KKR & Co. L.P. (KKR)

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KKR & Co. L.P. (KKR)

Q4 2012 Earnings Conference Call

February 7, 2013 10:00 am ET

Executives

Craig Larson – Head, IR

William J. Janetschek – Chief Financial Officer

Scott Nuttall – Global Head, Capital and Asset Management

Analysts

William R. Katz – Citi Group

Matthew Kelley – Morgan Stanley

Patrick Davitt – Autonomous Research USA

Michael Kim – Sandler O’Neill & Partners L.P.

Howard Chen – Credit Suisse

Michael Carrier – Bank of America/Merrill Lynch

Roger A. Freeman – Barclays Capital

Chris Kotowski – Oppenheimer

Marc Irizarry – Goldman Sachs

Presentation

Operator

Ladies and gentlemen, thank you standing by. Welcome to KKR’s Fourth Quarter 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following management’s prepared remarks, the conference will be opened for questions. (Operator Instructions)

I would now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson

Thank you, Sean. Welcome to our fourth quarter 2012 earnings call. Thank you for joining us. As usual, I’m joined by Bill Janetschek, our CFO, and Scott Nuttall, Global Head of Capital and Asset Management.

We’d like to remind everyone that 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 and we’ll also refer to non-GAAP measures on this call, which are reconciled to GAAP figures in our press release.

This morning, we reported our fourth quarter and full year of 2012 results, a few highlights. For the quarter, economic net income was $348 million, which translates into $0.48 of quarterly after-tax economic net income per unit 45% higher than the $0.33 per unit reported in the fourth quarter of 2012.

For 2012 we generated $2.1 billion of ENI or $2.90 of after-tax economic net income per unit, almost four times the $0.73 per unit we reported for 2011. These strong results were driven by the performance of our private equity funds, which appreciated 4% this quarter ahead of the public market indices.

In 2012, our private equity funds were up 24%, meaningfully ahead of both the S&P 500 and the MSCI World indices, which increased 16% and 16.5% respectively. Our private equity portfolio beat those yearly returns by over 700 basis points.

This was also an active quarter for us on the realization front. So I want to emphasis some of our cash metrics. We reported a record $546 million of total distributable earnings this quarter, which included record contributions from both cash carry, as well as gains off the balance sheet. As a result, our fourth quarter distribution per unit $0.70 is also the highest quarterly figure we’ve ever reported. Our 2012 total distribution per unit is $1.22 up 65% from the $0.74 distribution for 2011.

Before we move on, I would like to bring your attention to an upcoming event. On May 23rd, we will host our second Investor Day in New York featuring presentations and Q&A session with our senior business leaders. We will be sending our formal invitations in the coming week. So if you like to attend, please follow up with Sara or with me after the call. Additionally, we will put out a press release in the coming months information on the live webcast. We hope you’ll be able to join us.

And with that, I’ll now turn it over to Bill to discuss our performance in depth and also give you an update on netting and then Scott will walk you through what we have been focused on across our segments.

William J. Janetschek

Thanks, Craig. When we look at our financial results for the fourth quarter and the full year 2012, and compare those results with the fourth quarter and full year of 2011. There were four important trends to remember. First, our funds in our balance sheet perform well in 2012, which drove greater economic net income. Second, our level of monetization activity was greater causing significant growth in our total distributable earnings and our distribution.

Third, although the fourth quarter was almost active investing quarter in 2012, we invested less in 2012 than 2011, which resulted in a decline in transaction fees and fee related earnings. And fourth, our public market business now includes Prisma and its segment results. These four trends will broadly explain the underlying movement in our numbers that we reported this morning.

More specifically, we reported total distributed earnings of $1.4 billion for the full year 2012, up over 80% from the same time last year. And our full year distribution per unit of $1.22 was held by the $0.70 we’ve recorded in the fourth quarter.

Fee related earnings were $86 million in the quarter, and $320 million for the full year. Our lower level on investment activity in 2012 lead to a decrease in transaction monitoring fees, driving the year-over-year decline. However, the 24% write-off in our private equity portfolio more than out laid lower fee related earnings this year, resulting in ENI of over $2 billion, nearly three times our 2011 reported ENI.

We ended the fourth quarter with record assets under management of $76 billion and fee paying assets under management of $61 billion, up 28% and 31% from the same time last year. This increase is in part attributed to the $8.5 billion from Prisma. The hedge fund-of-funds manager that we acquired in the fourth quarter, which is now included in our public market segments.

These figures also benefited from $11 billion of new capital we raised in 2012. And please remember, these numbers do not factoring in an additional $8 billion of committed capital. $4 billion from Asia II rise to date, $1 billion of the Texas Teachers mandate, and about $3 billion of capital in other vehicles that will be included in AUM once it’s invested.

Turning to our segments, in private markets fee related earnings were $32 million, down from the fourth quarter of 2011, as a result of lower transaction fees. ENI was a $178 million for the quarter, up from the same time last year, given the increase in private equity valuations we discussed earlier. The full year showed essentially the same trends for both fee related earnings and ENI in this segment.

Touching on pubic markets, fee related earnings were $29 million, up 26% from last quarter and more than double the fee related earnings year-over-year. The 80% increase in management fees, largely offset lower incentive fees this quarter leading to sizable fee related earnings growth.

Public market ENI for the quarter was $37 million, up slightly from $35 million last quarter, and up meaningfully from $12 million a year ago. For the year, the segment earned over a $100 million of ENI, 78% increase over 2011. As we continue to growth and scale the capital in our carry eligible funds, we expect the carry potential of the public market segments to continue to increase.

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