KKR & Co. Inc. (KKR) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to KKR's Fourth Quarter 2016 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, the conference will be open for questions. I will now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead. Craig Larson - KKR & Co. LP: Thank you, Vince. Welcome to our fourth quarter 2016 earnings call. Thanks for joining us. As usual, I'm joined by Bill Janetschek, our CFO; and Scott Nuttall, Global Head of Capital and Asset Management. We first 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, which is available on the Investor Center section of our website. This 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. Finally, like previous quarters, we've also posted a supplementary presentation on our website that we'll be referring to over the course of the call. This morning we reported fourth quarter and full-year 2016 results. Of note, we reported fourth quarter and full-year after-tax economic net income of $339 million and $576 million, which equates to $0.40 and $0.68 of after-tax ENI per unit. We did healthy level of monetization activity in Q4 and for the full year. Realized carry in Q4 is the second highest quarter we've had as a public company, and realized carry in 2016 was a record for us, contributing to total after-tax distributable earnings of $390 million for the fourth quarter and over $1.5 billion for the full year. Turning to fund raising, we continue to have success with record organic capital raised over the year, and fee-paying AUM at the highest it's ever been, resulting in direct line of sight to future management fee and FRE growth. We've again announced our regular $0.16 per unit distribution for the fourth quarter, and are pleased to announce an increase in our planned quarterly distribution to $0.17 per unit beginning with the first quarter of 2017. And in addition, we've also announced an incremental $250 million to our buyback authorization. And with that, I'll turn it over to Bill to discuss our results in more detail William Joseph Janetschek - KKR & Co. LP: Thanks, Craig. This quarter let me first touch on AUM and fee-paying AUM. Page two of the supplement highlights the growth in assets in the last 12 months. AUM and fee-paying AUM were up 8% and 11% respectively, driven by record organic capital raised. All told, we now have $38 billion of dry powder as of December 31, a 28% increase year-over-year. And looking more broadly, as you can see on the bottom of page two, since the end of 2010, we've seen AUM and fee-paying AUM double, with the meaningful part of that coming from diversification across the firm. Growth in Public Markets from 2010 to 2016 shows the extent of this diversification, with fee-paying AUM increasing by six times over that period. We ended the fourth quarter with record fee-paying AUM of $101 billion. This includes $11.9 billion of third-party capital committed to Americas XII, which was activated at the very end of the quarter. Please turn to page 3. On the left side of the chart, you can see that the increase in fee-paying AUM has in turn resulted in the management fee growth and diversification, with fees growing at a 10% CAGR since 2010. And now that Americas XII is turned on, we are entitled to management fees on that third-party portion of that capital. At the same time, now that NAXI switched to the post-investment period, we received management fees based upon remaining cost. Simply said, Americas XII will add about $90 million to our 2017 management fee on a run rate basis. Turning to our total segment financials, management, monitoring and transaction fees were $256 million in total in Q4. Management fees were up year-over-year, and now that Americas XII has turned on, we will begin to see the impact of management fees starting in Q1. Total management, monitoring and transaction fees were down on a year-over-year basis, as Q4 of last year benefited from approximately $115 million of monitoring and transaction fees related to the First Data IPO, which was a one-time event. Turning to total performance income, we reported $241 million, which was anchored by a robust level of realization activity with over $500 million of realized carried interest in the quarter. Page 4 highlights this activity. In total, realization events at several portfolio companies drove the doubling of cash carry compared to last year. And this quarter's exits were broad-based. On a blended basis, the PE exits were done at 2.9 times our cost. The exits include our final sale of Walgreens, which was an excellent investment for us. In 2007, we invested $2.1 billion out of the 2006 and Europe II funds. Inclusive of the recent Galenica sale, we've now returned over $7 billion of realized cash proceeds to our fund investors, representing a 3.3 times realized multiple of money. Shifting to investment income, our final exit in Walgreens, in particular, drove a sizeable realized gain given our co-investment and fund exposure in that company. This though was offset by a loss from our investment in Samson. As a result of prior downward marks, this loss has no impact at all on ENI and that's important to note. Absent our Samson loss, the after-tax distributable earnings would have been $0.79 per unit. Total investment income of $167 million was helped by the positive marks seen across all of our strategies, including private equity, energy, real estate and alternative credit, driving $141 million of unrealized gains. Bringing it all together, on a total reportable segment basis, fee related earnings came in at $116 million. Our after-tax distributable earnings were $390 million, with after-tax ENI of $339 million. Moving to deployment, we invested $2.5 billion of capital this quarter. Public Markets deployment was $1.6 billion, up meaningfully relative to the pace of deployment over the last several quarters. This deployment came from investments made across our alternative credit vehicles, primarily within Special Sits and Direct Lending. And as you recall, we're entitled to economics on our alternative credit vehicles on an invested as opposed to committed basis. Given this dynamic, deployment in these strategies contributed to the increase in public markets fee-paying AUM this quarter. On the Private Markets side, we invested about $900 million. The largest contributors were a private equity investment a Hispanic food retailer out of NAXI and an investment in India's second-largest private life insurance company out of Asia II. Looking forward, we have an excellent pipeline of activity which Scott will discuss in more detail. And finally, as you've likely seen in our press release, we are pleased to announce that our board has authorized an additional $250 million to our share buyback plan. In addition, reflecting the continued growth of the firm and our strong fundamentals, we plan to increase our next fixed distribution by 6%, and our planned quarterly distribution will increase from $0.16 per quarter to $0.17 per quarter beginning with the first quarter of 2017. And with that, I'll turn it over to Scott. Scott C. Nuttall - KKR & Co. LP: Thanks, Bill and thanks everybody for joining our call today. We find that the fourth quarter call is a really good opportunity for us to reflect on our progress as a firm over the past 12 months, and looking back, despite a lot of market and geopolitical volatility, we're pleased with our progress in 2016 and with the fundamentals we're seeing across our firm and businesses. As we've said before, there are five things that we need to do well. I'm going to briefly update you on our progress on each of these. The first thing we need to do well is generate investment performance. Performance in the quarter and full year was strong and broad based. In private equity, our portfolio appreciated 3.4% in the quarter and 11.9% in the full-year 2016. Within real assets, our more mature real estate, energy and infrastructure flagship funds were up 4%, 23% and 21%, respectively, in the last 12 months. And in credit, we continue to see strong performance in our opportunistic credit and direct lending platforms in particular. The second thing we need to do well is raise capital. We had a very active fundraising year last year, raising a record $29 billion. Private Markets accounted for $16 billion of the capital raise, driven by Americas XII, our new growth strategies, and our real-estate platform. And Public Markets accounted for the other $13 billion, driven by CLOs, liquid credit mandates, and our strategic partnerships. And importantly, the quality of the capital that we've been raising is quite high. On a blended basis, of the $29 billion of new capital raised, roughly 80% is carry or incentive fee eligible and locked up for at least eight years from inception. Given the success we've had in our fundraising, we now have record fee-paying AUM, and we believe 2017 is going to be another active fundraising year as we scale our newer businesses and also focus on Asia Private Equity, providing direct line of sight to future fee growth. The third thing we need to do well is find new, compelling investment opportunities. We deployed $2.5 billion in the fourth quarter and $11 billion in 2016. If you turn to page five of the deck, you can see we've also announced several pending transactions expected to close in the first half of 2017, including Airbus out of European Fund IV, Calsonic and Hitachi Koki out of Asia II, and Calvin Capital out of Infrastructure II. When you put it all together, in aggregate, we've already announced over $10 billion of transactions that are expected to close in 2017, requiring about $3 billion of equity from our funds. The fourth thing we need to do is monetize our existing investments. As Bill mentioned, this was a strong monetization quarter and year for us. Looking at the full year, we returned $13.5 billion of cash to our Private Markets investors, helping to drive $1.5 billion of after-tax distributable earnings. And the last thing we need to do well is use our model of AUM, capital markets, and balance sheet to capture greater economics for our investors in the firm from all of our activities. It's important to remember that capital markets and the balance sheet do not show up in our AUM, but they are powerful economic contributors for the firm. Our capital markets capabilities, alongside the balance sheet, allow us to source large transactions and move quickly in the market. This allows us to scale all of our businesses more rapidly while generating fee economics for the firm. Our activity level here has continued to increase. In 2016 in Capital Markets, as an example, we executed 117 transactions involving $65 billion of total financings in equity and debt. Looking forward, KCM has begun 2017 with a high level of activity and an excellent pipeline. The balance sheet facilitates our model and a good performance in Q4, up 2.8%. We made good progress evolving our balance sheet asset allocation last year. We've reduced our overall CLO exposure and increased our commitment to our own funds, including Americas XII. We've also continued to use the balance sheet to seed new strategies and accelerate growth. For example, similar to how we started our real estate platform, we seeded our new growth strategies off the balance sheet and used that track record to attract third-party capital. As a result, in December, the next-generation technology fund held its final close and will now be a fee and future carry contributor. As we always say, the balance sheet is a real strategic asset for us, allowing us to accelerate AUM growth and increase firm profitability. I'm going to spend a minute on one additional topic. We announced on Monday that KKR Prisma and PAAMCO are combining to create a new firm, which will be one of the largest in the liquid alternatives industry with over $30 billion of AUM. The Prisma team will be part of the new combined firm and KKR will retain a 39.9% ownership stake as a strategic partner. By way of background, KKR Prisma has grown significantly from $7.5 billion or so to $10 billion since the formation of our partnership in 2012. Similarly, PAAMCO has experienced strong growth due to its performance and its value proposition for clients. The two businesses are complementary, and once combined, will become one of the largest in the liquid alternatives industry, a space where scale and providing a full suite of client solutions really matters. The transaction provides us with more capabilities, increased operating flexibility and is accretive to our AUM and our growth profile. Pro forma for this transaction and using December 31 numbers, our hedge fund business, which now includes five strategic partnerships, will have $74 billion of assets under management, of which our pro rata share will be $24 billion. To bring it all together, our core fundamentals are summarized on page six of the deck. 2016 was a good year, but even more importantly, the work done last year laid the foundation for significant growth and progress in 2017 and beyond. And with that, we're happy to take your questions.

Thank you. Craig Larson - KKR & Co. LP: And Vince, actually before we get going, if we could ask everyone to limit themselves to one question and one follow-up, that'd be helpful just so we can make sure we can work our way through the queue.

Thank you, sir. Our first question is from Glenn Schorr of Evercore. Your line is open.

Thank you. So, question on balance sheet and just philosophy from a strategic view, if you feel anything is shifting? In other words, you've had some big wins over time, but they were lumpy and had caused us some volatility from time to time. So, lot of cash. You talked about seeking higher-return opportunities in some of the co-invests, but maybe from a top down – do you approach it from a top down perspective? And do you have thoughts about trying to create a little more balance over time? William Joseph Janetschek - KKR & Co. LP: Hey, Glen. It's Scott. I'll take that. We do definitely approach it as a top down matter in the first instance. We have an asset allocation approach that we use in terms of how we want to get the balance sheet positioned in time. And we're working our way toward that asset allocation model and outcome that we've targeted. What you'll be seeing is we've got, though, to your point, we've got a couple of legacy positions. For example, the Walgreens position that we talked about today, it actually has been on the balance sheet since before the merger with KPE. So we've got some legacy positions that have been rolling off. And you're right, some of those are lumpy. But what we've been doing with the proceeds is committing that capital largely to our funds, which we think over time will create a less lumpy stream of outcomes, because there'd be less larger investments like a Walgreens, as an example, on the balance sheet in due course. And we've also been using the balance sheet to make investments strategically for the firm. So, for example, we had used balance sheet to create fee and carry opportunities, whether you think about that in terms of our hedge funds, strategic partnerships, or other acquisitions that we've made, which is really in our mind using balance sheet to create more stable and higher multiple fee profits for KKR over the long-term. So the balance sheet has been in transition. We've had the original KPE portfolio, which was largely private equity. We had the KFN merger, which was largely credit. And we spent the last couple of years really repositioning ourselves toward this asset allocation model that I referenced. And we're getting there. We're not quite there yet, but we've made good progress.

Great. I appreciate that. And maybe just a quickie follow-up on, you gave good detail on slide 4 with the robust realization activity. You announced $10 billion in proceeds. Is there a DE number that corresponds with that? Sometimes on the quarter you'll have those along (19:08) with that math. William Joseph Janetschek - KKR & Co. LP: Sure. So, Glenn, if you're talking about 2017, based upon the assets that are shown on this slide and assume all the monetizations take place, that's going to translate into roughly about $300 million of cash earnings.

All right. Awesome. Thank you very much. Scott C. Nuttall - KKR & Co. LP: Thank you.

Thank you. Our next question is from Bill Katz with Citi. Your line is open, sir.

Okay. Thank you very much. I really appreciate the (19:40) update as well. It's very helpful (19:42). So you mentioned a couple of different things in terms of capital raising (19:47) that Americas XII just got turned on. And you highlighted in your prepared remarks that Asia made scaling of some next gen funds and then strategics. Give me (19:58) sort of sense of sizing as you think through the opportunity set looking into this year? Scott C. Nuttall - KKR & Co. LP: Sure, Bill. Happy to take that. It's Scott. I'd say, you think about what we have in the market, probably is a good way to start. You're right that Americas XII, we're about done. We expect to hit the $12.5 billion hard cap which has been upsized slightly, and then our commitment will be on top of that. Asia III is in early stages. We're still on the market with our second real estate fund, our second private credit opportunistic fund, health care growth, Direct Lending III and different vehicles in our Real Estate Credit business. And then on top of that, we've got high-yield leverage loans, CLOs, separate accounts, our BDC and then our hedge fund strategic partnerships are obviously also accessing capital. So if you look at the list as a whole, it's a very active year for us in terms of what's on the docket for fundraising, and it's an excellent fundraising environment right now. And so we're finding a lot of opportunity, and a lot of clients want to engage with us across all these different topics. In terms of how to think about it, it's hard to give you a precise sizing for the year. I will point out that 2016 was a big year just by virtue of the fact that we had the Americas XII closings, and that $12.5 billion is a large fund for us. But I do think that if you aggregate these others, we're also going to hopefully have a very nice outcome for this year as well; not entirely clear sitting here it'll be as big as last year just by virtue of how big the Americas XII fundraise was, but I'm optimistic. The other thing that we're seeing is a continuation, just from a color standpoint, of the trends we've talked about in the past. You know, LPs wanting to do more with fewer consolidating their relationships and working with us across multiple asset classes. So we're encouraged by those trends continuing. William Joseph Janetschek - KKR & Co. LP: Hey, Bill.

Okay. Thank you. William Joseph Janetschek - KKR & Co. LP: This is Bill Janetschek. Just one quick modeling point. Scott mentioned Americas XII and earlier I mentioned that we had turned on Americas XII as of January 1. Just keep in mind that we increased the hard cap to $12.5 billion and that would mean that if we actually do get to that $12.5 billion, which we anticipate happening, you'll see actually another $600 million of AUM and fee-paying AUM come online when that capital is raised. So I just want to make that modeling point.

Okay. Thank you. And maybe, Bill, just to stay with you for a second, maybe it's just due to the big capital raise, but your other expense line within, sort of, the FRE calc looks, like it pops a little bit more than we maybe anticipated. What was the driver to that? And then how do you sort of think about go-forward level? William Joseph Janetschek - KKR & Co. LP: Well, you did see a slight increase this quarter and what ended up happening is, as is typical in a fourth quarter, for whatever reason that deal expenses just come in slightly higher in the fourth quarter, but more importantly if you look for the full-year 2016 to 2015, those other operating expenses were flat year-over-year. And so I would say from a modeling perspective, you should assume to model that number or maybe up 1% or 2%.

Okay. Thank you. I'll get back in the queue. Scott C. Nuttall - KKR & Co. LP: Thank you.

Thank you. Our next question is from Chris Kotowski of Oppenheimer. Your line is open. Chris Kotowski - Oppenheimer & Co., Inc.: Yeah, good morning. I guess I always believe in looking more at people – what do than what they say, but I want you to comment on it. And just if you – we look at the build-up in your cash year-on-year from $1.3 billion to $3.4 billion, your investments are down by $2 billion. And if I pair that with, kind of, what I would characterize as a, kind of, chintzy increase in the dividend and the buy-back, it kind of telegraphs that you're really husbanding cash, building dry powder and kind of adopting a posture of extreme conservatism. And especially when I look at, like, again, the commitments to the funds are kind of flat quarter-on-quarter and I realize you've raised a lot of cash, but it looks like you're just building cash at every moment – at every opportunity. So comment on that. Scott C. Nuttall - KKR & Co. LP: Thanks, Chris and good morning. Chris Kotowski - Oppenheimer & Co., Inc.: Good morning. Scott C. Nuttall - KKR & Co. LP: Maybe just to give you a couple of things to look at as you think about the cash level, because I characterized it as a moment in time consideration. So you're right, the cash went up through the course of the year. We did have a lot of realizations as we talked about. Couple of things we look at, is if you look at page 17 of the press release, just putting the $3.4 billion cash number in context, when it (24:58) shows up on that table is about $2.6 billion of uncalled commitments that we have to our funds. And as we've said and telegraphed, we're making more commitments to our funds. We also plan to be making some co-investments in individual transactions across the firm's different strategies. The page 17 detail does not yet include our Asia III fund. And so we would expect to also make a meaningful commitment to that fund as well, as we seek to increase our exposure to Asia across our balance sheet asset allocation approach. So that would, in the first instance, point you to that, and say, we've been making these commitments and expect to make more. Secondly, with respect to the commentary, obviously, we did reload the buyback program to some extent. We did increase the dividend by 6%. And I do think you're right, we believe that we have been kind of committing capital smartly, and we like where we are a few years out as a result of the commitments we're making now. But we also, on the margin, are being thoughtful about retaining capital to be able to be opportunistic, whether that is to fund new growth strategies for the firm, like our real estate business or some of the things we're doing in the growth areas or, frankly, just to wait for periods of dislocation where we find interesting investment opportunities. So we're working to get the balance right. But I wouldn't overreact to what's kind of the moment-in-time year-end cash balance, because a lot of that's been committed to future strategies. Chris Kotowski - Oppenheimer & Co., Inc.: Okay. I'll get back in queue. Thank you. Scott C. Nuttall - KKR & Co. LP: Thank you.

Thank you. Our next question is from Patrick Davitt of Autonomous. Your line is open.

Good morning. Thank you. Obviously, it's changing a lot around proposed tax legislation. But your approach, having the big balance sheet, is fairly unique. I'm wondering, is there anything in the kind of broad package that's kind of floating out there that would make that policy more or less attractive to you? Because I don't think it's exposed to carry tax (27:07). William Joseph Janetschek - KKR & Co. LP: Hey, Patrick. This is Bill. Suffice to say, what's going on down in Washington has been quite dynamic. There's a lot of snippets coming out as to what proposed legislation might get passed. But to be quite honest, it's early days. It's something that we're going to monitor. And as we get more clarity around what's going on, we'd probably be best able to comment then.

Okay. Fair enough. And then, just quickly on the $90 million increase in management fees, should we expect any incremental expense on that? William Joseph Janetschek - KKR & Co. LP: Not really. There's always going to be some compensation element to anything that we do but, certainly on the G&A side, the answer is no.

Great. Thank you.

Thank you. Our next question is from Devin Ryan of JMP Securities. Your line is open.

Hey. Great. Thanks. Good morning, everyone. Scott C. Nuttall - KKR & Co. LP: Good morning.

Maybe starting here within private equity and just thinking about the pace of investments for Americas XII, and when you look at interest rates as an input into deals, assuming the forward curve right now is correct, where our (28:31) interest rates will be moving higher, is there a sense of urgency at all to get some deals done to take advantage of lower interest rates? Or do you actually maybe, on the other hand, sit back and wait longer than you otherwise would, just because there could be some dislocations if we're going into that backdrop? I'm just curious how you guys are thinking about that input. Scott C. Nuttall - KKR & Co. LP: Yeah. Sure. Thanks for the question, Devin. It's Scott. The short answer is, no, it's not changing how we're thinking about deployment. If you really run out a buyout model, as an example, and you move LIBOR by 25 basis points, 50 basis points, even 100 basis points, over time, it really does not have a dramatic impact on returns. What's far more important, frankly, is the availability of the capital and the valuations you're paying for the asset upfront, and kind of critically, what you do with the asset while you own it in terms of growth. So, all of those would kind of dwarf the impact of any nominal move in interest rates.

Okay. Terrific. And then, maybe coming back to tax reform, I understand you can't commit to anything today, because as you guys, mentioned it is dynamic, but I'm sure you're following closely. So just as you're thinking about some of the puts and takes of what you're reading about coming out of Washington, D.C, is there anything that you're looking for that would make you feel differently about the corporate structure, or even certain levels of where tax rates could go or deductions that could stay or go away, that would kind of make you feel like this is the level where we should consider a change to the corporate structure? William Joseph Janetschek - KKR & Co. LP: Hey, Devin. This is Bill. Getting back to taxes again, it all depends on what happens with carried interest. And so if carried interest is treated as still investment income, but it's taxed at a higher rate, our structure will not have to pay tax. It will still flow to our unitholders. However, if they decide that carried interest is going to be technical, non-qualified income, and then it ends up having to run through the corporate blocker, we would be subject to corporate tax on that. Then the other toggle that you have to think about is, what is the corporate rate going to go down to? And so right now, the federal corporate rate is at 35%. If it got down to a rate where, all-in, you take a look at what the true tax leakage is for us being a corporation, and by then becoming a C corp, the universe of possible investors we could introduce ourselves to, it's something that, again, as I mentioned earlier, we're certainly focused on and monitoring, but it's still way too early to tell where everything is going to settle out.

Got it. But, I mean, philosophically, to the extent you had to take maybe a little bit of economic dilution, if you will, with that thought, there could be some valuation benefit that would go into the equation. It doesn't have to be economically neutral. Scott C. Nuttall - KKR & Co. LP: You're right. You're right, Devin. We'll look at it on the behalf of all of our shareholders of which we're the largest and try to do the equation and think about what is the incremental tax cost relative to the potential valuation uplift. And once the facts become a little bit more clear, we'll continue to do that calculus and keep you updated on our thinking.

Yes. Terrific. Okay. Thank you, guys. Scott C. Nuttall - KKR & Co. LP: Thank you.

Thank you. Our next question is from Robert Lee of KBW. Your line is open. Robert Lee - Keefe, Bruyette & Woods, Inc.: Great. Thanks. Good morning, everyone. Scott C. Nuttall - KKR & Co. LP: Good morning. Robert Lee - Keefe, Bruyette & Woods, Inc.: Hi. Just wondering if you could talk a little bit about trends, maybe, in the various hedge fund businesses and investments, Marshall Wace and Prisma, I mean, $24 billion is still a significant chunk of your AUM, at least your pro rata share. Could you give us an update maybe on, kind of, what the new business trends are like underneath there and kind of the outlook from your perspective? Scott C. Nuttall - KKR & Co. LP: Yeah, very happy to. I'd say – let's back up and, kind of, look at the overall platform and what we're doing in hedge funds taken as a whole. And as I mentioned, we've got now five strategic partnerships. And before the announcement of the PAAMCO Prisma transaction, we were seeing nice growth across the overall platform. A lot of that, frankly, has been driven by our partnership with Marshall Wace, which is off to a wonderful start. You know, the AUM of Marshall Wace has grown about 50% since we created the partnership; great partner relationships, strong, deep. We're doing a lot of different things together and we're very optimistic as to our ability to do a lot more together in the future. And Marshall Wace has been growing. Nephila has been growing. And, as I mentioned, Prisma has been growing. So taken as a whole, we have seen nice growth across the platform. If you look at the strategic partners, taking Prisma out of it for a minute, we saw very attractive growth last year, 10%-plus in AUM. And so what we've been trying to do is think about how this space is evolving. Our overall perspective is that kind of rumors of the demise of the hedge fund industry are vastly over-stated. And we do believe that this feels a little bit tough like private equity felt in 2008 and 2009, that it's still a very large space. There's a little bit of negativity out there, but the scale players with competitive advantages will do well. And so the way that we've really thought about it, Robert, is that we need to have either scale or be a strong niche player to be able to be successful. And so with Prisma PAAMCO, we'll have a scale player, top-three in the solutions space that's doing a lot more than just fund to funds with direct investing, LDI and a variety of other things. We think we can grow even faster together with PAAMCO than we could on our own. With Marshall Wace, we've got systematic and long-short on a global basis with a lot of scale. And then with Nephila and BlackGold, we've got niche. And so we've been able to grow the platform. And we're more optimistic post this strategic move that we can grow more from here. And the only other thing I'd add is that we are learning from our partners in terms of how they run their businesses; it's helping us in terms of how we run ours. And Marshall Wace in particular, we're spending a lot of time with in terms of comparing notes on what they're doing and what we're doing. Robert Lee - Keefe, Bruyette & Woods, Inc.: Maybe as a follow-up to that, has their plugging into your distribution helped accelerate their growth, particularly at Marshall Wace? Scott C. Nuttall - KKR & Co. LP: I think we've been able to make introductions to each other, frankly. They've also been introducing us to some of their clients. So the answer is, yes. It's not been a big driver of kind of the logic behind the partnership, but where we've got the opportunity to help each other, we absolutely are. Robert Lee - Keefe, Bruyette & Woods, Inc.: Great. Thanks for taking my question. Scott C. Nuttall - KKR & Co. LP: Thank you.

Thank you. Our next question is from Brian Bedell of Deutsche Bank. Your line is open.

Great. Thanks very much. Maybe just a follow-on on the PAAMCO Prisma. I guess it closes in the second quarter, I believe. Any impact in the way the financials are stated on that? Any impact on fee-paying AUM that you can talk about? And also I think one of your other partnerships, Avoca Credit, if you want to also just comment on the status of that as well. And then maybe just linking in with that, with the fee growth from NAXI XII turning on the $90 million extra, sounds like with the fundraising that you've got in the pipeline, even net of the distributions, we should be growing management fees more than the $90 million for 2017. If you could give some color on that. William Joseph Janetschek - KKR & Co. LP: Hey, Brian. This is Bill. You clearly broke the Craig Larson rule of just one question. I think you had three, so I'll tackle them in order. As it relates to the Prisma PAAMCO transaction, we hope that it will close some time in the second quarter. And when you think about it on the combined business, we're looking this from an ENI perspective as upfront a relatively neutral trade. So don't expect the income to go up or down just on the combination itself. But to Scott's earlier point, to the extent that the scaled platform becomes larger, we see the potential for significant growth opportunities prospectively, but again, on the initial transaction closing, you can think of it roughly as a push. As it relates to Avoca, that's a much different transaction. That was really a merger. And we were strong in credit in the U.S. and we really didn't have a presence in Europe, and so that acquisition took place in 2013. The way we look at that, Avoca is for the most part gone away, and now we have just a global credit platform. People that were at Avoca in Dublin are now in San Francisco. People that are in San Francisco are now in Dublin. And so I couldn't even tell you the true performance of Avoca as a standalone entity, because we don't run the business that way anymore. It's a combined platform. Scott C. Nuttall - KKR & Co. LP: Yes. One thing I'd just jump in here, Brian, it's Scott, is it is an important distinction. So Avoca was an acquisition for the firm and a full integration with our credit platform. So think of it as that's now part of the 100% owned credit business that we have, and it gave us the European leverage credit and CLO capabilities that we did not have prior to the deal. And it's worked out great. So we're very happy with how that's played out. Our approach to hedge funds has been markedly different. We've kind of taken the view that we're better to have a handful of strategic partnerships with very strong players where we own a portion of their business and help each other, but we do not integrate it. So we've been trying to take a methodical approach to building these five different strategic partnerships across the different areas that I mentioned before, and we think that's the best approach for us in the hedge fund space. And as a reminder, we're doing this off our balance sheet, and so it's with our own capital. So it creates meaningful profitability and flow-through for all of us as shareholders. So, quite a bit different, Avoca, fully-owned and integrated. Hedge funds, kind of more a third-party partial ownership stakes through the balance sheet for strategic reasons.

Right. Great. And then just on the management fee outlook? William Joseph Janetschek - KKR & Co. LP: Sure. When you think about where we're going to come out in 2017, we feel pretty comfortable right now. Management fees in 2017 are going to be higher than 2016. We already talked about the impact with Americas XII going live, but then when you think about the other platforms we've got, Scott had mentioned Asia III, we're out raising capital for that. Once that closes, and that will probably be in the back-half of 2017, then we've got Asia I, Asia II and Asia III all earning fees. And depending on the size the close on Asia III, that could be another significant needle mover as far as management fees are concerned. Another thing to keep in mind is, remember, on Public Markets, we've got about $6.5 billion of dry powder that's in AUM that we've already raised, and we won't actually receive management fees until it's deployed. And so we talked about the robust activity in 2016 in the fourth quarter. Now that we have that capital in the ground, that will impact to higher management fees in 2017. So we've got that to look forward to in 2017 as well. Plus, any other mandates that we are raising capital for. And I'm not going to go through them all; Scott already covered them. But on the negative side, obviously, to the extent that, and this is the way the model works, we have monetizations. You're actually going to see some of the funds that are in a post-investment period, like the 2006 Fund and now NAXI, as we sell those investments, we're going to lose that capital and lose the ability to charge management fees. But pretty optimistic on where we'll be in 2017 from a management fee perspective.

All right. Great. Great. That's great color. Thank you.

Thank you. Our next question is from Chris Harris of Wells Fargo. Your line is open.

Thank you. Yes. As you're activating Fund XII here, I think it would be helpful if maybe you guys can give us an update on what industry valuations look like. And then maybe as you frame that answer, some of these recent deployments, maybe you can help us with what kind of valuation multiples those deals are coming through at. Scott C. Nuttall - KKR & Co. LP: Sure. It's Scott. I'm happy to try to take that. So I'd say, overall, valuations in the Americas, and so you just put this in context, Americas private equity's about 25%, 30% of our AUM, give or take. And as an overall reminder, we got half our investment executives outside the U.S. So I just want to put it in context. But Americas PE valuations were high before the election, and have become even higher after the election. And so, we're working to be creative to find value, I guess, would be the high-level summary. And looking at opportunities where we can leverage our industry expertise, our operational capabilities, to really find something that's more idiosyncratic. And so, we're having to be patient to find good opportunities. But as Bill mentioned, and as we lay out on slide 5 in the deck, we are finding some interesting things to do. At the same time, we're selectively monetizing. We did a deal for U.S. Foods. We sold Capsugel. The portfolio is performing well. But on the new deal front, I'd say it's selective, idiosyncratic, patience, defined value, and stay disciplined on not overpaying. And we are able to find things to do in this environment. It just requires a bit more work and a bit more creativity and using the whole model of the firm. In answer to your question, in terms of some of the recent transactions that we've done, if you look in the U.S. in particular, the valuation ranges have gone from as low as 4 times EBITDA to as high as 9 to 10 times, for more growth. And one thing I'll say about our portfolio as a whole is, we have seen quite a bit of growth. We're still growing our revenues and EBITDA high-single digits plus, and we are finding opportunities to invest in companies that are seeing those kind of growth opportunities. It just takes a bit more work to find, as I mentioned.

Gotcha. Thank you. And then a quick follow-up, if I may, on Prisma. Would you guys characterize this move as offensive or defensive? And I know they are scale benefits to putting the two firms together, but I'm a little unclear of what other benefits there are. So maybe if you could just highlight those, that would be helpful. Scott C. Nuttall - KKR & Co. LP: Yeah, I would characterize it as offensive. I mean, I think the way that I would look at this, and the way we've thought about this internally is, we had a business that we invested in, partnered with, that was growing well. And the industry we're in continued to evolve. And so what happened is, with the fund-of-funds, quote unquote, industry really evolved to one where it wasn't just fund of funds anymore. It was direct investing. It was liability-driven investing, a variety of other ways that we could work with clients, and clients were looking for broader solutions. And so what was happening with us is a few things as we grew the business. One, we started to build new products ,and one of the things we found as we were building new products, especially on the direct-investing side is, there were aspects of being in the KKR regulatory and compliance infrastructure that didn't actually allow us to move as quickly as we liked in some instances. And so we thought about this and said, okay, what's most important in this industry. Scale is more important; transparency; the ability to build new products with flexibility. And what we figured out is that we could be more offensive if we had more scale and an ability to move more quickly on the new product front. And putting that all together, we determined that it made sense to be offensive, find a partner that would give us that scale, and we think getting into number three in this space is important. And we decided that having a partner that would allow us to do all of those things would position the investment that we'd made in Prisma to have even greater growth in the future. And so I'd put it very much in the offensive category and reacting to what we saw was happening in the industry and where we think the industry is going. But the most important thing is, you got to create solutions for clients, and this partnership allows us to create more.

Thank you. Scott C. Nuttall - KKR & Co. LP: Thank you.

Thank you. Our next question is from Mike Carrier of Bank of America Merrill Lynch. Your line is open.

Hey. Good morning, guys. This is Mike Needham in for Mike Carrier. First on book value growth, it looks like our ROE continues to improve. So I'm just wondering how confident are you that you'll be able to drive book value growth over the next, say, two years assuming relative stable markets, which I know is a big assumption? But I'm just thinking about the other value-creation drivers apart from markets and your shift to investing more in your funds. Scott C. Nuttall - KKR & Co. LP: Sure. It's Scott, I'll take that. I'd say we feel quite good about it. Your base assumption of steady markets, obviously important, but the model that we've built is one where hopefully we'll be able to continue to build value on our balance sheet investments and that will compound. So that'll create book value growth, will generate fee-related earnings and carry-related earnings in excess of our dividend, and that retained capital on the margin after doing the buybacks and other things we've committed to over time, I think will allow book value to growth. And so book value in aggregate will grow, and hopefully we're thoughtful in terms of how we use our buyback programs. So book value per share will hopefully grow at an even faster rate. So, we feel quite good about it. We like how the balance sheet is positioned and the investments that we've made, and our focus is, as you say, growing book value per share, and at the same time, growing our third-party AUM profitability.

Okay. Thanks. And then just on the $3 billion of recent deployment announcements that are pending, will any of those drive any upsized transaction fees or are there other items that could drive higher transaction fees over the next couple of quarters? Thanks. William Joseph Janetschek - KKR & Co. LP: This is Bill. If you look at the supplement on page 5, we list out the investments that we're talking about, and nothing abnormal as far as upsized transaction fees. Generally speaking, this transaction fees that we charge are roughly in the neighborhood of 1% of total enterprise value or which gets you down based upon debt to equity, about 3% (48:06) of the equity invested. And so it's probably the same old, same old.

Okay. Got it. Thanks.

Thank you. Our next question is from Patrick Davitt of Autonomous. Your line is open.

Thanks for the follow-up. Just a quick one on Prisma PAAMCO. Do you have any stats on LP overlap? How many LPs they have that you don't work with and vice versa? Scott C. Nuttall - KKR & Co. LP: Good question, Patrick. The businesses are very complementary, almost to a spooky extent. So there's very little client overlap, very little product overlap. We've been developing new products, as had they. And those do not overlap at all. They're going to actually fit in quite nicely and complementary to each other. Different approach in terms of generally pricing in the market. So the products themselves I don't think are going to be cannibalizing each other because there's different approaches for different clients. So quite complementary across the board. And we think working together, we will be able to work with even more clients and do a better job for them, given all the new product opportunities that we have, in addition to those already in place. So really very little overlap is the punch line.

Great. Thank you. Scott C. Nuttall - KKR & Co. LP: Thanks.

Thank you. I see no other questions in queue at this time. I'd like to turn it back to Mr. Larson for any closing comments. Craig Larson - KKR & Co. LP: Thanks, Vince. Thanks, everyone for joining us. If you have any follow-ups, please feel free to call us directly. Otherwise, look forward to chatting next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.