KKR & Co's (KKR) Management Presents at Bernstein Strategic Decisions Conference 2020 (Transcript)
by SA Transcripts, https://seekingalpha.com/author/sa-transcriptsKKR & Co. Inc. (NYSE:KKR) Bernstein Strategic Decisions Conference 2020 Call May 28, 2020 3:00 PM ET
Company Participants
Scott Nuttall – Co-President and Co-Chief Operating Officer
Conference Call Participants
Patrick Davitt – Autonomous
Patrick Davitt
Hey, good afternoon, everyone. Thanks for joining our last asset manager conversation of the day. Before we get started, quickly I wanted to remind you that we’re using an interactive Q&A on Pigeonhole. There should be a link on the left side of your screen to access Pigeonhole. It’ll open in a separate browser from this video stream. And then you can submit your own questions in the box at the top or vote on questions that have already been submitted by pressing the up triangle next to any questions. So please go ahead and click on that link now and begin submitting your questions for Scott. Also after the show, please fill out the Procenses poll in the conference website to get a better view of how your fellow investors are viewing KKR stock.
So to get started, for those of you that don’t know me, I’m Patrick Davitt, the asset manager analyst at Autonomous. And I am thrilled to welcome KKR’s Co-President and Co-Chief Operating Officer, Scott Nuttall, who’s widely considered to be on the very short list to take over as CEO one day. So to get started, Scott would like to go through a few slides and then we’ll get into the fireside chat.
So Scott, with that I’ll throw it over to you.
Scott Nuttall
Thank you, Patrick. Hello, everybody. Thanks for joining today and spending some time talking about KKR with us. Hope everybody and your ones are healthy and safe. I thought maybe what we do today is just kickoff, give a little bit of background. I understand several of you have more of a generalist, maybe less financial services focused effort. And so we thought it might be helpful just to set the stage. So I’ll hit a few slides.
But starting on the Slide 2 for a second, this is the high level. We are an alternative asset manager. We focused exclusively in alternatives in terms of the assets that we manage for third-parties, a little over $200 billion. As we’ll talk about there are other aspects of our business model that are a little different. We have a capital markets business, so I’ll explain what that is and how it works. And then we also have a balance sheet. So we’re a large investor in everything that we do. We also use that balance sheet, which is about $14 billion of book value to make strategic acquisitions and accelerate our growth.
On the right hand side of the slide, you can see this story has been evolving. We used to be a publicly traded partnership. We were early in converting to a C-Corp. Our shareholder base has broadened as a result of that. We’ve been more active than others in repurchasing our shares. And we are also very early in fixing our annual dividend at a fixed level.
If you go to Page 3, you can see really the story of the growth of our AUM. You can see up into the right about a 17% CAGR since 2005. And you can see on the far right hand side of the slide, nice diversity between private markets and public markets and that diversity continues to increase as we feel that our businesses around the world.
If you go to Slide 4, what you’ll see is that we are very global firm. You can see we’re now 20 offices around the world. And nearly half of our investment professionals are outside the United States. And eight of our 20 offices are actually in Asia. So 40% of our office footprint is in Asia. And we have a lot of insight in terms of what’s happening in that part of where the specialties, we see some of those countries recover from COVID, which I’m sure we’ll talk about a bit later.
If you keep going in the deck, one of the other things that’s a bit different about us and I’m going to highlight a few things. Asia would be one in terms of how much activity we have in that part of the world. The second would be how many of our businesses have significant growth opportunities ahead. I mean, we have 23 investing businesses at KKR. They’re listed on this slide. Only six of the 23 are over 10 years-old, 10 or five years old or less. And our business it takes 10 plus years to get to scale. It just takes time. Fund one, fund two, fund three.
By the time you get to fund three, you’re better part of a decade in and you’re starting to generate carry from funds one and two. So as we look at the opportunity we have ahead, we think there’s a significant amount of growth ahead of us at KKR. And so that’s one thing that’s a bit different about us. Our private equity business the U.S. PE you can see on the slide, we’ve been in that for 44 years, everything else, much less than that. And most of our business is less than 10 years.
If you flip the side again, Page 6, you can see that we see a lot of opportunity to become a leader in these spaces. We have made a strategic decision that we only want to be in businesses where we can be in the top three in the world. And you can see, if you look at this slide, what that means, we just can benchmark where we are today relative to where the leader is. And everywhere we look we have an opportunity to at least double if not grow 10x to 20x as these businesses mature and go global. So significant growth opportunity for us across the firm.
On Page 7, we talk about the next thing that’s a bit different about us. One is, that we have our balance sheet. And our balance sheet does make us a bit different. We view it as providing stability and an engine for growth. And what we’ve done in this slide is we’ve listed six things that we do with the balance sheet. One, we capture our own investment performance. You can see at the bottom of this slide how our book value has compounded, especially after we moved to a more fixed distribution policy at the end of 2015.
We use the balance sheet to seed new businesses. It allows us to grow our AUM and management fees and fee related earnings much faster. It supports our capital markets business, we use it for acquisitions, we use it to buyback our own stock. And one of the things it does is it accelerates the capital that we raised from third-parties, because we are very aligned with our LP’s more than anybody else that does what we do, we’re the largest investor in everything that we do at KKR. And so you can see this balance sheet have $14 billion of cash and investments. It compares to $12 billion for three other large publicly traded alternative asset managers combined. And so it is something that is a bit different about us and it provides a lot of stability and we think is a real strategic tool, especially at times like this.
The other part of our business model that’s a bit different is on Page 8. This is our capital markets business. Now this business was started in 2007. You can see, what the growth of the business has looked like. And really the way it was started was to be able to allow us to access equity and debt directly from third-parties. And so it was particularly powerful. And you can see it really started around the time of the crisis itself. We were able to get transactions done, because we could speak for the debt ourselves and actually place it with third-parties directly.
And then that business has continued to expand. So it started as equity syndication, now it’s equity and debt. It started as just KKR clients and now we have third-party clients involved. And it’s a big part of the business. We’re actually doing this for third-party sponsors and corporates. And so what we do is we run this on a capital light basis so we don’t make markets, but what we do is it allows us to actually speak for more equity in the transaction. And then we have ball control, so we can syndicate that equity over and above that which we’re going to hold to third parties. Oftentimes we create economics for ourselves by doing that. And it shows that you can see this on the slide. And it’s important to understand that these revenues, both from capital markets and our balance sheet do not actually show up in our AUM. And you can see the increasing activity of that business at the bottom of the slides.
So when we think about the building blocks for growth on Page 9, really there’s several elements that we’ve got going on simultaneously. And we’ve got the flagship strategies which are continuing to perform nicely. We have all this growth opportunity ahead that I mentioned in terms of these newer strategies where we see a lot of runway, we’re building out global adjacencies. For example, in Asia we started with private equity, we’re now bringing real estate, infrastructure, credit and our growth tech business all to Asia as well, all raising new funds for Asia specifically. Then you add in our balance sheet compounding and our capital markets business, which allows us to capture more of everything that we’re doing in the firm. So you put all that together, you’ve got a real multiplier effect in terms of how we can grow KKR from here.
I also wanted to hit quickly on a few things that we’ve been hearing, just questions that we’ve been getting from investors over the course of the last two, three months. And just share with you how we see things. So one of the questions we get is what about management fees? Aren’t those at risk and more volatile markets? And if you go to Slide 12, you can see part of the answer to that question. It’s important to understand one thing that’s a bit different about our business and true most alternative asset managers is we get paid management fees based on committed capital or the amount of invested capital. We tend not to get paid on mark-to-market. And so what that means is we’re raising additional capital, our management fees can scale with that capital as it grows. So if there’s temporary markdowns, it largely does not impact our management fee line. So you can see this little chart that takes you back to 2004 and you see 19% annual growth over that period.
If you flip the slide again to Slide 13, you can see this – really we drill down on the global financial crisis to make the point. And if you look at the right hand side of the slide, you can see what I’m talking about. So we grew from 2006 to 2007 15%, but if you go from 2007 to 2008, our management fees grew 56% and that’s because we raised our Asia private equity fund. It turned on, again committed capital, not mark-to-market capital. And in 2009 we grew again. So we’ve been growing consistently since inception as a result of that dynamic.
And if you turn the Slide 14 you can see on the right hand side here kind of how this compares to some of the traditional asset managers. So we understand the question, but our business is quite a bit different than traditional asset managers. So this right hand side of the slide just shows you in the first quarter of 2020 relative to Q4 2019, you can see, we were up 5% sequentially in management fees and we just picked traditional asset managers, market caps over $3 billion. You can see anywhere from down 1% to down 10% sequentially, quarter-over-quarter, because they tend to have more of a mark-to-market model. So management fees have been up into the right and very stable.
The next question we’ve been getting has been around deployment. Can you deploy capital given the volatility in the markets? And if you go to Slide 16, you can see the answer to that. We just captured this relative to February 21, which is where we mark the beginning of the volatility that we were seeing in the markets. So you can see $13 billion invested or committed since that date, relatively even split between credit and equity. And it’s evolved, if you go to the right hand side and started with dislocated credit and equity and we had built by lists and what we found interesting in the market and the target prices, number of things hit those targets during the early days of the crisis. And then number those of opportunities went away from us.
So the opportunity that involves providing liquidity for companies in need and now we’re even more active today with our portfolio companies pursuing acquisitions and talking to a number of companies that are trying to sell non-core subsidiaries. Oftentimes taking the proceeds themselves to either delever or buyback their stock because they think it’s exceedingly cheap. So we’ve been quite active on the deployment front and our pipelines are quite full, especially in Asia and Europe.
If you go to the next question we get on 17 it’s about performance. Not trying to get ahead of your questions Patrick, but just trying to recognize, I’m sure these things were on people’s minds. How do you perform when markets are not performing well in particular, we get the question around private equity. So I included here, this Slide 18. This goes back to 1984. And the story would be the same if you went back to 1976. So you can see we are the darker of the bars. And what we did here is we just put the returns of the S&P 500 over the same period of time, dollar matched, dollars in and out of the ground. In terms of how we performed relative to if you just invested those dollars in the S&P 500. And so you can see, since the inception, 25.6% S&P of 11.5% and you can see all but two of those funds have outperformed over the last three decades, often meaningfully.
And if you go to Slide 19 to more directly hit the point about, well, what about what you do during a crisis like this or doing a period of time like this. Again, we just looked at deals we did in 2009 and 2010 in private equity just to carve out the performance of those. And the short answer is they tend to have stronger performance than our historical averages. So we put $3.9 billion to work in 2009 and 2010, 17 different private equity deals. That $3.9 billion turned into $11.4 billion. So you can see about a 33% return versus 11% to 15%, depending on which of the indices you look to. So looks like strong performance on dollars we put in the ground in the crisis. And that’s part of the reason you’ve seen us be as active as we’ve been over the course of the last few months.
Another question we get, can you raise any money? What are your LP’s going to do? What’s the dynamic in terms of fundraising? Is this going to impact flows into alternatives, which have been very strong. And the short answer so far from our standpoint is, we are continuing to raise capital. Here again, we just went back 17 quarters and just showed the average amount of new capital we’ve raised per quarter, which is just shy of $8 billion per quarter over this period. And you can see, in the last two months, March and April, these are the actual numbers for the months of March and April we raised over $10 billion and that’s just two months, not three months of a quarter. So far we continue to see strong fundraising momentum. It’s a little early to say, how this will play out in the longer-term, but we have not seen it show up in our results as of yet. And we’re quite active with dialogues all around the world.
The last question we tend to get is around our stock price. And will our stock underperform during periods of market arrests? And I think historically our space has had a higher beta than most. But one of the things that’s important to understand is the transition of ownership that’s been going on in these stocks. And our stock is a good example of this. So as I mentioned, we used to be a publicly traded partnership, more narrowly owned. And it was harder for mutual funds and index funds to own us. And that was one of the reasons that we converted to a C-Corp not too long ago.
And since we made that conversion, we’ve actually been getting into more indices. We’ve seen a significant expansion of our shareholder base. And the results of that you can see on the left hand side of the slide. So we’ve seen kind of a doubling of the number of our shares owned by mutual and index funds since conversion. And you’ve also seen the percentage of our stock owned by hedge funds and broker dealers, which are largely hedge funds owning us on swap has gone down by more than half. So doubling the mutual and index, having hedge funds and so the mix of our shareholder base is in the process of shifting and we continue to get into more indices, which we think will continue that dynamic.
And part of what’s happened as a result of that, you can see on the right hand side of the slide. And this is just our year-to-date, total return, haven’t looked today, but you can see how we’ve performed relative to our alternatives peers, the S&P, the Russell and S&P Financials outperforming all of those. And I think it’s a combination of the underlying financial performance of the company but also this technical shift in our shareholder base, which we do not think has fully run its course.
So those are some of the questions that we get. I’ll wrap it up there. I think the bottom line for us is that, we still see a lot of ways to grow. We got a lot of dry powder about $60 billion to invest into this environment and we see significant ways to win over time and it’s kind of – we’re having a good time because it’s a firm that’s been around 44 years by virtue of the youth of our businesses and all of the opportunity we have ahead of us. It really feels like the second or third Emmy in terms of the build out of the firm.
So I’ll stop there, Patrick. And maybe we can shift to any questions that I can try to answer.
Patrick Davitt
Sure. Thank you, Scott. That was a great overview. I think the macro environment is kind of on top of mind for everyone given what’s happened over the last couple of months in COVID. And most economists and some of your competitors I think have had a fairly negative economic view of what we’re seeing here. Erring more on the side of an L-shape recovery versus a V and a recovery that could drag on for years, not quarters potentially. So from what you can see in your own portfolios, your own gut, what does KKR – where does KKR now stand on the macro liquidity seeing in your own portfolios?
Scott Nuttall
Well, it’s very dynamic. So I’ll tell you the answer continues to evolve based on information we’re getting weekly at this point. But I’ve mentioned that we do have a big operation in Asia and that gives us a pretty interesting lens in terms of kind of what may lie ahead. And we’re seeing activity resume. Most of our operations in Asia are back to 70% to 100% of capacity on the manufacturing side. Obviously our tech and internet companies in Asia are doing very well. So we’re continuing to see that activity pick up. And as we’re looking to Europe and the U.S. same thing, we’re seeing a slow resumption of activity. It is definitely not a V, but it is not an L either.
It looks like an escalator – elevator down, escalator up. So it’s kind of a slow recovery back. But the activity is definitely returning. We’re seeing, domestic travel pickup in Asia. We’re starting to see more business activity. We’re working on transactions, meeting with management teams in parts of the world. Again, that was not the case a month ago. So again, very dynamic, but we’re definitely starting to see some resumption of activity and time will tell. So more updates as we see more data.
Patrick Davitt
Helpful. Thanks. And as we think through and beyond the pandemic, how would you expect your priorities to shift at all? Especially as it relates to increasing investment or maybe even pulling back on costs? We have another kind of – if we have a double peak or another pullback in economic activity.
Scott Nuttall
Look, as I mentioned, we’re really fortunate because we have a very stable business model, especially at the management fee line. And so we are not making any major changes in terms of how we’re thinking about building out the firm. If anything, we view times like this as an opportunity to accelerate our growth. And that’s certainly what we saw after the financial crisis as a big opportunity to invest.
And that’s where a lot of those new businesses I mentioned that were created was in 2009 to 2012. So we’re not we’re not making any big changes. Our headcounts actually grown year-to-date. You should not expect any change in how we talk about our compensation levels. We’ve been low 40’s as a percentage of revenues that will remain the case. But we are frankly leaning in, in particular focused on where we can get some senior revenue getters for the firm, opportunities to grow, like senior investors or senior business builders. We’ve been out continuing to hire.
Patrick Davitt
Great. Helpful. Thanks. Last one, kind of on the current situation. Every firm in this business has a few portfolio companies that are particularly exposed or stress, right? So how do you think about managing those more stressed portfolio positions through something like this? Obviously, having locked up capital gives you a lot more flexibility. But beyond that, what are the major tools you use to kind of keep the positions viable as we get through those sessions?
Scott Nuttall
Yes. It’s a great question. There’s no doubt we’ve got some tough situations to manage. Having said that, I think we feel really fortunate because we have relatively few as a percentage of the total. So we have been underweight a number of sectors, energy, retail, hospitality, leisure. I’ve been, some of those three together is about 7% of our AUM. Just to give you a sense. So while we have work to do in some of our companies, we have a lot less than if we’d been overweight or equal weight in those sectors. We’ve just been really underweight. But the short answer is, it’s liquidity, liquidity, liquidity. So we are very focused, we always are that’s part of what our capital markets team does working with our investment teams. Just making sure, we don’t have any near term debt maturities and we’ve got a sum total of 4% of our total debt maturities coming due between now and the end of 2021.
And our companies tend to be besides we’re very able to access the markets. But what we’re really focused on with those management teams is how do we get through to the other side in the sectors that are COVID impacted? How do we make sure we husband liquidity? And then also there’s an offense part of those conversations too, which is we have available capital for these companies, what can we be doing to actually get on offense and go make some acquisitions? Because if our company is experiencing difficulty because of the environment, it’s competitive set is as well. So it tends to lead to a very interesting consolidation opportunity. And so we’re spending time on defense on liquidity, but also on offense on what should we acquire to grow.
Patrick Davitt
Great. Let feeds into, I guess the other side of the coin, right? Which is the investment opportunity where, obviously the markets have come back significantly, but it does still feel like the return prospects of your dry powder are now probably looking a lot better than they were a few months ago. So could you remind us how much dry powder you have, how you’ve been deploying that so far? I’m already seeing on pigeonhole, there’s a lot of questions in this theme, because there have been a lot of announcements over the last week, I think. And then perhaps, how you see the investment opportunity evolving as this plays out?
Scott Nuttall
Yes, absolutely. So the short answer is we have about a $60 billion, $60 billion of dry powder today. And then we also have $14 billion of cash and investments on the balance sheet. So we have a good amount of capital liquidity with which to work. And we have been active, as I said, in the slides and as noted in terms of some of these announcements. We do just think this is going a bit in waves. It’s definitely feels that way to us. The first few weeks was by traded credit and some really beaten down equities and there were just a lot of things on sale and some of those companies, frankly, were not even impacted by COVID, but everything is on sale in that first phase. So we did a lot in the traded markets in that first wave.
The second wave was companies that were calling and saying, hey, I need liquidity but I need it by Tuesday. It’s can you move quickly? And those tend to only work with situations largely where the management team really well, the industry really well, because you got to be able to move fast. And so we’ve done a number of transactions that kind of fit that description, U.S. Foodservice being one that got a lot of attention. And now it’s getting into the third and fourth wave, as I mentioned, portfolio companies making acquisitions. We’ve been quite active there. And then also companies that are selling non-core subs. We’ve been quite active there, the Coty, well a transaction being one of the more recent one of those. So there’s plenty of activity across those needs.
And in terms of your question, as to where do we think it goes from here? As I mentioned, we’re quite busy. There’s a significant amount of opportunity, I’d say more of it right now is on the private market side than on the public market side. So it kind of shifted early. It was traded and now it’s illiquid. And so that’s where we’re seeing most of our opportunities set. And as I mentioned, Asia and Europe are even more active than the U.S., Asia in particular.
Patrick Davitt
That’s helpful. And I guess obviously there’s been kind of an unprecedented amount of government backstop type activity. Do you think that that derails the distressed opportunity to any extent or kind of those deep distress opportunities that you sometimes see through a recession?
Scott Nuttall
I don’t think it’s derailed it. I think it just changed it. Yes. So I think what happened is a lot of that activity we were seeing very early in the traded markets that went away relatively quickly. I think that was, because of what the government was doing and I’m glad we were ready to get because we’ve got a lot of risk on, but if we hadn’t been prepared, we might’ve missed that. It’s definitely shifted though. And it’s now shifted more quickly, frankly, to the private markets as I mentioned. And I think it’s probably going to stay there. I think there’s still a distressed opportunity. It’s just probably more in the middle market, because if you’re a company of any real size today, that the public markets in terms of the credit markets tend to be open at a price, but in the middle market or small to medium-sized companies, it’s harder for them to access funding. And so there may be more opportunity. It should shift it down in size.
Patrick Davitt
That’s helpful. And then I guess, the big question we always get and in particular, in this kind of environment is, is there enough opportunity at a return profile that you like given the amount of dry powder out there away from you?
Scott Nuttall
Yes. And I guess we smile when we get that question. So as I mentioned, we have $60 billion of dry powder. Just to give you a sense, last year, we invested and syndicated $28 billion in one year. So, and we feel really good about the companies that we bought. And so our level of activity that dry powder would be gone in the two to three years, and obviously, we continue to raise capital along the way. So actually what we’re finding, and that’s part of the reason we have the capital markets business, is there’s actually more investment opportunity than we have capital that to hold investments with. So what we will do is we’ll actually save, it’s a $2 billion check, and we only can hold $1.2 billion, we’ll speak for the whole $2 billion, syndicate the $800 million and seem to retain economics on that. But the point is that the opportunities are large and they’re significant. So we’re finding that there’s a lot to do. And as you saw from the slides and the investments we made in 2009 and 2010 and those coming out of the GFC, those tend to be very good vintages.
Patrick Davitt
And should we think about the return profile being better, worse, the same of the money you’re putting to work now than what you were putting to work say six months ago? Or is that not the way you guys think about it?
Scott Nuttall
It’d all be interesting to see how all this plays out from here and the length and depth of the recession. But I’d say our experience has been that the money, we would be putting to work right now would tend to have higher IRRs than money put to work six to 12 months ago. But it’s a little bit early to be definitive on that. But our expectation is that that’s probably the case if you’re picking an answer.
Patrick Davitt
Great. Great. So we’ve covered the macro positioning, investment opportunity, which is a good lead in, I think, to the issue most investors care most about which is fundraising and fee earnings growth. So as we triangulate all of these data points, macro stress, portfolio companies stress, even LP stress, how should we thinking about your ability to raise new funds and in particular, large flagship funds, which you have a few coming over the next 12 to 18 months, after this correction?
Scott Nuttall
Look, I say, we remain very optimistic. There’s a significant amount of interest in what we do. In a low rate world, there was a lot of interest. In a no rate world, we were finding as we talk to CIOs around the world, there remains a lot of interest. So we are having ongoing dialogue with our investors. It’s multiples of what it typically is. So there’s a level of frequency of dialogue. Part of that is, we’re not flying to see them as much that you can – we can talk to them for a day and there they want to talk to us. And so we’re having much greater attendance to any client event than we typically have. And there’s a lot of interaction. But we’re raising capital. So March and April I mentioned the $10 billion we raised, we’re also, I’ve been raising this dislocation fund.
On our call, we did make a comment that I’ll reference here, which is, we have grown our management fees as a firm by about 50% over the last three years. And we had said pre-COVID that we thought we could do that again in the next three years. And so what we said on the call as we kind of thought about whether that was still the right way for investors to think about the path ahead. As we said, we’re still highly confident in our ability to grow by that 50% again, but all else equal, we’d probably just push it out a few quarters. And hopefully that’ll end up being conservative. It’s certainly conservative relevant, Patrick, than what we’ve seen so far in terms of capital we’ve raised. But that was the guidance we gave. If it’s a – if there is movement, it’s relatively modest. So we feel really good about the fundraising environment and we have several things in market right now and to your point, 20 plus strategies coming over the course of the next couple of years.
Patrick Davitt
Great to hear. And I guess if we do remain in this Zoom kind of environment where people aren’t traveling to raise funds and whatnot, do you think you could raise those flagship funds given your existing LP relationship?
Scott Nuttall
Yes, absolutely. Yes. I mean because a large percentage of the money we raise is from re-ops from existing investors, right? So that tends to be the majority to the vast majority of the capital that’s raised, especially for flagship funds. And so I think that’s relatively straightforward. And then the question is around newer investors, but I’ve been really pleased by the number of new investors we’ve been able to add even during the course of this dislocation fundraise, which has been entirely during COVID. So we’ve been able to add a number of new investors as part of that fundraise. So I think everybody’s figuring out how to work both in terms of re-ops and then also making decisions on new investors and new partners. And I think that’s, you will see if that continues. But so far, it’s certainly been our experience.
Patrick Davitt
That’s helpful. Thanks. I guess to finish up, we’ve got a lot of questions coming through, so I’ll move to that after this. But obviously, regulatory risk I think is back on people’s minds with the risk that a democratic takeover, the probability of a democratic takeover getting higher. What are your thoughts around handicapping that risk, any particular issues that you are worried about impacting either your portfolio or your broader business from a change in the regulatory regime in D.C.?
Scott Nuttall
No, nothing material. As you know as well, we tend to stay focused on what we can control.
Patrick Davitt
For sure.
Scott Nuttall
That’s definitely not on the list. So but we’re seeking to build a business and portfolio that can navigate whatever environment we find ourselves in.
Patrick Davitt
Great. Thanks. So getting to the questions looks like, so you talked about the importance of Asia. Obviously, China trade headlines have come fast and furious once again. The question is around, your view of your current exposure to the country through that lens and any impact to the opportunity in that country given the heated rhetoric is that?
Scott Nuttall
It’s a great question and it’s evolving probably as we speak. But just to be – just to step back, so our investing in China has been focused on domestic consumption for the most part. It has not been export-driven. We’ve been very focused on ensuring that we are getting in the way of the themes and the trends that we’re particularly excited about. And so a lot of what we’ve done has been focused on domestic consumption. It’s been focused on environmental. Safety, it’s been focused on things like food safety. So we’ve done a number of things in the dairy space, cork and largely about bringing Western style food production and safety to China. And so we believe all of those themes are still going to be highly relevant. And the companies that we own in that part of the world today continue to perform quite well for the most part. So our exposure I think is where you would want to be exposed, which is the domestic story as opposed to the export story. So in that basis, we continue to feel quite confident in what we’ve got in the ground there. It is a very small percentage, so our overall private equity portfolio. So I think there’s more opportunity ahead.
Patrick Davitt
Do you think there’s any risk to the growth opportunity from the standpoint the Chinese government maybe shutting down access or anything like that?
Scott Nuttall
Look there’s definitely, there’s risk and we don’t know exactly what’s going to happen. But we’ve already seen some of this with respect to [indiscernible] here in terms of our ability to exit some investments. It is just far too early to speculate on what all this could mean. But thus far we have offices in Beijing, Shanghai, the activity levels continue to stay quite high.
Patrick Davitt
Okay, that’s helpful. Next one, many of your public peers and newer entrance like Goldman, talk about the advantages of a capital-light model, do you believe the markets are undervaluing your balance sheet strategy and why?
Scott Nuttall
Yes. I think, we definitely do, the gourd bottle is a bit different as I mentioned. What we’re focused on doing is creating the next $23 billion of market cap. That’s our job is to double the share price again, that with the market cap, again. And what we found and it’s just math, AUM is great and we have a lot of it and we’re seeking to get more, but it only gets you so far in terms of creating that next $20 billion, $30 billion, $40 billion market cap. And so what we’re focused on doing is making sure that we have a model that allows us to double the market cap again. And so the way that our model plays out is if we have our own capital invested alongside third-party capital, we can double the value of our enterprise faster and capital markets adds onto it as well.
And so if that’s why we built what we built, we think we can actually create more value this way. And I do think there’s a bit of a question. People, I think there’s a little dissonance on this topic. There’s worry about the balance sheet. Remember the balance sheet is invested in what we do. And if people are worried that we’re not good at what we do, they’ll probably shouldn’t be owning our stock, if we’re not going to generate a lot of carry and we’re not going to grow our AUM. And so if you believe we’re good investors, the balance sheet will benefit from that. Just like the third-party AUM will benefit and grow from that and so there’s right way of risk.
And the other thing I would point out is it, do you look like we just went through a really interesting stress test of the model, right, in Q1. Our book value per share went down 14%, right? And that’s with carry going on, getting marked down much more than 14%. So the balance sheet away from that went down much less relative to other things. I think that’d be much less than people would have thought would happen during that kind of a stress test for a model like ours. So as I said in the slides, we view it as a stabilizer, balanced and a way for us to grow and we really view it as a strategic weapon. And if you think about the things we’ve done with Marshall Wace or Franklin Square or a number of other strategic things we’ve done, we’ve taken balance sheet capital and we’ve turned it into AUM and fee-related earnings. And the balance sheet allows us to do things like that in an aggressive way when we find something we like.
Patrick Davitt
That makes sense, thanks. One that’s getting a lot – a few votes, what capabilities would you seek to acquire via inorganic growth to broaden the suite? Many of your peers have developed – have more fully developed credit platforms to service insurance is one example given. So what do you see as kind of the strategic opportunities for you through the dislocation?
Scott Nuttall
Sure. Now we’re looking at a number of different types of opportunities. I’d say some things that highlight one. One of our younger businesses where we see a significant amount of growth opportunity is real estate. And so we’re spending time thinking about that on a global basis. Is there anything out there that that could be an interesting fit for us? So real estate, I’d say real assets more broadly defined would be one major topic. We’re also looking at things that could fit from the standpoint of distribution. Things that we could do that would broaden our distribution footprint, whether it’s allows us to get into the retail world more aggressively. We’re doing that organically right now with good success. But we’re looking in thinking about other things that we could do that would be inorganic as well.
And then we’re also looking at other things that don’t call it adjacent. Things like the secondary area and other things that, it’s hard to find something that fits, especially given our goal to be top three and everything that we do, if not now at some point in the not too distant future. And so really high bar for anything in organic, because the cultural fit is so critical. But if we can find something that checks all the boxes, we have the capital and that allows us to go after those things. And I’d say a good amount of our growth opportunity ahead could be satisfied by ideas like that.
Patrick Davitt
Sounds good. On the real estate point a couple of people wanted you to touch on how kind of – how you feel about the idea of the strong performance they are getting to second, third generation has changed maybe the outlook for that, having a step function kind of scale up from here.
Scott Nuttall
Yes, I think a crisis like this provides real opportunity for growth in a number of our businesses. It’s a horrible human tragedy. But as I mentioned, we do think it does create an inflection point for a number of the businesses we’re in. And real estate is one of those. I mean, we are a mess, really quite underweight retail and hospitality. And the big part of the reason for that as a real estate business is quite underweight, retail and hospitality. And so we have very, very few things that need fixing or cleaning up in our real estate business. And I think it was part of the reason that you’ve seen the performance in the first quarter that you did relative to what might’ve been expected.
So, no, we’re viewing it as a growth opportunity. And we have, the Asia real estate effort, we have Core Plus Real Estate. We’re raising successor funds across the U.S., and Europe. We have multiple strategies raising successor vehicles in real estate credit and first-time vehicles. So there’s a lot happening in real estate and the teams focused very much on offense because there’s, they’re just happily not as much defense to play given our portfolio construction.
Patrick Davitt
Sounds good. The last one, and it’s all we have time for, is how volatile do you expect carry revenue to be either on the upside or downside depending on vintage and dry powder available?
Scott Nuttall
That’s a good question. I mean, if you look back at our carry over time, it’s been very, very steady. It’s been kind of up into the right and very, very stable, if you just look at trailing 12 months over the last few years. And I think, you can see in our balance sheet our accrued carry metric and you can see how that moves quarter-to-quarter. So there’s definitely going to be more volatility to carry generally, even if we haven’t had it as of late relative to management teams. But we do believe that by virtue of all the younger businesses that we have and all of the fun ones and the fun tunes that are now getting more mature and exceeding their hurdle rate, that we have an ability for that carry number to go up meaningfully from here.
So when we did our investor day a couple of years ago, Joe Bae and I put up a slide that said we saw a path to be able to take carry, which at the time was about $1.2 billion, a year up to $2 billion plus, we still see that opportunity as we sit here today and it’s really a combination of the scaling of our more mature businesses. And then the maturing of our younger businesses leads to that growth opportunity. So it will be more, I don’t look told me to do it quarter-to-quarter, right, over a 12-month period, over a cycle, we see a lot of opportunity for growth there.
Patrick Davitt
Can I throw one more in, sorry, I hate this one’s, you gave us an update on the CLO book. Can you give us an update on the CLO book? Has anything changed in terms of your view on adverse performance impacting FRA since the call?
Scott Nuttall
No. No change. I think consistent with the Rob’s comments on the call.
Patrick Davitt
Awesome. Well, thank you so much for the time, Scott, really helpful overview and thank you investors. As a reminder, please go to the conference website and fill out the KKR Procenses poll to get a better view of what your fellow investors are thinking on this stock. Thank you all. Thanks again, Scott. Have a good day.
Scott Nuttall
Thanks, Patrick.
Question-and-Answer Session
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