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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to KKR’s Second Quarter 2019 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 will now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead, sir.
Thanks, Michelle. Welcome to our second quarter 2019 earnings call, thanks for joining us. As usual, I’m joined by Bill Janetschek, our CFO and Scott Nuttall, our Co-President and Co-COO. 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, which is available on the Investor Center section at KKR.com.
This call will contain forward-looking statements, which do not guarantee future events or performance, so please refer to our SEC filings for cautionary factors related to these statements, and like previous quarters, we’ve posted a supplementary – a supplementary presentation on our website that we’ll be referring to over the course of the call. And I’m going to begin by referencing Pages 2 and 3 of the deck.
So Page 2 shows the summary of our four key metrics. The strength of our underlying fundamentals are evident in the trends that you see on the page. Perhaps most importantly the earnings power of the firm continues to grow nicely as can be seen by the charts on the left hand side.
Our AUM is now at $206 billion and book value per share is $17.81. Spending a minute on book value, we’ve seen attractive returns really across asset classes in this performance combined with the power of compounding has driven the 14% year-over-year increase in our book value per share. This 14% figure compares favorably to broad market indices like the MSCI World, which is up 7% over this timeframe. As well as fixed income indices like the LSTA that’s up about 4% over the last 12 months.
Highlighting the strong performance, we’ve seen unrealized carried interest, one of the key components of our book is up 21% since last quarter and it’s increased 45% since the beginning of the year. Looking at the right-hand side of the page alongside of this management fees have grown steadily and distributable earnings on an LTM basis have increased 12%.
Turning to Page 3, you’ll see some additional details. We reported after-tax distributable earnings of $327 million for the quarter or $0.39 on a per adjusted share basis. And as a reminder, as you look at these figures, we do report our distributable earnings after taking into account equity based charges.
Management fees for the quarter came in at $303 million, up 16% compared to Q2, 2018 and 17% comparing the year-over-year LTM periods. Fee related earnings for the quarter are $287 million and on an LTM basis, our $1.1 billion, this is a record fee related earnings figure for us on a trailing 12 month basis of 28% compared to the LTM figure as of a year ago.
Now, as we reviewed historically there are five things we need to do well as we evaluate our performance. We need to generate investment performance, we need to raise capital, find attractive new investments, monetize existing investments and use our model to capture more economics from everything that we do. I’m going to update you on the progress on the first two and Bill is going to cover the remaining three.
In terms of our investment performance, please take a look at Page 4 of the deck, which shows the trailing 12-month performance across our flagship funds. In private equity, our three flagship funds appreciated 12% on a blended basis and the private equity portfolio as a whole appreciated 15%, both of these figures compare favorably to the 7% total return of the MSCI World, I mentioned a minute ago.
Our real asset strategies are performing as well with our more mature, real estate and infrastructure flagship funds up 7% and 13%, while our flagship energy fund is flat over the last 12 months compared to a 36% decline in S&P’s Oil and Gas E&P Select Index. And in credit, our composite performance compares favorably relative to the LSTA and the HFRX special sits indices, which are plus 4% and minus 8.7% respectively over the last 12 months.
In terms of fundraising, we raised $6.5 billion of new capital in the quarter. We held an initial close in our new Asia real estate strategy. We price new CLOs in the U.S. and Europe and had inflows in the leverage credit SMAs as well as various alternative credit products. Additionally, we progressed in our goal of raising long duration capital.
As of quarter end, we now have $43 billion in permanent and strategic capital there has either recycling or a very long expected life of 15-plus years or more at inception. In total inflows in the quarter contributed to $56 billion of dry powder at quarter end and included in this is $18 billion of capital commitments that become fee-paying on an as-invested basis at a weighted average rate of just over 100 basis points.
And with that, I’ll turn it over to Bill.
Thanks, Craig. I’ll start with the third thing we need to do well, which is find new investment opportunities. We invested $5.8 billion across businesses and geographies in the second quarter. Public markets deployment was $1.8 billion, coming primarily from our private credit and direct lending strategies.
On the private market side, we invested $4 billion. The largest contributors for our newest core investment coming out of Europe and in Middle Eastern – Midstream investment from our infrastructure fund. Other notable investments were a handful of Asia private equity investments and a European private equity investment.
Shifting to monetization activity, we completed a number of secondaries including our final exit from higher. We also completed multiple strategic sales that positively impacted both our fund and the balance sheet. On a blended basis, the PE exits were down at four times our cost. For the quarter, it was $358 million of gross total realized carried interest and total realized investment income. This compares to $600 million that as we stand here today has closed or has been signed and is expected to close in 2019 or 2020 of which at this point, we expect $250 million to close in Q3, and it’s only in the end of July.
And finally, the last thing we need to do well is use our model of AUM capital markets and balance sheet to capture greater economics for our investors and the firm from all of our activities. Focusing first on capital markets KCM had a strong quarter with $158 million of transaction fees. The market environment in Q2 is certainly improved compared to Q1 of this year. Performance in this quarter, highlighted the geographic breadth of the business as capital markets revenues added in Asia and Europe, both outpace revenues in North America.
And if you turn to Page 5 of the supplement, I’m going to spend a minute on our core investing strategy as we’ve seen core begin to impact our balance sheet investment performance, and our book value compounding. We introduced the core strategy on this call two years ago with a focus on investments that have a lower target to return profile in private equity, but a solid businesses and we want to own for 10 plus years. We chose to commit significant balance sheet capital alongside a handful of partners. We currently have $10.5 billion of AUM focused on this strategy, including $3.5 billion we’ve committed of our own capital.
Now two years in, looking at L.P. Capital together with balance sheet capital we’ve invested a total of $4 billion through transactions across the U.S., Europe and Asia with a gross IRR of 21% and in terms of the investment line on the segment balance sheet, Core as a fair value of $1.9 billion as of quarter end. Keep in mind, the 21% IRR has not run through our total distributor earnings yet, that is all unrealized gain.
However, Core is contributed approximately $425 million of balance sheet value since we began investing in this strategy we feel we’re off to a good start and we’ll keep you posted along the way. There are two other point I’d like to make in relation to the balance sheet. The first thing I want to point out is you’ll see BridgeBio, a biopharma investment is now our third largest balance sheet holdings. Following its Q2 IPO and strong trading – post IPO, fair value as of June 30 was $395 million and its market five times our cost. Given its significance we wanted to provide that additional color.
The second thing I’d like to call out related to our debt obligations. We recently priced two bond offerings, a euro denominated offering and a U.S. dollar denominated refinancing of the 2020 maturity both at attractive rates. Putting aside any premium associated with taking out the 2020 notes, we will have added approximately $725 million of liquidity to the balance sheet, with effectively no increase in interest expense.
And with that, I’ll turn it over to Scott.
Thanks, Bill and thanks everybody for joining our call. I’m going to focus today on how we’ve been scaling and how we think about the trajectory for our business from here. I mentioned on our last call that despite our 43-year history, we’re young firm. 18 of our 22 strategies were launched in the last decade, and in our business it takes about a decade to start to achieve scale. So we have a lot of growth ahead of us as we go from fund one or two to fund three, four and five across the majority of the firm’s investing activities.
We think that upside is dramatic, but for us this growth opportunity is compounded by the fact that while we’ve been launching new investing businesses. We’ve also been making large investments in distribution. We relate to building out our distribution efforts. Remember, 10 years ago, we had about a dozen people on our fundraising team and 275 investors. We now have 90 people on the team and nearly 1,000 investors, but we still have a long way to go. Our investors count has been growing and our cross-sell stats have been improving, but we still see an opportunity to meaningfully expand both of those numbers. As a result, going forward, we expect to see our AUM compound significantly from the powerful combination of more mature track records and a growing investor base.
Page 6 of the deck, give you a good sense of what’s been happening on this front over the last seven years. We report in our press release, the gross new capital raised every quarter. That number can be lumpy, given the timing of closings and when our funds come to market. Especially, the larger funds. To give a better sense for what we are experiencing this chart looks at the new capital raised and acquired on a trailing three-year basis. You can see from the chart that despite the use of many of our strategies and relationship the trailing three year number has grown from $18 billion in 2012 and $95 billion today. And with acquisitions, the number is over $100 billion.
As you can see from the chart, PE has grown from about $8 billion to $20 billion to $30 billion as our three regional PE funds have scaled. What’s more dramatic however is our non-PE fund, which on this trailing three-year basis have gone from $9 billion of capital raised to $73 billion. As you look at this chart and think about these numbers please keep in mind, what I said. This has all happened with a lot of fund ones and a lot of new relationships. So while we’re pleased with the progress we’ve made, we feel like the last 10 years of building track records in relationships position us to really scale from here.
We see growth from creating new investment platforms scaling our existing platforms with existing relationships and doing more with those existing investors. And we see even more upside from creating new relationships across channels and around the world. And on top of these points, it’s important to recognize that in the next six to 18 months we’ll be in the market for our largest three funds. Asia PE, Americas PE and infrastructure. So the long-term opportunity is large and the near-term visibility is high.
Thank you for joining our call. We’re happy to take your questions.
[Operator Instructions]
And Michelle we’d like to ask everyone if they wouldn’t mind to please ask one question and then one follow-up if necessary to just allow us to work our way through the queue. Thank you.
And our first question comes from Michael Carrier of Bank of America. Your line is open.
Good morning and thanks for taking the questions. Maybe the first question. Scott, you mentioned sort of the fundraising outlook focus on distribution, some of the opportunities there. I guess, just given the pace of deployment and then the performance relative to, whether it’s the peers or the benchmarks. How should we be thinking about it, I think we have a pretty good view maybe over the – in the second half in terms of what’s out there, but if you’re thinking about 2020 and 2021, both on the distribution with the flagships like how meaningful can it be over that timeline.
Craig, why don’t you kick in off and talk about what we see coming to market over the next couple of years and then I’ll give some color.
Yes, sure. So Mike in terms of where we’re fundraising currently. Why do we start there, that would include fundraising for a number of European strategies. So that’s private equity opportunistic real estate and direct lending. In Asia, we’re fundraising for strategies outside of private equity within, including infrastructure and real estate, and we’re also fundraising across our impact, real estate credit, special situations and our next generation technology growth strategy. And at the same time we have areas where we look to raise capital on a more continuous basis that includes the CLO business, leverage credit platforms in the U.S. and Europe as well as our BDC and hedge fund partnerships.
Yes. So I’d say, it just as an overlay, Michael, I’d say that the opportunity to scale from here, we think is dramatic. We mentioned the three large funds coming to market in the next six to 18 months because those do tend to be a little bit more sizable when they do come, but as you can, you tell from the chart on Page 6 of the deck. It’s much more than just the larger episodic funds coming to market, it’s showing up in the numbers.
And so the way we look at it is we have for these 18 other businesses of the 22 that were in, that – they are starting to work their way through kind of the fund one, fund two dynamic and as we’ve talked about in the past we think successor funds can be multiples of the prior. And we just happen to have that in a lot of different places across the firm. And so it’s the – the opportunity to scale is something that we are quite optimistic about and at the same time, the reason we mentioned that we have been building out distribution as we see opportunity everywhere, more institutional relationship, insurance retail, high net worth, structured products we begin – we believe we’re just scratching the surface and there is a lot of incremental relationships we can create and a lot of relationships we can build from a good start. So, a long way of saying we see a lot of upside and this chart has been created during a period of time where we’re just creating a lot of things.
All right, that’s helpful. And then just a quick follow-up, you guys talk about ROE as a metric, just given the balance sheet, but you mentioned Core on this call and the growth in that area. When you think about, like how that impacts the balance sheet, meaning the mark-to-market more immediately versus say the benefits on the realizations flowing through the EBITDA can take years for that to play out. Like, how do you think about that in especially relative to ROE in that being a metric.
Yes, Mike. Thanks for asking about it – it’s actually a very good question precisely for the reason you mentioned and Core is a great example of this dynamic. So as we look at our ROE and we evaluate our performance. We do look at ROE on a marks basis, in order to really focus on total value creation, and I think to us that aspect is critical. So for the numerator, we look at the change in book value over the last 12 months, and as you know we mark-to-market invest – in our book. And we’ll add the dividend to that to really look at the total value that has been created, whether that’s paid out in the dividend or retain on the balance sheet and we’ll look at that versus the average book over that period.
So if you do that over the last 12 months, you’d get 16.5% and I think as we think about, and in after-tax ROE 16.5% with really low net leverage as a firm is very attractive versus broad financials. So that’s how we focus on ROE and again, I think most importantly reflecting mark-to-market in the numerator and the denominator is a critical piece of that.
Okay, thanks a lot.
Thank you.
Our next question comes from Craig Siegenthaler of Credit Suisse. Your line is open.
Thanks, good morning.
Good morning.
Last quarter you had a slide that provided us an update on the KKR shareholder base following the C-Corp conversion and I didn’t see at this quarter, but I’m wondering if you had any fresh data points that you can share with us in terms of how your investor base has evolved over the last three months?
Craig, thanks for asking about. The answer is actually a good one. So thinking back to what we had last quarter. If I could – have you jot down three numbers and then let me walk through what it represent. So the three numbers are $177 million, $291 million and then $332 million. So as you pointed out last quarter within the supplement we had a slide that highlighted the evolution in our shareholder base since conversion and what it – it showed most significantly was an increase in the mutual fund, the index fund and the other institutional components.
So if you were to go back and look at that slide as of year-end 2017. So pre-conversion that group combined to own $177 million units that first number and as of year-end 2018. So post conversion that group combined to own $291 million so over 2018 we saw an increase of 114 million shares. Looking at that, that part of our shareholder base. So to help put some numbers around that update, as of March 31, that group owned 332 million shares. So in that three-month period, we saw an increase of $41 million or about 14% with increases across all three categories.
And the other statistics that we look at is a number of institutions that file 13-F [ph] gives a sense of breadth. So we saw a double-digit percentage increase in the institutions that file 13-F, was a 12% increase. And when you look at again just over that time period. So we’ve seen a continued improvement across all these statistics as you probably get a sense, we follow them pretty – pretty closely to update the progress and I think two other final thoughts.
One, when we look at the stats as best as we can against other large financials and C-Corp’s both those that are inside the S&P 500 and outside. It looks like, we still have a lot of room to grow. So, I think we’ve seen continued progress, which is great, but importantly, still feels like there is – like there is a lot to do.
Thanks, Craig.
Our next question comes from Patrick Davitt of Autonomous Research. Your line is open.
Hey guys, good morning.
Good morning.
On the Capital Markets’ revenue. I think it came in a lot better than anyone was expecting given the lack of kind of large visible deal. Could you walk through maybe any of the key drivers of the increase in syndicated capital and the surgeon revenue there?
Sure, Patrick. This is Bill, and remember, when we mentioned the number in the first quarter which was only about $6 million. We said that, Capital Markets was "shut" for probably half of the quarter. Capital Markets is rebounding and we saw a nice activity in the second quarter. The interesting thing this quarter and that’s why I highlighted in prepared remarks is, we’ve always talked about the geographic breadth and this quarter, the fees generated from Europe and for major were actually in excess of the fee generation from the U.S.
And so that is positive as far as the geographic expansion that we talked about, but more importantly from a revenue point of view, we have KKR portfolio companies, plus we also have our third party business. And when you look at the activity during the quarter, about 70% of the revenue we generated from debt issuing fees and about 30% from the equity issuances. And the mandates, we’re in excess of 35%, so that means this came from over 35% separate and distinct clients that actually use KKR and Capital Markets in their business.
And lastly, when you think about those verified mandates there were only two mandates that were in excess of $20 million, and so again, this is again in the broad breadth of the activity in Capital Markets this quarter.
And would you give the percent [ph] that was third-party?
I did not, but this quarter, it was roughly about 15%.
15%. Okay, thank you.
Yes.
Thank you.
Our next question comes from Gerald O’Hara of Jefferies. Your line is open.
Q - Gerald O’Hara
Great, thanks. Bill maybe staying with you for a minute, just kind of looking at the income taxes in the quarter, and thinking about how to kind of model that going forward. Is this a reasonable run rate to start to begin that sort of linear increase over the next several years. I know you kind of given a – given some guidance previously in a state increase to sort of the low 2020s and 2023. Any kind of change and how that progression might play out or should we still kind of think about it as somewhat linear in nature.
Gerald as you know, we talk about this every single quarter since we actually did convert to C-Corp and trying to give you better guidance as to how to model this, but what we did say was that when we dig out C-Corp, about half of the step-up was towards goodwill and we’d be amortized over 15 years, and so that’s pretty linear and that could be model. The other 50% we’ve actually tied to specific assets or specific funds and carry and as we saw those investments we will get the benefit of that shelter of tax.
What’s happened in this quarter and still we’re talking about second quarter 2019, if there were a couple of investments, which weren’t written up much as of June 30, 2018 when we did go C-Corp. A lot of the appreciation occurred after that time and so when those investments were monetize, we didn’t have any shelter as far as against that income. That being said, we still have a heavily decent amount of shelter to provide few investments that when we went C-Corp had a lower cost than value. And so we were able to allocate to those investments. As those investments are sold, we’ll get the benefit of that tax reduction. But as I mentioned a year ago, it is very hard to predict, we – to try to keep things simple, said that it was going through roughly go up a few percentage points every single year on a walk from roughly 9%, up to the 22% and so long-winded way of telling you that, it – it’s pretty hard to model. I’ve written the hard wire a 15% rate, which is the rate this quarter. Next quarter, it could be depending on the mix of assets to be 11% or it could very well be that of all the assets that are sold in the third quarter, were written up at all when we went C-Corp, the tax rate on that will be 22%.
Okay, thanks for the – thanks for the color. Appreciate it.
Our next question comes from Bill Katz of Citi. Your line is open.
Okay, thank you very much for taking my questions this morning. And I certainly appreciate page 6 of the supplement is very, very helpful. It’s a big picture question as you continue to scale your business and diversify. Can you talk a little bit maybe the dividend policy and how important does the book value strategy remain?
I’d say the book value compounding remains a critical priority and focus for us, Bill. As we talked about in the past, in particular, we got into – in good detail when we changed our distribution policy several years ago, we’re big believers in the power of long-term compounding and if you flip back to page 2 of the deck and look at the bottom left-hand side, you can see over the last few years, instead of distribution policy was changed, we’ve started to see meaningful compounding in our book from $12 or so, to the better part of 2018 in a relatively shorter period of time.
So, book value compounding continues to be a big part of our story as does AUM compounding and fee related earnings compounding. So, we’re focused on all of the above. Dividend policy is something that we’ll revisit on an annual basis, but we’re going to continue to invest in our own growth, and bet our – bet on ourselves, and that will show up in our book value per share. So, I think you should expect or else equal to have the dividend policy, move up the dividend over time. So, we do expect it to grow but we will largely be focused on compounding book as we compound the rest of our metrics.
Okay. And a bit more of a tactical question, just coming back to the FRE drivers sequentially, just given the very strong activity on the transaction line. Is it a way to think about the incremental impact of that activity on FRE?
Well, Bill, when you – when you focus on their transaction fees, you have to break it down between KCM and KKR proper. As you know in private markets, you see transaction fees and they were quite robust, but there also was a big increase in fee credits, because remember on the private market side, we have a sharing arrangement with our L.P.’s and roughly speaking, that’s 80% to the L.P.’s and 20% to us. So, if you see a transaction fee go up on the private market side, that’s good news, but the fee credit is going to be adjusted in the economics to us or roughly be about that 20%. Again, to believe with the point, if you go back to the Capital Markets, any sort of transaction fee we reported there is going to be 100%.
Interestingly though, you still are pretty robust activity in the second quarter compared to the first, and if you take the transaction monitoring fees and netted against fee credit, you actually saw an increase of roughly about $23 million. And keep in mind, if you look at the capital investment line, we went from investing $3.3 billion to almost $4 billion and so you should expect that, that transaction fee would be higher this quarter.
Okay. I’m just trying to get toward the incremental FRE contribution, but we can follow up offline. Okay, thank you very much for taking the question, Scott.
Thanks, Bill.
Our next question comes from Alex Blostein of Goldman Sachs. Your line is open.
Hey, good morning everyone, thanks. Scott, to follow up to your discussion around scaling the business and the fact that maybe, you guys are related to some of the distribution initiatives, but maybe, have been sort of been catching up over the last couple of years as you look out, and especially, as we look at the flagship funds that are on the horizon here. How should we think about the company being in that 40%-ish range for now? How much flexibility you guys have to bring it down over the next couple of years?
So, I think the guidance we’ve given you is that we expect the comp ratio to be in the low-40s. Alex, I think that’s what we suggest, it’s still the right assumption to use. As we scale our businesses and in particular, as we see carried interest we generated from a number of these fund ones and twos that have been invested, but not yet realized and as our AUM and fees continue to scale from all the good work that teams have been doing in terms of creating a very attractive track records. We would have more flexibility over time to potentially bring that down, but in the next couple of years. I wouldn’t guide you any differently than the low-40s.
Okay, fair enough. And then just a quick follow-up, Bill to your kind of state of the Union sort of update on where realize incentive income investment stand for the next kind of couple of quarters, so that $600 million number. I just want to make sure, does that contemplate any disposition of first Data FIS or kind of the related transaction there or any of your other public holdings.
Good question. To be clear, it does not contemplate any secondaries. So, these are transactions that have closed our strategic sales that have been signed and it’s yet to close. And the reference was it the $250 million, which we expect in the third quarter and the headline number was $600 million, that’s because there are a couple of strategic sales have taken place. We had a signed documentation and we expect those to close in the early part of 2020.
Great, thanks so much.
Thank you.
Our next question comes from Glenn Schorr of Evercore. Your line is open.
Thanks very much. See what I can get at this one. We hear all the growth is scaling and the distribution we’ll get it and it’s working great. If you look at the proposal out of Elizabeth Warren recently, it would suggest something other than we all – we all believe is taking place. So I guess I’m – I’d love to give you a shot to either A, response and/or B, talk about how the business would adapt if some of those proposals are put in place.
Thank you, Glenn for the question. Always appreciate being given an opportunity, not going to take you up on it today.
Okay, no problem.
We’re not – we’re not going to comment. I think, we’re obviously at the beginning of, probably a season of a number of different things that will be in the medias will – we’ll watch it as will you and we’ll let you know as how things developed, if and how it impacts our business. I would tell you that we have been focused for the last decade plus on making sure that we have a robust effort around all things ESG and making sure that we’re being thoughtful about all the stakeholders to whom we’re responsible. And so we’ll continue to focus on that endeavor and then adjust as the environment adjusts.
Okay. And maybe, a business related to one. This seems to be a rising public to private trends. Curious if you’re seeing that the same degree I am, if it’s just a function of differential in valuations and I think of it as a seasonal thing.
We’re seeing it too. And I think it is providing opportunities to us. I think the market, Glenn; it’s become a bit of a have/have not market. And I think if a company has real growth, there is in certain sectors and is a really simple story. They tend to get a high multiple and as a lot of capital goes that direction, if there is some complexity if, it’s lower growth; if there is more explaining needs to be done. There’s a lot of companies that get left behind.
And so we are seeing this bifurcated market develop and I do think that is leading to more interest on the part of management teams to consider going private transactions. So that’s clearly creating the opportunities for us. I’d say the market’s focus on simple stories is also creating opportunities and so far, as a lot – a number of companies are selling non-core subsidiaries. And we’ve been particularly active around corporate carveouts all around the world. And I think that’s a derivative of this public to private trend, it’s more of a simplified trend that we’re benefiting from, but we’re seeing the same thing you are.
Okay. Thanks very much.
Our next question comes from Chris Kotowski of Oppenheimer & Company. Your line is open.
Yes. good morning and thanks. The – I noticed the carried interest receivable is up 21% linked quarter and that just seems like a big number and kind of a ho-hum market. Is there any particular story behind that?
Hey, Chris. This is Bill. No particularly story other than we manage a lot of capital and the appreciation was quite robust during the quarter, for example, private equity or private equity portfolio is up 6.4%. So, demand is a lot of capital and you see that appreciation, you’ll see that come through in the accrued carry number.
And the only thing I’d add Chris, it’s also coming from non-PE and we mentioned in the number of these younger funds are now getting invested. The dollars in the ground are growing and the accrued carry is starting to tick up for non-PE as well. And we’ve shared that we think there is significant upside to our carried interest line over time is that continues to play out and those investments are exited. So, all else equal, we hope to see that, that accrued carry from non-PE continue to grow.
Right. And to that point, we actually – we actually had a slide in the supplemental deck last quarter and of the $123 billion of eligible carry that we – carry eligible funds that we manage that number was $88 billion. So again, to Scott’s point, as we continue to grow the business, not only in PE, but continue to add different mandates and they work their way through their preferred returns and then our carry eligible, you’re going to see that number go up.
Okay. And then as a follow-up, is BridgeBio also in the healthcare growth fund or is it just a balance sheet investment?
Good question. And it’s not a straightforward answer. The answer is that it was originally on our balance sheet, again, the beauty of our balance sheet is we have the ability to use some of their balance sheet capital to prove contact and then we go raise capital with a third-party mandate attached. BridgeBio we invested over four separate tranches, the first two were made specifically just on the balance sheet.
And then as we raised a fund and that fund was eligible to participate in that investment with – the fund participated. So that $395 million is balance sheet capital plus a flavor [ph] of the GP interest in a healthcare growth on. But more importantly, you’ve got the $395 million of value, but it’s only $75 million of cost and we made that investment over the last two and a half years.
Well, I guess what I was also wondering about is obviously, it’s nice – it would be nice to have a five banger in the – in your first time biotech. So, I mean it’s – I mean is that – did that – it does help boost the performance of the fund by a similar amount as to what we see on your balance sheet.
And it certainly has and that’s a very good, very good point. And when you take into account, we’re just talking about the $395 million, which is our investment on our balance sheet. Embedded in there is also some accrued carry, because of the healthcare growth fund – because of the IRR that it has, right now. Healthcare growth fund is right now. Remember, it’s an early funding, we had some big write-up, so is – the gross IRR is, I think over a 100%. And so you’re going to see that big bang that you talk about.
Okay, all right. thank you.
Thanks, Chris.
Our next question comes from Devin Ryan of JMP Securities. Your line is open.
Okay, great. Good morning, everyone. Most of my questions have been asked, but maybe, just one here for Scott, you had mentioned a lot of visibility into the business near-term, and you had given some longer-term perspective on fee related earnings and the trajectory at the Investor Day. but since then we’ve got some pretty specific FRE guidance for the next few years from some of your peers just given this transparency, which I think it has been helpful to the market. And so if possible, is it possible to give us anything more granular on where you see fee related earnings, maybe over the next two to three years or range of growth rates from here just based on that level of visibility you have into the business and some of the moving parts like fund-raising or deployment?
Great question, Devin. And I appreciate this opportunity as well, but also not going to take you up on it. I think we’re not comfortable giving FRE guidance per se. I think what we are comfortable doing is just sharing with you the trends that we’re seeing in the business. And as you can tell from the narrative and the significant growth we’ve had in management fees, 16% give or take plus the opportunities we see to continue to scale our Capital Markets businesses.
We’ll share with you what we’re seeing, but we do see meaningful upside and the opportunity to create operating leverage as well. but there’s no specific guidance. but with that, I’d tell you the overall sentiment here is we’ve put in a lot of hard work in the last decade. Getting ourselves to this point in terms of creating track records and new relationships and if we can create page six with fund ones and new relationships, we’re kind of in a mode of being very optimistic around what we can do as we scale from this point forward. So upbeat, but no specifics for you.
And just to give you a little bit of color, very short-term, remember when you take a look at fee-paying AUM year-over-year, it’s up 9% and we have talked about shadow fee-paying AUM that number is roughly $18 billion and over 100 basis points of the income attached to that – to that as that capital was invested over the next couple of years, you’re certainly going to be able to see management fees increased, because of that.
Yes, okay. Bill, thanks for that and give it a shot, but I appreciate it guys.
I’ll just try.
Appreciate it.
Our next question comes from Chris Harris of Wells Fargo. Your line is open.
So, there is a lot of negative yielding debt in Europe as you guys know. How is this impacting your business or your approach to investing in that region if at all?
Oh, it’s a great question. And it’s – what we’re finding in Europe is that the opportunity in the private markets and the opportunity to generate return from capturing the illiquidity premium Chris, it’s significant. And so it’s not impacting our investment approach per se, but we are finding that when we talk to investors around the world, especially those in Europe are with big European components of their portfolio. So, they are looking to do more with us, because they are focused on figuring out how to capture that illiquidity premium for them.
So, it hasn’t really changed how we’re investing per se, but what it has done is it allowed us to create a series of discussions with investors that are trying to figure out how to position their portfolio on a negative yielding environment. So, we’re seeing more flows into things like private credit infrastructure, real estate and anything that has a yield coming from the illiquidity private markets. We’re finding a lot of interest.
Got it. Thank you.
Thank you.
Our next question comes from Michael Cyprys of Morgan Stanley. Your line is open.
Hey, good morning. Thanks for taking the question. Just hoping you could talk a little bit about some of the newer product initiatives that you’re introducing targeted toward insurance companies and in particular, I saw you recently had a return enhanced structured note that I think invest across a number of your strategies, but pays a fixed distribution. So, I guess what sort of market opportunities do you see for these sort of innovative solutions and how are you able to structure such a high coupon that pays out on the sort of structured note? Are you evolving the return streams and payouts on your private equity funds to match if you could just help us understand that? Thank you.
Thank you, Michael. Yes, I think this kind of – this question brings together a few different themes we’ve covered in the past. One is that we’re focused on how we can continue to raise capital that is longer duration. As you know, we’re focused on kind of generating more permanent capital and recycling long-term 15-plus year block of type capital. And so that’s one thing we’ve been very focused on.
Another thing, we’ve been very focused on is building our relationships out in the insurance space. And over the course of the last four or so years, we’ve seen our AUM from insurance companies go from $8 billion to north of $25 billion and as we’ve been spending time across those two themes, we have found an opportunity in a number of different respects to innovate to create products that achieve both objectives, raise longer-term capital for us to invest in compound for our partners and do it in a format that is attractive for insurers and easier for them to invest in.
And so the product that you’re talking about is just one example of many that we have been working on and a number of them have actually been completed. The answer to your higher level question around how can you generate yield on a Private Markets portfolio is relatively straightforward. If you think about what we do, private equity and growth equity, it’s true traditionally do not generate much current return but if you think about it, whereas basically everything else we’re doing does private credit infrastructure, real estate equity, real estate credit, energy are just some examples. And so we’re finding that you can create a more diversified portfolio of alternatives that does have recurring yield. And I think it’s a combination of that recurring yield plus upside of private and growth equity and other asset classes that we think it’s an opportunity to create hybrid products that are attractive, both on the run and then also in terms of long-term upside.
Great. thanks. I’ll get back in the queue to ask follow-up.
Thank you.
Our next question comes from Robert Lee of KBW. Your line is open.
Great. Good morning and thanks for taking my questions. And I apologize if this – you maybe went over this, because I got on the call a little bit late, but just going back to kind of capital management and the dividend, I mean, not a year anniversary since one converted, reset the dividends. So, how should we think about your view about dividend growth from here? Since we’re kind of a year in at this point and second question is it really relates kind of more to comp ratio and the carry pool, I guess you – I think you guys are somewhat unique and that you pay everyone pretty much out of one big carry pool, I believe, as opposed to point on those specific funds. but as you get bigger as you have many more strategy is that a model that other becomes easier to execute on, or is there, the pressure to change it, is kind of the firm becomes more diverse?
Hey, Rob, this is Bill. We did cover both these points earlier on, but – so the punch line is, is it relates to the change in dividend policy. It’s nothing that we’ll address annually and it’s probably something what we will be discussed on the fourth quarter call. As it relates to that one comp full what we mentioned earlier, is that we’re talking that comparable to be in the low-40s and remember we pay every one-off of one P&L, and we don’t break down specifically, how that – how that income is generated whether or not it’s fee income over then on carry to the balance sheet earnings, we look at everything more holistically. but you’ve got to believe that as we continue to scale our business and grow that business, you should see over time, margin improvement, but that’s not going to happen next quarter per se.
And so when we went to the C-Corp conversion and we only reported one comp number, we said that we were going to target that number in the low-40s to make sure that the operating margins would be roughly about 50%. And so there is not going to be any change anytime soon.
And I think on the last part of your question Rob, the pressure to change it. no, we don’t see any pressure to change that. This has been a part of how the KKR is operated from inception that everybody is always participated in the global carry pool. It’s a critical part of our culture and allows us to make sure we connect the dots across the firm and everybody works together and so we expect that to continue to be the case.
Okay, great. Thanks for taking my question.
Thank you.
Our next question is a follow-up from Michael Cyprys with Morgan Stanley. Your line is open.
One on lending, just how you’re seeing that used across the industry today in terms of order of magnitude and size, and to what extent does KKR use capital call lending when you’re making deployments, delaying capital costs using leverage and then drawing down on that?
Mike, you actually just cut in halfway through your question. Would you mind just repeating it and we didn’t catch, you were silent for the first part.
Sure. I was just asking about capital call line lending. So, when you’re buying an asset in a fund using leverage initially to buy and then drawing down on the line to, and then repaying it off in the future. Just curious, what you’re seeing across the industry in terms of usage of this form of leverage. What sort of magnitude in size do you see for this that part of the industry and to what extent is KKR using this form of leverage?
Hey Michael, this is Bill. I’ll take that one. When you think about the administrative eased by having a subscription facility in each one of the funds. We’ve been doing that for the past few years. And so that line is not as built in much at all. It’s again, more for administrative ease as opposed to anything.
As it relates, maybe, to a question that you might be asking as far as to the extent that you use a facility, do you actually increase the return profile on that particular fund, because of the delay draw, but I would just want to let you know that as we report to our L.P.’s, we report the IRR, because of us having the ability to use that subscription line, but we also report a return as if we didn’t use the subscription line. So, we actually have these transparency reports, where again, we report for both of those numbers.
Great. And what would be the typical duration of a draw on that?
Typically, on average, we have this facility, we’ve drawn this facility and it usually gets paid down every six months.
Got it, okay. So, six months. thanks so much.
Thank you.
You’re welcome.
There are no further questions. I’d like to turn the call back over to Craig Larson for any closing remarks.
Michelle, thanks for your help and thank you everybody for joining our call. please of course, follow up directly with anything else and we look forward to chatting next quarter.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.