KKR & Co. L.P. (KKR)

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KKR (KKR)

Citigroup US Financial Services Conference

March 06, 2013 1:20 pm ET

Executives

Scott C. Nuttall - Head of Global Capital and Asset Management Group, Principal and Member of the Management Committee

Analysts

William R. Katz - Citigroup Inc, Research Division

Presentation

Question-and-Answer Session

William R. Katz - Citigroup Inc, Research Division

[indiscernible] with a lot of personal asset managers, but we haven't really had a sort of a ground-up view of what's happening -- a ground-up view of what's happened with sort of the economies around the world.

And given the uniqueness of the private equity platform, can you comment about what your portfolio companies are seeing in terms of just the big picture, in terms of economic growth. Can you go around the world to the extent you can?

Scott C. Nuttall

Sure. I'd start with the U.S. I'd say stability. I wouldn't say a real change in fundamentals, though. We're looking at overall GDP growth in the high 1s to 2% this year. Not easy to get a lot of organic revenue growth, so no big change relative to prior years on that front. But the operating environments have been more stable over the course of the last -- call 6 to 24 months or so. So we're seeing some basic stability. In Asia, China seems to have gone through a bit of a difficult period but actually, we're pretty constructive on China right now. Our companies are doing a bit better. We see more opportunity to invest. And across Asia generally, seeing quite attractive trends, certainly relative to the U.S. and Europe, so we're still reasonably upbeat about the Asian economic growth environment.

In Europe, actually our companies have done well in Europe. Our European private equity portfolio was up nearly 50% last year. And a lot of that is where we've invested capital, and we've managed to avoid some of the more difficult markets. We're actually quite constructive on Europe and are spending quite a bit of time there, both with our distress businesses and our private equity business, looking to deploy capital as some of these markets are starting to bottom out. But the overall economic environment is mixed. But generally speaking, our companies are performing quite well and finding ways to create value. So overall, I'd say the global perspective is relatively low growth and stable, with pockets of more interesting opportunity coming out of this location.

William R. Katz - Citigroup Inc, Research Division

Okay. Next question I have is just thinking about the story here a little bit. We've certainly heard a theme of allocations going up for alternative managers, that some of the traditional managers, in fact had set strategic comparative advantages to get their way into [indiscernible] into alternatives. What are you hearing from the consultant community and the underlying investors, given the markets have rallied as much as they have? Is it the denominator effect that the allocations are filling in, or is there now more upside to a move to deeper allocations and alternatives?

Scott C. Nuttall

Well, I think we have already seen the allocations to alternatives increase quite a bit. We actually did some work around the top 10 U.S. pension plans, which have, today, about a $1.2 trillion of assets. And 5 years ago, their allocations to alternatives, were somewhere between 11% and 12%, and now they're pushing 24%. And that's just those 10 plans. And if you think about it around the world, we're seeing sovereign wealth funds, corporate plans, family offices. We're seeing many different types of investors allocate more capital into alternatives. And really, there's been more of a barbelling of a lot of different investor strategies. They're trying to get kind of their beta exposure through passives on one end of the spectrum and at the other end, putting more money into alternatives to get more alpha in their portfolio. And that's how we're hearing investors investing globally now. It's a fairly consistent theme, and we've seen it show up in the allocations, and I agree with the audience's views. I think we're going to continue to see that. And the definition of alternatives will continue to expand. So we've got different energy funds, real assets, hedge funds, obviously, different credit opportunities. We're seeing quite a broadening of how people are participating in the alternatives landscape. So I think it will continue, and when you meet with consultants, we're hearing the same thing.

William R. Katz - Citigroup Inc, Research Division

So the 24%, which is doubled, if you will, is there any tension in terms of those, potentially reducing their allocations and therefore that offsets some of their growth in some of the newer areas?

Scott C. Nuttall

I have not heard that at all. And then the opposite the denominator effect on the positive side, right, is as now the Public Markets have started to move in a positive direction. The dollars of allocation, once you set your percentage, allocation goes up. And so the overall assets have increased, and so actually, we've heard a pretty consistent trend of investors around the world increasing their allocation to alternative. I have not actually -- I can't even think of an occurrence of someone decreasing, in recent memory.

William R. Katz - Citigroup Inc, Research Division

Okay. That's good to hear. One of your competitors put up a slide recently suggesting larger players, including KKR, are taking a higher share in 2012 than they did back in 2000, and I think it was something like 8% now versus 6% then. And so 2-part question, why do you think this is happening? And are there any threats to the oligopoly, if you will?

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