KKR & Co. L.P. (KKR)

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KKR & Co. L.P. (KKR)

Q3 2012 Earnings Call

October 26, 2012 10:00 AM ET

Executives

Craig Larson – Head, IR

Bill Janetschek – CFO

Scott Nuttall – Global Head, Capital and Asset Management

Analysts

Chris Kotowski – Oppenheimer

Roger Freeman – Barclays

Michael Kim – Sandler O’Neill

And so just to name a few

Howard Chen – Credit Suisse

Marc Irizarry – Goldman Sachs

Robert Lee – KBW

Presentation

Operator

Good morning and welcome to KKR’s Third 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) As a reminder, this call is being recorded.

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

Craig Larson

Thank you, Sean. Welcome, everyone, to our third 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. 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 quarterly economic net income of $510 million and year-to-date economic net income of $1.8 billion, almost four times greater than last year’s figure. This translates into $0.69 of after-tax economic net income per unit this quarter and $2.42 per unit for the first nine months of 2012.

The key driver here is the appreciation of our private equity funds, which increased approximately 6% in the quarter and for the first nine months of 2012 are up 20%, outperforming the MSCI World Index by over 600 basis points so far this year.

Focusing on our cash metrics, total distributable earnings are $333 million for the quarter and for the first nine months of 2012 are $903 million, up over 40% relative to the first nine months of 2011. This growth originated from both realized cash carry as well as realized gains from our balance sheet.

We announced a quarterly distribution of $0.24 per unit, of which about $0.15 came from carry and $0.09 came from fee-related earnings. This is not only a record for cash carry, the highest quarterly figure since we’ve gone public, but also the 10 consecutive quarter where we have seen cash carry in the distribution.

Finally, two additional items of note. The first relates to our XI North American private equity fund, referred to internally as NAXI. The investment period for the 2006 Fund has officially come to a close, and, consequently, the investment period for NAXI, the successor to the 2006 Fund, commenced at the end of the quarter. You’ll see, for the first time, NAXI listed on the “Investment Vehicle Summary” table on page 20 of our press release, and fundraising will continue here into 2013. Bill is going to spend a few minutes reviewing the impact this has on our financials, now that NAXI has turned on and the 2006 Fund has moved to the post-investment period.

And the second topic is Prisma. We’re pleased to announce that the transaction closed on October 1, and starting in the fourth quarter, Prisma will be reflected in our financial results within the Public Markets segment. The addition of Prisma provides us with the ability to provide customized hedge fund solutions to our clients and an attractive platform, which we can leverage to create new, more liquid products. This transaction, as you’ll recall, is the first strategic acquisition for us, and we are excited to officially welcome our newest colleagues to the firm.

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

Bill Janetschek

Thanks, Craig. Good morning, everyone. We ended the third quarter with record assets under management of $66 billion, up 8% from last quarter and 13% from the same time last year. Investment appreciation contributes to a portion of the increase, helping offset distributions to LPs in the quarter, but the majority of the AUM growth was due to the fact that we now include $6 billion of capital we have raised so far for NAXI.

It is important to remember that these numbers do not factor in an additional $15 billion of committed capital: $8 billion from Prisma, $4 billion ASIA II, $1 billion of the Texas Teachers mandate that we have not yet allocated and about $2 billion of capital in other vehicles that will be included in AUM once it is invested.

As of September 30, our fee-paying AUM was also the highest we’ve reported, totaling $50 billion and representing a 6% jump from last quarter. Similar to AUM, the addition of NAXI’s third party capital positively impacted our fee-paying AUM, which more than offset the reduction in fee-paying assets of our 2006 Fund as it transitioned into the post-investment period.

We’ve been getting a lot of questions about fund roll-off, so I wanted to spend some time on this. Let’s walk through an example using the 2006 Fund and NAXI. As Craig mentioned, in September, the investment period for the 2006 Fund ended and NAXI was activated. That said, we are still able to make follow-on investments in the 2006 Fund portfolio. If you turn to page 20 of our press release you will see $1.3 billion of uncalled commitments remaining in the 2006 Fund and we plan to invest these funds in the future.

Turning on NAXI impacts our fee related earnings in two ways. First, we have raised $6.2 billion of capital so far, including our GP and employee commitments, and we are entitled to a management be on the third-party portion of that capital. As you may recall, the blended fee rate for the 2006 Fund was about 125 basis points. The management fee we will receive on NAXI is closer to 140 basis points, based on the capital raised to date.

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