Earnings Call Transcript - KKR Q1 2020

Craig Larson, Head of Investor Relations

Thank you, Operator. Welcome to our first quarter 2020 earnings call. As usual, I'm joined this morning by Scott Nuttall, our Co-President and Co-COO; and by Rob Lewin, our CFO. 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. The call will contain forward-looking statements, which do not guarantee future events or performance, so please refer to our SEC filings for cautionary factors related to these statements. And like previous quarters, we've also posted a supplementary presentation on our website that we'll be referring to over the course of the call. Before we get into the results, we want to start by recognizing the extremely challenging times that we're all experiencing, and we hope that everyone on the call is safe and healthy. Our thoughts, of course, are with those most affected by COVID-19, particularly those on the front line. As a firm, our priority during the pandemic has been the health and safety of our employees while at the same time, continuing to provide best-in-class investment services. Like many of you, we've largely been working remotely over the last several weeks. Thanks to the tremendous efforts of our technology and operations teams, it feels like connectivity across the firm has actually increased. Similarly, the dialogue we've been having across our LP base has also increased as we've looked, if anything, to overcommunicate given volatility. In terms of helping those in need during the pandemic, we established KKR's global relief fund, and we're also incredibly proud of all that our portfolio companies are doing in support of COVID-19. Now turning to our results. We're going to begin on Page 2 of our supplement. AUM for the quarter came in at $207 billion compared to $218 billion as of 12/31 and $200 billion 1 year ago. New capital raised in Q1 totaled $7 billion, driven by fundraising in our real estate and Asia infrastructure strategies as well as within private equity. Management fees for the quarter as well as the trailing 12 months are up 14%. We reported after-tax distributable earnings of $355 million for the first quarter, or $0.42 on a per adjusted share basis. Looking on a trailing LTM basis, we generated after-tax DE of approximately $1.4 billion. Book value per share, which is mark-to-market every quarter, came in at $16.52. As Rob will talk about in a few minutes, investment performance over the past 12 months has been nicely ahead of both equity and fixed income indices. So our book value is down only modestly over the trailing 12 months. Lastly, touching on a topic we introduced last quarter, inclusion in Russell's benchmark indices continues to be a priority for us. We've been meaningfully engaged with FTSE Russell over the last couple of months. Any decision on index inclusion is obviously FTSE Russell's and not ours. We believe we meet Russell's requirements.

Robert Lewin, CFO

Thanks a lot, Craig, and hello, everyone. Really glad to be speaking with all of you today and hope that you and your families are safe and healthy. Beginning with the quarter's financial performance, we've reported solid results, especially when you consider how challenged the operating and monetization environment was from mid-February onward. Looking at our distributable earnings P&L on Page 3 of the supplement and starting with our operating revenue, total fees came in at $426 million for the quarter. Of those fees, approximately 75% are management fees, which are up 14% versus last year. Our management fees are largely driven by commitments to our funds and the invested cost of our assets as opposed to the NAVs of our funds, which is a real financial benefit that our industry affords during periods of market dislocation. Our realized performance income came in at just over $370 million for the quarter, driven by the sale of PURE Group and in South Korea, the sale of KCF Technologies. In total, carry-generating exits in Q1 on a blended basis were done at 3.5x our investment costs. Finally, realized investment income for the quarter totaled $145 million. In aggregate, our revenues grew by 11% this quarter compared to a year ago. Moving to expenses, compensation and benefits totaled $377 million, while non-compensation expenses totaled $94 million. One thing to note here—our total compensation ratio, including equity based comp, came in at 40% for the quarter. As you think about your go-forward models, you should continue to expect our total compensation ratio to remain variable and in the low 40% range for the remainder of 2020. Finally, our operating margin came in at 50% for the quarter, with an increase in our after-tax distributable earnings per share of 11%. Looking forward, we actually have reasonably good line of sight on future carried interest and total realized investment income from transactions that have closed since 3/31 or have been signed and are expected to close. As of today, that number exceeds $400 million. While a small number of those transactions still rely on various regulatory approvals to close, there is some uncertainty around achieving 100% of that figure. Regardless, it is definitely helpful to go into the next couple of quarters with a solid base of additional revenue. As a point of reference, a year ago on this call, that same number was just over $200 million. So in a quarter with tremendous volatility, all three forms of our revenue increased. Our margins were maintained. Our distributable earnings per share increased by 11%, and our visibility into our near-term earnings has meaningfully improved relative to a year ago. However, this quarter clearly did bring its share of adverse impacts to our financial profile as well. You can see that most clearly in our book value per share, which came in at $16.52 at March 31. Specific to our balance sheet, investment performance for the quarter was down 14% compared to down 20% for the S&P 500. For the trailing 12 months, balance sheet investment performance was down 2% compared to down 7% for the S&P 500. While our book value per share decreased 14% since the end of December, it is still relatively close to flat from this time last year. Turning more specifically to our broad investment performance for the quarter, please go to Page 4 of the supplemental presentation. While you can see that many of the asset classes where we invest have been affected by the market downturn this quarter, our performance remains positive over the last 12 months. Our most recent flagship private equity funds were down 6% in the quarter, and our entire PE portfolio is down 12% compared to down 21% for the MSCI World index. Outperformance was driven both by our modest exposure to areas directly impacted by the pandemic. As an example, direct energy is less than 2% of the private equity portfolio. Alongside greater exposure to a number of technology and online-oriented investments that performed quite well. Turning to real assets, our flagship real estate funds depreciated 1% over the quarter, while our infrastructure flagship fund appreciated by 18% in the quarter, driven by a significant exit that was at a valuation well in excess of its carrying value. While our energy returns are not shown in the supplement this quarter because we have an AUM threshold for what appears on this page, we know it's a front of mind topic right now. Our direct energy funds in aggregate were down 33% in the quarter. But as a reminder, this is only 1% of our total AUM. On the public market side, alternative credit and leveraged credit depreciated by 16% and 13%, respectively. This compares to the LSTA and the high-yield bond indices that were both down around 13% in the quarter. We do believe that the combination of our continued strong relative investment performance, especially in our flagship funds, as well as a 44-year history of operating through market cycles will hold us in good stead with our clients. While undoubtedly some investing clients have slowed down their pace of new commitments, we are also finding that there are others looking for ways to invest into the dislocation. As an example, in the 2-month window from March 1 through May 1, we have closed on or are in legal documentation on over $10 billion of new commitments across our fund platform. In terms of what this all means for our fundraising outlook, it's too early to say. We've grown our management fees over the last 3 years by approximately 50%. We've shared in the last couple of quarters that given the funds we have coming to market, we felt we could do that again from 2019 through 2022. We are still confident in our trajectory, but our best judgment sitting here today is that the 3-year path can now take us a few additional quarters to achieve. So the destination is very much the same; it may just take us a little longer to get there. This is obviously a dynamic environment, so we'll keep you updated to the extent our views change. Two final points before I hand it off to Scott. The first relates to liquidity. During the first quarter, we opportunistically raised $500 million of 30-year senior notes priced at 3.625%. We knew at the time what was valuable capital to raise, but it certainly feels quite differentiated in this environment. In April, we thought it made sense to take advantage of an opening in the investment-grade markets for an additional $250 million of 3.75% senior notes that mature in 2029. Taken together, we have $2.5 billion of cash and short-term investments in addition to our undrawn revolver capacity, providing significant liquidity and financial flexibility. The weighted average maturity of our debt portfolio today is over 15 years. The second point relates to our share buyback activity. Since the last earnings call, we have retired 11 million shares at an average price of just over $23 per share. Looking at our buyback program since inception, in total, we have retired over $1.3 billion in shares at a weighted average cost of just under $19 per share. We are confident that the shares we repurchased in Q1 will be a very good use of capital as we look forward over the next several years. As you would have seen in our press release, we have increased our share repurchase authorization back up to $500 million.

Scott Nuttall, Co-President and Co-COO

Thank you, Rob. Hello, everybody. Thanks for joining our call today. I hope you and your families are safe and healthy and that you're doing as well as can be expected during this strange time. The first thing I want to do is acknowledge how much the world has changed since our last call with you. It's pretty remarkable. I'm sure you're all working to process it just like we are. I thought today, I would spend some time telling you how we are approaching the crisis as a firm and what we think it means for us. Before I do that, let me go back to the global financial crisis because it was formative for our firm. At the time of the GFC, KKR was a smaller, more narrowly focused firm. We had a private equity franchise alongside a young U.S.-centric credit business. Our capital markets business was nascent, and we did not have a balance sheet. As we went through that crisis, we focused first on defense in our portfolio companies. We repositioned companies where we had to and focused on capital structures and debt maturity profiles. We were not forced sellers. On balance, our teams did a very good job during that period. We also made some good new investments, largely in PE, and we raised our first third-party capital in credit. During this time, we also took advantage of market dislocation and merged our then-private asset management business into one of our public permanent capital vehicles, creating KKR as you think of it today. However, we found during and immediately after the GFC that our businesses and footprint were not relevant to many of the very interesting investment opportunities we were seeing. We became frustrated by that, and that frustration helped set us on the course to make sure that the next time there was a crisis or a meaningful investment opportunity, we would have the ability to invest more flexibly in any risk-reward we found interesting. In short, we wanted to feel as good about our offense as we did about our defense. So we spent the last 10 years since that crisis building KKR based on that formative experience. Over that time, we've gone from a few hundred million of balance sheet assets to $20 billion, and we've dramatically increased our capital markets capabilities. We've also meaningfully expanded and diversified our business. Since the last crisis, we've gone from 2 investing businesses to 24, 10 offices to 21, and $45 billion of AUM to $207 billion. Because of all this, we now have the ability to invest in opportunities we like anywhere in the world. Looking back, the last crisis was a critical development for us. We made some great investments, made large and important moves for the firm strategically, and it was an inflection point that drove us to meaningfully expand our business in the years post-crisis. We view this crisis as providing similar opportunities, but off a larger base of capital, AUM, and capabilities to work with. So the possibilities from here are greater, too. We find ourselves in the fortunate position of being ready as a firm this time to not only play defense, but also to play more offense. We've been doing a lot of both over the last several weeks. I thought I would share a bit of color on what we're doing on both fronts. But before I do that, let me remind you why our business model positions us well for periods of volatility. Our model provides a significant amount of stability and visibility. About 80% of our capital is committed for an average of 8 years or more. We have $58 billion in dry powder waiting to be called for new investments. When you have contractually committed capital that cannot be taken away, and our liquid balance sheet, it is good news when asset prices get cheaper. Our management fees are largely calculated on committed or invested capital and not influenced by marks. So our management fees are very steady. As an example, our fees actually grew year-over-year in both 2008 and 2009. Plus, we have a lot of committed capital on which we're not yet earning fees. $19 billion committed with a weighted average management fee rate of about 100 basis points that turns on when the capital is invested or enters its investment period. So we have nice stability of management fees and visibility on how they will grow. We're also global. As you heard from Rob, the visibility of our near-term exit pipeline remains high. That is due in some part to our Asia portfolio, where, of course, the virus hit first, and where we've seen some economies reopen ahead of Europe and the U.S. As we've discussed, we also have a large and liquid balance sheet. During times like this, we can use our balance sheet to be aggressive for new investments, for strategic acquisitions, and for buying our own stock. We view our balance sheet as a critical strategic tool, never more so than now. Having said all that, there is no doubt this crisis is impacting our business. We've been playing a good amount of defense over the last several weeks, largely focused on protecting what we have. Most of our people around the world are working from home. We're finding that it's actually going quite well. Hats off to our technology team— we're very well connected as a firm, and our teams are functioning at a high level. We're also focused on our portfolio companies. We were fortunate from a portfolio construction standpoint as we've been quite underweight direct energy, retail, and hospitality. Those account for only 2%, 4%, and 1% of our global investments, respectively. Now to be clear, we definitely have a number of tough situations to manage, but it's a relatively small percentage of the total right now, and much smaller than it could have been with a different approach to portfolio construction. So the firm is operating well through this. And while we have a lot to manage, it is manageable. And while defense is taking some of our time, we're spending at least as much time on offense. We've been using our business model and dry powder to invest in these markets. As I explained, we've been preparing for an environment like this for over a decade. More recently, as we've mentioned on prior calls, starting a couple of years ago, we repositioned our distressed and private equity teams to be closer together and created target lists or shopping lists for debt and equity that we would want to buy if and when dislocation occurred. This preparation has helped us. Since the crisis began, which we mark as when the market started to be more volatile on February 21, we've invested or committed approximately $8 billion of capital as a firm. This amount includes dollars invested by our leveraged credit teams in the traded loan and high-yield markets. Of the $8 billion, approximately $5 billion has been in credit of some type and $3 billion has been in equity. We are using the target list we've been building over the last few years and investing in companies we know and like at risk-reward levels we find attractive. We're also finding opportunities for our portfolio companies to pursue M&A and to invest behind former portfolio companies, like we recently did with U.S. Foods, and we are looking at noncore subsidiary sales from companies looking to delever or buy back stock. So there's plenty to do on new investments. We're also spending even more time than usual with our clients. Part of this is making sure they know what's happening with their portfolios. But a lot of it is discussing how to invest into these markets and ways we can work together. We're encouraged by those conversations, which have helped lead to 40 first-time clients committing capital to us since the beginning of the year. Hopefully, that gives you some color. We've been busy on both defense and offense, and the firm is incredibly well connected through this. There's no doubt the near-term path ahead is uncertain, but there are several critical areas where we have clarity. We expect to continue being successful raising and deploying capital. We expect to continue being able to generate returns well above what's available in the public markets. And we expect to be able to use this crisis as we did the last one to evolve and grow our business aggressively through and coming out of this, creating the next inflection point for our firm.

Alexander Blostein, Analyst

So first, wanted to start with the outlook on fundraising. The path taking a little bit longer makes sense, given, obviously, lots of near-term uncertainty. But I wonder if you guys can talk a little bit about how the composition of that fundraising pipeline may change relative to your original expectations. Which products could be smaller, which products could be larger, where you could continue to be pretty active versus the areas that could actually take a little bit longer?

Craig Larson, Head of Investor Relations

Alex, it's Craig. Why don't I begin with that, and I'll let Scott add on at the end? Just to give you a sense of where we're fundraising currently because the breadth is something that I think you'll see in this. So in Asia, we're fundraising for our private equity strategy, also outside of private equity and real assets. In Europe, that includes fundraising for opportunistic real estate and direct lending. Also fundraising across our dislocation, Americas opportunistic real estate, real estate credit and core plus real estate strategies, and at the same time, that's going to continue areas that you're going to see on a more continuous basis, including our CLO business. We had issued a new CLO actually a few weeks ago as well as areas like our BDCs and hedge fund partnerships. So I think it's a very active list of areas where we're fundraising.

Scott Nuttall, Co-President and Co-COO

Yes. Thanks for the question, Alex. A couple of things. One, I'd just overall say we remain very optimistic on the go-forward when it comes to fundraising. So in terms of your question about composition, no material change to the composition in terms of where we see ourselves accessing capital. Maybe just a little bit of color for you. There's just been a lot of dialogue and engagement with our clients, easily 2 to 3 times the usual. It's everything from comparing notes on the environment, explaining what we're seeing through our portfolio, especially in Asia, given our large Asia portfolio, where we started to see recovery ahead of the rest of the world. A lot of questions on that. We're talking to them about their portfolios, but basically, every conversation then pivots to offense and where to lean in. I think we have many clients around the world that invested into the recovery post-GFC and are looking for ways to play offense. We have a couple of these in the prepared remarks, about 40 new LPs since year-end, and $10 billion raised in the last 2 months. In particular, we're seeing high net worth and retail lean in, in addition to institutional capital. So there's no material change in expectation for our outcomes—the commentary around it may just take a few additional quarters is our best guess. But as the markets continue to recover, we may shorten that over time, but it's highly path dependent, but no change in composition.

Alexander Blostein, Analyst

Great. Of course. That makes sense. My follow-up question is just around the $10 billion number that Rob and Scott, you both just mentioned. So $10 billion over the last 2 months. Can you give us what was in May? And then again, what kind of strategies drove that fundraising over the course of May? Give us maybe a sense on the sort of timing when that actually is going to come in into management fees?

Robert Lewin, CFO

Great. Thanks, Alex. So what we were trying to do with the $10 billion, we'll not guide it quarter-to-quarter in terms of where our fundraising is but instead give a good sense to the investor community that we're still raising capital despite the volatility in the markets. The best example we could give is the $10 billion of closed commitments or commitments that we have in legal documentation that we expect to close, as opposed to trying to parse it, whether that's going to be Q1 or Q2 or Q3 fee-paying AUM.

William Katz, Analyst

Okay. I hope everyone is doing okay during this crisis, and thanks for the well-thought-out prepared commentary. A couple of hot-button topics that seem to be going through the alt space this earnings season are some of the composition of CLOs as well as potential clawback risk just given performance metrics in the quarter. I was wondering if you could address both, maybe on the CLOs, how much of your revenues come from base management fees versus maybe subordinated or performance fees? How should we think about any clawback risk, if at all, against the carry?

Robert Lewin, CFO

Bill, it's Rob. I'll handle both questions. On our CLOs, I'll just put it into context, we do about $17 million a quarter of management fees across our CLO complex. A little more than $10 million of the $17 million are subordinated management fees, which are more at risk. Across that $17 million, we see de minimis impact in Q2, where compliance today or at the end of 3/31 with all of our OC tests. Based on what we see today, with downgrades coming through our portfolio and the market, we could see some impact in Q3 and Q4. Right now, we don't think that's a material impact. But as things change over the course of the quarter, we'll make sure to update everybody on our Q2 call. And then on the second part of that question, Bill was around clawbacks. Today, we've got roughly $90 million of clawback exposure through KKR. That's a few small clawbacks in a number of different funds globally. It's not something that's an irregular part of our business. What we shoot for is to have our accrued carry certainly be north of any clawback liabilities in a material way, and that's really how we present our numbers. So the $1.26 billion of accrued carry that we have on our balance sheet is net of the $90 million of clawback liabilities that we have spread across the firm in a lot of different and smaller ways. Again, that's pretty normal course for us to have some form of clawback liability in our business. And as of now, it's relatively contained.

Scott Nuttall, Co-President and Co-COO

Thanks for the question, Bill. As you know, we're always looking for opportunities, and we continue to look in this environment that may provide some strategic opportunities that we find interesting. We're going to have a really high bar just like we always do. In terms of areas where we may be looking, I would point you to some of the younger areas for us, whether it's real assets, which is a place that we've been building businesses around the world as one potential opportunity. We're also thinking about opportunities on the distribution front. But nothing specific that I would point you to right now, just an observation that when you get in periods like this, sometimes opportunities come our way that we find especially interesting.

Craig Larson, Head of Investor Relations

And operator, if we could just ask everyone to please limit themselves to 1 question, that would just be really helpful as we look to work our way through the queue. If you have a follow-up, feel free to then get back in, and we can circle back around. We appreciate it.

Christoph Kotowski, Analyst

Yes. Scott, I thought the color you gave on the investments that you're making was really interesting. Just a couple of things around that. One is when you said the $5 billion of credit investments, does that include investments made by your portfolio companies themselves to retire debt at a discount? I'm curious if there is a lot of that kind of activity or was the window where they were distressed too short? And secondly, you mentioned you did an investment in U.S. Foods. I was curious, was that, since it's a publicly traded company, equity or debt? I guess, why would you invest in a publicly traded company in a private equity portfolio?

Scott Nuttall, Co-President and Co-COO

Thanks for the question, Chris. First, on the $5 billion, no, that does not include activity by our portfolio companies themselves in terms of buying their own debt at a discount. There was some of that activity but not extensive activity, so that $5 billion I mentioned was just for the firm's account specifically. In terms of the U.S. Foods investment, that was a convert, so it was a convert in a company we know well.

Craig Siegenthaler, Analyst

I wanted your updated thoughts on FRE stability in 2020 from current levels, just given your previous comments, to Bill's question on CLO subordinated fees and also some other sources of risk, including mark-to-market on NAV-based funds, which I think is a small component for you guys, capital markets transaction fees, which are already quite low. I'm forgetting if you include any FRE performance fees, including from like your BDC business Franklin Square and FRA 2. So maybe just unpack other sources of risk that could develop throughout the year. Of course, that would be offset by shadow AUM deployment and fundraising too, but just wanted to unpack those sources of risk there.

Robert Lewin, CFO

Great. Thanks, Craig. It's Rob. Maybe the best way to do this is to take our FRE in component parts. The first and most important are our management fees, which are roughly 75% of our total fees this quarter. Even with the potential impact of the CLO subordinate fees, it's a fairly minor part of our overall business. As you said, our NAV-based funds is also pretty minor. As we look at our management fee component, we think it's stable and has significant growth ahead. The best example of that is it's up 14% year-over-year this quarter. On top of that, we've also guided that we expect to grow our management fees by greater than 50% over the next 3 and change years. The other 25% of our fees today are made up of a combination of transaction and monitoring fees that I think, over time, are probably biased to go up based on KKR’s overall size and how it grows, as well as our capital markets business, which we think is a long-term growth engine for us. A normalized environment should allow us to take share based on the business model we've set up and the people that we have. Finally, the last component is the margin piece of it. What we've indicated in the past is that if we're able to achieve the management fee growth trajectory that we think we can do over the next few years, we would expect to see some margin expansion flow through our business. While we haven't guided to a specific FRE number, we do think that, when you break out all of the component parts, that would suggest two things: meaningful stability and real upside from here.

Devin Ryan, Analyst

I guess just would love to maybe dig in a little bit more about the investing playbook from here. I heard the comments about moving the distressed team closer to the PE team. Just trying to think about whether you guys will look at opportunities in areas that you've shied away from because valuations weren't interesting, but now we're getting to some maybe pretty severe distress, and so that could be more attractive. Or is it more focusing on the same areas you have been focused on but just potentially getting a bit more attractive valuation? Just trying to think about what the stress defined might look like to you guys and just kind of the investment playbook in that.

Scott Nuttall, Co-President and Co-COO

Devin, thanks for the question. It's Scott. I would say we're kind of seeing this rolling out in a few different waves, and there's probably 4 big themes as we see how this unfolds from an investment opportunity standpoint. I'd say the first wave was investing in dislocated traded credit and equities, and we were particularly busy on that front over the last couple of months. The commentary we gave around the target lists we had created was very helpful in that regard. So there were a number of companies we were tracking both credit and equity, where, frankly, the prices were too high, but we had a target price. We did our work and were able to buy on the back of that work when the dislocation first showed up. Some of those opportunities were very short-lived, so we were able to move quickly by virtue of that. That was kind of wave one. We continue to see opportunities there. Spreads are still wide, and we continue to deploy capital into that opportunity set. The second wave we've seen is providing liquidity to companies in need, which tend to take the form of either structured equity or credit, and we've got the firm working very well together across both PE credit, real estate, and infrastructure where appropriate—making sure that all hands are on deck. When we have companies that we know and like asking for liquidity, we can move quickly. U.S. Foods is one example of that, but we have several other opportunities like that that we're working on at the firm right now. The third big theme would be around portfolio companies making acquisitions. We're starting to see opportunities of that type of merge now, and are working with several of our portfolio companies looking to grow and be consolidators through this time. Many of those conversations have been going on for months or years, but there was a meeting of the minds on valuation opportunities in times like this; everybody becomes a little more economic around what can get done and the synergies are even more powerful relative to the base of earnings. We're busy there. The fourth theme I'd mention is around companies, both public and private, that are looking to sell non-core subsidiaries. They're doing that to delever or to buy back stock, or in some cases, a little bit of both. That wave is starting to show up as well. What we've seen generally is it started in the traded markets and now has moved into more private markets. We're busy on all of those fronts as we sit here today. That's part of the reason we're so enthusiastic about the deployment opportunity ahead of us and the return opportunity on the deployed capital. Yes, to your question, some of those are in areas that we may have shied away from in the past because valuations were too high, and they have started to come back our way.

Patrick Davitt, Analyst

Thanks for the industry exposure breakout detail there. A lot of other firms have also been giving us more color around what percentage of the portfolio they view as particularly stressed or exposed to this recession. So if I believe you have 1 high-profile, one that's been in the press that doesn't fit into the 3 buckets you gave, could you maybe frame your view of the portfolio from that standpoint, the percent of exposed companies that you maybe have bucketed into a meaningful stress category? Conversely, perhaps the percent that has been categorized as more okay or maybe even benefiting from this environment?

Robert Lewin, CFO

Sure. Thanks, Patrick. It's Rob, and I'll take that question. We're not going to disclose how we break companies out into different buckets. But what we can tell you, and it's what Scott mentioned on the call, is we feel really good about our relative portfolio of construction, and it's going to be a combination of our limited exposure in energy, retail, travel, hospitality, and leisure through our portfolio. Upside-wise, I think we've become overweight over the last number of years in online and e-commerce businesses, which have held up quite well over the last couple of months. The last point around portfolio construction for us is we obviously have a fair bit of weighting towards Asia as a firm. North of 30% of our private equity portfolio today is exposed to Asia or directly exposed to the Asian market, which has held up on a relative basis better than the U.S. and Europe. Overall, we feel good about our portfolio. Scott mentioned on the call that we certainly have our companies that are going to need some additional support through this period of time. But we think the overall construction of our portfolio and the health of our companies is part of the reason why you would have seen our investment performance hold up pretty well in our private equity businesses over the last quarter, especially if you look over the last 12 months.

Glenn Schorr, Analyst

That's a good lead-in to the question. I want to talk a little more about the Asia franchise. I would ask both the short-term and the long-term. Short-term meaning, besides holding up better, what can you use in terms of those markets being ahead of us and opening up? What can you learn from that across the franchise and where the opportunities are? Longer-term, it’s a little tougher because right now, there's a little more China-related friction and nationalism everywhere in the world. I don't know if that has any implications on your thought process about the Asia franchise because it's such an important part of who you are.

Scott Nuttall, Co-President and Co-COO

Thanks for the question, Glenn. It's Scott. First, on the short term, it's been hugely helpful having such a broad platform in Asia and such a substantial portfolio there. We were able to see several of those countries and markets be impacted by the crisis ahead of Europe and the U.S., and we have started to see a lot of those markets now bottom and start to show some improvement. Just to give you a bit of color, when the crisis started, we moved to a daily call with the top people in the firm from around the world, including in Asia. The Asia team shared its insights from what they're seeing with our portfolio and on the ground very early, so we've been able to learn from that as we adjusted our approach in Europe and the U.S. on the back of those learnings. We are starting to see slow improvement across a number of our portfolio companies. We started to see it in Asia. Most manufacturing facilities are kind of now operating at 70% to 100% of capacity. We're starting to see that also occur in parts of Europe, and we're actually, in some markets—even in the U.S.—starting to see a bit of bottoming. To be clear, it's not of the—it's more like an elevator down, escalator up type set of charts that we're seeing across the portfolio. But we started to see that happen in Asia over the last few weeks, and now it's showing up in the rest of the world. So it's been very helpful to us as we've navigated all this. In terms of the longer term, we feel great about our Asia franchise and the opportunity we have in front of us. As a reminder, we have 8 of our 22 offices there; two of those are in China, 6 outside. We see a big opportunity to grow our business. As you know from prior discussions, we started in Asia in private equity and have now been bringing the rest of KKR's businesses to Asia across real estate, infrastructure, credit, just to name a few. We continue to see a big opportunity to expand our platform in that part of the world. Regardless of what happens with the China dialogue, we still feel quite good about the opportunity ahead for the firm.

Robert Lewin, CFO

One additional point, I'll mention it's worth mentioning when we talk about our Asia franchise. We've talked a lot about Japan carve-outs over the last number of quarters and how that's been a real strategy for us. We actually had our first exit of one of our carve-outs that we announced in March; the sale of Alpha Beta, and that closed in April, around 3x multiple of money for us. You'll see that flow through our Q2 financials, but that was a nice win for that strategy for us in Japan.

Michael Carrier, Analyst

I just have a question on performance fees and investment income. Your level of carry-eligible AUM seemed to dip less than some firms. Your ratio of paying carries is above 60%, likely higher post-April rally. You mentioned the $400 million pipeline. Curious on the outlook of performance fees; it's tough to predict, but on one hand it still seems like a fairly challenging backdrop, depending on the type of coverage. Some of these stats make it look better than average periods. Any additional color you can provide, including the stability of interest income and dividends from the balance sheet?

Robert Lewin, CFO

Sure. There's a lot about the environment that's challenging to predict right now, and carry—realized carried interest—would certainly be at the top of that list, I think, for all of us. But as you said, there are some encouraging statistics; about 60% of our total carry eligible AUM is in carry paying mode on a liquidation value basis, and our accrued carry still stands at over $1 billion. I think the most critical thing—and what we try and do every quarter—is to provide visibility in terms of what we actually know on our carried interest and our realized balance sheet earnings, which is the $400 million plus number that I mentioned in the prepared remarks. As for interest and dividends, they have been elevated over most of the last three quarters for largely the same reason. We have a margin loan against our Pfizer shares, and we've used that margin loan—fairly low LTV margin loan—to take a dividend in Q3, Q4, and Q1. That represented about 2/3 of our interest and dividends this quarter. The other 1/3 is relatively stable, albeit, with interest rates near zero, we’ll probably take a hit on our cash balance on our interest line item. But overall, that line should be reasonably stable going forward.

Robert Lee, Analyst

Great, and I hope everyone is doing well in this crazy environment. I have a question on the capital markets business. So I guess, thinking about it, it would make sense that at least in the near term, that business would slow. But by the same token, to the extent investment activity or opportunities kind of pick up or remain healthy; there's actually some near-term opportunity for that business to be more resilient. How should we think about the capital markets business over the coming quarters?

Robert Lewin, CFO

So, it's Rob, and I'll take that question. Q1 was an interesting quarter for us with $60 million of revenue—sort of in line with the $50 million to $70 million of baseline revenue that we suggested in our last call. About half of our business in Q1 was from third-party business; it's pretty meaningful, especially in a quarter where KKR didn't have much deployment across our organization. We continue to feel that in capital markets environments that are stable, we should be able to generate $50 million to $70 million a quarter, and then have upside potential from large transactions that have regularly occurred as part of that business, which is exactly why we've averaged in that business over the last few years. That said, I'm not sure we're yet in a normalized capital market type environment. So for Q2, we might be on the lower end of that $50 million to $70 million range; it's certainly too early to say. There's a lot of the quarter left to go. But we do think that business in markets where capital is scarce is where it can shine around some of the larger transactions that continue to come through our pipeline.

Brian Bedell, Analyst

Actually, a good follow-on right to Rob's question. In this environment, maybe you just got it Rob, if you can characterize the deployment capabilities in terms of anything getting delayed with the COVID-19 crisis and how that might project for the rest of the year, certainly if we get more contagion in the second wave? How do you see your capital markets business and balance sheet being used to help get deals done that a lot of other firms can't do to that extent?

Scott Nuttall, Co-President and Co-COO

Thanks for the question, Brian. It's Scott. In terms of deployment opportunities being delayed, I'd say there's probably a bit of a pause that went on, especially during the first several weeks of the crisis as people were trying to process what was happening. But we've actually started to see our pipelines pick up around the world. Some of it was in the areas I mentioned in terms of providing capital to companies in need of liquidity, the rescue type opportunities. But we are also seeing some larger scale private markets opportunities beginning to reemerge. For example, our pipeline in Asia is very active right now. So I don't think it's going to have a significant impact in the long term. It's all path-dependent obviously, but we are starting to see pipelines pick up on the back of some improvement in timing visibility. Regarding KCM and the balance sheet, it's a great question. We view our model as providing us with a real advantage in times like this. Some of the deals we've been able to execute during periods of dislocation have been because we can use the balance sheet and our capital markets business to access financing, both equity and debt when others couldn't. We’ve had several situations over time, including recently, where we were not necessarily the highest bidder, but we were the only bidder that could actually access the capital and secure financing. Like in prior periods, we view KCM and the balance sheet as a strategic tool to do that again. Good question; we are focused on maintaining liquidity on the balance sheet, and the capital markets team is well connected with our deal teams to make sure that we can execute in times like this.

Craig Larson, Head of Investor Relations

And Brian, it's Craig. Just one tangential point as it relates to capital markets and this value-add that is certainly strategic is greater in periods like this. Sometimes people ask that question in the context of our portfolio companies. One thing that's helpful to understand is how active the capital markets team has been to position us and allow us to be in a position of strength entering this volatility. When we look across the private equity portfolio, we have very few near-term maturities. Looking at the maturities of our portfolio companies and what we see in 2020 and 2021 represents only about 4% of the quantum of that long-term debt we have. I think the strength of capital markets helps position us well as we enter a period of volatility.

Christopher Harris, Analyst

Can you give us an update on where things stand with respect to the ownership of your stock by index and long-only investors? Related to that, what do you anticipate the potential Russell index might do to that number?

Craig Larson, Head of Investor Relations

Chris, it's Craig. We've seen a nice increase in index buying and that index ownership, but also as it relates to mutual funds that look at those benchmark indices for investment decisions. It has been our experience that influences our decision regarding Russell. When we look at ETFs in that passive amount, that's been in the mid-60s, between 60 million and 70 million shares owned by those index providers. As it relates to Russell, there are ETFs and strategies linked to those indices like the Russell 1000 and 3000, which suggest to teens, millions in the teens related to those formulaic strategies. The second piece that has most interested us are mutual funds that are benchmarked against those indices and our ability to market ourselves to those institutions to increase our mind share. We've spent a fair amount of time looking at Russell; they publish a detailed methodology document. Within that, they cover a series of considerations for public equity, domicile, market cap, and float structure. As we've mentioned earlier, we have meaningfully engaged directly with FTSE Russell. While any decision on index inclusion is obviously their decision and not ours, we believe we meet Russell’s requirements.

Michael Cyprys, Analyst

Just wanted to ask around LP demand. I certainly heard you on the $10 billion of new commitments coming in the door. But I'm curious if you could talk about how you see LP demand for private markets evolving in this backdrop. On one hand, you have the denominator effect that drives allocations higher and lower distributions from the asset class that all LPs have to fund their commitments from elsewhere in their portfolio. That could be a challenge, but then you have low rates, which could mean more demand. I’m intrigued by how you see these dynamics and the impact they might have on the asset class? Do we expect to see more secondary activity? Is that a part of the marketplace that you'd like to have more presence in?

Scott Nuttall, Co-President and Co-COO

Thanks, Michael. It's Scott. It's a great question, and it’s a bit early honestly to give you a decisive answer. I think you're right, there will be a bit of puts and takes. There will be questions for some institutional investors around the denominator effect and what happens with the rest of their portfolio and their allocations to alternatives. Honestly, we've started to see the public markets rebound, so those initial questions about that create some uncertainty about whether the denominator effect will be substantial. We’ll have to give that time to see how it settles out. Last time that happened, we saw not a big reduction in allocation to alternatives, but actually an increase in allocation to alternatives so institutional investors could continue to invest in the asset class. On the flip side, you're right. I've noticed there is recognition among CIOs around the world as to a low rate environment moving to a virtually zero rate environment. They need to look for ways to generate returns. The dialogue around alternatives continues which is why those conversations pivot quickly to offense and where to lean in, which we find encouraging. Investors continue to look to private markets for returns as they expect less and less from traditional fixed income and public equities. We think that bodes well for our business. Just to add a detail, during this time, there’s been a lot of interest from the insurance space, which tends to be quite liquid and conservative in its approach. We've been quite active in our dialogue with insurance companies during this period. From the high net worth and retail markets, we're seeing them lean into this from an offense standpoint. There's lots of nuance in that, but overall, we think it bodes well for our business. There's going to be an even greater need for return, and if you consider the power of the illiquidity premium the alternative space provides, the lower the overall normal market return, the greater that illiquidity premium is as a percentage of the total return. Regarding your question on the secondary market, it’s a space we continue to spend time on, looking periodically for strategic opportunities for us there.

Craig Larson, Head of Investor Relations

This concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Craig Larson for closing remarks. Please go ahead. Thank you, operator, for your help. Thank you, everybody, for joining our call. We look forward to giving you an update next quarter. For any follow-up items, please feel free to reach out to me directly. Thank you once again.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.