KKR & Co. Inc. (KKR) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to KKR's First Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Thanks, Janine. Welcome to our first quarter 2013 earnings call. Thank you for joining us. As usual, this morning, I'm with Bill Janetschek, our CFO; and Scott Nuttall, Global Head of Capital and Asset Management. We'd like to remind everyone that this call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our SEC filings for cautionary factors related to these statements. And we'll also refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release. This morning, we reported after-tax economic net income per unit of $0.88, which compares to the $0.99 that we reported in the first quarter 2012. Total distributable earnings were $291 million for the quarter, up sharply from the $164 million reported for the first quarter last year. This increase was driven by the realized gains from our balance sheet, which went from the $53 million we reported in the first quarter of 2012 to the $153 million that we reported this quarter. Importantly, these realized balance sheet gains will now directly impact our first quarter distribution given the change we've announced to our distribution policy. Beginning with this quarter, in addition to the fee related earnings and realized cash carry that we've always distributed in the quarter in which they're earned, we're changing our distribution policy to include 40% of the realized balance sheet income earned each quarter. This 40% is comprised of realized balance sheet gains, dividends and interest income, less realized balance sheet losses and interest expense. This realized balance sheet income component of our distribution will be paid out on a quarterly basis and replaces the annual additional distribution that we have historically announced in the fourth quarter of each year. With this change in our policy, we've announced a first quarter distribution of $0.27 per unit. This has the traditional fee related earnings and cash carry components, which are $0.10 and $0.08, respectively, as well as $0.09 of realized balance sheet income. And finally, before we move on, I'd like to remind you of our second Investor Day to be held in New York on Thursday, May 23. We will issue a press release in the coming weeks with information on the live webcast, but we'd like to invite you to attend in person. If you haven't already registered, please follow up with either Sarah or with me after the call. We all look forward to seeing you there. And with that, I will now turn it over to Bill to walk you through the drivers of our performance and give you an update on netting, and then Scott will discuss the environment and what we've been focused on across our different segments. Bill?

Thanks, Craig. We ended the first quarter with record assets under management of $78 billion, up 4% from last quarter and 26% from the same time last year. Distribution to our fund LPs in the quarter were more than offset by investment appreciation and new capital raise, which is true for both our Private and Public Market segments. As of March 31, our fee paying assets under management were also the highest we've reported, totaling $62 billion and representing an increase of 3% and 32% from last quarter and last year. Keep in mind, these numbers do not include approximately $9 billion of committed capital, over $5 billion from Asia 2 as of March 31, $1 billion from the Texas Teachers mandate that we have not yet allocated and about $3 billion of capital and other vehicles that will be included in AUM once it's invested. Let me give you an update on Asia 2. In April, the investment period for our first Asia Fund closed, and with that our Asia 2 fund was activated. In our second quarter press release, you will see for the first time Asia 2 listed on the investment summary table, and this fund will officially be included in our AUM and fee paying AUM figures. So what does this mean for our financials? Now that Asia 2 is turned on, we are entitled to a management fee on the third-party portion of that capital. Assuming that we reach a final close of $6 billion by the end of the second quarter, we would earn a fee of 150 basis points on the $5.75 billion of LP committed capital. Additionally, when Asia 2 turned on, our first Asia Fund switched from the investment period to the post-investment period, and the management fee on Asia 1…

Thanks, Bill. I want to give everybody a quick update on how we feel about our progress one quarter into the year. The way that we look at it, we have several jobs we need to do well to generate performance for investors and shareholders. We need to be thoughtful around our deployment of capital. We have to generate strong investment returns, including exits, generating cash back to our fund LPs and carry. We need to scale our newer businesses, and we have to put our balance sheet to work in high-ROE opportunities. Let me give you a quick update on each of these. This is a really interesting time in that we're finding good opportunities to both deploy capital and exit investments. On the deployment front, in the first quarter, we closed or announced 6 new private equity investments and a handful of follow-ons, with total committed equity from KKR of about $2.3 billion. The transaction activity was global, with deals in the U.S., Europe and Asia. And we've also been busy in our originated credit businesses, in particular, direct lending and special situations. On the exit front, we had several monetizations. We had secondary Jazz Pharmaceuticals at approximately 4x our cost. We did secondaries at HCA, Nielsen and Dollar General at 3.2x, 2.1x and 5.5x our cost. And we announced strategic sales of BMG in Europe for 1.8x and Intelligence in Japan at 5.4x our cost. Together, these exits helped contribute to the $4 billion in actual and expected distributions to our private equity investors so far this year and filled the netting hole for the 2006 Fund. In addition, they generated $0.08 per unit of carry distribution in Q1 and are expected to generate $0.18 of carry so far for Q2. Turning to performance. Our private equity…

[Operator Instructions] The first question is from Robert Lee of KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: I appreciate the change in the distribution policy. Just a quick question. First thing, simple one, is could you just update us on where NAXI is? Is it still fund-raising? Or was the last raise the last close? Or is there -- are you still kind of out there with that fund?

Robert, it's Scott. NAXI is still fund-raising. We're at about $7.5 billion, give or take, as we sit here today, and we expect to wrap up fund-raising sometime in the second half. But we're still in the market. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And maybe just going down the fund-raising path, I know you've got multiple irons in the fire, but I guess the first thing is can you, number one, with the good inflows in the quarter into the Public Markets, how much of that came from a Prisma? I mean, how much of that added to kind of the organic growth? And then secondly, if you can maybe call out some of the strategies where you see kind of where you're really focusing on in the markets right now and you think there's pretty good fund-raising momentum, aside from Asia, and maybe update us on the real estate progress?

Bill, you want to take the first one?

Sure. Rob, it's Bill Janetschek. You're referring to Page 16. We raised about $1.5 billion in Public Markets segment alone in this quarter, and that's a combination of capital that we raised to KFN of about $500 million, about $400 million from Prisma. We also raised about $400 million from CCT, which is that BDC that we launched about 1.5 years ago. And about another $300 million in SMAs. But as you point out, NAXI, we're still fund-raising from now until the second half of 2013. We hope to hit our hard cap in Asia by June 30 of '13. And then on the Public Markets side, we have plenty of venues on which we're trying to raise capital. We launched 2 mutual funds at the end of 2012, and we are continuing to raise a modest amount of capital in that strategy. And as we mentioned on the prior call, it's early days on that, and we're not expecting anything big from that. But we hope that will ramp up over time. We're also raising capital still for a special situations fund. And is there anything else that we're -- we've got open funds on, on Public Markets, Scott?

No. I'd say those are the big ones. I think there's -- we continue to raise capital around some of the liquid strategy and high-yielding loans, but I think Bill covered the big ones. I think on your question on real estate, Robert, we have been doing the deals that I mentioned off -- the KKR balance sheet and the KFN balance sheet basically in partnership. We will, here, be creating a real estate fund. It's not going to be our typical long fund raise. I think that we'll club together a group of investors, drop some of those investments down into the fund to -- so it's seeded with some of these investments that we've made with a portion of what we've deployed off the balance sheet. But it's very early days on that. We'll give you an update in future quarters.

The next question is from William Katz of Citigroup.

Just -- if you look at the margin of the business on the fee related margin, that improved pretty nicely sequentially. How much of that was just seasonal factors versus a more sustainable level?

Well, Bill, if you're referring to Page 6 in fee related earnings, you can see our margins are about 40%, which is up a little. And when you take a look at these 3 quarters just as a snapshot, none of these were, what I would say, quarters where we had significant activity, like a quarter where we had the Samson transaction close in the fourth quarter of 2011. So I would say that this is more or less what we should expect more or less on a quarter-to-quarter basis. To the extent that we have significant transaction activity in a particular quarter, you will see those margins increase. However, in a quarter where we don't have any transaction activities, you might actually see margin decline.

Yes. I'd say, Bill, the way I would look at it is there tends to be a higher flow-through margin on incentive fees and transaction fees. We had a decent incentive fee quarter so the margin's up a bit as a result of that. So part of it, I would say, is due to that dynamic. But I also say part of it, frankly, is that were starting to get scale on some of the expenses that we've put in the ground on these newer businesses. And so I'd say some of it's sustainable and part of it's just due to the good incentive fee quarter.

And then, Bill, just one other point. If you take a look on operating expenses, you could see that they've been somewhat lumpy when again, you're just looking at a snapshot of these 3 quarters. The fourth quarter of 2012 was higher than what you would think is a run rate number only for the fact that in that particular quarter, we had a halfway decent amount of broken deal expenses. You could see that in the first quarter. That number's about $44 million. And I would expect that if you want to try to think about how to model this out, it would be in that probably $40 million, $45 million range over the next few quarters, barring any unforeseen write-offs in a couple of deals that we're chasing, where we get close and rack up a halfway decent amount of broken deal expenses but don't actually close on it.

Okay. Second question is I think -- I was writing down as quickly as I could -- about $400 million of net business from Prisma. Maybe just sort of stepping back, what's sort of your sense for capacity and opportunity in that platform now that you've had another quarter of integration?

I'd say, Bill, we feel very good about capacity, both in the existing vehicles that they manage, and also some new product ideas that we're working on. And so I think there's a significant amount of running room there. There are some other competitors in the customized hedge fund solution space that manage significant capital, $20-plus billion. And I think, given our strategies, if we can keep our top quartile performance and they've done a great job, both before the acquisition and since on the performance front, but if we can sustain that, we think we have a significant opportunity to continue to scale the business.

Okay. And just one final one, just a clarification, Bill, you mentioned earlier that the delta between Asia 1 moving over to the monetization period and then the Asia 2 kicking in is a plus $13 million in terms of management fee income. Did I hear that correct?

Yes. So it's management fee income. So about $13 million per quarter.

The next question is from Michael Carrier of Bank of America.

Just on the distribution, just wanted to get a sense in terms of your thought process on when you think about the payout, the fee related earnings makes sense, the cash carry makes sense. In terms of the 40% of the balance sheet, why the 40%? And then going forward, over time, do you feel like those investments, Scott, you mentioned in terms of making sure that you're investing for an attractive ROE, you have had -- starts to slow. Can that payout tick up? Just wanted to get your thought process around why the 40%.

Sure. Michael, it's Scott. I'd say we look at it obviously in the individual pieces, is how we articulate the distribution policy. But frankly, we also keep an eye on the overall payout ratio that's implied by the aggregation of how we pay out our earnings. So when you really add it up, it's 100% of fees and carry and 40% of the balance sheet gains, and that equates to approaching 70% of all of the cash earnings of the firm. And so another way to look at it is we're kind of almost at a 70% payout ratio given the mix of our earnings as it's been historically anyway. And so that's something that we kept an eye on. I'd say the other thing that we looked at is the uses of capital that we retained. Because obviously, that implies that we're retaining 60% of the income and profits, and we feel really good still today about how we're deploying that capital and the ROE that we're generating on it. As you know, we've been seeding new businesses and investing behind everything we're doing. But with Prisma, with Nephila, we're starting to use the balance sheet for more strategic activity as well. And so what I would say is that's the number that we feel good about right now. We think 70% is a very high payout ratio, frankly, which is about where this ends up. And I think you'd expect us to stick with this for the time being. If the analysis changes, of course, we can change it. But this is the distribution policy that I think you should think about, at least for the near to intermediate term.

And Mike, excuse me, just keep in mind, when you think about the return on our balance sheet, for 2012, that was 24% for the year. Balance sheet's up now another 7%, and that's just earnings off the balance sheet. That really doesn't take into account, as we're launching new platforms and raising third-party capital, the benefit we get from additional fee related earnings in the overall business as well. So again, to Scott's point, to the extent that we feel comfortable in using that capital to deploy in strategies where we think we're going to get a high return on investment, we're going to continue to do that.

Okay, it makes sense. And then maybe just on the Public Markets side. I guess 2 questions there. Just the incentive fees, obviously, stronger this quarter. Just wanted to get a sense of -- there's been a lot of changes, whether it's with Prisma, the stake in Nephila, some of the products that you've launched. Just -- what should we think about in terms of driving that line? And then same thing on the carrier, the incentive fees and then the carried interest. Just -- when we think about the AUM that's in that segment, like what portion should we be thinking about more in line with like the PE business versus something that won't have the same upside on the fees?

Mike, it's Scott again. I guess a fairly simple way of breaking it down in terms of what goes where, more the hedge fund-type economics plus KKR's financials incentive fee tends to flow through the incentive fee line. So when you think about what's in there, it's Prisma; it's the equity long, short vehicles; it's the KKR financial incentive fee; and other hedge fund-type products, which are more -- tend to be more high watermark then clawback-type in nature, will go into the incentive fee side. And then the carry calculation that you see in the segment reporting kind of further down the schedule there, that tends to be more the fund product. So think of the mezzanine fund, special situations funds that have more typical private equity fund formats. So those would be more the locked-up pools of capital that would fall into that part of the income statement.

And to help you with the numbers that Scott just walked you through, if you take a look on Page 17, you could see Public Markets. That lists out the committed funds that we've got, which you have more -- what I'll say, a traditional private equity-like model, where we're entitled to a profit participation. And again, you'll see that flow through in that line item in the Public Markets segment. And up on top, again, with the incentive fees, that's going to be KFN, it's going to be KES, it's going to be Prisma, and it's going to be Nephila.

The next question is from Michael Kim of Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, just to follow up on the shift in distributions. In the past, you've talked a fair amount about sort of the returns that you've been able to generate off the balance sheet and retaining capital to continue to build out the footprint. And I understand you're still retaining 60% of the related income to kind of earmark for those initiatives. But does it also suggest maybe that you feel like you've got more of the pieces in place as it relates to kind of the broad evolution in the franchise, if you will?

Michael, it's Scott. I would say there's certainly some truth to that. I think we've clearly built out the platform materially over the course of the last 2 to 3 years. And so some of it is a reflection on that. But I'd say also, it's 40% because we still see a lot of opportunities for growth. And so we're trying to find the right balance. But I think the other thing to think about is some of the legacy investments off the balance sheet, the private equity investments that were part of the legacy KPE balance sheet, are becoming more liquid. And so it's a combination of all of that, that had us settle into -- and settle into this as a distribution policy. So I'd say we are starting to get some scale on the newer businesses. But one thing that we see as a big opportunity is that we manage today about $30 billion of non-private equity assets, which gives us a pretty small market share, frankly, in those markets given how big they are. But we see a significant amount of growth opportunity against that $30 billion. But a lot of that $30 billion is in the U.S. So if you look at the firm's global footprint, we see opportunities to scale the non-private equity businesses as we scale the private equity on a global basis. So I'd say it's a balanced perspective that we've -- we started to get good traction on these newer businesses and have a lot of runway.

And Michael, when you think about where we were a year ago, our cash balance was down compared to where it is today. And we also had a lot hotter commitments in funds where we had the legacy KPE LP commitment. And so if I go back probably a year ago, the hard commitments, as well as the soft commitments we made to energy and real estate, were probably $1.6 billion, $1.7 billion. That number has actually now come down to a little under $1 billion. So if you were to turn to Page 3, you could still say that we've still got, what I'll say, hard commitments of about $650 million, plus we've also got very hard indications of interest in our real estate and our energy platform of about another $200 million. So that's where I'm getting the $1 billion. That being said, our cash balance is up. And so we're at a point right now where we feel comfortable, as we look out over the next year, of going with a 40% distribution on realized investment income off the balance sheet. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay. That's helpful. And then second, as you continue to build out your investment capabilities across the new strategies and geographies, is there an opportunity to maybe offer LPs sort of a multi-asset class fund that maybe has a broader mandate? Do you feel like there's demand for that type of strategy that's more flexible and might offer more of a shorter timeline relative to sort of a traditional PE fund?

Yes, I think there is. There are a lot of interesting opportunities like that, Michael, that come out from having all these capabilities under one roof. And we have done this with some institutional investors, where we create multi-product relationships, where we do a lot of different things in one wrapper. But I do think there is an ability to create over time kind of a KKR multi-strat capability and series of products for different investor types. So that's one of the ideas that we're working on from a new product standpoint and are talking selectively to some of our limited partners about doing things like that with us.

The next question is from Howard Chen of Credit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Scott, you gave some really helpful updates on fund-raising, deployment and harvesting, and I was hoping you could discuss a bit more on what you're seeing across core portfolio company fundamentals and maybe some of the other real-time data that you all look at in shaping the outlook.

Howard, it's Craig. Why don't I take a crack at that? When we look at the growth in the portfolio, and we do this really on an NAV-weighted basis, and the data, when we begin to look at it, is about a month lag. So it's February 2013 versus November 2012. And we haven't really seen a change in that LTM EBITDA growth profile. So when we look at EBITDA growth in North America and Europe across the portfolio, it's remained in the mid- to high-single digit. It's meaningfully higher than that across Asia, which frankly you'd expect given the more growth-oriented nature of these investments and also, frankly, the strong performance we've seen in our highest NAV businesses there. So when you blend all of that together, we haven't seen really any change in the overall growth profile within the portfolio companies.

Yes. The only thing I would add, Howard, I'd say the U.S. -- I agree with Craig's characterization. There hasn't been a real change. It's kind of more the same globally. U.S., the recovery continues to be pretty uneven. There are some sectors where we're seeing a recovery, like autos, housing, energy, manufacturing, but it's a slow growth overall. Europe, the economies obviously are struggling. Asia got better growth. It's still a bit uneven. But overall, the economic backdrop for our companies is pretty much what we've articulated the last couple of quarters, and yet we're really pleased that the portfolios themselves, the companies themselves have been able to keep growing revenue and have good flow-through down to the bottom line. So more of the same, but hopefully that color is a little helpful. Howard Chen - Crédit Suisse AG, Research Division: That's really helpful. And my follow-up, the harvesting activity has been fairly balanced between equity offerings, strategic sales and other forms of monetization like dividend recaps. Do you have any point of view on how you see that balance of realizations evolving or changing?

Very hard to predict. I would say we're pleased that there's been more strategic exit activity recently, which is something we've talked about in the last couple of calls. It's hard to predict how many of those are actually going to get done, so we were pleased that a couple did get done. And it's been global. And so that makes us feel good. But I think -- I would expect that we're going to continue to see a mix of the 3, with frankly more on the public exit side and strategic exit and then selectively some dividend recaps from time to time.

And just to give you a little color on our Public Market -- our public positions in the private equity portfolio right now, that stands at about 25%. So if you take a look at the $36 billion of fair value we have in the private equity portfolio, about 25% of that is public, so we still have that as an exit opportunity.

The next question is from Patrick Davitt of Autonomous Research.

I wanted to focus on the energy and infrastructure. It looks like you've kind of characterized all those strategies as various commencement dates and end dates. So does that -- should we assume that those are just kind of always in fund-raising mode? And is there an opportunity to maybe raise a more -- a larger, more traditional-type fund with the solid commencement date and end date in those strategies?

Patrick, it's Scott. Just to be clear, what falls in the energy and infrastructure portion of Page 17 there, where we list the funds, that's the non-private equity assets in energy and infra.

Oh, I'm sorry.

And so -- but just to be clear, so there's additional energy activity happening up in the private equity section. But it's a good question. I mean, what you'll see there is a mix of funds and separate account activity. And so on the fund side, you could see what's listed there, the natural resources fund and the infrastructure fund. Those are going to be more traditional kind of locked-up capital, multiple investors in those vehicles. And then also, frankly in the same vein, we talked about the energy income and growth fund that we're in the market with now. That would also kind of ultimately, when raised, show up in this section and be more traditional fund format. But to your question on the continuous fund-raising, the answer is yes. I mean, we see such a large opportunity to deploy capital in the energy spaces and frankly, a pretty interesting supply/demand dynamic that we will, I would guess, continue to be raising separate accounts for different elements of our energy strategy, which is kind of aggregated, as you see it there, under this global energy opportunities heading. And then there's co-investments as well. So I think you'll continue to see activity in both funds, separate accounts and co-invest.

Okay, that's helpful. And just to follow up on your comments on the distribution in the second quarter, I want to confirm that, that $0.18 number does not include the associated balance sheet gains?

Correct. That is just cash carry.

Just cash carry. Okay, great.

The next question is from Matt Kelley of Morgan Stanley.

Just one more question on the distribution policy from me. When you guys think about this, over time, as the balance sheet gets deployed potentially in more kind of fee earning assets or some of the hedge fund businesses that you've been more active in, I wanted to get a sense for what you guys think and what your unitholders are asking you when you come up with this new distribution policy? The migration would seem naturally to be more towards a higher payout ratio than what you're talking about now over time, just from the natural migration of that business. Am I thinking about that right? And is that what your shareholders are kind of asking you for over time as well?

Well, I'd say the way that we think about it, Matt, is that we would expect the balance sheet, which, as you know, was largely a private equity-heavy balance sheet, just given the legacy of the KPE platform to invest in our private equity funds and deals. I'd say that the balance sheet over time will begin to look more like the makeup of the firm's assets under management, which are more diversified, as you know, across credit hedge funds, real estate, et cetera, over time. And so I'd say we're going to see a migration from what was a 90-plus percent private equity balance sheet to something less. As part of that migration, if you think about it, just about everything that we do, except private equity, has either a current yield associated with it or liquidity. And so one of the things that we're doing with this policy is as the current yield or investment income and dividends off the balance sheet increases, and the -- as we redeploy that capital into these other strategies, we're going to be paying out 40% of that as well through the distribution. So it'll be not just gains, but it'll also be that investment income and dividend component, will also get paid out. And I think what you're hearing from us today is that we're repositioning that distribution so everybody can participate in that on a quarterly basis. And then we'll share with you how much is coming from realized gains versus kind of more predictable ongoing investment income as that capital gets redeployed. I think as we talked to our shareholders, what they're focused on is making sure that we have good uses for the capital and making sure that we are deploying that properly. And that's why we emphasize so much the return on equity that we're getting for the overall firm and the return that we're generating off the balance sheet itself. And keep in mind, we continue to own nearly 2/3 of the stock as folks here at KKR, so we're very focused on that as well as shareholders. And frankly, we remain the largest shareholders in the company. So trust me, it gets a lot of focus internally here, too.

Thanks Scott, that's helpful. And then second from me is I was hoping you could give us an update on LPs and your cross-sell, because there's been a lot of change in additions, moving parts to the business, as you indicated. So I'm just wondering if you can tell us kind of how many LPs you have now, how many of them own multiple products and if there's any sort of subset they can't own multiple products, just based on what they can kind of invest in?

Sure. I'd say, roughly, we have 580 or so LPs. It's somewhere between 575 and 600 today. We have -- the cross-sell is about an average of 1.7 products per LP. And there's a little pressure on that number, frankly, because if you add the number of LPs in one product, it obviously pushes down the cross-sell metric. But it's about 1.7. So we've seen the number of LPs continue to increase. We've seen that cross-sell metric continue to increase. And so -- and that's been on a global basis across all the different regions we cover. And so we've been pleased that we continue to make progress there. Having said that, we've got a lot of opportunity for growth. I think we'd talked about kind of when we started this journey in terms of building out our distribution capability, getting from kind of the 250 to 300 investors we have not that long ago to 1,000 plus, and we're working our way toward that. I don't think we have many LPs that can only invest in one product. I'd say some, kind of by virtue of their mandate, are focused on just a handful of things that we do. But one of the things we also look at, if you look at our top clients in terms of those that have the most capital with us, the kind of biggest investors that we have, they tend to be in between 3 and 4 products or more. And so when you segment it by size of relationship, you can see those cross-sell statistics move up materially. So we know what's in the realm of the possible. We have some that are in 5-plus different things that we do. And so I think we can continue to make progress at that end and then see the overall average blend up as well.

And then one last one from me. Is there any color you can give us on the early returns that you are going to be able to market for your real estate fund? Or any -- I don't know if you can talk about that or not, but just any sort of incremental data or directionally on how the real estate investments have done thus far?

Hard to give you any return numbers, Matt. But I would tell you that thus far, we've been really pleased with the investments we've been able to make, both in terms of different types of investments, different types of opportunistic and value-add real estate. And so far, we're quite pleased with the results.

Right. Matt, keep in mind that Scott referred to the over $600 million of commitments that we made to the real estate platform, half of which is coming from the balance sheet. Of that, we've only invested approximately about $150 million, and it's really early days. The first investment we made was only probably 6 months ago.

And one final thing on that, Matt, Ralph Rosenberg runs that business for us. He's one of the folks who's going to be -- has a -- is on a schedule for Investor Day. So certainly, in terms of trying to get a sense of the types of investments that the team has made and how that's been integrated across the whole franchise, I think there's actually a lot of color and perspective that will be helpful on May 23.

The next question is from Chris Kotowski of Oppenheimer. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: I'm looking at Page 17, the schedule of investments. And as we noted, it was a productive quarter in terms of realizations. But I'm trying to figure out how that translates into the carry, because -- and specifically, what I'm looking at is the Millennium Fund where last quarter, you had $7.9 billion of realized value in that fund, and that went up to $9.15 billion. So you had like an increase of -- or realizations of over $1.2 billion. And if you take 20% of that, you would have thought it would generate somewhere around $250 million of carry. And instead, there was $88 million. So what am I missing? Is there an offset or a markdown against that?

Sure, Chris. Yes, the offset is cost. So realize, take into account the cost plus the profit on an exit of a particular investment. And so you can't just take the realized at 20%. You'd actually have to have the information -- and you don't on this table, but you could actually figure it out -- of the difference between what the sales proceeds were minus the cost. And that gain at 20% pre the 40% carry pool would actually flow through to ENI. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: Okay. But you're already over -- you've returned more than 100% of cost. Is it still on an investment-by-investment basis? Or is it against the whole fund?

[indiscernible] Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: I'm sorry?

Sorry, Chris. I wasn't as clear as I could have been. It's investment by investment. So we don't have a European-type fund where you have to return all cost and then anything beyond that is gain. And we share in the profit participation. It's on an investment-by-investment basis. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: Okay. And then as a follow-up, I noticed like -- okay, as I said, there are like $1.2 billion of realizations there and only about $400 million in the '06 Fund. Does that mean like that the funds do not sell the investments on a ratable basis always? Or how does that work?

Well, the -- actually, they -- if they were in the same investments, they would sell on a ratable basis. But Millennium and '06 are largely invested in different companies. And so there'll be some carryover investments like HCA...

Like HCA.

So that's probably what you're seeing there, is -- the HCA would be a good portion of the '06 number and part of the Millennium number. But there were several other exits in the Millennium Fund like Nielsen and Sealy and Jazz that are just in Millennium and not in '06.

And the other point on that, Chris, if you think of -- if you were thinking of Dollar General, that was a transaction that did price in March, but it actually closed in April. So when Bill ran through the carry numbers that will be in the second quarter, that actually would have included Dollar General again in the second quarter as opposed to the first. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division: Okay. And then just a general -- I guess I'm curious about both Asia and Asia 2. I'm curious, roughly how much of that portfolio is invested in Japan, if you can disclose that? And does the existing portfolio get a lift from what's happening there now? And does it make you more likely or less likely to invest a greater portion of Asia 2 in Japan?

Well, Chris, we generally don't comment on portfolio-by-portfolio companies in a particular fund. But being that you're directly asking in the Asia Fund, do we have any investments in Japan, at that time, we only had one. And as Scott mentioned, we signed an agreement to sell that portfolio company at roughly 5.5x our money, and we expect that to close over the next couple of weeks. Once that sale takes place, we will then currently not have any investments in Japan, although we're -- we see a lot of opportunities in Japan, and we've got a dedicated team looking at investments daily.

The next question is from Marc Irizarry of Goldman Sachs.

Scott, I was wondering if you could just give us an update on your strategy in high net worth and retail. And specifically, can you talk about the fees that we should sort of think about when you're innovating in those areas? And also, the amount of KKR capital that you could -- that you sort of intend on a fund-by-fund basis to commit there?

Sure. Thanks, Marc. I'd say, in the high net worth and retail, there's a variety of different things that we're doing. I'd say our strategy has a few different elements to it. One is that we are building relationships with different platforms. So we will work with different groups that have high net worth franchises, and we'll create product with them and then market to their high net worth investors. And so a lot of what we're doing is through those platform relationships. The other thing that we've done is we've built a direct high net worth team at KKR. And so we are calling actively on high net worth individuals and family offices. And that's actually worked quite nicely in that we found that we can build relationships with those individuals, they will bring us deal flow, so there's a nice synergy back into the deal side of what we're doing at the firm. But that's a second element of the strategy. A third element is that -- we have talked a little bit about this, a Corporate Capital Trust, a CCT business development company that we've created in partnership with CNL. We are marketing that to individuals through the independent broker-dealer channel. And so that vehicle is now over $1 billion of fee paying assets. And then on top of those, we have created and launched 2 vehicles, one is a high-yield mutual fund and one is basically what they call an interval fund. It's more of a closed-end fund that invests in the liquid portion of our special situations business. And then in addition to that, we've filed for 2 new vehicles, one is for a Prisma multi-manager product that could be sold to retail investors, and another is a closed-end fund that would invest across things…

Okay, great. And then just one quick one, Bill, for you. In the Public Markets segment, the AUM growth, if you look sequentially at that versus the management fee growth, outstripped the AUM growth and the fee paying AUM growth by a big margin. What's that related to? Is it mix of funds? Or what's -- is it something we're missing there?

No, you're not missing anything. And it's a good point. And it is -- it has everything to do with the mix of capital that was raised. As I mentioned earlier, in the $1.5 billion was $500 million of capital raised from KFN, which actually pays a 1.75% fee. So when you have something like that come in, you're going to see the overall percentage go up.

The next question is from Aaron Teitelbaum of Surveyor Capital.

I just had a quick question. In the past -- this is in regards to the new distribution policy, and it's probably directed at Bill. But I believe in the past you paid tax distributions off your balance sheet. And I'm just trying to understand a little bit better the implications of balance sheet gains, how it flows through your structure, whether it goes through the corporate blocker purely from a modeling standpoint.

Sure, Aaron. From a modeling perspective, really, nothing has changed. We have earnings off our balance sheet, and what we had done historically, and with too much precision, was just call that a tax distribution. And we would only be paying that out once a year. Now because we have and we feel better about liquidity, instead of just trying to be granular and looking at this as a tax distribution only, we've come up with a formula internally here and are comfortable with 40%, where we are comfortable paying out 40% of all realized investment income. That's realized capital gains offset against realized capital losses, interest income against interest expense and dividend income. And so we feel comfortable in paying that out. Now from the structure itself, our unitholders will still have pass-through income. And depending on the type of investor, some investors might actually have a tax lability. But the one thing that we came across is, as we've talked to several investors, there are a lot of investors that are foreign, and their tax situation is different than in the U.S. We have tax exempts, et cetera. And so what we really wanted to do was get away from a focus of calling this a tax distribution, which it really isn't, and more in line of just paying out a certain percentage of realized income off the balance sheet.

I am showing no further questions in the queue and would like to turn the conference back for any further remarks.

Well, Janine, thank you. And thank you, everybody, on the phone. And we look forward to seeing everybody again on May 23. Take care.

Ladies and gentlemen, thank you for participating in today's program. This does conclude the conference, and you may all disconnect. Everyone, have a good day.