Good day ladies and gentlemen and welcome to KKR & CO Second Quarter Financial Results. At this time all parties are in a listen-only mode. We will have a question and answer session later on and the instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. Now I would like to welcome our host of for today’s conference Mr. Craig Larson. Please go ahead.

Thank you, Carmen. Thank you everybody this is Craig Larson, Head of Investors Relations for KKR. Welcome to our second quarter 2015 earnings call. As usual, I’m joined by Bill Janetschek, our CFO, and Scott Nuttall, Head of Global Capital and Asset Management. We would like to remind everyone that we’ll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release. The call will also contain forward-looking statements, which do not guarantee future events or performance. And please refer to our SEC filings for cautionary factors related to these statements. This morning, we reported strong second quarter results. Of note we reported second quarter economic net income of $840 million equating to $0.88 of after-tax economic net income per unit. Both of these figures are up over 40% from last quarter driving by strong investment performance. Total distributable earnings were $491 million in the quarter which translates into $0.57 of distributable earnings per unit net of taxes. And in terms of the distribution we’ve announced a distribution for the quarter of $0.42 per unit. Before we move on I’d like to bring your attention this quarter in addition to our press release we’ve included a supplementary presentation for the first time which is also posted on our website. We thought we would use these slides to highlight the key themes for the quarter as we reflect on our performance and will refer to the pages in this presentation over the course of the call. If you could turn to page two for a moment of the presentation this highlights the four main themes in our business that we’ll expand on over the next 10 to 15 minutes. Strong underlying investment performance, a continued scaling of our newer initiatives, however, continuing to use our balance sheet to invest in our ideas and enhance our growth profile and lastly key initiatives were focused on looking forward. And with that let me turn it over to Bill to discuss our financial performance in more depth.

Thanks, Craig. To set the stage for our results let me touch on page three of the earning supplement that Craig reference earlier. As you can see on this page we had strong investment performance this quarter across our carrying paying funds in both private and public market, helping our performance fees. And the performance is broad base. Our three key flagship PE funds were up between 9% and 15% in the quarter. We have also seen strong performance in our real asset strategies, which were up between 4% and 6%. And our alternative credit funds also had a good quarter with Special Sit especially strong returning 6% in Q2. And that investment performance helped drive the results we announce this morning most notably ENI, where we’ve announced record ENI on a total segment basis as well as within both private and public markets. In private markets we reported ENI of $666 million, which is up 17% from the first quarter and 77% on a year-over-year basis. This increase was primarily driven by the continued performance of our private equity portfolio appreciated 7.4% in the second quarter and 11.8% year-to-date. So far in 2015 through June 30th, our portfolio has outpaced the S&P 500 by over 1,000 basis points. Our private market balance sheet assets we’re also marked up, contributing to material quarter-over-quarter and year-over-year increases in investment income. In public markets we report $137 million of ENI, this is also materially on a quarter-over-quarter and year-over-year basis due mostly to strong performance fees and record quarterly investment income. Contributed to our performance this quarter includes the performance of our carry funds including our direct lending, mezzanine and special sit strategies, $31 million of realize investment income driven by gains in both liquid credit and Special Sit and we reported…

Thanks, Bill. As Craig and Bill walked you through, we had a very good quarter. I thought I would focus on the big takeaways for the quarter, share what we’ve been doing on the balance sheet and spend a few minutes on areas of focus and what’s next. The first takeaway from the quarter is that we are generating strong investment performance. Bill ran you through the data on page three, as you can see performance in the quarter was not only strong but also broad based. Let’s turn to page four and dig into the details of our private equity funds. We have executed a number of strategic sales over the last couple of years. In several those transactions we took back stock in the acquirer. Overall those stocks have performed well. In addition we have taken a number of companies, public. The result that we’ve seen a value of the public securities in our private equity portfolio increase from $4.6 billion a year ago to $11.9 billion today and those stocks continue to perform. As you can see on the right hand side of the page, Walgreens is up 14% over the last year, and higher HVA, TRA and GoDaddy are up between 40% and over 100% each. And the $11.9 billion of public securities does not includes First Data which filed its S1 earlier this week. As a reminder we have total exposure to First Data of approximately $4.5 billion approximately $3.2 billion in our funds and $1.3 billion of total exposure on our balance sheet. So PE performance for the quarter were strong. We have line of site to liquidity in the portfolio and the exit environment is good. In our non-PE strategies we are also seeing strong investment performance, good deployment and strong asset flows,…

Before we go into Q&A Mr. Larson would you like to add anything before we open the lines?

Thanks Carmen, I was just going to say just looking at the queue we actually have quite a few people lined up in the queue so if you could please ask one question and then get back in the queue if necessary we’d appreciate it.

[Operator Instructions] And our first question comes from the line of Craig Siegenthaler. Your line is open.

Hey thanks. Asia Fund II had a very strong mark in the second quarter but the Asian markets have been rolling over since May. I am wondering if you can talk about the potential for negative marks in 3Q and how the recent volatility has impacted your prices in Asia Fund II.

Hey, Craig this is Bill. I will take this one. As it relates to the performance in Asia during the second quarter you are right which is pretty strong and as you heard in my prepared remarks we had several monetizations in some of those Asia positions. Interestingly when you take a look at our public holding in our China investments and I ran these numbers on Tuesday our portfolio was only down about 4% and so when you look at where the marks were as of June 30th for those public companies and again based upon the drop in the Asia market again we have solid companies in our product we believe in China and again it was only down about 4%. I also want to point out as I ran the numbers if you take a look at where our publics were as of Tuesday, I am talking about all the public position that are embedded in that 32% that’s Scott mentioned we were up about 4% so that would be positive 4%.

Got it, very helpful. Thank you.

And our next question comes from the line of Glenn Schorr from Evercore.

Hi, thanks. I don’t know if there is anything that’s driving this specific shift in some of the structures and arrangements that you put under the shadow AUM, but I appreciate the slide and the disclosure. I am curious do they come at different fee structures things like the sovereign wealth partnership, the expansion of existing strategic partnership and does it change the way we think about the earning power of the dry powder in this expanded definition?

Hey Glenn this is Bill Janetschek, as it relates to the economics on most of those structures take for example Special Sits and Special Sit II Special Sit I which is originally based upon committed capital, Special Sit II it was little more challenging environment to raise on the public market side committed funds and so we went to a model where we were going to get paid on invested capital. The good news is that really when you look at Special Sit I to II it’s really only a timing issue because the management fee that we are going to be able to get on Special Sit II is 1.75% on invested capital as opposed to 1.5% on the original Special Sit, but that’s just one example. As it relates to some of the more strategic partnerships, where we’re raising large amount of capital and we’ve got to be deploying that capital those are very economic trade for us, so there might be slight fee concessions that we give up, but overall it’s a very profitable business for us.

Okay, I appreciate that.

And our next question comes from the line of Chris Kotowski from Oppenheimer. Your line is now open.

Yeah, good morning. Thanks for the slide back. I was wondering a little about out of NAXI, we saw like the first major harvest, looked like more than $800 million in realized proceeds out of NAXI and I was wondering if this is sooner than one would normally expect or do you think it is now at a point where you have a number of mature investments or was this kind of a one-off quarter for that?

Hey Chris, this is Bill. Very specifically to NAXI what’s ended up happening in a couple of the investments that we’ve made is we’ve actually refinanced those companies and returned that capital to our investors and all you’re saying is, us putting money up closing the investment, seeing early performance go the right way, doing a little bit of refinance and getting money back to our LP sooner.

Okay. So those were basically like dividend refinancing.

Yes.

Okay. And then secondly, I had, just if we look at your balance sheet, your investment and credit in terms of cost basis in the alternative credit, the last three quarters have gone from $3 billion to $2.8 billion and then $2.7 billion this quarter. So it just seems like there was kind of a deliberate rundown in that and like you’re not replacing what you’re harvesting. Can you kind of give us the thinking underlying that and whether we should see more of that?

Hey, Chris, it’s Scott. I’m happy to take that one. Yeah look, if you look at slide eight of the deck you’ll see on the left hand side we call out that we have been selling down some of our on balance sheet credit portfolios, CLO and otherwise. And frankly what we’ve seen there is an opportunity to redeploy that capital at higher returns and opportunities like those we lay out on the right hand side of the page. So it’s been somewhat deliberate because we’ve seen valuations and credit move up and so we’ve seen the returns from this point forward go down and we saw opportunities to redeploy at a higher return level. And so it’s hard to say where we’re going to go from here but it has been a deliberate move to bring down credits we’re deploying to other areas.

Okay. Great. Thank you.

Thank you.

And our next question comes from the line of Michael Kim from Sandler O’Neill. Your line is open.

Hey guys good morning. Just to maybe follow up on the discussion on shadow AUM. I know it’s difficult to generalize just given the different strategies and opportunities sort of beneath the surface if you will it. Any thoughts or color on how you’re thinking about sort of the timeline or trajectory for potentially deploying those assets?

So Michael, it’s Scott. I guess what I would tell you one of the biggest components of the shadow AUM is our private credit business. And that business as we talked about in our last call has really scaled from $3 billion to now well in excess of $15 billion in the last few years and if you think about the deployment in those strategies if you look at our Direct Lending I or Special Sit I funds you know we’ve been managed to get that money to work in a two to three years kind of timeframe. These funds are going to be larger, would be our expectation and then obviously Direct Lending II is much larger than Direct Lending I but if you think in the two to four-year timeframe that’s probably a reasonable expectation.

And Michael, this is Bill. Just a little bit of a follow-up on shadow AUM. We’ve been talking about shadow AUM on the earnings for probably the last couple of years and it’s always been roughly at a range of in between say $4 billion or $5 billion or $6 billion. We saw a significant increase this quarter and what we’ll end up doing is we’re signing commitments, we’re raising capital but it’s not just coming through or AUM or fee paying AUM because of the way we report it. But we wanted to make sure we draw it to your attention the significant capital raising that we’ve had over the last couple of quarters and I hope you find this information useful. Another thing that I want you just take a look at is, if you look at page 15 in that uncalled commitment column a lot of the shadow AUM that we’re talking about on the slide six is actually reflected on that table. So you could see Special Sits II where we’ve got uncalled capital the $1.6 billion that’s part of that shadow AUM.

Got it, that’s helpful. Thanks for taking my question.

Thank you.

And our next question comes from the line of Bill Katz from Citi.

Okay, thanks for taking my questions, I appreciate the actual disclosure it is very helpful. Just a big picture question, Scott I may read too much into this but it sounds like as you monetize some of the bigger stakes in the balance sheet you said this would be tactically adding to over time so I guess the question is as you are scaling the business will it be what you have now or shadow AUM and given what looks like a bit of a slowdown in dry power deployment and much of your peer saying hey the markets are pretty heavier with the equity fix income. Can you talk about rationale of managing such a large balance sheet at this point in time, is it strategically compelling now as you scale the business and maybe the root question here so Craig just [indiscernible] is could you lower the size of the balance sheet and maybe pickup cap return in terms of repurchase on top of the distribution?

Great, thanks for the question, Bill. I’d probably separate topics a little bit if it’s right. First let’s talk about deployment, if you look at actually the deployment that we’ve seen across the firm over the course of this year, it’s actually been pretty strong, relative to the first half of last year $4 billion in private markets, this year at $3.3 billion so far that doesn’t include some investments like WMI so if you include those it’s actually closer to $4 billion. So we’ve seen private markets deployment kind of flat to off a little bit after a very active first half last year. And if you look in public markets you can actually see deployments gone up. So for gross dollars invested $1.8 billion first half last year $2.3 billion first half of this year it’s across Direct Lending, mezzanine and special situations. So we continue to find interesting ways to deploy capital, we are being very prudent because valuations have moved up in most markets but if you look at in the markets like Asia where we’ve been active in the number of different areas we’ve been able to find some very interesting opportunities special situations Direct Lending we are finding needs for capital have been active there. I would separate that discussion from the balance sheet question. As we talked about the last several quarters, our model is a bit different than its model that we choose and we like having this marriage of third party AUM with our own balance sheet and our capital markets business because we think it allows us to really monetize our ideas to a much greater extent. And I would actually take the result at this quarter as a proof point as to what the model can generate when we…

Okay. Thanks for taking all my embedded questions.

Thank you.

And our next question comes from the line of [indiscernible] from Deutsche Bank.

Hi, good morning folks.

Good morning.

Maybe just to focus a little bit, maybe Scott, you were talking about the Americas Private Equity is sort of what’s next idea. If you could talk a little bit about - two-part of question I guess, the deployment outlook in the Americas given what we’ve seen in high valuations where you are finding opportunities. And then thinking about the fund raising outlook, beyond where you are already in the market for in and to potential to raise a NAXI 12, sometime in the next I don’t know 12 to 18 month or so.

Happy to take it Bryan [ph]. Look I think a couple things. One, let’s start with deployment. As I mentioned that NAXI fund is about 60% invested and committed. They include transactions we’ve announced but haven’t yet closed and so we continue to find interesting opportunities. Valuations in the US are pretty high but we have managed to find some opportunities bit off the run that we find interesting. Two recent ones we announced Mature [ph] which is high note worth life insurance provider and CHI which is a garage door manufacturer. So these aren’t opportunities that you necessarily going to redevelop in the paper but, in most of those situations we’ll deploy $300 million or so of equity which is kind of been in our sweet spot for last several years. So we are finding some interesting opportunities for deployment and as we talked about we are taking advantage of the equity capital markets to facilitate exits as well. In terms of fund raising all I can tell you is that we’d expect to be in market soon to launch the successor to the NAXI Fund and as I mentioned we are pleased, performance have been top quartile so we were finding good ways to get capital to work, we’re pleased with the early results and we’ll be in market soon.

Okay, great, thanks very much.

Thank you.

And our next question comes from the line of Ann Dai from KBW.

Hi good morning. Thanks for taking my question. There’s been some discussions by some of your peers about creating pools of capital that invests for 10 years longer than the average PE fund. So is your funding what your thoughts are on that and you know if it’s that something KKR would be interesting in doing?

Thanks, Ann. We’ve looked at it. I think the thesis is that there’s some investments that you may want to hold for very long period of time where the returns maybe a bit below traditional private equity fund targets. And it’s something that we’ll continue to look at. If it does become a part of the business I would expect it to be relatively a small part but you know it’s something that we’re assessing and exploring with a partner or two.

Great. Thank you.

Thank you.

And our next question will come from the line of Patrick Davitt from Autonomous.

Good morning guys. I think Alex at a conference last quarter mentioned that NAXI’s EBITDA growth had tracking at 20% plus year-over-year which is clearly better than market and seems pretty outsized even relative to funds of similar vintage. Is there any one or two positions driving that, is there an industry confrontation that’s maybe driving that? I mean it’s pretty incredible.

Patrick its Scott. I think what I’d like to do is probably aggregate a little bit for you and maybe talk more about that portfolio more broadly.

Okay.

So our overall private equity portfolio we track this quarterly, has continued to perform quite well. If you look globally last 12 months we’ve had about 8% revenue growth and about 13% EBITDA growth and that’s on the global portfolio. Within that you’d see North America and Asia growing faster than the 13 and Europe growing more slowly but we’ve been quite pleased with the private equity portfolio performance. The Americas private equity portfolio has been performing very well. I would tell you that within the NAXI portfolio it’s been petty broad based, it’s not just one or two companies or one or two industries.

Okay, great thank you.

And our next question comes from the line of Michael Cyprys from Morgan Stanley.

Hey good morning and thanks for taking the question and thanks for the enhanced disclosure in the slide deck that’s helpful. Just around that on the balance sheet you mentioned I think it was slide eight that you amortized that $1.4 billion in the first half of balance sheet and also invested about $1.4 billion. Just curious how much of that came through in the second quarter alone and then as we think about reflecting this in our model this enhanced disclosure is this something we can expect to see similar level of disclosure going forward?

Hey, Michael. This is Bill. I’ll take that one. As it relates to the $1.4 billion approximately half of that came through the first quarter and other half came through in the second quarter. And far as disclosure is concerned I would say that because we’ve gotten a lot of emails from a few of the analyst that cover us and they found this quite helpful from a transparency point of view and you just mentioned it as well. I would say that we’re going to continue to report this on a quarterly basis.

Okay, thanks great. And I want just to make sure I understand so the $1.4 billion on the monetization and the investment side they were each roughly half-half first quarter second quarter?

Yes, it’s pretty close, it’s not going to be exact but it’s very close to being in the neighborhood of 50-50 on both sides.

Got it. And then sense just on the deployment outlook off the balance sheet $1.4 billion in the first quarter how are you thinking about things going into the second half of the year?

Hard to be too specific as it’s going to be based on the opportunities as we see them. We continue to see opportunities in real estate credit, so I’d expect that number will continue to go up. As I mentioned, we are continuing to explore strategic partnerships and liquid alternatives. So you may see us do some more there. But it’s hard to be too precise because it’s based on the opportunities that are coming our way and how the markets evolve.

Okay, got it. Thanks so much.

Thank you.

And our next question comes from the line of Mike Carrier from Bank of America.

Thanks guys. You said a question, I guess the revenue and just the expenses kind of on the core, the fee earnings. Just on the management fees it seemed like it ticked up. I just wanted to find out if there were anything like catch up fees this quarter? And then in the outlook, if we should be expecting anything differently? And then just on the monitoring fees, Bill I think you mentioned, you kind of gave a range because the first quarter was extremely strong. So just any update on that, and I know it’s volatile. So whatever you can us. And then on the expenses both the core comp and the non-comp expenses, both were either well managed or came in lower than expected. So just wanted to see if there were anything unusual in the expense lines in terms of the run rate going forward?

Sure. And although you were told to ask one question, I think there were three questions.

Sorry about that.

I’ll give you a pass. But when you talk about management fees, let’s talk about private markets. You could see that there is a slight uptick. A little bit of that is a catch up with regards the E4 fund closing and Infra II but that’s modest. When you look at public markets, you could see slight increases and that’s just assets coming online like its Direct Lending II and Special Sits II so nothing where you would see a reversal of that number in the subsequent quarter. As it relates to monitoring fees we said last quarter that the average run rate on monitoring fees should be approximately $20 million a quarter. You could see that the number in the first quarter was quite large and we talked about a monitoring termination payment from the Boots, Walgreens transaction. In the second quarter we also had two monitoring termination payments one of which was outsize and that was the Biomet, Zimmer transaction. And so you would see those happen episodically but again back to your earlier question the run rate number for modeling purposes should be about 20. As it relates to expenses you could see that the expenses in private markets were and we’re talking about operating expenses were down from $42 million. That really was driven by smaller get deal expenses in private markets. But overall you could see that the expense from the first quarter and I’m talking about total reportable segments went down from 60 to 51. I would say that this is probably a light quarter from an expense point of view and you should think that that number is going to be anywhere in between say 55 and 65 on a quarterly basis.

Okay. Thanks for the color.

You bet.

And our next question comes from the line of Devin Ryan from JMP Securities.

Hey, good morning. Most questions have been asked here but maybe just one on the energy exposures across the platform, you didn’t really touch on that I know who the better story this quarter. But we’ve seen a slight reversal in commodities thus far and the third quarter. So I’m just trying to get a sense. If we don’t see a recovery in commodity prices from here do you see any impact on related exposures or you have to take an additional marks or do we get to maybe a point where hedges roll off and so there could be some more pain, just trying to get some sense here?

It’s Craig, let me a few thoughts on that. First, and it’s a good question. One other things that is important to remember is that as the energy investments largely are valued will run long lived discounted cash flow analyses. So when you look at the movements in commodity prices both in terms of oil and natural gas, and along with that by the way is it and you referenced this, is that the majority of our near term production is hedged. So the results of that is that the shape of curve and prices four to five years out are important to consider that’s true both when prices are higher as well as lower. So when you look at the movements that you referenced in terms of crude and natural gas you have seen some low teens to mid-teens movement downwards in spot crude but when you look four to five years out that you’ve seen movement a lot less than that. And from the standpoint of our overall holdings were pretty equally split between natural gas and crude and natural gas prices have actually haven’t seen that same type of volatility, one off at this point. Now one of the things that does read into this it’s also just worth mentioning is from a deployment standpoint, one of the new launches is that if you look at the second quarter at least we actually we are not active in deploying or were not active even in terms of deploying capital in Q2, in our energy strategies. I think as we’ve seen commodity prices moved down even since June 30, we actually think that could help opportunities in the back half of the year. So we’re pretty constructive on what that opportunity is and what those opportunities could be for us. Although with the margin we’re probably seeing more opportunities at the asset level versus the corporate level. And one other point as we think about this vertical actually would relate to infrastructure because infrastructure actually is an area where we have been very active. So even within the last couple of, last two weeks we’ve announced another couple of investments within our Infra II funds those naturally haven’t closed but at this point even with those four investments Infra II is over 25% committed which is certainly a healthy figure recognizing that we only held the final close in Infra II early in the month.

Great. Very helpful color, I appreciate the update.

And then our next question comes from the line of Patrick Davitt from Autonomous.

Yeah thanks for the follow-up. You mentioned the third-party stakes or the minority stakes and hedge funds, could you kind of walk through all of the hedge funds that are in that bucket and how they’re performing?

Sure, Patrick. It’s Scott. So a couple of things, stepping back as a reminder let’s just talk about the hedge fund business broadly for a moment. So we really, we really got three or four different components. So as you know we have the KKR Prisma platform where we manage about 11 billion of solutions and fund to funds mandates, we’re creating new product off that platform, we’re direct investment product, so we’ll give you updates on that, those efforts build over time. We mentioned the seed investment that we made in Asia, the Acion Partners investment that I mentioned in the prepared remarks and on the stake side today we really have two. We’ve got in the Nephila which manages about $10 billion and then we have BlackGold which mean is approximately $2 billion so $12 billion in aggregate and we earn approximately 25% of each and so if you take the 25% of the $12 billion, that’s how you get the $2.9 billion on slide seven is part of that bridge. We have taken a different approach to stakes than other which is that we are approaching it much more as a strategic matter. So this is investments that we’re making off our balance sheet and we believe that we have an ability to work with our partners to create new product and deliver solutions to clients that otherwise we can’t deliver with just the products that we manage on a 100% own basis. Both Nephila and BlackGold financially for the firm have performed in line with or in excess of original expectations.

And was there another negative mark in the LP investment you have in BlackGold the $100 million.

No, Patrick, this is Bill. It was flat for the second quarter.

Okay, thanks a lot.

Thank you.

And I would like to turn the call back to Larson for any final remarks.

Just thank you everybody for your time. Thank you, Carmen. If there are any follow-up questions please feel free to follow up with me directly.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day everyone.