Third Quarter Financial Results Conference Call - KKR & CO INC

Explicit Guidance:

• Strategic Holdings Earnings: Reiterated guidance of >$350 million in operating earnings for full year 2026; provided a long-term target of >$1.1 billion in operating earnings by 2030.
• Capital Allocation: Projected total capital returns to clients in 2026 to exceed $40 billion (excluding Q4 activity and USI transaction), surpassing previous annual records by >50%.
• Insurance Growth: Anticipated an annualized run rate for new retail business volumes of ~$13.5 billion based on Q3 pace, with recent September-October activity implying an annualized run rate of ~$20 billion.
• Specific Transaction Impact: Expected the USI sale to close and generate approximately $2.0 billion in adjusted net income (approx. $2.00 per share) and ~$3.3 billion in after-tax proceeds.
• Insurance Asset Sale: Anticipated a gain from the sale of a rail car equipment lessor (announced October) generating >$200 million in operating earnings upon closing in Q1 2027.
• Strategic Holdings Reinvestment: Anticipated three recent strategic holdings investments (Integer, Gen2, A1) to replace roughly 50% of USI's 2028 operating earnings and nearly 100% by 2030.
• Long-Term Earnings Target: Referenced an Investor Day goal of achieving $15+ per share of Adjusted Net Income (ANI) by 2034 or earlier.

Business-Segment Outlook:

• Management Fees: Expects "durable management fee growth" to translate into ~22% Fee-Related Earnings (FRE) growth, leveraging a 17% compounded fee growth rate since 2022 vs. 10% OPEX growth.
• Asset Visibility: $75 billion of AUM remains "not yet turned on" and non-fee earning (up 24% YTD), providing a backlog for future fee recognition.
• Private Credit: Expects 2026 to be a "record fundraising year" for both total third-party credit and private credit specifically.
• Asia Infrastructure: Early fundraising for Asia infrastructure expected to occur in the first half of 2027; capital raising for Asia private equity expected to generate inflows through 2027–2028.
• Capital Markets Fees: Anticipates a structural improvement in the "floor" of capital markets fees, with insurance-related capital markets fees expected to contribute several hundred million in revenue annually over time; identified Asia-Pacific as a key growth vector.
• Strategic M&A (Cake Air Solutions): Projects the new vertical to become a $100+ billion AUM business over time; new GP-led secondary strategy expected to launch in 2027.
• Real Estate: Sees opportunities in North American real estate, specifically acquiring assets below replacement costs in pockets of positive demand and declining supply; constructive outlook for the current vintage.
• Wealth (K-Series): K-Series AUM stands at $45 billion; expects continued momentum in distribution and potential new product rollouts, though no specific new strategies were announced for immediate launch.

Market and Competitive Outlook:

• Industry Cycle: Distinguishes KKR's 50-year "through-cycle" experience from the industry average, noting >65% of market participants formed after 2009 and lack recession experience.
• K-Shaped Industry: Anticipates a "K-shaped" industry dynamic where capital concentrates with experienced managers (KKR) at the expense of newer entrants, accelerating momentum going forward.
• Monetization: Projects a robust monetization pipeline; $18 billion in embedded gains across the platform (up 60% in 3 years), providing a buffer against market volatility.
• Competition: Views the current environment as favorable for KKR due to the "learning by doing" phase for competitors; expects top-quartile performance differentials to widen (1,600–1,800 bps) as the market normalizes.
• AI Infrastructure: Believes the opportunity set differs from the late 90s fiber boom due to the mix of infrastructure and credit capabilities; focuses on off-takes with governments and investment-grade hyperscalers (90% of lease exposure) to mitigate risk.

Macro / Industry Outlook:

• Interest Rates: Views current 10-year Treasury yields (~5%) as a "return to normalcy" compared to the 5.8% 50-year average, contrasting with the anomalous 2%–3% low-rate environment of the last 15 years.
• Private Credit Environment: Believes higher entry multiples are less of a concern in a higher-rate environment if value creation through operational improvements (e.g., doubling profitability) is executed.
• Regulatory (401k): Remains constructive on the Department of Labor's efforts to provide clarity on 401k access to alternative assets, viewing it as a long-term tailwind for industry allocation, despite potential timeline adjustments.
• Geopolitical: Plans to focus on long-term investment periods that span political cycles; expects to leverage substantial dry powder ($146 billion) to capitalize on short-term volatility resulting from the midterm elections.

Strategic Initiatives:

• Capital Allocation: No fixed allocation targets; focus is on deploying marginal dollars into the highest recurring, durable, growth-oriented earnings per share across four buckets: Share Buybacks, Strategic Holdings, Strategic M&A, and Insurance.
• Insurance (GA): Positioned to respond quickly to rate environment changes; shifting portfolio to extend asset duration and modestly increase allocation to alternatives (currently ~2%, targeting industry avg of 5–8%).
• Share Buybacks: Active repurchase program ($567 million in Q3, >$900 million YTD); management views share price as disconnected from business durability and expects buybacks to accrete long-term EPS.
• New Investments: Announced acquisitions in strategic holdings (Integer, Gen2 Fund Services, A1) to replenish earnings from the USI divestiture; launch of Arcus sports strategy vintage and new secondary strategy.
• Governance: Anticipated transition to a traditional one-share, one-vote governance structure following the sunset of super-voting rights for co-founders by the next earnings call.

Risks and Headwinds to Outlook:

• Market Volatility: Acknowledges potential for "money to be made and lost" in AI; warns of risks in speculatively built data centers and less investment-grade companies.
• Cycle Learning: Notes that a majority of industry participants are inexperienced regarding real recessions, creating uncertainty for those firms and potential capital outflows, though KKR views this as a differentiator.
• Deployment Pacing: Emphasizes the need to stay "judicious" in capital deployment within the AI space, avoiding drift and maintaining diversification.
• Regulatory/Political: Potential short-term volatility from midterm election outcomes, though long-term investment periods are insulated from these shifts.

Management Tone on the Future:

• Confidence Level: Highly confident; describes forward indicators as "as strong as they have ever been" and expresses belief in delivering a "third consecutive quarter with record ANI per share" to close the year.
• Tone on Pessimism: Characterizes current market noise as "unflattering" but views the current cycle as an opportunity to demonstrate "through-cycle investment acumen"; asserts that the "best response to pessimism is performance."
• Differentiation: Strong conviction that KKR's "all-weather" model and 50-year history provide a structural advantage over younger competitors facing their first cycle.
• Hedges: Repeatedly notes humility regarding the unknown long-term trajectory of AI and acknowledges the firm will continue to make mistakes while focusing on "getting better."

Miscellaneous:

• FY2026 Record Expectation: Management projects 2026 to be a record year across all headline financial metrics, including monetizations and cash distributed to investors.
• USI Transaction Details: Sale expected to deliver a ~6x multiple on original 2017 cost, ~3.4x on balance sheet capital, and a ~33% premium to last quarter's valuation.
• AUM Growth: K-Series AUM up 55% YoY; Private Equity K-Series up 55% YoY to $22B; Infrastructure K-Series up significantly to $17B in just three years.
• Q3 Market Context: Noted 10-year Treasury yield surged 80 bps, Russell 2000 declined 7%, and S&P 500 Mag 7 declined 2% during the quarter.