Earnings Call Transcript
KKR & Co. Inc. (KKR)
Earnings Call Transcript - KKR Q1 2022
Operator, Operator
Thank you all for being here. Welcome to KKR's First Quarter 2022 Earnings Conference Call. I'll now turn the call over to Craig Larson, Head of Investor Relations for KKR. Craig, the floor is yours.
Craig Larson, Head of Investor Relations
Thank you, operator. Good morning, everyone. Welcome to our first quarter 2021 earnings call. This morning, I'm joined by Scott Nuttall, our Co-Chief Executive Officer; and 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. As a reminder, we report our segment numbers on an adjusted-share basis. This call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our earnings release and our SEC filings for cautionary factors about these statements. So we're pleased to be reporting strong results this morning. Fee-related earnings per share for the first quarter were $0.69, up 66% year-over-year and the highest quarterly figure we've ever reported. After-tax distributable earnings per share came in at $1.10, up almost 50% compared to the first quarter of 2021, and is the second highest quarterly figure we reported. When looking at the quarter, our results and activities reflect four key points. First, we are seeing the strength and resiliency of our model and our people. Despite all of the volatility and uncertainty, we reported strong results across nearly every metric. Second, as businesses inside KKR are growing and scaling, they're providing a real impact on our numbers. For example, in private markets, our infrastructure and real estate platforms of scale have driven real asset strategies, comprising over half of both our fundraising and our deployment over the last 12 months. Third, we're finding creative ways to enhance our strategic positioning. Last week we closed on the previously announced acquisition of a Japanese REIT business, which is one of the largest real estate platforms in the second largest real estate market globally. Lastly, despite the volatility and increased uncertainty, our limited partners continue to trust us with their capital. Strong investment performance has been a critical driver of the success we've experienced. Looking at fundraising in detail, new capital raised in Q1 totaled $26 billion and $132 billion over the last 12 months. Notably in private markets, both our Global Infrastructure IV fund and North America Fund XIII held final closes in the first quarter. Including employee commitments, Infrastructure IV totaled $17 billion, more than two times larger than Infra III, and North America XIII closed out at $19 billion, which is over 35% larger than its predecessor. Also, we're continuing to raise capital for our European private equity strategy, which has thus far reached $7.1 billion, already surpassing the size of the previous European private equity vintage. It's worth highlighting the regional approach we've taken in our traditional private equity business with individual funds across the Americas, Asia, and Europe, rather than having a single global fund. We believe this strategy maximizes our fundraising potential while allowing us to diversify our carry pools, reducing our vintage risk across these funds, and making us less susceptible to market sentiment at any single moment. Additionally, in public markets, $9 billion of new capital raised is among the highest quarterly figures we've reported. This activity was widespread, spanning hedge funds and credit. In alternative credit, we raised capital across our asset-based finance, Asia credit, and direct lending strategies, private credit strategies in Europe, and the next iteration of our opportunistic strategy. In leverage credit, we observed activity across a range of separately managed accounts and loan strategies, complemented by our CLO business where we issued our 41st US CLO in the quarter. Furthermore, Global Atlantic closed on a block transaction in the quarter, contributing $3 billion. These fundraising efforts helped raise AUM to $479 billion and fee-paying AUM to $371 billion, both up approximately 30% year-over-year. Moving to investment activities, capital invested in the quarter totaled $21 billion. In private markets, our real assets platform invested $9 billion of capital, including $4.5 billion in real estate, driven by activity in our Americas and European opportunistic equity strategies, as well as real estate credit. Our infrastructure platform invested over $3 billion of capital, led by activity in both the US and Asia, with $3.5 billion of private equity deployment, relatively evenly spread across geographies. In public markets, our global Atlantic really added to the pace of investment activity in private credit, most notably in asset-based finance and direct lending. Speaking on asset-based finance, we invest across various pools of capital looking for different risk profiles, from our private credit funds to our BDC platform to global Atlantic. Consequently, the addressable market for us and available investable capital has grown substantially. Quarterly ABF deployment surpassed $5 billion, with $2.4 billion in direct lending activity in Q1. Now, shifting to investment performance, please refer to Page 7 of the press release for details. The private equity portfolio saw a 5% decrease in the quarter, aligning with the decline of the MSCI world. Yet, over the last 12 months, the PE portfolios increased by 19%, outpacing the MSCI world by 800 basis points. In terms of real assets, the portfolios continue to perform well. The opportunistic real estate portfolio appreciated by 11% in the quarter and is up 30% over the past year. Meanwhile, infrastructure portfolios appreciated by 6% in the quarter, and 11% over the past year, showcasing resilience in an inflationary environment. Moving to the credit side, leverage credit was down two for the quarter and up three over the last 12 months, tracking closely with broad high-yield and leverage loan indices, while alternative credit showed a decrease of 1% in the quarter and up 9% year-over-year. Returning to the acquisition of the Japanese REIT, now known as KJRM, we believe the benefits extend beyond simply adding AUM. It is a strategically important transaction across areas of focus, including real estate in Asia, perpetual capital, and private wealth. Lastly, as a piece of financing for this acquisition, in April we raised approximately $475 million in Japanese yen-denominated notes across various maturities with a weighted average coupon of around 1.2%. With that, I will turn the call over to Rob.
Robert Lewin, CFO
Thanks a lot, Craig. I'll quickly go through our quarterly financials. Our management fees continue to scale quickly, increasing by 46% in the LTM period to $2.3 billion and reaching $625 million for this quarter alone. This growth was primarily driven by the fundraising activity that Craig detailed. Notably, Europe VI entered its investment period in the quarter, contributing approximately $20 million of catch-up fees from final closes of Americas XIII and Infra IV. Our capital raising success and investment activity boosted fee-paying AUM to $371 billion, a 29% year-on-year increase. Our net transaction and monitoring fees totaled $306 million for the quarter, mainly fueled by our capital markets franchise, which earned $255 million, nearing $1 billion for the LTM period. Transactions during the quarter remained diversified across clients, strategies, and geographies, while operating expenses totaled $126 million. As we've discussed in previous calls, we continue to expect modest increases in this area as we expand our footprint and invest in marketing and technology. In summary, our fee-related earnings this quarter increased to $605 million, up 66% compared to last year. Moving down the income statement, our realized carried interest for the quarter was $580 million, with realized investment income at $349 million. Considering the industry volatility in Q1, these results are quite solid and reflect the breadth and scale of our firm today. Shifting to our insurance segment, we experienced a robust quarter with $116 million of operating earnings. Overall, our after-tax distributable earnings for the first quarter amounted to $969 million, translating to $1.10 per share. I now wish to discuss our balance sheet briefly. During periods of market volatility, concerns may arise regarding increased risk profiles; however, we perceive this in an entirely different manner. Our balance sheet attributes are a valuable asset in times of market dislocation. Beginning with our liability side, we enjoy access to long-dated and low-cost liabilities. The average maturity of our recourse debt, including recent Yen issuance, is around 20 years at a weighted average coupon of about 3.5%, all fixed. Therefore, we have minimal duration risk and no exposure to margin calls, with our after-tax cost of debt being less than 3%. We lack exposure to rising interest rate risks. Focusing on our asset side, we've made significant commitments to asset allocation risk, resulting in exceptional returns for shareholders. Over the last one, three, and five years, our annual returns were 15%, 20%, and 16%, respectively. A crucial strategic decision made years ago was the launch of our core private equity business, representing a pivotal moment in our portfolio's evolution. We're working towards establishing what we believe to be the largest business of its nature, contributing significantly to our management fees and fee-related earnings. In this regard, core private equity is a long-term strategy for us, with expected holding periods of 10 to over 50 years, which we believe presents a modest risk-return profile versus traditional private equity models. Our target is mid-to-high teen gross IRRs, compoundable over a decade. As you may have noticed, while equity and fixed income indices dipped 5% in the quarter, our core portfolio rose by 3%. This performance is attributed to the strong attributes of the core portfolio, better positioning it to outperform in volatile and inflationary periods due to its inherent pricing power. Currently, core private equity comprises 30% of our balance sheet investments, approximately $5.5 billion. We embarked on core private equity not just for its stable long-term benefits for our balance sheet, but also due to its synergy with our overall business model. We aimed to become a leading player in core PE asset management and anticipated our capital markets division would facilitate these investments over time as they access both debt and equity markets. Since its inception five years ago, we've established an impressive global portfolio of over 15 companies, managing $32 billion of AUM across third-party and balance sheet capital, positioning us as the largest core PE asset management enterprise globally, with gross IRRs of 26% since inception, reinforcing our confidence in scaling this franchise. With management fees generated throughout these extended investments, we also receive an annual allocation of carried interest from our clients, which we earn each Q1. For 2021 performance alone, we recorded around $250 million of carry, reflected in our Q1 results. The potential for performance-related revenue to become substantial over time, coupled with compounding and deployment, is significant. Moreover, our core portfolio companies accounted for approximately 10% of capital markets fees over the past couple of years, expected to grow alongside the expansion of our portfolio. In summary, we've cultivated an exposure in our balance sheet that has excelled with a stable return profile, and we've significantly augmented our asset-level returns by establishing leadership in core asset management, generating incremental management fees, carry, and capital markets revenues. Given the increasing scale and diversification of our balance sheet portfolio, we've committed to enhancing our disclosures. Starting this quarter, our 10-Q will include the 20 largest balance sheet positions with their cost and fair value instead of just the five largest investments, aiming to enhance transparency—13 out of the top 20 positions, as of March 31st, being core private equity investments, highlighting the performance of this portfolio moving forward. Refocusing on our broader balance sheet strategy, we believe this environment plays to our advantage. This point was especially clear in the first half of 2020 when we outperformed the market. Accessing this additional liquidity during risk-off periods seems an invaluable asset, and we believe many investment firms would prefer having it during challenging market conditions. Furthermore, our solid capital base proves advantageous in pursuing strategic acquisitions. A clear example of this is that we wouldn't have been able to pursue Global Atlantic in early 2020 amidst significant capital market dislocation without leveraging our capital base. As Craig stated, we recently closed a strategic acquisition of a Japanese REIT manager, funding its entirety to the $1.8 billion purchase price without generating equity dilution, a move beneficial for promptly addressing limited dilution concerns for shareholders. From these two transactions alone, we anticipate generating well over $300 million of fee-related earnings next year, primarily from perpetual capital, requiring minimal equity dilution for realization. We are utilizing our balance sheet to achieve very high ROEs while simultaneously generating additional FRE. Moreover, we have engaged in share repurchases since 2015, investing $2.2 billion to repurchase or retire 85 million shares at a weighted average price of $25.50. Hopefully, this effectively outlines the strategic value of our balance sheet in enhancing our economic outcomes across diverse market scenarios. Now, I will hand it off to Scott.
Scott Nuttall, Co-CEO
Thank you, Rob. It has been a dynamic three months since our last call, and there certainly is more information to digest and uncertainty to navigate. While environments like this can induce anxiety for most, they also highlight the strengths of our culture and business model. Our connected firm and culture ensure information flows and opportunities are highlighted to the correct capital pools. With valuations decreasing and the costs of capital rising, more companies require solutions that may not be readily apparent, and our clients desire more information. Consequently, the investments we make during such times carry enhanced potential for higher returns, as our clients gain a clearer understanding of our unique value. In simpler terms, dislocation reveals the depth of our culture and investment prowess, positioning us exceptionally well for this environment. We are armed with record dry powder, a trusted client base, a range of growing global businesses, and the resilience of our connected culture, which positions us for success moving forward. I'm sure we will discuss the macro dynamics further today, but regardless of speculation surrounding near-term rates, inflation, and the economy, we remain committed to executing our strategy and confident in achieving the five-year plan outlined in November. We're happy to take your questions.
Operator, Operator
Our first question will come from Alex Blostein with Goldman Sachs. Please go ahead with your question.
Alex Blostein, Analyst
Thanks. Good morning, everybody. I was hoping we could start with fundraising comments. For the last couple of months, we've heard a lot about some of the challenges in the private equity sector. It doesn't appear to be affecting you at all, given your remarks on the recent fundraisers, especially in Europe. While I understand it's difficult to generalize, could you give us kind of an overview of what you're hearing from LPs that is positive and maybe where you foresee challenges in fundraising over the next 12 to 18 months?
Scott Nuttall, Co-CEO
Great. Thanks for the question, Alex. It's Scott. Good morning. We have heard some of the same comments that you have regarding the landscape. You're correct that we are not experiencing the same impacts. Let me elaborate on what we’re seeing and why that’s the case. We’re indeed hearing from some LPs that they notice GPs returning to the market quicker than anticipated, creating a bit of a crowding effect. This dynamic is particularly true among more traditional institutional investors, such as certain public pension funds and sovereign wealth funds, especially those primarily invested in private equity. However, we are not hearing this sentiment regarding other alternative asset classes, nor are we hearing it from newer participants in the broader alternative asset scene, including private equity. From our perspective, we raised $26 billion in the first quarter and $132 billion over the past 12 months. We have successfully raised nearly all our flagship private equity funds over the last couple of years, totaling over $40 billion for that fund cycle. Therefore, any relative crowding in the private equity sphere does not significantly affect our current fundraising activities. Most of the funds we are raising this year revolve around real estate, infrastructure, and credit, which are driving substantial investor interest, especially as inflation and interest rates rise. We feel confident about our position and have no intentions to alter our plans for the year. Regarding your inquiry on potential challenges down the line, nothing negative stands out. Currently, we view real assets and credit as favorable areas, and we're positioned well against them.
Alex Blostein, Analyst
Great. Thanks for that. My follow-up question is about the wealth channel. Scott, you mentioned that you are continuing to build that out. I want to focus on KREST, which has demonstrated strong investment performance, showing around 9% year-to-date, and it follows over a 20% return last year. Growth seems to have been slower than many of us expected. Could you discuss some of the challenges to accelerating growth in KREST, particularly concerning its platforms?
Craig Larson, Head of Investor Relations
Hey Alex, this is Craig. Let me start, and before we delve into specifics, allow me to provide some context. We believe the overall opportunity within private wealth to introduce tailored democratized products is massive, and we regard ourselves as well-positioned against this burgeoning asset class. Over time, we do foresee unfettered democratized products across all our asset classes, coupled with continued investments in sales, marketing, data, and digital talent. Currently, we tend to evaluate these on an aggregate basis, and we have three broad democratized solutions across multiple platforms, as well as bespoke solutions tailored for individual platforms. Across these products, we currently manage about $5.6 billion of AUM. I believe during these calls we should avoid providing individual updates extensively. The key takeaway is this: we have a reputable brand that we consider unrivaled in this channel, alongside an outstanding long-term track record, which can be supported by some of the individual product track records you've noticed. We are confident in our ability to innovate in product design and have established strong relationships with various distribution partners, providing a compelling long-term opportunity, and we genuinely feel positive about our current progress.
Operator, Operator
Our next question is from Michael Cyprys with Morgan Stanley. Please proceed with your question.
Michael Cyprys, Analyst
Hey, good morning. Thanks for taking the question. Given the current inflationary backdrop, rising rates, and supply chain challenges, could you discuss how you see these factors impacting your portfolio companies? How are you assisting your companies in managing through this environment? Additionally, can you provide insight into revenue and EBITDA growth trends across your portfolios?
Robert Lewin, CFO
Hi Mike, it's Rob. Thanks for the question. Across our portfolio, we are indeed observing a stickier inflation environment. We are closely monitoring three primary factors: labor availability and wage inflation, housing short supply driven by underbuilding over the past 15 years, especially now as millennials are entering their prime homeownership years, and the underinvestment in CapEx related to energy supply, which will continue to exert pricing pressure. Nonetheless, we are also observing easing supply chain challenges within our portfolios. For 2022, our inflation expectation ranges between 7-8%, with a moderation anticipated by 2023. We are extensively engaged in sharing best practices across our portfolio while continuing our long-standing interest rate hedging efforts, anticipating a potential increase in rates. Historically, we’ve discussed inflation trends, and we are quite optimistic about how the broader portfolio is set to perform. Revenue and earnings growth trends across our portfolios remain exceptionally robust, indicating strong positioning moving forward.
Scott Nuttall, Co-CEO
Hey Michael, it’s Scott again. I'd like to add a couple more points. We've adopted a thematic focus over the past several years, and one of our vital considerations has been the likelihood of inflation emerging. Thus, we have proactively invested in businesses globally that possess genuine pricing power, helping the portfolio maintain robust performance. Furthermore, in terms of how we are assisting our portfolio companies, we provide procurement programs, leverage our scale prudently, and ensure they have access to our market insights, which has positioned them well against prevailing supply chain challenges. As a result, portfolio performance has exhibited resilience with revenue and EBITDA growth significantly showing trends of improvement, up 20-30% last year and robust trends persisting into the first quarter despite macroeconomic headwinds.
Michael Cyprys, Analyst
Great. As a follow-up question regarding rising rates, how do you perceive rising rates impacting different areas of your business? Can you help us understand what portion of your credit book is floating rate and how Global Atlantic should be framed regarding asset repricing during a rising rate environment?
Scott Nuttall, Co-CEO
Certainly. These are important questions, Mike. In a rising rate environment, there are both advantages and disadvantages across our business, but we generally believe we're well positioned. Most of our leverage credit AUM operates under floating rates, with the same generally true for most of our private credit AUM. Thus, as interest rates increase, our returns will also rise. Additionally, the hurdles for most of our fund products are fixed, suggesting a greater likelihood for additional incentives. Across Global Atlantic, the overall implications of a rising rate environment can be fairly positive over time, although you do see impacts on the fixed-income book you mentioned. Our assets and liabilities are firmly aligned at Global Atlantic, meaning that as rates rise, the valuation of liabilities offsets the potential drop in asset values. It's pertinent to mention KKR possesses a distinct liability structure; we benefit from 20-year duration capital entirely at less than 3% after-tax costs. Furthermore, we currently hold $115 billion in dry powder, which is a record high, positioning us advantageously for investments during this phase.
Michael Cyprys, Analyst
Great. Thank you.
Scott Nuttall, Co-CEO
Thank you.
Operator, Operator
The next question is from Glenn Schorr with Evercore. Please proceed with your questions.
Glenn Schorr, Analyst
Hello there. Thanks. Capital markets and transaction fees showed resilience considering the environment. Yet, markets worsened in April. Can you help us understand future expectations, given that exits may be down while deployment remains robust, and diversification stays positive? It seems management fees can be discounted, but they represent a significant part of the structure and appear resilient.
Robert Lewin, CFO
Hey Glenn, it's Rob. I'll start. In the last quarter, we mentioned that in normal functioning markets, our capital markets typically generate around $200 million in revenue per quarter. In Q4 last year and Q1 this year, we operated on the advantageous side of that as we expected transactions in Q1 to be slightly forward-looking. However, it’s crucial not to confuse quarter-to-quarter variability with the durability and growth prospects of our franchise. The pipeline for generating fees remains strong, as does our ability to engage in diverse transactions across various sectors. While we foresee continued growth from various segments, we maintain belief in our ability to capture market share owing to our business model and talent access.
Glenn Schorr, Analyst
That’s great. You mentioned in the prepared remarks that ABS deployment was around $5 billion, which raised my interest. Can we anticipate an increase in the rate of ABF growth and deployment on a quarterly basis, thus potentially leading to a more stable fee flow coming from this? I’m curious how significant this contribution could become.
Craig Larson, Head of Investor Relations
Glen, it's Craig. I appreciate the question. We probably don’t spotlight this platform enough. To start, ABF is a massive market—approximately $4.5 trillion—projected to grow to over $7 trillion in the coming four to five years, compared to a mere $1.5 trillion high-yield market. So, we are discussing a market fundamentally larger with better growth projections. Similar to leveraged lending to corporates, ABF is vital for financing daily operations, covering mortgages, credit cards, receivables, equipment leasing, and more. With the massiveness of the market and associated barriers to entry, we generally identify attractive risk-return profiles. Additionally, we enjoy diversification away from typical traded credit. In terms of approach, we target three significant objectives. First, as noted in prepared remarks, we are using various capital pools to seek different risk-reward profiles. Hence, we've seen significant deployment last year exceeding $15 billion, including $5 billion this quarter—a trend expected to continue as our credit platform expands. Thirdly, we've partnered with about 15 specially financed platforms globally, which help access exciting opportunities—each contributing 5,000 employees and over $100 billion of AUM. This has us well positioned for forward origination. To sum up, ABF is becoming a vital and interesting channel for the firm.
Glenn Schorr, Analyst
Thanks, Craig. I appreciate the insights.
Operator, Operator
The next question is from Bill Katz with Citigroup. Please proceed with your questions.
Bill Katz, Analyst
Thanks for taking the questions. I look forward to reviewing that queue and your updates. Given the rapidly changing dynamics from the first to second quarters, can you discuss your recent deployment opportunities? How is monetization activity progressing, and how might declines in private equity and net accrued carries impact monetization opportunities?
Craig Larson, Head of Investor Relations
Thanks, Bill. It's Craig. Addressing deployment is a considerable topic, particularly with the varying themes of inflation, interest rates, and economic growth. We expect more market volatility and need our firm to stay as interconnected as possible. Areas of focus include: first, companies demonstrating pricing power, especially amidst labor shortages and rising input costs; second, investing in collateral-backed cash flows; third, facilitating investments in real assets that can keep pace with nominal GDP, such as infrastructure and real estate; fourth, capitalizing on technological advancements in digitization, automation, and logistics; fifth, strengthening security, particularly in energy, payment, and data; last but not least, capturing shifts in savings trends within Asia’s millennial base. Notably, in private equity deployment, it often constitutes a smaller allocation within our firm, representing youth in real assets over prior deployment. Last year, 55% of our private market deployment was attributed to real assets, increasing to 67% in Q1 this year.
Robert Lewin, CFO
Bill, it's Rob. Building on your question about Q1 private equity returns, it's worth acknowledging the context. We soared by 46% in 2021 within PE, then gave back approximately five points in Q1. Yet over the past four months, our PE portfolios demonstrate a robust 40% increase. Concerning your query on monetization, we're exceedingly optimistic about our pipeline, especially amid the current market's volatility; thus, we reported a healthy revenue figure for Q1's monetization. Looking ahead to Q2, transactions within our pipeline, monitored by signed deals or equivalent indicators, project over $600 million in revenue. Furthermore, we anticipate that approximately 75% of this revenue may derive from realized performance revenue, while the remainder comes from realized investment income. I hope this provides additional clarity.
Bill Katz, Analyst
That was very helpful. I have a quick follow-up regarding the evolving conversation around regulation in the insurance sector. There's a divide among peers regarding whether balance sheets are a liability or asset. Your ownership of Global Atlantic is a slight variance to that. Can you discuss potential regulatory risks? What are the pros and cons you see surfacing?
Robert Lewin, CFO
Bill, it's Rob again. We discussed this during our last call—there's not much news to share. With Global Atlantic, we focus on maintaining strong, transparent relationships with regulators. Although the regulatory landscape continues to evolve, we aim to ensure Global Atlantic is part of those dialogues. We don’t foresee substantial changes affecting our business model of prudently investing behind long-term obligations to policyholders. So we remain cautiously optimistic about our regulatory relationships, maintaining a focus on transparency moving forward.
Operator, Operator
The next question is from Brian McKenna with JMP Securities. Please proceed with your question.
Brian McKenna, Analyst
Thanks. If we annualize the first quarter's FRE, it suggests a $2.75 run rate for 2022. Back in November, you updated your FRE target to $4 plus by 2026. If you're approaching $3 FRE this year, how does that affect your timeline for the five-year forecast?
Robert Lewin, CFO
It’s Rob. Thank you for the question. Our focus generally doesn’t center on short-term FRE targets as our business management style diverges from that approach. Thus, continual updates on our short-term FRE projections aren’t typical from us. However, rest assured, we're excited about our current trajectory, marked by significant momentum beyond past months. Our fundraising has consistently exceeded targets, and over the next year, we anticipate around 30 products coming to market, many poised to scale in areas such as infrastructure, real estate, and floating rate credit, where growth is apparent. Additionally, Global Atlantic’s positioning demonstrates better market strength than it did during acquisition, along with substantial growth in our capital markets business. Thus, we expect robust near- and long-term FRE growth.
Scott Nuttall, Co-CEO
To add context, Brian, when reflecting on where we've suggested future positioning, we've historically outperformed those projections. Our goal remains consistent: continue that trajectory.
Brian McKenna, Analyst
Got it. Helpful. Can you describe the mix of your net unrealized carried interest? What portion of the $4.2 billion derives from traditional private equity products, and how has that shifted forward, if at all?
Scott Nuttall, Co-CEO
That's a good question. The majority of our unrealized carried interest today is still very much linked to traditional private equity products. However, we are noticing increased contributions from our infrastructure and real estate strategies, among other newer strategies that have expanded significantly in recent years. We foresee this shift continuing as we progress.
Operator, Operator
The next question is from Patrick Davitt with Autonomous Research. Please proceed.
Patrick Davitt, Analyst
Good morning, everyone. Most of my questions have been addressed already. But can you briefly discuss the economic impact of KJRM specifically on AUM and earnings? Furthermore, how has its organic growth performed over the last few periods?
Scott Nuttall, Co-CEO
Absolutely. The acquisition, at current exchange rates, represents close to $14 billion of additional AUM, all coming from perpetual capital through managed REITs in the Japanese market. We see ample opportunity to expand this franchise in Japan, leveraging the strength of our team and core strategies for both our real estate and opportunistic ventures in the region. From an economic standpoint, we expect around $100 million of incremental FRE from this platform in 2023.
Patrick Davitt, Analyst
Great, thanks. Lastly, regarding the $600 million pipeline, can you clarify if that pertains to Q2 specifically, or is it a two-quarter outlook?
Scott Nuttall, Co-CEO
That’s a one-quarter view based on our current visibility, all focused on ongoing Q2 activity.
Operator, Operator
The next question is from Craig Siegenthaler with Bank of America. Please proceed.
Craig Siegenthaler, Analyst
Thank you, and good morning, everyone. I'm interested in an overview of your Pan Asia business, particularly in light of the recent Japanese REIT acquisition. There seems to be a considerable fundraising pipeline for your Asian products over the near term. Could you clarify the strategic advantages of the Japanese REIT acquisition, especially regarding cross-selling? Additionally, how is your China business holding up following the recent geopolitical decoupling?
Scott Nuttall, Co-CEO
Thanks, Craig. I'll start, and Craig can elaborate. We've communicated a vision that we anticipate our AsiaPac business will eventually rival our US operations, hence our strategic investments directed toward this. The Japanese REIT manager acquisition aligns perfectly with this overarching goal. In 2019, we had around $20 billion of AUM in AsiaPac—projected growth now puts us close to $55 billion post-acquisition, indicating nearly a tripling of our AUM in the relatively short span. Our competitive edge is evident, and we plan to capitalize on this head start as we strive for further growth.
Craig Larson, Head of Investor Relations
Regarding China, it's crucial to note that investing in China now requires a nuanced approach. Navigating the complexities in this environment means having a top-notch localized team and adding specialized resources like our public affairs team and the KKR Global Institute. China remains a significant long-term growth engine and will continue to be a priority market. Our focus centers on themes like domestic consumption, and we remain dedicated to supporting leading local firms' growth strategies. Current exposure is modest, encompassing just over 1% of our AUM.
Craig Siegenthaler, Analyst
Thank you, Rob and Scott, that was insightful.
Operator, Operator
The next question comes from Brian Bedell with Deutsche Bank. Please proceed with your questions.
Brian Bedell, Analyst
Thank you. I would like to revisit your comments regarding Asia, which you elaborated on well earlier. My question pertains to your approach towards energy investments—specifically your activity surrounding four different energy or natural resource-focused funds, which have remained stagnant. Investing in fossil fuels has faced challenges over the past decade and some question its viability as an sector. Given there is a notable capital need, how are you threading the needle between fossil fuels and new energy transitions while upholding ESG commitments?
Craig Larson, Head of Investor Relations
Good question, Chris. At a high level, we remain committed to investing in the energy transition and transitioning to cleaner energy. This translates to our investments in a diverse range of energy sources. To discuss renewables, we are escalating our activity within global clean energy developers, participating across several strategies including infrastructure and our impact business. In terms of conventional energy, we're engaging through a permanent capital vehicle named Crescent Energy, where we see great potential for developing industry-leading ESG programs while constructing equity value. Crescent functions under a fee structure that adjusts over time as the company scales. It is free cash flow positive and possesses low leverage, operating an area ripe for M&A opportunities. In summary, this represents our strategic approach while acknowledging broader societal energy objectives.
Robert Lewin, CFO
To emphasize, Chris, we have no immediate plans for a traditional fossil fuel fund, having refrained from investing in conventional oil and gas through our private equity portfolio since 2018. Our focus remains on Crescent as we work to enhance its ESG performance, while concurrently advancing in renewable sectors.
Operator, Operator
The next question is from Finian O'Shea with Wells Fargo. Please proceed.
Finian O'Shea, Analyst
Morning. Most of my questions have been addressed already, but could you provide insight on product rollouts or major relationship developments across retail channels concerning the private wealth progress?
Craig Larson, Head of Investor Relations
Our progress in private wealth is promising. While we aren't currently announcing incremental products, our vision entails rolling out democratized products across all asset classes. We continue to invest in core operational sectors like sales and marketing to solidify our foothold in this promising channel. We anticipate that new capital raised from individual investors will account for one-third to one-half of our new overall capital accordingly over the coming years.
Operator, Operator
Our final question is from Robert Lee with KBW. Please proceed with your questions.
Robert Lee, Analyst
Many of your peers have either acquired or built up their secondaries or solutions capacities. I’m curious about your current interest in that segment, which doesn't seem to have been a traditional focus for you within the market.
Craig Larson, Head of Investor Relations
It's an area of continual exploration for us. However, it’s not a pressing need. Should we find a platform that matches our requirements of being a top-tier player, one that can complement us and where the valuation aligns, we may consider branching into this space more aggressively. We're actively evaluating potential opportunities within the sector that can introduce unique value into the firm, given its sizable addressable market.
Robert Lee, Analyst
Great, thanks for the insights.
Operator, Operator
Thank you; we've reached the end of our question-and-answer session. I'll now hand the call back to management for closing remarks.
Craig Larson, Head of Investor Relations
Thank you all for your time and patience this morning, and for your interest in KKR. We look forward to following up with many of you directly, and if not, we anticipate providing our next update in approximately 90 days. Thank you once again.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.