KKR & Co. L.P. (KKR)

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Kohlberg Kravis Roberts & Co. L.P. (KKR)

Q4 2013 Earnings Call

February 06, 2014 10:00 am ET

Executives

Craig Larson - Managing Director of Investor Relations

William J. Janetschek - Chief Financial Officer of KKR Management LLC, Member of Balance Sheet Committee, Member of Risk Committee and Member of Valuation Committee

Scott C. Nuttall - Head of Global Capital & Asset Management Group and Principal

Analysts

William R. Katz - Citigroup Inc, Research Division

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

Michael Carrier - BofA Merrill Lynch, Research Division

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

Brian Bedell - Deutsche Bank AG, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

M. Patrick Davitt - Autonomous Research LLP

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to KKR's Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, today's conference is being recorded. I now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Craig Larson

Thank you, Karen. Good morning, and welcome to our fourth quarter 2013 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 we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release. This call will also 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.

As well, we will be providing estimates on cash carry and its impact on future distributions on the call. These estimates are based on December 31 valuations and share counts prior to the KFN closing. And on the KFN transaction, please refer to the proxy statement and other SEC filings that KFN and KKR may make because they'll contain important information about the transaction.

On to our results. This morning, we reported fourth quarter and full year 2013 results. For the quarter, economic net income was $790 million, which equates to $1.08 of after tax net income per unit, 29% higher than the $0.84 we reported for the third quarter of 2013 and over twice what we reported for the fourth quarter of 2012. Total distributable earnings were $510 million for the quarter and $1.5 billion for the year.

Before we move on, I'd like to highlight some new disclosures in our press release on Pages 7 and 15. By way of backdrop, with over $7 billion of cash and investments on our balance sheet and our Capital Markets business, in addition to our third-party business model -- third-party business, we have a differentiated business model. Our objectives are to deliver excellent results on behalf of our LPs and, at the same time, generate significant cash flow from the ideas that we generate across all 3 of our segments. When we find something that we like, our goal is to capture as much value as possible for our fund investors and shareholders.

We can achieve this goal through 3 main avenues, all of which contribute to our overall revenue: one, investing third-party pools of capital, like our funds in separately managed accounts; two, investing in our own balance sheet; and three, syndicating and underwriting through our Capital Markets business. We don't manage our business focused on only one earnings stream, rather we're focused on leveraging all of our people and infrastructure and minimizing costs to drive the highest amount of revenue for the firm, whether that comes in the form of fees, carry or balance sheet income.

We're continuing to work through our reporting to ensure that we provide the most representative metrics to understand our profitability, particularly as we work towards the closing of the KFN transaction. In advance though, to better help frame this, we've introduced a new page in our press release on Page 7 that realigns the historical figures in our press release into 2 main buckets, total segment revenues and total segment expenses, and highlights our ROE on the bottom of the page. As well, we've also realigned our total distributable earnings disclosure on Page 15 and also disclosed, specifically, our payout ratio, which for the fourth quarter and the year 2013 was around 70%. We believe these changes provide even more clarity around how we measure our financial progress.

And with that, I'll turn it over to Bill.

William J. Janetschek

Thanks, Craig. Before I review our fourth quarter and full year results, I want to highlight 4 aspects of our performance. The first is fund-raising and organic growth. Scott is going to walk through our inorganic activity later, but we raised over $21 billion of new capital organically in 2013, increasing our fee-paying AUM by 27%. And if you focus on our newer businesses, excluding private equity, the growth is even higher, up 48% for the year. This scaling of our fee-paying assets drove a 25% increase in both management fees and total fee revenue, which exceeded $1 billion for all of 2013.

Second is cash carry. We reported $150 million of net cash carry for the quarter and over $400 million for the year, a 45% year-over-year increase in 2013. And these figures exclude pending transactions like U.S. Food and Oriental Brewery. A year ago, 32% of the remaining fair value in our mature private equity funds was in position to pay cash carry. That figure has increased over 90% today.

Third is performance. Our business has had a strong fourth quarter and the $790 million of E&I we reported in the fourth quarter is a record for us since we went public.

And finally, our distribution. We announced a quarterly distribution per unit of $0.48, which is comprised of the traditional fee-related earnings and cash carry components of $0.12 and $0.22 and includes $0.14 of realized balance sheet income, bringing our total distribution per unit for the year to $1.40, up 15% from the $1.22 distributed for 2012.

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