Third Quarter Financial Results Conference Call - KKR & CO INC

Financial Performance:

• Q3 2026 delivered record results across all headline metrics: Fee-related earnings (FRE) per share of $1.42 (+24% YoY), total operating earnings per share of $1.88 (+21% YoY), and adjusted net income per share of $1.78 (+26% YoY).
• Management fees reached $1.2 billion for the quarter; excluding catch-up fees, growth was 16% YoY, with a 19% increase in the first nine months of 2026 compared to 2025.
• FRE margin expanded to a record 71%, with fee-related earnings totaling $1.3 billion.
• Total transaction and monitoring fees were $328 million; capital markets fees hit $290 million (3rd highest quarterly result on record).
• Insurance segment operating earnings were $230 million (excludes GA actuarial impacts); total insurance economic earnings over the trailing 12 months were $1.9 billion.
• Strategic holdings delivered $192 million in operating earnings for the quarter, placing the firm on track to exceed $350 million for the full year 2026.
• Realized performance and investment income totaled $824 million, with $71 million from strategic holdings.

Guidance and Future Outlook:

• Management expects a third consecutive quarter of record adjusted net income per share (ANI) to close 2026, driven by momentum and the anticipated impact of the USI sale.
• Strategic holdings guidance remains reiterated at >$350 million for 2026 and $1.1 billion+ for 2030; new investments in Integer, Gen2 Fund Services, and A1 are expected to replenish USI earnings by 2028/2030 using less capital than the USI return.
• Capital allocation targets a long-term goal of $15+ per share ANI by 2034 or earlier, utilizing four tools: share buybacks, strategic holdings, strategic M&A, and insurance.
• Management projects $40 billion+ in capital returns to clients in 2026, exceeding the previous annual record by over 50%.
• Full-year capital deployment is expected to be robust, with $146 billion in dry powder available.

Business Segments and Product Lines:

• Real Assets: Fee-paying AUM in real assets grew at an 18% CAGR over three years ($108B to $176B); flagship global infrastructure fund final close reached $19.2 billion. Helix AI infrastructure strategy secured $1 billion from Samsung, totaling over $11 billion in commitments.
• Credit: Raised $14 billion in Q3, positioning for a record year; new vertical "Cake Air Solutions" targets >$100 billion AUM long-term.
• Wealth: Raised $3 billion in Q3 (up 11% QoQ); K-Series AUM stands at $45 billion (+55% YoY).
• Insurance (Global Atlantic): Total capital raised in the quarter was >$9 billion (+42% QoQ); retail new business volume implied an annualized run rate of ~$13.5 billion, accelerating to ~$20 billion in September/October.
• M&A: Completed acquisitions of Arctos and Keystone (largest first-time GP solutions fund at ~$6B); Arctos tracking ahead of budget.
• Strategic Holdings: Sold USI (inaugural core PE investment) for ~6x cost on original 2017 investment, expected to generate ~$3.3 billion in after-tax proceeds and ~$2 billion in adjusted net income.

Market and Competitive Landscape:

• Management notes a "K-shaped" industry where top-tier firms are gaining market share from peers lacking cycle experience.
• Despite public market volatility (10-year Treasury yield +80bps, Russell 2000 -7%), KKR's private equity portfolio remained flat, while infrastructure was up 4% and credit composites were positive.
• 65% of private market industry participants were formed post-2009 and have not experienced a full economic cycle, contrasting with KKR's 50-year history across multiple downturns.
• Capital markets fees are benefiting from insurance-related activity and a broader client base, with the business viewed as having a raised floor and multiple growth levers (geography, product, client coverage).
• AI infrastructure investments are concentrated (~1-2% of total firm AUM) with 90% of lease exposures to governments or investment-grade hyperscalers.

Risks and Challenges:

• Market volatility and higher interest rates present challenges but are viewed as a "return to normalcy" rather than a new anomaly.
• Potential risks in the AI sector include uneven adoption and investment losses; management emphasizes avoiding "speculative" data center builds.
• Regulatory landscape regarding 401(k) access to alternatives is evolving, though the firm remains constructive on long-term tailwinds.
• Competition in insurance capital markets remains high, requiring disciplined underwriting to maintain returns.
• No predetermined capital allocation limits exist for the four capital deployment buckets, introducing execution risk if market opportunities shift rapidly.

Management Commentary and Tone:

• Tone was highly confident and resilient, emphasizing that record results were achieved despite "noise" and pessimism in the broader private markets industry.
• Management framed the current high-rate environment as a return to historical norms (50-year avg Treasury yield 5.8%), suggesting their cyclical experience provides a distinct advantage over newer entrants.
• Scott Nuttall emphasized humility regarding AI investments but confidence in downside protection and long-term capital stewardship.
• Rob Lewin highlighted the efficiency of their business model, noting that OPEX growth (10%) has trailed FRE growth (22%) due to fee-related compensation ratios.
• Strong focus on capital discipline, with 54% of capital now in perpetual or 15+ year durations.

Analyst Questions and Answers:

• Global Atlantic Growth: Rate movements and fixed income spread widening improved investment opportunities; duration of liabilities extended significantly (93% >5 years), with assets moving toward alternatives (currently 2%, industry avg 5-8%).
• Quality of Earnings: Management defends transaction fees as recurring and high-flow-through, citing the platform's scale in capital markets (syndicating $10-20B+ equity annually) and embedded deal flow.
• AI Exposure: KKR maintains a measured approach, avoiding "speculative" builds, focusing on investment-grade hyperscalers and governments; current AI infrastructure exposure is small (~6% of Infra AUM).
• Management Fee Outlook: Despite a potential slowdown in fundraising campaigns post-2027, growth is supported by $75 billion in untapped AUM (up 24% YTD) and high fee-to-bottom-line conversion.
• USI Proceeds Allocation: Proceeds (~$3.3B) will be allocated flexibly among buybacks, strategic holdings, M&A, and insurance based on marginal returns; buybacks and strategic holdings viewed as highly attractive currently.
• Real Estate: Opportunities exist in pockets of the market where assets trade below replacement costs; favorable to invest at current Treasury yields vs. the recent low-rate era.

Other Key Points:

• KKR will transition to a traditional "one-share, one-vote" governance structure following the sunset of super-voting rights held by co-founders Henry Kravis and George Roberts.
• The firm returned over $31 billion to clients YTD 2026 (excluding Q4 and USI), with expectations to exceed $40 billion for the full year.
• Management highlighted that 84% of pre-tax segment earnings were driven by recurring streams over the last 12 months, demonstrating business model durability.
• New strategic holdings (Integer, Gen2, A1) are already replacing USI earnings, with the first closed in Q4 2026.
• Insurance-related capital markets fees in Q3 reached ~$50 million, with a long-term annual target in the "several hundred million" range.