that in terms of the realization potential? I'm just trying to get a sense of what you meant by that.

Scott C. Nuttall

All I meant by that, Bill, is that with the strategic exit, you tend to get the proceeds in one closing as opposed to an exit through the public markets where you can maybe do an IPO with some secondary or no secondary and then a series of secondaries over time. So it's really more of a comment of how quickly the cash proceeds from the exit show up.

William R. Katz - Citigroup Inc, Research Division

I see. Okay. And then just one final one for me. When you think about KFN, you may say it's to be determined. But as you've had a little more time now to sort of study the asset, any updates or thoughts around synergies or incremental return potential against those assets?

Scott C. Nuttall

Not much we're able to share incremental than what we shared back in December, Bill. But suffice it to say, we already know the assets quite well because we built the portfolio and have been managing it since 2004. So we like what we're buying. And as you know, we see quite a few opportunities to redeploy that capital with a higher returning strategies and ability to seed new businesses for the firm and that remains the case.

Operator

And our next question comes from line of Chris Kotowski from Oppenheimer & Co.

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

A couple of things. Just -- I wonder if you could update us on -- well, if I look at where you had the realizations, about $1.3 billion came out of E2, $600 million out of Millennium and $850 million out of the 2006 fund. And I'm wondering if you look at the carry, is it kind of spread proportionately to that, or are there still netting hole effects in E2? And can you update us on the whole netting hole concept, if it applies anymore?

William J. Janetschek

Sure, Chris. This is Bill Janetschek. As it relates to netting holes during the fourth quarter, all the netting holes were filled. We've got, right now, to go granular, a small netting hole in Millennium overseas. But when you look at the total funds that we're managing right now, in excess of 90% of the fair value of those PE portfolio assets are in position to pay cash carry anytime we have a realization.

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

Okay. And if I think about it, as of last quarter, your E2 was marked at a 4% net IRR and the 2006 fund more at a -- like 8%. Just conceptually, the carry potential then out of the '06 fund would be significantly bigger than out of E2, right?

William J. Janetschek

Sure. Just based upon the size of the fund. But when you're talking about 2013 and really on a mark-to-market basis, then it's really drives the ENI. You mentioned earlier that, overall, the fund performance was up about 20.5%. Europe, actually, fund performance was up about 28%. So Europe actually outperformed in total. And we had a good amount of monetizations, especially in E2 during 2013, which once we fill that hole, now we're in ability to actually payout, hopefully, a significant amount of future cash carry.

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

Okay. Then secondly, just because it's an interesting case study, it looks like you -- the position in First Data was marked up from about 70% to 81%, and they reported earnings and EBITDA has been kind of flat. So is that just -- as a case study for us, is that -- was that driven primarily just by market appreciation?

Scott C. Nuttall

Chris, it's Scott. I'd say primarily, the market comparables has traded up. And as you know, that's about a 50% component of our valuation methodology. That's largely what drove it.

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

Okay. And then last question for me is if you look at the assets in the Special Situations Vehicles, it went up nicely from $2.6 billion to $3.5 billion. And I'm wondering, is that driven by specific new funds and vehicles coming into existence, or is this just the kind of the regular add-on kind of quarterly activity that one might expect? Or -- so I guess what I'm getting at is, is this a -- hopefully, theoretically, a recurring event, or is this just the -- of the result of a fund launching?

William J. Janetschek

Chris, it's Bill again. As I mentioned earlier, the -- what I would say the co-mingle dedicated fund for special sits closed at $2 billion. But remember -- and we've actually said that that's our first fund. But in essence, we've actually been managing what I would call fund of ones for big institutional or sovereign wealth investors, where they gave us committed capital and it was in a private equity-like structure. So we are entitled to management fee can carry, and those were pretty big checks. And so we actually had 3 mandates prior to actually going out and launching a dedicated special situations funds. And so that's what represents that number right now. But keep in mind that we still have the ability to continue to raise capital as the interest in special situation investments. And so we could raise another mandate with a big institution, which we then, if it was like a private equity-type fund, where we will be committed capital, would show up on the table next quarter.

Scott C. Nuttall

Yes. The biggest reason for the increase, Chris, is the capital raise for the special sits fund in the quarter that's ahead of the final close. Chris, I'll just add one other thing as it relates to your point on the netting holes, and Bill had mentioned this. But a year ago, when you think of that 90% figure, that was roughly 32% a year ago. So the implications of that when you look at our financials in terms of total distributable earnings and realized cash carry specifically, this year, when you look at that and we saw 45% increase in realized cash carry and the netting hole certainly plays an important part in terms of the monetization that ultimately end up flowing through to the distribution.

Operator

And our next question comes from the line of Michael Carrier from Bank of America Merrill Lynch.

Michael Carrier - BofA Merrill Lynch, Research Division

Just a question on fund-raising. 2013 was just a huge year, kind of across-the-board. When you start thinking going forward, whether it's 2014, '15, I just want to get a sense of kind of what's in the pipeline, what you guys are working on, where can we see additional demand from clients and new money coming in. And then this is just a minor thing. But just remind, I think in the table on Page 13, when your new capital, in terms of AUM, can be less than fee AUM, I think that's just the transfer of some of the money that used -- was raised and now it's collecting fees. But I just want to make sure we're clear on that.

Scott C. Nuttall

Yes. Michael, it's Scott. I'll take the first question. So in terms of fund-raising, there's no question, we had the benefit last year of kind of the closes of NAXI and Asia II and our real estate fund that aided us giving to the $21 billion number for the year. So it's a larger episodic funds that we're closing over the course of the year. But as we look ahead, we also have a lot of things in the market. And as you know, we have a significant amount of the offerings that are now continuously offered. So if you just reflect on the fact that Q4, we had $3.5 billion of the $5 billion came from the Public Markets businesses, a lot of which was the more recurring components of the product set. But just to be specific with you, we're finishing fund-raising for our energy income and growth funds. That's $1.4 billion close. We expect that to wrap up that fund over the course of the next several months. We're also in the process of raising our Europe IV Fund, which is now launched. And we expect that'll continue into this year and into -- likely into next year. Other things that kind of our on deck, as you know, we've had a lot of fund ones that are getting close to being fully invested. And so if you think about infrastructure 2, direct lending 2, we're looking at private credit. Our first mezzanine fund is nearly fully invested. And then the ongoing front, you've got Public and Private Market separate accounts, you've got high yield, you've got loans, Prisma and Nephila, KES, et cetera. So there's a lot of different things that we have in the market right now and that will be in the market over the course of this year. And then parenthetically, just a couple of things. As you know, we've been focused on continuing to expand our individual investor franchise. And so we continue to see opportunities there across a number of our different products. Last year, that was about 23% of the capital we raised came from individual investors, which was up -- so it's basically $4.7 billion. That was up from $1.8 billion the prior year, so up 160%. So we'll continue to focus on bringing products to that channel. And as you also know, a big part of the focus of the firm is expanding the number of investors that entrust us with their capital. Last year, that number went up 23%. So we're now up nearly 700 investors, up from 560 or so at the end of 2012. So hopefully, that gives you some color, and I'll hand it over to Bill to handle the second question.

William J. Janetschek

And then just to answer the question -- I mean, generally speaking, you would expect fee-paying AUMs to actually be less than AUM when it's actually brought on board. Interestingly, in this quarter, you actually saw the fee-paying number actually go up. In Private Markets, the anomaly here is around our Annex Fund. We didn't fully deploy all that capital. We gave the people a choice to take that Annex commitment and roll it into E3. And if so, it went from an non-fee-paying entity into a fee-paying entity. And so you actually saw fee-paying AUM go up. On Public Markets, interestingly, we actually had an old hedge fund that was invested in credit. Most of its assets were in the CLO. We decided to sell those CLOs off to a third-party investor. That was about $1 billion. When that happened, because that old investor was not being charged the CLO fee, when we sold it off to a new investor, we turned on the CLO fee. And by doing that, our fee-paying AUM went up by about $1 billion.

Michael Carrier - BofA Merrill Lynch, Research Division

Okay, got it. And, Bill, maybe just one more -- just a few things on the income statement. Just -- any expenses this quarter that were seasonal? I know sometimes it's like dead deal cost and stuff in the other line in the Private Markets. Just wanted to figure that out. And then I know it's impossible, but incentive fees, when we think about Prisma and Nephila like going forward, is this -- would you characterize this as a great quarter, something we could see in like the seasonal fourth quarter or second quarter? Just trying to get some sense. And then in Private Markets, given the money that was raised, is this a good quarter in terms of all the fee AUM and the fee -- the management fees and the run rate, or will we see any step functions in the first quarter?

William J. Janetschek

Okay. As it relates to run rate fees, you could probably take notice that the basis point on management fees, when you take the management fees over total fee-paying AUM, it went down a little in the fourth quarter. The reason being is that a lot of that capital was raised at the end of the quarter. And so obviously, as of December 31, we're reporting the big fee-paying AUM number but we actually don't have the management fee to match up in this particular quarter. And so you'll actually see somewhat of an uplift in that prospectively. Your second question as it relate to incentive fees, on the Public Markets side, just to give you a broad stroke as far as how those incentive fees come as far as crystallizations as it relates to Nephila. Generally speaking, Nephila is going to realize its incentive fee once a year. And so you might see small amount come through, through the first 3 quarters if there are redemptions, but you're not going to see any significant activity. Again, you'll only see that pop if performance is there in the fourth quarter. Prisma is a little different. About half of the capital that they manage crystallizes vis-à-vis the incentive fee in June and the other half in December. And so you're not going to see any real activity in the first quarter or third quarter. But with Prisma, you're going to see it in the second quarter and fourth quarter. And as it relates to what we call KAM, there are a couple of funds that actually do pay an incentive fee, while one being the BDC called CCT. And for the most part, that has got an annual crystallization event. And so you'll see that in the fourth quarter. So long-winded answer, but for the most part, you're going to see it. Performance is there, higher incentive fees in the fourth quarter and some incentive fees in June because of Prisma. Last question on the, I guess, the choppiness of -- or lumpiness sometimes of expenses. You could see in Private Markets that the operating expenses were up quite considerably in the fourth quarter from the third quarter. We actually closed on a lot of investments, and we announced the closing of several investments in the first half of '14. But we also look at other investments, which were unsuccessful. And during the third quarter and fourth quarter, the dead deal expense that we actually recorded in the fourth quarter was abnormally high. You wouldn't see that number being the run rate number in the first quarter.

Operator

And our next question comes from the line of Michael Kim from Sandler O'Neill.

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

First, I know you talked about some of the near-term realization events to come. But just curious to get your take on how you see the trajectory of distributable earnings playing out beyond that, just given what seemed to be some building tailwinds for realizations around embedded gains, the level of AUM and cash carry, as well as sort of the maturity and liquidity of the underlying portfolio holdings.

Scott C. Nuttall

Thanks, Michael. It's Scott. I'll take a crack. It's hard to give you too much guidance on the trajectory of total distributable earnings overall, but maybe a couple of things to think about it. If you look at the portfolio -- well, step back. We've announced a few transactions that have not yet closed. And so Bill mentioned some of those on the call, SCUSA, KION, Oriental Brewery, a big one. And so there's some very specific math associated with those exits that we think will have closings in Q1, in Q2, that'll contribute to total distributable earnings, in particular, in cash carry and also in terms of balance sheet realized gains. And then you look at the portfolio in terms of the potential for monetizations after that. And if you look at the actual unrealized value in our private equity portfolio, it's give or take $39 billion. If you look through that, we have about, I think, 33% of that portfolio, including the Alliance Boots stake that is in public securities, and the other 2/3 is in private securities. So on the public side, as you know, we have several investments that we have just been continuing to sell down in the Public Markets, and so there's opportunities to monetize those positions on a continuous basis. Then you look at some of the Private Market investments that we have that are still private. And as I mentioned in the prepared remarks, we are seeing a pickup in strategic exit activity. And we've seen that over the last 1 to 2 years, and it continues to build. There's always the potential to have exits on that front as well. And then lastly, what I would say is if you kind of look more broadly at the firm in terms of the trajectory of total cash flow growth, we have a number of businesses that you know -- that we've seeded over the last 3 or 4 years, probably 8 to 10 first-time funds since 2010. And what we're encouraged by is the strong investment performance that we've seen in those first-time funds and the potential now to get to fund 2, fund 3, which means that we'll be able to generate more revenues without meaningfully more expense associated. And the balance sheet, happily, is invested alongside all those strategies. So as we start to have those portfolios mature, we'll see more cash flow coming up the balance sheet as well. So hopefully, that gives you a little bit of color. But we continue to see quite a bit of upside in the portfolios that we manage and our balance sheet as well.

William J. Janetschek

And this is Bill. Just one other thing to add. I mean, for the most part, Scott focused on the Private Markets side and where we might see realizations. But don't forget that on the Public Markets side, we've got now over $5 billion of committed capital, which, right now -- and remember, we only started investing in these committed structures a couple of years ago, but I mentioned earlier that we've got now $60 billion -- $60 million of embedded unrealized gains. As those strategies continue to mature, we're expecting to see realized cash carry coming from the Public Market side to help bolster the cash carry distribution that we anticipate making in 2014.

Scott C. Nuttall

Yes. And maybe just one addition for you, Michael, is if you step back pro forma for the closing of the Avoca transaction, we have about $85 billion of fee-paying AUM. That's now about evenly split between private equity and non-private equity. So to Bill's point about scaling the non-private equity businesses and their ability to generate more cash flow, we're starting to see that scaling happen.

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

Great, that's helpful. And then second, assuming more LPs increasingly gravitate towards more flexible multi-strategy solutions, just wondering how much of a competitive advantage do you think the bigger, more diversified franchises maintain? And then related to that, do you feel like firms need kind of fund-to-funds capabilities just to provide a more comprehensive and liquid solutions across asset classes?

Scott C. Nuttall

Well, on the first part of your question, I think there's clearly an advantage to being able to talk to a Chief Investment Officer or a broad investment staff about their broader investment portfolio goals and what they're trying to accomplish. It's clearly helped us win a number of mandates. And as you know, we track our cross-sell statistics. We continue to see more and more investors investing with us across asset classes. Several have started with us in non-private equity and now are investing in our private equity funds. So I do think that there's a clear advantage of being able to talk to them, give them asset allocation thoughts and advice across a number of asset classes. And we talked the past, as you know, about how much interest we're seeing in alternatives. So it's hard to quantify what that advantage means. But clearly, from our standpoint, part of the reason we're able to raise the $21 billion we raised last year organically was because of that ability to speak across asset classes. In terms of the question on fund-to-funds, look, as you know, we've been very happy with the addition of Prisma to the KKR family. It has allowed us to broaden that dialogue even further to more liquid alternatives, and the hedge fund market is a meaningful part of the liquid alternatives opportunity set, a big and growing market. I don't know that I'd characterize it as a have to have for people. That has certainly been quite helpful for us, to be able to giving a broader advice across a important and growing asset class to the people that trust us with capital or the prospects that they're thinking about it.

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

Got it, okay. And then just maybe one final one for Bill, just on the equity-based comp. Could you just talk about sort of the drivers behind the step-up in the those charges in '13 versus 2012? And then any color on how we should be thinking about that line going forward as it relates to sort of vesting schedules and further issuances?

William J. Janetschek

Sure. I mean, historically, we've always reported the noncash comp, but it was actually is a footnote on Page 7 now. It's shown in the total economics of the firm. And so when you think about where we've been as public company, in 2009 and 2010, we didn't issue any stock from the public plan. All issuances were from KKR Holdings, which was non-dilutive to public entity. Obviously, in order to compensate people, both with cash and stock, that stock is now being issued by the public company. And so to give you a rough percentage, the total number of shares that were issued as part of 2012 comp, which was reported in March of 2013 was a little under 2%. We've gone through the computation process in December, and those awards will be granted in the first quarter of '14. And so you won't actually see that in this coming 10-K, but you'll see it in the first quarter Q. And we expect that number to be roughly about the same. What that means as far as a comp charge is, obviously, the awards are long in nature. They're anywhere between 3 and 5 years. And as you take that, invest that over a certain period of time, you're going to continue to see that comp charge come through again as a noncash comp item. And keep in mind, that is not going to impact our distribution.

Operator

And our next question comes from the line of Brian Bedell from Deutsche Bank.

Brian Bedell - Deutsche Bank AG, Research Division

If we can just drill down on the credit market strategy in Europe. In particular, I know Avoca is closing soon. Maybe you can talk a little bit about the game plan for the fund-raising and investing with Avoca in the context of Europe, along with high yields and leverage loans strategies and also direct lending and mezzanine?

Scott C. Nuttall

Brian, it's Scott, happy to take that. Just in terms of -- just a rough outline, because Avoca is $8.4 billion or so of credit assets in Europe. Prior to closing the Avoca transaction, we're managing $3 billion or so of credit assets already at KKR. So pro forma, it will probably be somewhere between $11 billion and $12 billion in terms of assets under management focused on Europe -- European credit. And we continue to see a very exciting opportunity there over the course of the next several years. And so we really increased our headcount pro forma for the Avoca deal from 11 to better part of 80 people focused on the opportunity set, in addition to leveraging our Private Markets colleagues. So we're excited about the opportunity. From a fund-raising standpoint, I think it's on several different fronts. One, you have the legacy kind of Avoca businesses around European leverage loans in CLO format and separate account format, potentially co-mingled fund format. So we'll continue to see growth in those businesses. Avoca also has a Europe-focused credit long/short hedge fund will -- where that will also be a focus for fund-raising on a go-forward basis. And we see opportunities to scale what they're doing before making them part of the KKR infrastructure. But another exciting opportunity that we see is to marry the more liquid Avoca capabilities with our illiquid credit capabilities in Europe. And our team in Europe today is really focused on special sits and mezzanine and starting to focus on direct lending. And really, by adding Avoca to the platform in Europe, we're able to have a footprint that looks like our footprint in the U.S., where we have liquid and illiquid teams sitting side by side and teams really working on both. And so Avoca today and their database is tracking 1,300 European credits, and we're already starting to capture some synergy of idea sharing and approaching companies together that may be in need of help. So illiquid opportunity, a company that gets into a little bit of trouble can turn into an illiquid special situations investment opportunity. And we're able to now kind of create that bridge where we couldn't before. What that means from a fund-raising standpoint and implications is that there's an opportunity for us to raise private credit funds focused on Europe, special sits, mezzanine, direct lending, and we're seeing potential opportunities across all those fronts. And parenthetically, I would say institutional investors are quite interested in the opportunity set as they see how much incremental return we're able to get to do private lending in Europe as the banks are pulling back. So this -- the Avoca transaction for us is highly strategic and gives us a bigger footprint and more capabilities at the time where we think there's going to be a very interesting period for investment the next several years there.

Brian Bedell - Deutsche Bank AG, Research Division

It's fair to say it's early innings in the long-term opportunity over, say, next 2 to 3 years is the stronger than it is here in the U.S. on that front.

Scott C. Nuttall

Yes. I would -- I agree with that. I think it is relatively early innings, and we haven't even closed the Avoca deal yet, so very early innings. But if you look even at the deployment, we have the gross deployment we had in our originated credit strategy last year was $4.2 billion, up 2.5x from the prior year. And that's, frankly, without Europe yet firing on all cylinders. I think Avoca will take those numbers up meaningfully. So we're excited about it.

Brian Bedell - Deutsche Bank AG, Research Division

All right, great. And just a comment on emerging markets, given the recent sell off, I think, in the third quarter. You were talking about accelerating the pace there, looking for IRRs over 20%, I guess. How do you feel about that now? Does -- providing even -- the market sell off providing even a better opportunity?

Scott C. Nuttall

Yes. I'd say, really, 2 comments on that. First, as it pertains to Asia, we are seeing more opportunities, good buying opportunities for private equity and special sits as a result of the valuation pullback. And some of the deals that we've been doing in Asia have really been as a result of this meaningful downdraft. We mentioned the higher investment we made in China, as an example, is a good example of that. So the volatility creates opportunities for us, which is great. And then the other thing I would point to is market like Brazil in South America. We've had an office in São Paulo for over a year, and we've been waiting for volatility to make valuations more attractive. And so I think it will be a net positive for us. If this volatility continues, there'll be some interesting things to do. So yes, we do view it as a net positive for our business.

Operator

Our next question comes from the line of Matt Kelley from Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

First, I want to come back to the monetization realization front. Commentary I'm hearing in -- from you guys seems to support this with the strategic commentary you made. But with the markets kind of weak this quarter but the exit market seemingly still open, and granted, it's very early in the year, just curious from your perspective and the strategic talk that you're hearing, how is your kind of inclination towards selling in this market changed thus far this year and how has the strategic talk changed thus far this year?

Scott C. Nuttall

Matt, it's Scott. I would tell you that it's been a very short period of time. So I think it is far too early to be able to tell you if there's any long-term implications from the recent market volatility. But I do think that while some investors are very anxious about what happened in January, we stepped back and we say, "Okay, since the beginning of last year, the total return in the S&P has been 26%." So yes, January wasn't a lot of fun. But overall, it's actually been a pretty good run, maybe multiples got a bit ahead of themselves. And we're starting to see a little bit of a pullback. But the long and the short of this, we have not seen any immediate impact on the monetization environment or kind of things that we've got going on inside the portfolio. So nothing that I'd point you to there in terms of any increased anxiety. We'll see how it plays out through the year. But the bigger opportunity for us, frankly, is CEOs gaining confidence around the economy, what they're seeing. And they start to be more aggressive with their own capital structures and what they want to do in the acquisition front. We still think through the noise, it's going to be a good time for strategic exits relative to the last 5 years.

Matthew Kelley - Morgan Stanley, Research Division

Okay, great. And then one more for you guys on Prisma and Nephila. I'm sorry for coming back to this again. But anything you can give us on -- and maybe we have to wait for the 10-K, but on AUM for you, that the strategy is percent above high watermark or how they performed or anything like that, that you can kind of help us quantify? I know you gave the Nephila disclosure for the quarter. But in terms of sizing, how big the assets are and that sort of thing would be helpful.

Scott C. Nuttall

Sure. Scott, again, Matt. I'd say on Prisma, in terms of what we can share, AUM finished the year over $10 billion. Nephila, coincidentally, finished the year a bit over $10 billion. So good growth in both. Both had very strong incentive fee quarters and years. And so overall -- frankly, both are well ahead of our expectations in terms of your first year financial results. So the performance has been strong. Virtually all the assets across the strategies are above the high watermarks, off to a great start.

Matthew Kelley - Morgan Stanley, Research Division

Okay, great. And then the last one for me. In terms of your platform build-out, obviously, 2013 was a very impressive year from that standpoint, built a lot of strategies. But I'd be curious, you said you had about 700 LPs now. Are there any cross-selling metrics you can share and how that changed year-over-year? And as you think about that going forward, what do you feel like are the most obvious pieces that you could add still to your platform that you don't have?

Scott C. Nuttall

Yes, sure. On -- let me take cross-sell first. So we ended the year with 693 clients. Now what that does is we don't look through the platforms. So when we sell through a bank platform and they have high net worth investors in there, that does not include that number. So this is -- think of this as institutions in direct high net worth are nearly 700. We are now averaging 1.6 products per client. And if you think about it, you have a tension in that number. So it's been kind of 1.6, 1.7. 1.6. When you add an investor, you tend to add them with one product. And so despite the downward pressure as a result of increasing our number of clients by 23%, we ended the year about 1.6 products per client. Just to give you a sense, our largest 35 clients averaged about 3.5 products. So we think there's meaningful upside opportunity because we have a lot of clients in one product and several in 2 or 3 or more. And so we see a lot of upside to that cross-sell number. And in terms of the platform build-out question, Matt, I'd say it's a few different things. One, we've got the opportunity for geographic expansion across a number of the businesses that we built. As you know, a lot of the businesses we started, we started in North America and we are now moving those to Europe, Asia, South America. So there's an opportunity from a geographic build-out standpoint, and we think that's meaningful. And we talked about South America. We're looking at credit opportunities in Asia. We've talked about European credit is just some examples. But the same thing is true across real estate, energy, hedge funds. So we see meaningful opportunity to expand, both in the U.S. and outside the U.S. In addition, the platform build-out, frankly, will be most driven economically by going from fund 1 to fund 2, 3 and 4 and starting to generate not only fees but carry as those portfolios start to perform. And in the more public side businesses, those incentive fees begin to get earned. So in terms of kind of do we see another big leg to the stool, there's nothing that we've got in our sights. But if you look at what we have today, private equity, energy, real estate, credit, hedge funds, capital markets, there's a lot to do across all those different asset classes. And just as a reminder, you have a private equity. It's a $1 trillion industry. If you add up everything else that we're looking at, it's probably $5 trillion or $6 trillion. And our market share, although there are AUMs up to $40 billion to $45 billion pro forma, our market share is quite small relative to the opportunity sets. We've got a lot of runway.

William J. Janetschek

The other thing I'd add on that, which is interesting, when you look at the specific stats on some of the fundraises, so it again shows that the strength we're having in terms of bringing new LPs. Looking at my number of LPs in Asia II, roughly 45% of those were new investors to us. When we look at NAXI, again, similar by number of LPs. That number again is about 40% by number. And by some of our newer funds, like special sits, again, by number of LPs, that number is actually over half. So in terms of growing and focusing on the LP base, we feel we've made quite a bit of progress this year.

Operator

And our next question comes from the line of Chris Harris from Wells Fargo Securities.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

So question on deals and kind of deal pace. You guys are starting to accelerate things a little bit here. And I'm just kind of curious to get your thoughts. As you guys kind of the look at the deals you're doing today and maybe compare that to deals you did in the '05, '07 timeframe, what would you guys say would be the main differences between those 2 periods of time? And I think what would be helpful is if you could perhaps frame it up from a valuation perspective or if there's any other kind of differences in the way the transactions are structured, that would be great.

Scott C. Nuttall

Sure, Chris. It's Scott. I'd say today's deals versus '05 to '07, the first thing that comes to mind in terms of big difference is it's much more of a global opportunity set. So remember, we went to Asia and started to build our business there in '06. And if you look -- so in that period of time, there really was not much of anything in terms of the deal opportunity in Asia because we were just starting to build business. But if you actually look at, as an example, I mentioned $2.5 billion of deals we've announced but not yet closed, over $1 billion of that $2.5 billion is in Asia. You'd also see much more opportunity in Europe. Of that $2.5 billion, $800 million of it is in Europe. So there's a meaningful amount of the answer that's, frankly, just related to the vivality [ph] of the opportunity set now and the types of transactions we're seeing relative to where we were in the period of time you referenced. So that's number one. Number two, the types of transactions are different. Obviously, in Asia, we're not doing a lot of buyouts. We're doing some, but a significant amount of the opportunities set there is more growth equity. It is providing companies with capital, giving them operational and capital markets expertise. And that's something that we see is -- it's an interesting way to invest in that part of the world and, frankly, the best way to invest in that part of the world. So you'd see transaction structures a bit different. The third thing that I would point you to is just some math-related things. There's less leverage than you would've seen during the peak times, and we've seen leverage creep back up from the kind of deep parts -- the low parts of the cycle. But we've got less leverage now than in the deals that were done in that period of time. There's more of an operational focus. We've continued to build our KKR Capstone efforts globally. So we're bringing more operational intensity to the businesses that we're investing in. There's more macro analysis. We just made an investment -- our first investment in Serbia. Our macro team, the KKR Global Institute was highly involved to make sure that we understood that market. That is a new way that we look at transactions, and we're investing in different parts of the world with that focus. So there's a lot of different differences from where we were. And depending on the part of the '05 to '07 period you're talking about is size. Size of the transactions are smaller than some of the deals that were done back then. Multiples, probably on average or lower. And the other thing I would say is we're doing more control deals, not from the standpoint of control of the company but from the standpoint of when we speak for equity in a transaction, we're speaking for all of it and we're syndicating out the excess to our limited partners and others. So that's another thing that's changed as opposed to club deals. We're controlling more of them ourselves. And finally -- sorry, there's a long list, so lots of change. By building these other parts of the firm, we have actually -- and creating culture where everybody kind of helps each other and everybody gets paid off one P&L. We've got more people in KKR sourcing for different parts of KKR. So if we're talking to a company on the credit side, there's nothing to do there but to buy out opportunity. We've got the credit team sourcing for private equity teams and vice versa. And so there's more ideas coming into the place. It's just by virtue of having more people out talking to companies around the world. I'll stop with that.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Scott, it sounds like you may have been asked that question once or 2 before. Real quick numbers question for Bill. I know we're running long. But, Bill, when I look at your results, just kind of holistically, this year was a record year in many respects, yet the taxes you guys paid from a GAAP perspective are the lowest they've been since the IPO. So I'm sure there's a good explanation for that, but can you maybe kind of help us understand the puts and takes along with that?

William J. Janetschek

Sure. And to say it's complicated would be an understatement, so let me start there. But remember, when we originally did the transaction with back end mergers of KPE, approximately 30% of the assets on our balance sheet were actually held through the corporate blocker. As we've monetized those investments, we've moved away from putting those assets back on, what I would say, the management company side and being subject to tax and taking those proceeds and actually investing them on the flow-through side of our public structure. So over time, the amount of tax that we actually paid, all things being equal, has gone down considerably since we've gone public. In addition, as we're making new investments and an investment overseas, like in Nephila, we structure that so that income is actually going directly to our unitholders and not actually going through a corporate blocker. And so by doing that, obviously, we're minimizing tax. Plus there are other reductions as far as the typical fee-related earnings. As we've made investments in Prisma and Nephila, we get to amortize intangibles for taxes. And so that number is actually coming down. So there's a lot of to's and fro's on trying to figure out exactly what the run rate tax number is going to be. But I assure you that when you take a look at 2012 to 2013, that the number has actually come down. I would say that it would probably, if I look at '14, be somewhere in the range of 2012, 2013. But take into account that another big driver of that is going to be what our fee income is. So a long-winded answer on that, and I don't know if that was as clarifying point as you were hoping to receive. But the short answer is the taxes are actually lower for a couple of good reasons.

Operator

And our next question comes from the line of Patrick Davitt from Autonomous.

M. Patrick Davitt - Autonomous Research LLP

Another question on Avoca. How should we think about that coming in relative to the current kind of weighted average fee rate in Public Markets margin, if the margin is similar to what's already happening in Public Markets? And thirdly, how much LP overlap is there between Avoca and your current business?

Scott C. Nuttall

Patrick, this is Scott. So let met just take it maybe in reverse order. LP overlap, virtually none. So think of it as very similar to Prisma in terms of most of it is just net adds in terms of the LP base of the firm. Hopefully, some cross-selling opportunity there for us. If you look at the average fee rate for Avoca, given its focus predominately on liquid credit, CLOs, some hedge fund assets, their -- actually, their fee rate on a blended basis has been increasing over the course of the last couple of years. But relative to our embedded fee rate, it's going to be lower on average because CLOs tend to be a 50-basis-point kind of business. And in terms of margin, it's going to be reasonably consistent with the business we have today.

M. Patrick Davitt - Autonomous Research LLP

And how many LPs do they have?

Scott C. Nuttall

Depends on how you count it in terms of whether you look through the CLOs. Give or take, call it between 50 and 100.

M. Patrick Davitt - Autonomous Research LLP

Okay. And on the distribution guidance you gave, nice detail on the Oriental Brewery detail. Could you give us a similar detail on the U.S. Foods sale? And if you're not comfortable doing that, is it of a similar magnitude, or can we kind of expect it to be a similar magnitude as that sale?

William J. Janetschek

I'd much rather not comment on that as it relates to the distribution. Because remember, that transaction is going to be part cash and part stock. And we are going to be owners of Sysco. And so I'm not going to even try to predict the timing of that.

Operator

And that concludes our question-and-answer session for today. I would like to turn the conference back over to management for any concluding remark.

Craig Larson

Thanks, Karen [ph], and thank you, everyone, on the line for your interest. Naturally, please follow-up with me or with Sarah should you have any follow-up questions. Thanks, again.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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