ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of KKR & Co. Inc., together with its consolidated subsidiaries, and the related notes included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, filed with the SEC on February 18, 202019, 2021 (our "Annual Report"), including the audited consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under "Cautionary Note Regarding Forward-looking Statements,"Statements" and "Business Environment" in this report and our Annual Report and "Risk Factors" in this report, our Annual Report, and our other filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements.
The unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are hereafter referred to as the "financial statements." Additionally, the condensed consolidated statements of financial condition are referred to herein as the "consolidated statements of financial condition"; the condensed consolidated statements of operations are referred to herein as the "consolidated statements of operations"; the condensed consolidated statements of comprehensive income (loss) are referred to herein as the "consolidated statements of comprehensive income (loss)"; the condensed consolidated statements of changes in equity are referred to herein as the "consolidated statements of changes in equity"; and the condensed consolidated statements of cash flows are referred to herein as the "consolidated statements of cash flows."
fund to a specified percentage of investment gains that are generated on third-party capital that is invested. Beginning in the first quarter of 2021, we also earn our share of income generated by Global Atlantic.
Our investment teams have deep industry knowledge and are supported by a substantial and diversified capital base; an integrated global investment platform; the expertise of operating professionals, senior advisors and other advisors; and a worldwide network of business relationships that provide a significant source of investment opportunities, specialized knowledge during due diligence and substantial resources for creating and realizing value for stakeholders. These teams invest capital, a substantial portion of which is of a long duration and not subject to redemption. As of September 30, 2020, approximately 80%March 31, 2021, 87% of our capital is committednot subject to redemption for an average ofat least 8 years or more, providingfrom inception and 42% of our capital is from strategic investor partnerships and investment funds and vehicles that have an indefinite term and for which there is no immediate requirement to return invested capital to investors upon realization of investments. This capital provides us with significant flexibility to increase the value of the investments and select exit opportunities. We believe that these aspects of our business will help us continue to expand and grow our business and deliver strong investment performance in a variety of economic and financial conditions.
Through our Private Markets business line, we manage and sponsor a group of private equity funds that invest capital for long-term appreciation, either through controlling ownership of a company or strategic minority positions. In addition to our traditional private equity funds, we sponsor investment funds that invest in growth equity core(including impact) and impactcore investments. We also manage and sponsor investment funds that invest capital in real assets, such as real estate, infrastructure energy and real estate.energy. Our Private Markets business line includes separately managed accounts that invest in multiple strategies, which may include our credit strategies as well as our private equity and real assets strategies. These funds and accounts are managed by Kohlberg Kravis Roberts & Co. L.P., an SEC-registered investment adviser. As of September 30, 2020,March 31, 2021, our Private Markets business line had $135.8$177.7 billion of AUM, consisting of $91.6$111.0 billion in private equity (including growth equity, core,impact and impactcore investments), $31.4$49.7 billion in real assets (including real estate, infrastructure energy, and real estate)energy) and $12.8$17.0 billion in other related strategies.
(2) These credit funds utilize third-party financing facilities to provide liquidity to such funds, and in such event, IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund. The use of such financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period and are calculated taking into account recycled capital. Net IRRs presented are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees. Gross IRRs are calculated before giving effect to the allocation of carried interest and the payment of any applicable management fees.
(3) The multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the investors. The use of financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate multiples of invested capital, which tends to increase multiples when fair value grows over time and decrease multiples when fair value decreases over time. Such amounts do
not give effect to the allocation of any realized and unrealized returns on a fund's investments to the fund's general partner pursuant to a carried interest or the payment of any applicable management fees and are calculated without taking into account recycled capital.
Our Capital Markets business line is comprised of our global capital markets business, which is integrated with KKR's otherasset management business lines, and serves our firm, our funds, our portfolio companies and third-party clients by developing and implementing both traditional and non-traditional capital solutions for investments or companies seeking financing. These services include arranging debt and equity financing, placing and underwriting securities offerings, and providing other types of capital markets services that may result in the firm receiving fees, including underwriting, placement, transaction and syndication fees, commissions, underwriting discounts, interest payments and other compensation, which may be payable in cash or securities, in respect of the activities described above.
Our capital markets business underwrites credit facilities and arranges loan syndications and participations. When we are sole arrangers of a credit facility, we may advance amounts to the borrower on behalf of other lenders, subject to repayment. When we underwrite an offering of securities on a firm commitment basis, we commit to buy and sell an issue of securities and generate revenue by purchasing the securities at a discount or for a fee. When we act in an agency capacity or best efforts basis,
we generate revenue for arranging financing or placing securities with capital markets investors. We may also provide issuers with capital markets advice on security selection, access to markets, marketing considerations, securities pricing, and other aspects of capital markets transactions in exchange for a fee. Our capital markets business also provides syndication services in respect of co-investments in transactions participated in by KKR funds or third-party clients, which may entitle the firm to receive syndication fees, management fees and/or a carried interest.
The capital markets business has a global footprint, with local presence and licenses to carry out certain broker-dealer activities in various countries in North America, Europe, Asia-Pacific and the Middle East. Our flagship capital markets subsidiary is KKR Capital Markets LLC, an SEC-registered broker-dealer and a member of the Financial Industry Regulatory Authority ("FINRA").
Asset Management - Principal Activities
Through our Principal Activities business line, we manage the firm's own assets on our balance sheet and deploy capital to support and grow our asset management business lines. Typically, the funds in our Private Markets and Public Markets business lines contractually require us, as general partner of the funds, to make sizable capital commitments from time to time. We believe making general partner commitments assists us in raising new funds from limited partners by demonstrating our conviction in a given fund's strategy. We also use our balance sheet to bridge investment activity during fundraising by seeding investments for new funds and also to acquire investments in order to help establish a track record for fundraising purposes in new strategies. We may also use our own capital to seed investments for new funds, to bridge capital selectively for our funds' investments or finance strategic acquisitions and partnerships, although the financial results of an acquired business or hedge fund partnership may be reported in our other business lines.
Our Principal Activities business line also provides the required capital to fund the various commitments of our Capital Markets business line when underwriting or syndicating securities, or when providing term loan commitments for transactions involving our portfolio companies and for third parties. Our Principal Activities business line also holds assets that may beare utilized to satisfy regulatory requirements for our Capital Markets business line and risk retention requirements for our CLOs.
We also make opportunistic investments through our Principal Activities business line, which include co-investments alongside our Private Markets and Public Markets funds as well as Principal Activities investments that do not involve our Private Markets or Public Markets funds.
We endeavor to use our balance sheet strategically and opportunistically to generate an attractive risk-adjusted return on equity in a manner that is consistent with our fiduciary duties, in compliance with applicable laws, and consistent with our one-firm approach.
The chart below presents the holdings of our Principal Activities business line by asset class as of September 30, 2020:March 31, 2021:
Holdings by Asset Class (1)
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(1) | General partner commitments in our funds are included in the various asset classes shown above. Assets and revenues of other asset managers with which KKR has formed strategic partnerships where KKR does not hold more than 50% ownership interest are not included in our Principal Activities business line but are reported in the financial results of our other business lines. Private Equity includes KKR private equity funds, co-investments alongside such KKR-sponsored private equity funds, certain core equity investments, and other opportunistic investments. Equity investments in other asset classes, such as real estate, special situations and energy appear in these other asset classes. Other Credit consists of certain leveraged credit and specialty finance strategies. |
(1)General partner commitments in our funds are included in the various asset classes shown above. Assets and revenues of other asset managers with which KKR has formed strategic partnerships where KKR does not hold more than 50% ownership interest are not included in our Principal Activities business line but are reported in the financial results of our other business lines. Private Equity includes KKR private equity funds, co-investments alongside such KKR-sponsored private equity funds, certain core equity investments, and other opportunistic investments. Equity investments in other asset classes, such as real estate, special situations and energy appear in these other asset classes. Other Credit consists of certain leveraged credit and specialty finance strategies.
Insurance - Global Atlantic
Our insurance business is operated by Global Atlantic, which we acquired on February 1, 2021. KKR owns all of the voting interests in Global Atlantic and a 61.1% economic interest in Global Atlantic as of the closing of the acquisition, which economic interest is subject to change based on post-closing purchase price adjustments. The balance of Global Atlantic is owned by third-party investors and Global Atlantic employees. Following the Global Atlantic acquisition, Global Atlantic continues to operate as a separate business with its existing brands and management team. Beginning with the first quarter of 2021, we present Global Atlantic's financial results as a separate reportable segment.
Global Atlantic is a leading U.S. annuity and life insurance company that provides a broad suite of protection, legacy and savings products and reinsurance solutions to clients across individual and institutional markets. Global Atlantic has made the strategic decision to focus on target markets that it believes supports issuing products that have attractive risk and return characteristics. These markets allow Global Atlantic to leverage its strength in distribution and to deploy capital opportunistically across market conditions.
Global Atlantic primarily offers individuals fixed-rate annuities, fixed-indexed annuities, and targeted life products through a network of banks, broker-dealers, and insurance agencies. Global Atlantic provides its institutional clients customized reinsurance solutions, including block, flow and pension risk transfer, as well as funding agreements. Global Atlantic primarily generates income by earning a spread between its investment income and the cost of policyholder benefits. As of March 31, 2021, Global Atlantic served over two million policyholders.
Business Environment
Economic and Market Conditions
Impact of COVID-19
COVID-19. The outbreak of a novel strain of coronavirus ("COVID-19")COVID-19 continues to impact the United States and other countries throughout the world. In March 2020,For a description of the World Health Organization declaredimpact that COVID-19 had and may in the future have on our business, see "Risk Factors—Risks Related to be a pandemic and the United States declared a national emergency dueOur Business—COVID-19 continues to the outbreak. In connection with these declarations, various governments around the world have instituted measures to slow the transmissions of COVID-19, which substantially restrict individual and business activities. These measures have included, for example, closures of non-essential businesses, limitations of crowd size, stay-at-home orders, quarantines, heightened border controls and limitations on travel. Governments inimpact the United States and aroundother countries throughout the world, have responded with fiscal and monetary stimuli that aim to provide emergency assistance to individuals and businesses negatively impacted by COVID-19. The outbreak of COVID-19 and the actions taken in response have had far reaching impact on the U.S. and global economies, contributing to significant volatility in the financial markets, resulting in increased volatility in equity prices (including our common stock) and lower interest rates, and causing furloughs and layoffs in the labor market. While COVID-19 cases have temporarily declined in some parts of the United States, many states in the Southern, Midwestern and Western regions saw sharp increases in the infection rates as they began to allow businesses to reopen. COVID-19 cases have also continued to surge in certain countries outside the United States, and certain countries that were initially successful at containing the virus have experienced renewed outbreaks in recent months.
We are monitoring developments relating to the global spread of COVID-19 and continuing to assess the potential for adverse impact on our business, including the investment funds we manage and the portfolio companies owned by us and our funds. In addition, we have implemented various initiatives intended to reduce the impact of COVID-19, such as employees working remotely from home, while also seeking to maintain business continuity.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, financial performance and operating results for the quarterly periods and full fiscal year of 2020 and likely beyond,it has caused and may be material and affect us in ways that we cannot foresee at this time. Many of the adverse ways in which COVID-19 may impact us have already materialized and adversely affected (or may in the future materialize and adversely affect) our stock price, our portfolio valuations, and the operations offurther cause disruptions to our business and the businesses of our portfolio companies, as well as the businesses of entities of which we or our funds are creditors, and our and their other counterparties, including suppliers and customers. These risks may, in the future, become even more significant than is currently the case or than is currently anticipated. Although it is impossible to predict with certainty the potential full magnitude of the business and economic ramifications, COVID-19 has impacted, and may further impact, our business in various ways, including but not limited to:
Difficult market and economic conditions may adversely impact the valuations of our and our funds’ investments, particularly if the value of an investment is determined in whole or in part by reference to public equity markets. Valuations of our and our funds’ investments are generally correlated to the performance of the relevant equity and debt markets. Although valuations across our investments generally improved after the first quarter of 2020, driven by a strong rebound in equity and fixed income markets, the continuing existence and resurgence of COVID-19 cases, which among other things could result in a second shutdown of businesses, may negatively affect the value of our investment portfolio in the future and thereby adversely impact our book value per share, accrued carried interest and assets under management;
COVID-19 significantly increases the challenges associated with business planning, strategy, execution, portfolio management, fundraising, and other aspects of our business operations, the operation of our portfolio companies' businesses, and the operation of entities to whom we or our funds have loaned money or otherwise do business through supply or customer relationships. None of us, our portfolio companies or our and their respective counterparties, vendors, or advisors have previously faced a situation that we view as comparable to the current COVID-19 crisis, which, among other factors, involves a major simultaneous supply and demand shock to global, regional and national economies and significant outsize effects on particular business sectors. The future trajectory of the COVID-19 crisis is subject to a complex interplay of epidemiological, technological, social, psychological, economic and political factors that are generally beyond our ability to forecast or control. In this environment, historical comparisons may be of little or no value, while the risk and uncertainty associated with a large number of business decisions are materially increased;
Limitation on travel and social distancing requirements implemented in response to COVID-19 challenge our ability to market new or successor funds as anticipated prior to COVID-19, potentially resulting in reduced or delayed
revenues. In addition, fund investors may become restricted by their asset allocation policies to invest in new or successor funds that we provide, because these policies often restrict the amount that they are permitted to invest in alternative assets like the strategies of our investment funds when there is a decline in public equity markets. Further, the COVID-19 crisis may cause fund investors to change their investment strategies in manners that we cannot now foresee, and that may additionally and negatively affect our ability to raise funds from traditional or other sources;
While the market dislocation caused by COVID-19 would expect to present attractive investment opportunities, due to increased volatility in the financial markets, we may not be able to complete those investments;
If the impact of COVID-19 continues, weresults" and our funds may have more limited opportunities to successfully exit existing investments, due to, among other reasons, lower valuations, decreased revenues and earnings, lack of potential buyers with financial resources to pursue an acquisition, or limited or no ability to conduct initial public offerings in equity capital markets, resulting in a reduced ability to realize value from such investments;
Our portfolio companies are facing or may face in the future increased credit and liquidity risk due to volatility in financial markets, reduced revenue streams, and limited or higher cost of access to preferred sources of funding, which may result in potential impairment of our or our funds’ equity investments. Changes in the debt financing markets are impacting, or, if the volatility in financial market continues, may in the future impact, the ability of our portfolio companies to meet their respective financial obligations. We and our funds may experience similar difficulties, and certain funds have been subject to margin calls when the value of securities that collateralize their margin loan decreased substantially;
Borrowers of loans, notes and other credit instruments in our credit funds’ portfolio are more likely to be unable to meet their principal or interest payment obligations or satisfy financial covenants, and tenants leasing real estate properties owned by our funds are more likely not to be able to pay rents in a timely manner or at all, resulting in a decrease in value of our funds’ credit and real estate investments and lower than expected return. In addition, for variable interest instruments, lower reference rates resulting from government stimulus programs in response to COVID-19 could lead to lower interest income for our credit funds;
While the impact of COVID-19 on our portfolio companies has varied depending on the location and industry in which they operate, many of our portfolio companies operate in industries that have been, and continue to be, materially affected by COVID-19, including but not limited to healthcare, travel, entertainment, hospitality, senior living, energy and retail industries. Many of these companies are facing operational and financial hardships resulting from the spread of COVID-19 and related governmental measures, such as the closure of stores, limitations on business operations, restrictions on travel, quarantines or stay-at-home orders. If the disruptions caused by COVID-19 continue and the restrictions put in place are not lifted or reinstated, the businesses of these portfolio companies could suffer materially or become insolvent, which would decrease the value of our funds’ investments. For a discussion of the pandemic's impact on our energy investments, see "—Commodity Markets";
COVID-19 may generate workplace, consumer, insurance, contract and other forms of litigation that exposes us, our portfolio companies, suppliers, customers, debtors and other counterparties to risks and claims of a magnitude and nature that we cannot now anticipate;
An extended period of remote working by our employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments are less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic; and
COVID-19 presents a significant threat to our employees’ well-being and morale. While we have implemented a business continuity plan to protect the health of our employees and have contingency plans in place for key employees or executive officers who may become sick or otherwise unable to perform their duties for an extended period of time, such plans cannot anticipate all scenarios, and we may experience potential loss of productivity or a delay in the roll out of certain strategic plans.
Given the ongoing nature of the outbreak, at this time we cannot reasonably predict the magnitude of the ultimate impact that COVID-19 will have on our business, financial performance and operating results. Economic downturn caused by COVID-19 may be prolonged and extend beyond the timeframe of the pandemic itself. We believe COVID-19’s adverse impact on our business, financial performance and operating results will be significantly driven by a number of factors that we are unable to predict or control, including, for example: the severity and duration of the pandemic; the pandemic's impact on the U.S. and global economies; the timing, scope and effectiveness of additional governmental responses to the pandemic; the
timing and speed of economic recovery, including the availability of a treatment or vaccination for COVID-19; and the negative impact on our fund investors, vendors and other business partners that may indirectly adversely affect us.
See "Item 1A. Risk"Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition."condition" in our Annual Report. The impact of COVID-19 may also exacerbate the other risks discussed in our Annual Report.
Economic Conditions. As a global investment firm, we are affected by financial and economic conditions globally. Global and regional economic conditions, including those caused by the COVID-19 pandemic, have substantial impact on our financial condition and results of operations, impacting the values of the investments we make, our ability to exit these investments profitably, our ability to raise capital from investors, and our ability to make new investments. Financial and economic conditions in the United States, European Union, Japan, China, and other major economies are significant contributors to the global economy.
The U.S. economy expanded significantly inDuring the third quarterperiod ended March 31, 2021, the United States continued to show signs of 2020,economic improvement, primarily driven largely by consumer spending as states began to reopen, as COVID-19 cases declined temporarily.fiscal and monetary support and its vaccine rollout program. In the United States, real GDP is estimated to have expanded by 33.1%, on5.4% at a seasonally adjusted annualized basis, forrate in the quarter ended September 30, 2020,March 31, 2021, compared to contractionan expansion of 31.4% for4.3% at a seasonally adjusted annualized rate in the quarter ended June 30, 2020;December 31, 2021; the U.S. unemployment rate was 7.9%6.0% as of September 30, 2020,March 31, 2021, down from 11.1%6.7% as of June 30,December 31, 2020; the U.S. core consumer price index was 1.7%1.6% on a year-over-year basis as of September 30, 2020, upMarch 31, 2021, flat from 1.2%1.6% on a year-over-year basis as of June 30,December 31, 2020; and the effective federal funds rate set by the U.S. Federal Reserve was 0.1% as of September 30, 2020, unchangedMarch 31, 2021, flat from June 30,0.1% as of December 31, 2020.
The European Union's economy also experienced a rebound inDuring the third quarter of 2020, although certain countries in Europe, including France, Germany, Belgium, Ireland and England, reimposed restrictions and lock-downs asperiod ended March 31, 2021, the number of COVID-19 cases surged across Europe after the third quarter.Euro Area continued to face economic challenges. In the Euro Area, real GDP expandedis estimated to have contracted by 12.7%,0.8% on a seasonally adjusted quarter-over-quarter basis forin the quarter ended September 30, 2020,March 31, 2021 compared to a contraction of 11.8%,0.7% on a seasonally adjusted quarter-over-quarter basis forin the quarter ended June 30,December 31, 2020; the Euro Area unemployment rate wasis estimated to have been 8.3% as of September 30, 2020,March 31, 2021, slightly up from 7.9%8.2% as of June 30,December 31, 2020; Euro Area core inflation was 0.9% on a year-over-year basis as of March 31, 2021, up from 0.2% on a year-over-year basis as of September 30, 2020, down from 0.8% on a year-over-year basis as of June 30,December 31, 2020; and the short-term benchmark interest rate set by the European Central Bank was 0.0% as of September 30, 2020,March 31, 2021, unchanged from June 30,December 31, 2020.
During the period ended March 31, 2021, in Asia, Japan's economy grew 16.6%continued to suffer economic contraction. In Japan, real GDP growth for the quarter ended March 31, 2021 is estimated to be -4.20% on a seasonally adjusted annualized quarter-over-quarter
basis, down from 11.7% as of December 31, 2020 on a seasonally adjusted quarter-over-quarter basis. Inflation in the third quarterJapan rose to 0.3% as of 2020 following its record 28.1% decline in the second quarter. China reported steady economic growth in the third quarterMarch 31, 2021, up from -0.4% as of 2020, fueled by strong retail sales and industrial production.December 31, 2020. In Japan, the short-term benchmark interest rate set by the Bank of Japan was -0.1% as of September 30, 2020,March 31, 2021, unchanged from June 30, 2020; andDecember 31, 2020. In China, signs of growth continued to emerge but at a slower pace than in the second half of 2020. Reported real GDP in China reported real GDP growth was 2.7%,grew by 0.6% on a seasonally adjusted quarter-over-quarter basis in the quarter ended March 31, 2021, compared to 3.2% reported for the quarter ended September 30, 2020, compared to 11.7%December 31, 2020. Reported inflation in the quarter ended June 30,China was 0.3% as of March 31, 2021, down from 0.4% as of December 31, 2020.
These and other key issues could have repercussions across regional and global financial markets, which could adversely affect the valuations of our investments. Other key issues include (i) political uncertainty caused by, among other things, populist political parties, economic nationalist sentiments, tensions surrounding socioeconomic inequality issues, and the 2020at-times partisan nature of U.S. Presidential election,government administration, which has potentially global ramifications with regards to policy, (ii) geopolitical uncertainty such as U.S.-China relations, (iii) regulatory changes regarding, for example, taxation, international trade, cross-border investments, immigration, and austerity programs,stimulus programs/rising levels of debt, (iv) volatility or downturn in stock and credit markets, (v) any unexpected shift in the central banks' monetary policies, (vi) technological advancements and innovations that may disrupt marketplaces and businesses, and (vii) further developments regarding COVID-19, as discussed above.including the spread of variants that may hinder the success of the vaccines and the ability to vaccinate sufficient segments of the global population. For a further discussion of how market conditions may affect our businesses, see "Risk Factors—Risks Related to Our Business—Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition"condition," in our Annual Report.
Equity and Credit Markets. Global equity and credit markets have a substantial effect on our financial condition and results of operations. In general, a climate of reasonable interest rates and high levels of liquidity in the debt and equity capital markets provide a positive environment for us to generate attractive investment returns, which also impacts our ability to generate incentive fees and carried interest. Periods of volatility and dislocation in the capital markets, such as the present, raise substantial risks, but also can present us with opportunities to invest at reduced valuations that position us for future growth and investment returns. Low interest rates related to monetary stimulus and economic stagnation may negatively impact expected returns on all types of investments. Higher interest rates in conjunction with slower growth or weaker currencies in some
emerging market economies have caused, and may further cause, the default risk of these countries to increase, and this could impact the operations or value of our investments that operate in these regions. Areas that have ongoing central bank quantitative easing campaigns and comparatively low interest rates relative to the United States could potentially experience further currency volatility and weakness relative to the U.S. dollar.
ManyWith respect to our insurance business, fluctuations in market interest rates can expose Global Atlantic to the risk of reduced income in respect of its investment portfolio, increases in the cost of acquiring or maintaining its insurance liabilities, increases in the cost of hedging, or other fluctuations in Global Atlantic's financial, capital and operating profile which materially and adversely affect the business. Higher interest rates, periods of changes in rates and lower rates each may result in differing impacts on Global Atlantic’s business. See "Risk Factors—Risks Related to Global Atlantic— Interest rate fluctuations and sustained periods of low or high interest rates could adversely affect Global Atlantic’s business, financial condition, liquidity, results of operations, cash flows and prospects.
In our asset management business, many of our investments are in equities, so a change in global equity prices or in market volatility directly impacts the value of our investments and our profitability as well as our ability to realize investment gains and the receptiveness of fund investors to our investment products. For the quarter ended September 30, 2020,March 31, 2021, global equity markets were positive, with the S&P 500 Index up 8.9%6.2% and the MSCI World Index up 8.0%5.0% on a total return basis including dividends. Equity market volatility as evidenced by the Chicago Board Options Exchange Market Volatility Index (the "VIX")(VIX), a measure of volatility, ended at 26.419.4 as of September 30, 2020,March 31, 2021, decreasing from 30.422.8 as of June 30,December 31, 2020. For a discussion of our valuation methods, see "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report and see also "Management’s Discussion and Analysis of Financial Condition and Results of Operations—"—Critical Accounting Policies—Fair Value Measurements—Level III Valuation Methodologies" in our Annual Report. In our insurance business, a change in equity prices also impacts Global Atlantic’s equity-sensitive annuity and life insurance products, including with respect to hedging costs related to and fee-income earned on those products.
Many of our investments, particularly in asset management, are also in non-investment grade credit instruments, and, ourparticularly in insurance, in investment grade credit instruments. Our funds, and our portfolio companies and Global Atlantic also rely on credit financing and the ability to refinance existing debt. Consequently, any decrease in the value of credit instruments that we have invested in or any increase in the cost of credit financing reduces our returns and decreases our net income. In particular due
Due in part to holdings of credit instruments such as CLOs on our balance sheet, the performance of the credit markets has had an amplified impact on our financial results, as we directly bear the full extent of losses from credit instruments on our balance sheet. Credit markets can also impact valuations because a discounted cash flow analysis is generally used as one of the methodologies to ascertain the fair value of our investments that do not have readily observable market prices. In addition, with respect to our credit instruments, tightening credit spreads are generally expected to lead to an increase, and widening credit spreads are generally expected to lead to a decrease, in the value of these credit investments, if not offset by hedging or other factors. In addition, the significant widening of credit spreads is also typically expected to negatively impact equity markets, which in turn would negatively impact our portfolio and us as noted above. Conversely, widening credit spreads may have a positive impact on our insurance business, as the margin Global Atlantic is able to earn between crediting rates offered on its insurance products and the investment income it earns from its credit investments should increase, and tightening credit spreads may negatively impact the pricing and therefore competitiveness of Global Atlantic’s products, adversely impacting sales and growth, or may negatively impact the margins that Global Atlantic earns on sales and transactions.
During the quarter ended September 30, 2020,March 31, 2021, U.S. investment grade corporate bond spreads (BofA Merrill Lynch US Corporate Index) contracted by 166 basis points and U.S. high-yield corporate bond spreads (BofAML HY Master II Index) contracted by 10350 basis points. The non-investment grade credit indices were up during the quarter ended September 30, 2020,March 31, 2021, with the S&P/LSTA Leveraged Loan Index up 4.1%1.8% and the BAML US High Yield Index up 4.7%0.9%. During the quarter ended September 30, 2020,March 31, 2021, 10-year government bond yields rose 383 basis points in the United States, rose 665 basis points in the United Kingdom, fell 7rose 28 basis points in Germany, rose 305 basis points in China, and fell 1rose 7 basis point in Japan. For a further discussion of how market conditions may affect our businesses, see "Risk Factors—Risks Related to Our Business—Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" in our Annual Report and "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report.
For further discussion of the impact of global credit markets on our financial condition and results of operations, see "Risk Factors—Risks Related to the Assets We Manage—Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income," "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" and "Risk Factors—Risks Related to the Assets We Manage—Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" and "Risk Factors—Risks Related to Global Atlantic—Interest rate fluctuations and sustained periods of low or high interest rates could adversely affect Global Atlantic’s business, financial condition, liquidity, results of operations, cash flows and prospects" in our Annual Report. For a further discussion of our valuation methods, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations—"—Critical Accounting Policies—Fair Value Measurements—Level III Valuation Methodologies" in our Annual Report.
Foreign Exchange Rates. Foreign exchange rates have a substantial impact on the valuations of our investments that are denominated in currencies other than the U.S. dollar. Currency volatility can also affect our businesses and investments that deal in cross-border trade. The appreciation or depreciation of the U.S. dollar is expected to contribute to a decrease or increase, respectively, in the U.S. dollar value of our non-U.S. investments to the extent unhedged. In addition, an appreciating U.S. dollar would be expected to make the exports of U.S. based companies less competitive, which may lead to a decline in their export revenues, if any, while a depreciating U.S. dollar would be expected to have the opposite effect. Moreover, when selecting investments for our investment funds that are denominated in U.S. dollars, an appreciating U.S. dollar may create opportunities to invest at more attractive U.S. dollar prices in certain countries outside of the United States, while a depreciating U.S. dollar would be expected to have the opposite effect. For our investments denominated in currencies other than the U.S. dollar, the depreciation in such currencies will generally contribute to the decrease in the valuation of such investments, to the extent unhedged, and adversely affect the U.S. dollar equivalent revenues of portfolio companies with substantial revenues denominated in such currencies, while the appreciation in such currencies would be expected to have the opposite effect. For the quarter ended September 30, 2020,March 31, 2021, the euro rose 4.3%fell 4.0%, the British pound rose 4.2%0.8%, the Japanese yen rose 2.3%fell 6.7%, and the Chinese renminbi rose 4.0%fell 0.4%, respectively, relative to the U.S. dollar. For additional information regarding our foreign exchange rate risk, see "Quantitative and Qualitative Disclosure About Market Risk—Exchange Rate Risk" in our Annual Report.
Commodity Markets. Our Private Markets portfolio contains energy real asset investments, and certain of our other Private Markets and Public Markets strategies and products, including private equity, direct lending, special situations and CLOs, also have meaningful investments in the energy sector. The value of these investments is heavily influenced by the price of natural gas and oil. During the quarter ended September 30, 2020,March 31, 2021, the 3-year forward price of WTI crude oil increased approximately 4%9%, and the 3-year forward price of natural gas increased approximately 5%4%. The 3-year forward price of WTI crude oil increased from approximately $43$46 per barrel to $44$50 per barrel, and the 3-year forward price of natural gas increased from approximately $2.38$2.47 per mcf to $2.49$2.56 per mcf as of June 30,December 31, 2020 and September 30, 2020,March 31, 2021, respectively. When commodity prices decline or if a decline is not offset by other factors, we would expect the value of our energy real asset investments to be adversely impacted, to the extent unhedged. In addition, because we hold certain energy real asset investments which had a fair value of $0.7 billion as of September 30, 2020 on our balance sheet, these price movements wouldcan have an amplified impact on our financial results, to the extent unhedged, as we would directly bear the full extent of such gains or losses. For additional information regarding our energy real assets, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations—"—Critical Accounting Policies—Fair Value Measurements—Level III Valuation Methodologies—Real Asset Investments" in our Annual Report and see also "Risk Factors—Risks Related to the Assets We Manage—Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" in our Annual Report.
Following the significant volatility experienced in 2020, oil prices continued to recover during the first half of 2020, due in large part to the COVID-19 pandemic, oil prices remained relatively stable during the third quarter albeit at prices meaningfully lower than pre-COVID-19 levels. If demand stays depressed, we expect significant volatility in oil prices to continue. While the impact to longer-term prices of crude oil and natural gas has been less pronounced, wealongside improving global demand. We expect downward price movements to have a negative impact on the fair value of our energy portfolio, all other things being equal, given those commodity prices are an input in our valuation models. However, we expect the impact of the decline will be mitigated by the existence of ourdue to near-term commodity price hedges, which makederivative transactions, we expect long-term oil and natural gas prices to be a more significant driver of the valuation of our energy investments in asset management than spot prices. As of September 30, 2020,March 31, 2021, energy strategiesinvestments in oil and gas assets make up approximately 1% of our assets under management, 2%1% of our total GAAP assets and 3%1% of our booktotal segment assets.
Business Conditions
Our operating revenues consist of fees, performance income and investment income.
Our ability to grow our revenues depends in part on our ability to attract new capital and investors, our successful deployment of capital including from our balance sheet and our ability to realize investments at a profit.
Our ability to attract new capital and investors. Our ability to attract new capital and investors in our funds is driven, in part, by the extent to which they continue to see the alternative asset management industry generally, and our investment products specifically, as an attractive vehiclemeans for capital appreciation or income. In addition, our ability to attract new capital and investors in our insurance business is driven, in part, by the extent to which they continue to see the life and annuity insurance industry generally, and in certain cases our re-insurance vehicles, as attractive means for capital appreciation or income. Since 2010, we have expanded into strategies such as real assets, credit, core, impact and, through hedge fund partnerships, hedge funds.funds, and most recently, insurance. In several of theseour asset management strategies, our first time funds have begun raising successor funds, and we expect the cost of raising such successor funds to be lower. We have also reached out to new fund investors, including retail and high net worth investors. However, fundraising continues to be competitive. While our Asian Fund IV, Americas Fund XII, Asian Fund III, European Fund V, Real Estate Partners Americas II, Global Infrastructure Investors III and Next Generation Technology Growth Fund II exceeded the size of their respective predecessor
funds, there is no assurance that fundraises for our other flagship private equityinvestment funds or vehicles or for our newer strategies and their successor funds will experience similar success. If we are unable to successfully raise comparably sized or larger funds, our AUM, FPAUM, and associated fees attributable to new capital raised in future periods may be lower than in prior years. See "Risk Factors—Risks Related to Our Business—Our inability to raise additional or successor funds (or raise successor funds of a comparable size as our predecessor funds) could have a material adverse impact on our business" in our Annual ReportReport.
Our ability to successfully deploy capital. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital available to us and participateas well as our participation in capital markets transactions. Greater competition, high valuations, increased overall cost of credit and other general market conditions may impact our ability to identify and execute attractive investments. Additionally, because we seek to make investments that have an ability to achieve our targeted returns while taking on a reasonable level of risk, we may experience periods of reduced investment activity. We have a long-term investment horizon and the capital deployed in any one quarter may vary significantly from the capital deployed in any other quarter or the quarterly average of capital deployed in any given year. Reduced levels of transaction activity also tends to result in reduced potential future investment gains, lower transaction fees and lower fees for our Capital Marketscapital markets business line, which may earn fees in the syndication of equity or debt. In our insurance business, we deploy capital by
investing in assets that are anticipated to generate net investment income in excess of the net cost of insurance. If we are unable to originate or source attractive investments, the success and growth in revenues of our insurance business will be adversely impacted. See “Risk Factors—Risks Related to the Assets We Manage—Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income” in our Annual Report.
Our ability to realize investments. Challenging market and economic conditions may adversely affect our ability to exit and realize value from our investments and result in lower-than-expected returns. Although the equity markets are not the only means by which we exit investments from our funds, the strength and liquidity of the U.S. and relevant global equity markets generally, and the initial public offering market specifically, affect the valuation of, and our ability to successfully exit, our equity positions in our private equitythe portfolio companies of our funds in a timely manner. We may also realize investments through strategic sales. When financing is not available or becomes too costly, it may be more difficult to find a buyer that can successfully raise sufficient capital to purchase our investments. In our insurance business, we depend on the ability of our investments to generate their anticipated returns, through the payment of interest and dividends and interest as well as return of principal, in the amounts and at the times that we expect them to be made in order to manage our obligations to make payments to our policyholders. If policyholder behavior differs from our expectations, we may be forced to sell our investments earlier than we anticipated and during market conditions where we may realized losses on the investment. In addition, material delays in payments or impairments to our anticipated investment returns could have material adverse affects to our results of operations. For additional information about how business environment and market conditions affect Global Atlantic, see "—Global Atlantic's Investment Portfolio."
Basis of Accounting
We consolidate the financial results of KKR Group Partnership and theirits consolidated entities, which include the accounts of our investment management and capital marketsadvisers, broker-dealers, Global Atlantic’s insurance companies, the general partners of certain unconsolidated investment funds, and vehicles, general partners of certainconsolidated investment funds and vehicles that are consolidated and their respective consolidated investment funds and certain other entities including certain CLOs and CMBS. We refer to CLOs and CMBS as collateralized financing entities ("CFEs").
When an entity is consolidated, we reflect the accounts of the consolidated entity, including its assets, liabilities, revenues, expenses, investment income, cash flows and other amounts, on a gross basis. While the consolidation of a consolidated fund or entity does not have an effect on the amounts of Net Income Attributable to KKR or KKR's stockholders' capital that KKR reports, the consolidation does significantly impact the financial statement presentation under GAAP. This is due to the fact that the accounts of the consolidated entities are reflected on a gross basis while the allocable share of those amounts that are attributable to third parties are reflected as single line items. The single line items in which the accounts attributable to third parties are recorded are presented as noncontrolling interests on the consolidated statements of financial condition and net income (loss) attributable to noncontrolling interests on the consolidated statements of operations.
The presentations in the financial statements reflect the significant industry diversification of KKR by its acquisition of Global Atlantic. Global Atlantic operates an insurance business, and KKR operates an asset management business, each of which possess distinct characteristics. As a result, KKR developed a two-tiered approach for the financial statements presentations in this Management's Discussion and Analysis. KKR believes that these separate presentations provide a more informative view of the consolidated financial position and results of operations than traditional aggregated presentations. KKR believes that reporting Global Atlantic’s insurance operations separately is appropriate given, among other factors, the relative significance of Global Atlantic’s policy liabilities, which are not obligations of KKR (other than the insurance companies that issued them). If a traditional aggregated presentation were to be used, KKR would expect to eliminate or combine several identical or similar captions, which would condense the presentations but would reduce transparency. KKR also believes that using a traditional aggregated presentation would result in no new line items compared to the two-tier presentation included in the financial statements in this report. We acquired Global Atlantic on February 1, 2021; accordingly, the results of Global Atlantic's insurance operations included in our condensed consolidated results of operations are from February 1, 2021 (the closing date of the acquisition) through March 31, 2021.
All the intercompany transactions have been eliminated.
For a further discussion of our consolidation policies, see Note 2 "Summary of Significant Accounting Policies" to theour financial statements included elsewhere in this report. The summary of the significant accounting policies has been organized
considering the two-tiered approach described above and includes a section for common accounting policies and an accounting policy section for each of the two tiers when a policy is specific to one of the tiers.
Key Financial Measures Under GAAP - Asset Management
The following discussion of key financial measures under GAAP is based on KKR's asset management business as of March 31, 2021.
Revenues
Fees and Other
Fees and other consist primarily of (i) management and incentive fees from providing investment management services to unconsolidated funds, CLOs, other vehicles, and separately managed accounts; (ii) transaction fees earned in connection with successful investment transactions and from capital markets activities; (iii) monitoring fees from providing services to portfolio companies; (iv) expense reimbursements from certain investment funds and portfolio companies; (v) revenue earned by oil and gas entities that are consolidated; and (vi) consulting fees. These fees are based on the contractual terms of the governing agreements and are recognized when earned, which coincides with the period during which the related services are performed and in the case of transaction fees, upon closing of the transaction. Monitoring fees may provide for a termination payment following an initial public offering or change of control. These termination payments are recognized in the period when the related transaction closes.
Capital Allocation-Based Income (Loss)
Capital allocation-based income (loss) is earned from those arrangements whereby KKR serves as general partner and includes income or loss from KKR's capital interest as well as "carried interest" which entitles KKR to a disproportionate allocation of investment income or loss from an investment funds'fund's limited partners.
For a further discussion of our revenue policies, see Note 2 "Summary of Significant Accounting Policies" to theour financial statements included elsewhere in this report.
Expenses
Compensation and Benefits
Compensation and benefitsBenefits expense includes (i) base cash compensation consisting of salaries bonuses, and benefits,wages, (ii) equity-based compensation consisting of charges associated with the vesting of equity-based awards andbenefits, (iii) carry pool allocations.allocations, (iv) equity-based compensation, and (v) discretionary cash bonuses.
To supplement base cash compensation, benefits, carry pool allocations, and equity-based compensation, we typically pay discretionary cash bonuses, which are included in Compensation and Benefits expense in the consolidated statements of operations, based principally on the level of (i) management fees and other fee revenues (including incentive fees), (ii) realized carried interest and (iii) realized investment income earned during the year. The amounts allocatedpaid as discretionary cash bonuses, if any, are at our sole discretion and vary by individual to individual and from period to period, including having no cash bonus. We accrue discretionary cash bonuses when payment becomes probable and reasonably estimable which is generally in the period when we make the decision to pay discretionary cash bonuses and is based upon a number of factors, including the recognition of fee revenues, realized carried interest, realized investment income and other factors determined during the year.
Beginning in 2021, we expect to pay our employees by assigning a percentage range to each component of distributable revenues. Based on the current components and blend of our distributable revenues on an annual basis, we expect to use approximately 20‐25% of fee revenues, 60‐70% of realized carried interest and 10‐20% of realized investment income and hedge fund partnership incentive fees to pay our asset management employees. Because these ranges are applied to applicable distributable revenue components independently, and on an annual basis, the amount paid as a percentage of total distributable revenues will vary and will, for example, likely be higher in a period with relatively higher realized carried interest and lower in a period with relatively lower realized carried interest. We decide whether to pay a discretionary cash bonus and determines the percentage of applicable revenue components to pay compensation only upon the occurrence of the realization event. There is no contractual or other binding obligation that requires us to pay a discretionary cash bonus to the asset management employees, except in limited circumstances.
Assuming that we had accrued compensation of (i) 65% of the unrealized carried interest earned by the funds that allocate 40% and 43% to the carry pool are accounted forand (ii) 15% of the unrealized gains in our Principal Activities business line (in each case at the mid-point of the ranges above), KKR & Co. Inc. Stockholders’ Equity – Series I and II Preferred, Common Stock as compensatory profit-sharing arrangements and recorded as compensation and benefits expenses.
All employees receive a base salary that is paid by KKR or its consolidated entities, and is accounted for as compensation and benefits expense. These employees are also eligible to receive discretionary cash bonuses based on performance, overall profitability, and other matters. While cash bonuses paid to most employees are borne by KKR and certain consolidated entities and result in customary compensation and benefits expense, in the past cash bonuses that are paid to certain employeesof March 31, 2021 would have been bornereduced by KKR Holdings. These bonuses have historically been funded with distributions that KKR Holdings receivesapproximately $1.99 per share, compared to our reported $22.62 per share on KKR Group Partnership Units held by KKR Holdings but are not then passed on to holderssuch date, and our book value as of unvested units of KKR Holdings. Because employees are not entitled to receive distributions on units that are unvested, any amounts allocated to employees in excess of an employee's vested equity interests are reflected as employee compensation and benefits expense. These compensation charges are currently recorded based on the amount of cash expected to be paid by KKR Holdings. Because KKR makes only fixed quarterly dividends, the distributions made on KKR Group Partnership Units underlying any unvested KKR Holdings units are generally insufficient to fund annual cash bonus compensation to the same extent as in periods prior to the fourth quarter of 2015. In addition, substantially all remaining units in KKR HoldingsMarch 31, 2021 would have been allocated and, while subjectreduced by approximately $2.12 per adjusted share, compared to a 5 year vesting period, will become fully vested by 2021, thus decreasing the amountour reported book value of distributions received by KKR Holdings that are available for annual cash bonus compensation. We, therefore, expect to pay all or substantially all of the cash bonus payments from KKR's cash from operations and the carry pool, although, from time to time, KKR Holdings may contribute to the cash bonus payments in the future. See "Risk Factors—Risks Related to Our Business—If we cannot retain and motivate our principals and other key personnel and recruit, retain and motivate new principals and other key personnel, our business, results and financial condition could be adversely affected" in our Annual Report regarding the adequacy of$ 25.84 per adjusted share on such distributions to fund future discretionary cash bonuses.date.
Carry Pool Allocation
KKR uses several methods, which are designed to yield comparable results, to allocate carried interest. With respect to KKR'sour funds that provide for carried interest, KKR allocates 40% or 43%, depending on the fund's vintage,we allocate a portion of the realized and unrealized carried interest that we earn to a carry it earnspool established at KKR Associates Holdings L.P., which is not a KKR subsidiary, from these fundswhich our asset management employees and vehiclescertain other carry pool participants are eligible to itsreceive a carried interest allocation. The allocation is determined based upon a fixed arrangement between KKR Associates Holdings L.P. and us, and we do not exercise discretion on whether to make an allocation to the carry pool.pool upon a realization event. These amounts are accounted for as compensatory profit sharing arrangements in Accrued Expenses and Other Liabilities within the accompanying consolidated statements of financial condition in conjunction with the related carried interest income and are recorded as compensation expense. Upon a reversal of carried interest income, the related carry pool allocation, if any, is also reversed. Accordingly, such compensation expense is subject to both positive and negative adjustments.
In February 2021, with the approval of a majority of our independent directors, KKR amended the percentage of carried interest that is allocable to the carry pool to 65% for (i) current investment funds for which no or de minimis amounts of carried interest was accrued as of December 31, 2020 and (ii) all future funds. For all other funds, the percentage of carried interest remains 40% or 43%, as applicable. The percentage of carried interest allocable to the carry pool is subjectmay be increased above 65% only with the approval of a majority of our independent directors. To account for the difference in the carry pool allocation percentages, we expect to changeuse a portion of realized carried interest from timethe older funds equal to time.the difference between 65% and 40% or 43%, as applicable, to supplement the carry pool and to pay amounts as discretionary cash bonus compensation as described above to our asset management employees. The amounts paid as discretionary cash bonuses, if any, are at our discretion and vary from individual to individual and from period to period, including having no cash bonus at all for certain employees. See "—Fair Value Measurements—Critical Accounting Policies - Asset Management—Recognition of Carried Interest in the Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—"—Key Financial Measures Under GAAP—GAAP - Asset Management—Expenses—Compensation and Benefits" in our Annual Report.Benefits."
Equity-based Compensation
In addition to the cash-based compensation and carry pool allocations as described above, employees receive equity awards under the Equity Incentive Plans, most of which are subject to service-based vesting typically over a three to five-year period from the date of grant, and some of which are subject to the achievement of market-based conditions. Certain of these awards are subject to post-vesting transfer restrictions and minimum retained ownership requirements.
General, Administrative and Other
General, administrative and other expense consists primarily of professional fees paid to legal advisors, accountants, advisors and consultants, insurance costs, travel and related expenses, communications and information services, depreciation and amortization charges, expenses (including impairment charges) incurred by oil and gas entities, CLOs and investment funds that are consolidated, costs incurred in connection with pursuing potential investments that do not result in completed transactions ("broken-deal expenses"), expense reimbursements, placement fees and other general operating expenses. A portion of these general administrative and other expenses, in particular broken-deal expenses, are borne by fund investors.
Investment Income (Loss)
Net Gains (Losses) from Investment Activities
Net gains (losses) from investment activities consist of realized and unrealized gains and losses arising from our investment activities as well as income earned from certain equity method investments. Fluctuations in net gains (losses) from investment activities between reporting periods is driven primarily by changes in the fair value of our investment portfolio as well as the realization of investments. The fair value of, as well as the ability to recognize gains from, our investments is significantly impacted by the global financial markets, which, in turn, affects the net gains (losses) from investment activities recognized in any given period. Upon the disposition of an investment, previously recognized unrealized gains and losses are reversed and an offsetting realized gain or loss is recognized in the current period. Since our investments are carried at fair value, fluctuations between periods could be significant due to changes to the inputs to our valuation process over time. For a further discussion of
our fair value measurements and fair value of investments, see "—Critical Accounting Policies—Policies - Combined—Fair Value Measurements."
Dividend Income
Dividend income consists primarily of distributions that we and our consolidated investment funds receive from portfolio companies in which theywe and our consolidated investment funds invest. Dividend income is recognized primarily in connection with (i) dispositions of operations by portfolio companies, (ii) distributions of cash generated from operations from portfolio investments, and (iii) other significant refinancings undertaken by portfolio investments.
Interest Income
Interest income consists primarily of interest that is received on our credit instruments in which we and our consolidated investment funds, CLOs and other entities invest as well as interest on our cash and other investments.
Interest Expense
Interest expense is incurred from debt issued by KKR, including debt issued by KFN, credit facilities entered into by KKR, debt securities issued by consolidated CFEs, and financing arrangements at our consolidated investment funds entered into primarily with the objective of managing cash flow. KFN's debt obligations are non-recourse to KKR beyond the assets of KFN. Debt securities issued by consolidated CFEs are supported solely by the investments held at the CFE and are not collateralized by assets of any other KKR entity. Our obligations under financing arrangements at our consolidated funds are generally limited to our pro rata equity interest in such funds. However, in some circumstances, we may provide limited guarantees of the obligations of our general partners in an amount equal to its pro rata equity interest in such funds. Our management companies bear no obligations with respect to financing arrangements at our consolidated funds. We also may provide other kinds of guarantees. See "—Liquidity."
Key Financial Measures Under GAAP - Insurance
The following discussion of key financial measures under GAAP is based on KKR's insurance business as conducted by Global Atlantic as of March 31, 2021.
Revenues
Premiums
Premiums primarily relate to payout policies with life contingencies and whole life and term life insurance policies, recognized when due from the policyholders.
Policy fees
Policy fees include charges assessed against policyholder account balances for mortality, administration, separate account, benefit rider and surrender fees.
Net investment income
Net investment income reflects the income earned on our investments, net of any associated investment expenses (including management fees charged by the asset management segment) and net investment income credited to funds withheld at interest. Net investment income includes, amongst other things (i) interest earned on our fixed income available-for-sale and fixed-income trading investments, (ii) interest income and other related fees from our mortgage and other loan receivables, (iii) interest on funds withheld at interest receivables, (iv) proportional share of income from equity-method investments and (v) income from physical assets, such as renewable energy plants, railcars, and airplanes (net of depreciation and operating expenses).
Net investment gains
Net investment gains primarily consists of (i) realized gains and losses from the disposal of investments, (ii) unrealized gains and losses from investments held for trading, or with fair value remeasurements recognized in earnings as a result of the election of a fair-value option, (iii) unrealized gains and losses on funds withheld at interest, (iv) unrealized gains and losses
from derivatives not designated in an hedging relationship and (v) allowances for loan losses, and other impairments of investments.
Other income
Other income is primarily comprised of administration, management fees and distribution fees.
Expenses
Policy benefits and claims
Policy benefits and claims represent the current period expense associated with providing insurance benefits to policyholders, including claims and benefits paid, interest credited to policyholders, changes in policyholder liability reserves (including fair value reserves) amortization of cost of reinsurance liabilities, and amortization of deferred sales inducements.
Amortization of policy acquisition costs
Amortization of policy acquisition costs primarily consist on amortization of value of business acquired and deferred policy acquisition costs.
Insurance expense
Insurance expenses are primarily comprised of commissions expense, premium taxes, and captive financing charges.
Interest expense
Interest expense is incurred from insurance segment debt issued, including related interest rate swaps, credit facilities and other financing agreements.
General, administrative and other
General and administrative expenses are primarily comprised of employee compensation and benefit expenses, third-party administrator ("TPA") policy servicing fees, administrative and professional services, and other operating expenses.
Other Key Financial Measures Under GAAP
Income Taxes
KKR & Co. Inc. is a domestic corporation for U.S. federal income tax purposes and thus is subject to U.S. federal, state and local corporate income taxes at the entity level on KKR’sits share of net taxable income. In addition, KKR Group Partnership and certain of its subsidiaries operate in the United States as partnerships for U.S. federal tax purposes but as taxable entities for certain state, local or non-U.S. tax purposes. Moreover, certain corporate subsidiaries of KKR, including certain Global Atlantic subsidiaries, are domestic corporations for U.S. federal income tax purposes and as corporate entities in certain non-U.S. jurisdictions. These entities, in some cases, are subject to U.S. federal, state, orand local income taxes or non-U.S. income taxes.
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties. We review our tax positions quarterly and adjust our tax balances as new information becomes available.
For a further discussion of our income tax policies, see Note 2 "Summary of Significant Accounting Policies" and Note 1117 "Income Taxes" to theour financial statements included elsewhere in this report.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests primarily represents the ownership interests that certain third parties hold in entities that are consolidated in the financial statements as well as the ownership interests in KKR Group Partnership that are held by KKR Holdings. The allocable share of income and expense attributable to these interests is
accounted for as net income (loss) attributable to noncontrolling interests. Given the consolidation of certain of our investment funds and the significant ownership interests in KKR Group Partnership held by KKR Holdings, we expect a portion of net income (loss) will continue to be attributed to noncontrolling interests in our business.
For a further discussion of our noncontrolling interests policies, see Note 1521 "Equity" to the financial statements included elsewhere in this report.
Key Non-GAAP Performance Measures and Other Operating and Performance Measures
The key non-GAAP and other operating and performance measures that follow are used by management in making operational and resource deployment decisions as well as assessing the overall performance of KKR's businesses. They include certain financial measures that are calculated and presented using methodologies other than in accordance with GAAP. These non-GAAP measures including after-tax distributable earnings, distributable revenues, distributable expenses, distributable operating earnings, fee related earnings, book assets, book liabilities, book value and book value per adjusted shares,as described below are presented prior to giving effect to the allocation of income (loss) between KKR & Co. Inc. and KKR Holdings L.P. and as such represent the entire KKR business in total. In addition, these non-GAAP measures are presented without giving effect to the consolidation of the investment funds and CFEscollateralized financing entities (“CFEs”) that KKR manages as well as other consolidated entities that are not subsidiaries of KKR & Co. Inc.manages.
We believe that providing these non-GAAP measures on a supplemental basis to our GAAP results is helpful to stockholders in assessing the overall performance of KKR's businesses.business. These non-GAAP measures should not be considered as a substitute for or superior to, financial measures calculated in accordance with GAAP. We caution readers thatReconciliations of these non-GAAP measures may differ fromto the calculations of other investment managers,most directly comparable financial measures calculated and as a result, may not be comparable to similar measures presented by other investment managers. These non-GAAP measures are presented in this report as KKR's operating results, which were previously referred to as KKR's segment results.
accordance with GAAP, where applicable. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included under "—Reconciliations to GAAP Measures."
After-tax Distributable Earnings
After-tax distributable earnings is a non-GAAP performance measure of KKR’s earnings, which is derived from KKR’s reported segment results. After-tax distributable earnings is used to assess the performance of KKR’s business operations and measures the earnings potentially available for distribution to its equity holders or reinvestment into its business. After-tax distributable earnings is equal to Distributable Operating Earnings less Interest Expense, Series A and B Preferred Stock dividends, Net Income Attributable to Noncontrolling Interests and Income Taxes Paid. Series C Mandatory Convertible Preferred Stock dividends have been excluded from After-tax Distributable Earnings, because the definition of Adjusted Shares used to calculate After-tax Distributable Earnings per Adjusted Share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of common stock. Income Taxes Paid represents the implied amount of income taxes that would be paid assuming that all pre-tax distributable earnings were allocated to KKR & Co. Inc. and taxed at the same effective rate, which assumes that all units in KKR Holdings L.P. and other exchangeable securities were exchanged for common stock of KKR & Co. Inc. Income Taxes Paid includes amounts paid pursuant to the tax receivable agreement and the benefit of tax deductions arising from equity-based compensation, which reduces income taxes paid or payable during the period. Equity based compensation expense is excluded from After-tax Distributable Earnings, because (i) KKR believes that the cost of equity awards granted to employees does not contribute to the earnings potentially available for distributions to its equity holders or reinvestment into its business and (ii) excluding this expense makes KKR’s reporting metric more comparable to the corresponding metric presented by other publicly traded companies in KKR’s industry, which KKR believes enhances an investor’s ability to compare KKR’s performance to these other companies. If tax deductions from equity-based compensation were to be excluded from Income Taxes Paid, KKR’s After-tax Distributable Earnings would be lower and KKR’s effective tax rate would appear to be higher, even though a lower amount of income taxes would have actually been paid or payable during the period. KKR separately discloses the amount of tax deduction from equity-based compensation for the period reported and the effect of its inclusion in After-tax Distributable Earnings for the period. KKR makes these adjustments when calculating After-tax Distributable Earnings in order to more accurately reflect the net realized earnings that are expected to be or become available for distribution to KKR’s equity holders or reinvestment into KKR’s business. However, After-tax Distributable Earnings does not represent and is not used to calculate actual dividends under KKR’s dividend policy, which is a fixed amount per period, and After-tax Distributable Earnings should not be viewed as a measure of KKR’s liquidity.
Book Value
Book value is a non-GAAP performance measure of the net assets of KKR and is used by management primarily in assessing the unrealized value of KKR’s net assets presented on a basis that (i) deconsolidates KKR’s investment funds and CFEs that KKR manages and (ii) includes Global Atlantic's book value representing KKR’s ownership of the net assets of Global Atlantic. We believe this measure is useful to stockholders as it provides additional insight into the net assets of KKR excluding those net assets that are allocated to noncontrolling interest holders and to the holders of the Series A and B Preferred Stock. KKR's book value includes the net impact of KKR's tax assets and liabilities as prepared under GAAP. Series C Mandatory Convertible Preferred Stock has been included in book value, because the definition of adjusted shares used to calculate book value per adjusted share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been
converted to shares of common stock. To calculate Global Atlantic's book value and to make it more comparable with the corresponding metric presented by other publicly traded companies in Global Atlantic’s industry, Global Atlantic's book value excludes (i) accumulated other comprehensive income and (ii) accumulated change in fair value of reinsurance balances and related assets, net of deferred acquisition costs and income tax.
Distributable Operating Earnings
Distributable operating earnings is a non-GAAP performance measure that KKR believes is useful to stockholders as it provides a supplemental measure of our operating performance without taking into account items that KKR does not believe arise from or relate directly to KKR's operations. Distributable Operating Earnings is presented prior to giving effect to the allocation of income (loss) among KKR & Co. Inc., KKR Holdings L.P. and holders of other exchangeable securities, and the consolidation of the investment funds, vehicles and accounts that KKR advises, manages or sponsors (including collateralized financing entities). Distributable Operating Earnings excludes: (i) equity-based compensation charges, (ii) amortization of acquired intangibles, (iii) strategic corporate transaction-related charges and (iv) non-recurring items, if any. Strategic corporate transaction-related items arise from corporate actions and consist primarily of (i) impairments, (ii) non-monetary gains or losses on divestitures, (iii) transaction costs from strategic acquisitions, and (iv) depreciation on real estate that KKR owns and occupies. Distributable Operating Earnings represents operating earnings of KKR’s Asset Management and Insurance segments, which are comprised of the following:
•Asset Management Segment Operating Earnings is the segment profitability measure used to make operating decisions and to assess the performance of the Asset Management segment and is comprised of: (i) Fee Related Earnings, (ii) Realized Performance Income, (iii) Realized Performance Income Compensation, (iv) Realized Investment Income, and (v) Realized Investment Income Compensation. Asset Management Segment Operating Earnings excludes (i) unrealized carried interest, (ii) net unrealized gains (losses) on investments, and (iii) related unrealized performance income compensation. Management fees earned by KKR as the adviser, manager or sponsor for its investment funds, vehicles and accounts, including management fees paid to KKR by Global Atlantic's insurance companies and management fees paid to Global Atlantic by reinsurance investment vehicles, are included in Asset Management Segment Operating Earnings.
•Insurance Segment Operating Earnings is the segment profitability measure used to make operating decisions and to assess the performance of the Insurance segment and is comprised of: (i) Net Investment Income, (ii) Net Cost of Insurance, (iii) General, Administrative, and Other Expenses, (iv) Income Taxes, and (v) Net Income Attributable to Noncontrolling Interests. The non-operating adjustments made to derive Insurance Segment Operating Earnings eliminate the impact of: (i) realized (gains) losses related to asset/liability matching investments strategies, (ii) unrealized investment (gains) losses, (iii) changes in the fair value of derivatives, embedded derivatives, and fair value liabilities for fixed-indexed annuities, indexed universal life contracts and variable annuities, and (iv) the associated income tax effects of all exclusions from Insurance Segment Operating Earnings except for equity-based compensation expense. Insurance Segment Operating Earnings includes (i) realized gains and losses not related to asset/liability matching investments strategies and (ii) the investment management fee expenses that are earned by KKR as the investment adviser of Global Atlantic's insurance companies.
Fee Related Earnings ("FRE")
Fee related earnings is a performance measure used to assess the Asset Management segment’s generation of profits from revenues that are measured and received on a recurring basis and are not dependent on future realization events. KKR believes this measure is useful to stockholders as it provides additional insight into the profitability of KKR’s fee generating asset management and capital markets businesses and other recurring revenue streams. FRE equals (i) Management Fees, (ii) Transaction and Monitoring Fees, Net and (iii) Fee Related Performance Revenues, less (x) Fee Related Compensation, and (y) Other Operating Expenses.
•Fee Related Performance Revenues refers to the realized portion of Incentive Fees from certain AUM that has an indefinite term and for which there is no immediate requirement to return invested capital to investors upon the realization of investments. Fee-related performance revenues consists of performance fees (i) to be received from our investment funds, vehicles and accounts on a recurring basis, and (ii) that are not dependent on a realization event involving investments held by the investment fund, vehicle or account.
•Fee Related Compensation refers to the compensation expense, excluding equity-based compensation, paid from (i) Management Fees, (ii) Transaction and Monitoring Fees, Net, and (iii) Fee Related Performance Revenues.
•Other Operating Expenses represents the sum of (i) occupancy and related charges and (ii) other operating expenses.
Total Asset Management Segment Revenues
Total asset management segment revenues is a performance measure that represents the realized revenues of the Asset Management segment (which excludes unrealized carried interest and unrealized net gains (losses) on investments) and is the sum of (i) Management Fees, (ii) Transaction and Monitoring Fees, Net, (iii) Fee Related Performance Revenues, (iv) Realized Performance Income, and (v) Realized Investment Income. KKR believes that this performance measure is useful to stockholders as it provides additional insight into the realized revenues generated by KKR's asset management segment.
Adjusted Shares
Adjusted shares represents shares of common stock of KKR & Co. Inc. outstanding under GAAP adjusted to include shares issuable upon exchange of all units of KKR Holdings L.P. and other exchangeable securities and the number of assumed shares of common stock assumed to be issuable upon conversion of ourthe Series C Mandatory Convertible Preferred Stock. We believe providing adjusted shares is useful to stockholders as it provides insight into the calculation of amounts available for distribution as dividends on a per adjusted share basis assuming all units of KKR Holdings L.P. and all shares of Series C Mandatory Convertible Preferred Stock are exchanged and converted, respectively, to shares of common stock. Weighted average adjusted shares is used in the calculation of after-tax distributable earningsAfter-tax Distributable Earnings per adjusted shareAdjusted Share, and adjusted sharesAdjusted Shares is used in the calculation of book valueBook Value per adjusted share.
After-tax Distributable Earnings
After-tax distributable earnings is a non-GAAP performance measure of KKR’s earnings after interest expense, Series A and B preferred dividends, noncontrolling interests and income taxes paid. After -tax distributable earnings excludes mark-to-market gains (losses) and is used by management to assess the net realized earnings of KKR for a given reporting period, after deducting equity-based compensation under the Equity Incentive Plans and adjusting to exclude the impact of strategic corporate transaction-related charges and non-recurring items, if any. KKR believes that after-tax distributable earnings is useful to stockholders as it aligns KKR’s net realization performance with the manner in which KKR receives its revenues and determines the compensation of its employees. Series C Mandatory Convertible Preferred Stock dividends have been excluded from after-tax distributable earnings because the definition of adjusted shares used to calculate after-tax distributable earnings per adjusted share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of common stock. After-tax distributable earnings does not represent and is not used to calculate actual dividends under KKR’s dividend policy. Equity-based compensation expense is included in after-tax distributable earnings as a component of compensation expense in order to reflect the dilutive nature of these non-cash equity-based awards. Income taxes paid represents the implied amount of income taxes that would be paid assuming that all pre-tax distributable earnings were allocated to KKR & Co. Inc. and taxed at the same effective rate, which would occur following an exchange of all KKR Holdings units for common stock of KKR & Co. Inc. Income taxes paid also includes amounts paid pursuant to the tax receivable agreement.
Adjusted Share.
Assets Under Management ("AUM")
Assets under management represent the assets managed, advised or advisedsponsored by KKR from which KKR is entitled to receive management fees or a carried interest (either currentlyperformance income (currently or upon deployment of capital)a future event), general partner capital, and assets managed, advised or advisedsponsored by our strategic BDC partnership and the hedge fund and other managers in which KKR holds an ownership interest. We believe this measure is useful to stockholders as it provides additional insight into the capital raising activities of KKR and its hedge fund and other managers and the overall activity in their investment funds and other managed or sponsored capital. KKR calculates the amount of AUM as of any date as the sum of: (i) the fair value of the investments of KKR's investment funds;funds and Global Atlantic's insurance companies; (ii) uncalled capital commitments from these funds, including uncalled capital commitments from which KKR is currently not earning management fees or carried interest;performance income; (iii) the fair value of investments in KKR's co-investment vehicles; (iv) the par value of outstanding CLOs (excluding CLOs wholly-owned by KKR);CLOs; (v) KKR's pro rata portion of the AUM of hedge fund and other managers in which KKR holds an ownership interest; (vi) all AUM of theKKR's strategic BDC partnership with FS Investments;partnership; and (vii) the fair value of other assets managed or sponsored by KKR. The pro rata portion of the AUM of hedge fund and other managers is calculated based on KKR’s percentage ownership interest in such entities multiplied by such entity’s respective AUM. KKR's definition of AUM (i) is not based on any definition of AUM that may be set forth in the agreements governing documents of the investment funds, vehicles, accounts or accounts that it manages orother entities whose capital is included in this definition, (ii) includes assets for which KKR does not act as an investment adviser, and (iii) is not calculated pursuant to any regulatory definitions.
Book Assets
Book assets is a non-GAAP performance measure that represents cash and short-term investments, investments, net unrealized carried interest, tax assets, and other assets of KKR presented on a basis that deconsolidates (i) KKR's investment funds and collateralized financing entities that KKR manages and (ii) other consolidated entities that are not subsidiaries of KKR & Co. Inc. We believe this measure is useful to stockholders as it provides additional insight into the assets of KKR that are used to operate its business lines. As used in this definition, cash and short-term investments represent cash and liquid short-term investments in high-grade, short-duration cash management strategies used by KKR to generate additional yield.
Book Liabilities
Book liabilities is a non-GAAP performance measure that represents the debt obligations of KKR (including KFN), tax liabilities, and other liabilities of KKR presented on a basis that deconsolidates (i) KKR's investment funds and collateralized financing entities that KKR manages and (ii) other consolidated entities that are not subsidiaries of KKR & Co. Inc. We believe this measure is useful to stockholders as it provides additional insight into the liabilities of KKR excluding the liabilities that are allocated to noncontrolling interest holders and to the holders of the Series A and Series B Preferred Stock.
Book Value
Book value is a non-GAAP performance measure of the net assets of KKR and is used by management primarily in assessing the unrealized value of KKR’s book assets after deducting for book liabilities, noncontrolling interests and Series A and B Preferred Stock. We believe this measure is useful to stockholders as it provides additional insight into the net assets of KKR excluding those net assets that are allocated to noncontrolling interest holders and to the holders of the Series A and B Preferred Stock. KKR's book value includes the net impact of KKR's tax assets and liabilities as prepared under GAAP. Series C Mandatory Convertible Preferred Stock has been included in book value, because the definition of adjusted shares used to calculate book value per adjusted share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of common stock.
Capital Invested
Capital invested is the aggregate amount of capital invested by (i) KKR’s investment funds and Global Atlantic's insurance companies, (ii) KKR's Principal Activities business line as a co-investment, if any, alongside KKR’s investment funds, and (iii) KKR's Principal Activities business line in connection with a syndication transaction conducted by KKR's Capital Markets business line, if any. Capital invested is used as a measure of investment activity at KKR during a given period. We believe this measure is useful to stockholders as it provides a measure of capital deployment across KKR’s business lines. Capital invested includes investments made using investment financing arrangements like credit facilities, as applicable. Capital invested excludes (i) investments in certain leveraged credit strategies, (ii) capital invested by KKR’s Principal Activities business line that is not a co-investment alongside KKR’s investment funds, and (iii) capital invested by KKR’s Principal Activities business line that is not invested in connection with a syndication transaction by KKR’s Capital Markets business line. Capital syndicated by KKR's Capital Markets business line to third parties other than KKR’s investment funds or Principal Activities business line is not included in capital invested. See also syndicated capital.
Distributable Revenues
Distributable revenues is a non-GAAP performance measure that represents the realized revenues (which excludes unrealized carried interest and unrealized net gains (losses)) generated by KKR and is the sum of (i) fees and other, net, (ii) realized performance income (loss) and (iii) realized investment income (loss). KKR believes that distributable revenues is useful to stockholders as it provides insight into the realized revenue generated by KKR's business lines.
Distributable Expenses
Distributable expenses is a non-GAAP performance measure that represents the expenses of KKR and is the sum of (i) compensation and benefits (excluding unrealized performance income compensation), (ii) occupancy and related charges and (iii) other operating expenses. KKR believes that distributable expenses is useful to stockholders as it provides insight into the costs expended in connection with generating KKR's distributable revenues.
Distributable Operating Earnings
Distributable operating earnings is a non-GAAP performance measure that represents after-tax distributable earnings before interest expense, preferred dividends, income (loss) attributable to noncontrolling interests and income taxes paid. We believe distributable operating earnings is useful to stockholders as it provides a supplemental measure of our operating performance without taking into account items that we do not believe relate directly to KKR's operations.
Fee Paying AUM ("FPAUM")
Fee paying AUM represents only the AUM from which KKR is entitled to receive management fees. We believe this measure is useful to stockholders as it provides additional insight into the capital base upon which KKR earns management fees. FPAUM is the sum of all of the individual fee bases that are used to calculate KKR's and its hedge fund and BDC partnership management fees and differs from AUM in the following respects: (i) assets and commitments from which KKR is not entitled to receive a management fee are excluded (e.g., assets and commitments with respect to which it is entitled to receive only carried interestperformance income or is otherwise not currently entitled to receive a management fee) and (ii) certain assets,
primarily in its private equity funds, are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments.
Fee Related Earnings ("FRE")
Fee related earnings is a non-GAAP supplemental performance measure of earnings of KKR before performance income and investment income. KKR believes this measure may be useful to stockholders as it may provide additional insight into the profitability of KKR’s fee generating management companies and capital markets businesses. Fee related earnings is calculated as KKR’s total Fees and Other, Net, multiplied by KKR’s distributable operating margin. For purposes of the fee related earnings calculation, distributable operating margin is calculated as distributable operating earnings, before equity-based compensation, divided by total distributable revenues.
Syndicated Capital
Syndicated capital is the aggregate amount of capital in transactions originated by KKR and its investment funds and carry-yielding co-investment vehicles, which has been distributed to third parties, generally in exchange for a fee. It does not include (i) capital invested in such transactions by KKR investment funds and carry-yielding co-investment vehicles, which is instead reported in capital invested, (ii) debt capital that is arranged as part of the acquisition financing of transactions originated by KKR investment funds, and (iii) debt capital that is either underwritten or arranged on a best efforts basis. Syndicated capital is used as a measure of investment activity for KKR during a given period, and we believe that this measure is useful to stockholders as it provides additional insight into levels of syndication activity in KKR's Capital Markets business line and across KKR's investment platform.
Uncalled Commitments
Uncalled commitments is the aggregate amount of unfunded capital commitments that KKR’s investment funds and carry-paying co-investment vehicles have received from partners to contribute capital to fund future investments. We believe this measure is useful to stockholders as it provides additional insight into the amount of capital that is available to KKR’s investment funds to make future investments. Uncalled commitments are not reduced for investments completed using fund-level investment financing arrangements.
Unaudited Consolidated Results of Operations (GAAP Basis)
The following is a discussion of our consolidated results of operations for the three months ended September 30, 2020 and 2019. You should read this discussion in conjunction with the financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected our non-GAAP operating results in these periods, see "—Analysis of Non-GAAP Operating Results." See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
|
| | | | | | | | | | | |
| Three Months Ended |
| September 30, 2020 | | September 30, 2019 | | Change |
| ($ in thousands) |
Revenues | |
| | |
| | |
Fees and Other | $ | 563,340 |
| | $ | 416,217 |
| | $ | 147,123 |
|
Capital Allocation-Based Income (Loss) | 1,331,898 |
| | 374,268 |
| | 957,630 |
|
Total Revenues | 1,895,238 |
| | 790,485 |
| | 1,104,753 |
|
| | | | | |
Expenses | | | | | |
Compensation and Benefits | 882,339 |
| | 427,527 |
| | 454,812 |
|
Occupancy and Related Charges | 17,321 |
| | 14,894 |
| | 2,427 |
|
General, Administrative and Other | 194,039 |
| | 177,112 |
| | 16,927 |
|
Total Expenses | 1,093,699 |
| | 619,533 |
| | 474,166 |
|
| | | | | |
Investment Income (Loss) | | | | | |
Net Gains (Losses) from Investment Activities | 2,284,602 |
| | (4,590 | ) | | 2,289,192 |
|
Dividend Income | 116,379 |
| | 147,989 |
| | (31,610 | ) |
Interest Income | 354,865 |
| | 344,140 |
| | 10,725 |
|
Interest Expense | (223,709 | ) | | (268,747 | ) | | 45,038 |
|
Total Investment Income (Loss) | 2,532,137 |
| | 218,792 |
| | 2,313,345 |
|
| | | | | |
Income (Loss) Before Taxes | 3,333,676 |
| | 389,744 |
| | 2,943,932 |
|
| | | | | |
Income Tax Expense (Benefit) | 359,375 |
| | 53,132 |
| | 306,243 |
|
| | | | | |
Net Income (Loss) | 2,974,301 |
| | 336,612 |
| | 2,637,689 |
|
Net Income (Loss) Attributable to Noncontrolling Interests | 1,909,458 |
| | 87,058 |
| | 1,822,400 |
|
Net Income (Loss) Attributable to KKR & Co. Inc. | 1,064,843 |
| | 249,554 |
| | 815,289 |
|
| | | | | |
Series A Preferred Stock Dividends | 5,822 |
| | 5,822 |
| | — |
|
Series B Preferred Stock Dividends | 2,519 |
| | 2,519 |
| | — |
|
| | | | | |
Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders | $ | 1,056,502 |
| | $ | 241,213 |
| | $ | 815,289 |
|
Revenues
For the three months ended September 30, 2020 and 2019, revenues consisted of the following:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Management Fees | | $ | 254,467 |
| | $ | 216,733 |
| | $ | 37,734 |
|
Fee Credits | | (89,487 | ) | | (57,470 | ) | | (32,017 | ) |
Transaction Fees | | 300,805 |
| | 165,212 |
| | 135,593 |
|
Monitoring Fees | | 28,824 |
| | 27,546 |
| | 1,278 |
|
Incentive Fees | | 63 |
| | — |
| | 63 |
|
Expense Reimbursements | | 44,553 |
| | 34,356 |
| | 10,197 |
|
Oil and Gas Revenue | | 6,687 |
| | 11,264 |
| | (4,577 | ) |
Consulting Fees | | 17,428 |
| | 18,576 |
| | (1,148 | ) |
Total Fees and Other | | 563,340 |
| | 416,217 |
| | 147,123 |
|
| | | | | | |
Carried Interest | | 1,077,932 |
| | 335,219 |
| | 742,713 |
|
General Partner Capital Interest | | 253,966 |
| | 39,049 |
| | 214,917 |
|
Total Capital Allocation-Based Income (Loss) | | 1,331,898 |
| | 374,268 |
| | 957,630 |
|
| | | | | | |
Total Revenues | | $ | 1,895,238 |
| | $ | 790,485 |
| | $ | 1,104,753 |
|
Total Fees and Other for the three months ended September 30, 2020 increased compared to the three months ended September 30, 2019 primarily as a result of the increase in transaction fees and management fees.
For a more detailed discussion of the factors that affected our transaction fees during the period, see "—Analysis of Non-GAAP Operating Results—Distributable Revenues."
The increase in management fees was primarily due to management fees earned from Asian Fund IV, Asia Pacific Infrastructure Investors and Next Generation Technology Growth Fund II, which entered their investment periods subsequent to September 30, 2019. These increases were partially offset by a decrease in management fees earned from Asian Fund III as it entered its post investment period in the third quarter of 2020.
Fee credits increased compared to the prior period as a result of a higher level of transaction fees in our Private Markets business line. Fee credits owed to consolidated investment funds are eliminated upon consolidation under GAAP. Transaction fees earned from KKR portfolio companies are not eliminated upon consolidation because those fees are earned from companies which are not consolidated. Furthermore, transaction fees earned in our Capital Markets business line are not shared with fund investors. Accordingly, certain transaction fees are reflected in revenues without a corresponding fee credit.
Capital Allocation-Based Income (Loss) for the three months ended September 30, 2020 increased compared to the three months ended September 30, 2019 primarily due to the higher level of net appreciation in the value of our investment portfolio resulting from the recovery in the financial markets that occurred in the three months ended September 30, 2020.
Compensation and Benefits Expenses
The increase in compensation and benefits expenses during the three months ended September 30, 2020 compared to the prior period was primarily due to (i) an increase in accrued carried interest compensation from the higher level of accrued carried interest as compared to the prior period and (ii) a higher level of cash compensation and benefits resulting from a higher level of fees. These increases were partially offset by lower equity-based compensation charges resulting from a decrease in the weighted average number of unvested shares outstanding.
General, Administrative and Other Expenses
The increase in general, administrative and other expenses during the three months ended September 30, 2020 compared to the prior period was primarily due to (i) strategic corporate transaction-related charges incurred in the third quarter of 2020 and (ii) a higher level of expenses reimbursable by investment funds. These increases were partially offset by (i) a decrease in corporate travel-related expenses as a result of the COVID-19 pandemic and (ii) a lower level of expenses that are creditable to our investment funds, in particular a lower level of broken-deal expense. The level of broken-deal expenses can vary significantly period to period based upon a number of factors, the most significant of which are the number of potential investments being pursued for our investment funds, the size and complexity of investments being pursued and the number of investment funds currently in their investment period.
Net Gains (Losses) from Investment Activities
The following is a summary of net gains (losses) from investment activities:
|
| | | | | | | |
| Three Months Ended |
| September 30, 2020 | | September 30, 2019 |
| ($ in thousands) |
Private Equity | $ | 1,591,134 |
| | $ | 54,487 |
|
Credit | 315,459 |
| | (176,438 | ) |
Investments of Consolidated CFEs | 392,287 |
| | (101,011 | ) |
Real Assets | 251,599 |
| | (97,858 | ) |
Equity Method - Other | 435,664 |
| | 123,260 |
|
Other Investments | 57,808 |
| | (74,505 | ) |
Debt Obligations and Other | (336,811 | ) | | 65,013 |
|
Other Net Gains (Losses) from Investment Activities | (422,538 | ) | | 202,462 |
|
Net Gains (Losses) from Investment Activities | $ | 2,284,602 |
| | $ | (4,590 | ) |
Net Gains (Losses) from Investment Activities for the three months ended September 30, 2020
The net gains from investment activities for the three months ended September 30, 2020 were comprised of net realized gains of $548.6 million and net unrealized gains of $1,736.0 million.
Investment gains and losses relating to our general partner capital interest in our unconsolidated funds are not reflected in our discussion and analysis of Net Gains (Losses) from Investment Activities. Our economics associated with these gains and losses are reflected in Capital Allocation-Based Income (Loss) as described above. For a discussion and analysis of the primary investment gains or losses relating to individual investments in our unconsolidated funds, see "—Analysis of Non-GAAP Operating Results—Distributable Revenues."
Realized Gains and Losses from Investment Activities
For the three months ended September 30, 2020, net realized gains related primarily to (i) the sale of our investment in The Hut Group Limited (LSE: THG), (ii) the sale of our investment in Ivalua SAS (technology sector) and (iii) a partial sale of our investment in Fiserv Inc. (NASDAQ: FISV). Partially offsetting these realized gains were realized losses primarily relating to our consolidated CLOs and special situations funds.
Unrealized Gains and Losses from Investment Activities
For the three months ended September 30, 2020, net unrealized gains were driven primarily by (i) mark-to-market gains in our private equity and core investments held by KKR and certain consolidated entities, the most significant of which were Arnott's Biscuits Limited (consumer products sector) and PetVet Care Centers, LLC (healthcare sector), and (ii) mark-to-market gains in certain investments held through our consolidated real asset funds and through our consolidated credit funds and CLOs. These unrealized gains were partially offset by the reversal of unrealized gain positions due to the sales of The Hut Group Limited and Ivalua SAS.
For a discussion of other factors that affected KKR's realized investment income, see "—Analysis of Non-GAAP Operating Results."
Net Gains (Losses) from Investment Activities for the three months ended September 30, 2019
The net gains from investment activities for the three months ended September 30, 2019 were comprised of net realized gains of $203.2 million and net unrealized losses of $(207.8) million.
Realized Gains and Losses from Investment Activities
For the three months ended September 30, 2019, net realized gains related primarily to realized gains on (i) the sales of assets in our consolidated special situations funds, (ii) the sale of our investment in Trainline PLC (LSE: TRN), and (iii) the sale of real estate investments held through certain consolidated entities.
Unrealized Gains and Losses from Investment Activities
For the three months ended September 30, 2019, unrealized losses were driven primarily by (i) mark-to-market losses in our growth equity investments held by KKR and certain consolidated entities, the most significant of which was BridgeBio Pharma, Inc. (NASDAQ: BBIO), (ii) reversal of previously recognized unrealized gains resulting from the sale of assets in our consolidated special situations funds, (iii) mark-to-market losses in our energy investments held through certain consolidated entities and (iv) mark-to-market losses on investments held at our India debt financing company. For more details regarding investments held at our India debt financing company, see "—Analysis of Non-GAAP Operating Results—Non-GAAP Balance Sheet Measures." Partially offsetting the unrealized losses above were unrealized gains relating to (i) mark-to-market gains in portfolio companies in our core investment strategy, the most significant of which were USI, Inc. (financial services sector), Exact Group B.V. (technology sector), and The Bay Clubs Company, LLC (hotels/leisure sector), (ii) mark-to-market gains on our investment in Fiserv, Inc., which is held in our funds and as a co-investment by KKR, and (iii) mark-to market gains on real estate investments held through certain consolidated entities.
For a discussion of other factors that affected KKR's realized investment income, see "—Analysis of Non-GAAP Operating Results."
Dividend Income
During the three months ended September 30, 2020, the most significant dividends received included $46.5 million from our consolidated real estate funds and $48.9 million from our investment in Epicor Software Corporation (technology sector). During the three months ended September 30, 2019, the most significant dividends received included $99.4 million from our investment in Fiserv, Inc. which is held as a co-investment by KKR, $7.3 million from our consolidated real estate funds and $6.7 million from our consolidated energy funds. Significant dividends from portfolio companies and consolidated funds are generally not recurring quarterly dividends, and while they may occur in the future, their size and frequency are variable. For a discussion of other factors that affected KKR's dividend income, see "—Analysis of Non-GAAPOperating Results—Distributable Revenues—Principal Activities —Realized Investment Income."
Interest Income
The increase in interest income during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to (i) the interest income earned by the investments held in our Dislocation Opportunities Fund, (ii) the impact of closing additional consolidated CLOs subsequent to September 30, 2019 and (iii) an increase in interest income from certain of our consolidated direct lending funds, primarily related to an increase in the amount of capital deployed. Partially offsetting these increases was the lower level of interest income earned from loans held by KKR Real Estate Finance Trust Inc. ("KREF"), a NYSE-listed real estate investment trust.
For a discussion of other factors that affected KKR's interest income, see "—Analysis of Non-GAAP Operating Results—Distributable Revenues—Principal Activities—Realized Investment Income."
Interest Expense
The decrease in interest expense during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to (i) a lower level of interest expense on debt obligations of the consolidated CLOs and KREF due to a decrease in interest rates subsequent to September 30, 2019 and (ii) the redemption of our $500 million aggregate principal amount of 6.375% Senior Notes due 2020 in the third quarter of 2019. The decrease was partially offset by the impact of multiple issuances of senior notes subsequent to September 30, 2019, including the issuance of $750 million aggregate principal amount of 3.500% Senior Notes due 2050. For a discussion of other factors that affected KKR's interest expense, see "—Analysis of Non-GAAP Operating Results—Distributable Expenses—Interest Expense."
Income (Loss) Before Taxes
Income before taxes for the three months ended September 30, 2020 increased compared to the prior period due primarily to a higher level of (i) net gains from investment activities and (ii) capital allocation-based income during the three months ended September 30, 2020. These increases were partially offset by an increase in accrued carried interest compensation.
Income Tax Expense (Benefit)
For the three months ended September 30, 2020, income tax expense was $359.4 million compared to $53.1 million for the prior period. Our effective tax rate under GAAP for the three months ended September 30, 2020 was 10.8%. For a discussion of factors that impacted KKR's tax provision, see Note 11 "Income Taxes" to the financial statements included elsewhere in this report.
Net Income (Loss) Attributable to Noncontrolling Interests
Net Income attributable to noncontrolling interests for the three months ended September 30, 2020 relates primarily to net income attributable to KKR Holdings representing its ownership interests in the KKR Group Partnership as well as third-party limited partner interests in those investment funds that we consolidate. Net income attributable to noncontrolling interests for the three months ended September 30, 2020 increased compared to the prior period due primarily to a higher level of net gains from investment activities recorded for the three months ended September 30, 2020, as described above.
Net Income (Loss) Attributable to KKR & Co. Inc.
Net income attributable to KKR & Co. Inc. for the three months ended September 30, 2020 increased compared to the prior period due primarily to a higher level of (i) net gains from investment activities and (ii) capital allocation-based income during the three months ended September 30, 2020. These increases were partially offset by an increase in accrued carried interest compensation and income tax expense, as described above.
Unaudited Consolidated Results of Operations (GAAP Basis)
The following is a discussion of our consolidated results of operations for the nine months ended September 30, 2020 and 2019. You should read this discussion in conjunction with the financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected our non-GAAP operating results in these periods, see "—Analysis of Non-GAAP Operating Results." See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
|
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | Change |
| ($ in thousands) |
Revenues | |
| | |
| | |
Fees and Other | $ | 1,337,385 |
| | $ | 1,308,206 |
| | $ | 29,179 |
|
Capital Allocation-Based Income (Loss) | 888,342 |
| | 1,849,623 |
| | (961,281 | ) |
Total Revenues | 2,225,727 |
| | 3,157,829 |
| | (932,102 | ) |
| | | | | |
Expenses | | | | | |
Compensation and Benefits | 1,211,526 |
| | 1,581,056 |
| | (369,530 | ) |
Occupancy and Related Charges | 51,222 |
| | 46,777 |
| | 4,445 |
|
General, Administrative and Other | 491,327 |
| | 529,278 |
| | (37,951 | ) |
Total Expenses | 1,754,075 |
| | 2,157,111 |
| | (403,036 | ) |
| | | | | |
Investment Income (Loss) | | | | | |
Net Gains (Losses) from Investment Activities | (179,033 | ) | | 2,237,273 |
| | (2,416,306 | ) |
Dividend Income | 295,047 |
| | 187,744 |
| | 107,303 |
|
Interest Income | 1,040,052 |
| | 1,068,378 |
| | (28,326 | ) |
Interest Expense | (725,245 | ) | | (782,601 | ) | | 57,356 |
|
Total Investment Income (Loss) | 430,821 |
| | 2,710,794 |
| | (2,279,973 | ) |
| | | | | |
Income (Loss) Before Taxes | 902,473 |
| | 3,711,512 |
| | (2,809,039 | ) |
| | | | | |
Income Tax Expense (Benefit) | 204,960 |
| | 386,124 |
| | (181,164 | ) |
| | | | | |
Net Income (Loss) | 697,513 |
| | 3,325,388 |
| | (2,627,875 | ) |
Net Income (Loss) Attributable to Noncontrolling Interests | 206,225 |
| | 1,843,781 |
| | (1,637,556 | ) |
Net Income (Loss) Attributable to KKR & Co. Inc. | 491,288 |
| | 1,481,607 |
| | (990,319 | ) |
| | | | | |
Series A Preferred Stock Dividends | 17,466 |
| | 17,466 |
| | — |
|
Series B Preferred Stock Dividends | 7,557 |
| | 7,557 |
| | — |
|
| | | | | |
Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders | $ | 466,265 |
| | $ | 1,456,584 |
| | $ | (990,319 | ) |
Revenues
For the nine months ended September 30, 2020 and 2019, revenues consisted of the following:
|
| | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Management Fees | | $ | 696,892 |
| | $ | 611,238 |
| | $ | 85,654 |
|
Fee Credits | | (185,746 | ) | | (252,809 | ) | | 67,063 |
|
Transaction Fees | | 561,259 |
| | 658,304 |
| | (97,045 | ) |
Monitoring Fees | | 86,875 |
| | 79,621 |
| | 7,254 |
|
Incentive Fees | | 731 |
| | — |
| | 731 |
|
Expense Reimbursements | | 100,779 |
| | 121,157 |
| | (20,378 | ) |
Oil and Gas Revenue | | 21,054 |
| | 36,714 |
| | (15,660 | ) |
Consulting Fees | | 55,541 |
| | 53,981 |
| | 1,560 |
|
Total Fees and Other | | 1,337,385 |
| | 1,308,206 |
| | 29,179 |
|
| | | | | | |
Carried Interest | | 626,338 |
| | 1,581,045 |
| | (954,707 | ) |
General Partner Capital Interest | | 262,004 |
| | 268,578 |
| | (6,574 | ) |
Total Capital Allocation-Based Income (Loss) | | 888,342 |
| | 1,849,623 |
| | (961,281 | ) |
| | | | | | |
Total Revenues | | $ | 2,225,727 |
| | $ | 3,157,829 |
| | $ | (932,102 | ) |
Total Fees and Other for the nine months ended September 30, 2020 increased compared to the nine months ended September 30, 2019 primarily as a result of (i) an increase in management fees and (ii) a reduction in fee credits, partially offset by a decrease in transaction fees.
For a more detailed discussion of the factors that affected our transaction fees during the period, see "—Analysis of Non-GAAP Operating Results—Distributable Revenues."
The increase in management fees was primarily due to management fees earned from Next Generation Technology Growth Fund II, Asian Fund IV, and Asia Pacific Infrastructure Investors which entered their investment periods subsequent to September 30, 2019. These increases were partially offset by (i) a decrease in management fees earned from Asian Fund III as it entered its post investment period in the third quarter of 2020, in which it pays fees based on capital invested rather than capital committed and pays fees at a lower rate and (ii) a decrease in management fees earned from European Fund IV as it entered its post investment period in the second quarter of 2019, in which it pays fees based on capital invested rather than remaining commitments and capital invested during the investment period.
Fee credits decreased compared to the prior period as a result of a lower level of transaction fees in our Private Markets and Public Markets business lines. Fee credits owed to consolidated investment funds are eliminated upon consolidation under GAAP. Transaction fees earned from KKR portfolio companies are not eliminated upon consolidation because those fees are earned from companies which are not consolidated. Furthermore, transaction fees earned in our Capital Markets business line are not shared with fund investors. Accordingly, certain transaction fees are reflected in revenues without a corresponding fee credit.
Capital Allocation-Based Income (Loss) for the nine months ended September 30, 2020 decreased compared to the nine months ended September 30, 2019 primarily due to the lower overall appreciation in value of our investment portfolio driven by the impact of COVID-19 on the economic outlook and financial markets.
Compensation and Benefits Expenses
The decrease in compensation and benefits expenses during the nine months ended September 30, 2020 compared to the prior period was primarily due to (i) a decrease in carried interest compensation resulting from a lower level of appreciation in the value of our private equity portfolio as compared to the prior period and (ii) lower equity-based compensation charges resulting from a decrease in the weighted average number of unvested shares outstanding. Partially offsetting these decreases was a higher level of cash compensation and benefits resulting from a higher level of fees.
General, Administrative and Other Expenses
The decrease in general, administrative and other expenses for the nine months ended September 30, 2020 compared to the prior period was primarily due to a decrease in capital raising costs, corporate travel-related expenses and broken-deal expenses. Partially offsetting these decreases were strategic corporate transaction-related charges incurred in connection with the planned acquisition of Global Atlantic. The level of broken-deal expense can vary significantly period to period based upon a number of factors, the most significant of which are the number of potential investments being pursued for our investment funds, the size and complexity of investments being pursued and the number of investment funds currently in their investment period.
Net Gains (Losses) from Investment Activities
The following is a summary of net gains (losses) from investment activities:
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| ($ in thousands) |
Private Equity | $ | 1,456,254 |
| | $ | 2,005,568 |
|
Credit | (541,388 | ) | | (209,796 | ) |
Investments of Consolidated CFEs | (552,093 | ) | | 182,596 |
|
Real Assets | (221,562 | ) | | 18,782 |
|
Equity Method - Other | 244,193 |
| | 432,955 |
|
Other Investments | (597,787 | ) | | (146,036 | ) |
Debt Obligations and Other | 303,261 |
| | (305,925 | ) |
Other Net Gains (Losses) from Investment Activities | (269,911 | ) | | 259,129 |
|
Net Gains (Losses) from Investment Activities | $ | (179,033 | ) | | $ | 2,237,273 |
|
Net Gains (Losses) from Investment Activities for the nine months ended September 30, 2020
The net losses from investment activities for the nine months ended September 30, 2020 were comprised of net realized gains of $281.4 million and net unrealized losses of $(460.4) million.
Investment gains and losses relating to our general partner capital interest in our unconsolidated funds are not reflected in our discussion and analysis of Net Gains (Losses) from Investment Activities. Our economics associated with these gains and losses are reflected in Capital Allocation-Based Income (Loss) as described above. For a discussion and analysis of the primary investment gains or losses relating to individual investments in our unconsolidated funds, see "—Analysis of Non-GAAP Operating Results—Distributable Revenues."
Realized Gains and Losses from Investment Activities
For the nine months ended September 30, 2020, net realized gains related primarily to (i) the sale of our investment in Hut Group Limited, (ii) the sale of our investment in Ivalua SAS, (iii) a partial sale of our investment in BridgeBio Pharma, Inc. and (iv) a partial sale of our investment in Fiserv Inc. Partially offsetting these realized gains were realized losses primarily relating to (i) an $88.3 million impairment charge taken on one of our investments that is accounted for under the equity method of accounting, (ii) a realized loss on the partial sale of our investment in LCI Helicopters Limited (financial services sector) and (iii) realization of losses on certain investments held through consolidated CLOs.
Unrealized Gains and Losses from Investment Activities
For the nine months ended September 30, 2020, net unrealized losses were driven primarily by (i) the reversal of previously recognized unrealized gains relating to the realization activity described above (ii) mark-to-market losses on our investment in Fiserv, Inc., which is held in our funds and as a co-investment by KKR (iii) mark-to-market losses on investments held in consolidated credit, real estate and energy funds and (iv) mark-to-market losses on certain investments held through consolidated CLOs. Partially offsetting these unrealized losses were unrealized gains relating to (i) mark-to-market gains in our private equity, growth equity, and core investments held by KKR and certain consolidated entities, the most significant of which were FanDuel Inc. (technology sector), Arnott's Biscuits Limited and PetVet Care Centers, LLC.
For a discussion of other factors that affected KKR's realized investment income, see "—Analysis of Non-GAAP Operating Results."
Net Gains (Losses) from Investment Activities for the nine months ended September 30, 2019
The net gains from investment activities for the nine months ended September 30, 2019 were comprised of net realized gains of $407.1 million and net unrealized gains of $1,830.2 million.
Realized Gains and Losses from Investment Activities
For the nine months ended September 30, 2019, net realized gains related primarily to realized gains on (i) the sales of assets in our consolidated special situations funds, (ii) the sale of our investment in Trainline PLC, and (iii) the sale of our investment in Sedgwick Claims Management Services, Inc. (financial services sector). Partially offsetting these realized gains were realized losses, the most significant of which related to the sale of DoubleDutch, Inc. (technology sector).
Unrealized Gains and Losses from Investment Activities
For the nine months ended September 30, 2019, net unrealized gains were driven primarily by (i) mark-to-market gains on our investment in Fiserv, Inc., which is held in our funds and as a co-investment by KKR, (ii) mark-to-market gains in portfolio companies in our core investment strategy, the most significant of which were PetVet Care Centers, LLC, Heartland Dental LLC, (health care sector) and USI, Inc. and (iii) mark-to-market gains on our growth equity investments held by KKR and certain consolidated entities, the most significant of which was BridgeBio Pharma, Inc. Partially offsetting the unrealized gains above were unrealized losses relating to (i) mark-to-market losses in our energy investments held through certain consolidated entities, (ii) mark-to-market losses on investments held at our India debt financing company, and (iii) the reversal of previously recognized unrealized gains relating to the realization activity described above. For more details regarding investments held at our India debt financing company, see "—Analysis of Non-GAAP Operating Results—Non-GAAP Balance Sheet Measures."
Dividend Income
During the nine months ended September 30, 2020, the most significant dividends received included $128.8 million from our consolidated real estate funds, $62.5 million from our investment in Fiserv, Inc. and $48.9 million from our investment in Epicor Software Corporation. During the nine months ended September 30, 2019, the most significant dividends received included $99.4 million from our investment in Fiserv, Inc. which is held as a co-investment by KKR, $23.0 million from our consolidated real estate funds, $12.6 million from our consolidated special situations funds, and $12.3 million from our consolidated energy funds. Significant dividends from portfolio companies or consolidated funds are generally not recurring quarterly dividends, and while they may occur in the future, their size and frequency are variable. For a discussion of other factors that affected KKR's dividend income, see "—Analysis of Non-GAAP Operating Results—Distributable Revenues—Principal Activities Distributable Revenues—Realized Investment Income."
Interest Income
The decrease in interest income during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to a lower level of interest earned from (i) investments held at our consolidated special situations funds and (ii) loans held by KREF. These decreases were partially offset by (i) the impact of closing additional consolidated CLOs subsequent to September 30, 2019 and (ii) an increase in interest income from certain of our consolidated direct lending funds, primarily related to an increase in the amount of capital deployed. For a discussion of other factors that affected KKR's interest income, see "—Analysis of Non-GAAP Operating Results—Distributable Revenues—Principal Activities Distributable Revenues—Realized Investment Income."
Interest Expense
The decrease in interest expense during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to (i) a lower level of interest expense on debt obligations of the consolidated CLOs and KREF due to a decrease in interest rates subsequent to September 30, 2019 and (ii) the redemption of our $500 million aggregate principal amount of 6.375% Senior Notes due 2020 in the third quarter of 2019. These decreases were partially offset by the impact of multiple issuances of senior notes subsequent to September 30, 2019, including the issuance of $750 million aggregate principal amount of 3.500% Senior Notes due 2050. For a discussion of other factors that affected KKR's interest expense, see "—Analysis of Non-GAAP Operating Results—Distributable Expenses—Interest Expense."
Income (Loss) Before Taxes
The decrease in income before taxes during the nine months ended September 30, 2020 was due primarily to (i) a lower level of net investment income and (ii) a lower level of capital allocation-based income. These decreases were partially offset by (i) lower accrued carried interest compensation, (ii) lower level of General, Administrative and Other Expenses and (iii) an increase in management fees, in each case as described above.
Income Tax Expense (Benefit)
For the nine months ended September 30, 2020, income tax expense was $204.9 million compared to $386.1 million for the prior period. Our effective tax rate under GAAP for the nine months ended September 30, 2020 was 22.7%. For a discussion of factors that impacted KKR's tax provision, see Note 11 "Income Taxes" to the financial statements included elsewhere in this report.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the nine months ended September 30, 2020 relates primarily to net income attributable to KKR Holdings representing its ownership interests in the KKR Group Partnership as well as third-party limited partner interests in those investment funds that we consolidate. The decrease from the prior period is due primarily to (i) net losses recorded for the nine months ended September 30, 2020 by certain consolidated fund entities that are attributable to third-party limited partners and (ii) lower net income attributable to KKR Holdings in connection with a lower level of income recognized for the nine months ended September 30, 2020.
Net Income (Loss) Attributable to KKR & Co. Inc.
The decrease in net income attributable to KKR & Co. Inc. for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to (i) lower level of net investment income and (ii) lower accrued carried interest. These decreases were partially offset by (i) lower accrued carried interest compensation, (ii) lower level of General, Administrative and Other Expenses and (iii) an increase in management fees, in each case as described above.
Unaudited Consolidated Statements of Financial Condition (GAAP Basis)
The following table provides the Consolidated Statements of Financial Condition on a GAAP basis as of September 30, 2020 and December 31, 2019.
|
| | | | | | | | |
(Amounts in thousands, except per share amounts) |
| | As of | | As of |
| | September 30, 2020 | | December 31, 2019 |
| | | | |
Assets | | | | |
Cash and Cash Equivalents | | $ | 4,363,105 |
| | $ | 2,346,713 |
|
Investments | | 60,990,162 |
| | 54,936,268 |
|
Other Assets | | 5,302,066 |
| | 3,616,338 |
|
Total Assets | | $ | 70,655,333 |
| | $ | 60,899,319 |
|
| | | | |
Liabilities and Equity | | | | |
Debt Obligations | | $ | 31,451,641 |
| | $ | 27,013,284 |
|
Other Liabilities | | 5,160,062 |
| | 3,383,661 |
|
Total Liabilities | | 36,611,703 |
| | 30,396,945 |
|
| | | | |
Stockholders' Equity | | | | |
KKR & Co. Inc. Stockholders' Equity - Series A and B Preferred Stock | | 482,554 |
| | 482,554 |
|
KKR & Co. Inc. Stockholders' Equity - Series C Mandatory Convertible Preferred Stock | | 1,115,792 |
| | — |
|
KKR & Co. Inc. Stockholders' Equity - Series I and II Preferred Stock, Common Stock | | 10,599,310 |
| | 10,324,936 |
|
Noncontrolling Interests | | 21,845,974 |
| | 19,694,884 |
|
Total Equity | | 34,043,630 |
| | 30,502,374 |
|
Total Liabilities and Equity | | $ | 70,655,333 |
| | $ | 60,899,319 |
|
| | | | |
KKR & Co. Inc. Stockholders' Equity - Common Stock Per Outstanding Share of Common Stock | | $ | 18.72 |
| | $ | 18.44 |
|
| | | | |
KKR & Co. Inc. Stockholders’ Equity - Common Stock per Outstanding Share of Common Stock was $18.72 as of September 30, 2020, up from $18.44 as of December 31, 2019. The increase was primarily attributable to the net appreciation in the value of our investment portfolio that is attributable to KKR & Co. Inc. net of dividends to common stockholders.
Unaudited Consolidated Statements of Cash Flows (GAAP Basis)
The accompanying consolidated statements of cash flows include the cash flows of our consolidated entities which include certain consolidated investment funds and CFEs notwithstanding the fact that we may hold only a minority economic interest in those investment funds and CFEs.
The assets of our consolidated investment funds and CFEs, on a gross basis, can be substantially larger than the assets of our business and, accordingly, could have a substantial effect on the cash flows reflected in our consolidated statements of cash flows. The primary cash flow activities of our consolidated funds and CFEs involve: (i) capital contributions from fund investors; (ii) using the capital of fund investors to make investments; (iii) financing certain investments with indebtedness; (iv) generating cash flows through the realization of investments; and (v) distributing cash flows from the realization of investments to fund investors. Because our consolidated funds are treated as investment companies for accounting purposes, certain of these cash flow amounts are included in our cash flows from operations.
Net Cash Provided (Used) by Operating Activities
Our net cash provided (used) by operating activities was $(4.1) billion and $(3.5) billion during the nine months ended September 30, 2020 and 2019, respectively. These amounts primarily included: (i) proceeds from investments net of investments purchased of $(4.4) billion and $(4.0) billion during the nine months ended September 30, 2020 and 2019, respectively; (ii) net realized gains (losses) on investments of $281.4 million and $407.1 million during the nine months ended September 30, 2020 and 2019, respectively; (iii) change in unrealized gains (losses) on investments of $(0.5) billion and $1.8 billion during the nine months ended September 30, 2020 and 2019, respectively; and (iv) capital allocation-based income (loss) of $0.9 billion and $1.8 billion during the nine months ended September 30, 2020 and 2019, respectively. Investment funds are, for GAAP purposes, investment companies and reflect their investments and other financial instruments at fair value.
Net Cash Provided (Used) by Investing Activities
Our net cash provided (used) by investing activities was $(111.5) million and $(163.8) million during the nine months ended September 30, 2020 and 2019, respectively. Our investing activities included: (i) the purchase of fixed assets of $(100.3) million and $(160.6) million during the nine months ended September 30, 2020 and 2019, respectively and (ii) development of oil and natural gas properties of $(11.1) million and $(3.2) million for the nine months ended September 30, 2020 and 2019, respectively.
Net Cash Provided (Used) by Financing Activities
Our net cash provided (used) by financing activities was $6.9 billion and $4.7 billion during the nine months ended September 30, 2020 and 2019, respectively. Our financing activities primarily included: (i) distributions to, net of contributions by, our noncontrolling interests of $2.2 billion and $1.0 billion during the nine months ended September 30, 2020 and 2019, respectively; (ii) proceeds received net of repayment of debt obligations of $4.2 billion and $4.0 billion during the nine months ended September 30, 2020 and 2019, respectively; (iii) common stock dividends of $(220.5) million and $(202.7) million during the nine months ended September 30, 2020 and 2019, respectively; (iv) net delivery of common stock of $(40.6) million and $(53.4) million during the nine months ended September 30, 2020 and 2019, respectively; (v) repurchases of common stock of $(246.2) million and $(28.6) million during the nine months ended September 30, 2020 and 2019, respectively; (vi) Series A and B Preferred Stock dividends of $(25.0) million during each of the nine months ended September 30, 2020 and 2019 and (vii) issuance of Series C Mandatory Convertible Preferred Stock (net of issuance costs) of $1.1 billion during the nine months ended September 30, 2020.
Analysis of Non-GAAP Operating Results
The following is a discussion of the results of our business on a non-GAAP basis for the three and nine months ended September 30, 2020 and 2019. You should read this discussion in conjunction with the information included under "—Basis of Accounting—Key Non-GAAP and Other Operating and Performance Measures" and the financial statements and related notes included elsewhere in this report. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
The following tables set forth information regarding KKR's operating results and certain key operating metrics as of and for the three months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
DISTRIBUTABLE REVENUES |
| | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Distributable Revenues | | | | | | |
Fees and Other, Net | | | | | | |
Management Fees | | $ | 359,831 |
| | $ | 314,793 |
| | $ | 45,038 |
|
Transaction Fees | | 300,645 |
| | 164,892 |
| | 135,753 |
|
Monitoring Fees | | 28,824 |
| | 27,546 |
| | 1,278 |
|
Fee Credits | | (115,442 | ) | | (61,308 | ) | | (54,134 | ) |
Total Fees and Other, Net | | 573,858 |
| | 445,923 |
| | 127,935 |
|
| | | | | | |
Realized Performance Income (Loss) | | | | | | |
Carried Interest | | 217,978 |
| | 296,344 |
| | (78,366 | ) |
Incentive Fees | | 16,223 |
| | 11,184 |
| | 5,039 |
|
Total Realized Performance Income (Loss) | | 234,201 |
| | 307,528 |
| | (73,327 | ) |
| | | | | | |
Realized Investment Income (Loss) | | | | | | |
Net Realized Gains (Losses) | | 172,224 |
| | 26,529 |
| | 145,695 |
|
Interest Income and Dividends | | 88,191 |
| | 183,705 |
| | (95,514 | ) |
Total Realized Investment Income (Loss) | | 260,415 |
| | 210,234 |
| | 50,181 |
|
| | | | | |
|
|
Total Distributable Revenues | | $ | 1,068,474 |
| | $ | 963,685 |
| | $ | 104,789 |
|
| | | | | | |
DISTRIBUTABLE EXPENSES |
| | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Distributable Expenses | | | | | | |
Compensation and Benefits (1) | | $ | 427,396 |
| | $ | 385,237 |
| | $ | 42,159 |
|
Occupancy and Related Charges | | 13,639 |
| | 14,141 |
| | (502 | ) |
Other Operating Expenses | | 76,163 |
| | 77,532 |
| | (1,369 | ) |
Total Distributable Expenses | | $ | 517,198 |
| | $ | 476,910 |
| | $ | 40,288 |
|
| | | | | | |
AFTER-TAX DISTRIBUTABLE EARNINGS |
| | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
After-tax Distributable Earnings | | | | | |
|
|
(+) Total Distributable Revenues | | $ | 1,068,474 |
| | $ | 963,685 |
| | $ | 104,789 |
|
(-) Total Distributable Expenses | | 517,198 |
| | 476,910 |
| | 40,288 |
|
(=) Total Distributable Operating Earnings | | 551,276 |
| | 486,775 |
| | 64,501 |
|
(-) Interest Expense | | 54,458 |
| | 48,326 |
| | 6,132 |
|
(-) Series A and B Preferred Dividends | | 8,341 |
| | 8,341 |
| | — |
|
(-) Income (Loss) Attributable to Noncontrolling Interests | | 2,709 |
| | 881 |
| | 1,828 |
|
(-) Income Taxes Paid | | 75,413 |
| | 40,429 |
| | 34,984 |
|
After-tax Distributable Earnings | | $ | 410,355 |
| | $ | 388,798 |
| | $ | 21,557 |
|
| |
(1) | Includes equity-based compensation of $42.5 million and $54.4 million for the three months ended September 30, 2020 and 2019, respectively. |
Distributable Revenues
The following sections discuss distributable revenues for each of our business lines on a disaggregated basis for the three months ended September 30, 2020 and 2019.
Private Markets
The following table presents Fees and Other, Net, and Realized Performance Income (Loss) in the Private Markets business line for the three months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Fees and Other, Net | | | | | | |
Management Fees | | $ | 241,788 |
| | $ | 202,632 |
| | $ | 39,156 |
|
Transaction Fees | | 133,943 |
| | 63,580 |
| | 70,363 |
|
Monitoring Fees | | 28,824 |
| | 27,546 |
| | 1,278 |
|
Fee Credits | | (107,275 | ) | | (44,625 | ) | | (62,650 | ) |
Total Fees and Other, Net | | $ | 297,280 |
| | $ | 249,133 |
| | $ | 48,147 |
|
| | | | | | |
Realized Performance Income (Loss) | | | | | | |
Carried Interest | | $ | 217,978 |
| | $ | 281,494 |
| | $ | (63,516 | ) |
Incentive Fees | | 701 |
| | — |
| | 701 |
|
Total Realized Performance Income (Loss) | | $ | 218,679 |
| | $ | 281,494 |
| | $ | (62,815 | ) |
Fees and Other, Net
The increase for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 was primarily due to an increase in management fees and transaction fees, net of associated fee credits.
The increase in management fees was primarily due to management fees earned from Asian Fund IV, Next Generation Technology Growth Fund II and Asia Pacific Infrastructure Investors, which entered their investment periods subsequent to September 30, 2019. These increases were partially offset by a decrease in management fees earned from Asian Fund III as it entered its post-investment period in the third quarter of 2020. During Asian Fund III's post-investment period, we earn fees based on capital invested rather than capital committed and at a lower fee rate.
The increase in transaction fees was primarily attributable to an increase in the average size of transaction fees earned. During the three months ended September 30, 2020, there were 19 transaction fee-generating investments that paid an average fee of $7.0 million compared to 20 transaction fee-generating investments that paid an average fee of $3.2 million during the three months ended September 30, 2019. For the three months ended September 30, 2020, approximately 57% of these transaction fees were paid by companies in Europe, 39% were paid from companies in the Asia-Pacific region, and 4% of these transaction fees were paid from companies located in North America. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular agreements as to the amount of the fees, the complexity of the transaction, and KKR's role in the transaction. Additionally, transaction fees are generally not earned with respect to energy and real estate investments. The increase in fee credits is due primarily to a greater level of transaction fees which are shared with fund investors.
Realized Performance Income (Loss)
The following table presents realized carried interest by investment vehicle for the three months ended September 30, 2020 and 2019:
|
| | | | | | | |
| Three Months Ended September 30, |
| 2020 | | 2019 |
| ($ in thousands) |
Co-Investment Vehicles and Other | $ | 76,950 |
| | $ | 12,876 |
|
2006 Fund | 55,846 |
| | 78,475 |
|
North America Fund XI | 42,807 |
| | 96,910 |
|
European Fund IV | 27,980 |
| | 32,138 |
|
Next Generation Technology Growth Fund | 13,964 |
| | — |
|
Asian Fund | 431 |
| | — |
|
Asian Fund II | — |
| | 56,633 |
|
Real Estate Partners Americas | — |
| | 3,703 |
|
China Growth fund | — |
| | 759 |
|
Total Realized Carried Interest (1) | $ | 217,978 |
| | $ | 281,494 |
|
| |
(1) | The above table excludes any funds for which there was no realized carried interest during both of the periods presented. |
Realized carried interest for the three months ended September 30, 2020 consisted primarily of (i) realized gains from the sale of our investment in The Hut Group Limited and a partial sale of our investment in SoftwareOne Holding AG (technology sector) and (ii) dividends received from our investment in Epicor Software Corporation.
Realized carried interest for the three months ended September 30, 2019 consisted primarily of dividends received from our investment in Fiserv, Inc., and realized gains from the final sales of our investment in PRA Health Sciences, Inc. (NASDAQ: PRAH) and National Vision Holdings, Inc.(NASDAQ: EYE), and the partial sale of our investment in Trainline PLC.
Public Markets
The following table presents Fees and Other, Net, and Realized Performance Income (Loss) in the Public Markets business line for the three months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Fees and Other, Net | | | | | | |
Management Fees | | $ | 118,043 |
| | $ | 112,161 |
| | $ | 5,882 |
|
Transaction Fees | | 8,436 |
| | 17,313 |
| | (8,877 | ) |
Fee Credits | | (8,167 | ) | | (16,683 | ) | | 8,516 |
|
Total Fees and Other, Net | | $ | 118,312 |
| | $ | 112,791 |
| | $ | 5,521 |
|
| | | | | | |
Realized Performance Income (Loss) | | | | | | |
Carried Interest | | $ | — |
| | $ | 14,850 |
| | $ | (14,850 | ) |
Incentive Fees | | 15,522 |
| | 11,184 |
| | 4,338 |
|
Total Realized Performance Income (Loss) | | $ | 15,522 |
| | $ | 26,034 |
| | $ | (10,512 | ) |
Fees and Other, Net
The increase for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to an increase in management fees.
The increase in management fees was primarily attributable to management fees earned from the issuance of new CLOs subsequent to September 30, 2019 and greater overall FPAUM at our direct lending and leveraged credit strategies.
The decrease in transaction fees was primarily attributable to a decrease in both the number and average size of transaction fees earned during the period. During the three months ended September 30, 2020, there were 7 transaction fee generating investments that paid an average fee of $1.2 million, compared to 10 transaction fee generating investments that paid an average fee of $1.7 million during the three months ended September 30, 2019. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular agreements as to the amount of the fees, the complexity of the transaction, and KKR's role in the transaction. The decrease in fee credits is due primarily to a lower level of transaction fees which are shared with fund investors.
Realized Performance Income (Loss)
The decrease for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily attributable to no realized carried interest earned from our Public Markets investments funds, partially offset by a higher level of incentive fees earned from our hedge fund partnership, Marshall Wace, during the three months ended September 30, 2020.
Capital Markets
The following table presents Transaction Fees in the Capital Markets business line for the three months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Transaction Fees | | $ | 158,266 |
| | $ | 83,999 |
| | $ | 74,267 |
|
| | | | | | |
The increase in transaction fees was primarily due to an increase in the average size of capital markets transactions for the three months ended September 30, 2020, compared to the three months ended September 30, 2019. Overall, we completed 47 capital markets transactions for the three months ended September 30, 2020, of which 12 represented equity offerings and 35 represented debt offerings, as compared to 48 transactions for the three months ended September 30, 2019, of which 9 represented equity offerings and 39 represented debt offerings. We earned fees in connection with underwriting, syndication and other capital markets services. While each of the capital markets transactions that we undertake in this business line is separately negotiated, our fee rates are generally higher with respect to underwriting or syndicating equity offerings than with respect to debt offerings, and the amount of fees that we earn for similar transactions generally correlates with overall transaction sizes.
Our capital markets fees are generated in connection with our Private Markets and Public Markets business lines as well as from third-party companies. For the three months ended September 30, 2020, approximately 10% of our transaction fees were earned from unaffiliated third parties as compared to approximately 25% for the three months ended September 30, 2019. Our transaction fees are comprised of fees earned from North America, Europe, and the Asia-Pacific region. For the three months ended September 30, 2020, approximately 78% of our transaction fees were generated outside of North America as compared to approximately 43% for the three months ended September 30, 2019. Our Capital Markets business line is dependent on the overall capital markets environment, which is influenced by equity prices, credit spreads, and volatility. Our Capital Markets business line does not generate management or monitoring fees.
Principal Activities
The following table presents Realized Investment Income (Loss) in the Principal Activities business line for the three months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Realized Investment Income (Loss) | | | | | | |
Net Realized Gains (Losses) | | $ | 172,224 |
| | $ | 26,529 |
| | $ | 145,695 |
|
Interest Income and Dividends | | 88,191 |
| | 183,705 |
| | (95,514 | ) |
Total Realized Investment Income (Loss) | | $ | 260,415 |
| | $ | 210,234 |
| | $ | 50,181 |
|
Realized Investment Income (Loss)
The increase in realized investment income for the three months ended September 30, 2020 compared to the prior period is primarily due to a higher level of net realized gains, partially offset by a decrease in interest income and dividends. The amount of realized investment income (loss) depends on the transaction activity of our funds and balance sheet, which can vary from period to period.
For the three months ended September 30, 2020, net realized gains were comprised of realized gains primarily from the sale of our Private Markets investments in The Hut Group Limited and Ivalua SAS, and the partial sale of our investment in Fiserv, Inc. Partially offsetting these realized gains were realized losses, the most significant of which was a realized loss on our investment in Yorktown Center (real estate).
For the three months ended September 30, 2019, net realized gains were comprised of realized gains primarily from the sale of our Private Markets investments including the sales or partial sales of our investment in PRA Health Sciences, Inc., Trainline PLC, and National Vision Holdings, Inc., and from the sale of certain investments in our special situations funds. Partially offsetting these realized gains were realized losses, the most significant of which was a realized loss on Santanol Pty Ltd. (forestry sector).
For the three months ended September 30, 2020, interest income and dividends were comprised of (i) $57.1 million of dividend income from our investment in Epicor Software Corporation and distributions received through our real estate investments including our investment in KREF and (ii) $31.1 million of interest income from our investments held at our Capital Markets business line, investments in CLOs and our cash balances.
For the three months ended September 30, 2019, interest income and dividends were comprised of (i) $117.0 million of dividend income from our investment in Fiserv, Inc. and $34.8 million of dividend income from distributions received primarily through our real estate investments including our investment in KREF and (ii) $31.9 million of interest income which consists primarily of interest that is received from our Public Markets investments including CLOs and other credit investments and to a lesser extent our cash balances and investments held at our India debt finance company which included a reversal of interest income on certain investments as a result of an increase in non-performing loans.
See "—Analysis of Non-GAAPOperating Results—Non-GAAP Balance Sheet Measures."
We expect realized performance income and realized investment income to be greater than $250 million in the fourth quarter of 2020 relating to realized incentive fees from Marshall Wace and realized performance fees and realized investment income from completed, or signed and expected to be completed sales, partial sales or secondary sales subsequent to September 30, 2020 with respect to certain private equity portfolio companies and other investments. Some of these transactions are not complete, and are subject to the satisfaction of closing conditions, including but not limited to regulatory approvals; there can be no assurance if or when any of these transactions will be completed.
On January 1, 2020, KKR Capstone was acquired by KKR and became a wholly-owned subsidiary of KKR. For GAAP purposes, KKR Capstone was consolidated prior to January 1, 2020 and as such the fees and expenses attributable to KKR Capstone were included in KKR's consolidated revenues and expenses. Additionally, prior to January 1, 2020, KKR excluded the results of KKR Capstone from KKR's non-GAAP financial measures since KKR presents these financial measures prior to giving effect to the consolidation of certain entities that are not legal subsidiaries of KKR.
Following this acquisition, KKR's after-tax distributable earnings includes the net income (loss) from KKR Capstone within realized investment income (loss). For the quarter ended September 30, 2020, total fees attributable to KKR Capstone were $17.4 million and total expenses attributable to KKR Capstone were $14.4 million. For KKR Capstone-related adjustments in reconciling distributable revenues and distributable expenses to GAAP revenues and expenses, respectively, see "—Non-GAAP Balance Sheet Measures—Reconciliations to GAAP Measures".
Distributable Expenses
Compensation and Benefits
The increase for the three months ended September 30, 2020 compared to the prior period is primarily due to higher compensation expense recorded in connection with the higher level of total distributable revenues. Equity-based compensation charges were lower compared to the prior period resulting from a decrease in the weighted average number of unvested shares outstanding.
Occupancy and Other Operating Expenses
The decrease for the three months ended September 30, 2020 compared to the prior period is primarily due to a lower level of expenses that are creditable to our investment funds, in particular a lower level of broken-deal expenses as well as a decrease in travel related expenses as a result of the COVID-19 pandemic. These decreases were partially offset by a higher level of professional fees and other administrative costs in connection with the growth of the firm. The level of broken-deal expenses can vary significantly period to period based upon a number of factors, the most significant of which are the number of potential investments being pursued for our investment funds, the size and complexity of investments being pursued and the number of investment funds currently in their investment period.
Other Components of After-tax Distributable Earnings
Interest Expense
For the three months ended September 30, 2020 and 2019, interest expense relates primarily to the senior notes outstanding for KKR and KFN. The increase in interest expense for the three months ended September 30, 2020 compared to the prior period is due primarily to the issuances of (i) $500 million aggregate principal amount of 3.625% Senior Notes due 2050, (ii) $250 million aggregate principal amount of $3.750% Senior Notes due 2029 and (iii) $750 million aggregate principal amount of 3.500% Senior Notes due 2050 subsequent to September 30, 2019. This increase was partially offset by the redemption of our $500 million aggregate principal amount of 6.375% Senior Notes due 2020 in the third quarter of 2019.
Income Taxes Paid
The increase in income taxes paid is primarily due to a higher level of total distributable operating earnings.
After-tax Distributable Earnings
The increase in after-tax distributable earnings for the three months ended September 30, 2020 compared to the prior period was due primarily to a higher level of distributable revenues, partially offset by an increase in distributable expenses, interest expense and income taxes paid.
Other Operating and Performance Measures
The following table presents certain key operating and performance metrics as of September 30, 2020 and June 30, 2020:
|
| | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | June 30, 2020 | | Change |
| | ($ in thousands) |
Assets Under Management | | $ | 233,808,800 |
| | $ | 221,756,700 |
| | $ | 12,052,100 |
|
Fee Paying Assets Under Management | | $ | 177,290,200 |
| | $ | 160,329,800 |
| | $ | 16,960,400 |
|
Uncalled Commitments | | $ | 67,077,600 |
| | $ | 66,818,800 |
| | $ | 258,800 |
|
The following table presents one of our key performance metrics for the three months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Capital Invested and Syndicated Capital | | $ | 10,019,100 |
| | $ | 5,043,800 |
| | $ | 4,975,300 |
|
Assets Under Management
Private Markets
The following table reflects the changes in our Private Markets AUM from June 30, 2020 to September 30, 2020:
|
| | | |
| ($ in thousands) |
June 30, 2020 | $ | 124,828,200 |
|
New Capital Raised | 5,754,000 |
|
Distributions and Other | (2,447,100 | ) |
Change in Value | 7,623,400 |
|
September 30, 2020 | $ | 135,758,500 |
|
AUM for the Private Markets business line was $135.8 billion at September 30, 2020, an increase of $11.0 billion, compared to $124.8 billion at June 30, 2020.
The increase was primarily attributable to an increase in value of our Private Markets portfolio and new capital raised in Asian Fund IV, Real Estate Partners Americas III, and various real asset co-investment vehicles. These increases were partially offset by distributions to Private Markets fund investors, primarily as a result of realizations, most notably in North America Fund XI, 2006 Fund, European Fund IV, and Asian Fund II.
The increase in the value of our Private Markets portfolio was driven primarily by net gains of $2.3 billion in Americas Fund XII, $1.1 billion in North America Fund XI, $0.6 billion in our core investment strategy, $0.5 billion in 2006 Fund, and $0.4 billion in both European Fund V and Asian Fund III.
For the three months ended September 30, 2020, the value of our private equity investment portfolio increased 12.4%. This was comprised of a 13.7% increase in value of our privately held investments and a 7.1% increase in share prices of various publicly held or publicly indexed investments. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
The most significant increase in value of our privately held investments related to AppLovin Corporation (technology sector), The Nature's Bounty Co. (consumer products sector), and Inkling Holdings LLC (media sector). These increases in value were partially offset by decreases in value relating primarily to Ticket Monster Inc. (technology sector), Novaria Group (industrial sector), and The Bay Clubs Company, LLC. The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to an increase in the value of market comparables and individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) an unfavorable business outlook and (ii) a decrease in the value of market comparables, both influenced from the impact of COVID-19 on the economic outlook and overall market environment.
The most significant increases in share prices of various publicly held or publicly indexed investments were increases in Fiserv, Inc., Ingersoll Rand Inc. (NYSE: IR), and Max Healthcare Institute Limited (NSE: MAXHEALTH). These increases were partially offset by decreases in share prices of various publicly held investments, the most significant of which were decreases in Fujian Sunner Development Co. Ltd. (SZ: 002299) and Bharti Infratel (BHIN:IN).
For the three months ended September 30, 2019, the value of our private equity investment portfolio increased 2.7%. This was comprised of a 3.1% increase in shares prices of various publicly held or publicly indexed investments and a 2.6% increase in value of our privately held investments.
The most significant increases in share prices of various publicly held or publicly indexed investments were increases in Fiserv, Inc., Sonos, Inc. (NASDAQ: SONO), and Laureate Education, Inc. (NASDAQ: LAUR). These increases were partially offset by decreases in share prices of various publicly held investments, the most significant of which were decreases in Gardner Denver Holdings, Inc. (renamed Ingersoll Rand Inc. in connection with the merger transaction with Ingersoll Rand Inc.), BrightView Holdings, Inc. (NYSE: BV), and Fujian Sunner Development Co. Ltd.
The most significant increases in value of our privately held investments related to KCF Technologies Co. Ltd. (industrial sector), Internet Brands, Inc. (technology sector), and Kokusai Electric Corporation (manufacturing sector). These increases in value on our privately held investments were partially offset by decreases in value relating primarily to Envision Healthcare Corporation (healthcare sector), our energy income and growth portfolio, and A-Gas Limited (services sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance and (ii) an increase in the value of market comparables, and with respect to KCF Technologies Co. Ltd. and Kokusai Electric Corporation, increases in valuation reflecting agreements to exit these investments. The consummation of such exits are subject to the satisfaction or waiver of closing conditions, the satisfaction or waiver of which cannot be guaranteed. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook.
Certain investments included in our AUM are denominated in currencies other than the U.S. dollar. Those investments expose our AUM to the risk that the value of the investments will be affected by changes in exchange rates between the currency in which the investments are denominated and the currency in which the investments are made. We generally seek to reduce these risks by employing hedging transactions in connection with certain investments, including using foreign currency options and foreign exchange forward contracts to reduce exposure to changes in exchange rates when a meaningful amount of capital has been invested in currencies other than the currencies in which the investments are denominated. We do not, however, hedge our currency exposure in all currencies or for all investments. See "Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk" and "Risk Factors—Risks Related to the Assets We Manage—We make investments in companies that are based outside of the United States, which may expose us to additional risks not typically associated with investing in companies that are based in the United States" in our Annual Report.
Public Markets
The following table reflects the changes in our Public Markets AUM from June 30, 2020 to September 30, 2020:
|
| | | |
| ($ in thousands) |
June 30, 2020 | $ | 96,928,500 |
|
New Capital Raised | 2,916,700 |
|
Distributions and Other | (1,385,400 | ) |
Redemptions | (4,270,300 | ) |
Change in Value | 3,860,800 |
|
September 30, 2020 | $ | 98,050,300 |
|
AUM in our Public Markets business line totaled $98.1 billion at September 30, 2020, an increase of $1.2 billion compared to $96.9 billion at June 30, 2020. The increase was primarily due to (i) an increase in the value of our Public Markets portfolio and (ii) new capital raised across multiple strategies. Partially offsetting these increases were redemptions, primarily in our hedge fund partnerships and distributions to our fund investors.
The increase in new capital raised came from multiple strategies, most notably $0.9 billion in our hedge fund partnerships, $0.8 billion in alternative credit strategies, and $0.7 billion in CLOs and certain other leveraged credit strategies.
The increase in the value of our Public Markets portfolio was driven primarily by net gains of $1.8 billion in our hedge fund partnerships, $1.1 billion in certain leveraged credit strategies, and $0.7 billion in alternative credit strategies. Partially offsetting these increases were redemptions and distributions, most notably $3.8 billion of redemptions from our hedge fund partnerships. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
Fee Paying Assets Under Management
Private Markets
The following table reflects the changes in our Private Markets FPAUM from June 30, 2020 to September 30, 2020:
|
| | | |
| ($ in thousands) |
June 30, 2020 | $ | 77,356,100 |
|
New Capital Raised | 15,370,800 |
|
Distributions and Other | (771,900 | ) |
Net Changes in Fee Base of Certain Funds | (2,177,800 | ) |
Change in Value | 573,800 |
|
September 30, 2020 | $ | 90,351,000 |
|
FPAUM in our Private Markets business line was $90.4 billion at September 30, 2020, an increase of $13.0 billion, compared to $77.4 billion at June 30, 2020.
The increase was primarily attributable to new capital raised of $12.0 billion in Asian Fund IV, $2.0 billion in our real assets funds and $0.9 billion in our core investment strategy. This increase was partially offset by (i) net changes in the fee base of Asian Fund III as a result of it entering into its post-investment period, during which we earn fees on invested capital rather than committed capital, and (ii) distributions relating to realizations in North America Fund XI, 2006 Fund, and Asian Fund II.
Uncalled capital commitments from Private Markets investment funds from which KKR is currently not earning management fees amounted to approximately $12.8 billion at September 30, 2020, which includes capital commitments reserved for follow-on investments for funds that have completed their investment periods. This capital will generally begin to earn management fees upon deployment of the capital or upon the commencement of the fund's investment period. The average annual management fee rate associated with this capital is approximately 1.1%. We will not begin earning fees on this capital until it is deployed or the related investment period commences, neither of which is guaranteed to occur. If and when such management fees are earned, which will occur over an extended period of time, a portion of existing FPAUM may cease paying fees or pay lower fees, thus offsetting a portion of any new management fees earned.
Public Markets
The following table reflects the changes in our Public Markets FPAUM from June 30, 2020 to September 30, 2020:
|
| | | |
| ($ in thousands) |
June 30, 2020 | $ | 82,973,700 |
|
New Capital Raised | 3,194,200 |
|
Distributions and Other | (660,900 | ) |
Redemptions | (1,828,800 | ) |
Change in Value | 3,261,000 |
|
September 30, 2020 | $ | 86,939,200 |
|
FPAUM in our Public Markets business line was $86.9 billion at September 30, 2020, an increase of $3.9 billion, compared to $83.0 billion at June 30, 2020. The increase was primarily due to (i) an increase in the value of our Public Markets portfolio and (ii) new capital raised across multiple strategies. Partially offsetting these increases were redemptions primarily in our hedge fund partnerships and distributions to fund investors.
The increase in new capital raised came from multiple strategies, most notably $1.0 billion in alternative credit strategies, $0.9 billion in our hedge fund partnerships, and $0.7 billion in both certain leveraged credit strategies and CLOs. These increases were partially offset by redemptions and distributions, most notably $1.4 billion of redemptions from our hedge fund partnerships.
The increase in the value of our Public Markets portfolio was driven primarily by net gains of $1.8 billion in our hedge fund partnerships and $1.1 billion in certain leveraged credit strategies. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
Uncalled capital commitments from Public Markets investment funds from which KKR is currently not earning management fees amounted to approximately $7.1 billion at September 30, 2020. This capital will generally begin to earn management fees upon deployment of the capital or upon the commencement of the fund's investment period. The average annual management fee rate associated with this capital is approximately 0.9%. We will not begin earning fees on this capital until it is deployed or the related investment period commences, neither of which is guaranteed to occur. If and when such management fees are earned, which will occur over an extended period of time, a portion of existing FPAUM may cease paying fees or pay lower fees, thus offsetting a portion of any new management fees earned.
Uncalled Commitments
Private Markets
As of September 30, 2020, our Private Markets business line had $56.2 billion of remaining uncalled capital commitments that could be called for investments in new transactions as compared to $55.4 billion as of June 30, 2020. The increase was primarily attributable to new capital raised, which was partially offset by capital called from fund investors to make investments during the period. See "—Analysis of Non-GAAP Operating Results—Other Operating and Performance Measures—Assets Under Management—Private Markets" for a detailed discussion on new capital raised for the three months ended September 30, 2020.
Public Markets
As of September 30, 2020, our Public Markets business line had $10.9 billion of remaining uncalled capital commitments that could be called for investments in new transactions, as compared to $11.4 billion as of June 30, 2020. The decrease was primarily attributable to capital called from fund investors to make investments during the period, which was partially offset by new capital raised in various alternative credit strategies.
Capital Invested and Syndicated Capital
Private Markets Capital Invested
For the three months ended September 30, 2020, Private Markets had $6.2 billion of capital invested as compared to $2.4 billion for the three months ended September 30, 2019. The increase was driven primarily by a $2.5 billion increase in capital invested in our private equity strategies (including core, growth equity, and impact investments) and a $1.3 billion increase in capital invested in our real asset strategies. Generally, the portfolio companies acquired through our private equity funds have higher transaction values and result in higher capital invested relative to transactions in our real assets funds. The number of large private equity investments made in any quarter is volatile and consequently, a significant amount of capital invested in one quarter or a few quarters may not be indicative of a similar level of capital deployment in future quarters. During the three months ended September 30, 2020, 58% of capital deployed in private equity, which includes core, growth equity, and impact investments, was in transactions in Europe, 38% was in the Asia-Pacific region, and 4% was in North America.
Public Markets Capital Invested
For the three months ended September 30, 2020, Public Markets had $1.7 billion of capital invested as compared to $2.0 billion for the three months ended September 30, 2019. The decrease was primarily due to a lower level of capital deployed in our direct lending strategies, partially offset by a higher level of capital deployed in our dislocation opportunities strategies. During the three months ended September 30, 2020, 59% of capital deployed was in transactions in Europe, 39% of capital deployed was North America, and 2% was in Asia-Pacific region.
Capital Markets Syndicated Capital
For the three months ended September 30, 2020, Capital Markets syndicated $2.1 billion of capital as compared to $0.7 billion for the three months ended September 30, 2019. The increase was primarily due to an increase in the size and number of syndication transactions in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. Overall, we completed six syndication transactions for the three months ended September 30, 2020 as compared to four
syndications for the three months ended September 30, 2019. The size and frequency of syndication transactions depend in large part on market conditions and other factors that are unpredictable and outside our control, which may negatively impact the fees generated by our capital markets business from syndication transactions.
The following tables set forth information regarding KKR's operating results and certain key operating metrics as of and for the nine months ended September 30, 2020 and 2019.
|
| | | | | | | | | | | | |
DISTRIBUTABLE REVENUES |
| | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Distributable Revenues | | | | | | |
Fees and Other, Net | | | | | | |
Management Fees | | $ | 1,024,450 |
| | $ | 910,105 |
| | $ | 114,345 |
|
Transaction Fees | | 560,404 |
| | 655,421 |
| | (95,017 | ) |
Monitoring Fees | | 86,875 |
| | 79,621 |
| | 7,254 |
|
Fee Credits | | (226,167 | ) | | (274,278 | ) | | 48,111 |
|
Total Fees and Other, Net | | 1,445,562 |
| | 1,370,869 |
| | 74,693 |
|
| | | | | | |
Realized Performance Income (Loss) | | | | | | |
Carried Interest | | 924,974 |
| | 838,608 |
| | 86,366 |
|
Incentive Fees | | 36,913 |
| | 52,485 |
| | (15,572 | ) |
Total Realized Performance Income (Loss) | | 961,887 |
| | 891,093 |
| | 70,794 |
|
| | | | | | |
Realized Investment Income (Loss) | | | | | | |
Net Realized Gains (Losses) | | 215,430 |
| | 146,334 |
| | 69,096 |
|
Interest Income and Dividends | | 280,474 |
| | 312,969 |
| | (32,495 | ) |
Total Realized Investment Income (Loss) | | 495,904 |
| | 459,303 |
| | 36,601 |
|
| | | | | | |
Total Distributable Revenues | | $ | 2,903,353 |
| | $ | 2,721,265 |
| | $ | 182,088 |
|
| | | | | | |
DISTRIBUTABLE EXPENSES |
| | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Distributable Expenses | | | | | | |
Compensation and Benefits (1) | | $ | 1,161,240 |
| | $ | 1,088,552 |
| | $ | 72,688 |
|
Occupancy and Related Charges | | 41,717 |
| | 44,586 |
| | (2,869 | ) |
Other Operating Expenses | | 227,842 |
| | 235,285 |
| | (7,443 | ) |
Total Distributable Expenses | | $ | 1,430,799 |
| | $ | 1,368,423 |
| | $ | 62,376 |
|
| | | | | | |
AFTER-TAX DISTRIBUTABLE EARNINGS |
| | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
After-tax Distributable Earnings | | | | | | |
(+) Total Distributable Revenues | | $ | 2,903,353 |
| | $ | 2,721,265 |
| | $ | 182,088 |
|
(-) Total Distributable Expenses | | 1,430,799 |
| | 1,368,423 |
| | 62,376 |
|
(=) Total Distributable Operating Earnings | | 1,472,554 |
| | 1,352,842 |
| | 119,712 |
|
(-) Interest Expense | | 152,676 |
| | 139,315 |
| | 13,361 |
|
(-) Series A and B Preferred Dividends | | 25,023 |
| | 25,023 |
| | — |
|
(-) Income (Loss) Attributable to Noncontrolling Interests | | 4,800 |
| | 3,104 |
| | 1,696 |
|
(-) Income Taxes Paid | | 198,763 |
| | 155,237 |
| | 43,526 |
|
After-tax Distributable Earnings | | $ | 1,091,292 |
| | $ | 1,030,163 |
| | $ | 61,129 |
|
| |
(1) | Includes equity-based compensation of $133.4 million and $157.9 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. |
Distributable Revenues
The following sections discuss distributable revenues for each of our business lines on a disaggregated basis for the nine months ended September 30, 2020 and 2019.
Private Markets
The following table presents Fees and Other, Net and Realized Performance Income (Loss) in the Private Markets business line for the nine months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Fees and Other, Net | | | | | | |
Management Fees | | $ | 682,269 |
| | $ | 578,494 |
| | $ | 103,775 |
|
Transaction Fees | | 236,289 |
| | 298,893 |
| | (62,604 | ) |
Monitoring Fees | | 86,875 |
| | 79,621 |
| | 7,254 |
|
Fee Credits | | (192,027 | ) | | (224,546 | ) | | 32,519 |
|
Total Fees and Other, Net | | $ | 813,406 |
| | $ | 732,462 |
| | $ | 80,944 |
|
| | | | | | |
Realized Performance Income (Loss) | | | | | | |
Carried Interest | | $ | 889,334 |
| | $ | 813,858 |
| | $ | 75,476 |
|
Incentive Fees | | 2,723 |
| | 1,485 |
| | 1,238 |
|
Total Realized Performance Income (Loss) | | $ | 892,057 |
| | $ | 815,343 |
| | $ | 76,714 |
|
Fees and Other, Net
The increase for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 was primarily due to an increase in management fees, partially offset by a decrease in transaction fees, net of associated fee credits.
The increase in management fees was primarily due to (i) management fees earned from Next Generation Technology Growth Fund II, Asian Fund IV, and Asia Pacific Infrastructure Investors which entered their investment periods subsequent to September 30, 2019 and (ii) higher management fees earned from European Fund V in the current period since it entered its investment period in the second quarter of 2019. These increases were partially offset by (i) a decrease in management fees earned from Asian Fund III as it entered its post-investment period in the third quarter of 2020, in which it pays fees based on capital invested rather than capital committed and pays fees at a lower rate, and (ii) a decrease in management fees earned from European IV as it entered its post investment period in the second quarter of 2019, in which it pays fees based on capital invested rather than remaining commitments and capital invested during the investment period.
The decrease in transaction fees was primarily attributable to a decrease in the average size of transaction fee generating investments. During the nine months ended September 30, 2020, there were 48 transaction fee-generating investments that paid an average fee of $4.9 million compared to 46 transaction fee-generating investments that paid an average fee of $6.5 million during the nine months ended September 30, 2019. For the nine months ended September 30, 2020, approximately 42% of these transaction fees were paid by companies in the Europe, 32% were paid from companies in Asia-Pacific region, and 26% were paid by companies located in North America. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular agreements as to the amount of the fees, the complexity of the transaction and KKR's role in the transaction. Additionally, transaction fees are generally not earned with respect to energy and real estate investments. The decrease in fee credits is due primarily to a lower level of transaction fees which are shared with fund investors.
Realized Performance Income (Loss)
The following table presents realized carried interest by investment vehicle for the nine months ended September 30, 2020 and 2019:
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2020 | | September 30, 2019 |
| ($ in thousands) |
North America Fund XI | $ | 165,202 |
| | $ | 341,602 |
|
Global Infrastructure Investors II | 148,882 |
| | — |
|
European Fund IV | 134,853 |
| | 92,731 |
|
2006 Fund | 113,555 |
| | 107,186 |
|
Co-Investment Vehicles and Other | 88,263 |
| | 61,529 |
|
Asian Fund II | 60,647 |
| | 117,418 |
|
Core Investment Vehicles | 57,484 |
| | 14,449 |
|
Global Infrastructure Investors | 54,729 |
| | — |
|
Asian Fund III | 46,347 |
| | — |
|
Next Generation Technology Growth Fund | 13,964 |
| | — |
|
Real Estate Partners Americas | 4,977 |
| | 6,488 |
|
Asian Fund | 431 |
| | 10,912 |
|
European Fund III | — |
| | 58,505 |
|
China Growth Fund | — |
| | 3,038 |
|
Total Realized Carried Interest (1) | $ | 889,334 |
| | $ | 813,858 |
|
| |
(1) | The above table excludes any funds for which there was no realized carried interest during both of the periods presented. |
Realized carried interest for the nine months ended September 30, 2020 consisted primarily of realized gains from the sales of our investments in Deutsche Glasfaser (telecom sector), Privilege Underwriters, Inc. (financial services sector), LGC Science Group Limited (health care sector), The Hut Group Limited and the partial sales of our investment in SoftwareOne Holding AG.
Realized carried interest for the nine months ended September 30, 2019 consisted primarily of realized gains from the sale of our investment in Sedgwick Claims Management Services, Inc., and the partial sale of our investment in Trainline PLC, and dividends received from our investment in Fiserv, Inc.
Public Markets
The following table presents Fees and Other, Net and Realized Performance Income (Loss) in the Public Markets business line for the nine months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Fees and Other, Net | | | | | | |
Management Fees | | $ | 342,181 |
| | $ | 331,611 |
| | $ | 10,570 |
|
Transaction Fees | | 36,228 |
| | 53,241 |
| | (17,013 | ) |
Fee Credits | | (34,140 | ) | | (49,732 | ) | | 15,592 |
|
Total Fees and Other, Net | | $ | 344,269 |
| | $ | 335,120 |
| | $ | 9,149 |
|
| | | | | | |
Realized Performance Income (Loss) | | | | | | |
Carried Interest | | $ | 35,640 |
| | $ | 24,750 |
| | $ | 10,890 |
|
Incentive Fees | | 34,190 |
| | 51,000 |
| | (16,810 | ) |
Total Realized Performance Income (Loss) | | $ | 69,830 |
| | $ | 75,750 |
| | $ | (5,920 | ) |
Fees and Other, Net
The increase for the nine months ended September 30, 2020 was primarily due to an increase in management fees partially offset by a decrease in transaction fees, net of associated fee credits.
The increase in management fees was primarily attributable to management fees earned from the issuance of new CLOs subsequent to September 30, 2019 and greater overall FPAUM at our direct lending and leveraged credit strategies, partially offset by a lower level of management fees earned in certain alternative credit strategies, most notably special situations.
The decrease in transaction fees was primarily attributable to a decrease in both the number and average size of transaction fee-generating investments during the period. During the nine months ended September 30, 2020, there were 24 transaction fee-generating investments that paid an average fee of $1.5 million compared to 34 transaction fee-generating investments that paid an average fee of $1.6 million during the nine months ended September 30, 2019. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular agreements as to the amount of the fees, the complexity of the transaction, and KKR's role in the transaction. The decrease in fee credits is due primarily to a lower level of transaction fees which are shared with fund investors.
Realized Performance Income (Loss)
The decrease for the nine months ended September 30, 2020 compared to the prior period was primarily attributable to a lower level of incentive fees earned from BDCs advised by FS/KKR Advisor, partially offset by an increased level of realized carried interest earned in certain of our alternative credit funds.
Capital Markets
The following table presents Transaction Fees in the Capital Markets business line for the nine months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Transaction Fees | | $ | 287,887 |
| | $ | 303,287 |
| | $ | (15,400 | ) |
The decrease in transaction fees was primarily due to a decrease in the number of capital markets transactions for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. Overall, we completed 125 capital markets transactions for the nine months ended September 30, 2020, of which 21 represented equity offerings and 104 represented debt offerings, as compared to 151 transactions for the nine months ended September 30, 2019, of which 24 represented equity offerings and 127 represented debt offerings.
Our capital markets fees are generated in connection with our Private Markets and Public Markets business lines as well as from third-party companies. For the nine months ended September 30, 2020, approximately 22% of our transaction fees were earned from unaffiliated third parties as compared to approximately 24% for the nine months ended September 30, 2019. Our transaction fees are comprised of fees earned from North America, Europe and Asia-Pacific. For the nine months ended September 30, 2020, approximately 59% of our transaction fees were generated outside of North America as compared to approximately 56% for the nine months ended September 30, 2019. Our Capital Markets business line is dependent on the overall capital markets environment, which is influenced by equity prices, credit spreads and volatility. Our Capital Markets business line does not generate management or monitoring fees.
Principal Activities
The following table presents Realized Investment Income (Loss) in the Principal Activities business line for the nine months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Realized Investment Income (Loss) | | | | | | |
Net Realized Gains (Losses) | | $ | 215,430 |
| | $ | 146,334 |
| | $ | 69,096 |
|
Interest Income and Dividends | | 280,474 |
| | 312,969 |
| | (32,495 | ) |
Total Realized Investment Income (Loss) | | $ | 495,904 |
| | $ | 459,303 |
| | $ | 36,601 |
|
Realized Investment Income (Loss)
The increase in realized investment income for the nine months ended September 30, 2020 compared to the prior period is primarily due to a higher level of net realized gains, partially offset by a decrease in interest income and dividends. The amount of realized investment income (loss) depends on the transaction activity of our funds and balance sheet, which can vary from period to period.
For the nine months ended September 30, 2020, net realized gains were comprised of realized gains primarily from the sale of our Private Markets investments in The Hut Group Limited, Deutsche Glasfaser and Ivalua SAS, and the partial sales in our investments in Fiserv, Inc. and BridgeBio Pharma, Inc. Partially offsetting these realized gains were realized losses, the most significant of which were realized losses on our investment in LCI Helicopters Limited, Yorktown Center and various alternative credit strategy investments.
For the nine months ended September 30, 2019, net realized gains were comprised primarily of gains from the sale of our investment in GEG German Estate Group AG (financial services sector), the sales or partial sales of our investments in Trainline PLC and Sedgwick Claims Management Services, Inc., and the sale of certain investments in our special situations funds. Partially offsetting these realized gains were realized losses, the most significant of which was a realized loss on the sale of DoubleDutch, Inc.
For the nine months ended September 30, 2020, interest income and dividends were comprised of (i) $178.8 million of dividend income from our investment in Fiserv, Inc. of $62.5 million and Epicor Software Corporation as well as distributions received primarily through our real assets investments, including our real estate investment in KREF and (ii) $101.7 million of interest income from our Public Markets investments, including CLOs and other credit investments, and to a lesser extent our cash balances and investments held at our Capital Markets business line.
For the nine months ended September 30, 2019, interest income and dividends were comprised of (i) $120.3 million of interest income which consists primarily of interest that is received from our Public Markets investments, including CLOs and other credit investments and, to a lesser extent, our Capital Markets business and our cash balances, (ii) $117.0 million of dividend income from our investment in Fiserv, Inc., and $75.7 million of dividend income from distributions received primarily through our real assets investments, including our real estate investment in KREF and our energy investments, as well as certain of our credit investments.
On January 1, 2020, KKR Capstone was acquired by KKR and became a wholly-owned subsidiary of KKR. For GAAP purposes, KKR Capstone was consolidated prior to January 1, 2020 and as such the fees and expenses attributable to KKR Capstone were included in KKR's consolidated revenues and expenses. Additionally, prior to January 1, 2020, KKR excluded the results of KKR Capstone from KKR's non-GAAP financial measures since KKR presents these financial measures prior to giving effect to the consolidation of certain entities that are not legal subsidiaries of KKR.
Following this acquisition, KKR's after-tax distributable earnings includes the net income (loss) from KKR Capstone within realized investment income (loss). For the nine months ended September 30, 2020, total fees attributable to KKR Capstone were $55.5 million and total expenses attributable to KKR Capstone were $46.3 million. For KKR Capstone-related adjustments in reconciling distributable revenues and distributable expenses to GAAP revenues and expenses, respectively, see "—Non-GAAP Balance Sheet Measures—Reconciliations to GAAP Measures".
Distributable Expenses
Compensation and Benefits
The increase for the nine months ended September 30, 2020 compared to the prior period is primarily due to higher compensation expense recorded in connection with the higher level of distributable revenues. Equity-based compensation charges were lower compared to the prior period resulting from a decrease in the weighted average number of unvested shares outstanding.
Occupancy and Other Operating Expenses
The decrease for the nine months ended September 30, 2020 compared to the prior period is primarily due to a lower level of expenses that are creditable to our investment funds, in particular a lower level of broken-deal expenses as well as a decrease in travel related expenses as a result of the COVID-19 pandemic. These decreases were partially offset by a higher level of professional fees and other administrative costs in connection with the growth of the firm. The level of broken-deal expenses can vary significantly period to period based upon a number of factors, the most significant of which are the number of potential investments being pursued for our investment funds, the size and complexity of investments being pursued and the number of investment funds currently in their investment period.
Other Components of After-tax Distributable Earnings
Interest Expense
For the nine months ended September 30, 2020 and 2019, interest expense relates primarily to the senior notes outstanding for KKR and KFN. The increase in interest expense for the nine months ended September 30, 2020 compared to the prior period is due primarily to the (i) issuances of $500 million aggregate principal amount of 3.625% Senior Notes due 2050, $250 million aggregate principal amount of $3.750% Senior Notes due 2029 and $750 million aggregate principal amount of 3.500% Senior Notes due 2050 subsequent to September 30, 2019 and (ii) the issuance of the €650 million aggregate principal amount of 1.625% Senior Notes due 2029 in the second quarter of 2019 and $500 million aggregate principal amount of $3.750% Senior Notes due 2029 in the third quarter of 2019, which were both outstanding for all nine months of 2020. This increase was partially offset by the redemption of our $500 million aggregate principal amount of 6.375% Senior Notes due 2020 in the third quarter of 2019.
Income Taxes Paid
The increase in income taxes paid is primarily due to a higher level of total distributable operating earnings.
After-tax Distributable Earnings
The increase in after-tax distributable earnings for the nine months ended September 30, 2020 compared to the prior period was due primarily to a higher level of distributable revenues, partially offset by an increase in distributable expenses, interest expense and income taxes paid.
Other Operating and Performance Measures
The following table presents certain key operating and performance metrics as of September 30, 2020 and December 31, 2019:
|
| | | | | | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 | | Change |
| | ($ in thousands) |
Assets Under Management | | $ | 233,808,800 |
| | $ | 218,355,100 |
| | $ | 15,453,700 |
|
Fee Paying Assets Under Management | | $ | 177,290,200 |
| | $ | 161,209,800 |
| | $ | 16,080,400 |
|
Uncalled Commitments | | $ | 67,077,600 |
| | $ | 56,920,600 |
| | $ | 10,157,000 |
|
The following table presents one of our key performance metrics for the nine months ended September 30, 2020 and 2019:
|
| | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2020 | | September 30, 2019 | | Change |
| | ($ in thousands) |
Capital Invested and Syndicated Capital | | $ | 22,059,000 |
| | $ | 18,222,900 |
| | $ | 3,836,100 |
|
Assets Under Management
Private Markets
The following table reflects the changes in our Private Markets AUM from December 31, 2019 to September 30, 2020:
|
| | | |
| ($ in thousands) |
December 31, 2019 | $ | 119,274,700 |
|
New Capital Raised | 20,193,000 |
|
Distributions and Other | (10,253,900 | ) |
Change in Value | 6,544,700 |
|
September 30, 2020 | $ | 135,758,500 |
|
AUM for the Private Markets business line was $135.8 billion at September 30, 2020, an increase of $16.5 billion, compared to $119.3 billion at December 31, 2019.
The increase was primarily attributable to new capital raised primarily in Asian Fund IV, Property Partners America, Asia Pacific Infrastructure Investors, and Real Estate Partners Americas III, and to a lesser extent, an increase in the value of our Private Markets portfolio. This increase was partially offset by distributions to Private Markets fund investors primarily as a result of realizations, most notably in Global Infrastructure Investors II, North America Fund XI, 2006 Fund, European Fund IV, Global Infrastructure Investors, and Asian Fund II.
The increase in the value of our Private Markets portfolio was driven primarily by net gains of $3.1 billion in Americas Fund XII, $0.9 billion in Global Infrastructure Investors II, $0.8 billion in our core investment strategy, $0.7 billion in North America Fund XI and $0.6 billion in Asian Fund III. These net gains were partially offset by net losses of $0.8 billion in Asian Fund II and $0.6 billion in 2006 Fund.
For the nine months ended September 30, 2020, the value of our private equity investment portfolio increased 7.3%. This was comprised of a 13.1% increase in value of our privately held investments and a 9.8% decrease in share prices of various publicly held or publicly indexed investments. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
The most significant increases in value of our privately held investments related to increases in AppLovin Corporation, Internet Brands, Inc., and Inkling Holdings LLC. These increases in value on our privately held investments were partially offset by decreases in value relating primarily to Magneti Marelli (industrial sector), Ramky Enviro Engineers Limited (industrial sector), and Envision Healthcare Corporation. The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to an increase in the value of market comparables and individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally
related to (i) an unfavorable business outlook and (ii) a decrease in the value of market comparables, both influenced by the impact of COVID-19 on the economic outlook and overall market environment.
The most significant decreases in share prices of various publicly held or publicly indexed investments were decreases in Fiserv, Inc., Ingersoll Rand Inc., and BrightView Holdings Inc. These decreases were partially offset by increases in share prices of various publicly held investments, the most significant of which was Focus Financial Partners, LLC (NASDAQ: FOCS).
For the nine months ended September 30, 2019, the value of our private equity investment portfolio increased 20.4%. This was comprised of a 45.5% increase in share prices of various publicly held or publicly indexed investments and a 13.2% increase in value of our privately held investments.
The most significant increases in share prices of various publicly held or publicly indexed investments were increases in Fiserv, Inc., Trainline PLC, Gardner Denver Holdings, Inc., and BrightView Holdings Inc. These increases were partially offset by decreases in share prices of various publicly held investments, the most significant of which were decreases in Coffee Day Resorts Private Limited (NSE: CCD), Tarena International, Inc. (NASDAQ: TEDU), and Focus Financial Partners, LLC.
The most significant increases in value of our privately held investments related to increases in KCF Technologies Co. Ltd., Kokusai Electric Corporation, AppLovin Corporation, and Internet Brands, Inc. These increases in value on our privately held investments were partially offset by decreases in value relating primarily to Envision Healthcare Corporation, our energy income and growth portfolio, and Academy Ltd. (retail sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance and (ii) an increase in the value of market comparables, and with respect to KCF Technologies Co. Ltd. and Kokusai Electric Corporation, increases in valuation reflecting agreements to exit these investments. The consummation of such exits are the subject to the satisfaction or waiver of closing conditions, the satisfaction or waiver of which cannot be guaranteed. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook.
Public Markets
The following table reflects the changes in our Public Markets AUM from December 31, 2019 to September 30, 2020:
|
| | | |
| ($ in thousands) |
December 31, 2019 | $ | 99,080,400 |
|
New Capital Raised | 11,999,400 |
|
Distributions and Other | (3,005,900 | ) |
Redemptions | (8,816,900 | ) |
Change in Value | (1,206,700 | ) |
September 30, 2020 | $ | 98,050,300 |
|
AUM in our Public Markets business line totaled $98.1 billion at September 30, 2020, a decrease of $1.0 billion compared to AUM of $99.1 billion at December 31, 2019.
The decrease was primarily attributable to (i) redemptions and distributions from our hedge fund partnerships and our alternative and leveraged credit strategies and (ii) a decrease in the value of our Public Markets Portfolio, most notably across our alternative strategies and BDCs. These decreases were partially offset by new capital raised related to multiple strategies, most notably $3.9 billion in alternative credit strategies, $3.3 billion in our hedge fund partnerships, $2.3 billion in leveraged credit strategies, and $1.8 billion in CLOs. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
Fee Paying Assets Under Management
Private Markets
The following table reflects the changes in our Private Markets FPAUM from December 31, 2019 to September 30, 2020:
|
| | | |
| ($ in thousands) |
December 31, 2019 | $ | 76,918,100 |
|
New Capital Raised | 18,773,900 |
|
Distributions and Other | (4,747,500 | ) |
Net Changes in Fee Base of Certain Funds | (2,177,800 | ) |
Change in Value | 1,584,300 |
|
September 30, 2020 | $ | 90,351,000 |
|
FPAUM in our Private Markets business line was $90.4 billion at September 30, 2020, an increase of $13.5 billion, compared to $76.9 billion at December 31, 2019.
The increase was primarily attributable to new capital raised of $12.0 billion in Asian Fund IV, $1.5 billion in Asia Pacific Infrastructure Investors, and $1.1 billion in our core investment strategy, and to a lesser extent, increases in the value of certain infrastructure funds, which are in their post-investment periods and their fee is based on net asset value. These increases were partially offset by (i) distributions primarily relating to realizations of $1.8 billion in Global Infrastructure Investors II, $0.7 billion in Global Infrastructure Investors, $0.5 billion in both North America Fund XI and 2006 Fund, and $0.4 billion in Asian Fund II and (ii) net changes in the fee base of Asian Fund III as a result of it entering into its post-investment period, during which we earn fees on invested capital rather than committed capital.
Public Markets
The following table reflects the changes in our Public Markets FPAUM from December 31, 2019 to September 30, 2020:
|
| | | |
| ($ in thousands) |
December 31, 2019 | $ | 84,291,700 |
|
New Capital Raised | 11,384,900 |
|
Distributions and Other | (3,455,600 | ) |
Redemptions | (5,616,300 | ) |
Change in Value | 334,500 |
|
September 30, 2020 | $ | 86,939,200 |
|
FPAUM in our Public Markets business line was $86.9 billion at September 30, 2020, an increase of $2.6 billion compared to $84.3 billion at December 31, 2019.
The increase was primarily due to new capital raised related to multiple strategies, most notably $3.3 billion in our hedge fund partnerships, $3.0 billion in alternative credit strategies, $2.6 billion in certain leveraged credit strategies, and $1.8 billion in CLOs. Partially offsetting this increase was redemptions primarily in our hedge fund partnerships and distributions to fund investors in our alternative credit and leverage credit investment funds. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
Uncalled Commitments
Uncalled commitments is the aggregate amount of unfunded capital commitments that KKR’s investment funds and carry-paying co-investment vehicles have received from partners to contribute capital to fund future investments. We believe this measure is useful to stockholders as it provides additional insight into the amount of capital that is available to KKR’s investment funds and carry paying co-investment vehicles to make future investments. Uncalled commitments are not reduced for investments completed using fund-level investment financing arrangements or investments we have committed to make but remain unfunded at the reporting date.
Consolidated Results of Operations (GAAP Basis) (Unaudited)
The following is a discussion of our consolidated results of operations for the three months ended March 31, 2021 and 2020. You should read this discussion in conjunction with the financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected our segment results in these periods, see "—Analysis of Segment Operating Results." See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
The presentation of our consolidated results of operations that follows reflects the significant industry diversification of KKR by its acquisition of Global Atlantic. Global Atlantic operates an insurance business, and KKR operates an asset management business, each of which possess distinct characteristics. As a result, KKR developed a two-tiered presentation approach, where Global Atlantic's insurance operations are presented separately from KKR's asset management business. Additionally, the results of Global Atlantic's insurance operations included in our consolidated results of operations are from February 1, 2021 (closing date of the acquisition) through March 31, 2021.
| | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2021 | | March 31, 2020 | | Change |
| ($ in thousands) |
Revenues | | | | | |
Asset Management | | | | | |
Fees and Other | $ | 493,311 | | | $ | 380,572 | | | $ | 112,739 | |
Capital Allocation-Based Income (Loss) | 2,684,647 | | | (1,382,077) | | | 4,066,724 | |
| 3,177,958 | | | (1,001,505) | | | 4,179,463 | |
Insurance | | | | | |
Premiums | 1,176,142 | | | — | | | 1,176,142 | |
Policy Fees | 201,683 | | | — | | | 201,683 | |
Net Investment Income | 444,781 | | | — | | | 444,781 | |
Net Investment (Losses) Gains | (455,702) | | | — | | | (455,702) | |
Other Income | 18,144 | | | — | | | 18,144 | |
| 1,385,048 | | | — | | | 1,385,048 | |
Total Revenues | 4,563,006 | | | (1,001,505) | | | 5,564,511 | |
| | | | | |
Expenses | | | | | |
Asset Management | | | | | |
Compensation and Benefits | 1,306,797 | | | (262,137) | | | 1,568,934 | |
Occupancy and Related Charges | 15,200 | | | 16,322 | | | (1,122) | |
General, Administrative and Other | 166,997 | | | 149,123 | | | 17,874 | |
| 1,488,994 | | | (96,692) | | | 1,585,686 | |
Insurance | | | | | |
Policy Benefits and Claims | 1,485,318 | | | — | | | 1,485,318 | |
Amortization of Policy Acquisition Costs | (20,478) | | | — | | | (20,478) | |
Interest Expense | 10,672 | | | — | | | 10,672 | |
Insurance Expenses | 52,084 | | | — | | | 52,084 | |
General, Administrative and Other | 79,955 | | | — | | | 79,955 | |
| 1,607,551 | | | — | | | 1,607,551 | |
Total Expenses | 3,096,545 | | | (96,692) | | | 3,193,237 | |
| | | | | |
Investment Income (Loss) - Asset Management | | | | | |
Net Gains (Losses) from Investment Activities | 2,696,200 | | | (3,944,504) | | | 6,640,704 | |
Dividend Income | 75,746 | | | 168,699 | | | (92,953) | |
Interest Income | 367,455 | | | 353,455 | | | 14,000 | |
| | | | | | | | | | | | | | | | | |
Interest Expense | (251,756) | | | (261,469) | | | 9,713 | |
Total Investment Income (Loss) | 2,887,645 | | | (3,683,819) | | | 6,571,464 | |
| | | | | |
Income (Loss) Before Taxes | 4,354,106 | | | (4,588,632) | | | 8,942,738 | |
| | | | | |
Income Tax Expense (Benefit) | 438,739 | | | (360,679) | | | 799,418 | |
| | | | | |
Net Income (Loss) | 3,915,367 | | | (4,227,953) | | | 8,143,320 | |
Net Income (Loss) Attributable to Redeemable Noncontrolling Interests | — | | | — | | | — | |
Net Income (Loss) Attributable to Noncontrolling Interests | 2,245,531 | | | (2,947,429) | | | 5,192,960 | |
Net Income (Loss) Attributable to KKR & Co. Inc. | 1,669,836 | | | (1,280,524) | | | 2,950,360 | |
| | | | | |
Series A Preferred Stock Dividends | 5,822 | | | 5,822 | | | — | |
Series B Preferred Stock Dividends | 2,519 | | | 2,519 | | | — | |
Series C Mandatory Convertible Preferred Stock Dividends | 17,250 | | | — | | | 17,250 | |
| | | | | |
Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders | $ | 1,644,245 | | | $ | (1,288,865) | | | $ | 2,933,110 | |
Unaudited Consolidated Results of Operations (GAAP Basis) - Asset Management
Revenues
For the three months ended March 31, 2021 and 2020, revenues consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
| | ($ in thousands) |
Management Fees | | $ | 276,181 | | | $ | 222,689 | | | $ | 53,492 | |
Fee Credits | | (35,398) | | | (35,387) | | | (11) | |
Transaction Fees | | 165,893 | | | 98,996 | | | 66,897 | |
Monitoring Fees | | 35,388 | | | 31,149 | | | 4,239 | |
Incentive Fees | | 3,438 | | | 668 | | | 2,770 | |
Expense Reimbursements | | 27,729 | | | 28,224 | | | (495) | |
Oil and Gas Revenue | | — | | | 13,315 | | | (13,315) | |
Consulting Fees | | 20,080 | | | 20,918 | | | (838) | |
Total Fees and Other | | 493,311 | | | 380,572 | | | 112,739 | |
| | | | | | |
Carried Interest | | 2,140,426 | | | (1,210,925) | | | 3,351,351 | |
General Partner Capital Interest | | 544,221 | | | (171,152) | | | 715,373 | |
Total Capital Allocation-Based Income (Loss) | | 2,684,647 | | | (1,382,077) | | | 4,066,724 | |
| | | | | | |
Total Revenues - Asset Management | | $ | 3,177,958 | | | $ | (1,001,505) | | | $ | 4,179,463 | |
Fees and Other
Total Fees and Other for the three months ended March 31, 2021 increased compared to the three months ended March 31, 2020 primarily as a result of the increase in transaction fees and management fees.
For a more detailed discussion of the factors that affected our transaction fees during the period, see "—Analysis of Asset Management Segment Operating Earnings."
The increase in management fees was primarily due to management fees earned from Asian Fund IV, which entered its investment period after the first quarter of 2020, and Asia Pacific Infrastructure Investors due to additional capital raised for these funds. These increases were partially offset by a decrease in management fees earned from Asian Fund III as it entered its post investment period in the third quarter of 2020.
Fee credits owed to consolidated investment funds are eliminated upon consolidation under GAAP. Transaction fees earned from KKR portfolio companies are not eliminated upon consolidation because those fees are earned from companies which are not consolidated. Furthermore, transaction fees earned in our Capital Markets business line are not shared with fund investors. Accordingly, certain transaction fees are reflected in revenues without a corresponding fee credit.
Capital Allocation-Based Income (Loss)
Capital Allocation-Based Income (Loss) for the three months ended March 31, 2021 was positive primarily due to the net appreciation of the underlying investments at our carry earning investment funds most notably Americas Fund XII, North America Fund XI and 2006 Fund. Capital Allocation-Based Income (Loss) for the three months ended March 31, 2020 was negative due to the net depreciation of the underlying investments at our carry earning investment funds most notably 2006 Fund, North America Fund XI and Asia Fund II primarily due to the market dislocation from COVID-19.
KKR generally calculates the carried interest that would be due to KKR for each investment fund, pursuant to the fund agreements, as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to
make adjustments to amounts recorded as carried interest to reflect either (a) positive performance resulting in an increase in the carried interest allocated to the general partner or (b) negative performance that would cause the amount due to KKR to be less than the amount previously recognized, resulting in a negative adjustment to carried interest allocated to the general partner. In each case, it is necessary to calculate the carried interest on cumulative results compared to the carried interest recorded to date and to make the required positive or negative adjustments. Additionally, unrealized carried interest and general partner capital interest reverse upon a realization, and unrealized carried interest and general partner capital interest can be negative if the amount of realized carried interest exceeds total unrealized carried interest generated in the period.
Investment Income (Loss) - Asset Management
Net Gains (Losses) from Investment Activities
The following is a summary of net gains (losses) from investment activities:
| | | | | | | | | | | |
| Three Months Ended |
| March 31, 2021 | | March 31, 2020 |
| ($ in thousands) |
Private Equity | $ | 1,550,665 | | | $ | (1,282,404) | |
Credit | 29,407 | | | (946,304) | |
Investments of Consolidated CFEs | 125,515 | | | (2,153,393) | |
Real Assets | 274,147 | | | (797,652) | |
Equity Method - Other | 401,701 | | | (440,618) | |
Other Investments | 206,181 | | | (679,172) | |
Debt Obligations and Other | (1,397) | | | 1,903,986 | |
Other Net Gains (Losses) from Investment Activities | 109,981 | | | 451,053 | |
Net Gains (Losses) from Investment Activities | $ | 2,696,200 | | | $ | (3,944,504) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net Gains (Losses) from Investment Activities for the three months ended March 31, 2021
The net gains from investment activities for the three months ended March 31, 2021 were comprised of net realized gains of $584.4 million and net unrealized gains of $2,111.8 million.
Investment gains and losses relating to our general partner capital interest in our unconsolidated funds are not reflected in our discussion and analysis of Net Gains (Losses) from Investment Activities. Our economics associated with these gains and losses are reflected in Capital Allocation-Based Income (Loss) as described above. For a discussion and analysis of the primary investment gains or losses relating to individual investments in our unconsolidated funds, see "—Analysis of Asset Management Segment Operating Results."
Realized Gains and Losses from Investment Activities
For the three months ended March 31, 2021, net realized gains related primarily to the (i) sale of our investment in FanDuel Inc. (technology sector), (ii) partial sale of our investment in BridgeBio Pharma, Inc. (NASDAQ: BBIO), and (iii) sale of our investment in American Equity Investment Life Holding Company (NYSE: AEL). Partially offsetting these realized gains were realized losses primarily relating to certain investments held in our consolidated special situations funds.
Unrealized Gains and Losses from Investment Activities
For the three months ended March 31, 2021, net unrealized gains were driven primarily by (i) mark-to-market gains from private equity, growth equity and core investments held by KKR and certain consolidated funds, the most significant of which were OutSystems Holdings S.A (technology sector), PetVet Care Centers, LLC (healthcare sector), and USI, Inc. (financial services sector) and (ii) mark-to-market gains for certain investments held in our consolidated energy funds, special situations funds and CLOs. These unrealized gains were partially offset by (i) mark-to-market losses from our investment in BridgeBio Pharma, Inc. and (ii) the reversal of previously recognized unrealized gains relating to the realization activity described above.
For a discussion of other factors that affected KKR's realized investment income, see "—Analysis of Asset Management Segment Operating Results."
Net Gains (Losses) from Investment Activities for the three months ended March 31, 2020
The net losses from investment activities for the three months ended March 31, 2020 were comprised of net realized gains of $63.4 million and net unrealized losses of $(4,007.9) million.
Realized Gains and Losses from Investment Activities
For the three months ended March 31, 2020, net realized gains related primarily to realized gains on (i) the sale of real estate investments held through certain consolidated entities and (ii) the settlement of foreign currency derivatives in our consolidated credit funds, partially offset by realized losses primarily on (i) realization on assets held through our consolidated credit funds and (ii) realization of certain investments held through consolidated CLOs.
Unrealized Gains and Losses from Investment Activities
For the three months ended March 31, 2020, net unrealized losses were driven primarily by (i) mark-to-market losses in our private equity investments held by KKR and certain consolidated entities, the most significant of which was Fiserv, Inc. (NASDAQ: FISV) and (ii) mark-to-market losses in our credit investments held through certain consolidated entities. Partially offsetting the unrealized losses above were unrealized gains relating to (i) mark-to-market gains in portfolio companies in our healthcare strategies, the most significant of which was Blue Sprig Pediatrics Inc. (health care sector), (ii) mark-to-market gains in a portfolio company in our core investment strategy, Exact Group B.V. (technology sector), and (iii) mark-to-market gains on some real estate investments held through certain consolidated entities.
For a discussion of other factors that affected KKR's realized investment income, see "—Analysis of Asset Management Segment Operating Results."
Dividend Income
During the three months ended March 31, 2021, the most significant dividends received included $26.6 million from our consolidated real estate funds and a dividend of $17.7 million from our investment in US Foods Holding Corp. (NYSE: USFD) held by a consolidated fund. During the three months ended March 31, 2020, the most significant dividends received included $80.9 million from our consolidated real estate funds and $62.5 million from our investment in Fiserv, Inc.
Significant dividends from portfolio companies and consolidated funds are generally not recurring quarterly dividends, and while they may occur in the future, their size and frequency are variable. For a discussion of other factors that affected KKR's dividend income, see "—Analysis of Asset Management Segment Operating Results."
Interest Income
The increase in interest income during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to (i) interest income earned on investments held in our Dislocation Opportunities Fund that is consolidated and closed subsequent to March 31, 2020 and (ii) an increase in interest income from certain of our consolidated direct lending funds, primarily related to an increase in the amount of capital deployed. Partially offsetting these increases was a lower level of interest income earned from loans held by KKR Real Estate Finance Trust Inc. ("KREF"), a NYSE-listed real estate investment trust (NYSE: KREF), due to an overall decrease in interest rates compared to three months ended March 31, 2020. For a discussion of other factors that affected KKR's interest income, see "—Analysis of Asset Management Segment Operating Results."
Interest Expense
The decrease in interest expense during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to a lower level of interest expense on debt obligations of KREF as a result of a decrease in interest rates subsequent to March 31, 2020. The decrease was partially offset by the impact of multiple issuances of our senior notes subsequent to March 31, 2020. For a discussion of other factors that affected KKR's interest expense, see "—Analysis of Non-GAAP Performance Measures."
Expenses - Asset Management
Compensation and Benefits Expenses
The increase in compensation and benefits expenses during the three months ended March 31, 2021 compared to the prior period was primarily due to (i) accrued carried interest compensation in the current period as compared to the reversal of previously recognized accrued carried interest compensation in the prior period resulting from a depreciation in the value of our investment portfolio in the prior period and (ii) a higher level of discretionary compensation and benefits resulting from a higher level of revenues.
General, Administrative and Other
The increase in general, administrative and other expenses during the three months ended March 31, 2021 compared to the prior period was primarily due to (i) issuance expenses at consolidated CLOs, which closed in the current period and (ii) a higher level of broken-deal expenses. The level of broken-deal expenses can vary significantly period to period based upon a number of factors, the most significant of which are the number of potential investments being pursued for our investment funds, the size and complexity of investments being pursued and the number of investment funds currently in their investment period.
Consolidated Results of Operations (GAAP Basis) - Insurance (Unaudited)
As discussed above, our Insurance segment consists solely of the operations of Global Atlantic, which was acquired on February 1, 2021. Accordingly, prior periods have been excluded for Insurance segment results. The results of Global Atlantic's insurance operations included in our condensed consolidated results of operations are from February 1, 2021 (closing date of the acquisition) through March 31, 2021.
Revenues
For the three months ended March 31, 2021, revenues consisted of the following:
| | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2021 | | | | |
| | ($ in thousands) |
Premiums | | $ | 1,176,142 | | | | | |
Policy Fees | | 201,683 | | | | | |
Net Investment Income | | 444,781 | | | | | |
Net Investment (Losses) Gains | | (455,702) | | | | | |
Other Income | | 18,144 | | | | | |
Total Insurance Revenues | | $ | 1,385,048 | | | | | |
Premiums
Premiums were primarily driven by initial premiums related to new reinsurance transactions with life contingencies assumed during the three months ending March 31, 2021, which were offset by a comparable increase in policy reserves reported within policy benefits and claims (as discussed below).
Policy fees
Policy fees were primarily driven by cost of insurance, administrative, and rider fees in the individual market channel.
Net investment (losses) gains
Net investment income was primarily driven by insurance segment investments and the effective book yield (as determined, in part, by the allocated fair value of the investment portfolio as determined as of February 1, 2021, the closing date of the Global Atlantic acquisition). Average insurance segment investments were primarily driven by inflows of assets from the individual markets and institutional channels. The impact of higher asset balances were offset by lower income primarily due to the negative impact of higher than usual average cash and cash equivalent balances as a result of new reinsurance transactions closing during the two month period ending March 31, 2021 pending reinvestment.
Net investment losses
The components of net investment losses were as follows:
| | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2021 | | | | |
| | ($ in thousands) |
Embedded derivatives on funds withheld at interest | | $ | 369,113 | | | | | |
Equity index options | | 104,021 | | | | | |
Other | | 9,938 | | | | | |
Foreign currency forwards | | 1,810 | | | | | |
Interest rate contracts | | (266,731) | | | | | |
Equity future contracts | | (69,583) | | | | | |
Credit risk contracts | | (36) | | | | | |
Net gains on derivative instruments | | 148,532 | | | | | |
Net other investment losses | | (604,234) | | | | | |
Net investment losses | | $ | (455,702) | | | | | |
Net gains on derivative instruments
The increase in the fair value of embedded derivatives on funds withheld at interest were primarily driven by the decrease in fair value of the underlying investments in the funds withheld portfolio.
The increase in the fair value of equity index options were primarily driven by the performance of the indexes upon which call options are based. Global Atlantic purchases equity index options to hedge the market risk of embedded derivatives in indexed universal life and fixed-indexed annuity products (the change for which is accounted for in policy benefits and claims.) The majority of Global Atlantic's equity index call options are based on the S&P 500 index, which increased during the three months ended March 31, 2021.
The decrease in the fair value of interest rate and equity future contracts were driven primarily by the performance of equity and interest markets. Global Atlantic purchases equity futures primarily to hedge the market risk in our variable annuity products which are accounted for in policy benefits and claims. The majority Global Atlantic's equity futures are based on the S&P 500 Index, which increased during the three months ended March 31, 2021, resulting in a loss on equity futures contracts. Market interest rates increased during the three months ended March 31, 2021, resulting in a loss on interest rate contracts.
Net other investment losses
Net other investment losses were primarily due to (i) net unrealized losses on trading fixed maturity securities underlying a portion of the funds withheld payable at interest portfolio due to an increase in market interest rates, (ii) the recognition of an initial credit loan loss allowance as a result of the adoption of the current expected credit loss accounting standard concurrent with the acquisition of Global Atlantic, and (iii) realized losses from the sale of securities during the two month period ended March 31, 2021. Offsetting these losses were realized gains on embedded derivatives associated with the funds withheld receivable at interest portfolio.
Other income
Other income is mainly driven by administration, management fees and distribution fees, modestly increasing during the three months ended March 31, 2021 due in part to higher administration fees earned from an increase in the volume of reinsured assets assumed in the institutional channel.
Expenses
Policy benefits and claims
Policy benefits and claims was primarily driven by (i) initial reserves related to new reinsurance transactions, (ii) an increase in the value of embedded derivatives in our indexed universal life and fixed indexed annuity products, as a result of higher equity market returns (as discussed above under "–Net investment losses–Gains on derivatives," Global Atlantic purchases equity index options in order to hedge this risk, the fair value changes of which are accounted for in gains on derivative instruments, and generally offsetting the change in embedded derivative fair value reported in policy benefits and claims,) and (iii) an increase in individual retirement channel sales. Offsetting these increases was a decrease in variable annuity reserves primarily due to higher equity market returns and higher market interest rates.
Amortization of policy acquisition costs
Amortization of policy acquisition costs was primarily driven by the amortization of insurance intangibles recognized as part of purchase accounting of the Global Atlantic acquisition. Amortization is negative (that is, a reduction to expense) as a result of the net negative value-of-business-acquired insurance intangible recognized as part of the aforementioned purchase accounting.
Interest expense
Interest expense for the two month period ended March 31, 2021 was lower primarily due to the amortization of the fair value adjustment to debt recognized as part of the purchase accounting for the Global Atlantic acquisition.
Insurance expenses
Insurance expense was primarily driven by (i) commission expense related to sales, and (ii) reinsurance ceding expense allowances paid for policy administration services.
General, administrative and other
General, administrative and other expenses were driven primarily by (i) employee compensation and benefits related expenses, (ii) third-party administrator ("TPA") policy servicing fees, and (iii) technology hardware and software related charges.
Other Unaudited Consolidated Results of Operations (GAAP Basis)
Income Tax Expense (Benefit)
For the three months ended March 31, 2021, income tax expense was $438.7 million compared to an income tax benefit of $360.7 million in the prior period. Our effective tax rate under GAAP for the three months ended March 31, 2021 was 10.1%. For a discussion of factors that impacted KKR's tax provision, see Note 17 "Income Taxes" to the financial statements included elsewhere in this report.
Net Income (Loss) Attributable to Noncontrolling Interests
Net Income (Loss) attributable to noncontrolling interests for the three months ended March 31, 2021 relates primarily to net income (loss) attributable to (i) interests of KKR Holdings and other exchangeable securities representing ownership interests in KKR Group Partnership, (ii) third-party limited partner interests in consolidated investment funds and (iii) interests that GA Co-Investors and GA Rollover Investors hold in Global Atlantic. Net income (loss) attributable to noncontrolling interests for the three months ended March 31, 2021 increased compared to the prior period primarily due to mark-to-market net gains from investment activities during the three months ended March 31, 2021, as described above, as compared to overall losses in the prior period.
Net Income (Loss) Attributable to KKR & Co. Inc.
Net income (loss) attributable to KKR & Co. Inc. for the three months ended March 31, 2021 increased compared to the prior period due primarily to (i) net gains from investment activities and (ii) capital allocation-based income during the three months ended March 31, 2021. These increases were partially offset by accrued carried interest compensation and income tax expense as described above.
Condensed Consolidated Statements of Financial Condition (GAAP Basis) (Unaudited)
The following table provides the Unaudited Condensed Consolidated Statements of Financial Condition on a GAAP basis as of March 31, 2021 and December 31, 2020.
| | | | | | | | | | | | | | |
(Amounts in thousands, except per share amounts) |
| | As of | | As of |
| | March 31, 2021 | | December 31, 2020 |
| | | | |
Assets | | | | |
Asset Management | | | | |
Cash and Cash Equivalents | | $ | 5,031,724 | | | $ | 6,507,874 | |
Investments | | 76,156,229 | | | 69,274,715 | |
Other Assets | | 3,907,076 | | | 4,023,913 | |
| | 85,095,029 | | | 79,806,502 | |
Insurance | | | | |
Cash and Cash Equivalents | | 5,467,012 | | | — | |
Investments | | 98,271,046 | | | — | |
Other Assets | | 27,612,027 | | | — | |
| | 131,350,085 | | | — | |
Total Assets | | $ | 216,445,114 | | $ | 79,806,502 |
| | | | |
Liabilities and Equity | | | | |
Asset Management | | | | |
Debt Obligations | | $ | 34,669,430 | | | $ | 33,423,596 | |
Other Liabilities | | 7,615,588 | | | 5,582,990 | |
| | 42,285,018 | | | 39,006,586 | |
Insurance | | | | |
Debt Obligations | | 1,400,338 | | | — | |
Other Liabilities | | 126,457,128 | | | — | |
| | 127,857,466 | | | — | |
Total Liabilities | | $ | 170,142,484 | | | $ | 39,006,586 | |
| | | | |
Redeemable Noncontrolling Interests | | 91,845 | | | — | |
| | | | |
Stockholders' Equity | | | | |
KKR & Co. Inc. Stockholders' Equity - Series A and B Preferred Stock | | 482,554 | | | 482,554 | |
KKR & Co. Inc. Stockholders' Equity - Series C Mandatory Convertible Preferred Stock | | 1,115,792 | | | 1,115,792 | |
KKR & Co. Inc. Stockholders' Equity - Series I and II Preferred Stock, Common Stock | | 13,077,710 | | | 12,118,472 | |
Noncontrolling Interests | | 31,534,729 | | | 27,083,098 | |
Total Equity | | 46,210,785 | | | 40,799,916 | |
Total Liabilities and Equity | | $ | 216,445,114 | | | $ | 79,806,502 | |
| | | | |
KKR & Co. Inc. Stockholders' Equity - Common Stock Per Outstanding Share of Common Stock | | $ | 22.62 | | | $ | 21.15 | |
| | | | |
KKR & Co. Inc. Stockholders’ Equity - Common Stock per Outstanding Share of Common Stock was $22.62 as of March 31, 2021, up from $21.15 as of December 31, 2020. The increase was primarily due to the net income attributable to KKR & Co. Inc. common stockholders during the first three months of 2021, partially offset by (i) unrealized losses on available-sale-securities from Global Atlantic that are recorded in other comprehensive income and (ii) dividends to common stockholders.
Consolidated Statements of Cash Flows (GAAP Basis)
The accompanying consolidated statements of cash flows include the cash flows of our consolidated entities which include certain consolidated investment funds, CLOs and certain variable interest entities formed by Global Atlantic notwithstanding the fact that we may hold only a minority economic interest in those investment funds and CFEs.
The assets of our consolidated investment funds and CFEs, on a gross basis, can be substantially larger than the assets of our business and, accordingly, could have a substantial effect on the cash flows reflected in our consolidated statements of cash flows. The primary cash flow activities of our consolidated funds and CFEs involve: (i) capital contributions from fund investors; (ii) using the capital of fund investors to make investments; (iii) financing certain investments with indebtedness; (iv) generating cash flows through the realization of investments; and (v) distributing cash flows from the realization of investments to fund investors. Because our consolidated funds are treated as investment companies for accounting purposes, certain of these cash flow amounts are included in our cash flows from operations.
Net Cash Provided (Used) by Operating Activities
Our net cash provided (used) by operating activities was $(0.1) billion and $(1.4) billion during the three months ended March 31, 2021 and 2020, respectively. These amounts primarily included: (i) investments purchased (asset management), net of proceeds from investments of $(1.3) billion and $(1.3) billion during the three months ended March 31, 2021 and 2020, respectively, (ii) net realized gains (losses) on asset management investments of $584.4 million and $63.4 million during the three months ended March 31, 2021 and 2020, respectively, (iii) change in unrealized gains (losses) on investments of $2.1 billion and $(4.0) billion during the three months ended March 31, 2021 and 2020, respectively, (iv) capital allocation-based income (loss) of $2.7 billion and $(1.4) billion during the three months ended March 31, 2021 and 2020, respectively and (v) net realized gains (losses) on insurance operations of $(441.6) million during the three months ended March 31, 2021. Investment funds are, for GAAP purposes, investment companies and reflect their investments and other financial instruments at fair value.
Net Cash Provided (Used) by Investing Activities
Our net cash provided (used) by investing activities was $(376.0) million and $(45.4) million during the three months ended March 31, 2021 and 2020, respectively. Our investing activities included: (i) investments purchased (insurance), net of proceeds from investments of $(44.5) million during the three months ended March 31, 2021, (ii) acquisitions, net of cash acquired of $(415.6) million during the three months ended March 31, 2021, (iii) the purchase of fixed assets of $(27.7) million and $(41.4) million during the three months ended March 31, 2021 and 2020, respectively and (iv) development of oil and natural gas properties of $(4.1) million for the three months ended March 31, 2020.
Net Cash Provided (Used) by Financing Activities
Our net cash provided (used) by financing activities was $4.5 billion and $1.5 billion during the three months ended March 31, 2021 and 2020, respectively. Our financing activities primarily included: (i) contributions by, net of distributions to, our noncontrolling interests of $2.1 billion and $0.6 billion during the three months ended March 31, 2021 and 2020, respectively, (ii) proceeds received net of repayment of debt obligations of $1.6 billion and $1.2 billion during the three months ended March 31, 2021 and 2020, respectively, (iii) additions to, net of withdrawals from contractholder deposit funds of $958.3 million during the three months ended March 31, 2021, (iv) common stock dividends of $(77.8) million and $(69.7) million during the three months ended March 31, 2021 and 2020, respectively; (v) net delivery of common stock of $(55.9) million during the three months ended March 31, 2021; (vi) repurchases of common stock of $(71.4) million and $(246.2) million during the three months ended March 31, 2021 and 2020, respectively; (vii) Series A and B Preferred Stock dividends of $(8.3) million during each of the three months ended March 31, 2021 and 2020; (viii) Series C Mandatory Convertible Preferred Stock dividends of $(17.3) million during the three months ended March 31, 2021 and (ix) private placement share issuance of $38.5 million during the three months ended March 31, 2021.
Analysis of Segment Operating Results
The following is a discussion of the results of our business on a Segment basis for the three months ended March 31, 2021 and 2020. You should read this discussion in conjunction with the information included under "—Key Non-GAAP Performance Measures and Other Operating Measures" and the financial statements and related notes included elsewhere in this report. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
In connection with our acquisition of Global Atlantic on February 1, 2021, management reevaluated the manner in which we manage and assess the performance of our business and allocate resources. As a result, beginning with the three months ended March 31, 2021, we have introduced a new Insurance segment and report segment results for two operating and reportable segments: Asset Management and Insurance. See Note 20 “Segment Reporting” to our financial statements included elsewhere in this report.
Analysis of Asset Management Segment Operating Results
The following tables set forth information regarding KKR's Asset Management segment operating results and certain key operating metrics as of and for the three months ended March 31, 2021 and 2020:
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| | Three Months Ended | |
| | March 31, 2021 | | March 31, 2020 | | Change | |
| | ($ in thousands) | |
Management Fees | | $ | 439,740 | | | $ | 336,074 | | | $ | 103,666 | | |
Transaction and Monitoring Fees, Net | | 135,677 | | | 79,428 | | | 56,249 | | |
Fee Related Performance Revenues | | 10,296 | | | 9,156 | | | 1,140 | | |
Fee Related Compensation | | (131,785) | | | (83,345) | | | (48,440) | | |
Other Operating Expenses | | (90,161) | | | (83,531) | | | (6,630) | | |
Fee Related Earnings | | 363,767 | | | 257,782 | | | 105,985 | | |
Realized Performance Income | | 171,309 | | | 363,132 | | | (191,823) | | |
Realized Performance Income Compensation | | (109,986) | | | (225,278) | | | 115,292 | | |
Realized Investment Income | | 461,273 | | | 145,164 | | | 316,109 | | |
Realized Investment Income Compensation | | (69,191) | | | (17,604) | | | (51,587) | | |
Asset Management Segment Operating Earnings | | $ | 817,172 | | | $ | 523,196 | | | $ | 293,976 | | |
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Management Fees
The following table presents management fees by business line for the three months ended March 31, 2021 and 2020:
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
| | ($ in thousands) |
Management Fees | | | | | | |
Private Markets | | $ | 286,967 | | | $ | 221,075 | | | $ | 65,892 | |
Public Markets | | 152,773 | | | 114,999 | | | 37,774 | |
Total Management Fees | | $ | 439,740 | | | $ | 336,074 | | | $ | 103,666 | |
The increase in Private Markets management fees was primarily due to management fees earned from Asian Fund IV, which entered its investment period after the first quarter of 2020, and Asia Pacific Infrastructure Investors and Asia Real Estate Partners due to additional capital raised. These increases were partially offset by a decrease in management fees earned from Asian Fund III as it entered its post-investment period in the third quarter of 2020 and now earn fees based on capital invested rather than capital committed and at a lower fee rate.
The increase in Public Markets management fees was primarily attributable to (i) management fees earned from the Insurance Segment during the period February 1, 2021 through March 31, 2021, (ii) the issuance of new CLOs subsequent to March 31, 2020 and (iii) greater overall FPAUM at our direct lending and dislocation opportunities strategies.
Transaction and Monitoring Fees, Net
The following table presents transaction and monitoring fees, net by business line for the three months ended March 31, 2021 and 2020:
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
| | ($ in thousands) |
Transaction and Monitoring Fees, Net | | | | | | |
Private Markets | | $ | 22,462 | | | $ | 18,016 | | | $ | 4,446 | |
Public Markets | | 1,030 | | | 1,229 | | | (199) | |
Capital Markets | | 112,185 | | | 60,183 | | | 52,002 | |
Total Transaction and Monitoring Fees, Net | | $ | 135,677 | | | $ | 79,428 | | | $ | 56,249 | |
Our Capital Markets business line only earns transaction fees that are not shared with fund investors. The increase in transaction fees was primarily due to an increase in the number and average size of capital markets transactions for the three months ended March 31, 2021, compared to the three months ended March 31, 2020. Overall, we completed 57 capital markets transactions for the three months ended March 31, 2021, of which 11 represented equity offerings and 46 represented debt offerings, as compared to 43 transactions for the three months ended March 31, 2020, of which 3 represented equity offerings and 40 represented debt offerings. We earned fees in connection with underwriting, syndication and other capital markets services. While each of the capital markets transactions that we undertake in this business line is separately negotiated, our fee rates are generally higher with respect to underwriting or syndicating equity offerings than with respect to debt offerings, and the amount of fees that we earn for similar transactions generally correlates with overall transaction sizes.
Our capital markets fees are generated in connection with our Private Markets and Public Markets business lines as well as from third-party companies. For the three months ended March 31, 2021, approximately 26% of our transaction fees in our Capital Markets business line were earned from unaffiliated third parties as compared to approximately 49% for the three months ended March 31, 2020. Our transaction fees are comprised of fees earned from North America, Europe, and the Asia-Pacific region. For the three months ended March 31, 2021, approximately 32% of our transaction fees were generated outside of North America as compared to approximately 29% for the three months ended March 31, 2020. Our Capital Markets business line is dependent on the overall capital markets environment, which is influenced by equity prices, credit spreads, and volatility. Our Capital Markets business line does not generate monitoring fees.
Our Private Markets and Public Markets business lines earn transaction and monitoring fees from portfolio companies, and under the terms of the management agreements with certain of our investment funds, we are required to share all or a portion of such with such fund's investors.
The increase in Private Markets transaction and monitoring fees, net was primarily attributable to an increase in net transaction fees. During the three months ended March 31, 2021, there were 19 transaction fee-generating investments that paid an average fee of $2.0 million compared to 11 transaction fee-generating investments that paid an average fee of $1.5 million during the three months ended March 31, 2020. For the three months ended March 31, 2021, approximately 41% of these transaction fees were paid by companies in North America, 36% were paid from companies in the Asia-Pacific region, and 23% of these transaction fees were paid from companies in Europe. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular agreements as to the amount of the fees, the complexity of the transaction, and KKR's role in the transaction. Additionally, transaction fees are generally not earned with respect to energy and real estate investments.
Public Markets transaction and monitoring fees, net remained relatively flat for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Fee Related Performance Revenues
The following table presents fee related performance revenues by business line for the three months ended March 31, 2021 and 2020:
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
| | ($ in thousands) |
Fee Related Performance Revenues | | | | | | |
Private Markets | | $ | 1,552 | | | $ | 1,137 | | | $ | 415 | |
Public Markets | | 8,744 | | | 8,019 | | | 725 | |
Total Fee Related Performance Revenues | | $ | 10,296 | | | $ | 9,156 | | | $ | 1,140 | |
Fee related performance revenues earned in our Private Markets and Public Markets business lines represent realized incentive fees which are measured and received on a recurring basis. These incentive fees are primarily earned from our BDCs and our investment in KREF. The increase was primarily due to a higher level of investment income at these incentive fee earning investment vehicles during the three months ended March 31, 2021 as compared to the prior period.
Fee Related Compensation
The increase in fee related compensation for the three months ended March 31, 2021 compared to the prior period is primarily due to a higher level of compensation recorded in connection with the higher level of revenues included within fee related earnings.
Other Operating Expenses
The increase in other operating expenses for the three months ended March 31, 2021 compared to the prior period is primarily due to a higher level of professional fees and other administrative costs in connection with the overall growth of the firm. These increases were partially offset by a decrease in travel related expenses as a result of the COVID-19 pandemic.
Fee Related Earnings
The increase in fee related earnings for the three months ended March 31, 2021 compared to the prior period is primarily due to a higher level of management fees and transaction fees, partially offset by a higher level of fee related compensation, as described above.
Realized Performance Income
The following table presents realized performance income by business line for the three months ended March 31, 2021 and 2020:
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
| | ($ in thousands) |
Realized Performance Income | | | | | | |
Private Markets | | $ | 166,418 | | | $ | 325,691 | | | $ | (159,273) | |
Public Markets | | 4,891 | | | 37,441 | | | (32,550) | |
Total Realized Performance Income | | $ | 171,309 | | | $ | 363,132 | | | $ | (191,823) | |
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
| | ($ in thousands) |
Private Markets | | | | | | |
Core Investment Vehicles | | $ | 80,937 | | | $ | 57,484 | | | $ | 23,453 | |
North America Fund XI | | 44,881 | | | 122,395 | | | (77,514) | |
2006 Fund | | 19,960 | | | 53,693 | | | (33,733) | |
Co-Investment Vehicles and Other | | 15,533 | | | — | | | 15,533 | |
Real Estate Partners Europe | | 3,478 | | | — | | | 3,478 | |
European Fund III | | 353 | | | — | | | 353 | |
Asian Fund III | | — | | | 46,347 | | | (46,347) | |
Asian Fund II | | — | | | 20,485 | | | (20,485) | |
Global Infrastructure Investors II | | — | | | 20,310 | | | (20,310) | |
Real Estate Partners Americas | | — | | | 4,977 | | | (4,977) | |
Total Realized Carried Interest (1) | | 165,142 | | | 325,691 | | | (160,549) | |
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Incentive Fees | | 1,276 | | | — | | | 1,276 | |
Total Realized Performance Income | | $ | 166,418 | | | $ | 325,691 | | | $ | (159,273) | |
(1)The above table excludes any funds for which there was no realized carried interest during both of the periods presented.
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
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Public Markets | | | | | | |
Mezzanine Partners | | $ | — | | | $ | 9,900 | | | $ | (9,900) | |
Other Alternative Credit Vehicles | | — | | | 25,740 | | | (25,740) | |
Total Realized Carried Interest (1) | | — | | | 35,640 | | | (35,640) | |
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Incentive Fees | | 4,891 | | | 1,801 | | | 3,090 | |
Total Realized Performance Income | | $ | 4,891 | | | $ | 37,441 | | | $ | (32,550) | |
(1)The above table excludes any funds for which there was no realized carried interest during both of the periods presented.
Realized performance income includes (i) realized carried interest from our carry earning funds and (ii) incentive fees not included in Fee Related Performance Revenues.
Realized carried interest in our Private Markets business line for the three months ended March 31, 2021 consisted primarily of (i) realized performance income from our core investment vehicles, (ii) dividends received from our investment in Internet Brands, Inc. (technology sector) and (iii) realized gains from the partial sale of our investments in BridgeBio Pharma, Inc. and Academy Sports & Outdoors Inc. (NASDAQ: ASO).
Realized carried interest in our Private Markets business line for the three months ended March 31, 2020 consisted primarily of realized gains from the final strategic sales of Privilege Underwriters, Inc. (financial services sector) and KCF Technologies Ltd. (industrial sector), realized performance income from our core investment vehicles, and dividends received from our investment in Fiserv, Inc.
During the three months ended March 31, 2021, there was no realized carried interest earned in our Public Markets business line. Realized carried interest was recognized at certain of our alternative credit strategy funds during the three months ended March 31, 2020.
Realized Performance Income Compensation
The decrease in realized performance income compensation for the three months ended March 31, 2021 compared to the prior period is primarily due to a lower level of compensation recorded in connection with the lower level of realized performance income.
Realized Investment Income
The following table presents realized investment income in our Principal Activities business line for the three months ended March 31, 2021 and 2020:
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
| | ($ in thousands) |
Realized Investment Income | | | | | | |
Net Realized Gains (Losses) | | $ | 373,120 | | | $ | 6,670 | | | $ | 366,450 | |
Interest Income and Dividends | | 88,153 | | | 138,494 | | | (50,341) | |
Total Realized Investment Income | | $ | 461,273 | | | $ | 145,164 | | | $ | 316,109 | |
The increase in realized investment income is due to a higher level of net realized gains, partially offset by a decrease in interest income and dividends. The amount of realized investment income depends on the transaction activity of our funds and balance sheet, which can vary from period to period.
For the three months ended March 31, 2021, net realized gains were comprised of realized gains primarily from the partial sales of our Private Markets investments in FanDuel and BridgeBio Pharma Inc. Partially offsetting these realized gains were realized losses, the most significant of which was a realized loss on the sale of an investment in our special situations funds.
For the three months ended March 31, 2020, net realized gains were comprised of realized gains primarily from the sale of our Private Markets investments including the final sales of KCF Technologies, Inc. and Privilege Underwriters, Inc. Partially offsetting these realized gains were realized losses, the most significant of which was a realized loss on the sale of our investment in General Healthcare Group (healthcare sector).
For the three months ended March 31, 2021, interest income and dividends were comprised primarily of (i) $44.5 million of dividend income primarily from our Private Markets investments in Internet Brands, Inc. and US Foods Holding Corp. as well as distributions received from our real estate investments including our investment in KREF and (ii) $43.7 million of interest income primarily from our Public Markets investments in CLOs.
For the three months ended March 31, 2020, interest income and dividends were comprised primarily of (i) $62.5 million of dividend income from our investment in Fiserv, Inc. and $38.9 million of dividend income from distributions received primarily through our real estate investments including our investment in KREF and (ii) $37.1 million of interest income which consists primarily of interest that is received from our Public Markets investments including CLOs and other credit investments and to a lesser extent our cash balances and investments held at our India debt finance company. See "—Analysis of Non-GAAP Performance Measures—Non-GAAP Balance Sheet Measures."
We expect realized performance income and realized investment income to be greater than $700 million in the second quarter of 2021 relating to realized carried interest and realized investment income from completed, or signed and expected to be completed sales, partial sales or secondary sales subsequent to March 31, 2021 with respect to certain private equity portfolio companies and other investments. Some of these transactions are not complete, and are subject to the satisfaction of closing conditions, including but not limited to regulatory approvals; there can be no assurance if or when any of these transactions will be completed.
Following the acquisition of KKR Capstone on January 1, 2020, after-tax distributable earnings includes the net income (loss) from KKR Capstone within realized investment income (loss). This treatment is consistent with periods prior to the acquisition of KKR Capstone, when KKR excluded KKR Capstone from KKR's non-GAAP financial measures even though KKR Capstone was consolidated KKR's financial statements prepared in accordance with GAAP. For the quarter ended March 31, 2021, total fees attributable to KKR Capstone were $20.1 million and total expenses attributable to KKR Capstone were
$18.9 million. For KKR Capstone-related adjustments in reconciling Asset Management segment revenues to GAAP revenues see "—Analysis of Non-GAAP Performance Measures—Reconciliations to GAAP Measures".
Realized Investment Income Compensation
The increase in realized investment income compensation for the three months ended March 31, 2021 compared to the prior period is primarily due to a higher level of compensation recorded in connection with the higher level of realized investment income.
Other Operating and Performance Measures
The following table presents certain key operating and performance metrics as of March 31, 2021 and December 31, 2020:
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| | As of |
| | March 31, 2021 | | December 31, 2020 | | Change |
| | ($ in thousands) |
Assets Under Management | | $ | 367,453,400 | | | $ | 251,679,200 | | | $ | 115,774,200 | |
Fee Paying Assets Under Management | | $ | 288,440,500 | | | $ | 186,217,000 | | | $ | 102,223,500 | |
Uncalled Commitments | | $ | 68,988,300 | | | $ | 66,960,000 | | | $ | 2,028,300 | |
The following table presents one of our key performance metrics for the three months ended March 31, 2021 and 2020:
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| | Three Months Ended |
| | March 31, 2021 | | March 31, 2020 | | Change |
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Capital Invested | | $ | 6,891,600 | | | $ | 5,076,100 | | | $ | 1,815,500 | |
Assets Under Management
Private Markets
The following table reflects the changes in our Private Markets AUM from December 31, 2020 to March 31, 2021:
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| ($ in thousands) |
December 31, 2020 | $ | 148,689,300 | |
New Capital Raised | 7,090,400 | |
Impact of Global Atlantic | 12,012,400 | |
Distributions and Other | (2,344,500) | |
Change in Value | 12,283,500 | |
March 31, 2021 | $ | 177,731,100 | |
AUM for the Private Markets business line was $177.7 billion at March 31, 2021, an increase of $29.0 billion, compared to $148.7 billion at December 31, 2020.
The increase was primarily attributable to (i) assets we now manage under our investment management agreements with Global Atlantic's insurance companies, (ii) capital raised from our first special purpose acquisition company (SPAC), KKR Acquisition Holdings I, which had an initial public offering, (iii) new capital raised in our Health Care Strategic Growth Fund II, Diversified Core Infrastructure Investors, Real Estate Partners Americas III, and Asian Fund IV, and (iv) an increase in value of our Private Markets portfolio. These increases were partially offset by distributions to fund investors, primarily as a result of realizations, most notably in Americas Fund XII, Asian Fund II, North America Fund XI and 2006 Fund.
The increase in the value of our Private Markets portfolio was driven primarily by net gains of $5.9 billion in Americas Fund XII, $1.3 billion in Asian Fund III, $$0.9 billion in North America Fund XI, $0.7 billion in our core investment strategy, and $0.6 billion in Next Generation Technology Growth Fund.
For the three months ended March 31, 2021, the value of our private equity investment portfolio increased 19%. This was comprised of a 21% increase in value of our privately held investments and a 10% increase in share prices of various publicly held or publicly indexed investments. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
The most significant increase in value of our privately held investments related to AppLovin Corporation (technology sector), OneStream Software, LLC (technology sector), and OutSystems Holdings S.A. These increases in value were partially offset by decreases in value relating primarily to Colonial Enterprises, Inc. (infrastructure), Goodpack Limited (packaging sector), and Channel Control Merchants (retail sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance and (ii) an increase in the value of market comparables and (iii) transactional activity in the quarter related to new rounds of funding. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) an unfavorable business outlook and (ii) a decrease in the value of market comparables, both influenced from the impact of COVID-19 on the economic outlook and overall market environment.
The most significant increases in share prices of various publicly held or publicly indexed investments were increases in Max Healthcare Institute Limited (NSE: MAXHEALTH), Fiserv, Inc. and Academy Sports & Outdoor Inc. These increases were partially offset by decreases in share prices of various publicly held investments, the most significant of which were decreases in BridgeBio Pharma, Inc. and Laureate Education, Inc. (NASDAQ: LAUR).
For the three months ended March 31, 2020, the value of our private equity investment portfolio decreased 12%. This was comprised of an 8% decrease in value of our privately held investments and a 24% decrease in share prices of various publicly held or publicly indexed investments. Additionally, our infrastructure investment portfolio, which is comprised predominately of privately held investments, increased 6%.
The most significant decreases in value of our privately held investments related to Magneti Marelli S.p.A. (industrial sector), Envision Healthcare Corporation (healthcare sector) and Travelopia (services sector). These decreases in value on our privately held investments were partially offset by increases in value relating primarily to Deutsche Glasfaser (telecom sector), AppLovin Corporation and AlphaTheta Corporation (technology sector). The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) an unfavorable business outlook and (ii) a decrease in the value of market comparables, both influenced from the impact of COVID-19 on the economic outlook and overall market environment. The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to individual company performance, and with respect to Deutsche Glasfaser and AlphaTheta Corporation, increases in valuation reflecting agreements to exit these investments.
The most significant decreases in share prices of various publicly held or publicly indexed investments were decreases in Fiserv, Inc., Ingersoll Rand Inc. (NYSE: IR), and Laureate Education, Inc.
Certain investments included in our AUM are denominated in currencies other than the U.S. dollar. Those investments expose our AUM to the risk that the value of the investments will be affected by changes in exchange rates between the currency in which the investments are denominated and the currency in which the investments are made. We generally seek to reduce these risks by employing hedging transactions in connection with certain investments, including using foreign currency options and foreign exchange forward contracts to reduce exposure to changes in exchange rates when a meaningful amount of capital has been invested in currencies other than the currencies in which the investments are denominated. We do not, however, hedge our currency exposure in all currencies or for all investments. See "Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk" and "Risk Factors—Risks Related to the Assets We Manage—We make investments in companies that are based outside of the United States, which may expose us to additional risks not typically associated with investing in companies that are based in the United States" in our Annual Report.
Public Markets
The following table reflects the changes in our Public Markets AUM from December 31, 2020 to March 31, 2021:
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| ($ in thousands) |
December 31, 2020 | $ | 102,989,900 | |
New Capital Raised | 7,474,200 | |
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Impact of Global Atlantic | 85,490,800 | |
Distributions and Other | (2,601,000) | |
Redemptions | (3,728,700) | |
Change in Value | 97,100 | |
March 31, 2021 | $ | 189,722,300 | |
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AUM in our Public Markets business line totaled $189.7 billion at March 31, 2021, an increase of $86.7 billion compared to $103.0 billion at December 31, 2020.
The increase was primarily attributable to (i) assets we now manage under our investment management agreements with Global Atlantic's insurance companies and (ii) new capital raised across multiple strategies, most notably $1.6 billion in CLOs, and $1.0 billion in our hedge fund partnerships. Partially offsetting these increases were redemptions, primarily in our hedge fund partnerships and certain leveraged credit strategies and distributions to our fund investors. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
Fee Paying Assets Under Management
Private Markets
The following table reflects the changes in our Private Markets FPAUM from December 31, 2020 to March 31, 2021:
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| ($ in thousands) |
December 31, 2020 | $ | 94,195,900 | |
New Capital Raised | 4,293,400 | |
Impact of Global Atlantic | 12,012,400 | |
Distributions and Other | (1,121,100) | |
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Change in Value | (347,500) | |
March 31, 2021 | $ | 109,033,100 | |
FPAUM in our Private Markets business line was $109.0 billion at March 31, 2021, an increase of $14.8 billion, compared to $94.2 billion at December 31, 2020.
The increase was primarily attributable to (i) assets we now manage under our investment management agreements with Global Atlantic and (ii) new capital raised of $1.0 billion in Real Estate Partners Americas III, $0.9 billion in Asian Fund IV, and $0.3 billion in Diversified Core Infrastructure Investors. These increases were partially offset by distributions to our fund investors from realizations in our real assets funds, 2006 Fund, and Asian Fund II.
Uncalled capital commitments from Private Markets investment funds from which KKR is currently not earning management fees amounted to approximately $13.5 billion at March 31, 2021, which includes capital commitments reserved for follow-on investments for funds that have completed their investment periods. This capital will generally begin to earn management fees upon deployment of the capital or upon the commencement of the fund's investment period. The average annual management fee rate associated with this capital is approximately 1.2%. We will not begin earning fees on this capital until it is deployed or the related investment period commences, neither of which is guaranteed to occur. If and when such management fees are earned, which will occur over an extended period of time, a portion of existing FPAUM may cease paying fees or pay lower fees, thus offsetting a portion of any new management fees earned.
Public Markets
The following table reflects the changes in our Public Markets FPAUM from December 31, 2020 to March 31, 2021:
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| ($ in thousands) |
December 31, 2020 | $ | 92,021,100 | |
New Capital Raised | 7,649,200 | |
| |
| |
Impact of Global Atlantic | 85,490,800 | |
Distributions and Other | (3,071,700) | |
Redemptions | (2,131,300) | |
Change in Value | (550,700) | |
March 31, 2021 | $ | 179,407,400 | |
| |
| |
| |
FPAUM in our Public Markets business line was $179.4 billion at March 31, 2021, an increase of $87.4 billion, compared to $92.0 billion at December 31, 2020.
The increase was primarily attributable to (i) assets we now manage under our investment management agreements with Global Atlantic's insurance companies and (ii) new capital raised across multiple strategies, most notably $1.6 billion in CLOs, and $1.0 billion in both our hedge fund partnerships and alternative credit strategies. Partially offsetting these increases were distributions to fund investors and redemptions primarily in our hedge fund partnerships and certain leveraged credit strategies. See "—Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
Uncalled capital commitments from Public Markets investment funds from which KKR is currently not earning management fees amounted to approximately $6.8 billion at March 31, 2021. This capital will generally begin to earn management fees upon deployment of the capital or upon the commencement of the fund's investment period. The average annual management fee rate associated with this capital is approximately 0.8%. We will not begin earning fees on this capital until it is deployed or the related investment period commences, neither of which is guaranteed to occur. If and when such management fees are earned, which will occur over an extended period of time, a portion of existing FPAUM may cease paying fees or pay lower fees, thus offsetting a portion of any new management fees earned.
Uncalled Commitments
Private Markets
As of September 30, 2020,March 31, 2021, our Private Markets business line had $56.2$58.9 billion of remaining uncalled capital commitments that could be called for investments in new transactions as compared to $46.8$56.6 billion as of December 31, 2019.2020. The increase was primarily attributable to new capital raised, which was partially offset by capital called from fund investors to make investments during the period. See "—Analysis of Non-GAAP Operating Results—Other Operating and Performance Measures—Assets Under Management—Private Markets" for a detailed discussion on new capital raised for the six months ended September 30, 2020.
Public Markets
As of September 30, 2020,March 31, 2021, our Public Markets business line had $10.9$10.1 billion of remaining uncalled capital commitments that could be called for investments in new transactions, as compared to $10.1$10.3 billion as of December 31, 2019.2020. The increasedecrease was primarily attributable to new capital raised in various alternative credit strategies, which was partially offset by capital called from fund investors to make investments during the period.period, which was partially offset by new capital raised in various alternative credit strategies.
Capital Invested and Syndicated Capital
Private Markets Capital Invested
For the ninethree months ended September 30, 2020,March 31, 2021, Private Markets had $13.2$4.0 billion of capital invested as compared to $9.6$1.4 billion for the ninethree months ended September 30, 2019.March 31, 2020. The increase was driven primarily by a $2.7$1.5 billion increase in capital invested in our real assets strategies and a $1.1 billion increase in capital invested in our private equity strategies (including core, growth equity, and impact investments) and a $0.9 billion increase in capital invested in our real assets strategies.. Generally, the portfolio companies acquired through our private equity funds have higher transaction values and result in higher capital invested relative to transactions in our real assets funds. The number of large private equity investments made in any quarterly or year-to-date periodquarter is volatile and consequently, a significant amount of capital invested in one periodquarter or a few periodsquarters may not be indicative of a similar level of capital deployment in future periods.quarters. During the nine three
months ended September 30, 2020, 36%March 31, 2021, 72% of capital deployed in private equity, which includes core, growth equity, and impact investments, was in transactions in Europe, 32% was in North America and 32%28% was in the Asia-Pacific region.
Public Markets Capital Invested
For the ninethree months ended September 30, 2020,March 31, 2021, Public Markets had $6.5$2.9 billion of capital invested as compared to $6.0$3.6 billion for the ninethree months ended September 30, 2019.March 31, 2020. The increasedecrease was primarily due to a lower level of capital deployed in our direct lending strategies, partially offset by a higher level of capital deployed in our dislocation opportunities strategy, partially offset by a lower level of capital deployed in our private opportunistic credit strategies. During the ninethree months ended September 30, 2020, 60%March 31, 2021, 86% of capital deployed was in transactions in North America 39%and 14% of capital deployed was in Europe,Europe.
Analysis of Insurance Segment Operating Results
The following tables set forth information regarding KKR's insurance segment operating results and 1% wascertain key operating metrics as of and for the three months ended March 31, 2021:
| | | | | | | | | | | | | |
| |
| | | | | | | |
| | Three Months Ended | |
| | March 31, 2021 | | | | | |
($ in thousands) | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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Net Investment Income | | $ | 445,898 | | | | | | |
Net Cost of Insurance | | (250,219) | | | | | | |
General, Administrative and Other | | (75,489) | | | | | | |
Pre-tax Insurance Operating Earnings | | 120,190 | | | | | | |
Income Taxes | | (16,626) | | | | | | |
Net Income Attributable to Noncontrolling Interest | | (40,299) | | | | | | |
Insurance Segment Operating Earnings | | $ | 63,265 | | | | | | |
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Insurance segment operating earnings
Insurance segment operating earnings is driven by net investment income, general and administrative expenses, taxes and adjusted net cost of insurance.
Certain fees paid to Global Atlantic by reinsurance investment vehicles are reported in the Asia-Pacific region.Asset Management segment.
Capital Markets Syndicated CapitalNet investment income
Net investment income was primarily driven by insurance segment investments and the effective book yield (as determined, in part, by the allocated fair value of the investment portfolio as of the closing date of the GA Acquisition). Average insurance segment investments are driven by inflows of assets from the individual markets and institutional channels. The impact of higher asset balances was impacted by lower income primarily due (i) to the negative impact of higher than usual average cash and cash equivalent balances as a result of new reinsurance transactions closing during the three month period ending March 31, 2021 pending reinvestment, and (ii) net investment expenses.
Net cost of insurance
Net cost of insurance was driven primarily by stable liability performance across in-force and new business offset by favorable adjustments to reserves and policy acquisition costs resulting from higher reserves and insurance intangibles established as part of the purchase accounting for the Global Atlantic acquisition.
General, administrative and other expenses
General and administrative expenses are driven by (i) employee compensation and benefits related expenses, (ii) policy servicing fees, and (iii) technology-related charges.
Income taxes
Insurance segment income tax expense reflects the annual estimated effective tax rate for the insurance segment on an operating basis.
Net Income attributable to non-controlling interests
Income attributable to non-controlling interests represent the portion of the insurance segment adjusted operating earnings held by rollover and co-investors in Global Atlantic.
Analysis of Non-GAAP Performance Measures
The following is a discussion of our Non-GAAP performance measures for the three months ended March 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Three Months Ended | |
| | March 31, 2021 | | March 31, 2020 | | Change | |
| | ($ in thousands) | |
Asset Management Segment Operating Earnings | | $ | 817,172 | | | $ | 523,196 | | | $ | 293,976 | | |
Insurance Segment Operating Earnings | | 63,265 | | | — | | | 63,265 | | |
Distributable Operating Earnings | | 880,437 | | | 523,196 | | | 357,241 | | |
| | | | | | | |
Interest Expense | | (57,545) | | | (47,434) | | | (10,111) | | |
Preferred Dividends | | (8,341) | | | (8,341) | | | — | | |
Net Income Attributable to Noncontrolling Interests | | (3,192) | | | (1,089) | | | (2,103) | | |
Income Taxes Paid | | (151,120) | | | (60,035) | | | (91,085) | | |
After-tax Distributable Earnings | | $ | 660,239 | | | $ | 406,297 | | | $ | 253,942 | | |
| | | | | | | |
Distributable Operating Earnings
The increase in distributable operating earnings for the three months ended March 31, 2021 compared to the prior period is primarily due to a higher level of Asset Management segment operating earnings and the addition of our Insurance segment operating earnings, in connection with the Global Atlantic acquisition. For a discussion of the Asset Management and Insurance segment operating earnings, see "—Analysis of Asset Management Segment Operating Results and Analysis of Insurance Segment Operating Results."
Interest Expense
For the ninethree months ended September 30,March 31, 2021 and 2020, Capital Markets syndicated $2.4 billion of capital asinterest expense relates primarily to the senior notes outstanding for KKR and KFN.
The increase in interest expense for the three months ended March 31, 2021 compared to $2.6 billionthe prior period is due primarily to new senior note issuances including: (i) $250 million aggregate principal amount of $3.750% Senior Notes due 2029 and (iii) $750 million aggregate principal amount of 3.500% Senior Notes due 2050 subsequent to March 31, 2020.
Income Taxes Paid
The increase in income taxes paid for the ninethree months ended September 30, 2019. The decreaseMarch 31, 2021 compared to the prior period was primarily due to a decreasehigher level of total distributable operating earnings.
After-tax Distributable Earnings
The increase in after-tax distributable earnings for the number of syndication transactions in the ninethree months ended September 30, 2020 asMarch 31, 2021 compared to the nineprior period was due primarily to a higher level of distributable operating earnings, partially offset by an increase in income taxes paid and interest expense.
The amount of the tax benefit from equity-based compensation included in income taxes paid for three months ended September 30, 2019. Overall, we completed 12 syndication transactions forMarch 31, 2021 and 2020 was $43.0 million and $11.9 million, respectively, and its inclusion in After-tax Distributable Earnings had the nine months ended September 30, 2020 as compared to 19 syndications for the nine months ended September 30, 2019. The sizeeffect of increasing this measure by 7% and frequency of syndication transactions depend in large part on market conditions and other factors that are unpredictable and outside our control, which may negatively impact the fees generated by our capital markets business from syndication transactions.
3%, respectively.
Non-GAAP Balance Sheet MeasuresBook Value
The following tables present information with respect toof our book assets, book liabilities, andcalculation of book value as of September 30, 2020March 31, 2021 and December 31, 2019:2020:
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| | | | | | | | |
BOOK ASSETS |
| | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
| | ($ in thousands) |
Book Assets | | | | |
Cash and Short-term Investments | | $ | 4,994,772 |
| | $ | 2,783,905 |
|
Investments | | 14,042,391 |
| | 13,026,387 |
|
Net Unrealized Carried Interest (1) | | 1,884,642 |
| | 1,982,251 |
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Tax Assets | | 139,605 |
| | 111,719 |
|
Other Assets (2) | | 4,187,603 |
| | 3,716,189 |
|
Total Book Assets | | $ | 25,249,013 |
| | $ | 21,620,451 |
|
| | | | |
BOOK LIABILITIES |
| | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
| | ($ in thousands) |
Book Liabilities | | | | |
Debt Obligations - KKR (ex-KFN) | | $ | 4,642,479 |
| | $ | 3,097,460 |
|
Debt Obligations - KFN | | 948,517 |
| | 948,517 |
|
Tax Liabilities | | 254,211 |
| | 169,997 |
|
Other Liabilities | | 1,083,694 |
| | 514,236 |
|
Total Book Liabilities | | $ | 6,928,901 |
| | $ | 4,730,210 |
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BOOK VALUE |
| | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
| | ($ in thousands) |
Book Value | | | | |
(+) Total Book Assets | | $ | 25,249,013 |
| | $ | 21,620,451 |
|
(-) Total Book Liabilities | | 6,928,901 |
| | 4,730,210 |
|
(-) Noncontrolling Interests | | 31,089 |
| | 26,291 |
|
(-) Series A and B Preferred Stock | | 500,000 |
| | 500,000 |
|
Book Value | | $ | 17,789,023 |
| | $ | 16,363,950 |
|
| | | | |
Book Value Per Adjusted Share | | $ | 20.26 |
| | $ | 19.24 |
|
Adjusted Shares (3) | | 877,876,658 |
| | 850,388,924 |
|
| |
(1) | The following table provides net unrealized carried interest by business line: |
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| | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
Private Markets Business Line | | $ | 1,865,042 |
| | $ | 1,832,581 |
|
Public Markets Business Line | | 19,600 |
| | 149,670 |
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Total | | $ | 1,884,642 |
| | $ | 1,982,251 |
|
| |
(2) | Other Assets include KKR's ownership interest in FS/KKR Advisor and minority ownership interests in hedge fund partnerships. |
| |
(3) | Includes shares of KKR & Co. Inc. common stock assuming conversion of all shares of Series C Mandatory Convertible Preferred Stock as of September 30, 2020. |
Book Value Per Adjusted Share | | | | | | | | | | | | | | | | | |
| | | | | |
| | | As of |
| | | March 31, 2021 | | December 31, 2020 |
| | | ($ in thousands) |
| | | | | |
(+) | Cash and Short-term Investments | | $ | 3,580,861 | | | $ | 5,961,083 | |
(+) | Investments | | 16,362,795 | | | 14,991,914 | |
(+) | Net Unrealized Carried Interest (1) | | 3,837,926 | | | 2,625,935 | |
| | | | | |
(+) | Other Assets (2) | | 4,465,953 | | | 4,198,641 | |
(+) | Global Atlantic Book Value | | 2,923,655 | | | — | |
| | | | | |
(-) | Debt Obligations - KKR (excluding KFN and Global Atlantic) | | 5,128,472 | | | 4,688,460 | |
(-) | Debt Obligations - KFN | | 948,517 | | | 948,517 | |
(-) | Tax Liabilities, Net | | 942,108 | | | 485,966 | |
(-) | Other Liabilities | | 894,221 | | | 857,764 | |
(-) | Noncontrolling Interests | | 31,086 | | | 29,510 | |
(-) | Series A & B Preferred Stock | | 500,000 | | | 500,000 | |
| | | | | |
| Book Value | | $ | 22,726,786 | | | $ | 20,267,356 | |
| | | | | |
| Book Value Per Adjusted Share | | $ | 25.84 | | | $ | 23.09 | |
| Adjusted Shares | | 879,681,840 | | | 877,613,164 | |
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(1)The following table provides net unrealized carried interest by business line:
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| | As of |
| | March 31, 2021 | | December 31, 2020 |
| | ($ in thousands) |
Private Markets Business Line | | $ | 3,750,800 | | | $ | 2,560,101 | |
Public Markets Business Line | | 87,126 | | | 65,834 | |
Total | | $ | 3,837,926 | | | $ | 2,625,935 | |
(2)Other Assets include KKR's ownership interest in FS/KKR Advisor and minority ownership interests in hedge fund partnerships.
Book value per adjusted share increased 5.3%12% from December 31, 2019. 2020. The increase was primarily attributable to (i) the net appreciation in the value of our investment portfolio, including investments held by KKR as well as investments held
through investment funds, such asincluding KKR's private equity, real assets and alternative credit funds, where KKR is entitled to earn carried interest and (ii) after-tax distributable earnings during the period. Partially offsetting this increase is the payment of dividends and the repurchases of our common stock during the period. For
With respect to book value relating to the nineasset management business, for the three months ended September 30, 2020,March 31, 2021, the value of KKR'sthe Asset Management segment balance sheet portfolio on a non-GAAP basis, increased 3.5%12% and KKR's overall private equity portfolio increased 7.3%19%. The increases in KKR's Asset Management segment balance sheet portfolio and net unrealized carried interest was primarily due to mark-to-market net gains in our portfolio companies.its investments. For a further discussion, see "—Unaudited Consolidated Results of Operations—Operations (GAAP Basis) - Asset Management—Unrealized Gains and Losses from Investment Activities" and "—Analysis of Non-GAAP Operating Results—Distributable Revenues—Principal Activities." For a discussion of the changes in KKR's private equity portfolio, see "—Analysis of Non-GAAPAsset Management Segment Operating Results—Other Operating and Performance Measures—AUM.Assets Under Management." For a discussion of factors that impacted KKR's after-tax distributable earnings, see "—Analysis of Non-GAAP Operating Results"Performance Measures— After-tax Distributable Earnings" and for more details on the potential adverse effects of COVID-19 onfactors that impact our business, financial performance, operating results and valuations, see "—Business Environment."
The following table presents the holdings of our investments in Asset Management by asset class as of September 30, 2020.March 31, 2021 on a segment basis. To the extent investments in our book assets are realized at values below their cost in future periods, after-tax distributable earnings would be adversely affected by the amount of such loss, if any, during the period in which the realization event occurs. For example, we have recognized certain net unrealized losses in our credit investment portfolio held at our India debt finance company.company, of which we own 50.3% of its equity. As of September 30, 2020,March 31, 2021, KKR’s 51%50.3% interest in our India debt finance company had a cost basis of approximately $195$168 million, comprised of invested capital of $100 million plus reinvested earnings. If the value of our 51% investment is ultimately realized at the current carrying value of $91$65 million, future realized investment losses of approximately $104$103 million would be recognized on a segment basis based on valuations as of September 30, 2020,March 31, 2021, which would reduce after-tax distributable earnings in future periods. | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2021 |
| | ($ in thousands) |
Investments (1) | | Cost | | Fair Value | | Fair Value as a Percentage of Total Investments |
| | | | | | |
Private Equity | | $ | 2,822,232 | | | $ | 5,536,501 | | | 33.8 | % |
Core | | 1,986,358 | | | 3,514,699 | | | 21.5 | % |
Growth | | 459,422 | | | 1,787,788 | | | 10.9 | % |
Private Equity, Core & Growth Total | | 5,268,012 | | | 10,838,988 | | | 66.2 | % |
| | | | | | |
Energy | | 767,084 | | | 751,299 | | | 4.6 | % |
Real Estate | | 1,262,708 | | | 1,390,387 | | | 8.5 | % |
Infrastructure | | 594,218 | | | 691,625 | | | 4.2 | % |
Real Assets Total | | 2,624,010 | | | 2,833,311 | | | 17.3 | % |
| | | | | | |
Leveraged Credit | | 1,004,264 | | | 972,600 | | | 5.9 | % |
Alternative Credit | | 855,548 | | | 825,265 | | | 5.0 | % |
Credit Total | | 1,859,812 | | | 1,797,865 | | | 11.0 | % |
| | | | | | |
Other | | 1,058,154 | | | 892,631 | | | 5.5 | % |
| | | | | | |
Total Investments | | $ | 10,809,988 | | | $ | 16,362,795 | | | 100.0 | % |
| | | | | | |
| | March 31, 2021 |
| | ($ in thousands) |
Significant Investments: (2) | | Cost | | Fair Value | | Fair Value as a Percentage of Total Investments |
Fiserv, Inc. (NASDAQ: FISV) | | $ | 614,098 | | | $ | 1,400,334 | | | 8.6 | % |
USI, Inc. | | 531,425 | | | 987,753 | | | 6.0 | % |
BridgeBio Pharma, Inc. (NASDAQ: BBIO) | | 63,821 | | | 759,640 | | | 4.6 | % |
PetVet Care Centers, LLC | | 243,188 | | | 632,289 | | | 3.9 | % |
Heartland Dental, LLC | | 320,626 | | | 577,126 | | | 3.5 | % |
Total Significant Investments | | 1,773,158 | | | 4,357,142 | | | 26.6 | % |
| | | | | | |
Other Investments | | 9,036,830 | | | 12,005,653 | | | 73.4 | % |
Total Investments | | $ | 10,809,988 | | | $ | 16,362,795 | | | 100.0 | % |
| | | | | | |
(1)Investments is a term used solely for purposes of financial presentation of a portion of KKR's balance sheet and includes majority ownership of subsidiaries that operate KKR's businesses, including the general partner interests of KKR's investment funds and Global Atlantic's insurance companies.
(2)Significant Investments include the top five investments based on their fair values as of March 31, 2021. Significant Investments exclude (i) investments expected to be syndicated, (ii) investments expected to be transferred in connection with a new fundraising, and (iii) investments in funds and other entities that are owned by one or more third parties and established for the purpose of making investments. Accordingly, this list of Significant Investments should not be relied upon as a substitute for information about the asset class exposure of KKR's balance sheet. For information about the asset class exposure of KKR's balance sheet see "—Our Business—Principal Activities" for the "Holdings by Asset Class" pie chart. The fair value figures include the co-investment and the limited partner and/or general partner interests held by KKR in the underlying investment, if applicable.
|
| | | | | | | | | | | |
| | As of September 30, 2020 |
Investments (1) | | Cost | | Fair Value | | Fair Value as a Percentage of Total Investments |
| | | | | | |
Private Equity Funds / SMAs | | $ | 4,005,067 |
| | $ | 5,939,123 |
| | 42.3 | % |
Private Equity Co-Investments and Other Equity | | 2,581,486 |
| | 4,024,203 |
| | 28.7 | % |
Private Equity Total | | 6,586,553 |
| | 9,963,326 |
| | 71.0 | % |
| | | | | | |
Energy | | 773,375 |
| | 687,477 |
| | 4.9 | % |
Real Estate | | 1,120,881 |
| | 1,149,910 |
| | 8.2 | % |
Infrastructure | | 502,725 |
| | 566,391 |
| | 4.0 | % |
Real Assets Total | | 2,396,981 |
| | 2,403,778 |
| | 17.1 | % |
| | | | | | |
Alternative Credit | | 786,397 |
| | 559,823 |
| | 4.0 | % |
CLOs | | 869,604 |
| | 695,471 |
| | 5.0 | % |
Other Credit | | 158,199 |
| | 155,423 |
| | 1.1 | % |
Credit Total | | 1,814,200 |
| | 1,410,717 |
| | 10.1 | % |
| | | | | | |
Other | | 759,528 |
| | 264,570 |
| | 1.8 | % |
| | | | | | |
Total Investments | | $ | 11,557,262 |
| | $ | 14,042,391 |
| | 100.0 | % |
| | | | | | |
| | September 30, 2020 |
Significant Investments: (2) | | Cost | | Fair Value | | Fair Value as a Percentage of Total Investments |
Fiserv, Inc. (NASDAQ: FISV) | | $ | 758,982 |
| | $ | 1,468,909 |
| | 10.5 | % |
USI, Inc. | | 531,425 |
| | 884,610 |
| | 6.3 | % |
BridgeBio Pharma, Inc. (NASDAQ: BBIO) | | 70,919 |
| | 514,082 |
| | 3.7 | % |
PetVet Care Centers, LLC | | 243,188 |
| | 486,376 |
| | 3.5 | % |
Heartland Dental LLC | | 320,626 |
| | 473,590 |
| | 3.4 | % |
Total Significant Investments | | 1,925,140 |
| | 3,827,567 |
| | 27.4 | % |
| | | | | | |
Other Investments | | 9,632,122 |
| | 10,214,824 |
| | 72.6 | % |
Total Investments | | $ | 11,557,262 |
| | $ | 14,042,391 |
| | 100.0 | % |
| | | | | | |
| |
(1) | Investments is a term used solely for purposes of financial presentation of a portion of KKR's balance sheet and includes majority ownership of subsidiaries that operate KKR's asset management and other businesses, including the general partner interests of KKR's investment funds. |
| |
(2) | Significant Investments include the top five investments based on their fair values as of September 30, 2020. Significant Investments exclude (i) investments expected to be syndicated, (ii) investments expected to be transferred in connection with a new fundraising, and (iii) investments in funds and other entities that are owned by one or more third parties and established for the purpose of making investments. Accordingly, this list of Significant Investments should not be relied upon as a substitute for the table above for information about the asset class exposure of KKR's balance sheet. The fair value figures include the co-investment and the limited partner and/or general partner interests held by KKR in the underlying investment, if applicable. |
With respect to KKR's book value relating to its insurance business, KKR includes Global Atlantic's book value, which consists of KKR's pro rata equity interest in Global Atlantic on a GAAP basis, excluding (i) accumulated other comprehensive income and (ii) accumulated change in fair value of reinsurance embedded derivative balances and related assets, net of deferred acquisition costs and income tax. KKR believes this presentation of Global Atlantic's book value is comparable with the corresponding metric presented by other publicly traded companies in Global Atlantic's industry. As of March 31, 2021, Global Atlantic Book Value was $2.9 billion. For more information about the composition and credit quality of Global Atlantic's investments on a consolidated basis, please see "--Global Atlantic's Investment Portfolio" below.
Global Atlantic's Investment Portfolio
As of March 31, 2021, 98% and 87% of Global Atlantic's available-for-sale ("AFS") fixed maturity securities were considered investment grade under ratings from the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC") and nationally recognized statistical rating organizations ("NRSROs"), respectively. Securities where a rating by an NRSRO was not available are considered investment grade if they have an NAIC designation of “1” or “2”. The three largest asset categories in Global Atlantic's AFS fixed-maturity security portfolio as of March 31, 2021 were Corporate, RMBS and U.S. state, municipal and political subdivisions securities, comprising 35%, 9% and 5% of Global Atlantic's investment portfolio, respectively. Within these categories, 98%, 97% and 100% of Global Atlantic's Corporate, RMBS and U.S. state, municipal and political subdivisions securities, respectively, were investment grade according to NAIC ratings and 98%, 39% and 100% of its Corporate, RMBS and U.S. state, municipal and political subdivisions securities, respectively, were investment grade according to NRSRO ratings as of March 31, 2021. NRSRO and NAIC ratings have different methodologies. Global Atlantic believes the NAIC ratings methodology, which considers the likelihood of recovery of amortized cost as opposed to the recovery of all contractual payments including the principal at par, as the more appropriate way to view the ratings quality of its AFS fixed maturity portfolio since a large portion of its holdings were purchased at a significant discount to par value. The portion of Global Atlantic's AFS fixed maturity portfolio consisting of floating rate assets was 35% as of March 31, 2021.
Within the funds withheld receivable at interest portfolio 95% of the fixed maturity securities were investment grade by NAIC designation as of March 31, 2021.
Trading fixed maturity securities back funds withheld payable at interest where the investment performance is ceded to reinsurers under the terms of the respective reinsurance agreements.
Credit quality of AFS fixed maturity securities
The Securities Valuation Office of the NAIC evaluates the AFS fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called “NAIC designations.” Using an internally developed rating is permitted by the NAIC if no rating is available. These designations are generally similar to the credit quality designations of NRSROs for marketable fixed maturity securities, except for certain structured securities as described below. NAIC designations of “1,” highest quality, and “2,” high quality, include fixed maturity securities generally considered investment grade by NRSROs. NAIC designations “3” through “6” include fixed maturity securities generally considered below investment grade by NRSROs.
An NRSRO rating was assigned based on the following criteria: (i) the equivalent S&P rating where the security is rated by one NRSRO; (ii) the equivalent S&P rating of the lowest NRSRO when the security is rated by two NRSROs; and (i) the equivalent S&P rating of the second lowest NRSRO if the security is rated by three or more NRSROs. If the lowest two NRSROs’ ratings are equal, then such rating will be the assigned rating. NRSROs’ ratings available for the periods presented were S&P, Fitch, Moody’s, DBRS, Inc. and Kroll Bond Rating Agency, Inc. If no rating is available from a rating agency, then an internally developed rating is used.
The portion of the AFS fixed maturity securities portfolio that was considered below investment grade by NAIC designation was 2% as of March 31, 2021. Pursuant to Global Atlantic's investment guidelines, it actively monitors the percentage of its portfolio that is held in investments rated NAIC 3 or lower and must obtain an additional approval from Global Atlantic's management investment committee before making a significant investment in an asset rated NAIC 3 or lower.
As of March 31, 2021, non-rated AFS fixed-maturity securities included $173 million of private placement securities for which Global Atlantic has not sought individual ratings from the NRSROs.
Corporate fixed maturity securities
Global Atlantic maintains a diversified portfolio of corporate fixed maturity securities across industries and issuers. As of March 31, 2021, 56% of the AFS fixed maturity securities portfolio was invested in corporate fixed maturity securities.
As of March 31, 2021, 98% of the total fair value of corporate fixed maturity securities is rated NAIC investment grade, and 98% is rated NRSROs investment grade.
Residential mortgage-backed securities
As of March 31, 2021, 14% of the AFS fixed maturity securities portfolio was invested in RMBS. RMBS are securities constructed from pools of residential mortgages and backed by payments from those pools. Excluding limitations on access to lending and other extraordinary economic conditions, we would expect prepayments of principal on the underlying loans to accelerate with decreases in market interest rates and diminish with increases in market interest rates.
The NAIC designations for RMBS, including prime, sub-prime, alt-A, and adjustable rate mortgages with variable payment options ("Option ARM"), are based upon a comparison of the bond’s amortized cost to the NAIC’s loss expectation for each security. Accordingly, an investment in the same security at a lower cost may result in a higher quality NAIC designation in recognition of the lower likelihood the investment would result in a realized loss. Prime residential mortgage lending includes loans to the most creditworthy borrowers with high quality credit profiles. Alt-A is a classification of mortgage loans where the risk profile of the borrower is between prime and sub-prime. Sub-prime mortgage lending is the origination of residential mortgage loans to borrowers with weak credit profiles.
As of March 31, 2021, 94% of RMBS securities that are below investment grade as rated by the NRSRO, carry an NAIC 1 designation. As of March 31, 2021, Alt-A, Option ARM, Re-Performing and Sub-prime represent 40%, 26%, 12% and 11% of the total RMBS portfolio ($8.5 billion), respectively.
Unrealized gains and losses for AFS fixed maturity securities
Global Atlantic's investments in AFS fixed maturity securities are reported at fair value with changes in fair value recorded in other comprehensive income as unrealized gains or losses, net of taxes and offsets. Certain AFS fixed maturity securities have experienced changes in fair value that Global Atlantic considers to be temporary in nature. Unrealized gains and losses can be created by changes in interest rates or by changes in credit spreads.
As of March 31, 2021, Global Atlantic had gross unrealized losses on below investment grade AFS fixed maturity securities of $33 million based on NRSRO rating and $12 million based on NAIC ratings.
Mortgage and other loan receivables - Credit quality indicators
Mortgage and other loan receivables consist of commercial and residential mortgage loans, and other loan receivables. As of March 31, 2021, 17% of Global Atlantic's total investments consisted of mortgage and other loan receivables. Global Atlantic invests in U.S. mortgage loans, comprised of first lien and mezzanine real estate loans, residential mortgage loans, consumer loans, and other loan receivables.
Global Atlantic's commercial mortgage loans may also be rated based on NAIC designations, with designations “CM1” and “CM2” considered to be investment grade. As of March 31, 2021, 91% of the commercial mortgage loan portfolio was rated investment grade based on NAIC designation. 100% of the commercial mortgage loan portfolio is in current status.
As of March 31, 2021, 92% of the residential mortgage loan portfolio is in current status, and approximately $241.3 million is over 90 days past due (representing 5% of the total residential mortgage portfolio).
The loan-to-value ratio is expressed as a percentage of the current amount of the loan relative to the value of the underlying collateral. Approximately 89% of the commercial mortgage loans has a loan-to-value ratio of 70% or less, and approximately 0.5% has loan-to-value ratio over 90%.
Changing economic conditions affect Global Atlantic’s valuation of commercial mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that Global Atlantic performs for monitored loans and may contribute to the establishment of (or increase or decrease in) a commercial mortgage loan valuation allowance for losses. In addition, Global Atlantic continuously monitors its commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have exposure to specific geographic events, or have deteriorating credit.
The weighted average loan-to-value ratio for residential mortgage loans was 73% as of March 31, 2021.
Global Atlantic's residential mortgage loan portfolio is comprised mainly of re-performing loans that were purchased at a discount after they were modified and returned to performing status, as well as prime jumbo loans and mortgage loans backed by single family rental properties. Global Atlantic has also extended financing to counterparties in the form of repurchase agreements secured by mortgage loans, including performing and non-performing mortgage loans.
Reconciliations to GAAP Measures
The following tables reconcile the most directly comparable financial measures calculated and presented in accordance with GAAP to KKR's non-GAAP financial measures for the three and nine months ended September 30, 2020March 31, 2021 and 2019:2020:
Revenues
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 31, 2021 | | March 31, 2020 |
| | | | | ($ in thousands) |
Total GAAP Revenues | | | | | $ | 4,563,006 | | | $ | (1,001,505) | |
Insurance GAAP Revenues | | | | | (1,385,048) | | | — | |
Impact of Consolidation and Other | | | | | 123,448 | | | 95,029 | |
Capital Allocation-Based Income (GAAP) | | | | | (2,684,647) | | | 1,382,077 | |
Realized Carried Interest | | | | | 165,142 | | | 361,331 | |
Realized Investment Income | | | | | 461,273 | | | 145,164 | |
Insurance Segment Management Fees | | | | | 22,930 | | | — | |
Capstone Fees | | | | | (20,080) | | | (20,918) | |
Expense Reimbursements | | | | | (27,729) | | | (28,224) | |
Total Asset Management Segment Revenues | | | | | $ | 1,218,295 | | | $ | 932,954 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| ($ in thousands) |
Total GAAP Revenues | $ | 1,895,238 |
| | $ | 790,485 |
| | $ | 2,225,727 |
| | $ | 3,157,829 |
|
(+) Management Fees - Consolidated Funds and Other | 121,365 |
| | 108,922 |
| | 362,887 |
| | 348,467 |
|
(-) Fee Credits - Consolidated Funds | 25,955 |
| | 3,838 |
| | 40,422 |
| | 21,469 |
|
(-) Capital Allocation-Based Income (Loss) (GAAP) | 1,331,898 |
| | 374,268 |
| | 888,342 |
| | 1,849,623 |
|
(+) Realized Carried Interest | 217,978 |
| | 296,344 |
| | 924,974 |
| | 838,608 |
|
(+) Realized Investment Income (Loss) | 260,415 |
| | 210,234 |
| | 495,904 |
| | 459,303 |
|
(-) Revenue Earned by Other Consolidated Entities | 6,687 |
| | 29,838 |
| | 21,054 |
| | 90,693 |
|
(-) Capstone Fees | 17,429 |
| | — |
| | 55,542 |
| | — |
|
(-) Expense Reimbursements | 44,553 |
| | 34,356 |
| | 100,779 |
| | 121,157 |
|
Total Distributable Revenues | $ | 1,068,474 |
| | $ | 963,685 |
| | $ | 2,903,353 |
| | $ | 2,721,265 |
|
Expenses
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| ($ in thousands) |
Total GAAP Expenses | $ | 1,093,699 |
| | $ | 619,533 |
| | $ | 1,754,075 |
| | $ | 2,157,111 |
|
(-) Equity-based and Other Compensation - KKR Holdings L.P. | 21,802 |
| | 22,539 |
| | 63,596 |
| | 69,085 |
|
(-) Unrealized Performance Income Compensation | 418,728 |
| | 9,281 |
| | (57,771 | ) | | 379,181 |
|
(-) Amortization of Intangibles | 399 |
| | 383 |
| | 1,158 |
| | 1,301 |
|
(-) Strategic Corporate Transaction-Related Charges (1) | 10,697 |
| | — |
| | 10,697 |
| | — |
|
(-) Reimbursable Expenses | 50,382 |
| | 38,515 |
| | 123,364 |
| | 140,241 |
|
(-) Expenses relating to Other Consolidated Entities | 43,268 |
| | 38,233 |
| | 98,726 |
| | 139,248 |
|
(-) Capstone Expenses | 14,433 |
| | — |
| | 46,278 |
| | — |
|
(+) Other | (16,792 | ) | | (33,672 | ) | | (37,228 | ) | | (59,632 | ) |
Total Distributable Expenses | $ | 517,198 |
| | $ | 476,910 |
| | $ | 1,430,799 |
| | $ | 1,368,423 |
|
| |
(1) | Represents transaction costs related to the acquisition of Global Atlantic. |
Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 31, 2021 | | March 31, 2020 |
| | | | | ($ in thousands) |
Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders (GAAP) | | | | | $ | 1,644,245 | | | $ | (1,288,865) | |
Preferred Stock Dividends | | | | | 25,591 | | | 8,341 | |
Net Income (Loss) Attributable to Noncontrolling Interests | | | | | 2,245,531 | | | (2,947,429) | |
Income Tax Expense (Benefit) | | | | | 438,739 | | | (360,679) | |
Income (Loss) Before Tax (GAAP) | | | | | $ | 4,354,106 | | | $ | (4,588,632) | |
Impact of Consolidation and Other | | | | | (1,378,567) | | | 2,033,009 | |
Equity-based Compensation - KKR Holdings | | | | | 16,434 | | | 20,696 | |
Preferred Stock Dividends | | | | | (8,341) | | | (8,341) | |
Income Taxes Paid | | | | | (151,120) | | | (60,035) | |
Asset Management Adjustments: | | | | | | | |
Unrealized Carried Interest | | | | | (2,109,018) | | | 1,659,940 | |
Net Unrealized Gains (Losses) | | | | | (1,316,644) | | | 1,974,531 | |
Unrealized Performance Income Compensation | | | | | 896,907 | | | (675,874) | |
Strategic Corporate Transaction-Related Charges | | | | | 4,875 | | | — | |
Equity-based Compensation | | | | | 49,761 | | | 49,334 | |
Equity-based Compensation - Performance based | | | | | 14,556 | | | 1,669 | |
Insurance Adjustments: | | | | | | | |
Net Gains (Losses) from Investments and Derivatives | | | | | 289,235 | | | — | |
Strategic Corporate Transaction-Related Charges | | | | | 4,819 | | | — | |
Equity-based and Other Compensation | | | | | 7,411 | | | — | |
Amortization of Acquired Intangibles | | | | | 2,451 | | | — | |
Income Taxes | | | | | (16,626) | | | — | |
After-tax Distributable Earnings | | | | | $ | 660,239 | | | $ | 406,297 | |
Interest Expense | | | | | 57,545 | | | 47,434 | |
Preferred Stock Dividends | | | | | 8,341 | | | 8,341 | |
Net Income Attributable to Noncontrolling Interests | | | | | 3,192 | | | 1,089 | |
Income Taxes Paid | | | | | 151,120 | | | 60,035 | |
Distributable Operating Earnings | | | | | $ | 880,437 | | | $ | 523,196 | |
Insurance Segment Operating Earnings | | | | | (63,265) | | | — | |
Realized Performance Income | | | | | (171,309) | | | (363,132) | |
Realized Performance Income Compensation | | | | | 109,986 | | | 225,278 | |
Realized Investment Income | | | | | (461,273) | | | (145,164) | |
Realized Investment Income Compensation | | | | | 69,191 | | | 17,604 | |
Fee Related Earnings | | | | | $ | 363,767 | | | $ | 257,782 | |
Insurance Segment Operating Earnings | | | | | 63,265 | | | — | |
Realized Performance Income | | | | | 171,309 | | | 363,132 | |
Realized Performance Income Compensation | | | | | (109,986) | | | (225,278) | |
Realized Investment Income | | | | | 461,273 | | | 145,164 | |
Realized Investment Income Compensation | | | | | (69,191) | | | (17,604) | |
Depreciation and Amortization | | | | | 6,164 | | | 4,804 | |
Adjusted EBITDA | | | | | $ | 886,601 | | | $ | 528,000 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 |
| ($ in thousands) |
Net Income (Loss) Attributable to KKR & Co. Inc. Common Stockholders | $ | 1,056,502 |
| | $ | 241,213 |
| | $ | 466,265 |
| | $ | 1,456,584 |
|
(+) Net Income (Loss) Attributable to Noncontrolling Interests held by KKR Holdings L.P. | 691,730 |
| | 175,231 |
| | 301,946 |
| | 1,017,827 |
|
(+) Equity-based and Other Compensation - KKR Holdings L.P. | 21,802 |
| | 22,539 |
| | 63,596 |
| | 68,460 |
|
(+) Amortization of Intangibles and Other, net | 11,211 |
| | 49,659 |
| | 7,454 |
| | 131,192 |
|
(+) Strategic Corporate Transaction-Related Charges (1) | 10,697 |
| | — |
| | 10,697 |
| | — |
|
(+) Non-recurring Items (2) | — |
| | 22,839 |
| | 88,322 |
| | 22,839 |
|
(-) Net Unrealized Carried Interest | 995,376 |
| | 13,695 |
| | (186,537 | ) | | 924,626 |
|
(-) Net Unrealized Gains (Losses) | 1,088,901 |
| | 130,972 |
| | (18,049 | ) | | 1,352,181 |
|
(+) Unrealized Performance Income Compensation | 418,728 |
| | 9,281 |
| | (57,771 | ) | | 379,181 |
|
(+) Income Tax Expense (Benefit) | 359,375 |
| | 53,132 |
| | 204,960 |
| | 386,124 |
|
(-) Income Taxes Paid | 75,413 |
| | 40,429 |
| | 198,763 |
| | 155,237 |
|
After-tax Distributable Earnings | $ | 410,355 |
| | $ | 388,798 |
| | $ | 1,091,292 |
| | $ | 1,030,163 |
|
| |
(1) | Represents transaction costs related to the acquisition of Global Atlantic. |
| |
(2) | Represents an $88.3 million non-recurring impairment charge taken on one of our equity method investments during the nine months ended September 30, 2020 and a $22.8 million non-recurring make-whole premium associated with KKR’s refinancing of its 6.375% Senior Notes due 2020 during the three and nine months ended September 30, 2019. |
The following tables provide reconciliations of certain of KKR's GAAP Consolidated Statements of Financial Condition measures to our non-GAAP balance sheet measures as of September 30, 2020 and December 31, 2019:
|
| | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
| | ($ in thousands) |
Total GAAP Assets | | $ | 70,655,333 |
| | $ | 60,899,319 |
|
(-) Impact of Consolidation of Funds and Other Entities | | 43,250,461 |
| | 37,453,629 |
|
(-) Carry Pool Reclassification | | 1,393,381 |
| | 1,448,879 |
|
(-) Other Reclassifications | | 762,478 |
| | 376,360 |
|
Total Book Assets | | $ | 25,249,013 |
| | $ | 21,620,451 |
|
Liabilities
|
| | | | | | | | |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
| | ($ in thousands) |
Total GAAP Liabilities | | $ | 36,611,703 |
| | $ | 30,396,945 |
|
(-) Impact of Consolidation of Funds and Other Entities | | 27,526,943 |
| | 23,841,496 |
|
(-) Carry Pool Reclassification | | 1,393,381 |
| | 1,448,879 |
|
(-) Other Reclassifications | | 762,478 |
| | 376,360 |
|
Total Book Liabilities | | $ | 6,928,901 |
| | $ | 4,730,210 |
|
KKR & Co. Inc. Stockholders' Equity - Common Stock
| | | | | | | | | | | |
| As of |
| March 31, 2021 | | December 31, 2020 |
| ($ in thousands) |
KKR & Co. Inc. Stockholders' Equity - Series I and II Preferred Stock, Common Stock | $ | 13,077,710 | | | $ | 12,118,472 | |
Series C Mandatory Convertible Preferred Stock | 1,115,792 | | | 1,115,792 | |
Impact of Consolidation and Other | 419,546 | | | 520,710 | |
KKR Holdings and Other Exchangeable Securities | 7,209,833 | | | 6,512,382 | |
Accumulated Other Comprehensive Income (AOCI) and Other (Insurance) | 903,905 | | | — | |
Book Value | $ | 22,726,786 | | | $ | 20,267,356 | |
|
| | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
| ($ in thousands) |
KKR & Co. Inc. Stockholders' Equity - Series I and II Preferred Stock, Common Stock | $ | 10,599,310 |
| | $ | 10,324,936 |
|
(+) Impact of Consolidation of Funds and Other Entities | 398,649 |
| | 327,826 |
|
(-) Other Reclassifications | 17,446 |
| | 17,446 |
|
(+) Noncontrolling Interests Held by KKR Holdings L.P. | 5,692,718 |
| | 5,728,634 |
|
(+) Series C Mandatory Convertible Preferred Stock | 1,115,792 |
| | — |
|
Book Value | $ | 17,789,023 |
| | $ | 16,363,950 |
|
The following table provides reconciliations of KKR's GAAP Shares of Common Stock Outstanding to Adjusted Shares:
| | | | | | | | | | | |
| As of |
| March 31, 2021 | | December 31, 2020 |
GAAP Shares of Common Stock Outstanding | 578,269,039 | | | 572,893,738 | |
Adjustments: | | | |
KKR Holdings Units | 273,367,712 | | | 275,626,493 | |
Other Exchangeable Securities (1) | 1,222,489 | | | — | |
Common Stock - Series C Mandatory Convertible Preferred Stock (2) | 26,822,600 | | | 29,092,933 | |
Adjusted Shares (3) | 879,681,840 | | | 877,613,164 | |
| | | |
| | | |
| | | |
| | | |
Unvested Shares of Common Stock and Other Exchangeable Securities (4) | 26,687,308 | | | 23,892,201 | |
| | | |
|
| | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
GAAP Shares of Common Stock Outstanding | 566,334,746 |
| | 560,007,579 |
|
Adjustments: | | | |
KKR Holdings Units (1) | 278,781,478 |
| | 290,381,345 |
|
Common Stock - Series C Mandatory Convertible Preferred Stock (2) | 32,760,434 |
| | — |
|
Adjusted Shares (3) | 877,876,658 |
| | 850,388,924 |
|
| | | |
Unvested Shares of Common Stock (4) | 15,683,349 |
| | 22,712,604 |
|
(1)Consists of vested restricted holdings units granted under our 2019 Equity Incentive Plan, which are exchangeable for shares of KKR & Co. Inc. common stock. | |
(1) | Common stock that may be issued by KKR & Co. Inc. upon exchange of units in KKR Holdings for shares of common stock. |
| |
(2) | Assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of KKR & Co. Inc. common stock on September 30, 2019. |
| |
(3) | Amounts exclude unvested equity awards granted under our Equity Incentive Plans. |
| |
(4) | Represents equity awards granted under our Equity Incentive Plans. The issuance of common stock of KKR & Co. Inc. pursuant to awards under our Equity Incentive Plans dilutes KKR common stockholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR business. Excludes the award of 2,500,000 restricted stock units granted to each of our Co-Presidents/Co-Chief Operating Officers during 2017 that have not met their market-price based vesting condition as of September 30, 2020. See Note 12 "Equity Based Compensation" to the financial statements included elsewhere in this report. |
(2)Assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of KKR & Co. Inc. common stock on March 31, 2021 and December 31, 2020. (3)Amounts exclude unvested equity awards granted under our Equity Incentive Plans.
(4)Represents equity awards granted under our Equity Incentive Plans. The issuance of common stock of KKR & Co. Inc. pursuant to equity awards under our Equity Incentive Plans dilutes KKR common stockholders and KKR Holdings pro rata in accordance with their respective ownership interests in the KKR business. Excludes market condition awards that did not met their market-price based vesting conditions as of March 31, 2021 and December 31, 2020.
Liquidity
We manage our liquidity and capital requirements by (i) focusing on our cash flows before the consolidation of our funds and CFEs and the effect of changes in short term assets and liabilities, which we anticipate will be settled for cash within one year.year, and (ii) maintaining access to sufficient liquidity through various sources. The overall liquidity framework and cash management approach of our insurance business are also based on building an investment portfolio that is cash flow matched, providing cash inflows from insurance assets that meet our insurance companies' expected cash outflows to pay their liabilities. Our primary cash flow activities typically involve: (i) generating cash flow from operations; (ii) generating income from investment activities, by investing in investments that generate yield (namely interest and dividends), as well as through the sale of investments and other assets; (iii) funding capital commitments that we have made to, and advancing capital to, our funds and CLOs; (iv) developing and funding new investment strategies, investment products, and other growth initiatives, including acquisitions of other investments, assets, and businesses; (v) underwriting and funding commitments in our capital markets business; (vi) distributing cash flow to our stockholders and holders of our Series A Preferred Stock, Series B Preferred Stock and Series C Mandatory Convertible Preferred Stock; and (vii) paying borrowings, interest payments, and repayments under credit agreements, our senior and subordinated notes, and other borrowing arrangements. See "—Liquidity—Liquidity Needs—Dividends."
See "—Business Environment" for more details on the potential adverse effects of COVID-19 onfactors that impact our business, financial performance, operating results and valuations.
Sources of Liquidity
Our primary sources of liquidity consist of amounts received from: (i) our operating activities, including the fees earned from our funds, portfolio companies, and capital markets transactions; (ii) realizations on carried interest from our investment funds; (iii) interest and dividends from investments that generate yield, including our investments in CLOs; (iv) in our insurance business, cash inflows in respect of new premiums, policyholder deposits, reinsurance transactions and funding agreements, including through memberships in Federal Home Loan Banks; (v) realizations on and sales of investments and other assets, including the transfers of investments for fund formations; and (v)(vi) borrowings, including advances under our revolving credit facilities, debt offerings, committed repurchase agreements, uncommitted financing, and other borrowing arrangements. In addition, we may generate cash proceeds from sales of our equity securities.
Many of our investment funds provide carried interest. With respect to our private equity funds, carried interest is distributed to the general partner of a private equity fund with a clawback provision only after all of the following are met: (i) a realization event has occurred (e.g., sale of a portfolio company, dividend, etc.); (ii) the vehicle has achieved positive overall investment returns since its inception, in excess of performance hurdles where applicable, and is accruing carried interest; and (iii) with respect to investments with a fair value below cost, cost has been returned to fund investors in an amount sufficient to reduce remaining cost to the investments' fair value. As of September 30, 2020,March 31, 2021, certain of our funds had met the first and second criteria, as described above, but did not meet the third criteria. In these cases, carried interest accrues on the consolidated statement of operations, but will not be distributed in cash to us as the general partner of an investment fund upon a realization event. For a fund that has a fair value above cost, overall, and is otherwise accruing carried interest, but has one or more investments where fair value is below cost, the shortfall between cost and fair value for such investments is referred to as a "netting hole." When netting holes are present, realized gains on individual investments that would otherwise allow the general partner to receive carried interest distributions are instead used to return invested capital to our funds' limited partners in an amount equal to the netting hole. Once netting holes have been filled with either (a) return of capital equal to the netting hole for those investments where fair value is below cost or (b) increases in the fair value of those investments where fair value is below cost, then realized carried interest will be distributed to the general partner upon a realization event. A fund that is in a position to pay cash carry refers to a fund for which carried interest is expected to be paid to the general partner upon the next material realization event, which includes funds with no netting holes as well as funds with a netting hole that is sufficiently small in size such that the next material realization event would be expected to result in the payment of carried interest. Strategic investor partnerships with fund investors may require netting across the various funds in which they invest, which may reduce the carried interest we otherwise would have earned if such fund investors were to have invested in our funds without the existence of the strategic investor partnership. See "Risk Factors—Risks Related to Our Business—Strategic investor partnerships have longer investment periods and invest in multiple strategies, which may increase the possibility of a 'netting hole,' which will result in less carried interest for us, as well as clawback liabilities" in our Annual Report.
As of September 30, 2020,March 31, 2021, netting holes in excess of $50 million existed at twothree of our private equity funds, which were Americas Fund XII of $538$234 million, and Asian Fund II of $470$131 million and China Growth Fund of $51 million. In accordance with the criteria set forth above, other funds currently have and may in the future develop netting holes, and netting holes for those and other funds may otherwise increase or decrease in the future.
We have access to funding under various credit facilities, other borrowing arrangements and other sources of liquidity that we have entered into with major financial institutions or which we receive from the capital markets. The following describes these sources of liquidity.
Revolving Credit Agreements, Senior Notes, KFN Debt Obligation, KFN Securities and Real Estate Financing
For a discussion of KKR'sour debt obligations, including our debt securities, revolving credit agreements senior notes, KFN debt obligations, KFN securities and corporate real estate financing,loans, see Note 10 "Debt Obligations" to the audited financial statements included in our Annual Report and Note 1016 "Debt Obligations" to the financial statements included elsewhere in this report.
Preferred Stock
For a discussion of KKR's equity, including our preferred stock, see Note 15 "Equity" to the consolidated financial statements included in this report.
Liquidity Needs
Our liquidity needs include funding of the previously announced transaction to acquire Global Atlantic. We expect to finance the acquisition with a combination of cash on hand and proceeds from potential minority co-investors. Depending on the number of existing shareholders of Global Atlantic who elect to roll over their investments and the amount of ownership interests that we syndicate to co-investors, if we are required to use more cash from our balance sheet than we currently anticipate to fund the acquisition, we would have a lower than normal level of liquidity available to satisfy our other near-term liquidity needs and objectives.
In addition, we expect that our primary liquidity needs will consist of cash required to:
•continue to support and grow our business lines, including seeding new strategies, funding our capital commitments made to existing and future funds, co-investments and any net capital requirements of our capital markets companies, pay the costs related to fundraising and launching of new strategies, and otherwise supporting investment vehicles which we sponsor;
warehouse investments in portfolio companies•seed or otherwarehouse investments for the benefit of onenew strategies or more of our funds, vehicles, accounts orincluding CLOs, pending the contribution of committed capital by the investors in such vehicles,funds, and advancing capital to themour funds for operational or other needs;
•pay interest expense;
•service debt obligations, including the payment of obligations upon maturity or redemption, as well as any contingent liabilities that may give rise to future cash payments;payments, including funding requirements to levered investment vehicles;
•fund cash operating expenses and contingencies, including litigation matters;
•pay corporate income taxes and other taxes;
•pay policyholders and amounts in our insurance business related to investment, reinvestment, reinsurance or funding agreement activity;
•pay amounts that may become due under our tax receivable agreement with KKR Holdings;
•pay cash dividends in accordance with our dividend policy for our common stock or the terms of our preferred stock;
•underwrite commitments, advance loan proceeds and fund syndication commitments within our capital markets business;business, and fund any net capital or regulatory requirements of our capital markets companies;
•post or return collateral in respect of derivative contracts;
•support and acquire other assets for our Principal Activities business line, including other businesses, investments and assets, some of which may be required to satisfy regulatory requirements for our capital markets business or risk retention requirements for CLOs (to the extent it continues to apply); and
•repurchase KKR's common stock or retire equity awards pursuant to the share repurchase program or other securities issued by KKR.
For a discussion of KKR's share repurchase program, see "Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds—Proceeds — Share Repurchases in the ThirdFirst Quarter of 2020.2021."
On February 1, 2021 we funded the $4.7 billion required to acquire Global Atlantic with $2.9 billion of cash from our own balance sheet, with the balance provided by rollover and co-investors. The purchase price is subject to certain post-closing adjustments, which we expect will require us to pay an incremental amount less than the $150 million maximum as provided under the merger agreement for the Global Atlantic acquisition.
Capital Commitments
The agreements governing our active investment funds generally require the general partners of the funds to make minimum capital commitments to such funds, which generally range from 2% to 8% of a fund's total capital commitments at final closing, but may be greater for certain funds (i) where we are pursuing newer strategies, (ii) where third party investor demand is limited, and (iii) where a larger commitment is consistent with the asset allocation strategy for our balance sheet is pursuing.Principal Activities business line.
The following table presents our uncalled commitments to our active investment funds and other vehicles as of September 30, 2020:March 31, 2021:
|
| | | |
| Uncalled Commitments |
Private Markets | ($ in thousands) |
Core Investment Vehicles | $ | 1,104,800 |
|
Asian Fund IV | 1,000,000 |
|
Property Partners Americas | 416,900 |
|
Americas Fund XII | 375,800 |
|
Asian Fund III | 266,300 |
|
Asia Real Estate Partners | 250,000 |
|
Asia Pacific Infrastructure Investors | 250,000 |
|
Global Infrastructure Investors III | 208,500 |
|
Real Estate Partners Europe II | 200,000 |
|
Next Generation Technology Growth II | 140,200 |
|
Energy Income and Growth Fund II | 118,200 |
|
European Fund V | 111,100 |
|
Health Care Strategic Growth Fund | 103,700 |
|
Real Estate Partners Americas II | 76,000 |
|
Global Impact Fund | 64,800 |
|
Real Estate Credit Opportunity Partners II | 32,900 |
|
Other Private Markets Vehicles | 421,400 |
|
Total Private Markets Commitments | 5,140,600 |
|
| |
|
Public Markets | |
Dislocation Opportunities Fund | 350,000 |
|
Lending Partners Europe II | 56,000 |
|
Special Situations Fund II | 47,400 |
|
Lending Partners III | 14,500 |
|
Private Credit Opportunities Partners II | 13,900 |
|
Lending Partners Europe | 11,300 |
|
Other Public Markets Vehicles | 110,300 |
|
Total Public Markets Commitments | 603,400 |
|
| |
|
Total Uncalled Commitments | $ | 5,744,000 |
|
| | | | | |
| Uncalled Commitments |
Private Markets | ($ in thousands) |
Asian Fund IV | $ | 1,118,500 | |
Core Investment Vehicles | 919,400 | |
Americas Fund XII | 325,700 | |
Real Estate Partners Americas III | 300,000 | |
Property Partners Americas | 261,000 | |
Asian Fund III | 216,300 | |
Asia Real Estate Partners | 215,400 | |
Real Estate Partners Europe II | 200,000 | |
Asia Pacific Infrastructure Investors | 193,900 | |
Global Infrastructure Investors III | 185,300 | |
Next Generation Technology Growth II | 115,500 | |
Energy Income and Growth Fund II | 113,900 | |
European Fund V | 96,400 | |
Health Care Strategic Growth Fund | 80,700 | |
Global Impact Fund | 57,600 | |
Real Estate Partners Americas II | 39,100 | |
Real Estate Credit Opportunity Partners II | 29,700 | |
Other Private Markets Vehicles | 1,121,400 | |
Total Private Markets Commitments | 5,589,800 | |
| |
Public Markets | |
Dislocation Opportunities Fund | 260,000 | |
Lending Partners Europe II | 33,700 | |
Special Situations Fund II | 26,800 | |
Private Credit Opportunities Partners II | 16,900 | |
Lending Partners Europe | 11,300 | |
Lending Partners III | 8,800 | |
Other Public Markets Vehicles | 499,500 | |
Total Public Markets Commitments | 857,000 | |
| |
Total Uncalled Commitments | $ | 6,446,800 | |
Other Commitments
In addition to the uncalled commitments to our investment funds as shown above, KKR has entered into contractual commitments with respect to (i) the purchase of investments and other assets primarily in our Principal Activities business line and (ii) underwriting transactions, debt financing, and syndications in our Capital Marketscapital markets business line. As of September 30, 2020,March 31, 2021, these commitments amounted to $449.0$310.3 million and $748.5$965.2 million, respectively.
Whether these amounts are actually funded, in whole or in part, depends on the contractual terms of such commitments, including the satisfaction or waiver of any conditions to closing or funding. Our capital markets business has arrangements with third parties, which reduce our risk when underwriting certain debt transactions, and thus our unfunded commitments as of September 30, 2020
March 31, 2021 have been reduced to reflect the amount to be funded by such third parties. In the case of purchases of
investments or assets in our Principal Activities business line, the amount to be funded includes amounts that are intended to be syndicated to third parties, and the actual amounts to be funded may be less than shown.
On January 14, 2020, KKR committed to invest up to an additional $150 million in KKRour India Financial Servicesdebt finance company to support KKR’sits alternative credit business in India. As of September 30, 2020,March 31, 2021, none of the $150 million commitment has been invested.
Tax Receivable Agreement
We may be required to acquire KKR Group Partnership Units from time to time pursuant to our exchange agreement with KKR Holdings, which may result in an increase in our tax basis of the assets of KKR Group Partnership at the time of an exchange of KKR Group Partnership Units. We have entered into a tax receivable agreement with KKR Holdings, which requires us to pay to KKR Holdings, or to current and former limited partners who have exchanged KKR Holdings units for KKR's common stock as transferees of KKR Group Partnership Units, 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of the increase in tax basis described above, as well as 85% of the amount of any such savings we realize as a result of increases in tax basis that arise due to future payments under the agreement. As of September 30, 2020,March 31, 2021, an undiscounted payable of $186.5$214.9 million has been recorded in due to affiliates in the financial statements representing management's best estimate of the amounts currently expected to be owed under the tax receivable agreement. As of September 30, 2020,March 31, 2021, approximately $43.0$50.2 million of cumulative cash payments have been made under the tax receivable agreement.
Dividends
A dividend of $0.135$0.145 per share of our common stock has been declared for the quarter ended September 30, 2020,March 31, 2021, which will be paid on DecemberJune 1, 20202021 to holders of record of our common stock as of the close of business on November 16, 2020.May 17, 2021.
A dividend of $0.421875 per share of Series A Preferred Stock has been declared and set aside for payment on DecemberJune 15, 20202021 to holders of record of Series A Preferred Stock as of the close of business on DecemberJune 1, 2020.2021. A dividend of $0.406250 per share of Series B Preferred Stock has been declared and set aside for payment on DecemberJune 15, 20202021 to holders of record of Series B Preferred Stock as of the close of business on DecemberJune 1, 2020.2021. A dividend of $1.0083$0.75 per share of Series C Mandatory Convertible Preferred Stock has been declared and set aside for payment on DecemberJune 15, 20202021 to holders of record of Series C Mandatory Convertible Preferred Stock as of the close of business on DecemberJune 1, 2020.2021.
When KKR & Co. Inc. receives distributions from KKR Group Partnership, other equityholders in KKR Group Partnership including KKR Holdings receives itsreceive their pro rata share of such distributions from KKR Group Partnership.
The declaration and payment of dividends to our common stockholders will be at the sole discretion of our board of directors, and our dividend policy may be changed at any time. Our current dividend policy is to pay dividends to holders of our common stock in an annual aggregate amount of $0.54$0.58 per share (or a quarterly dividend of $0.135$0.145 per share), beginning with the dividend announced with respect to the results for the first quarter of 2021. The declaration of dividends is subject to the discretion of our board of directors based on a number of factors, including KKR’s future financial performance and other considerations that the board deems relevant, and compliance with the terms of KKR & Co. Inc.'s certificate of incorporation and applicable law. For U.S. federal income tax purposes, any dividends we pay (including dividends on our preferred stock) generally will be treated as qualified dividend income for U.S. individual stockholders to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. There can be no assurance that future dividends will be made as intended or at all or that any particular dividend policy for our common stock will be maintained. Furthermore, the declaration and payment of distributions by KKR Group Partnership and our other subsidiaries may also be subject to legal, contractual and regulatory restrictions, including restrictions contained in our debt agreements and the terms of the preferred units of KKR Group Partnership.
Preferred Stock
For a discussion of KKR's equity, including our preferred stock, see Financial Statements and Supplementary Data—Note 21 "Equity" to the financial statements included elsewhere in this report.
Other Liquidity Needs
We may also be requiredFrom time to time, we fund various underwriting, syndication and fronting commitments in our capital markets business in connection with the arranging or underwriting of loans, securities or other financial instruments, for which has increased in significance in recent periodswe may draw all or substantially all of our availability for borrowings under the KCM Short-Term Credit Agreement, KCM Credit Agreement and may continue to be significant in future periods.Global Atlantic Revolving Credit Facility. We generally expect thatthese borrowings to be repaid promptly as these commitments will beare syndicated to third parties or otherwise fulfilled or terminated, although we may in some instances elect to retain a portion of the commitments for our own investment.
Contractual Obligations, Commitments and Contingencies
In the ordinary course of business, we (including Global Atlantic) and our consolidated funds and CFEs enter into contractual arrangements that may require future cash payments. The following table sets forth information relating to anticipated future cash payments as of March 31, 2021 excluding consolidated funds and CFEs with a reconciliation of such amounts to the anticipated future cash payments of KKR (including Global Atlantic) and our consolidated funds and CFEs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by Period |
Types of Contractual Obligations | | <1 Year | | 1-3 Years | | 3-5 Years | | >5 Years | | Total |
| | ($ in millions) |
Asset Management | | | | | | | | | | |
Uncalled commitments to investment funds (1) | | $ | 6,446.8 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,446.8 | |
Debt payment obligations (2) | | — | | | 225.8 | | | 45.2 | | | 5,770.8 | | | 6,041.8 | |
Interest obligations on debt payment obligations (3) | | 222.9 | | | 467.6 | | | 465.9 | | | 3,805.0 | | | 4,961.4 | |
Underwriting commitments (4) | | 782.1 | | | — | | | — | | | — | | | 782.1 | |
Lending commitments (5) | | 183.1 | | | — | | | — | | | — | | | 183.1 | |
Purchase commitments (6) | | 160.3 | | | — | | | — | | | — | | | 160.3 | |
Lease obligations | | 24.2 | | | 56.9 | | | 35.3 | | | 107.8 | | | 224.3 | |
| | | | | | | | | | |
Insurance (7) | | | | | | | | | | |
Policy liabilities (8) | | 9,263.6 | | | 20,962.2 | | | 18,758.7 | | | 78,673.8 | | | 127,658.3 | |
Debt payment obligations (9) | | 150.0 | | | 495.0 | | | — | | | 750.0 | | | 1,395.0 | |
Interest obligations on debt payment obligations (10) | | 65.6 | | | 103.2 | | | 90.5 | | | 576.3 | | | 835.6 | |
Purchase and lease commitments (11) | | 11.8 | | | 22.6 | | | 23.2 | | | 196.7 | | | 254.3 | |
Total Contractual Obligations of KKR | | $ | 17,310.4 | | | $ | 22,333.3 | | | $ | 19,418.7 | | | $ | 89,880.5 | | | $ | 148,943.0 | |
(+) Uncalled commitments of consolidated funds (12) | | 11,711.7 | | | — | | | — | | | — | | | 11,711.7 | |
(+) Debt payment obligations of consolidated funds, CFEs and Other (13) | | 3,313.6 | | | 3,454.4 | | | 131.2 | | | 21,342.6 | | | 28,241.8 | |
(+) Corporate real estate borrowings (14) | | 490.0 | | | — | | | — | | | — | | | 490.0 | |
(+) Interest obligations of consolidated funds, CFEs and Other (15) | | 647.6 | | | 966.6 | | | 894.5 | | | 2,043.6 | | | 4,552.3 | |
(+) Purchase commitments of consolidated funds (16) | | 454.2 | | | — | | | — | | | — | | | 454.2 | |
Total Consolidated Contractual Obligations | | $ | 33,927.5 | | | $ | 26,754.3 | | | $ | 20,444.4 | | | $ | 113,266.7 | | | $ | 194,393.0 | |
(1)These uncalled commitments represent amounts committed by us to fund a portion of the purchase price paid for each investment made by our investment funds which are actively investing. Because capital contributions are due on demand, the above commitments have been presented as falling due within one year. However, given the size of such commitments and the pace at which our investment funds make investments, we expect that the capital commitments presented above will be called over a period of several years. See "—Revolving Credit Agreements, Senior Notes, KFN Debt Obligation, KFN Securities and Real Estate Financing—Liquidity Needs."
(2)Amounts include senior notes and subordinated notes issued by KKR and its subsidiaries. KFN's debt obligations are non-recourse to KKR beyond the assets of KFN.
(3)These interest obligations on debt represent estimated interest to be paid over the term of the related debt obligation, which has been calculated assuming the debt outstanding at March 31, 2021 is not repaid until its maturity. Future interest rates are assumed to be those in effect as of March 31, 2021, including both variable and fixed rates, as applicable, provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness.
(4)Represents various commitments in our capital markets business in connection with the underwriting of loans, securities and other financial instruments. These commitments are shown net of amounts syndicated.
(5)Represents obligations in our capital markets business to lend under various revolving credit facilities.
(6)Represents commitments of KKR and KFN to fund the purchase of various investments.
(7)Global Atlantic has other obligations related to collateral payable held for derivative instruments ($804 million) and outstanding commitments to make investments in commercial mortgage loans, other lending facilities and other investments ($884 million) which have not been included in the above table as the exact timing of these payments cannot be estimated. Global Atlantic's debt obligations are non-recourse to KKR beyond the assets of Global Atlantic.
(8)Policy liabilities for insurance obligations consist of amounts required to meet future obligations for future policy benefits and policy account balances. Amounts presented in the table represent estimated cash payments under such contracts, including significant assumptions related to the receipt of future premiums, mortality, lapse, renewal, withdrawal, and annuitization comparable with actual experience. These assumptions also include market growth and policy crediting consistent with assumptions used in amortizing DAC. All estimated cash payments are not discounted to present value. Accordingly, the total of cash flows presented for all years of $127.7 billion significantly exceeds total policy liabilities of $102.6 billion recorded on the statements of financial condition as of March 31, 2021. Estimated cash payments are also presented gross of reinsurance. Due to the significance of the assumptions used, the amounts presented could differ materially from actual results.
(9)The payments due by period for debt obligations reflects the contractual maturities of principal.
(10)Reflects estimated future interest payments. Future interest on variable rate debt (which includes borrowing under our revolving credit facility, the term loan and the subordinated debentures) was computed using prevailing rates as of March 31, 2021 and, as such, does not consider the impact of future rate movements. Future interest on fixed rate debt was computed using the stated rate on the obligations.
(11)Reflects operational servicing agreements with third-party administrators for policy administration.
(12)Represents uncalled commitments of our consolidated funds excluding KKR's portion of uncalled commitments as the general partner of the respective funds. Because capital contributions are due on demand, the above commitments have been presented as falling due within one year. However, given the size of such commitments and the pace at which our investment funds make investments, we expect that the capital commitments presented above will be called over a period of several years. See "—Revolving Credit Agreements, Senior Notes, KFN Debt Obligation, KFN Securities and Real Estate Financing—Liquidity Needs."
(13)Amounts include (i) financing arrangements entered into by our consolidated funds with the objective of providing liquidity to the funds of $7.9 billion, (ii) debt securities issued by our consolidated CLOs of $18.7 billion and (iii) borrowings collateralized by fund investments, fund co-investments and other assets held by levered investment vehicles of $1.6 billion. Debt securities issued by consolidated CLO entities are supported solely by the investments held at the CLO vehicles and are not collateralized by assets of any other KKR entity. Borrowings by levered investment vehicles are supported solely by the investments held at the investment vehicles and are not collateralized by assets of any other KKR entity. Obligations under financing arrangements entered into by our consolidated funds are generally limited to our pro rata equity interest in such funds. Our management companies bear no obligations to repay any financing arrangements at our consolidated funds.
(14)Represents a debt obligation in connection with the ownership of KKR office space.
(15)The interest obligations on debt of our CFEs and other borrowings represent estimated interest to be paid over the term of the related debt obligation, which has been calculated assuming the debt outstanding at March 31, 2021 is not repaid until its maturity. Future interest rates are assumed to be those in effect as of March 31, 2021, including both variable and fixed rates, as applicable, provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness.
(16)Represents commitments of consolidated funds to fund the purchase of various investments.
The commitment table above excludes KKR's commitment to invest up to an additional $150 million in our India finance company to support its alternative credit business in India. Additionally, the commitment table above excludes contractual amounts owed under the tax receivable agreement because the ultimate amount and timing of the amounts due are not presently known. See "—Liquidity Needs—Tax Receivable Agreement" in this report and "Risk Factors—We will be required to pay our principals for most of the benefits relating to our use of tax attributes we receive from prior and future exchanges of our common stock for KKR Group Partnership Units and related transactions, and the timing and value of these tax attributes differ from those of our restricted stock units" in our Annual Report.
We may incur contingent liabilities for claims that may be made against us in the future. We enter into contracts that contain a variety of representations, warranties and covenants, including indemnifications. For example, certain of our investment funds and KKR have provided certain indemnities relating to environmental and other matters and have provided nonrecourse carve-out guarantees for fraud, willful misconduct and other customary wrongful acts, each in connection with the financing of certain real estate investments that we have made, including KKR's corporate real estate, and certain investment vehicles we manage or sponsor. KKR has also (i) provided credit support regarding repayment and funding obligations to third-party lenders to certain of its employees, excluding its executive officers, in connection with their personal investments in KKR investment funds and a levered investment vehicle and (ii) provided credit support to one of our hedge fund partnerships. We have also indemnified employees and non-employees against potential liabilities, in connection with their service as described under "Certain Relationships and Related Transactions, and Director Independence—Indemnification of Directors, Officers and Others" in our Annual Report. In addition, we have also provided credit support to certain of our subsidiaries' obligations in connection with certain investment vehicles or partnerships that we manage. For example, KKR has guaranteed the obligations of a general partner to post collateral on behalf of its investment vehicle in connection with such vehicle's derivative transactions. In addition, we have also agreed to be liable for certain investment losses (up to a maximum of approximately $116 million) and/or for providing liquidity in the events specified in the governing documents of certain investment vehicles. Our maximum exposure under these arrangements is currently unknown as our liabilities for these matters would require a claim to be made against us in the future.
The partnership documents governing our carry-paying funds generally include a "clawback" provision that, if triggered, may give rise to a contingent obligation requiring the general partner to return amounts to the fund for distribution to the fund investors at the end of the life of the fund. See Note 23 "Commitments and Contingencies—Contingent Repayment Guarantees" to our financial statements included elsewhere in this report for further information on KKR's potential clawback obligations.
Off Balance Sheet Arrangements
Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.
Critical Accounting Policies
The preparation of our financial statements in accordance with GAAP requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of fees, expenses and investment income. Our management bases these estimates and judgments on available information, historical experience and other assumptions that we believe are reasonable under the circumstances. However, these estimates, judgments and assumptions are often subjective and may be impacted negatively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from those estimated, judged or assumed, revisions are included in the financial statements in the period in which the actual amounts become known. We believe our critical accounting policies could potentially produce materially different results if we were to change underlying estimates, judgments or assumptions.
The following discusses certain aspects of our critical accounting policies. For a full discussion of these and all critical accounting policies, see Note 2 "Summary of Significant Accounting Policies" to the financial statements included elsewhere in this report.
Critical Accounting Policies - Asset Management
Recognition of Investment Income
Investment income consists primarily of the net impact of: (i) realized and unrealized gains and losses on investments; (ii) dividends; (iii) interest income; (iv) interest expense and (v) foreign exchange gains and losses relating to mark-to-market activity on foreign exchange forward contracts, foreign currency options, foreign denominated debt and debt securities issued by consolidated CFEs.
Certain of our investment funds are consolidated. When a fund is consolidated, the portion of our funds' investment income that is allocable to our carried interests and capital investments is not shown in the consolidated statements of operations. For funds that are consolidated, all investment income (loss), including the portion of a funds' investment income (loss) that is allocable to KKR's carried interest, is included in investment income (loss) on the consolidated statements of operations. The carried interest that KKR retains in net income (loss) attributable to KKR & Co. Inc. is reflected as an adjustment to net income (loss) attributable to noncontrolling interests. However, because certain of our funds remain consolidated and because we hold a minority economic interest in these funds' investments, our share of the investment income is less than the total amount of investment income presented in the consolidated statements of operations for these consolidated funds.
Recognition of Carried Interest in the Statement of Operations
Carried interest entitles the general partner of a fund to a greater allocable share of the fund's earnings from investments relative to the capital contributed by the general partner and correspondingly reduces noncontrolling interests' attributable share of those earnings. Carried interest is earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment returns decrease or turn negative in subsequent periods, recognized carried interest will be reversed and reflected as losses in the statement of operations. For funds that are not consolidated, amounts earned pursuant to carried interest are included in capital allocation-based income (loss) in the consolidated statements of operations. Amounts earned pursuant to carried interest at consolidated funds are eliminated upon consolidation of the fund and are included as investment income (loss) in net gains (losses) from investment activities along with all of the other investment gains and losses at the consolidated fund.
Carried interest is recognized in the statement of operations based on the contractual conditions set forth in the agreements governing the fund as if the fund were terminated and liquidated at the reporting date and the fund's investments were realized at the then estimated fair values. Due to the extended durations of our private equity funds, we believe that this approach results
in income recognition that best reflects our periodic performance in the management of those funds. Amounts earned pursuant to carried interest are earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment amounts earned decrease or turn negative in subsequent periods, recognized carried interest will be reversed and to the extent that the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled, a clawback obligation would be recorded. For funds that are not consolidated, this clawback obligation, if any, is reflected as a reduction of our investment balance as this is where carried interest is initially recorded. For funds that are consolidated, this clawback obligation, if any, is reflected as an increase in noncontrolling interests in the consolidated statements of financial condition.
Prior to 2012, most of our historical private equity funds that provide for carried interest do not have a preferred return. For these funds, the management company is required to refund up to 20% of any management fees earned from its limited partners in the event that the fund recognizes carried interest. At such time as the fund recognizes carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof, a liability due to the fund's limited partners is recorded and revenue is reduced for the amount of the carried interest recognized, not to exceed 20% of the management fees earned. The refunds to the limited partners are paid, and liabilities relieved, at such time that the underlying investment is sold and the associated carried interest is realized. In the event that a fund's carried interest is not sufficient to cover all or a portion of the amount that represents 20% of the earned management fees, such management fees would be retained and not returned to the funds' limited partners.
Most of our investment funds that provide for carried interest and were launched after 2012, however, have a preferred return. In this case, the management company does not refund the management fees earned from the limited partners of the fund as described above. Instead, the management fee is effectively returned to the limited partners through a reduction of the realized gain on which carried interest is calculated. To calculate the carried interest, KKR calculates whether a preferred return has been achieved based on an amount that includes all of the management fees paid by the limited partners as well as the other capital contributions and expenses paid by them to date. To the extent the fund has exceeded the preferred return at the time of a realization event, and subject to any other conditions for the payment of carried interest like netting holes, carried interest is distributed to the general partner. Until the preferred return is achieved, no carried interest is recorded. Thereafter, the general partner is entitled to a catch up allocation such that the general partner's carried interest is paid in respect of all of the fund's net gains, including the net gains used to pay the preferred return, until the general partner has received the full percentage amount of carried interest that the general partner is entitled to under the terms of the fund. In general, investment funds that entitle the management company to receive an incentive fee have a preferred return and are calculated on a similar basis that takes into account management fees paid.
Critical Accounting Policies - Insurance
Policy liabilities
Policy liabilities, or collectively, "reserves," are the portion of past premiums or assessments received that are set aside to meet future policy and contract obligations as they become due. Interest accrues on the reserves and on future premiums, which may also be available to pay for future obligations. Global Atlantic establishes reserves to pay future policy benefits, claims, and certain expenses for its life policies and annuity contracts.
Global Atlantic's reserves are estimated based on models that include many actuarial assumptions and projections. These assumptions and projections, which are inherently uncertain, involve significant judgment, including assumptions as to the levels and/or timing of premiums, benefits, claims, expenses, interest credits, investment results (including equity market returns), mortality, longevity, and persistency.
The assumptions on which reserves are based are intended to represent an estimation of experience for the period that policy benefits are payable. Global Atlantic reviews the adequacy of its reserves and the assumptions underlying those reserves at least annually. Global Atlantic cannot, however, determine with precision the amount or the timing of actual benefit payments. If actual experience is better than or equal to the assumptions, then reserves would be adequate to provide for future benefits and expenses. If experience is worse than the assumptions, additional reserves may be required to meet future policy and contract obligations. This would result in a charge to our net income during the period in which excess benefits are paid or an increase in reserves occurs.
For a majority of Global Atlantic's in-force policies, including its universal life policies and most annuity contracts, the base policy reserve is equal to the account value. For these products, the account value represents its obligation to repay to the policyholder the amounts held on deposit. However, there are several significant blocks of business where policy reserves, in
addition to the account value, are explicitly calculated, including variable annuities, fixed-indexed annuities, universal life products with secondary guarantees, indexed universal life and preneed policies.
Guaranteed minimum death benefits ("GMDB")
Some of Global Atlantic's variable annuity and fixed-indexed annuity contracts contain a GMDB feature that provides a guarantee that the benefit received at death will be no less than a prescribed minimum amount, even if the account balance is reduced to zero. This amount is based on either the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary, or sometimes a combination of these values. If the GMDB is higher than the current account value at the time of death, Global Atlantic incurs a cost equal to the difference.
Guaranteed minimum withdrawal benefits ("GMWB")
Global Atlantic issues fixed-indexed annuity and variable annuity contracts with a guaranteed minimum withdrawal feature. GMWB are an optional benefit where the contract owner is entitled to withdraw a maximum amount of their benefit base each year.
Once exercised, living benefit features provide annuity policyholders with a minimum guaranteed stream of income for life. A policyholder’s annual income benefit is generally based on an annual withdrawal percentage multiplied by the benefit base. The benefit base is defined in the policy and is generally the initial premium, reduced by any partial withdrawals and increased by a defined percentage, formula or index credits. Any living benefit payments are first deducted from the account value. Global Atlantic is responsible for paying any excess guaranteed living benefits still owed after the account value has reached zero.
The ultimate cost of these benefits will depend on the level of market returns and the level of contractual guarantees, as well as policyholder behavior, including surrenders, withdrawals, and benefit utilization. For fixed-indexed annuity products, costs also include certain non-guaranteed terms that impact the ultimate cost, such as caps on crediting rates that Global Atlantic can, in its discretion, reset annually.
GMDB and GMWB sensitivities
As of March 31, 2021, the GMDB and GMWB liability balance totaled $946 million. As of March 31, 2021, the liability balances for GMDB were $22 million for fixed-indexed annuities and $23 million for variable annuities. As of March 31, 2021, the liability balances for GMWB were $901 million for fixed-indexed annuities. The increase (decrease) to the GMDB and GMWB liability balance as a result of hypothetical changes in projected assessments, equity market prices, and annual equity growth is summarized in the table below. This sensitivity considers the direct effect of such changes only and not changes in any other assumptions used in or items considered in the measurement of such balances.
| | | | | | | | |
| | March 31, 2021 |
($ in thousands) | | |
Balance | | $ | 946,407 | |
Hypothetical change: | | |
+10% future assessments(1) | | (10,670) | |
-10% future assessments(1) | | 11,195 | |
+10% equity market prices | | (7,679) | |
-10% equity market prices | | 8,813 | |
1% lower annual equity growth | | 1,936 | |
________________Note: Hypothetical changes to the liability balance do not reflect the impact of related hedges.
(1)The assessments used to accrue liabilities are generally based on investment yields, realized gains and losses, rider charges, surrender charges, and asset-based fees, such as mortality and expense fees.
Embedded derivatives
Global Atlantic's fixed-indexed annuity, variable annuity and indexed universal life products contain equity-indexed features, which are considered embedded derivatives and are required to be measured at fair value.
The embedded derivative is calculated as the present value of future projected benefits in excess of the projected guaranteed benefits, using an option budget as the indexed account value growth rate. In addition, the fair value of the embedded derivative is reduced to reflect the risk of non-performance on Global Atlantic's obligations (i.e., own credit risk).
Changes in interest rates, future index credits, Global Atlantic's own credit risk, projected withdrawal and surrender activity, and mortality on fixed-indexed annuity and indexed universal life contracts can have a significant impact on the value of the embedded derivative.
Valuation of embedded derivatives – Fixed-indexed annuities
Fixed-indexed annuity contracts allow the policyholder to elect a fixed interest rate of return or a market indexed strategy where interest credited is based on the performance of an index, such as the S&P 500 Index, or other indexes. The market indexed strategy is an embedded derivative, similar to a call option. The fair value of the embedded derivative is computed as the present value of benefits attributable to the excess of the projected policy contract values over the projected minimum guaranteed contract values. The projections of policy contract values are based on assumptions for future policy growth, which include assumptions for expected index credits, future equity option costs, volatility, interest rates, and policyholder behavior. The projections of minimum guaranteed contract values include the same assumptions for policyholder behavior as are used to project policy contract values. The embedded derivative cash flows are discounted using a risk-free interest rate increased by a non-performance risk spread tied to Global Altantic's own credit rating.
Valuation of embedded derivatives – Indexed universal life
Indexed universal life products allow a policyholder’s account value to grow based on the performance of certain equity indexes, which result in an embedded derivative similar to a call option. The embedded derivative related to the index is bifurcated from the host contract and measured at fair value. The valuation of the embedded derivative is the present value of future projected benefits in excess of the projected guaranteed benefits, using the option budget as the indexed account value growth rate and the guaranteed interest rate as the guaranteed account value growth rate. Present values are based on discount rate curves determined at the valuation date/issue date as well as assumed lapse and mortality rates. The discount rate equals the forecast treasury rate plus a non-performance risk spread tied to Global Atlantic’s own credit rating. Changes in discount rates and other assumptions such as spreads and/or option budgets can have a substantial impact on the embedded derivative.
Valuation of embedded derivatives – Variable annuities
Variable annuity contracts offered and assumed by Global Atlantic provide the contractholder with GMDB and/or GMWB. The liabilities for these benefits are included in policy liabilities in the consolidated statement of financial condition. The change in the liabilities for these benefits is included in policy benefits and claims in the consolidated statements of operation.
Global Atlantic has issued variable annuity contracts with GMDB features. Global Atlantic elected the fair value option to measure the liability for certain of these variable annuity contracts, valued at $566 million as March 31, 2021. Fair value is calculated as the present value of the estimated death benefits less the present value of the GMDB fees, using 1,000 risk neutral scenarios. Global Atlantic discounts the cash flows using U.S. Treasury rates plus an adjustment for its own company credit risk.
Global Atlantic also issues variable annuity contracts with a GMWB. The GMWB feature represents an embedded derivative. The embedded derivative is required to be bifurcated and measured at fair value. This liability is calculated as the present value of the excess GMWB claims less the present value of GMWB fees, using 1,000 risk neutral scenarios. Global Atlantic discounts the cash flows using U.S. Treasury rates plus an adjustment for its own company credit risk.
As of March 31, 2021, the embedded derivative liability balance totaled $896.6 million for fixed-indexed annuities, $434.2 million for indexed universal life and $88.3 million for variable annuities. As of March 31, 2021, variable annuities accounted for using the fair value option was $566 million. The increase (decrease) to the embedded derivatives on fixed-indexed annuity, indexed universal life, and variable annuity products as a result of hypothetical changes in interest rates, non-performance risk premium, and equity market prices is summarized in the table below. This sensitivity considers the direct effect of such changes only and not changes in any other assumptions used in or items considered in the measurement of such balances.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | FIA | | IUL | | VA | | VA (FVO) |
($ in thousands) | | | | |
Balance | | $ | 896,582 | | | $ | 434,242 | | | $ | 88,327 | | | $ | 565,642 | |
| | | | | | | | |
Hypothetical change: | | | | | | | | |
+50 bps interest rates | | (22,090) | | | (4,260) | | | (65,781) | | | (33,550) | |
-50 bps interest rates | | 25,328 | | | 5,035 | | | 76,520 | | | 36,401 | |
'+25bps non-performance risk premium | | 13,875 | | | 2,250 | | | 16,627 | | | 10,809 | |
'-25bps non-performance risk premium | | (13,875) | | | (2,250) | | | (16,627) | | | (10,809) | |
+10% equity market prices | | 264,429 | | | 45,380 | | | (49,876) | | | (25,010) | |
-10% equity market prices | | (212,655) | | | (67,640) | | | 61,853 | | | 29,250 | |
________________Note: Hypothetical changes to the liability balances do not reflect the impact of related hedges.
Valuation of embedded derivatives in modified coinsurance or funds withheld
Global Atlantic's reinsurance agreements include modified coinsurance and coinsurance with funds withheld arrangements that include terms that require payment by the ceding company of a principal amount plus a return that is based on a proportion of the ceding company’s return on a designated portfolio of assets. Because the return on the receivable held by the assuming company is not clearly and closely related to the host insurance contract, these contracts are deemed to contain embedded derivatives, which are measured at fair value. Global Atlantic is exposed to both the market risk and the credit risk of the assets. Changes in discount rates and other assumptions can have a significant impact on this embedded derivative. The fair value of the embedded derivatives is included in the funds withheld receivable at interest and funds withheld payable at interest line items on the consolidated statement of financial condition. The change in the fair value of the embedded derivatives is recorded in net investment gains (losses) in the consolidated statement of operations.
As of March 31, 2021, the embedded derivative balance for modified coinsurance or funds withheld arrangements was a $369.1 million net asset ($55.9 million in funds withheld receivables at interest, and $(313.2) million in funds withheld payable at interest.) The increase (decrease) to the balance as a result of hypothetical changes in credit spreads and interest rates is summarized in the table below. This sensitivity considers the direct effect of such changes only and not changes in any other factors that impact the embedded derivative balance for modified coinsurance or funds withheld arrangements.
| | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Embedded derivative on funds withheld receivable at interest | | Embedded derivative on funds withheld payable at interest |
($ in thousands) | | | | |
Balance | | $ | 55,883 | | | $ | (313,230) | |
Hypothetical change: | | | | |
+25 bps credit spreads | | (31,696) | | | (204,250) | |
-25 bps credit spreads | | 31,696 | | | 204,250 | |
+50 bps interest rates | | (25,046) | | | (441,000) | |
-50 bps interest rates | | 33,277 | | | 441,000 | |
________________Note: Hypothetical changes to the funds withheld receivable and payable embedded derivative balances do not reflect the impact of related hedges or trading assets which back the funds withheld at interest.
Critical Accounting Policies - Combined
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Except for certain of KKR's equity method investments and debt obligations, KKR's investments and other financial instruments are recorded at fair value or at amounts whose carrying values approximate fair value.
GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Investments and other financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:
Level I
Pricing inputs are unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date. The types of financial instruments included in this category are publicly-listed equities and securities sold short.
We classified 4.2% of total investments measured and reported at fair value as Level I at September 30, 2020.
Level II
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the measurement date, and fair value is determined through the use of models or other valuation methodologies. The types of financial instruments included in this category are credit investments, investments and debt obligations of consolidated CLO entities, convertible debt securities indexed to publicly-listed securities, less liquid and restricted equity securities and certain over-the-counter derivatives such as foreign currency option and forward contracts.
We classified 39.8% of total investments measured and reported at fair value as Level II at September 30, 2020.
Level III
Pricing inputs are unobservable for the financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. The types of financial instruments generally included in this category are private portfolio companies, real assets investments, credit investments, equity method investments for which the fair value option was elected and investments and debt obligations of consolidated CMBS entities.
We classified 56.0% of total investments measured and reported at fair value as Level III at September 30, 2020. The valuation of our Level III investments at September 30, 2020March 31, 2021 represents management's best estimate of the amounts that we would anticipate realizing on the sale of these investments in an orderly transaction at such date.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Level III Valuation Methodologies
With respect to our private equity portfolio, which includes growth equityOur investments we generally employ two valuation methodologies when determining the fair value of an investment. The first methodology is typically a market comparables analysis that considers keyand financial inputs and recent public and private transactions and other available measures. The second methodology utilized is typically a discounted cash flow analysis, which incorporates significant assumptions and judgments. Estimates of key inputs used in this methodology include the weighted average cost of capital for the investment and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. In certain cases the results of the discounted cash flow approach can be significantly impacted by these estimates. Other inputs are also used in both methodologies. Also, as discussed in greater detail under "—Business Environment" and "Risk Factors—Risks Related to the Assets We Manage—Our investmentsinstruments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, butwhich may have a significant adverse impact on the valuevaluation of our investments" in this report,investments and, therefore, on the carried interest and investment income we realize. Additionally, a change in interest rates could have a significant impact on valuations. In addition, when a definitive agreement has been executed to sell an investment, KKR generally considers a significant determinant of fair value to be the consideration to be received by KKR pursuant to the executed definitive agreement.
Upon completion of the valuations conducted using these methodologies, a weighting is ascribed to each method, and an illiquidity discount is typically applied where appropriate. The ultimate fair value recorded for a particular investment will generally be within a range suggested by the two methodologies, except that the value may be higher or lower than such range in the case of investments being sold pursuant to an executed definitive agreement.
Across the total Level III private equity investment portfolio (including core investments), and including investments in both consolidated and unconsolidated investment funds, approximately 60% of the fair value is derived from investments that are valued based exactly 50% on market comparables and 50% on a discounted cash flow analysis. Less than 5% of the fair value of this Level III private equity investment portfolio is derived from investments that are valued either based 100% on market comparables or 100% on a discounted cash flow analysis. As of September 30, 2020,March 31, 2021, the overall weights ascribed to the market comparables methodology, the discounted cash flow methodology, and a methodology based on pending sales for this portfolio of Level III private equity investments were 40%39%, 50%51%, and 10%, respectively.
In the case of growth equity investments, enterprise values may be determined using the market comparables analysis and discounted cash flow analysis described above. A scenario analysis may also be conducted to subject the estimated enterprise values to a downside, base and upside case, which involves significant assumptions and judgments. A milestone analysis may also be conducted to assess the current level of progress towards value drivers that we have determined to be important, which involves significant assumptions and judgments. The enterprise value in each case may then be allocated across the investment's capital structure to reflect the terms of the security and subjected to probability weightings. In certain cases, the values of growth equity investments may be based on recent or expected financings.
Real asset investments in infrastructure, energy and real estate are valued using one or more of the discounted cash flow analysis, market comparables analysis and direct income capitalization, which in each case incorporates significant assumptions and judgments. Infrastructure investments are generally valued using the discounted cash flow analysis. Key inputs used in this methodology can include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. Energy investments are generally valued using a discounted cash flow analysis. Key inputs used in this methodology that require estimates include the weighted average cost of capital. In addition, the valuations of energy investments generally incorporate both commodity prices as quoted on indices and long-term commodity price forecasts, which may be substantially different from, and are currently higher than, commodity prices on certain indices for equivalent future dates. Certain energy investments do not include an illiquidity discount. Long-term commodity price forecasts are utilized to capture the value of the investments across a range of commodity prices within the energy investment portfolio associated with future development and to reflect a range of price expectations. Real estate investments are generally valued using a combination of direct income capitalization and discounted cash flow analysis. Key inputs used in such methodologies that require estimates include an unlevered discount rate and current capitalization rate, and certain real estate investments do not include a minimum illiquidity discount. The valuations of real assets investments also use other inputs.
For GAAP purposes, where KKR holds energy investments consisting of working interests in oil and gas properties directly and not through an investment fund, such working interests are consolidated based on the proportion of the working interests held by us. Accordingly, we reflect the assets, liabilities, revenues, expenses, investment income and cash flows of the consolidated working interests on a gross basis and changes in the value of these energy investments are not reflected as unrealized gains and losses in the consolidated statements of operations. Accordingly, a change in fair value for these investments does not result in a decrease in net gains (losses) from investment activities, but may result in an impairment
charge reflected in general, administrative and other expenses. For non-GAAP purposes, these directly held working interests are treated as investments and changes in value are reflected in our operating results as unrealized gains and losses.
On a non-GAAP basis, our energy real asset investments in oil and gas properties as of September 30, 2020 had a fair value of approximately $687 million. Based on this fair value, we estimate that an immediate, hypothetical 10% decline in the fair value of these energy investments from one or more adverse movements to the investments' valuation inputs would result in a decline in book value of $68.7 million. As of September 30, 2020, if we were to value our energy investments using only the commodity prices as quoted on indices and did not use long-term commodity price forecasts, and also held all other inputs to their valuation constant, we estimate that book value would have been approximately $5 million lower.
These hypothetical declines relate only to book value. There would be no current impact on KKR's unrealized carried interest since all of the investment funds which hold these types of energy investments have investment values that are either below their cost or not currently accruing carried interest. Additionally, there would be no impact on fees since fees earned from investment funds which hold investments in oil and gas properties are based on either committed capital or capital invested.
Credit investments are valued using values obtained from dealers or market makers, and where these values are not available, credit investments are generally valued by us based on ranges of valuations determined by an independent valuation firm. Valuation models are based on discounted cash flow analyses, for which the key inputs are determined based on market comparables, which incorporate similar instruments from similar issuers.
There is inherent uncertainty involved in the valuation of Level III investments, and there is no assurance that, upon liquidation, KKR will realize the values reflected in our valuations. Our valuations may differ significantly from the values that would have been used had an active market for the investments existed, and it is reasonably possible that the difference could be material. Furthermore, the recent market volatility caused by COVID-19 and the uncertainty surrounding its full impact have amplified the possibility that our future valuations may materially change from those reflected as of September 30, 2020. See "—Business Environment" for more details on the potential adverse effects of COVID-19 onfactors that impact our business, financial performance, operating results and valuations.
Key unobservable inputs that have a significant impact on our Level III investment valuations as described above are included in Item 8. Financial Statements and Supplementary Data—Note 59 "Fair Value Measurements."Measurements" to our financial statements included elsewhere in this report.
Level III Valuation Process
The valuation process involved for Level III measurements is completed on a quarterly basis and is designed to subject the valuation of Level III investments to an appropriate level of consistency, oversight, and review.
For Private Markets investments classified as Level III, investment professionals prepare preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and other factors. KKR begins its procedures to determine the fair values of its Level III assets one month prior to the end of a reporting period, and KKR follows additional procedures to ensure that its determinations of fair value for its Level III assets are appropriate as of the relevant reporting date. These preliminary valuations are reviewed by an independent valuation firm engaged by KKR to perform certain procedures in order to assess the reasonableness of KKR's valuations annually for all Level III investments in Private Markets and quarterly for investments other than certain investments, which have values less than preset value thresholds and which in the aggregate comprise less than 1% of the total value of KKR's Level III Private Markets investments. The valuations of certain real asset investments are determined solely by an independent valuation firmfirms without the preparation of preliminary valuations by our investment professionals, and instead such independent valuation firm reliesfirms rely on valuation information available to it as a broker or valuation firm. For credit investments and debt obligations of consolidated CMBS vehicles,in Public Markets, an independent valuation firm is generally engaged quarterly by KKR to assist with respect tothe valuations of most investments classified as Level III. The valuation firm either provides a value, or provides a valuation range from which KKR's investment professionals select a point in the range to determine the preliminary valuation, or performs certain procedures in order to assess the reasonableness and provide positive assurance of KKR's valuations. After reflecting any input from the independent valuation firm, the valuation proposals are submitted for review and approval by KKR's valuation committees. As of September 30, 2020,March 31, 2021, less than 1%4% of the total value of our Level III credit investments were not valued with the engagement of an independent valuation firm.
For Level III investments in Asset Management, KKR has a global valuation committee that is responsible for coordinating and implementing the firm's valuation process to ensure consistency in the application of valuation principles across portfolio investments and between periods. The global valuation committee is assisted by the asset class-specific valuation committees that exist for private equity (including core
investments and certain impact investments), growth equity (including certain impact investments), real estate, energy, and infrastructure and credit. The asset class-specific valuation committees are responsible for the review and approval of all preliminary Level III valuations in their respective asset classes on a quarterly basis. The members of these valuation committees are comprised of investment professionals, including the heads of each respective strategy, and professionals from business operations functions such as legal, compliance and finance, who are not primarily responsible for the management of the investments.
All Level III valuations for investments in Asset Management are also subject to approval by the global valuation committee, which is comprised of senior employees including investment professionals and professionals from business operations functions, and includes one of KKR's Co-Presidents and Co-Presidents/Co-Chief Operating Officers and its Chief Financial Officer, General Counsel and Chief Compliance Officer. When valuations are approved by the global valuation committee after reflecting any input from it, the valuations of Level III investments, as well as the valuations of Level I and Level II investments, are presented to the audit committeeAudit Committee of the boardBoard of directorsDirectors of KKR & Co. Inc. and are then reported to the boardBoard of directors.Directors.
Level III investments held by Global Atlantic are valued on the basis of pricing services, reputable broker-dealers or internal models. Global Atlantic performs a quantitative and qualitative analysis and review of the information and prices received from independent pricing services as well as broker-dealers to verify that it represents a reasonable estimate of fair value. For all the internally developed models, Global Atlantic seeks to verify the reasonableness of fair values by analyzing the inputs and other assumptions used. As of March 31, 2021, approximately 58% of these investments were priced via external sources, while approximately 42% were valued on the basis of internal models. When valuations are approved by Global Atlantic's management, the valuations of its Level III investments, as well as the valuations of Level I and Level II investments, are presented to the Audit Committee of the Board of Directors of KKR & Co. Inc. and are then reported to the Board of Directors.
As of September 30, 2020,March 31, 2021, upon completion by, where applicable, an independent valuation firmfirms of certain limited procedures requested to be performed by them on certain Level III investments, the independent valuation firmfirms concluded that the fair values, as determined by KKR (including Global Atlantic), of those investments reviewed by them were reasonable. The limited procedures did not involve an audit, review, compilation or any other form of examination or attestation under generally accepted auditing standards and were not conducted on all Level III investments. We are responsible for determining the fair value of investments in good faith, and the limited procedures performed by an independent valuation firm are supplementary to the inquiries and procedures that we are required to undertake to determine the fair value of the commensurate investments.
There were no changes made to our Level III valuation process as a result of COVID-19.
As described above, Level II and Level III investments were valued using internal models with significant unobservable inputs, and our determinations of the fair values of these investments may differ materially from the values that would have resulted if readily observable inputs had existed. Additional external factors may cause those values, and the values of investments for which readily observable inputs exist, to increase or decrease over time, which may create volatility in our earnings and the amounts of assets and stockholders' equity that we report from time to time.
Changes in the fair value of investments impacts the amount of carried interest that is recognized as well as the amount of investment income that is recognized for investments held directly in Asset Management and through our consolidated funds as described below. We estimate that an immediate 10% decrease in the fair value of investments held directly and through consolidated investment funds generally would result in a commensurate change in the amount of net gains (losses) from investment activities for investments held directly and through investment funds and a more significant impact to the amount of carried interest recognized, regardless of whether the investment was valued using observable market prices or management estimates with significant unobservable pricing inputs. With respect to consolidated investment funds, the impact that the consequential decrease in investment income would have on net income attributable to KKR would generally be significantly less than the amount described above, given that a majority of the change in fair value of our consolidated funds would be attributable to noncontrolling interests and therefore we are only impacted to the extent of our carried interest and our balance sheet investments. With respect to Insurance, a decrease in investment income for certain assets where investment gains and losses are recognized through the statement of operations would impact KKR only to the extent of our economic ownership interest in Global Atlantic.
As of September 30, 2020,March 31, 2021, there were no investments which represented greater than 5%of total investments on a GAAP basis. On a non-GAAP basis, as of September 30, 2020,March 31, 2021, investments which represented greater than 5% of total non-GAAP investments consisted of Fiserv, Inc. and USI, Inc. valued at $1,468.9$1,400.3 million and $884.6$987.8 million, respectively. Our investment income on a GAAP basis and our book value can be impacted by volatility in the public markets related to our holdings of publicly traded securities, including our sizable holdings of Fiserv, Inc. and BridgeBio Pharma Inc. See "—Business Environment" for a discussion on the impact of global equity markets on our financial condition and "—Non-GAAP Balance Sheet Measures" for additional information regarding our largest holdings on a non-GAAP basis.
Recognition of Investment Income
Investment income consists primarily of the net impact of: (i) realized and unrealized gains and losses on investments; (ii) dividends; (iii) interest income; (iv) interest expense and (v) foreign exchange gains and losses relating to mark-to-market activity on foreign exchange forward contracts, foreign currency options, foreign denominated debt and debt securities issued by consolidated CFEs.
Certain of our investment funds are consolidated. When a fund is consolidated, the portion of our funds' investment income that is allocable to our carried interests and capital investments is not shown in the consolidated statements of operations. For funds that are consolidated, all investment income (loss), including the portion of a funds' investment income (loss) that is
allocable to KKR's carried interest, is included in investment income (loss) on the consolidated statements of operations. The carried interest that KKR retains in net income (loss) attributable to KKR & Co. Inc. is reflected as an adjustment to net income (loss) attributable to noncontrolling interests. However, because certain of our funds remain consolidated and because we hold a minority economic interest in these funds' investments, our share of the investment income is less than the total amount of investment income presented in the consolidated statements of operations for these consolidated funds.
Recognition of Carried Interest in the Statement of Operations
Carried interest entitles the general partner of a fund to a greater allocable share of the fund's earnings from investments relative to the capital contributed by the general partner and correspondingly reduces noncontrolling interests' attributable share of those earnings. Carried interest is earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment returns decrease or turn negative in subsequent periods, recognized carried interest will be reversed and reflected as losses in the statement of operations. For funds that are not consolidated, amounts earned pursuant to carried interest are included in capital allocation-based income (loss) in the consolidated statements of operations. Amounts earned pursuant to carried interest at consolidated funds are eliminated upon consolidation of the fund and are included as investment income (loss) in net gains (losses) from investment activities along with all of the other investment gains and losses at the consolidated fund.
Carried interest is recognized in the statement of operations based on the contractual conditions set forth in the agreements governing the fund as if the fund were terminated and liquidated at the reporting date and the fund's investments were realized at the then estimated fair values. Due to the extended durations of our private equity funds, we believe that this approach results in income recognition that best reflects our periodic performance in the management of those funds. Amounts earned pursuant to carried interest are earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment amounts earned decrease or turn negative in subsequent periods, recognized carried interest will be reversed and to the extent that the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled, a clawback obligation would be recorded. For funds that are not consolidated, this clawback obligation, if any, is reflected as a reduction of our investment balance as this is where carried interest is initially recorded. For funds that are consolidated, this clawback obligation, if any, is reflected as an increase in noncontrolling interests in the consolidated statements of financial condition.
Prior to 2012, most of our historical private equity funds that provide for carried interest do not have a preferred return. For these funds, the management company is required to refund up to 20% of any management fees earned from its limited partners in the event that the fund recognizes carried interest. At such time as the fund recognizes carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof, a liability due to the fund's limited partners is recorded and revenue is reduced for the amount of the carried interest recognized, not to exceed 20% of the management fees earned. The refunds to the limited partners are paid, and liabilities relieved, at such time that the underlying investment is sold and the associated carried interest is realized. In the event that a fund's carried interest is not sufficient to cover all or a portion of the amount that represents 20% of the earned management fees, such management fees would be retained and not returned to the funds' limited partners.
Most of our investment funds that provide for carried interest and were launched after 2012, however, have a preferred return. In this case, the management company does not refund the management fees earned from the limited partners of the fund as described above. Instead, the management fee is effectively returned to the limited partners through a reduction of the realized gain on which carried interest is calculated. To calculate the carried interest, KKR calculates whether a preferred return has been achieved based on an amount that includes all of the management fees paid by the limited partners as well as the other capital contributions and expenses paid by them to date. To the extent the fund has exceeded the preferred return at the time of a realization event, and subject to any other conditions for the payment of carried interest like netting holes, carried interest is distributed to the general partner. Until the preferred return is achieved, no carried interest is recorded. Thereafter, the general partner is entitled to a catch up allocation such that the general partner's carried interest is paid in respect of all of the fund's net gains, including the net gains used to pay the preferred return, until the general partner has received the full percentage amount of carried interest that the general partner is entitled to under the terms of the fund. In general, investment funds that entitle the management company to receive an incentive fee have a preferred return and are calculated on a similar basis that takes into account management fees paid.
Recently Issued Accounting Pronouncements
For a full discussion of recently issued accounting pronouncements, see Note 2 "Summary of Significant Accounting Policies" to the financial statements included elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The acquisition of Global Atlantic on February 1, 2021 added certain risks to KKR, some of which represent incremental exposure to risks existing prior to the Global Atlantic acquisition, and some of which represent new risks. For a discussion of market risks faced by KKR's asset management business, see “Quantitative and Qualitative Disclosures about Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 19, 2021.
The following is a discussion of the significant market risk exposures for Global Atlantic.
Global Atlantic has material exposure to market volatility in interest rates, equity prices and credit spreads. Global Atlantic's insurance liabilities, many of which are structured to have exposure to market level changes, and financial instruments held in its investment portfolio and used in its hedge program, expose us to these risks.
Hedge program
To manage market risk, Global Atlantic established a hedge program that seeks to mitigate economic impacts primarily from interest rate and equity price movements, while taking into consideration accounting and capital impacts. For Global Atlantic's fixed-indexed annuity and indexed universal life policies, Global Atlantic generally seeks to use static hedges to offset the exposure primarily created by changes in embedded derivative balances. For Global Atlantic's variable policies, including variable annuity policies and variable universal life policies, Global Atlantic generally seeks to dynamically hedge its exposure to changes in the value of the guarantee Global Atlantic provides to policyholders. In the context of specific reinsurance or other transactions in Global Atlantic's institutional channel or strategic acquisitions, Global Atlantic may also enters into hedges which are designed to limit short-term market risks to the economic value of the target assets. From time to time, Global Atlantic also enters into hedges designed to limit the volatility associated with changes in the value of its general account assets or changes to net investment income as a result of interest rate or credit spread movements, while also taking into consideration economic impacts. While not the primary focus of its hedging strategy, Global Atlantic also enters into currency swaps and forwards to manage foreign exchange rate risks with respect to certain investments denominated in foreign currencies. Global Atlantic also enters into inflation swaps to manage inflation risk associated with inflation-indexed preneed policies. Where Global Atlantic has derivative instruments that are designated and qualify as accounting hedges, these derivative instruments receive hedge accounting.
Global Atlantic's hedge program is not designed to, and may not be effective in, offsetting all impacts to net income, statutory capital or economic values. Movements in market variables other than interest rates and equity market prices that are not explicitly hedged can also cause net income volatility. See “Risk factors—Risks Related to Global Atlantic—Global Atlantic's use of derivative financial instruments within its risk management strategy may not be effective or sufficient.” and “Risk factors—Risks Related to Global Atlantic—Global Atlantic may experience volatility in its net income under GAAP due to its funds withheld coinsurance transactions.” in our Annual Report.
Sensitivities
Global Atlantic evaluates the sensitivity of net income to specific changes in interest rates, credit spreads and equity prices projected using internal models. All of the estimated sensitivities assume that all other factors remain constant and reflect the impact of related hedges assuming no hedge rebalancing in Global Atlantic's dynamic program, as explained further below.
Global Atlantic's internal models project impacts as of a specific date, and are measured relative to a starting level reflecting its assets and liabilities at that date and the actuarial factors, investment activity, and assumed investment returns associated with insurance liabilities. The models measure the impact of changing one factor at a time and assume that all other factors remain unchanged. Actual results can differ significantly from these estimates for a variety of reasons, including the interaction among these factors when more than one changes, discretionary actions by management in response to such changes, differences between the return of the underlying fund and the return on the index being hedged, actual experience differing from the assumptions, changes in business mix, effective tax rates and other market factors, and limitations inherent in the use of models. For these reasons, the sensitivities should only be viewed as directional estimates of the impacts on Global Atlantic's net income and shareholders’ equity, excluding accumulated other comprehensive income ("AOCI"), and actual changes in response to such scenarios may differ materially from estimates provided.
For the dynamic portion of the hedge program, Global Atlantic primarily uses interest rate and equity futures to hedge liabilities which have option-like embedded derivatives. As such, Global Atlantic's program requires frequent rebalancing as markets move to ensure that the hedges are being re-sized to the new liability exposure. In addition, certain of the underlying variable annuity separate account funds are managed volatility funds, so Global Atlantic's market exposures may change
substantially after sharp market moves. The point-in-time estimates provided in this section assume no hedge rebalancing and, as such, the impact on Global Atlantic's consolidated net income may be different from what is shown below.
Interest rate risk
Global Atlantic is exposed to interest rate risk as a result of changes in the level and volatility of interest rates. Changes in the level and volatility of interest rates primarily impacts the fair value reported in our consolidated financial statements of the following:
•embedded derivatives associated with modified coinsurance and coinsurance with funds withheld business;
•embedded derivatives associated with variable annuities, fixed-indexed annuities and indexed universal life products; and
•financial instruments held in Global Atlantic's investment portfolio and used in its hedge program.
Changes in fair value of the foregoing are generally recorded as gains or losses in the consolidated statement of operations. For specific derivatives designated as cash flow hedges of forecasted bond purchases and receiving hedge accounting treatment, gains or losses are recorded in accumulated other comprehensive income and reclassified to net investment income following the qualifying purchases of available-for-sale securities, as an adjustment to the yield earned over the life of the purchased securities, using the effective interest method.
Due to the dynamic lapse sensitivities within Global Atlantic's models, market volatility in interest rates also impacts the reserves and deferred acquisition costs of certain fixed annuity products, changes in which are recorded in the consolidated statement of operations.
In periods following interest rate moves, Global Atlantic will also recognize a change in the income earned on certain of its floating-rate assets and the cost of funding on certain of Global Atlantic's liabilities recorded in the consolidated statement of operations.
Effect of interest rate sensitivity
In the table below, Global Atlantic estimates the impact of a 50 basis point increase/(decrease) in interest rates, from a parallel shift in the yield curve, from levels as of March 31, 2021 to net income and shareholders’ equity, excluding AOCI. These sensitivities include the impact of related hedges and adjustments to DAC attributable to interest rate changes.
| | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Hypothetical change(1) |
| | +50 Basis points | | -50 Basis points |
($ in thousands) | | |
Total estimated net income and shareholders’ equity excluding AOCI sensitivity (point in time) | | $ | (13,600) | | | $ | 14,800 | |
Total estimated net income and shareholders’ equity excluding AOCI sensitivity (over 12 months)(2) | | $ | 17,300 | | | $ | (17,300) | |
_________________1.The point in time and over 12 months total estimated impacts reflect the impact of hedges within Global Atlantic's liability hedging program, as well as hedges designed to limit surplus volatility resulting from interest rate movements.
2.Excludes point in time impact. Estimated sensitivity to a hypothetical change over 12 months does not take into account any management actions that may be taken to mitigate actual impacts.
The estimated point in time impact is driven by a net decrease/(increase) in the value of the embedded derivatives associated with Global Atlantic's modified coinsurance and coinsurance with funds withheld business and the embedded derivatives associated with its variable annuity, fixed-indexed annuity and indexed universal life products, and largely offset by a loss/(gain) in financial instruments used in its hedging program, investments classified as trading, and loans designated under the fair value option, based on balances in place at quarter end. These estimated changes include the impact of related amortization of deferred revenue and expenses and related income tax impacts. In addition, the point in time impact includes a decrease/(increase) in the value of the reserve and (decrease)/increase in the deferred acquisition cost balance of certain fixed annuity blocks of business due to the dynamic lapse sensitivities within Global Atlantic's models.
The impact over 12 months is driven by an increase/(decrease) in the income earned on Global Atlantic's floating rate assets, and partially offset by an increase/(decrease) in the cost of its floating-rate liabilities.
In the table below we estimate the impact of a 50 basis point increase/(decrease) in interest rates, for a parallel shift in the yield curve, from levels as of March 31, 2021 to Global Atlantic's AOCI.
| | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Hypothetical change(1) |
| | +50 Basis points | | -50 Basis points |
($ in thousands) | | |
Total estimated AOCI sensitivity (point in time) | | $ | (1,602,771) | | | $ | 1,938,185 | |
The estimated point in time impact is driven by a net (decrease)/increase in the value of Global Atlantic's available-for-sale fixed maturity securities which are carried at fair value with unrealized gains and losses, net of certain offsets, reported in AOCI. The estimated changes include the impact of related amortization of deferred revenue and expenses and related income tax impacts.
Credit spread risk
Global Atlantic is exposed to credit spread risk as a result of changes in the spread between the yields on its funds withheld receivable at interest and yields on comparable U.S. Treasury securities. Global Atlantic's reinsurance agreements include modified coinsurance and funds withheld coinsurance arrangements. Such arrangements are deemed to contain embedded derivatives, which are measured at fair value, and are therefore impacted by the mark-to-market value of the related assets. Changes in the credit spreads associated with the assets impact the mark-to-market value of the assets. There is additional credit spread risk exposure inherent in Global Atlantic's own credit spread used in valuing embedded derivative liabilities, which serves to mitigate net credit exposure. Global Atlantic may choose to enter into hedge positions to manage credit spread risk. As of March 31, 2021, Global Atlantic had a $1.7 million credit derivative position.
Effect of credit spread sensitivity
In the table below, Global Atlantic estimates the impact of a 50 basis points increase/(decrease) in credit spreads from levels as of March 31, 2021 to its net income and shareholders’ equity, excluding AOCI.
| | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Hypothetical change |
| | +50 Basis points | | -50 Basis points |
($ in thousands) | | |
Total estimated net income and shareholders’ equity excluding AOCI sensitivity (point in time) | | $ | 1,600 | | | $ | (1,600) | |
These estimated changes include the impact of related amortization of deferred revenues and expenses and related income tax impacts and include impacts on Global Atlantic's own credit spread used in valuing embedded derivative liabilities.
Equity price risk
Global Atlantic is exposed to equity price risk as a result of changes in the level and volatility of equity prices.
Changes in the level and volatility of equity prices primarily impacts the fair value reported in the consolidated financial statements of the following:
•embedded derivatives and policy liabilities associated with Global Atlantic's variable annuities, fixed-indexed annuities and indexed universal life products;
•financial instruments held in Global Atlantic's investment portfolio and used in its hedge program; and
•certain of Global Atlantic's alternative assets.
Changes in fair value of the foregoing are recorded as gains or losses in our consolidated statements of operations.
In addition, certain of the fees Global Atlantic earns in its variable annuity and variable universal life blocks are calculated on the account values, which are exposed to equity price risk. These changes impact our net income over the periods following equity price moves.
Effect of equity price sensitivity
In the table below, Global Atlantic estimates the impact of a 10% increase/(decrease) in equity prices from levels as of March 31, 2021 to its net income and shareholders’ equity, excluding AOCI. These sensitivities include the impact of related hedges but exclude the potential impact of alternative assets, because the fair value of these investments do not necessarily move directly in line with movements in public equity markets.
| | | | | | | | | | | | | | |
| | March 31, 2021 |
| | Hypothetical change(1) |
| | +10% Equity Prices | | -10% Equity Prices |
($ in thousands) | | |
Total estimated net income and shareholders’ equity excluding AOCI sensitivity (point in time) | | $ | (29,800) | | | $ | 23,100 | |
Total estimated net income and shareholders’ equity excluding AOCI sensitivity (over 12 months)(2) | | $ | 4,100 | | | $ | (4,700) | |
_________________
(1)From time to time, Global Atlantic may choose to enter into additional hedges to mitigate economic exposure to equity markets. Sensitivities as of March 31, 2021 include a macro equity hedge position established in December 2018.
(2)Excludes point in time impact. Estimated sensitivity to a hypothetical change over 12 months does not take into account any management actions that may be taken to mitigate actual impacts.
The estimated point-in-time impact is driven by an increase/(decrease) in the value of the embedded derivatives associated with Global Atlantic's fixed-indexed annuity and indexed universal life products, and largely offset by a decrease / (increase) in Global Atlantic's variable annuity embedded derivatives and policy benefits, and gains or losses on financial instruments used in Global Atlantic's hedging program. These estimated changes include the impact of related amortization of deferred revenue and expenses and related income tax impacts.
For a discussion of current market conditions, and uncertainties resulting from COVID-19, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Environment." We continue to monitor and plan for the potential market risks, and risks related to our results of operations and financial condition, related to the scheduled discontinuation of the London Interbank Offered Rate ("LIBOR") at the end of 2021. See "Risk Factors—Risks Related to Our Business—Transition away from LIBOR as a benchmark reference for interest rates may affect the cost of capital and may require amending or restructuring existing debt instruments and related hedging arrangements for us, our investment funds and our portfolio companies, and may impact the value of floating rate securities based on LIBOR we or our investment funds hold or may hold in the future, which may result in additional costs or adversely affect our or our funds' liquidity, results of operations and financial condition" in our Annual Report. There was no other material change in our market risks during the nine months ended September 30, 2020. For additional information, please refer to our Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that the information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and such information is accumulated and communicated to management, including the Co-Chief Executive Officers and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives.
We carried out an evaluation, under the supervision and with the participation of our management, including the Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020.March 31, 2021. Based upon that evaluation, our Co-Chief Executive Officers and Chief Financial Officer have concluded that, as of September 30, 2020,March 31, 2021, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
As discussed in Note 3 of our financial statements included elsewhere in this report, we acquired Global Atlantic on February 1, 2021. We are in the process of evaluating the internal controls of Global Atlantic. However, as permitted by related SEC staff interpretive guidance for newly acquired businesses, the internal control over financial reporting of Global Atlantic was excluded from the evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2021. In the aggregate, Global Atlantic represented approximately 61% of our total consolidated assets and approximately 30% of our total consolidated revenues as of and for the three months ended March 31, 2021.
Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during the three or nine months ended September 30, 2020March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As noted above, we acquired Global Atlantic on February 1, 2021. We are in the process of reviewing the internal control structure of Global Atlantic and, if necessary, will make appropriate changes as we continue to integrate Global Atlantic into our overall internal control over financial reporting process.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The section entitled "Litigation" appearing in Note 1623 "Commitments and Contingencies" to our condensed consolidated financial statements included elsewhere in this report is incorporated herein by reference.
ITEM 1A. RISK FACTORS.
Other than as set forth in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 under the heading "Risk Factors," which is incorporated herein by reference, and in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Environment" in this report, there were no material changes to the risk factors disclosed in our Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Share Repurchases in the ThirdFirst Quarter of 20202021
Under the repurchase program, KKR is authorized to repurchase its common stock from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing, manner, price and amount of any common stock repurchases will be determined by KKR in its discretion and will depend on a variety of factors, including legal requirements, price and economic and market conditions. KKR expects that the program, which has no expiration date, will continue to be in effect untilunless the program is not extended after the maximum approved dollar amount has been used.completely spent. As of May 7, 2021, the current program will be extended before the current maximum approved dollar amount will be completely spent. The program does not require KKR to repurchase any specific number of shares of common stock, and the program may be suspended, extended, modified or discontinued at any time.
In addition to the repurchases of common stock described above, subsequent to May 3, 2018, the repurchase program will beis used for the retirement (by cash settlement or the payment of tax withholding amounts upon net settlement) of equity awards issued pursuant to our Equity Incentive Plans representing the right to receive shares of common stock.Plans. From October 27, 2015 through September 30, 2020,March 31, 2021, KKR has paid approximately $369$462 million in cash to satisfy tax withholding and cash settlement obligations in lieu of issuing shares of common stock or its equivalent upon the vesting of equity awards representing 18.020.5 million shares of common stock. Of these amounts, equity awards representing 11.0 million shares of common stock or its equivalent were retired for $190 million prior to May 3, 2018 and did not count against the amounts remaining under the repurchase program.
The table below sets forth the information with respect to repurchases made by or on behalf of KKR & Co. Inc. or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock duringfor the thirdperiods presented. During the first quarter of 2020. No2021, 1.5 million shares of common stock were repurchased, during the third quarter of 2020 and no1.3 million equity awards were retired during the third quarter of 2020.retired. From inception of the repurchase program in 2015 through September 30, 2020,March 31, 2021, we have repurchased or retired a total of approximately 59.363.2 million shares of common stock under the program at an average price of approximately $19.02$20.55 per share.
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| | | | | | | | | | | | | |
Issuer Purchases of Common Stock |
(amounts in thousands, except share and per share amounts) |
| | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid Per Share | | Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
Month #1 (July 1, 2020 to July 31, 2020) | — |
| | $ | — |
| | 52,283,838 |
| | $ | 500,000 |
|
Month #2 (August 1, 2020 to August 31, 2020) | — |
| | $ | — |
| | 52,283,838 |
| | $ | 500,000 |
|
Month #3 (September 1, 2020 to September 30, 2020) | — |
| | $ | — |
| | 52,283,838 |
| | $ | 500,000 |
|
Total through September 30, 2020 | — |
| | | | | | |
| | | | | | | |
(1) Amounts have been reduced by retirements of equity awards occurring after May 3, 2018. On May 6, 2020, KKR announced the increase to the total available amount under the repurchase program to $500 million. |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Common Stock |
(amounts in thousands, except share and per share amounts) |
| | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid Per Share | | Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
Month #1 (January 1, 2021 to January 31, 2021) | — | | | $ | — | | | 52,283,838 | | | $ | 407,339 | |
Month #2 (February 1, 2021 to February 28, 2021) | 743,558 | | | $ | 47.64 | | | 53,027,396 | | | $ | 371,917 | |
Month #3 (March 1, 2021 to March 31, 2021) | 758,000 | | | $ | 47.42 | | | 53,785,396 | | | $ | 335,974 | |
Total through March 31, 2021 | 1,501,558 | | | | | | | |
| | | | | | | |
(1) Amounts have been reduced by retirements of equity awards occurring after May 3, 2018. On May 6, 2020, KKR announced the increase to the total available amount under the repurchase program to $500 million. |
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Other Equity Securities
During the thirdfirst quarter of 2020, 7,197,0172021, 2,258,781 KKR Group Partnership Units were exchanged by KKR Holdings for an equal number of shares of our common stock. This resulted in an increase in our ownership of KKR Group Partnership and a corresponding decrease in the ownership of KKR Group Partnership by KKR Holdings. In November 2020,May 2021, approximately 3.22.3 million KKR Group Partnership Units are expected to be exchanged by KKR Holdings into an equal number of shares of our common stock.
Unregistered Sales of Equity Securities
Following the closing of the Global Atlantic acquisition, on February 2, 2021, we issued 0.96 million newly issued shares of KKR & Co. Inc. common stock for an aggregate purchase price equal to $38.5 million to certain members of Global Atlantic’s senior management who agreed to invest a portion of their proceeds from the acquisition into KKR & Co. Inc. common stock. These members of Global Atlantic's senior management agreed not to transfer the shares received in this issuance for a three-year period following the acquisition, subject to certain exceptions, and to continue to own at least 25% of such shares so long as such person is employed with Global Atlantic. These shares were issued in a private placement exemption from registration under Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION
On November 3, 2020, KKR Capital Markets Holdings L.P.KKR’s 2021 Annual Meeting of Stockholders (the “Annual Meeting”) will be held on Tuesday, June 22, 2021 at 9:00 a.m., Eastern Time. The Annual Meeting will be held in a virtual meeting format only. Only stockholders of record at the close of business on May 21, 2021 may attend the meeting. To receive further information about how to attend the meeting, please register by sending an e-mail to Investor-Relations@kkr.com with the following information between May 21, 2021 and certain other capital market subsidiariesJune 20, 2021. Please write "KKR 2021 Annual Meeting Registration" in the subject line of KKR & Co. Inc. entered into a first amendment (the "Amendment") with Mizuho Bank, Ltd., as administrative agent,the e-mail, include your full name, address, and the lenders party thereto to the third amended and restated 5-year revolving credit agreement, datednumber of shares of common stock owned by you as of March 20, 2020 (as amended from timethe record date, and be prepared to time, the "Agreement") with Mizuho Bank, Ltd.,confirm your ownership of such shares as administrative agent, and the lenders party thereto. The Amendment provides for additional revolving borrowings of up to $250 million, for total revolving borrowings under the Agreement of $750 million with a $750 million sublimit for letters of credit, expires on March 20, 2025 and ranks pari passu with the existing $750 million 364-day revolving credit facility provided by them for KKR’s capital markets business. The foregoing description of the Amendment does not purportrecord date. Please note that no discussion of KKR's business will be presented at the Annual Meeting, and no matter will be presented to its stockholders for a vote. Therefore, no action is expected to be complete and is qualified in its entirety by reference totaken at the full text of the Amendment, a copy of which is attached as Exhibit 10.2 to this report, and the terms of which are incorporated by reference herein.Annual Meeting.
ITEM 6. EXHIBITS.
The following is a list of all exhibits filed or furnished as part of this report:
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| | | | | | | |
Exhibit No. | | Description of Exhibit |
2.13.1 | | Agreement and Plan of Merger, dated as of July 7, 2020, by and among Global Atlantic Financial Group Limited, a Bermuda exempted company, Global Atlantic Financial Life Limited, a Bermuda exempted company, Magnolia Merger Sub Limited, a Bermuda exempted company, Magnolia Parent LLC, a Cayman Islands limited liability company, and solely for Section 2.10(a) thereunder, LAMC LP, a Cayman Island exempted limited partnership, and Goldman Sachs & Co. LLC, solely as the Equity Representative (incorporated by reference to Exhibit 2.1 to the KKR & Co. Inc. Current Report on Form 8-K filed on July 10, 2020). |
3.1 | | |
3.2 | | |
3.34.1 | | |
4.1 | | |
4.2 | | |
4.34.2 | | |
4.44.3 | | |
10.1 | | |
10.210.1 † | | First Amendment,364-Day Revolving Credit Agreement, dated November 3, 2020,as of April 9, 2021, among KKR Capital Markets Holdings L.P., certain subsidiaries of KKR Capital Markets Holdings L.P., Mizuho Bank, Ltd., as administrative agent, and the one or more lenders party thereto. |
10.2 † | | Second Amendment, dated April 9, 2021, among KKR Capital Markets Holdings L.P., certain subsidiaries of KKR Capital Markets Holdings L.P., Mizuho Bank, Ltd., as administrative agent, and the one or more lenders party thereto, to the Third Amended and Restated 5-Year Revolving Credit Agreement dated March 20, 2020. |
31.110.3 † | | |
10.4 † | | |
22.1 | | |
| | | | | | | | |
Exhibit No. | | Description of Exhibit |
31.1 | | |
31.2 | | |
|
31.3 | | |
Exhibit No. | | Description of Exhibit |
31.3 | | |
32.1 | | |
32.2 | | |
32.3 | | |
101 | | Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Financial Condition as of September 30, 2020March 31, 2021 and December 31, 2019,2020, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2021 and March 31, 2020, and September 30, 2019, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020March 31, 2021 and September 30, 2019;March 31, 2020; (iv) the Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30,March 31, 2021 and March 31, 2020, and September 30, 2019, (v) the Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30,March 31, 2021 and March 31, 2020, and September 30, 2019, and (vi) the Notes to the Condensed Consolidated Financial Statements. |
104 | | Cover page interactive data file, formatted in Inline XBRL and contained in Exhibit 101. |
† Certain information contained in this agreement has been omitted because it is not material and is the type that the registrant treats as private or confidential.
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† | Certain information contained in this agreement has been omitted because it is not material and would likely cause competitive harm to the registrant if publicly disclosed. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | KKR & CO. INC. |
| | |
| | |
| | By: | /s/ ROBERT H. LEWIN |
| | | Robert H. Lewin |
| | | Chief Financial Officer |
| | | (principal financial and accounting officer) |
| | | |
DATE: | November 6, 2020May 10, 2021 | | |