KKR & Co. Inc. (KKR) Q2 2025 Earnings Conference Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

KKR's earnings call highlights strategic growth, strong investment management fees, and expanding global partnerships. Despite some management vagueness, the overall sentiment is positive, with robust financial metrics, optimistic guidance, and strategic positioning in emerging markets and technologies. The Q&A section reinforced confidence in asset-based finance and long-term opportunities in private markets. These factors suggest a positive stock price movement.

Key Financial Performance

Fee-related earnings (FRE) $0.98 per share, up 33% year-over-year for the 12-month period ended June 30, 2025, compared to June 30, 2024. This increase was driven by healthy management fee growth, strengthening in capital markets activities, and operating leverage.

Management fees $996 million, up 18% year-over-year. This growth was attributed to the activation of Americas XIV in Q2, broader fundraising initiatives, and continued deployment.

Total transaction and monitoring fees $234 million for the quarter. No year-over-year change or reasons provided.

Capital Markets transaction fees $200 million, with over half coming from activities in Europe. No year-over-year change or reasons provided.

Fee-related performance revenues $54 million, up 45% year-over-year. The growth was driven by performance allocation from the offshore Infrastructure K-Series vehicle.

Fee-related compensation 17.5% of revenues, consistent with the midpoint of the guided range. No year-over-year change or reasons provided.

Other operating expenses $172 million for the quarter. No year-over-year change or reasons provided.

FRE margin 69%, with a 360 basis point improvement year-over-year. This was driven by healthy management fee growth and operating leverage.

Insurance segment operating earnings $278 million, modestly ahead of the $250 million level discussed last quarter. No year-over-year change or reasons provided.

Strategic Holdings operating earnings $29 million for the quarter. No year-over-year change or reasons provided.

Realized performance income $419 million for the quarter. No year-over-year change or reasons provided.

Realized investment income $154 million for the quarter. No year-over-year change or reasons provided.

Private equity portfolio performance Up 5% in the quarter and 13% over the last 12 months. No reasons for the change provided.

Opportunistic real estate portfolio performance Up 3% in the quarter and 7% over the last 12 months. No reasons for the change provided.

Infrastructure portfolio performance Up 3% in the quarter and 14% over the last 12 months. No reasons for the change provided.

Credit portfolio performance Leverage credit composite up 2% in the quarter and 7% over the last 12 months. Alternative credit composite up 1% in the quarter and 9% over the last 12 months. No reasons for the change provided.

Capital deployed year-to-date $37 billion, with half deployed in Q2. No year-over-year change or reasons provided.

Unrealized carried interest $9.2 billion, up 30% year-over-year from $7.1 billion. This increase reflects the strength of the global portfolio.

Realized performance and investment income (last 12 months) $2.6 billion, up over 20% year-over-year. This growth was driven by monetization activities.

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Operating Highlights

HealthCare Royalty Partners (HCR) Acquisition: KKR acquired a majority stake in HCR, a leader in biopharma royalty investing, with $3 billion in AUM. This acquisition expands KKR's life sciences footprint and complements its existing healthcare investments.

Asia Market Expansion: KKR has been active in Asia with investments in various sectors, including agriculture in Australia, financial services in Singapore, and energy storage in Korea. Asia AUM has grown to $75 billion, with private equity now less than half of the total.

Asset-Based Finance (ABF) Growth: KKR raised $6.5 billion for its second ABF fund, tripling the size of its predecessor. ABF AUM increased by 20% year-over-year to $75 billion, with a $6 trillion addressable market expected to grow to $9 trillion in four years.

Fee-Related Earnings (FRE) Growth: FRE per share increased by 33% year-over-year, with a 360 basis point improvement in FRE margin. Management fees grew by 18% year-over-year, driven by fundraising and deployment activities.

Insurance Segment Performance: Insurance operating earnings reached $278 million, exceeding expectations. Third-party capital commitments, including $2 billion from Japan Post Insurance, are expected to add $60 billion in fee-paying AUM.

Global Atlantic Strategy: KKR continues to integrate third-party capital into its insurance strategy, with $6 billion in third-party capital capacity. This approach supports capital-efficient growth and enhances returns.

Life Sciences Expansion: The acquisition of HCR aligns with KKR's strategy to grow in long-duration and perpetual capital markets, leveraging synergies with its existing healthcare investments.

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Risk or Challenges

Market Volatility and Uncertainty: The company acknowledges that volatility and uncertainty in the macroeconomic environment create challenges, even as they present opportunities.

Regulatory and Compliance Risks: The company operates in multiple jurisdictions, including Asia, Europe, and the U.S., which may expose it to varying regulatory and compliance risks.

Geopolitical Risks: The company's significant operations in Asia and other global markets expose it to geopolitical risks, which could impact its investments and operations.

Fundraising Challenges: Despite progress, the company faces challenges in raising capital in a volatile market environment, which could impact its ability to grow AUM.

Insurance Business Risks: The insurance segment's performance is tied to long-term liabilities and alternative investments, which may carry inherent risks, including market fluctuations and leverage concerns.

Strategic Execution Risks: The company’s expansion into new areas like biopharma royalty investing and alternative credit markets involves execution risks, including integration and achieving expected returns.

Supply Chain and Operational Risks: The company’s investments in infrastructure and real assets may face supply chain disruptions and operational challenges.

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Guidance & Outlook

Insurance segment operating earnings: Expected to remain at the $250 million plus/minus level over the next few quarters.

All-in pretax ROE: Continues to approach the 20% level.

Deployment and monetization activity: Healthy pipeline for deployment in the second half of 2025 with $115 billion of uncalled capital. Direct line of sight to over $800 million of monetization-related revenue in the second half of 2025.

Asset-Based Finance (ABF) business: ABF market expected to grow from $6 trillion today to over $9 trillion in the next 4 years. KKR sees significant growth opportunities in this area.

Asia infrastructure strategy: Capital raising has begun, with expectations of strong demand based on historical success and Pan-Asian presence.

Wealth management products: Continued momentum with inflows tracking at or ahead of expectations. Plans to launch a real asset product in the future.

Insurance business: Focus on elongating and diversifying liabilities, with $2.5 billion of funding agreements issued recently. Expectation to continue activity in the longer duration parts of the FABN market.

Third-party capital for Global Atlantic: Approximately $6 billion of third-party capital capacity, translating to over $60 billion of additional fee-paying AUM once deployed.

Life sciences footprint expansion: Acquisition of a majority stake in HealthCare Royalty Partners (HCR), adding approximately $3 billion in largely perpetual AUM. HCR expected to enhance origination capacity across Global Atlantic and credit pools of capital.

2026 guidance: Confidence in achieving 2026 guidance across fundraising and core financial metrics, including FRE per share, TOE per share, and ANI per share.

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Shareholder Return Plan

Dividends and Interest Income: Realized performance income was $419 million and realized investment income was $154 million. These earnings were driven by a combination of public secondary sales and private transactions, as well as K-PRIME's annual crystallization alongside with dividends and interest income.

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Key Q&A

Q:Can you update us on the fundraising progress and platform additions for K-FIT, and how it differentiates itself in a crowded private wealth field?

A:Management highlighted that as of June 30, KKR had $120 billion of assets under management from individuals, excluding policyholders at Global Atlantic. K-Series AUM grew from $11 billion a year ago to $25 billion. K-FIT has a specific allocation to asset-based finance to differentiate itself. In Q2, K-FIT raised more capital than ever before, though from a lower base. KCOP is being converted to K-ABF, an asset-based finance vehicle, contingent on shareholder approval. Management emphasized strong returns for K-FIT and its potential for growth.

Q:How are institutional clients responding to the current fundraising cycle given the improved equity market and monetization activity?

A:Management reported raising $109 billion in the last 12 months and $217 billion over the last two years, indicating consistent momentum. They are ahead of their $300 billion fundraising target for 2024-2026. Institutional clients are showing interest in infrastructure, private credit, and asset-based finance. Strategic partnerships and consolidation of relationships are becoming more common, which aligns with KKR's strengths.

Q:Can you discuss the Harley-Davidson deal and opportunities for similar transactions in asset-based finance?

A:Management explained that Harley-Davidson sold the majority of its motorcycle loan portfolio and entered a long-term flow partnership for new loan originations. This reflects a broader trend of companies opting for capital-light models to free up resources for strategic initiatives. KKR sees significant growth in asset-based finance, with $75 billion in AUM growing at over 20% year-over-year. Similar opportunities have been seen with Discover, PayPal, and others.

Q:What is the strategy and timeline for the Energy Capital Partners relationship and the $50 billion announcement?

A:Management clarified that they are not speculative builders and the project is already leased to an attractive counterparty. Construction is underway with completion expected in Q4 next year. The partnership focuses on digital and energy infrastructure, with over $40 billion of equity invested across related areas. The $50 billion JV is split 50-50 between KKR and ECP, with capital coming from existing funds and strategies.

Q:What drove the outperformance of Global Atlantic in Q2, and how does the elongation of the liability profile factor into long-term strategy?

A:Global Atlantic reported $278 million in operating earnings for Q2, driven by variable investment income. Management maintains a guide of $250 million for future quarters. The elongation of liabilities is a multi-year process involving FABN channels, individual channels, and block side pipelines. They aim to increase allocation to alternatives methodically, currently at 1% compared to the industry average of 5%.

Q:What is KKR's perspective on potential 401(k) retirement reform and its impact on the firm?

A:Management is encouraged by discussions to make private market investments more accessible to U.S. retirement plans. They see this as an opportunity to offer higher-performing asset classes to individual investors. The U.S. retirement market is $40 trillion, with defined contribution at $12 trillion. Target date funds, which capture 60% of 401(k) flows, are likely to adopt alternatives first. KKR is positioning itself strategically for this long-term opportunity.

Q:How is KKR adapting its business model to changes from AI and blockchain over the next 5-10 years?

A:Management is focusing on building smarter solutions, enhancing productivity, and reimagining business models at portfolio companies. AI is creating significant capital needs, particularly in digital infrastructure. KKR is exploring tokenized interests in funds and other creative approaches. They are still determining how AI and blockchain will specifically impact their operations but see meaningful opportunities in scaling private wealth and insurance businesses.

Q:How does KKR address concerns about the scalability of private credit and its ability to generate differentiated returns?

A:Management emphasized their 35 origination platforms and $30-$35 billion in annual IG footprint as key differentiators. They believe private credit is becoming mainstream and see opportunities in asset-based finance, which is a $5-$6 trillion market. They compared current skepticism to early concerns about private equity scalability, asserting that scale and capabilities will drive growth and returns.

Q:What is KKR's view on the bid-ask spread for strategic buyers of sponsor-backed companies?

A:Management stated that they are not experiencing the bid-ask spread issues reported elsewhere. They have been active in monetizations, particularly in Asia, and find strategic buyers more willing to engage as their stock prices and cost of capital improve.

Q:What drove the strong investment management fees in private equity and real assets, and what is the outlook for capital markets fees?

A:Investment management fees benefited from the activation of Fund XIV and catch-up fees in Real Assets. Management expects continued solid growth in management fees. Capital markets fees were $200 million in Q2 and $430 million year-to-date. They anticipate Q3 fees to be in line with Q2, with potential upside if markets remain healthy.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the timing and quantum of potential 401(k) reform impacts, as well as the exact steps they are taking to adapt their business model to AI and blockchain. They also did not provide precise timelines for deploying the $50 billion JV with Energy Capital Partners or the specific breakdown of capital sources for this initiative.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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