KKR & Co. Inc. (NYSE:KKR) Q4 2023 Earnings Call Transcript
KKR & Co. Inc. (NYSE:KKR) Q4 2023 Earnings Call Transcript February 6, 2024
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Operator: Ladies and gentlemen, thank you for standing by. Welcome to KKR's Fourth Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the management's prepared remarks, the conference will be opened for questions [Operator Instructions]. Please note this conference is being recorded. I'll now turn the call over to Craig Larson, Partner, Head of Investor Relations for KKR. Craig, please go ahead.
Craig Larson: Thank you, operator. Good morning, everyone. Welcome to our fourth quarter 2023 earnings call. This morning, as usual, I'm joined by Rob Lewin, our Chief Financial Officer; and Scott Nuttall, our co-Chief Executive Officer. 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, which is available on the Investor Center section at kkr.com. And as a reminder, we report our segment numbers on an adjusted share basis. This call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our earnings release as well as our SEC filings for cautionary factors about these statements. And as a reminder, our earnings release in our financial reporting for Q4 is consistent with past quarters beginning in Q1 of 2024, our earnings release will reflect the segment and financial metric changes we announced on November the 29th.
Turning now to our numbers for the quarter, we're pleased to be reporting strong fourth quarter results with fee-related earnings per share of $0.76. This is a record figure for KKR up 21% from Q3 2023 as well as Q4 of 2022. After tax distributable earnings came in at $1 per share. New capital raised in the quarter was $31 billion, which is also particularly strong. So overall, a really solid quarter for us. I'll begin this morning by walking through our financials in a little more detail. So management fees in the quarter are 785 million. That's up 3.4% compared to just last quarter, with growth across all of our business lines. And comparing full year '23 to 2022, management fees grew 14%. We reported double-digit percentage annual growth in our management fees for several consecutive years now.
Net transaction and monitoring fees were 264 million in the quarter. Capital markets transaction fees in particular were quite strong in Q4 with 225 million in revenue that was driven by an increase in investment activity and financing transactions at several of our PE and core PE portfolio companies. So in total, fee-related revenues for the quarter were 1.1 billion, up 17% on a year-over-year basis compared to Q4 of 2022. Turning to expenses. Fee-related compensation, as usual was at the midpoint of our guided range at 22.5 a fee-related revenues for the quarter as well as for the year. Other operating expenses were 156 million. So in total, fee-related earnings were 675 million or $0.76 per share. As I mentioned just a moment ago, this was a record FRE quarter for us.
And this growth really highlights in our view the continued strength as well as the diversification that you're seeing across the firm. Our FRE margin in the quarter came in at 63% and on a per share basis FRE was $2.68 for the year. Turning now to realization activity. For the quarter, we generated 411 million a realized performance income. This was driven by multiple successful sales across our traditional private equity and core businesses, with realized incentive fees driven by Marshall Wace in the fourth quarter. Realized investment income in the quarter was 147 million. So together monetizations were 558 million. In total asset management operating earnings were 970 million. Moving to our insurance segment, performance continued to be strong in the quarter with 231 million of pre tax earnings that's up 10% quarter-over-quarter.
This was the result of stronger net inflows across both the institutional and individual channels, as well as variable investment income from the sale of a solar developer that generated 16 million of insurance segment pre tax operating earnings. So in total, after tax PE was 888 million or $1 per share. In comparison with the prior quarter, that figure was up 14%. Next, turning to investment performance, you can see this on page seven of the earnings release. The private equity portfolio appreciated 3% in the quarter and 16% in the year. In real assets, the opportunistic real estate portfolio was down one in the quarter and down two for the year. Infrastructure was up 5% in the quarter and up 18% for the year. So very strong broad performance across our infrastructure platforms.
And in credit, the leverage credit composite was up three and the alternative credit composite was up 2%. And over the year performance year was up 14% and 10% respectively. And finally, consistent with our historical practice, we are intending to increase our annual dividend from $0.66 to $0.70 per share, which we anticipate will go into effect alongside first quarter 2024 earnings. And with that, I'm pleased to turn the call over to Rob.
Rob Lewin: Thanks a lot, Craig. And good morning, everyone. First looking at our key operating metrics. New capital raised totaled 31 billion for the quarter. These results are quite strong and encouraging for us as we head into 2024. Credit and liquid strategies made up about two thirds of the capital we raised this quarter. As our business has grown with Global Atlantic as a significant partner. GA in particular had record inflows in the quarter, both overall and specifically from the individual channel. So activity here continues to be very strong. Block activity at GA is also active. As you know the MetLife block closed in the quarter and the Manulife block transactions is expected to close sometime in the first half of 2024.
And similar to prior blocks, GA continues to be very capital efficient here, contributing approximately 25% of the equity in both transactions with 75% of the capital coming from IV vehicles and additional CO investors. So 75% from third parties where we can earn management fees and have the opportunity for performance income as well. Over the past year, new capital raised totaled right around 70 billion. And looking post 12/31, we just announced the final closing in Asia Infrastructure 2 at approximately 6.4 billion over 65% larger than the previous fund. Of note, more than half of the capital came from new investors to the Asia Infrastructure platform. With this successful fundraise, we are clearly the largest infrastructure fund in the region, enhancing our Asia positioning more broadly.
And as we look out over the next 12 months and into 2025, a number of our flagship funds will be raising capital as well. So we continue to expect an acceleration our fundraising from here. Turning to capital invested, we deployed 16 billion in the quarter and 44 billion for the year. Capital invested was really diversified across private equity, real assets and credit and liquid strategies in the year, as U.S. private equity and core private equity deployment rebounded in the quarter. Of particular note, we made investments in three big private transactions in Q4. And with almost 100 billion of uncalled capital, we continue to be well positioned for the deployment opportunities that are ahead. I wanted to briefly shift now to a reflection on our progress through the course of 2023.
Our assets under management now total 553 billion that's up 10% compared to the end of 2022. With sizable capital raised in the past year, fee paying AUM now stands at almost 450 billion. Given our consistent growth in fee paying AUM, management fees increased 14% in 2023, with line of sight of future growth from approximately 40 billion of committed capital that becomes fee paying asset invested or when it enters its investment period. And that's at a weighted average rate of just over 90 basis points. And while realized performance and investment income was more muted in 2023, given the environment, our forward visibility has increased meaningfully year-over-year. Total embedded gains were 12.3 billion at year end that reflects embedded gains on our balance sheet plus gross unrealized carried interest.
This was up almost 40% compared to Q4 of 2022. The opportunity for future investing revenue remains robust. And strategically, we made a lot of progress in 2023. As you likely know, we announced 40 initiatives towards the end of November. As an update, on January 2, we closed on our acquisition of the remaining stake in Global Atlantic for approximately 2.6 billion in cash. We believe this acquisition will create more value for policyholders and shareholders and are excited to unlock future potential together. Concurrent with the closing of GA, we have created a new strategic holding segment, which you will see in our Q1 2024 earnings release. Here the segment operating earnings will be driven by cash dividends from our core PE portfolio. We also revised their compensation ratios, which similarly will be reflected in our Q1 financials, delivering more FRE to our shareholders, and driving even more alignment between our compensation model and the outcomes of our clients.
Combining these aspects, we will be introducing a new reporting framework that will better highlight our business model. This will include a new financial metric, total operating earnings, which represents our more recurring forms of income. Prior to our next earnings call, we will provide recap financials to help you further understand the various key metrics. As a reminder, we do expect these announcements to be accretive to all of our per share metrics. And together with the competence and current visibility we have, it is what allowed us to increase our 2026 FRE per share target to $4.50 plus cents per share. In 2023, we generate $2.68 per share of FRE. So our expectation is for a lot of growth from here. Given these four announcements paired with the existing growth engines we have, we believe that we are well set up to drive meaningful scale.
The opportunities we have across asset management, insurance and strategic holdings are multi-fold. Turning first to our asset management business. There remains a lot of upside here with multiple drivers of growth. We have a lot of younger strategies that are just beginning to scale. We started 25 or so investing businesses through the past decade alone, and many are now starting to inflect. We are an asset classes and geographies with massive end markets, Asia, infrastructure, including climate and credit are all great examples. And as a reminder, we only want to be competing in areas with large addressable markets and where we have conviction that we can be a top three player. We are in the early days of tapping into the private wealth end market.
We've had early success in our case theory suite of products with the tremendous amount of opportunity that is still in front of us. With these growth avenues, along with our strong track record count, and the trust that we've built with our clients, we feel that we could double our asset management business from here. And that's without starting anything new. Second, we have a meaningful opportunity in insurance with our partnership with Global Atlantic. Insurance is a very powerful contributor to our business. GA has already created a lot of value, going from 72 billion of assets under management at our announcement of the initial transaction in July of 2020 to over 170 billion of assets under management today, including the pending Manulife block deal.
We have a strong opportunity to unlock even more value together in investing, product development, global expansion, private wealth distribution and capital markets. And we are still in the very early stages of our partnership. And finally, number three, strategic holdings, where our opportunity is highly differentiated. This segment leverages all of our people, capabilities and our collaborative culture. As a result, we are uniquely positioned to capitalize on what we believe is a huge addressable market. And that's in addition to the current visibility we already have to drive net dividends in this segment of $300-plus million by 2026 and $600-plus million by 2028. In summary, we are incredibly well positioned as a firm. And we really don't think there are many companies in our industry or others that have the type of visibility that we have for long-term growth.
We have a high level of confidence that we can meaningfully grow all 3 of our business segments; asset management, insurance and strategic holdings. With that, we are excited to announce we are going to host an Investor Day in New York on April 10. Given the November strategic announcements and all of the opportunities across our firm, we thought it would be timely for you to hear directly from our senior leaders. We will provide additional detail in the coming months, and hope that you will join our broader team as we discuss our outlook and these opportunities. With that, Scott, Craig and I are happy to take your questions.
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