Welcome to KKR's Second Quarter 2018 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 opened for questions. As a reminder, this call is being recorded. I would now like to turn the call over to your host, Mr. Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead. Craig Larson - KKR & Co., Inc.: Thanks, Valerie. Welcome to our second quarter 2018 earnings call. Thanks for joining us. As usual, I'm joined by Bill Janetschek, our CFO, and Scott Nuttall, our Co-President and Co-COO. We'd like to remind everyone that we'll refer to non-GAAP measures on the call that are reconciled to GAAP figures in our press release, which is available on the Investor Center section at kkr.com. The call will also 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 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. Beginning first on page 2, this marks our first earnings call since our July 1 conversion from a partnership to a corporation as well as since our July 9 Investor Day. We know many of you did join for Investor Day and we thank you for that. For those of you that might be newer to KKR, we would encourage you to review the webcast presentation or the presentation and the transcript itself, all of which are available on our website. There's a wealth of information across all of those materials. Let's turn now to pages 3 and 4 of the supplement. Page 3 shows a summary of our four key metrics since…

Thank you. Craig Larson - KKR & Co., Inc.: Just before we begin with questions, if we could ask everyone to ask one question and then one follow-up, that would be helpful for us in making sure we work our way through the queue.

Thank you. Our first question comes from Bill Katz of Citigroup. Your line is open.

Hey, good morning. It's Ben Herbert on for Bill. Thanks for taking the question. Just wanted to follow-up on the Capital Markets business and with the BDC now in the fold, are we at kind of a stepped-up run rate going forward, kind of putting to side Unilever spreads, BMC and Envision Healthcare in the second half here? William J. Janetschek - KKR & Co., Inc.: This is Bill Janetschek. That's hard to predict. It's a Capital Markets business. So, Capital Markets is driven by the activity of the firm. And so, again, we're not going to be able to predict what the income would be a quarter out or two quarters out as it's a dynamic business. Scott Charles Nuttall - KKR & Co., Inc.: And the only thing I'd say, Ben, is that with Franklin Square's capital in-house on the private credit side, we can now make even larger underwritings and we think be even more competitive at the large end where we think the risk/reward is particularly attractive. And we do think all else equal it will allow us to have even more third-party syndication fee revenue coming out of Capital Markets. And you're right to point to the large private equity transactions we've announced, but that's a bit separate from what we're doing in Franklin Square.

Thanks for that. And then maybe the follow-up would be, I didn't see the aggregate PE portfolio accretion in the release this quarter. Would you mind providing that metric? Craig Larson - KKR & Co., Inc.: Yeah. Sure, Ben. It's Craig. So, I had mentioned just in the remarks the numbers were – it was 6.7% for the PE portfolio as a whole for the three-month period.

Great. Thank you. Scott Charles Nuttall - KKR & Co., Inc.: Thank you.

Thank you. Our next question comes from Craig Siegenthaler of Credit Suisse. Your line is open. Craig Siegenthaler - Credit Suisse Securities (USA) LLC: Thanks. Good morning. Scott Charles Nuttall - KKR & Co., Inc.: Good morning. Craig Siegenthaler - Credit Suisse Securities (USA) LLC: So, first just on Infra III, given that this fund will be more than two times the size of II with the upcoming final close, how long do you think it could take to deploy this fund? And can you provide us a quick update on the investing backdrop for infrastructure? William J. Janetschek - KKR & Co., Inc.: Hey, Craig. This is Bill Janetschek. As it relates to Infra II going to Infra III, we will be investing in Infra III starting into third quarter. We've already got a signed deal that is not yet closed, and we'll be putting the money to work. When you look at the infrastructure platform and you look historically at the pace of deployment for Infra I and Infra II, you could size that time period is anywhere between three to five years. Craig Larson - KKR & Co., Inc.: And, Craig, just on the backdrop and the opportunity set, I think it's interesting when you reflect back on 2017 more specifically. We syndicated more capital than we invested in our funds, and it wasn't because we didn't like the investment, it was because we felt undersized against what's really just an enormous opportunity. And I think as we look at deal flow today and the opportunity set, again, it's just an enormous opportunity that we're excited about over the long term. William J. Janetschek - KKR & Co., Inc.: And you could put some numbers around that, when you look at where we are today, signed but…

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

Hey, good morning. Thank you. We saw some pretty significant declines in some of the credit-related balances on the balance sheet. Is that just deals rolling off? Or is there some negative mark issues going on? And in that vein, could you kind of – yeah, go ahead. Yeah. Sorry. William J. Janetschek - KKR & Co., Inc.: This is Bill Janetschek. The good news is it's just a rotation out of the 1.0 CLO book into the 2.0 CLO book. And so, a couple of the older CLOs, recall where we had (20:21) more equity invested and so you'll actually see a decline of roughly $90 million, but that has nothing to do with the performance. As a matter of fact, the CLO portfolio was up on the balance sheet about $20 million this quarter.

Could you give kind of a broader update of the credit performance within the quarter, not just the LTM? William J. Janetschek - KKR & Co., Inc.: Sure. When you look at special sits, direct lending, mezzanine, CLOs, leverage credit, all of those categories that make up the credit total that you're referring to on page 9, when you look at the quarter and for the first six months of the year, most of those strategies are actually performing well above benchmark. And so, we're quite pleased with the performance of our credit portfolio, in our funds and on our balance sheet. Craig Larson - KKR & Co., Inc.: I think, Patrick, if you were to look at the high yield index, the HFRX special sits index and the LSTA, both for the quarter as well as on a year-to-date basis, the blended balance sheet performance over both those periods is ahead of all three of those. William J. Janetschek - KKR & Co., Inc.: And, Patrick, before you ask a question because you're talking about just credit, if you take a look at all of the platforms on our balance sheet for the quarter and for the first six months, all of those platforms are up.

Great. Thanks.

Thank you. Our next question comes from Andrew Disdier of Sandler O'Neill. Your line is open. Andrew Paul Disdier - Sandler O'Neill & Partners LP: (21:50) through the investment period.

One moment, please. Andrew Paul Disdier - Sandler O'Neill & Partners LP: Hello? Scott Charles Nuttall - KKR & Co., Inc.: Sorry, Andrew. We missed that. Andrew Paul Disdier - Sandler O'Neill & Partners LP: Sorry. So, it was nice to see Infra III enter the investment period, but did notice that there were two other funds that exited their investment period, one being Global Infra the II. And then, I guess looking out into 2020 have a number of other funds having the same dynamic, particularly the Euro IV. So, I guess the questions are, one, why did Global Infra II go from an ending investment period of October 2020 at the last prior update? And then, two, will this dynamic occur with Euro Fund IV and V? William J. Janetschek - KKR & Co., Inc.: It all depends on the pace of deployment in our funds. So, when we report, in the fund table we show the beginning period and the ending period. And depending on the fund life cycle, some are three, some are four, some are six years. With Infra II, we deployed that capital quicker than the investment period, which is good news. To Craig's earlier point, we saw a lot of opportunity in infra over the last couple of years. And we wish we had a bigger fund, because we could have actually deployed more capital. As it relates to Euro IV going to Euro V, what'll typically happen is once you get about two-thirds through the investment period where at a certain point in time you're about 65% invested, that's when you actually go out and start raising capital for that next fund. And so, that is the case with Euro IV rolling into Euro V. Scott Charles Nuttall - KKR & Co.,…

Thank you. Our next question comes from Michael Carrier of Bank of America. Your line is open.

Thanks, guys. Hey, Bill, just on the outlook, I think you mentioned for KCM the back half looks good. I might have missed it, but did you say anything on, like, the realizations for the third quarter or just the outlook for the second half? William J. Janetschek - KKR & Co., Inc.: No, Michael. I haven't given that number yet, but I knew it was coming. And so, right now as we stand here today, based upon those investments that have been realized or those we expect to realize, and remember we're only three weeks into the next quarter, we're at $175 million of gross realized investment income and gross realized carry. Scott Charles Nuttall - KKR & Co., Inc.: And as a reminder, Michael, we're going to give you an update on that as we get through the quarter as things progress.

Right. Okay. And, Bill, maybe just one more on that. So, I think on the fund side, we have pretty good visibility when we look at performance and kind of seasonality on some of the products. Just when we think about the balance sheet and where it's invested and where maybe some of the returns are, is there any way for us to be thinking about that over, say, the next 12 months in terms of how much that can contribute to the – relative to maybe the past three years. Like, is it – should be similar? Or has kind of the mix or the profile changed much? William J. Janetschek - KKR & Co., Inc.: And, Michael, it all depends on performance and a little bit depends on realization, but probably the simplest way to model this is if you go to page 9, we highlight the categories of those investments on the balance sheet and you can make your own assumptions as to what the rate of return is. But you could assume that so goes our funds, so goes our balance sheet. Most of the capital that we're investing in the balance sheet is also in the fund. And so, you would expect in private equity that those investments would be sold on a run rate of, say, every five years. Credit is obviously more accelerated. So, we can't give you a very specific answer, but generally speaking, nothing different.

Okay. Makes sense. Thanks.

Thank you. Our next question comes from Alex Blostein of Goldman Sachs. Your line is open. Alexander Blostein - Goldman Sachs & Co. LLC: Hey, guys. Good morning. Now that with FS in the run rate in the second quarter, could you guys spend a minute, I guess, on how you're thinking about growing this specific franchise? I know it's kind of part of the whole direct lending platform, but we're kind of just zoning in on this (28:21) part specifically, how are you thinking about growing this part of the business? Scott Charles Nuttall - KKR & Co., Inc.: Yeah, I guess there's really two ways to answer that, Alex. First is FS obviously brings to us a significant expansion of our private credit platform, which also feeds our third-party Capital Markets business. So, I think in the first instance what we're focused on doing is deploying that incremental capital well and as I mentioned, going out and really leaning into situations that we like. So, you'll see us financing larger companies where we think the risk/reward is more attractive, and that's allowing us and we've seen it already even though we just closed not long ago, we've seen already the ability to step up for larger transactions, which also feeds the syndication machine. So, so far so good. It's also allowing us to think about how do we further expand the platform around private credit with our partners at FS, how can we create incremental BDC capacity in partnership with them and that also allows us to also scale our private funds business alongside. So, I think we kind of went from number eight to number one or two in private credit globally, and scale begets scale in that business and I think it feeds both AUM and…

Thank you. Our next question comes from Rob Lee of KBW. Your line is open. Robert Lee - Keefe, Bruyette & Woods, Inc.: Thanks. Good morning, guys. William J. Janetschek - KKR & Co., Inc.: Hey, Rob. Robert Lee - Keefe, Bruyette & Woods, Inc.: Hi. Maybe a little bit of a modeling question but, Bill, any kind of additional color on how we should think about the effective tax rate ramping with the – you get the step up in basis and we know it's going to ramp over a multiyear period. But any additional color what we should be thinking balance of this year into next year at least? William J. Janetschek - KKR & Co., Inc.: Right now no change in thought from when we had this conversation on the last quarter call. Right now we say that the tax rate was roughly 7% and over time will grow to 22%. We do have these tax benefits by stepping up assets on the balance sheet and our carry as well as having a goodwill number that we're going to be able to amortize over a 15-year period. And you could see that in this quarter, but remember it's just this quarter. The effective tax rate was really actually even lower, it was about 4%. But you should think of when you're modeling this for anywhere in-between 7% starting in the third quarter, which should migrate to 10% probably throughout the next fiscal year. But again, if anything happens to the assumptions that we have that change that, we'll certainly communicate that before we actually have to tell you why it's happened. Robert Lee - Keefe, Bruyette & Woods, Inc.: Great. And maybe this is another little modeling question as a follow-up. With the BDCs and kind of Part 1 fees (32:47), some of your peers include that in management fees. I believe your intention is to include that in incentive fees. I just want to make sure I have that correct. William J. Janetschek - KKR & Co., Inc.: That is correct. Right now we're showing true management fees in that line, and we're showing the incentive fees in that separate line. And that's why you could see, if you look into page 7, you'd see actually incentive fees in 2018, both for the quarter and for the first half of the year, higher than what we reported. And a lot of that has to do with Franklin Square coming on board. Robert Lee - Keefe, Bruyette & Woods, Inc.: Great. That was all I had. Thanks. Scott Charles Nuttall - KKR & Co., Inc.: Thank you.

Thank you. Chris Harris from Wells Fargo has our next question.

Great. Thanks, guys. Now that DE is the primary earnings metric, I'm just curious if there's an accounting requirement that you guys need to abide by in regards to when you need to realize losses. Or is that really completely under your discretion? William J. Janetschek - KKR & Co., Inc.: That is completely under our discretion.

Okay. In regards to the realized losses for Q1, I know we've already talked about these, but can you go into a little bit more detail? Were these investments that were almost pretty much like written off, or were these some investments that you actually monetized, so still had some value? You've just kind of taken a loss from where you originally acquired them. William J. Janetschek - KKR & Co., Inc.: Right. You refer to Q1, but I think you meant Q2.

Oh, sorry. Q1, yeah. William J. Janetschek - KKR & Co., Inc.: And what we did from a planning perspective is that we had several investments, mostly in energy and credit, that over the course of several years had been written down significantly. There was really no opportunity for any increase in value, and so from a planning perspective, we took the opportunity to sell these investments and recognize that loss. And it's nothing other than that, but again the whole premise around this was around just tax planning. Craig Larson - KKR & Co., Inc.: And, Chris, I know we've talked about this, but again those are already recognized in the market to book value per share as that's been reported over time. No cash impact, et cetera. William J. Janetschek - KKR & Co., Inc.: Right.

Yeah. Understood. Okay. Thanks for clarifying.

Thank you. Our next question comes from Michael Cyprys of Morgan Stanley. Your line is open. William J. Janetschek - KKR & Co., Inc.: Michael? Craig Larson - KKR & Co., Inc.: Valerie, let's go to the next question, I guess.

Thank you. One moment, please. One moment.

Hello? Scott Charles Nuttall - KKR & Co., Inc.: Hey, Michael. Craig Larson - KKR & Co., Inc.: Or is this Devin?

This is Devin Ryan. I didn't get queued in here. Scott Charles Nuttall - KKR & Co., Inc.: Hey, Devin.

Hi, good morning. They didn't call my name here. But first question is on the roughly $60 billion of AUM that is at or above cost, but it's (36:00) not yet paying carry interest. I love to just get any sense from you guys if you can on how far away you are from carry generating, if you can give us any of kind of the main buckets there. Any more order of magnitude would be helpful. William J. Janetschek - KKR & Co., Inc.: Sure. And what you're referring to is something that we called out certainly at Investor Day for those of you who weren't at Investor Day or have read that presentation. But the punch line is we have a lot of investments that have been investing for just a few years. And so, all of these platforms are relatively new, like healthcare growth and TMT growth. And it's going to take some time to actually see the fruits of the labor as we ramp up those platforms. And in addition, let's not forget, in that AUM number now the large flagship funds like North America XII and Asia III, where we've got significant capital to deploy and then have that monetization. And so, when you look at the – and this would be for reference – on page 218 in the investor presentation, this is something we're really excited about, because what we're trying to drive home is that 25% of the AUM is driving 91% of the realized performance income. And so, when you look at all the other categories, where to use a baseball analogy and not a hockey analogy, we are talking about being in early innings in these strategies. And so, we're really excited about it. Scott Charles Nuttall - KKR & Co., Inc.: But I'd say some of these – it's not like it's years out, some of this is relatively imminent, and we're actually starting to see realizations out of several of those vehicles on that page. So, it's not something that you're going to have to wait years for. Some of this is coming quite soon.

Okay. Yeah. That's really helpful. And it was kind of good disclosure. And then, I guess the follow-up here is another kind of high-level modeling, and from the Investor Day I think you guys laid out a pretty compelling case as to why industry growth should remain elevated and then why KKR can continue to take share and grow at a faster pace than the industry. And so, as I play this out and kind of think it through kind of the longer-term model, what's the assumption on fee yields, like in aggregate? Do they hold the line? If not, why? And I guess I'm just trying to kind of think through some of the moving parts of the balance between kind of a mix shift in assets versus also the dynamic of just fee yields on kind of successor funds as those obviously should be getting bigger over time here. Scott Charles Nuttall - KKR & Co., Inc.: So, Devin, I think the way you should think about it is, we have not – as long as we have performance, we have not seen meaningful fee compression on an apples-to-apples basis. So, if it's a longer-term, more opportunistic strategy, we really haven't seen a lot of compression in our business. Where we have, and we talked about this before, agreed to reduce fees as if we get serious scale from investors or serious longevity. So, some of these recycling strategic partnerships, but the aggregate revenue outcome's greater. As we mentioned in Investor Day, we see growth opportunities across the firm. We mentioned several of our different platforms that we've created in the last 2 to 10 years where we think we can double, triple, quadruple, or more from a growth standpoint. And as we look at the opportunity set,…

Yeah. Thanks, Craig. Thank you, guys. Scott Charles Nuttall - KKR & Co., Inc.: Thank you.

Thank you. Our next question comes from Michael Cyprys of Morgan Stanley. Your line is open. Michael J. Cyprys - Morgan Stanley & Co. LLC: Hey, good morning. Can you hear me now? Scott Charles Nuttall - KKR & Co., Inc.: We can. William J. Janetschek - KKR & Co., Inc.: Hey, Mike. Michael J. Cyprys - Morgan Stanley & Co. LLC: Great. Hey, Scott, just wanted to follow up on your point you were making earlier on the alternative industry growing over the past decade. Just curious, as you think about that, how much of that growth do you think is secular versus cyclical given the dynamics at play over the past decade with QE? And as you look forward from here and interest rates continue to rise, how do you think about any sort of risk that demand for alternatives softens in a higher interest rate environment? Scott Charles Nuttall - KKR & Co., Inc.: That's a good question, Mike. But, look, I think what we've seen and it's not just been since the crisis, we obviously saw good growth in the industry pre-crisis as well. I think it is definitely a secular shift as opposed to a cyclical one. And, well, it's been not just, as you know, the traditional longer-term investors in alternatives, there's been a serious expansion of the pools of capital that invest in alternatives on a global basis. So, we've seen dramatic growth, we've talked a lot about sovereign wealth funds, more recently insurance and retail, but also high-net worth investors and family offices. And so, the types of investors have grown materially. We do not think that's a cyclical phenomenon, we think that's a secular one. And they are focused on asset allocation and it has really become a big part of…

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

Hey, thanks for the follow-up. There was an article a couple weeks ago about the latest generation funds with some of your competitors having much better or more constructive fee structures for the GP, and I'm curious if there's any reason to believe that you wouldn't have a similar experience in your next generation. Scott Charles Nuttall - KKR & Co., Inc.: Well, I think it kind of depends, Patrick, on which strategy you're talking about. I think as an example, in our infrastructure platform, we have experienced the same phenomenon. The Infrastructure I fund had lower fee and carry than Infrastructure II and III, and so we've kind of earned the right to improve the economics for ourselves in that platform. And sometimes what we'll do when we're creating a new business is we'll go to market with something that is a bit lower fee and carry, and then earn our way into getting to a higher outcome. And that's really what happened with infrastructure. I've got no reason to believe that we don't have the opportunity to do that in other places. So, I think it is something that we'll update you from time to time. I think private equity or more established strategies, probably less likely, but some of the younger businesses, that can happen.

Thanks.

Thank you. We have a question from Gerald O'Hara of Jefferies. Your line is open.

Great, thanks. Just circling back on the strategic partnership initiative mentioned a moment ago, can you perhaps provide any update around how those conversations are tracking, or perhaps where you see the demand for various different products or investments, or just more broadly the opportunity set there? Scott Charles Nuttall - KKR & Co., Inc.: Yeah. On the strategic partnership front, several conversations ongoing. As we've talked about in the past, Gerald, it takes time to get one of these formed. So, nothing to announce today, but we'll keep you posted as conversations progress. But I would say as a general matter, we continue to make progress, talking to investors who want to do more with fewer. So, kind of broader-based multiproduct mandates is something that's become more the norm in a conversation than the exception, and that trend continues. The real question in terms of strategic partnerships of how many of those can you do large scale with recycling and multi-asset class, and that's something that we are quite focused on as a firm and actually have a team dedicated around that effort now, and that was not the case a couple years ago. So, we see there's so much opportunity, we've actually created a dedicated team to get after it. I'd say more broadly, in terms of the fund-raising environment, it continues to be quite strong. A lot of interest in what we're doing, and we have a lot of opportunities in the market today and several slated to be launched over the next 6 to 12 months.

Great, thanks. And then perhaps one follow-up on Marshall Wace, if we could. The firm has effectively doubled since acquisition. Can you maybe give us some sense of how the growth trajectory might evolve from this point forward? Are there additional kind of channels for distribution or perhaps even under-penetrated channels that you see opportunity in? Just kind of trying to get a sense of where that business might be headed. Thank you. Scott Charles Nuttall - KKR & Co., Inc.: Thanks for the question. Look, there is, we think, significant opportunity for continued growth. As we shared in Investor Day, we've seen a lot of growth in the last few years since we created this strategic partnership. And the fun thing about it is we think that we're just getting started. There's lots of opportunities globally with respect to new product creation and distribution channels. I was actually having a conversation this morning with our partner there about the opportunities for growth from here, and we think they're significant. And as a reminder, this obviously has been a big opportunity for us. It's helped us grow our AUM and our fee-related profits and at nearly $40 billion give or take now, we still think there's meaningful upside from here.

Great. Thanks for taking my questions. Scott Charles Nuttall - KKR & Co., Inc.: Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Larson for any closing remarks. Craig Larson - KKR & Co., Inc.: Thanks, Valerie. Thank you, everybody, again for joining us in early July and also on this call. We look forward to giving you updates next quarter. If you have any questions, please circle up with us, of course, over the course of the day. Scott Charles Nuttall - KKR & Co., Inc.: Thanks again.

Thank you. That does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.