Q4 2023 Earnings Summary
- KKR's Infrastructure platform has experienced significant organic growth, expanding from $17 billion to $60 billion in AUM over three years, with strong performance exceeding targets, particularly in Asia.
- KKR expects significant growth in their insurance business through Global Atlantic, aiming to increase individual annuity production from $10 billion to $15–$20 billion and expanding institutional channels, including flow reinsurance and pension risk transfer.
- KKR is expanding into the private wealth channel, with their K Series products gaining traction and expectations for significant long-term growth potential, supported by increasing allocations from mass affluent investors.
- Declining interest rates may pressure earnings in KKR's insurance platform. As Robert Lewin noted, lower interest rates could reduce Global Atlantic's P&L due to decreased variable investment income, which may not be replicable in future periods.
- KKR's capital markets business relies on favorable market conditions that may not persist. The firm acknowledged that strong performance in Q4 was aided by market improvements in November and December, but capital markets activity remains muted compared to prior healthy levels, suggesting future revenues are uncertain.
- Changes in compensation structure and new financial metrics could obscure underlying performance. KKR is moving compensation from fees to carried interest and introducing new metrics like total operating earnings, making it more challenging to assess earnings stability and increasing potential earnings volatility.
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Flagship Fundraising and FRE Outlook
Q: What's the timing for flagship fundraises and FRE impact?
A: Management plans to actively fundraise for their infrastructure strategy and expects to launch fundraising for the Americas private equity strategy later this year, with Asia likely in 2025. In 2022 and 2023, they raised around $150 billion of new capital, but only $6 billion came from flagships. They anticipate this will change in 2024 and 2025. Fee-Related Earnings (FRE) per share are currently $2.68 and are expected to exceed $4.50 in three years, driven by management fee growth and contributions from flagships. -
Wealth Channel Expansion
Q: How will wealth initiatives contribute over time?
A: As of December 31, around $75 billion of AUM is from individuals, primarily high-net-worth investors. They recently introduced the K Series suite of products designed for wealth investors, with assets growing from $2.4 billion a year ago to $6.5 billion now. They're raising about $500 million a month with these products and expect an acceleration in platforms in the first half of 2024. While their 2026 targets didn't include much from private wealth, they now see contributions growing over the next few years, with a material impact expected post-2026. -
Asset-Based Finance Opportunities
Q: How is KKR positioning in asset-based finance growth?
A: KKR has around $90 billion in private credit AUM, with nearly $50 billion in asset-based finance (ABF) and $38 billion in direct lending. As banks pull back from certain lending areas, KKR sees expanding opportunities in ABF. They've recently announced several transactions, including a partnership with BMO on a $7 billion RV loan portfolio and acquisitions of auto loan portfolios. The asset-backed securities market is growing toward $7 trillion, and KKR expects significant growth ahead, with over 20 origination platforms in ABF.
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