Earnings Call Transcript - KKR Q2 2020

Operator, Operator

Thank you for joining us. Welcome to KKR's Second Quarter 2020 Earnings Conference Call. I will now turn the call over to Craig Larson, Head of Investor Relations for KKR. Craig, you may proceed.

Craig Larson, Head of Investor Relations

Thank you, Operator. Welcome to our Second 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 would 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 Investors Center section at kkr.com. This call will contain forward-looking statements which do not guarantee future events or performance. Please refer to our SEC filings for cautionary factors related to these statements. Like previous quarters, we've also posted a supplementary deck on our website that we'll be referring to over the course of the call. And we hope that you and your families, of course, are safe and healthy. To begin, as a reminder, in early July, KKR signed a definitive agreement to acquire Global Atlantic Financial Group, or GA. The acquisition is subject to regulatory approvals and closing conditions and isn't expected to close until early 2021. So while Scott is going to touch on GA in a few minutes, the quarterly results we're going to discuss on this call exclude the results of Global Atlantic. The presentation and transcript from our investor call that introduces GA and all of the opportunities that we see resulting from the acquisition are both available on the Investors Center section of our website. Also of note in the quarter before I turn to the supplement. On June 26, we were pleased to be added to the Russell Index family, including the benchmark Russell 1000 and 3000 indices. This is just the most recent step in the evolution of our structure and our shareholder base. Since we announced our conversion from a partnership to a traditional corporation in May 2018, we've seen a meaningful increase in our mutual fund and index ownership, and our stock is up over 70% on a total return basis over this time frame compared to negative 7% for the S&P 500 Financials Index. Alongside our fundamental performance, the changes we've made to our structure and reporting have played an important part in this, and we continue to meet with new potential investors who haven't evaluated our sector or KKR before. Let's turn to Page 2 of the supplement to go over our key metrics. Looking at the top half of the page, you can see AUM this quarter grew to $222 billion. With global equity indices up modestly over the last 12 months and high-yield and leveraged loan indices down over this period, our AUM has increased 8% year-over-year. Alongside investment performance in Q2, we had a strong fundraising quarter with $16 billion of new capital raised. Driven by fundraising and capital deployed, management fees over the last 12 months were $1.3 billion, up 13%. Looking at the bottom half of the page, our book value per share this quarter came in at $17.73 per share. This is up 7% from the $16.52 we reported last quarter. As you can see, even amid significant volatility over the last 12 months, our book values remain relatively steady compared to the $17.81 per share reported a year ago. Finally, our after-tax distributable earnings came in at $326 million for the quarter or $0.39 on an adjusted per share basis, flat from Q2 last year. That brings us to $0.80 per share for the first half of the year, up 5% compared to the first half of 2019 and over $1.4 billion of after-tax DE over the last 12 months. One additional point when you look at the bottom right-hand chart. The top part of the bars, the lighter shaded portion, reflects realized balance sheet gains which can be more episodic in nature as we're also going to look to compound value on the balance sheet. So where we've seen more consistent growth is reflected in the bottom, darker portion of the bars, our fees and carry, in addition to interest income and dividends. Turning to our summary financial results, please look at Page 3 of the supplement. Focusing on our results for the second quarter of 2020. Management fees were $333 million, up 10% compared to the second quarter of 2019. Our realized performance income totaled $355 million. Despite all of the volatility, it was a good realized carried interest quarter for us, with carry generated across the firm. Over 90% of the carry came from investments outside the U.S., with over half coming from non-private equity strategies. The largest exits in the quarter were accomplished at a blended multiple of approximately 3.5x our cost. With $90 million of realized investment income, our total revenues were $892 million this quarter. Now looking at our expenses. Compensation, including equity-based comp, totaled $357 million, with our comp ratio once again this quarter coming in at 40%. We noted last quarter that even with market volatility and an uncertain monetization backdrop, that we would maintain our expected comp ratio, low 40s as a percentage of total revenues, for the remainder of 2020. So this quarter is at the low end of that guidance. Non-compensation expense totaled $86 million in the quarter, which is down from the $99 million reported in the second quarter of 2019 due to prudent cost management. All of these results lead us to an operating margin of 50% and after-tax distributable earnings of $326 million, which again translates to that $0.39 per share figure. And with that, I'd like to turn it over to Rob.

Robert Lewin, CFO

Thanks a lot, Craig, and hello, everyone. I'm going to begin with some thoughts on our financial performance over the first half of 2020. And then we'll spend some time on our investment performance, before reviewing our fundraising and deployment activities. To start, please take a look at the right-hand side of Page 3 of the deck. We've all clearly experienced significant market volatility year-to-date. Recognizing that dynamic, I think the resiliency of our business model is best highlighted by our results in the first half of 2020 compared to 2019. One of the key financial metrics that we utilize as a management team and we know is a critical focus for our investors is after-tax distributable earnings per share. We were flat in Q2, and for the first half of 2020, our after-tax DE per share is up 5% relative to the same period last year. To be up 5% in such an important profitability metric does represent, we believe, differentiated performance relative to a broad set of comparables and speaks to the resilience of our model. I thought it would be helpful to spend a minute on this call walking through some of the drivers of our performance. Let's start with revenues, which totaled $1.8 billion for the first half of the year and are up 4% year-over-year. Our revenue contributions have really been broad-based. Our most stable form of revenue, management fees, are up 12% over the first 6 months of the year. Our carried interest has also been a meaningful contributor this year, as we have benefited from both strong investment performance and monetizations in several funds. Importantly, this is across different geographies and products, which has resulted in over $700 million of realized performance revenue year-to-date. That is up 25% relative to last year. Finally, our balance sheet continues to be a meaningful source of realized revenue, contributing $235 million in the first half of 2020. As it relates to our expense base, as Craig mentioned, last quarter on this same call, we committed to run KKR at a low 40% variable comp margin even through the volatility. Given our performance year-to-date, we are accruing total compensation, which includes equity-based comp, at a 40% margin, roughly flat to the same period last year. Moving to our non-compensation related expense. Like many corporates, we have benefited from the reduced operating spend of having most of our employees working remotely. In addition, our management team has been very focused on trying to reduce our cost footprint wherever we are able to do so responsibly and without jeopardizing future growth. While you can see this reduced operating costs on a year-to-date basis, it's most pronounced in Q2, where our operating expenses are down approximately 13%. As a result of both our revenue and cost performance, our distributable operating margin has increased by approximately 100 basis points year-to-date and is tracking right around 50%. All of this results in after-tax DE per share of $0.80 for the first 6 months of 2020 compared to $0.77 for the same period in 2019. So our revenues are up, our margins have improved, and most importantly, our distributable earnings per share are up 5%. In addition to some of the P&L metrics, fundraising has also meaningfully accelerated through the first half of the year. Our new capital raised is up almost 2x in 2020 relative to the same period in 2019. Looking at our results in full, our model is proving that it can hold up quite well during periods of market uncertainty. Turning to investment performance. Please take a look at Page 4 of the supplement. Generally, we tend to focus on the trailing 12 months. But on this page, you'll also see we have included performance figures for the quarter given how volatile markets have been. Our private equity flagship funds returned 14% over the trailing 12 months, that compares to the total return for the S&P 500 and MSCI World indices of 7% and 3%. Our flagship real estate and infrastructure strategies returned 13% and 30%, respectively, over the last 12 months. The sale of Deutsche Glasfaser closed in the quarter, which was a very meaningful monetization for our infra business and is a big driver of our LTM performance. In credit, we had a very positive quarter. Leveraged credit, the largest of our credit businesses by AUM, was up 11% in Q2 and flat over the LTM period. Alternative credit was up 2% in the quarter and down 10% LTM. Alternative credit is a combination of our private performing credit strategies, which had good relative performance; and our distressed portfolio, which took some marks LTM. This all compares to the LSTA index over the 12 months, which declined by about 2%. In terms of our balance sheet, our investment portfolio appreciated 8% this quarter, driving the increase in our book value per share to $17.73. Of note, our net accrued carry balance increased 27% in the quarter. Turning to fundraising. Please flip to Page 5 of the supplement. As mentioned earlier, we're finding this a good environment to raise capital. On this page, we show the quarterly capital raised over the past 5 years, where we have averaged around $7.3 billion per quarter. This compares to the $16-plus billion we raised in Q2, which is a record quarter for us as a public company in both private and public markets. In the bar on the far right, you could see how this $16 billion breaks down. The largest component is the capital raised so far for our Asia private equity strategy, one of our flagship raises. Including capital from initial closings through July, our Asia IV Fund is currently at approximately $11 billion, which is already 20% larger than its previous vintage and the largest pan-Asian private equity fund in the world. We will provide further updates on the fundraise as it continues to progress. The second component, $4.2 billion, encompasses first-time funds and adjacent strategies. As we have talked previously about increasing our management fees by at least 50% over the coming 3 years, flagship funds are definitely important, but scaling up these newer strategies are also critical to achieving that goal. We're now starting to see the impact as new capital is raised in areas like Asia infra, which now totals $2.5 billion, as well as Asia real estate, core plus real estate and our dislocation strategy. Finally, in the quarter, we raised capital within leveraged credit, we issued 2 European CLOs and earned our pro rata portion of inflows at Marshall Wace, all of which show up in the additional component. Turning to Page 6. I want to spend a few minutes on one aspect of our business that we believe is very differentiated. We've spoken frequently about the significant growth opportunities we have ahead had, maybe our biggest is in Asia. Over the past 15 years, we've created the leading private equity franchise in the region. In addition, for a number of years now, we've been hiring local talent and building integrated teams across many non-private equity strategies. As a result, you're starting to see our asset management footprint across Asia really start to scale. We are the clear leader in private equity and we're benefiting from the direct expansion of some of our non-PE strategies, with capital raised in infrastructure and real estate, with more to come over time in areas like alternative credit and growth equity. As you can see on the page, over the past 12 months, AUM has increased from $19 billion to $30 billion, with a lot of running room still ahead of us. Looking at the right-hand side of the page, you see the current run rate pro forma management fee impact of this new capital raise. With Asia IV now turning on in July, the net impact of this collective fundraising has added approximately $100 million of run rate management fees. Between the continued economic growth in Asia, secular tailwinds for the alternative space in the region, and our differentiated track record as well as best-in-class local team, we really believe our Asia business can be as big as our North America franchise in the coming years. Finally, turning to deployment on Page 7. Last quarter, we talked about the global financial crisis and how it was formative for our firm and drove us to meaningfully expand our business in the post-crisis years. We wanted to better position ourselves to play offense during periods of dislocation. And we've done just that, having really been on our front foot from a deployment perspective. As you can see on this page, we've invested or committed approximately $30 billion so far this year. This has been evenly split between public and private markets. Our public markets activity includes our traded credit as well as our alternative credit deployment. Mid-February through April was an exceptionally active period for this business when the market saw significant dislocation. Given our recent fundraising, we now have over $4 billion of AUM for our dislocation strategy. Approximately 30% of this capital has already been invested or committed. Focusing on private markets, which includes closed as well as pending investment activity. Deployment has been across a wide range of strategies and geographies and is reasonably split between U.S., Europe and Asia. Our global infrastructure team has also been active, with approximately 10% of our investment activity coming from this asset class. And with that, let me hand it over to Scott.

Scott Nuttall, Co-President and Co-COO

Thank you, Rob. And thank you, everyone, for not only joining the call today, but also for joining our call on the Global Atlantic acquisition in July. Before I start, let me first say that I hope you and your families are all safe and healthy, and that you're all doing well during these continuing strange times. To pick up where Rob left off, perhaps the best example of us playing offense year-to-date is our recently announced acquisition of GA. This transaction is highly strategic for KKR. As a reminder, concurrent with the closing of the acquisition and pending regulatory approvals, we expect to become GA's investment manager. If you look at Slide 8 of the deck, you can see what this will do for some of our important metrics pro forma. Taking a look at the top of the slide you could see AUM impact. As a result of the deal, our AUM increases over $70 billion, or 33%. All of these assets will immediately hit our fee-paying AUM, resulting in a 45% increase in assets from $160 billion to approximately $233 billion. The assets we manage on behalf of insurance companies will increase by more than 3.5x to over $100 billion. On the bottom half of the page, you'll see the transaction increases our perpetual capital by 4.9x, from $19 billion to $91 billion. Pro forma for the transaction, we will have 40% of our AUM either perpetual or with multi-decade recycling provisions. 84% of our capital overall will have a contractual life of over 8 years at inception. So the transaction will provide more scale and do it in a permanent way, meaningfully advancing several important strategic initiatives for us simultaneously. But it's not just about the numbers and the immediate impact. This transaction brings us a fantastic management team as a partner that we believe is well positioned to grow GA materially from here. The transaction provides us access to important underlying trends we have been looking to gain more exposure to and provides us an ability to grow faster overall as a firm. Please turn to Slide 9. One of the critical strategic areas of focus for us has been what's happening in retirement and wealth trends globally. The retirement end market continues to grow with an aging population creating demographic tailwinds. Importantly, more retirement wealth is being managed by the individuals themselves. We have been looking to gain more access to these trends, hence our discussions with you over the last few years about our focus on areas like insurance, high net worth, and retail. GA sells annuities and life insurance largely to individuals in their 50s and 60s managing their own retirement wealth or managing it with the help of a bank, wealth adviser or broker-dealer. So GA gets us in the way of trends we have been looking for across both insurance and retail. GA is well positioned to grow from here, both organically and inorganically. As GA grows, KKR grows. So the transaction will have a large immediate impact on us, but we think the growth from here over time will be even more powerful. Page 10 shows the financial impact of GA. Notably, we expect annual net management fees to increase by at least $200 million over the next couple of years as we ramp up our work together. Our current expectation is that this transaction will add north of $500 million of run rate annual after-tax distributable earnings by the end of our first year of ownership. That reflects incremental management fees as well as our share of GA's operating earnings. Overall, the transaction will be accretive to all our key financial metrics and increases their quality, stability, and visibility. Taking a step back, I want to take a minute to reflect on the year thus far. We have felt for some time that our business model provides us with a lot of ways to win and is more resilient than people understand. We also felt that it would take some volatility to really prove this out. Volatility has been the theme for some time now, and through it all, our model has proven to be quite resilient. If you step back and think about it, year-to-date, we've grown our revenues and TDE, increased our margins, scaled our businesses organically, raised record amounts of capital, invested or committed over $30 billion and announced an important strategic acquisition using our balance sheet as a strategic weapon, giving us yet another way to win. The last 7 months give us even more confidence in our ability to further increase our margins in the near term. Putting it all together, we have increased the scale and earnings power of our firm and the stability and visibility of those earnings during this period, and we see more growth and opportunity ahead. And with that, we're happy to take your questions.

Operator, Operator

Our first question comes from Alex Blostein with Goldman Sachs.

Alexander Blostein, Analyst

So the first question is around fundraising. Now that we've been in this more challenging environment for a couple of months now, what are some of the key lessons learned that we could extrapolate from with respect to KKR's ability to raise capital in this backdrop? And I guess how does this inform your prospects of management fee growth over the next 12 months?

Scott Nuttall, Co-President and Co-COO

Thank you for the question, Alex. It's Scott. I'll address that. We've learned a lot during this time. As mentioned last quarter, we've increased our communication with investors and prospects significantly. The level of discussions and outreach is easily two to three times what was typical before COVID. We're comparing insights on our experiences, discussing our offensive strategies, and also our defensive measures. One major takeaway for us has been that maintaining communication and transparency has been beneficial for strengthening those relationships, which is reflected in our numbers. Rob shared some fundraising statistics, and we're seeing participation from institutions, high net worth individuals, retail, and insurance, making it quite broad-based. Overall, a key lesson is to continue emphasizing communication and transparency. Additionally, we've recognized the strength of our brand and the significance of having a global presence. Having an established brand can provide an advantage in times like these. Regarding growth, Rob mentioned previously that we felt optimistic about growing our management fees organically by over 50% in the next three years, even before the Global Atlantic acquisition. While it's difficult to be exact, this period has given us even more confidence in that trajectory.

Operator, Operator

Our next question comes from Glenn Schorr with Evercore.

Glenn Schorr, Analyst

So you've made some hires on the retail front lately, and you're clearly seeing some progress as displayed in a couple of the fund raises that you just mentioned. I'm just curious where you think you're at in the retail buildout and which products might be better suited there. Meaning, do you have everything you need? Or are you still on that innovation and rollout front?

Scott Nuttall, Co-President and Co-COO

Thank you for the question, Glenn. You are correct that we have been adding to that team and enhancing our efforts. We have not completed the hiring process yet and there is still more to be done. We continue to make progress in the retail space and among high net worth individuals. We have established a direct team, a platforms team, and various global partnerships. There are still numerous opportunities for us to explore, so we are still in the early stages of this journey. Our product offering has been diverse, particularly effective in the retail channel for raising capital across credit, private equity, growth equity, and infrastructure. Recently, we have seen increased interest in yield-generating assets. We are focusing on real assets with yields, especially in real estate and infrastructure, and believe there are many ways to expand in those areas.

Craig Larson, Head of Investor Relations

And I think, Glenn, it's Craig. The one stat I'd add on top of that as it relates to the quarter, retail, again, typically represents a teens percentage of new capital raised in any given quarter. In terms of the $16 billion raised this quarter, again, it was a high-teens percentage. So it was again nice to see that follow through in terms of the results from this quarter as well.

Operator, Operator

Our next question comes from Robert Lee with KBW.

Robert Lee, Analyst

Great. I hope everyone is doing well. Scott, sticking with the fundraising theme, last quarter there was understandably a more cautious outlook regarding the timing and pace of fundraising. However, you seem a bit more optimistic now, suggesting it may not be as delayed or extended as previously thought. Is that an accurate assessment at this point?

Scott Nuttall, Co-President and Co-COO

Rob, thanks for the question. I hope you're doing well, too. Yes. I think last quarter, I would say, you're right, we did share that 3-year kind of perspective in terms of our ability to grow our management fee line again by 50%. We mentioned last quarter that, at best we could tell at that moment, we might push that out a few quarters. We were more in the teeth of COVID at the time. I do feel a bit more optimistic today. To be candid, it's hard to be entirely precise, given the dynamism of the environment. I do feel like we're a bit more optimistic today, with a quarter like the one we just had behind us and the deployment that we've seen across a number of our different strategies globally. Some of the fundraises that we expected might be kind of 24 to 36 months from now, some of those are looking like they could be more like 12 to 24 months from now. We're seeing some of those pulled in a bit. We're not going to get precise in terms of which quarter exactly. But you're right. I think we're a bit more optimistic today. Overall, our confidence in being able to grow 50-plus-percent is higher than it was last quarter, within that time frame, just by virtue of what we're seeing. I’d also say that, as a reminder, all of that is before the Global Atlantic acquisition. So if you think about what we've said today, we're expecting $200 million-plus of run rate management fees a year, a couple of years out, that's on top of that 50% growth, which would bring us to something more like 60% or 70% growth if you combine the two.

Operator, Operator

Our next question comes from Bill Katz with Citi.

William Katz, Analyst

So just coming back to margins for a moment. Just want to just understand how much is just sort of tactical versus structural. You mentioned on one hand that you feel like you have an opportunity to move the margins higher, so it sounds like that both in the scaling of the business as well as the transaction. But you've also alluded to sort of running at the low 40s for the comp ratio, and yet you're accruing at a 40% rate. Is the 40% rate the right baseline to be thinking about the legacy company? And will that improve subsequent to the GA transaction?

Robert Lewin, CFO

Great. Bill, it's Rob. Thanks a lot for the question. So let's start with GA. I think that's the easiest piece, and then we can build up. We expect the revenue that's associated with the transaction to flow through at a very high level. Let's take that in 2 buckets. The first is GA's distributable earnings. They're going to flow into KKR's distributable earnings. Just for clarity, we're not expecting any additional comp growth on those earnings. While our expectation as GA's asset manager is that we'll need to add some additional resources, we do have most of our teams well built out, and so the incremental management fees and carry over time, we think, should flow through to our P&L at a very high level. Scott mentioned earlier some of our more organic scaling that we think we have across the firm, and we think we should be able to drive real margin expansion there as well. While we don't have any specific guidance on this call, I think there are a lot of things that point to a positive direction in terms of our margins over the next couple of years.

Operator, Operator

Our next question comes from Mike Carrier with Bank of America.

Michael Carrier, Analyst

Rob, I didn't hear if you gave like an update on just kind of realization activity, or the pipeline. Sometimes, you guys do. And it's fair if you didn't, just given the environment. But any update on that front? And even from just the portfolio, like how are you guys feeling on sort of the realization of the performance, particularly on the private side of some of the companies? And not necessarily for the quarter, but just over the next 12, 18 months?

Robert Lewin, CFO

Great. Thanks a lot, Mike, for the question. As it relates to our Q3 revenue, we do have some forward-looking guidance there. We expect $250 million of carrying balance sheet gains that are from deals that are already closed or have been signed up and that we expect to close. We're only a month into the quarter and we've got a couple of months to go, so hopefully, we can take that $250 million number up a bit. But that's what we have locked in today from those 2 buckets for the remainder of Q3.

Scott Nuttall, Co-President and Co-COO

And then, Mike, I'll pick up on the second part of the question. In terms of the portfolio, I think the first thing to understand is portfolio construction really matters especially at a time like this. Our portfolio has been performing pretty well. I think it's due to a few different factors. One is we have just been underweight the hardest hit parts of the global economy. So direct energy is about 2% of our AUM; hotels and leisure, 2%; retail, about 3%. If you aggregate all 3 of those, you get to about 7% of our AUM. We've just been underweight those sectors. On the flip side, we have our largest exposure in technology. About 25% of our portfolio overall, give or take, is in TMT. Our investments in data and e-commerce are doing particularly well, as an example. On top of that, we have a heavier weighting toward Asia, about 30% of our private equity portfolio, and Asia is kind of further along in the recovery. When you put all that together, we've actually been quite encouraged by the data we're seeing. We've seen a snapback in numbers since the last time we talked. Asia is coming back. Europe is coming back. A number of different sectors in the U.S., we've seen the numbers bounce as well. Overall, a lot of that’s driven by how we've constructed the portfolios.

Operator, Operator

Our next question comes from the line of Patrick Davitt with Autonomous Research.

Patrick Davitt, Analyst

It looks like you have some chunkier new investments in the pipeline in terms of putting money into work. So through that lens, do you have a view that could translate into a more constructive capital markets outlook than you've had in previous calls?

Robert Lewin, CFO

Yes. Patrick, it's Rob. It's a good question. The short answer is we do. When we look at the first half of 2020, we've been quite pleased with the performance of our Capital Markets business, generating $130 million of revenue in what was a pretty challenging overall market, especially the leveraged finance markets, where we spend a lot of our time. Looking at the second half of the year, our pipeline is a lot healthier. Our expectation is that we will certainly improve on that first half number in the second half.

Operator, Operator

Our next question comes from the line of Devin Ryan with JMP Securities.

Devin Ryan, Analyst

I just want to follow-up on some of the retail opportunity commentary. And maybe just talk a little bit more about the connection with Global Atlantic's footprint and their retail brokerage network. I'm really just trying to get a better sense of framing the opportunity in terms of how important it will be in accelerating the overall effort. Are there new products that will make sense to launch once that closes? And just whether leveraging this network is really an initial focus once the deal closes or more of a long-term kind of just ancillary benefit? Really just trying to get a framing of the opportunity and sizing.

Scott Nuttall, Co-President and Co-COO

Thanks for the question, Devin. You're right. As a reminder for everybody, Global Atlantic has particular strength in their distribution through banks and broker-dealers, over 200 relationships of that type. Today, they distribute annuities and life insurance through those types of relationships. We do think there is a potential opportunity for us to work together with the GA team to distribute KKR products through that channel. To be clear, that's an upside lever. It's not embedded in any of the numbers that we've shared with you today or in last month's call. It is something we’ve talked about from time to time as an opportunity for us to pursue together, either in just outright KKR product form, or to your point, creating new products together with Global Atlantic. They have a very talented team on the investment side and we can marry that with our capabilities around investment management. So we have talked about creating new products together for those channels and using their distribution to distribute them. Again, neither of those opportunities, whether it's KKR product or new products we can create together, are in any of these numbers. But it is something that we thought about as an upside lever over time.

Operator, Operator

Our next question comes from Gerry O'Hara with Jefferies.

Gerald O'Hara, Analyst

Great. You mentioned in the presentation that the GA deal increases perpetual capital to around 40% of total assets under management. Scott, can you share your thoughts on how you anticipate the proportion of long-dated and perpetual capital will grow as you expand the business, whether through organic growth, acquisitions in the insurance sector, or by exploring other forms of longer-dated capital you might consider raising?

Scott Nuttall, Co-President and Co-COO

Great. Thanks for the question, Gerry. You're right. Just to clarify, the bottom-right of Page 8 of the supplemental deck; what we're saying there is, kind of the perpetual capital technically is 31% of our AUM pro forma. The way you get from that to the 40% that you referenced is we're also including our strategic investor partnerships. Those are relationships that we have with big institutions around the world, where we are recycling capital plus a percentage of profits for an extended period of time. Most of those have a total life of somewhere between 20 and 30 years. To your question, we think there's opportunities to continue to grow both. Just as a reminder, GA in its own right, without KKR as a partner, had about $17 billion of total assets in May of 2013; and is now, in terms of total GAAP assets, over $90 billion. They have been able to grow organically and inorganically without a partner like KKR. That's Part 1 of how we continue to grow our perpetual capital. It’s working with a great team at GA to continue enhancing that growth trajectory organically. There are also going to be inorganic opportunities, we think, working with Global Atlantic, whether it be blocks or additional acquisitions.

Operator, Operator

Our next question comes from Brian Bedell with Deutsche Bank.

Brian Bedell, Analyst

Just maybe, Scott, if we could just dive into Asia a little bit more, looking at Slide 5 and then to your points on scaling that business up, at that $30 billion level right now. Can you give us a little bit more color on the geographic distribution within Asia, which areas you're focused on and which areas you see geographically longer-term growth opportunities? When you're saying that Asia could eventually become as big as the North American franchise, what kind of AUM are you envisioning for both?

Scott Nuttall, Co-President and Co-COO

Thanks for the question, Brian. I'll take a stab and maybe Rob can jump in with anything I missed. In the first instance, you're right. We do have a pan-Asian approach. Just to be clear, 8 of our offices at KKR are actually in Asia. We have a presence throughout the region, and we have a very local model. We have country teams, we do local sourcing. Our teams work across PE but we're expanding and bringing the rest of KKR to Asia. You can see in the deck growth in Asia private equity, but also other bars starting to show up: infrastructure, real estate. We're also working on private credit in Asia and growth tech in Asia as well. We're bringing the rest of the KKR product suite to that part of the world and leveraging this footprint we've built, and we're adding specific talent in each market to execute on all this. What Rob's getting at is we’re starting to see the benefits of that growth trajectory. A lot of this is Asian infrastructure getting raised, Asia real estate starting to get raised. You can see how powerful that is just for that and the next Asia Fund adding $100 million in management fees. Our focus is quite broad; it's North Asia, South Asia, developed Asia, emerging Asia. We have been active everywhere and increasingly across real assets, private equity, growth equity, and now in credit. If retail is the second inning, I’d say the expansion of Asia is even earlier than that, and we see a lot of opportunity. We're not providing a forecast regarding management fees, but suffice it to say, we've just added $100 million in run rate with just what we've started, and this is just the beginning. We see significant growth opportunities ahead. The investing we're making in Asia follows investment themes we've been focused on globally. A lot of what we’ve done has been in themes around digitization, telecom, cloud, and there’s a lot happening across the tech space and other areas like healthcare and wellness.

Robert Lewin, CFO

I think that’s a really good summary, Scott. The only thing I’d add is we're seeing tailwinds at our back in Asia, clearly. If you look ahead over the next decade, you bet on that part of the world continuing to grow at a higher level than more western markets. We think alternatives as a percentage of the pie are going to continue to grow in Asia across all markets in Aoia Pacific. Most importantly, we’ve got a best-in-class brand in the region with unique access to great local talent. That’s what we've built over the years, especially in private equity and now expanding our strategies.

Operator, Operator

Our next question comes from Chris Harris with Wells Fargo.

Christopher Harris, Analyst

So we're seeing sales of annuity products across the industry drop pretty materially, and the culprit seems to be ultra-low interest rates. Can you guys talk a bit about why you don't necessarily think this is going to be a meaningful headwind to the organic growth at Global Atlantic?

Scott Nuttall, Co-President and Co-COO

Thanks for the question, Chris. We're seeing the same thing. It's a little hard to separate how much of the decline in sales is due to low rates versus the dynamics of the pandemic. It’s possible it's harder for some advisers to reach clients or for clients to focus on wealth management during this period. But time will tell. Our view is that this low rate environment will drive demand for savings products that have tax deferral, which is essentially what an annuity product offers. We believe that by working with the Global Atlantic team and leveraging their distribution, we can create a very competitive product in terms of what they've already done, but also hopefully create new products to meet the appetite for yield and tax deferral. We're not of the view that the last few months indicates a long-term trend. We see organic growth from the necessity for yield, and we find the inorganic opportunity even more exciting as many life and annuity companies look to sell blocks of business and utilize proceeds for share buybacks. We are actively working with GA on their pipeline of new opportunities. That's as much as I can share at this time.

Operator, Operator

Our next question comes from Michael Cyprys with Morgan Stanley.

Michael Cyprys, Analyst

I was hoping you could talk about your approach to product and strategy-level profitability. How do you approach that and think about that? Given the number of strategies that you're likely to raise in the next couple of years, which strategies do you think will make the most progress in terms of improving their profitability? Which ones might have to wait for another fundraise down the road?

Scott Nuttall, Co-President and Co-COO

Michael, it's Scott. Thanks for the question. It's a good one. We have a number of businesses we've been scaling over the course of the last decade. 18 of our 24 investing strategies are less than 10 years old. If you’d asked that question 5 to 7 years ago, my answer would have been quite different. Because back then, we had many businesses in kind of the Fund I, Fund II phase, just starting to earn their way to run rate margins. Now, we have a majority of our activity getting into that inflection part of the curve where we're starting to see real scale. We talked about what that means for our Asia IV PE Fund, as an example. Also, we’re getting into fund number three for some real estate strategies. Those areas, especially the real assets part of our firm, are where we expect to see significant upside and opportunity in terms of scaling. We also have a variety of other areas, such as our growth strategies. We're seeing health care growth, tech growth, Asia tech growth, and we’re expanding in those areas, reaching Funds II and III. The weight of our activities is now moving toward the Fund III, IV, V level, unlike before where it was I, II, III. This shift in our activity level gives us confidence in margin expansion.

Robert Lewin, CFO

Yes. Michael, it's Rob. Just to briefly add, we go through our analysis business by business. Even at a very micro level, there isn't much in our business today where we're looking at things that need to scale to turn profitable. Even newer products launching leverage existing teams and infrastructure we have, adding revenue to a cost base that’s largely built out. As Scott mentioned, there's really not a lot there waiting to scale for profitability.

Scott Nuttall, Co-President and Co-COO

Yes. The best example, Michael, is probably core, a strategy where we manage over $10 billion now. It’s just leveraging deal flow and work already in the firm. We literally did not hire anyone to raise that $10 billion; it was just monetizing our existing resources.

Operator, Operator

Our next question comes from the line of Chris Kotowski with Oppenheimer.

Christoph Kotowski, Analyst

A couple of questions around Asia III and IV. One is just to confirm. You said that Asia IV turned on for fees in July. I wonder if a lot of the $4.2 billion of Asia III has been spoken for already? Are the two funds going to be investing concurrently? Should we expect a quick follow-on for the next Americas flagship fund?

Robert Lewin, CFO

Chris, it's Rob. Great question. The chart you're looking at in our press release is based on deployed capital, not committed capital. What you don’t see flowing through there are deals where that capital is already spoken for and committed. There's a normal reserve for our Asia III fund, and over the coming quarters, you’ll see that deployed number for Asia III naturally increase based on committed transactions. Asia IV began in July, and you'll see it reflected in our Q3 numbers. As for the Americas XII fund, you're correct that capital deployment has been strong. You'll hear more about potential raises for that strategy in the upcoming quarters.

Craig Larson, Head of Investor Relations

Jesse, thanks for your help. And everyone on the call, thank you, of course, for your continued support. Please follow up with us directly if you have further questions regarding this quarter. Otherwise, we'll speak to you in 90 days.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.