KKR & Co Inc (KKR) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to today's KKR Private Equity Investor LP Second Quarter 2009 Financial Results Conference Call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions.

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Miss Laurie Poggi, Investor Relations Manager for KKR.

Please go ahead.

Thank you, Courtney, and welcome, everyone, to the KKR Private Equity Investors Second Quarter Conference Call.

I'm Laurie Poggi, the Investor Relations Manager for KPE.

I'm joined by Henry Kravis, Co-Founder of KKR and Co-Chairman of KPE's Managing Partners' Board of Directors; Paul Raether, Head of KKR's portfolio management committee; Kendra Decious, KPE's Chief Financial Officer; Scott Nuttall, Head of KKR's Global Capital and Asset Management Group; and Bill Janetschek, KKR's Chief Financial Officer.

We refer you to the KPE website, www.kkrprivateequityinvestors.com, for important information, including a press release and financial report detailing KPE's financial results for the quarter ended June 30, 2009.

We also included, in the press release, summary financial information for KKR on a historical stand alone basis for the quarter ended June 30, 2009.

On today's call, Henry Kravis will give an update on the KKR-KPE merger and discuss KKR and KPE's performance.

Following Henry's remarks, Paul Raether will review KPE's investments that have changing marks during the second quarter.

Following Paul's remarks, Kendra Decious will review KPE's financial performance.

After Kendra's remarks, we'll answer your questions.

Before we begin, we'd like to remind everyone that the following prepared remarks contain forward-looking statements regarding future events and the future performance of KPE.

And representatives from KPE may make additional forward-looking statements in response to your questions.

These statements do not guarantee future events or performance, therefore undue reliance should not be placed upon them.

KPE does not assume any obligation to revise any forward-looking remarks that may be made in today's release or call.

Today's call is scheduled to conclude within an hour.

With that, I'll turn the call over to Henry.

Laurie, thank you very much and thank you, everyone, for being on the call today.

We're going to cover several topics on today's call, including the transaction between KKR and KPE.

We'll cover the second quarter performance, both our portfolio and KKR, cover how we see the current environment.

We'll talk about a number of new investments and our proactive efforts around the capital structures of our portfolio of companies.

Let me turn first to the transaction between KKR and KPE.

The consent solicitation to KPE unitholders officially ended on August 14th, with approximately 98% of the submitted consents voting in favor of the transaction.

As previously announced, the unitholder consent requirement and all other conditions precedent to the closing of the transaction were satisfied on August 4th.

As a result, the combination is expected to become effective on October 1, 2009, subject to completion of the restructuring of KKR's business and other similar requirements.

Assuming these requirements are satisfied on October 1st, KPE and KKR's existing owners will begin to share in the profits and losses of the combined business.

As we discussed previously, we believe that this combination presents a great opportunity for both KPE unitholders and for KKR.

KKR's new unitholders will share in the financial performance of all of KKR's businesses and benefit from our asset management efforts around the world.

KKR will have valuable permanent capital to grow its new business and a new currency to recruit and retain talent.

All investors in KKR will benefit from these additional resources.

At the same time, the transaction reflects the confidence we have in the companies that we're invested in together.

Through this transaction, in exchange for 30% ownership of KKR, KKR will be taking $3 billion of net asset value, stated as of June 30, 2009 onto its balance sheet.

Our ownership of these assets will make KKR the largest investor in our own private equity portfolio and further align our interests with our investors.

We thank you, the KPE unitholders, for your broad showing of support and are pleased that you see the same opportunities as represented by the outcome of the consent solicitation.

Today we disclosed summary information for KKR, including second quarter segment results.

KKR's results fell at the high end of the ranges that we provided last month.

Our comments regarding KKR's performance will be limited this quarter, given the timing of the KKR-KPE transaction.

But in future quarters, we expect to provide more detailed information regarding KKR's results.

As of June 30, 2009, KKR's assets under management were $50.8 billion versus $47.3 billion as of the previous quarter ended March 31, 2009 and $60.8 billion a year earlier.

Assets under management grew 7.4% over last quarter, primarily due to the increase in the fair market value of our private equity funds.

For the three months ended June 30, 2009, KKR's fee-related earnings were $54.3 million compared to $43.7 million for the three-month period ended March 31, 2009 and $58.9 million for the three-month period ended June 30, 2008.

Fee-related earnings increased over last quarter, primarily as a result of higher transaction fees that were generated by increased investment in capital markets activity and a decrease in operating expenses.

As a reminder, KKR's management fees provide a relatively stable revenue base.

For the most part, KKR's management fee is based on committed capital or the remaining cost of investments, so mark-to-market changes do not affect the management fees.

Additionally, the monitoring fees KKR receives from portfolio companies for the work we do, partnering with management teams to improve the business are also recurring in nature.

For the three months ended June 30, 2009, KKR's economic net income was $366.9 million compared to an economic net loss of $52.1 million for the three-month period ended March 31, 2009 and economic net income of $119.9 million for the three-month period ended June 30, 2008.

Economic net income increased over the prior quarter, primarily due to the 11.5% increase in the fair market value of our private equity funds.

Economic net income is more volatile than fee-related earnings as it is driven significantly by the mark-to-market changes that we do quarterly on our valuations.

It is important to note that the vast majority of the economic income -- net income this quarter is related to unrealized gains.

Ultimately, we are focused on returning cash profits to our fund investors and cash carry to our public company investors.

We will be patient in our approach to improve the companies we own, use the attractive capital structures we have in place and seek to exit at the most opportune times.

This is the same approach we have used over the course of our history to generate almost 26% gross returns on our private equity funds since the time of inception of KKR.

Next, let me focus on the current environment and specifically KPE's performance.

Global equity markets rebounded during the second quarter of 2009.

The MSCI World Index rose 19.7% during the quarter, while the S&P 500 index rose 15.9%.

KPE's net asset value climbed 14.4% during the second quarter to $14.66 per unit versus $12.82 as of March 31, 2009.

This figure is consistent with the preliminary range of $14.55 to $14.75 provided last month.

As of June 30, 2009, KPE's net asset value was $3 billion, which compares to $2.6 billion as of March 31, 2009.

As you know, our private company valuations are generally based on a combination of market multiple and discounted cash flow analytics and our valuation process has been consistent from quarter-to-quarter.

While the market multiple approach generally resulted in increased valuations in the second quarter, the discounted cash flow approach led to valuations that were flat to down due to the use of a higher risk fee rate at June 30th versus March 31.

Since the close of the second quarter equity markets have extended the second quarter gains and credit markets have continued to perform well on the back of rallies in senior secured loans, high-yield debt and investment grade bonds.

For the first half of the year, the S&P loan index return was up 32.2% as compared to a 2008 record loss of 29.1%.

The Merrill Lynch high yield index returned 29.4% through June as compared to a loss of 26.4% in 2008.

Returns on both indices increased further through the end of July 2009.

Now these positive indicators are tempered by continued weakness in consumer spending, consumer confidence, retail sales and a very high unemployment rate.

We characterize the current environment as one of stabilization.

Capital markets have calmed, liquidity has improved.

But as a general rule, businesses continue to drive earnings growth more through cost reductions than revenue improvements.

We believe that companies in our private equity business are performing better than average.

The relatively strong performance is the result of two main factors.

One, our ownership of leading strong franchise companies, many of which operate in defensive sectors such as Alliance Boots, Energy Future Holdings and HCA.

And secondly, the great work of the management teams in our portfolio companies, private equity industry teams at KKR, our KKR capstone operating professionals and our portfolio management committee in driving operational improvements.

In addition to an intense focus on the operations of our portfolio companies, our capital markets and private equity industry teams have made considerable strides in addressing the capital structures of our various private equity portfolios.

As you're undoubtedly aware, the global debt markets face a looming wall of debt maturities over the next few years with approximately $560 billion of leveraged loans and $420 billion of high-yield bonds maturing prior to 2015.

Even though over 80% of the debt in our private portfolio companies matures in 2013 and thereafter, we still believe that proactive, coordinated activity and advanced focus on refinancing are critical to staying in front of the curve.

As a first step in building our coordinated approach to addressing the refinancing needs of our portfolio companies, the team assessed the issues facing each of our North American portfolio companies.

We then prioritized 11 of these portfolio companies and outlined the specific opportunities available to each.

Including situations where they could refinance upcoming debt maturities in the new issue market, capture value from debt trading at significant discounts to par value or amend existing credit facilities.

To date, we've made significant progress in our refinancing effort.

We've refinanced and extended over $13 billion of debt at eight of our prioritized portfolio companies.

This represents nearly 40% of all sponsor-backed high-yield and bank debt refinancings and extensions in 2009 and over 60% of all sponsor-backed amendment and extension transactions.

We believe that these refinancings and extensions have materially improved the maturity profile of our portfolio between now and 2012, reducing debt maturing in the period 2009 to 2011, for these eight portfolio companies, by over 60%.

And for our North American portfolio, overall, by over 22%.

The remaining portion of 2009 to 2011 period maturities is expected to be repaid with available cash and future liquidity.

We're also focused on accessing refinancing windows in Europe to improve the capital profile of our European portfolio companies.

KKR Capital Markets helps source a material amount of the debt repurchased at favorable prices by portfolio companies such as Alliance Boots and ATU in Germany in 2009, through its broad market relationships.

Alliance Boots was one of the largest debt buy-back programs in Europe this year.

In addition, KKR Capital Markets has worked closely with our deal teams, to help us act exchange transactions at NXP, to reduce leverage and to help us facilitate credit facility amendments at UN Ro-Ro, a shipping company in Turkey.

KKR Capital Markets professionals and our private equity industry teams will continue to work closely with all of our portfolio companies to aggressively review their capital structures.

You have to understand, though, that there's still considerable refinancing work to do, but we're convinced that this advanced focus will be critical to adding real value to our portfolio.

As discussed on private -- prior calls, we're convinced that today's environment is right for making good investments.

Clearly, there was a period during the fourth quarter of 2008 and the first quarter of 2009 when the world was a bit of a standstill and even though assets were cheap, it was very difficult to transact.

Now, however, with capital markets and liquidity improving, it's possible to buy good businesses or invest in good businesses.

However, 40 years of investing by George Roberts and myself in all economic environments has taught us to approach these opportunities with caution.

Let me walk you through the private equity transactions that we have recently completed.

Since we launched our operations in Asia, we've been focused on making investments in China.

We believe our capital and operational expertise can help companies capitalize on the naturally high growth Chinese economy.

In today's environment, in particular, we look for investments with low leverage and attractive growth prospects.

On June 15th, we announced the completion of a series of investments and Ma An Shan modern farming, which we call modern dairy.

Modern dairy is one of the largest operators of centralized large-scale dairy farms in China.

This is a proprietary transaction with a management team that our deal team knows very well and has successfully worked with before.

Dairy farming's an operationally intensive business and we think there are several operational improvement opportunities to tackle what this management team, who as I say, our team in China from KKR has worked with and invested with in the past and knows them very well.

On July 8th, we announced an agreement with Bertelsmann in Germany to create a joint venture to develop a global music rights management business to which Bertelsmann will contribute its BMG rights management business unit and KKR will contribute up to EUR250 million over the next five years.

And we were able to source this proprietary opportunity based on our long-standing relationship with Bertelsmann, as Bertelsmann believes that KKR is the right partner for this innovative transaction, given our focus on creative, long-term investing and improvement in operations.

Upon funding the transaction through the initial investment of the [EUR50 million], Bertelsmann will own 49% of the joint venture and we, at KKR, will own 51%.

KKR will significantly enhance BMG's rights management financial position and create new growth potential by providing access to its global network.

KKR and the management team foresee building a major music rights management business through organic growth and acquisitions.

We expect to complete the transaction by the end of September.

This transaction is an example of how a strong relationship, through corporate and strategic partners, will continue to drive proprietary deal flow for KKR.

We're also able to capitalize on identifying attractive assets of motivated sellers, which is a current investment theme of ours.

In today's environment, we believe many companies will be divesting assets.

For example, on July 24th, we closed our $1.8 billion purchase of Oriental Brewing in Korea from Anheuser-Busch InBev.

We discussed Oriental Brewing at length during our first quarter call, but as a reminder, Oriental Brewery is the second largest brewery in South Korea and our first South Korean investment.

Oriental Brewery possesses traits we look for in a successful private equity transaction, including a solid base business with high margins and strong free cash flows, a very strong management team, with significant experience in the Korean market and appealing growth prospects.

From the outset of the transaction, we focused on offering differentiated certainty and speed of execution to the seller.

We leveraged our strong local and global relationship with international banks and we were the only bidder to obtain certain funds debt financing.

Ultimately we won the limited auction, where price consideration was not the sole determining factor.

All of these investments were through existing private equity funds, through which KKR -- KPE invests.

KPE did not take an additional co-invest in these investments I mentioned and will have all of its exposure through its investments in KKR's private equity funds.

As always, we continue to monitor the global investment landscape for other new investment opportunities.

We believe that there will be attractive investments to make across asset classes and that we, drawing on the full resources of our firm, including geographic diversity, industry knowledge and proprietary sourcing skills, are competitively positioned to make them.

Although it's not necessarily meaningful to KPE's liquidity or economic performance, due to its small investment size of $27 million at cost.

I want to just spend a moment on the initial public offering of one of the portfolio companies, called Avago.

On Wednesday, August 5th, Avago completed its initial public offering at $15 per share, which compares to KKR's costs of $5 per share.

A substantial proportion of the offering's primary proceeds will be used to pay down debt.

There is also a piece of it that is a secondary piece as well.

The stock was trading at $16.44 as of 11 o'clock this morning.

Now that compares to our offering price of $15, so it's trading well and above the offer price.

We're going to continue to focus on monetizing investments -- other investments in our portfolio, when opportunities like this present themselves.

Finally, we continue to make very good progress expanding KKR's business in a synergistic way to capitalize on the exciting opportunities this market affords us to invest up and down the capital structure and around the world.

We look forward to updates in future calls, but to highlight a few items, one, we continue to build on our KKR asset management business, including a specific focus on mezzanine and other opportunistic credit strategies.

This business has over $13 billion in assets under management today and will be a growth engine for us going forward.

Two, we're making strong progress in expanding our energy and infrastructure efforts, leveraging our strong presence and track record in the space.

Three, we continue to build our KKR capital markets business, which is developing proprietary access to capital, providing KKR product directly to our investors and close relationships and helping our portfolio companies.

Four, finally, we continue to invest in our client and partner group, which is tasked with developing value-added relationships with our existing investors and sourcing new partners around the world.

And finally, we continue to expand globally with new team members in India and the Middle East in the last 12 months.

We believe this is a wonderful time to be investing in KKR and we highly value your partnership and trust, as our new partners in these efforts as we go forward.

And with that, I thank you very much and I would like to turn it over to my partner, Paul Raether.

Thank you, Henry.

I'll discuss the investments that KPE holds as co-investments that experienced changing marks during the second quarter ended June 30, 2009.

These included Dollar General and HCA.

I will also discuss the negotiated equity investments that had changing marks during the quarter.

These include Sun Microsystems, and Orient Corporation, which we refer to as Oraco.

Our private equity portfolio companies are, on the whole, performing quite well.

The majority of our companies, which are leaders in their industries, are large-scale and global, achieved solid performance results during the second quarter, despite continued global economic pressures.

During the quarter, all of KPE's co-investments remained flat or increased in value.

Here are the details of changing marks by company.

First, Dollar General.

We marked our investment in Dollar General up from 1.3 times cost, as of March 31, 2009, to 1.7 times cost as of June 30, an increase of 31%.

The aggregate fair value of the investment partnership's investment in Dollar General, as of June 30, was $514 million, or 17% of the investment partnership's net assets.

The increase in the Dollar General valuation was primarily due to continued positive performance by the company.

HCA.

We marked our investment in HCA up from costs as of March 31, 2009 to 1.2 times costs as of June 30.

The aggregate fair value of the investment partnership's investment in HCA at June 30 was $311 million, or 10% of the investment partnership's net assets.

The increase in the HCA valuation was primarily due to strong performance by the company, driven by positive top-line growth and effective expense management as well as increases in the trading valuations of comparable companies.

HCA's performance continues to be very strong year-to-date.

Q2 2009 revenue was up 7.2% over last year, driven by positive admissions and pricing trends and Q2 2009 adjusted EBITDA was up 26.7% over last year.

HCA's net leverage was approximately 5.1 times at June 30, 2009, down from approximately 6.2 times at June 30, 2008.

We continue to work closely with the HCA management on a number of initiatives, including proactively addressing the company's refinancing needs.

Year-to-date, we have completed two amendments to HCA's credit agreement, to create additional financing flexibility.

We have also issued $2.75 billion of first lien bonds and 310 million of second lien bonds since the beginning of the year to repay a portion of our term loans, which mature in 2012 and 2013.

We are pleased that in today's marketplace, we were able to execute these financing transactions.

Turning to the negotiated equity investments, at June 30, 2009, we marked the value of the Sun Microsystems investment up to $235 million, net of $350 million of financing, using fair value inputs versus a value of $175 million at March 31, 2009, or an increase of $60 million, or 34%.

As a reminder, the terms of the investment partnership's senior convertible notes investment in Sun, provide that the investment partnership has the right to require Sun to purchase the notes at par upon the consummation of a fundamental change of Sun, which includes the acquisition of Sun by Oracle, which was announced on April 20th, 2009 and was approved by the Sun shareholders on July 16, 2009.

If the transaction, as contemplated, closes, from an NAV perspective, we expect to recover our original costs resulting in NAV accretion of approximately $115 million, or $0.56 per unit, relative to the 30 -- the June 30 mark.

On a cash basis, we expect to net approximately $300 million in proceeds after settling the related financing, plus accrued interest.

There can be no assurance whether or when the pending acquisition of Sun will be consummated or whether or when the notes will actually be repurchased.

Lastly, we mark the value of KPE's Orico investment up to $199 million as of June 30, versus $143 million at March 31, an increase of 39%.

The challenging macroeconomic environment in Japan, particularly the decline of auto loan origination has significantly impacted the top line revenue of Orico.

However, the company remains profitable, as the management continues to focus on cost controls and credit management.

In closing, I would like to emphasize what Henry stated earlier.

That we believe our portfolio of companies are performing better than average.

Most of our companies are leaders in their industries, are large scale and global, and they have achieved solid performance results during the second quarter.

And now I would like to turn the call over to Kendra, who will review KPE's financial results.

Thank you, Paul.

I will review KPE's performance for the quarter ended June 30, 2009, then we will open the lines for questions.

As of June 30th, KPE's net asset value was $3 billion and our NAV per unit was $14.66.

This represented a 14.4% increase from the NAV per unit of $12.82 as of March 31, 2009.

Net assets increased $378 million, predominantly as a result of valuation changes in the four companies that Paul has already discussed.

Please refer to the financial information in KPE's second quarter 2009 earnings press release and interim financial report, both available on KPE's website, for further descriptions of the changes to NAV during the quarter.

The investment portfolio held by the investment partnership totaled $3,189 billion net of related refinancing, as of June 30, 2009.

These investments consisted of private equity fund investments of $1,296 billion within six KKR private equity funds, co-investments of $1,373 billion in 13 companies within these funds, negotiated equity investments of $434 million and an investment in the strategic capital institutional fund, which totaled $86 million.

As of June 30th, 2009, the investment partnership had a cash balance of $808 million and had drawn $938 million of its five-year senior secured credit facility, established on June 11, 2007.

As of June 30th, the investment partnership's availability for further borrowings under the credit facility was $18 million.

Absent a change in financial and economic markets, we expect to apply most of our cash or available credit to fund our capital commitments to the KKR private equity fund to make debt repayments and for operating expenses and other short-term working capital needs.

As of June 30, 2009, the investment partnership has remaining undrawn capital commitments for three KKR private equity funds of approximately $929 million.

These undrawn capital commitments are typically drawn over a multi-year time horizon because the largest use of capital commitments is to fund KKR's acquisitions and equity investments.

Because of this, we do not believe that the KKR fund will call the entire remaining undrawn capital commitments immediately.

Taking into account our portfolio and estimates of future cash needs, we believe that our sources of liquidity are currently sufficient to honor our commitments.

Please remember that our remarks have included forecasts and estimates that constitute forward-looking statements and actual results may be different due to changing circumstances.

Thank you all for your attention.

And, Courtney, we can now open the line for questions.

Thank you.

(Operator Instructions)

We'll go first to Michael Kim with Sandler O'Neill.

Hey, guys.

Good afternoon.

First off, just in terms of the merger, I understand the broader markets have stabilized more recently, but can you just kind of help me understand why you opted to go ahead with the transaction now after kind of sitting on the sidelines for some time?

And does this perhaps suggest you think we've reached somewhat of an inflection point in terms of the markets and maybe trying to get out in front of a step up in deal flow?

Let me ask my partner Scott Nuttall to answer that.

Hey, Michael.

In terms of why now, I think it's important to reflect on the fact that the transaction itself, which was announced actually last summer, was never actually called off.

It was actually delayed more than anything else, as we went through the tumultuous environment, especially the fourth quarter of last year.

So I'd say our commitment and approach to the transaction has been pretty steady throughout.

Obviously as we went through the fourth quarter, and what was happening in the capital markets, we decided to pull back from the conversations that we've been having with some of the investors to see how things played out.

Partly because we felt that was prudent and partly based on feedback from them.

So in terms of the why now, frankly, I think it was -- we had felt that it was the markets were starting to stabilize a bit, that based on our discussions with our shareholders, there seemed to be a continued interest in pursuing the transaction.

And from our standpoint, the original rationale for the transaction still held.

And so as a result of all that, our feeling was that it was the right time to move ahead.

The large shareholders in the Company agreed and obviously we've taken the steps we've had.

So it hasn't really been anything new from our standpoint, except some stability returning that's really allowed us to proceed under the original game plan.

In terms of a broader message about inflection point, I don't think we're calling any great bottom in the cycle or any such thing by this action.

Our perspective is that based on what we see in the markets, both the credit and the equity markets, and then also what we are seeing in the deal environment, as you can tell from what we've said today, we've been able to get some transactions completed.

The stability has allowed us to see a pick up in deal flow across our different businesses.

And I think that our perspective is that although we are still clearly in a difficult part of the cycle, that the returning of stability has allowed us to get some things done and we continue to see a fairly full pipeline of opportunities in front of us.

So that's how I'd articulate it.

I think from our standpoint, it's a continuation of what we started last summer.

Okay.

And then I know you kind of touched on this earlier, but do you think maybe we've kind of turned the corner in terms of the IPO market?

And if so, how are you thinking about realizations as you look across your portfolio of companies, maybe, over the next 12 to 18 months.

This is Henry.

Look, clearly the market has just started to open up.

We went for two years, almost, where there is basically no initial public offerings, except a small handful and that was it.

And nothing of any size.

I think the Avago offering is somewhat indicative of demand out there.

If you've got a good company with good prospects, the market will take it.

As you know, we upsized that particular transaction and the demand was there, we priced it, it was a range of $13 to $15 a share, with prices at the high end of the range, and it has traded up above that.

Now that is one transaction.

There are others, as you well know, Michael, that have now been filed by other people.

Assuming those go well, maybe the market will be open.

But we're certainly sensing a better attitude and much more receptivity than what we had seen, certainly, in the first quarter.

Okay.

And then just finally, I know liquidity at the holding company level isn't necessarily an issue, particularly after the deal with KPE.

But any interest in perhaps tapping the credit markets to kind of bolster your balance sheet, given what seems to be some pretty attractive spreads right now?

Hey, Michael, it's Scott again.

We -- we'll look at that over time.

We have no plans today.

Obviously, the funding that we have in place is relatively long term and relatively low cost, which we're pleased with.

But I think over time, we will assess the credit markets and consider whether it makes sense to issue longer-term debt.

But there's no plans in place today.

Okay.

Thanks for taking all my questions.

Sure.

We'll go next to Sanjay Sakhrani with KBW.

Hi.

Thank you.

I was hoping to get a sense of what the opportunities were for deployment of the uninvested assets at KKR?

I think those were about $15 billion.

I think Henry mentioned today's environment's kind of ripe for a good investment.

I was wondering if you could walk us through kind of what those look like and the types of returns you expect?

Also, a time line would be helpful as well.

Thanks.

Well, that's -- this is Henry.

That's a tough question to predict.

What we're looking at right now is all the way from companies where there is a divestiture, where a parent company, a public company, needs capital.

And Anheuser-Busch InBev, is a good example.

They need to raise money in order to pay down the debt load that InBev took on in buying Anheuser-Busch.

So we ended up working with them and bought Oriental Brewery.

There are a number of companies that we're in contact with and having conversations with that say, look, we have projects that we would like to build out.

We don't want to stop them now.

But it's tough for us to raise money.

Maybe you can raise money if you're at a big company, but we're a smaller company, a mid-size company and we can't raise the kind of money if we don't have the sponsorship.

So that's perfect for us.

We will come in and basically become the sponsor, sponsorship of that -- for that company.

We may, as we did in East Resources, our oil and gas investment, what we did there, was they needed capital to build out and to continue their project in the Marcellus Shale field, and we were perfect for them.

It was a private company, they didn't want to go public.

They didn't want to sell the company to somebody else.

And so we ended up, said we'll provide capital and not only provide capital, we'll go on the Board, we'll be a major shareholder and we will help you develop your business in the future.

So you're going to see a lot of those kinds of companies.

Another opportunity would be a company that may have a special project that they want to build out.

Or an acquisition that they want to make and don't have the capital.

So we would team up with them and say, fine, we'll put together a structure.

It'll be a structured piece of paper, an equity, maybe a convert of some kind, that will them the capital they need to finish the project or to make an acquisition.

And then down the road, we would then end up with a possibility of either converting into the parent company or staying in that particular subsidiary and maybe that subsidiary goes public, maybe an acquisition they make is a separate company.

They want to take it public, et cetera.

So today, what I'd say, is you have to be much more creative.

You have to be much more flexible than in years past.

Because the one issue that you just don't know is how real are the earnings going forward?

So that's why we're looking in certain very specific areas where we can have a high confidence level in the earnings projected and just because they were something in the past does not necessarily mean they'll be that in the future.

And so that's why it's tough to go in and buy a public company that -- where you're -- it's trading at X and you've got to pay 25%, 30% X as a premium in order to buy it in.

There'll be some of those.

We're looking at some of those.

But that's a tougher kind of thing.

And the last thing I would say is that in the environment we're in today, the capital structures are far different than they were back in 2006 and 2007.

First of all, leverage availability is down.

So therefore the requirement is to put much more equity into a particular transaction.

In general, and this is really just in general, you could look at somewhere in the neighborhood of four times EBITDA to -- for the debt piece in total.

So if you're buying something at eight times, then what you end up having to do is say you've got to put half equity and half would be debt then.

So it -- the requirement's more equity.

The debt terms are not as attractive as they used to be.

But they're becoming more attractive.

Spreads are coming into line very well right now.

And so hopefully this will continue and we'll be able to continue our creative type of investing.

Okay.

So it sounds like it probably is going to take a little bit to deploy that $15 billion.

And maybe you could just tie that into capital raising opportunities.

I mean, is there an appetite to put money with you guys?

Well, the answer is yes.

There is an appetite to put money with us.

We're constantly raising money here and it's what it's going to be.

But that's fine.

We're going to make investments when we find investments that we think really make sense.

And keep in mind, this $15 billion, in round numbers, is divided between Asia, Europe and the US.

So it -- we're a global firm.

We have opportunities to invest around the world and we're seeing opportunities around the world right now.

And it's just a question of how confident we feel in those and what price we can buy those at and it's so -- to me, I have a saying here, don't congratulate us when we buy a company.

Any fool can buy a company.

Just pay enough, you'll own a company.

That's the easy part of what we do at KKR.

The hard part is, what do you do once you've made that investment and how do you create value down the road.

And that's where our focus is.

So any investment we're going to make, we want to make very certain that we can add value to that investment.

Hey, Sanjay, it's Scott.

I think one way to think about it, historically, our private equity funds have tended to invest their capital over four to six years.

And I think if you look at the consent doc, you'll be able to see kind of the vintage of when these funds were raised.

I think that's still kind of the right time frame to think about those funds being deployed as a general matter.

It's hard to get too precise, frankly, in our business, as to the exact timing of that.

I'd say as to your first question, a little bit, historically, and you can't take much from history, but in environments like this, we've tended to make investments where the returns on average have been a bit higher than our historical long-term averages.

And so this environment, we think, is an interesting one for investing.

And then the last thing I would say is in our non-private equity business, we are seeing opportunities to deploy capital as well that are quite attractive, in particular in the credit space, given the remaining dislocation there.

So I -- hopefully that gives you a little bit of help.

No, that's very helpful.

And then maybe just one final one.

I was wondering if I could get this data point.

I mean, do we have a breakout of the fees, kind of what was management versus advisory versus incentive?

For KKR?

This quarter?

Yes.

Sanjay, this is Bill Janetschek.

With regard to specific information on management fees and advisory fees, it is reportable segment information that we've included with the KPE press release.

Okay.

We can't provide that information.

All right.

Great.

Thanks a lot.

(Operator Instructions)

We'll move next to [Henry Freeman] with [Liberian Capital].

Hi.

Thanks for the update.

I'd be interested, you were talking about increasing the asset management business.

I'd be interested in what kind of areas you would be looking to, A, move into as new areas or obviously you're continuing to focus on the credit and mezz debt opportunities out there.

But would there be opportunities in real estate?

Even hedge funds?

No, thanks, Henry.

The focus today is on fixed income more broadly and mezzanine strategies.

So I kind of think what we have today is largely non-investment grade fixed income, high yield, senior secured term loans and mezzanine.

We are expanding that to include more kind of rescue capital, distressed type pools as well.

And that's an area that I think will be opportunistic for us going forward and an area in which we're focused.

And then more broadly, as a firm, we're clearly focused on building out our infrastructure business as a broader part of our energy and infrastructure platform.

In terms of other strategies, real estate, public equities, et cetera, over time those are entirely possible, but today our focus is really infrastructure, mezzanine, and more broadly, opportunistic credits.

Okay.

Thanks.

Sure.

And we'll go next to Mark Sunderhuse with Red Rocks Capital.

Hi.

Given your slightly more constructive backdrop, when you're not looking externally right now for potential acquisitions, but at your internal companies and you're working with different management teams, who may have, I guess, higher or lower beta on cash flow looking at energy futures holding in HCA versus something that's more de novo, like the dairy project in China, are you encouraging your management teams now to be more assertive in their growth plans?

Or are you still somewhat cautious and still more cost cutting?

And the question really goes to, I think, our fear and a global fear of are we going to see some top line improvement as we kind of march forward in this environment?

This is Henry.

I think that the best way to answer this, Mark, is to say that we're constantly challenging our management teams to look for growth opportunities.

Clearly, on the cost side and productivity improvements, which is really more the -- what we're focusing on than just firing a bunch of people, that's one thing.

But you can only do that for so long.

And we feel that you have to put money back into the businesses, both for innovation, research and development as well as for the proper capital expenditures.

So each company's going to be different.

It really depends on what their needs are.

Some companies are actually making acquisitions right now because they find this an interesting opportunity to buy some other companies, to grow the business and to add what they have.

Other companies are saying, I feel confident enough to now put the spade back in the ground again and go ahead and complete a project that they were working on.

So we really are -- I can't give you a general statement.

You have to grow your top line at some point.

And as -- if you look at most earnings outside of KKR, just in general, these companies, the earnings are pretty good, but if you look at either in a retail setting, same store sales or you look at just revenue lines in other companies, they're pretty meager.

There isn't a lot of growth there yet.

Now we're anticipating that will come.

We've thrown a lot of money at this through the stimulus package.

Inventories are extremely low and they're now being rebuilt.

So slowly, but surely, we think that, yes, you will have some top-line growth in companies.

Again, depending upon the industry we're talking about.

Thank you very much.

(Operator Instructions)

Okay.

Well, Operator, since we don't see anyone else, thank you very much for everyone for participating in today's call and we also thank you very much for your support of the transaction as well as the confidence you've got in us and we look forward to speaking with you again in the next quarter and when we can talk more about KKR and the combination at that point.

Thanks very much.

Once again, that does conclude today's program.

We thank you for your attendance.

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