KKR & Co. L.P. (KKR)

KKR 
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Kohlberg Kravis Roberts & Co. (KKR)

Q1 2013 Earnings Call

April 25, 2013 10:00 am ET

Executives

Craig Larson - Managing Director of Investor Relations

William J. Janetschek - Chief Financial Officer of Kkr Management Llc, Member of Other Committee, Member of Risk Committee and Member of Valuation Committee

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

Analysts

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

William R. Katz - Citigroup Inc, Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Howard Chen - Crédit Suisse AG, Research Division

M. Patrick Davitt - Autonomous Research LLP

Matthew Kelley - Morgan Stanley, Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Aaron D. Teitelbaum

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to KKR's First Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson

Thanks, Janine. Welcome to our first quarter 2013 earnings call. Thank you for joining us. As usual, this morning, I'm with 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 the call, which are reconciled to GAAP figures in our press release.

This morning, we reported after-tax economic net income per unit of $0.88, which compares to the $0.99 that we reported in the first quarter 2012. Total distributable earnings were $291 million for the quarter, up sharply from the $164 million reported for the first quarter last year. This increase was driven by the realized gains from our balance sheet, which went from the $53 million we reported in the first quarter of 2012 to the $153 million that we reported this quarter. Importantly, these realized balance sheet gains will now directly impact our first quarter distribution given the change we've announced to our distribution policy.

Beginning with this quarter, in addition to the fee related earnings and realized cash carry that we've always distributed in the quarter in which they're earned, we're changing our distribution policy to include 40% of the realized balance sheet income earned each quarter. This 40% is comprised of realized balance sheet gains, dividends and interest income, less realized balance sheet losses and interest expense.

This realized balance sheet income component of our distribution will be paid out on a quarterly basis and replaces the annual additional distribution that we have historically announced in the fourth quarter of each year.

With this change in our policy, we've announced a first quarter distribution of $0.27 per unit. This has the traditional fee related earnings and cash carry components, which are $0.10 and $0.08, respectively, as well as $0.09 of realized balance sheet income.

And finally, before we move on, I'd like to remind you of our second Investor Day to be held in New York on Thursday, May 23. We will issue a press release in the coming weeks with information on the live webcast, but we'd like to invite you to attend in person. If you haven't already registered, please follow up with either Sarah or with me after the call. We all look forward to seeing you there.

And with that, I will now turn it over to Bill to walk you through the drivers of our performance and give you an update on netting, and then Scott will discuss the environment and what we've been focused on across our different segments. Bill?

William J. Janetschek

Thanks, Craig. We ended the first quarter with record assets under management of $78 billion, up 4% from last quarter and 26% from the same time last year. Distribution to our fund LPs in the quarter were more than offset by investment appreciation and new capital raise, which is true for both our Private and Public Market segments.

As of March 31, our fee paying assets under management were also the highest we've reported, totaling $62 billion and representing an increase of 3% and 32% from last quarter and last year. Keep in mind, these numbers do not include approximately $9 billion of committed capital, over $5 billion from Asia 2 as of March 31, $1 billion from the Texas Teachers mandate that we have not yet allocated and about $3 billion of capital and other vehicles that will be included in AUM once it's invested.

Let me give you an update on Asia 2. In April, the investment period for our first Asia Fund closed, and with that our Asia 2 fund was activated. In our second quarter press release, you will see for the first time Asia 2 lifted on the investment summary table, and this fund will officially be included in our AUM and fee paying AUM figures.

So what does this mean for our financials? Now that Asia 2 is turned on, we are entitled to a management fee on the third-party portion of that capital. Assuming that we reach a final close of $6 billion by the end of the second quarter, we would earn a fee of 150 basis points on the $5.75 billion of LP committed capital.

Additionally, when Asia 2 turned on, our first Asia Fund switched from the investment period to the post-investment period, and the management fee on Asia 1 is now based on invested, not committed capital. We have about $3 billion of remaining invested capital, and we are now entitled to a fee of 75 basis points on that remaining capital.

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