KKR & Co Inc

NYSE:KKR

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to KKR's Fourth Quarter and Full Year 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 open for questions. [Operator Instructions]

I will now hand the call over to, Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

[Craig Larson, Head of Investor Relations]

Thank you, Sydney. Welcome to our fourth 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 be referring 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 at kkr.com. The call will also contain forward-looking statements which do not guarantee future events or performance, so please refer to our SEC filings for cautionary factors related to these statements. And like previous quarters, we've posted a supplementary presentation on our website that we'll be referring to over the course of the call.

This morning we reported our Q4 and full year 2018 results, the fourth quarter rounded out a very strong year for us. Beginning on Page 2 of the supplement, you see our traditional key metric slide that profiles the year and we continue to make good progress across all four of these metrics. For the year our AUM increased 16% and both management fees and our after-tax distributable earnings increased 18%.

As of 12/31, if you look in the lower left hand slide, you see that our book value per share was marked at $15.57 up from $14.20 a year ago and it's worth noting that the $15.57 is before a meaningful increase we've seen in some of our more sizable public balance sheet holdings since 12/31.

Looking with a little more granularity, let's turn to Page 3. We reported after-tax distributable earnings of 460 million for the quarter or $0.55 on a per adjusted share basis. Despite all of the volatility experienced across markets in the quarter, this marked one of our strongest quarters on record.

We had record quarterly and annual fee related earnings. FRE for the quarter was 331 million, bringing full year FRE to 1.1 billion. For the quarter FRE came in 40% above the figures reported for the same period a year ago and for the year FRE increased 23%. This was driven both by growth in management fees, which were a record 1.1 billion for the year as well as continued strong results within our capital markets business.

As we evaluate our performance overall, there are five things that we knew we need to do well to succeed. We talked about these on our previous calls. We need to generate investment performance, we need to raise capital, find attractive new investments, monetize existing investments and then finally we need to use our model to capture more economics across everything that we're doing. I'll update you on the first two and Bill is going to cover the final three.

Beginning with investment performance, we all experienced significant volatility across asset classes in Q4. To give you a sense of this, from the beginning of 2108 through September 30, so for the first nine months of the year MSCI World appreciated 5.9% on a total return basis allowing to see all of this in and then some [ph] reversed in the fourth quarter as volatility spiked and index declined 13.3% to finish the year down over 8%.

In the fourth quarter, the US high yield index declined 4.7% and the LSTA was up 3.4%. In terms of KKR broadly, we saw mark-to-market declines given this backdrop, but outperformed relative to benchmark. For example, for the quarter our flagship private equity funds declined 5.2% and the overall private equity portfolio was up 8.3% compared to the 13.3% decline in the MSCI World.

Focusing on the year you see many of these statistics on Page 4 of the supplement. Our flagship private equity funds appreciated 2.5% and the overall PE portfolio appreciated 5.0% compared to the 8.2% decline in the MSCI World and the 4.4% decline in the S&P 500. In real assets are more mature real estate infrastructure and energy flagship funds were up 8.7%, 7.7% and 7.5% respectively and in credit our flagship alternative credit funds and are leveraged credit funds were up 7% and 1% respectively.

Now, while all of this is interesting, given the strong start we've seen in 2019, it also highlights why we don't run the business based on mark-to-market movements over any 90 day period. As we reflect on Q4, what's noteworthy to us isn't that the S&P declined13.5%, but instead in a quarter where you saw this volatility, we generated over 500 million and realized performance investment income, a record management fees, capital markets activity and fee related earnings and ultimately reported 460 million of after-tax DE, the second highest quarterly figure for us over the last three years. The beauty of our model is that we get to time our entries and exits. We're not for sellers during this period.

Moving on to fund our AUM really forward, we reported 11.3 billion of new capital raised in Q4. That's the strongest quarter of the year. In a particular note, we held a 5 billion first close on our next flagship European private equity fund. We've spoken for some time about the benefits of scaling subsequent funds across strategies and this announcement certainly fits squarely within that framework.

In the public markets inflows in our leverage, credit strategies and CLOs were the key drivers of new capital raised. Public markets AUM also did see the impact of both the Nephila sale as well as the incremental 5% Marshall Wace purchase, which resulted net in an outflow of approximately a billion as we discussed on last quarter's call and AUM of course reflects the impacts of the mark-to-market volatility over the quarter.

Looking at the full year, our AUM increased 16% year-over-year and our fee paying AUM increased 20% given our organic fundraising activities as well as the FS investments transaction that closed earlier in 2018. And critically we've been able to maintain attractive terms, as approximately 80% of our AUM has the ability to earn performances.

These inflows contributed to 58 billion of dry powder at year end and we now have over 23 billion of capital commitments that become fee paying as that capital is either invested or as it enters its investment period and that's at a weighted average rate of just over 100 basis points, helping provide direct line of sight towards future management fees.

And with that, I'll turn it over to Bill.

[William Janetschek, Chief Financial Officer]

Thanks, Craig. Moving on to new investment opportunities, we had an active quarter, investing 6.3 billion across businesses and geographies, with an additional 4 billion of syndicated capital, bringing total activity in the quarter to over $10 billion. In private markets we invested a 4.3 billion. The largest contributors were to private equity investments, BMC and Envision, both of which had meaningful equity syndication alongside our fund capital.

We also invested over 800 million across a handful of investments in Asia private equity, as well as 600 million in a French telecom tower investment out of our infrastructure strategy. Looking at deployment over the course of the year, we invested 13 billion in private markets, with just over half of that coming from traditional private equity. The rest came from the combination of our real asset, growth equity and core equity platforms, showcasing the growing diversity of our firm.

In public market, all the volatility experienced across credit markets in the quarter was quite helpful to us as we deployed a record 2 billion primarily from our private credit and special sit strategies.

Shifting the monetizations, we saw a healthy level of exit activity in the fourth quarter. As mentioned in our intra quarter press release strategic sales in two secondaries drove 420 million of gross realized carried interest and realized investment income we reported this morning and on a blended basis the PE exits were done at over three times our cost.

Looking at full year, our private equity funds distributed over 10 billion of capital to our investors, which in turn contributed to roughly 1.2 billion of realized carry. To give you an update on magnetizations, as we stand here today, based on transactions that have closed or signed transactions that are expected to close in the first half of 2019; gross realized carry and total realized investment income is expected to be approximately 400 million.

And just to be clear, First Data is not a part of that $400 million figure. Post quarter end, in mid-January, it was announced that First Data is to combine with Pfizer. This pending transaction would not be a realization of KKR as our shares in First Data would be exchanged for Pfizer at close. Since December 31 through last night, First Data stock price has gone up by about $7.50 per share or a 45% increase. All else being equal, that increase represents $0.55 cents per share of KKR after tax book value.

And finally, the last thing we need to do well is use our model of AUM, capital markets and balance sheet to capture a greater economics for our investors and our shareholders. Like up the last quarter, which was discussed in detail, BMC, Envision and a French telecom tower investment were similar furred wide transactions. They all required a global effort across multiple teams to collaborate and execute. BMC and Envision together generated approximately 140 million of capital markets transaction fees.

So in summary, 2018 was a strong year for us. Our AUM, management fees, fee related earnings and after-tax distributable earnings were up or between 16% and 23% compared to 2017. We used our model well, we continue to scale and in July, we completed our conversion from a partnership to a corporation. Page 5 of the supplement lists the five fundamental drivers in the firm. And we saw a continued progress against all of them. And we're really excited about the opportunities we have ahead of us.

With that, I'll turn it over to Scott.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you, Bill. And thank you everybody for joining our call today. I'd like to spend a few minutes outlining three of our key priorities for this year. The first priority is Asia. Today, we're the leading private equity franchise in the region with a strong and distinguished track record. In addition, for a number of years now, we've been hiring local talent and building integrated teams across non-private equity strategies like real estate, infrastructure and alternative credit and making investments through our funds, separate accounts and the balance sheet. The next step for us is the direct expansion of these non-PE strategies in Asia, all of which we've launched or plan to launch in 2019.

Second is scaling real estate more broadly, real estate is one of our youngest businesses with an enormous end market. Since launching the platform, we've made a lot of progress building out the foundation. Today, the business is global, with over 65 professionals based in nine offices across seven countries. And we're managing about 6 billion in AUM through debt and equity focused funds and permanent capital vehicles. Our focus is continuing to scale the platform with additional pools of capital, both debt and equity across the US, Europe and Asia. In 2019, we expect to see fundraising for strategies across all three geographies, largely comprised of first and second generation funds. Stepping back, we see significant runway in this asset class and many different ways to grow the business and create value over time.

Our third priority is investing aggressively into dislocation. We've been seeing valuations drop in Asia and parts of Europe over the past couple of years and we may be seeing the beginning of a similar dynamic in the US. In Q4 as Craig noted, US high yield indices declined 5% and the S&P 500 declined 14%. The last time US equity markets underperformed to this extent was in the third quarter of 2011. The growth of our firm and business model has been significant since then. You see some of these stats on Slide 6 of the deck. In Q3 2011, we had 13 billion of dry powder, today we have 58 billion. And today's dry powder is more global, more diversified and more flexible. Also, cash and investments on our balance sheet have more than doubled over this timeframe and our capital markets team is more integrated across the firm and has expanded globally.

We're focused on ensuring the entire firm is working together to use the model we have built to invest aggressively into dislocation when and where it arises and creatively provide capital to companies in need. We'll keep you updated on these priorities and our progress over the course of the year. And with that, we're happy to take your questions

[Operator]

Thank you.

[Craig Larson, Head of Investor Relations]

And Sydney, it's Craig. If we could just ask everybody to please ask one question and one follow up if necessary, just to make sure we work our way through the queue. That would be great.

[Operator]

Okay, wonderful. Thank you. [Operator Instructions] Our first question comes from Glenn Schorr with Evercore ISI. Your line is now open.

[Glenn Schorr, Evercore ISI]

Thanks. Just to get a little follow up to Scott's comments on scaling real estate more broadly, obviously, we're all for a big huge market for you to tap into. Could you talk about where you think you are in terms of having the performance to be able to go to market in all three geographies, is the distribution network there? And then in a first or second generation fund, what type of opportunity are you looking at it in '19 and '20 in terms of for these capital raises? Thanks.

[Craig Larson, Head of Investor Relations]

Thanks, Glenn. We tried to take those interns. I'd say for our real estate business, it's still very early innings. Most of these strategies under our real estate platform have been launched in the last two or three years and the real estate business itself was launched about six years ago and we continue to add new strategies in new geographies every year. In terms of your questions, the performance has been great. We've seen really strong performance across the entire platform, both equity and debt. Yes, we think our distribution network is in place to allow us to scale those businesses. And in terms of the third part of your question, the first or second generation funds, the answer varies depending on the market. The first business that we created was really opportunistic equity in the US and so we're on our second fund there are REPA fund and over time we'll continue to scale that. We think that platform can be a lot bigger in time. We've also created an opportunistic equity strategy in Europe and are in the process of raising capital for our first such fund in Asia.

So the first bucket is opportunistic equity broadly defined. And we are also in the equity side looking at other opportunities like Core-Plus, which we think could be an interesting growth opportunity for us over time and a variety of other strategies that are equity facing and we're just starting to talk to investors about those as well. So think about it as globalizing, but we started in the US and now we're taking the efforts to Europe and Asia and looking to scale there too. In addition to what we're doing on the equity side, there's a lot happening in the real estate credit part of the business which we don't talk about as much. We have a whole loan business on the mortgage side that today we execute largely through our public REIT, which is called KREF. We also have a CMBS B-Piece business which we call RECOP, which is out raising money for its second fund. And we're launching new strategies over the course of this year in real estate credit too. So when you put all that together, we think this can be a very large business for us in time, some very large multiple of the 6 billion or so we managed today and we're really pleased with the performance today.

[Glenn Schorr, Evercore ISI]

Okay, great. Thanks very much.

[Operator]

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

[Patrick Davitt, Autonomous Research]

Good morning. Thank you. The Press over the last week has been reporting on a number of senior departures, particularly in the public market side. I'm curious on your thoughts on the drivers of this, if you think it's outsized relative to history? And then as we think about public markets growth going forward, do you remain comfortable that this hasn't impaired the fundraising capability?

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Hey Patrick, it's Scott. The short answer is, don't believe everything you read. We're always - we always have been, we always will be a meritocracy and an entrepreneurial place. I say it's very natural for us to see some year-end departures and promotions. And in fact, in our business it's critical and really healthy to make room for people and on occasion to upgrade talent. So periodically, you're going to see people retire or leave. And you also see as others get promoted and new people join, but just to put it in context, and we have about 13 - approaching 1300 employees of which about 160 are partners and managing directors and both figures have been growing as we build for the future. So the bottom line is, I wouldn't overreact to a couple of departures. We've got a really deep bench of talent and feel great about the talent in the firm and we view all this as ordinary course and healthy for a firm like ours.

[Patrick Davitt, Autonomous Research]

Thank you.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Sure.

[Operator]

Thank you. Our following question comes from Alexander Blostein with Goldman Sachs. Your line is now open.

[Alexander Blostein, Goldman Sachs]

Great. Hey, good morning everybody. I was hoping you guys could help just kind of bridge some of the balance sheet moves we saw in the quarter, so I guess looking at total investment balances and the sort of the quarter-over-quarter decline, so call it 9.9 total versus 10.3. How much was the mark versus kind of net sales and deployment and then specifically, maybe just zoning in on credit business specifically that's where some of the bigger declines sequentially came from. Again, just help us break the mark versus any sort of activity.

[William Janetschek, Chief Financial Officer]

Hey, Alex, this is Bill. I'll take that question. When you're looking at the balance sheet on Page 9, you're going to see some of the activity with the reduction in value is just from exiting some investments that were replaced, so depending on strategy, but a good amount of that was again just on a mark-to-market basis, so some write down in a portfolio. So when you look at the balance sheet, one of the biggest investments we have is for First Data, the First Data we're down 30%. Again, on a mark-to-market basis we report that based on a closing stock price, but as I mentioned in prepared remarks, we actually saw First Data rebound and it was actually up 45%. And so had it closed at yesterday price on December 31 you wouldn't actually see as much of volatility, which is again one of the reasons why we're happy that we don't report on an ENI basis anymore. We're still going to do the valuations and report intrinsic book value like we do, but as you know the beauty of our business is that we time exits and so in market volatility, we're not sellers we're holders and we wait for recovery and we sell at with the prices we want to sell at.

As it relates to credit in particular, you asked me to just focus a little more on that. When you think about performance on a quarterly basis those assets were marked down, but when you look at that and take a look at the credit portfolio on the balance sheet for the entire year those positions were actually up. And so again on credit you might see a reduction in value, a portion of that is just sales of some of the assets and we rotated that into other places on the balance sheet and some of it is again just on a mark-to-market basis. The last point I'll mention is, remember about exiting when we want to exit. The good news is when you take a look at on Page 6, realized investment income we actually had net gains of roughly about $80 million from those balance sheet assets.

[Alexander Blostein, Goldman Sachs]

Got it, great, thanks and then just my follow up question is around the capital markets business.

Again, very strong results in the quarter, I was hoping you can talk to how the capital markets business performed specifically in December and really settle your ability to intermediate transactions at a time of dislocation. Obviously there's a question mark, how stable this business could be in a more challenging market backdrop. So I was wondering if there's something we could learn from the December activity?

[Craig Larson, Head of Investor Relations]

Hey, Alex, this is Craig. Let's just start broadly in thinking about the business as a whole and then can at least help frame how we think about the business and in the portion of that the maybe the baseline versus those more event driven things. But I think one of the things that's critical to understand stepping back is the growth we've seen in the business as a whole really reflects a few things. It certainly reflects the growth in the firm, but it reflects so much more than that. For the first five years, capital markets revenues were really only driven by our private equity business, and it was heavily US centric. Today the revenues are meaningfully more diversified. It's not just private equity, it's across all our strategies, it's not US, it's global and it's not just KKR, a third-party business at this point is also a real contributor. And at the same time, we've just become much, much better at integrating capital markets and everything that we're doing and capturing a higher share of that activity.

Now, in terms of your question and thinking about the business and how to frame the revenue profile, it might be lumpy from one quarter to the next but if you think of this on a trailing 12 month basis, there's a baseline business and then added to that baseline business or these larger events. Now these events typically surround deployments, not exits, but they can be meaningful as evidenced this quarter as Bill touched on by Envision and BMC. So to try to help frame the magnitude of these events, when you look at 2018, transactions where we earned fees of $20 million or more that represented a little over half of our total revenue. So there's a baseline amount of activity, that baseline amount should be growing for us over time. And then there's the opportunity for that to be supplemented by these events that can be quite additive to the revenue line in any specific quarter. So hopefully that helps frame how we think about the business.

[William Janetschek, Chief Financial Officer]

I'd just add a little more color on the numbers on just capital market. Just to give you an idea with the breadth of the business, number of transactions during 2018 over 200, and in that - in the fourth quarter that the - and when you think about the breadth again and the business is roughly 20% of a very large revenue number came from our third-party business and about a third of the economics from capital markets came from outside the US

[Alexander Blostein, Goldman Sachs]

Yes, that's very helpful. Thanks guys.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you.

[Operator]

Thank you. And our next question is from Robert Lee, KBW. Your line is now open.

[Robert Lee, KBW]

Great. Thanks. Good morning, everyone. I'm just kind of curious, I mean, certainly wasn't [indiscernible] your fundraising, but given the fourth quarter volatility and I guess concerns at least at the very start and maybe not the last couple weeks whether it's around credit or trends or whatnot? I'm just curious if LPs or perspective LPs are - even if they're still investing kind of how their thought process may have been impacted by events in the fourth quarter or the types of questions that are asked. I'm just trying to get a sense of how maybe their appetite has shifted subtly or not? And then maybe the second part of that, can you also update us on kind of LP expansion in terms of number of LPs are you now seeing pick up multiple strategies and kind of the broadening your LP base?

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Sure. Hey, Robert, it's Scott. I'll take that. On the LP appetite question, haven't really seen a change. I think there was a - few weeks there where people were just trying to figure out which way the world was going, but I think the reversal that we've seen so far this year has abated that kind of a question or discussion. So the bottom line is today no real change in LP dialogue.

If anything, I think the LPs take a longer-term perspective and the general view is that we're entering a lower return environment for the markets more broadly. And in that context, you know, we have a lot of discussions around clients feeling like they're going to need more alternatives, not less in order to hit their targets. So kind of as if the idea is beta is going down, you got to go find alpha elsewhere and alternatives have historically been the main generator, and we think that's good for us. We also think is the overall market return drops. The illiquidity premium that we're able to generate actually increases as a percentage of their overall return, and so, that's meaningful for us too. So, the LP appetite has not seen any change to date and if anything, you know, we're having some conversations where they recognize there's even more that we should be doing together.

In terms of the second part of the question of broadening of the LP base, as you know, that continues to be a key strategic focus for us. We've got today about 965 investors to be precise, on average, we are kind of selling two KKR products to each investor. But importantly, we only have 40% of our LPs in more than one product. So if you look at the largest investors we have, they tend to average about 4.5 products. So we see upside across everything I just said. We think the number of investors can continue to grow, we think our cross sell metric can continue to grow. And we think there's material opportunity to penetrate newer markets that we've talked about in the past and grow further in insurance, retail, sovereign wealth, et cetera.

[Robert Lee, KBW]

Great, thank you.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you.

[Operator]

Thank you so much. Our next question comes from Gerry O'Hara with Jefferies. Your line is now open.

[Gerald O'Hara, Jefferies]

Great, thanks. Maybe picking up on that - on that retail idea there for a moment, could you perhaps give us a little bit of an update as to how you see the outlook there into 2019? And of course, appetite and demand as well will be helpful. Thank you.

[Craig Larson, Head of Investor Relations]

Hey, Gerry, it's Craig. So, we've got several approaches here, the first is within our client and partner group. We have a team that's dedicated and spends all their time talking to family, offices and high net worth individuals. So we have that direct approach where we're working with families around the world and they're investing with us across a variety of strategies. We also have a long list of platform relationships. So think of this as bank's high net worth third-party platforms where we'll sell our products through their sales force, that's also been growing nicely. There's - so there's the direct component, there's a platform piece. And again, both of those are global. We also will work with partners. So we have a desire certainly not only have inside the firm what absolutely needs to be inside the firm. I think the relationship and partnership we have with FS is a great example of how we work with partners. FS is built out a lot of capabilities that we admire and have a few hundred people that spend their time focused on being in best-in-class as it relates through to their channel. And they're much better at raising funds to hundreds of thousands of individual investors probably than we ever could be. And I think that the opportunity set for that expanse also beyond just the - in the long-term just simply BDCs. So I'd say, when we think of where we were really from a standing starting this effort around six years ago, it's now probably is 10% to 15% of the money that we raised quarter-in quarter-out.

And I think as we think of that opportunity in particular with FS, the opportunity for us to do better.

[Gerald O'Hara, Jefferies]

Great, thanks. And maybe as a follow-up for Bill and apologies if I missed it, but could you give us a sense of where the FRE margin kind of shook out in 4Q or for the year? And then perhaps what the outlook there might be with the puts and takes around investment in Asia platform real estate et cetera kind of going forward? Thank you.

[William Janetschek, Chief Financial Officer]

So I'll take the first and I'll let Scott follow-up on the second one, but as it's relates to fee related earnings margin, when you take a look at page six, it's quite robust. And when you take a look at the way we define fee related earnings is that those margins are roughly about 58%.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Yeah, in terms of the second question, yeah, well, we will be continuing to invest in growth but as we do that, we've got a number of the investments that we've made in growth over the last three to five years starting to reach some maturity and generate incremental revenues. So we don't see a reason to believe that there's going to be a significant amount of downward pressure on that we think we can fund the growth with the - in terms of CapEx spending with the revenues that we're expecting from newer efforts.

[Craig Larson, Head of Investor Relations]

And then Gerry, it's great, just one final definitional point. If you look on that incentive fee line in –for the year 2018, we had about 140 million of incentive fees, approximately 50 of those came from the BDC platform. So I think some of our peers when they define FRE include the incentive fees from the BDC platform, we do not in our definition of FRE so just again wanted to highlight that is as you think about that apples-to-apples across the group.

[Gerald O'Hara, Jefferies]

Okay. Thanks for taking my questions.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you.

[Operator]

Thank you. Our following question comes from Mike Carrier with Bank of America. Your line is now open.

[Michael Carrier, Bank of America]

Thanks. Good morning. Given some of the concerns still in the market during 4Q in credit, could you provide maybe a little color if you saw much of a change in the portfolio fundamentals versus the mark-to-market? And Bill I think you mentioned, 2 billion deployed in credit, so maybe any color on those opportunities? It has the backdrop to deploy gotten a bit better with the 4Q scare. Thanks.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Hey, Mike, it's Scott. The short answer is that really no change in portfolio fundamentals in Q4, I think, yeah, there's some sectors, which had been seeing some kind of pull back in revenue growth over the prior several quarters. And no, no, nothing I would point out is materially different in Q4 versus the prior three quarters. I think to some extent our perspective is the market ended up getting quite anxious at the end of the year and put forward a number of concerns about whether a recession was coming sooner rather than later. And then a number of the markets there seemed to be a bit of an overreaction to that anxiety, especially in the US

So we did see a pullback in the liquid credit markets, particularly in December. And we did see opportunity to lean in even more on the private credit side. But I don't think I would tell you that a lot of that was due just to the markets getting disrupted for a couple of weeks. Some of these deals had been in process for a long period of time. And a lot of what we're seeing from a deployment standpoint, especially at a private credit is really just using the model that we've now built with our partnership with FS, the ability to lean into larger transactions and we are underwriting now much larger deals where we find that there's less competition and more attractive terms. So no fundamental difference and we continue to be busy on the large end.

[Michael Carrier, Bank of America]

Okay. Thanks a lot.

[Operator]

Thank you. Our next question comes from Bill Katz with Citigroup. Your line is now open.

[William Katz, Citi]

Okay. Thank you very much for taking the question. Good morning, everybody. So two questions from me, one is on performance fee and incentive fees, I appreciate that how you define it by the way in the FRE, that's great. But just how we think about pacing and the magnitude, is there anything unusual this year? Just trying to sort of think through the addition of Franklin Square versus performance in the year versus more of a run rate to try and get this more of a trend for process on that?

[William Janetschek, Chief Financial Officer]

Sure, Bill, I'll take that question. When you look at the incentive fees overall for the entire year was about 140 million, roughly 80 million of that came from Marshall Wace, and when you think about it, just a clarifying point, Marshall Wace incentive fees are crystallized on October 1st. So they're on a fiscal year basis. And so you're going to actually see that that number come through as it has in the fourth quarter. When you think about Franklin Square and the BDCs, you know, as Craig mentioned, the incentive fees actually have to get calculated every single quarter and it's driven by performance. Whereas management fees are usually based on invested capital or committed capital and so that - that's why we actually report that in incentive fees. But if you go back over the last four quarters, that number from the BDCs is anywhere between $12.5 million and $15 million. So I don't want to say that the run rate number, but since that transaction closed in April, that incentive fee both from CCT and Franklin Square is again anywhere in between $12.5 million and $15 million. Keep in mind that you would also have seen incentive fees come through prior to that from BDCs when we were just managing the CCT capital pool, but now on a combined basis, that number is actually been elevated.

[William Katz, Citi]

Okay, it's very helpful. And then just a follow-up from me and thanks for taking both questions, just in terms of capital management, you've been working down your authorization and I think you have a couple of million dollars left. So just sort of stepping back, just given all the growth opportunities that Scott articulated in the momentum of the business. How are you thinking about maybe cap [ph] return at this point in time and I was wondering if you can sort of address maybe the dividend policy as your few-related earnings and committed capital grow versus buy back?

[William Janetschek, Chief Financial Officer]

Okay. On the buyback, you can see that during the quarter we've actually been pretty busy and so if you refer to page three in a press release, we've actually put together a table, which we think is quite helpful and you can see that really from October 1st all the way through January 25, we've been in the market either buying back shares or actually canceling shares that's been to our employees. But again, the magnitude of that number is $160 million. When you think about the dividend, remember, we just change our dividend policy when we went to a C Corp. And so the stated dividend policy was $0.125. We just enacted that two quarters ago. And so I wouldn't expect to see much movement there anytime soon. But keep in mind that what we did communicate is that over time to the extent that the business continues to grow, and we continue to grow our management fees and more stable revenue from the balance sheet, that it is expected that that dividend number would continue to grow. One other thing Bill, I just want to highlight that when you take a look at this share count, I just wanted to call out the fact that what we had done historically was issue anywhere between 1.25% and 1% of - 1.5% of the total shares outstanding. At the end of 2018, as far as compensation is concerned, we only issued on net basis roughly about 3 million shares compared to that 13 million. And so what we're doing is we are making sure that what we said was that when we change our capital allocation policy in the fourth quarter 2015, we would make sure that it wouldn't be share credit with regard to our share count based upon issuance to our employees and we're trying to make sure that we honor that commitment.

[William Katz, Citi]

Okay. Thank you very much.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you.

[Operator]

Thank you. Our following question comes from Devin Ryan with JMP Securities. Your line is now open.

[Devin Ryan, JMP Securities]

Great. Good morning, everyone. First question here. Just a quick follow up on operating expenses, just given that really a bit elevated in the quarter. Not sure if that's seasonal or elevated capital markets revenue related, but when we look at the full year relative to kind of total revenues, it's in a similar ballpark as prior years at about 9%. So just trying to think about whether that's an appropriate level moving forward and also how to just think about the aggregate level of growth in the 2019 over '18?

[William Janetschek, Chief Financial Officer]

Sure, Devin. You are right, if you look at the fourth quarter number, it's elevated and what happened in the fourth quarter is that across several of the demand data was private equity across all three regions in infrastructure and real estate, we ran out there a couple of investments that we ended up not doing. And so you see an elevated level of broken deal expenses in that number. In addition, capital markets, as I mentioned, was quite busy, 50 mandates, we actually ended up incurring some syndication expenses, which show up on this line and so that's elevated. So I wouldn't focus on the fourth quarter as the new run rate number by any means. You should probably look at the third quarter is something closer to the reality of the expense base.

One other thing that we like to mention is that when you think about what we've communicated, we said that we've got three income streams and really two expense basis; one is compensation and the other is G&A and occupancy. And as you can see, we were trying to strive for a margin of about 50% plus. As we've communicated, the compensation number is, we said it would be in the low 40%s and if you take a look, this quarter was down about little less than 37%, but the entire year was about 40%, and the occupancy and G&A is roughly anywhere in between 7% to 9%, depending on the quarter. As we continue to grow this business, you should see margin improvement in that OpEx line over time.

[Devin Ryan, JMP Securities]

Got it. I appreciate all that color. And then just the follow-up is deployment question kind of bigger picture, you know, in Asia, valuations had been pressured, at least to some degree, probably because of slowing growth and I think that was one of the factors that that drove some of the volatility kind of in the US or at least perceptions of slow growth in the fourth quarter. So to the extent that we are later in the economic cycle. From a timing perspective, how are you guys balancing the opportunity that defined kind of some more attractive long-term valuations today, I know you're quite excited about number of things in Asia, but also balancing that versus kind of the potential risks that could come with, you know, slowdown in growth in the short term. And really just trying to think about, are you guys shifting kind of what you're looking at, or what are some of the considerations, because I think there's always some concern that a lot of capital is going to get deployed right at the kind of the end of an economic cycle?

[Craig Larson, Head of Investor Relations]

Yeah, Devin, it's Craig, let me spend a minute, really, I think, on the two things we'd highlight as relates to levels of activity and then can just speak very briefly geographically and this is through a private equity lens. I think the - when you look at our investment activity, you really see two things, and the first is you see us leaning into complexity. So we're focused on those opportunities where we can really bring our operational expertise to bear and either help reposition an investment or in some cases even restructure these investments. And so what are some examples of these, last quarter we talked about the Unilever transaction, carve outs are complicated and in global carve outs may even be probably even more complicated. And we have had a global team in that instance that evaluated this business, it operates in both developed and undeveloped markets. It's, again, just very complicated, there's a lot of complexity in terms of executing on an opportunity like that. Envision is an investment where we're going to be focused together with management on a series of operational improvement initiatives and BMC the mainframe industry, again, is certainly industry with complexity. So, complexity and operational improvements, that's the first thing.

I think the second thing you see is, is really our activity in healthcare that that we view as, as being a more defensive - more defensive sector. So in the US, certainly it's an enormous market, healthcare spending accounts were around 18% of US GDP. It's growing, it's fragmented and we've been active. In private equity investments, this quarter, again, would include and Envision, if you think more broadly, over the last 18 months or so, Internet brands acquired acquisition of WebMD, we acquired Nature's Bounty, Air Medical acquired a company called American Medical Response. We formed a partnership with Walgreens to acquire for PharMerica. There's a pending additional investment as PharMerica announced a transaction with BrightSpring. So again, I think all of that helps give you a sense of how busy our team's been. Activities not limited just to private equity, so when our core strategy in 2018, we acquired a company called PetVet in Q1, Heartland dental in Q2. It's also not limited to just the US, we have a pending investment in Genesis Healthcare, it's one of the largest providers of cancer and cardiac care in Australia and Europe, is again, is within core.

We've created a company called SinoCare in China, again, I think you get a sense of the level of activity in that sector for us. So I think where we are, you know, broadly in going by geographies in the Americas, I think the area of emphasis for us are going to be companies and sectors that are more defensive. Not every investments going to fit this profile, but certainly accurate in terms of what you've seen from us broadly. Asia, you're right, 2018 was an active deployment year for us and our backlog here is actually pretty healthy. Our team in China is busy. We've been seeing more control-oriented investments, which is exciting for us. And we're also seeing a greater number of conglomerate and carve out opportunities. So it feels like some companies have expanded in China have found its competitive, a unique environment and are now considering whether to rationalize and sell those businesses. So that's interesting for us. And in Europe, broadly, we're being disciplined given valuations. But we are seeing dislocation in the UK and most specifically. So hopefully that, again, gives you a sense of where we're active.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

The only color I'd add, Devin, is that we have been investing for the last three, four years, assuming that the investments that we've been making, we will need to hold through some kind of an economic pullback. So if you look at how we've been pricing assets in the US, we're assuming that there's going to be some form of recession in our whole period, largely assuming we get out of the lower multiple than where we get in. So we've been kind of pricing in and of the environment that's coming for a while. So to the extent we're closer to it, it's not really a new fact for us. We've kind of been assuming given how long we hold assets that we would have to ride through anyway. But at a really high level, I mean, we've got 58 billion of dry powder in terms of third-party capital we have a liquid balance sheet. We are getting our special situations and distress teams even more integrated alongside their private markets, colleagues, private equity, infrastructure, real estate, so everybody can work together and use the flexibility we have in our vehicles and all the tools at our disposal to invest into dislocation and complexity where we find it. So we actually are quite upbeat in terms of the opportunity that can be coming our way. And to your point, Asia and Europe have already seen a lot of that re-pricing.

[Devin Ryan, JMP Securities]

Yeah, I will really appreciate all the detail. Thanks, guys.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you.

[Operator]

Thank you so much. Our next question comes from Chris Harris with Wells Fargo. Your line is now open.

[Chris Harris, Wells Fargo]

Hey, thanks, guys. So when I look at your investment performance information on slide four, there's a lot of good detail here but one of the things that really jumps out at us is the - energy business being up 7% while the S&P - E&P index was down 28%. So can you guys elaborate and discuss a little bit about how you are able to achieve that level of outperformance and what was it really challenging year for that industry?

[Craig Larson, Head of Investor Relations]

Hey, Chris, this is Craig. Thanks for the question. You know, within the energy income and growth strategy, the type of opportunities that have been most interesting to us are acquiring, you know, for instance, non-core assets, so investments where you're in the midst of the decline curve in partnership, obviously, with a very strong management team. And in those investments we'll hedge out a very healthy percentage of your near term production. So, over the first number of years, two, three years of those investments will have hedged out the vast majority of whether it's crude or natural gas production. So that allows us to, for the valuations we have to be a lot more insulated. So if you look at commodity prices in Q4, you're right, you saw a meaningful downdraft and include prices much less though as it relates to natural gas were pretty equally split between crude and natural gas production. But it's that hedging program and action that you see there that that really was - is a real contributor relative to something like the E&P index.

[Chris Harris, Wells Fargo]

Okay, very good. And a quick follow up for Bill. Hey, Bill, how should we be thinking about the tax rate for this year?

[William Janetschek, Chief Financial Officer]

Yeah, that's a good question. When you take a look in the fourth quarter, the percentage was 9%, last quarter it was 12%. And when we communicated to you all when we made the conversion to C-Corp, we said that our tax rate at the time was roughly about 7%. We were fortunate enough to have made in an election, but we got a very big step up in our assets and also we're able to amortize goodwill. And so that benefit we said would come to fruition over the next five years. So five, six years out, our corporate rate will be 21% at the federal level. And it's really hard to predict what it's going to be year-to-year and never mind quarter-to-quarter. But the simple rule of thumb is you should assume that the tax rate is going to escalate roughly 3% a quarter. The reason why it was down this quarter is that one of the assets that it gotten a very large step up when it was sold, the taxes paid on that was minimal, which actually drove the tax rate down. So, the punch line is, for modeling purposes, you should probably use a tax rate of anywhere in between 11%, 12% for 2020 - sorry, 2019. And as we mentioned, we will keep you updated along the way to the extent that something changes.

[Chris Harris, Wells Fargo]

Great, thank you.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you.

[Operator]

Thank you. Our next question comes from Michael Cyprys with Morgan Stanley. Your line is now open.

[Michael Cyprys, Morgan Stanley]

Hey, good morning, just hoping you could give us an update on the fundraising pipeline. I know you mentioned last quarter that you'd expect to have six funds in the market for 2019 and I believe which funds are those that you expect to be in the market for 2019? And any color on how we should think about sizing?

[Craig Larson, Head of Investor Relations]

Mike, this is Craig, let me just review the - our current initiatives, so we're currently fundraising across European private equity impact, energy, European credit as well as one of our growth strategies in real estate. We're fundraising for an Asian equity strategy and a US credit strategy.

We're fundraising for an additional two strategies expected to be launched in the coming weeks.

At the same time, there are the areas where we look to raise capital on a more continuous basis that would include the CLO business, raising price there for [ph] CLO of the year, roughly a week ago, leverage credit platforms in the US and Europe and the BDCs and hedge fund partnerships. And then finally, just tying the fundraising to management fee growth, again, as we mentioned, we have over 23 billion of capital in our AUM that will become fee paying is out of the capitals invested or funds are turned on at a weighted average rate of just over 100 basis points. So I think you put that all together and our fundraising team is - our fundraising team is busy.

[Michael Cyprys, Morgan Stanley]

Great, thanks for the color there. And just as a follow up question, circling back to Asia, an area you guys are targeting for expansion and growth, if you could just kind of flush out, hoping to flush out a little bit more around how you're thinking about approaching the expansion of the business in Asia, which countries do you see the most growth in and if you could just talk a little bit about how you're approaching distribution across the different countries understanding could be a bit different. Thanks.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Hey, Michael, it's Scott. So, I'd say the couple of different aspects to the Asia story. First is, as we mentioned, the focus on building the non-private equity businesses and creating dedicated strategies for what has been some ongoing investment activity there already. So just give you a sense for the footprint, we had eight offices in Asia, but 270 people on the ground today and we have a very integrated platform and approach. So we have country teams throughout the region. And so what we are doing is building our non-private equity businesses in a very integrated way alongside in with their private equity colleagues. And so what we're really focused on now is scaling in infrastructure, real estate and credit. And as you've seen, we've been making some hires in the region with a focus on those areas. And kind of the answer to which parts of the region are most interesting kind of depends a little bit on which of the strategies that we're talking about. As we see more opportunities for credit in the kind of more Southeast Asia and Australia parts of the market, real estate more opportunities perhaps in North Asia and infrastructure is kind of a mix.

In terms of the overall private equity efforts in Asia, we continue to see a lot of opportunity for growth there too. In particular, recently we've been busy in Japan where we're seeing significant opportunity to buy non-core subsidiaries. We think that wave is continuing and gaining pace and we think there's even more for us to do in Japan on the private equity side and also in areas like real estate overtime. In terms of distribution of these new non-private equity strategies, it is not just an Asia distribution story. We're finding investors all around the world or under allocated to Asia and so our distribution approach for all of our Asia strategy is a really global one and in fact there are not that many alternative providers in Asia. So when we're talking to them about things that we're doing private equity infrastructure, real estate, credit, relative to what we see in terms of the competitive landscape in the US and Europe, there's just fewer players. So we have a team on the ground raising money in Asia of course and that we're focused on these products and others, but we're using the global team to distribute.

[Michael Cyprys, Morgan Stanley]

Great, thanks so much. I appreciate your color.

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Thank you.

[Operator]

Thank you. We have a follow up question from Patrick Davitt with Autonomous Research. Your line is now open. If your line is on mute, please unmute.

[Patrick Davitt, Autonomous Research]

Hey, sorry. Thank you. Sorry, good morning. It looks like the consensus realized carrier expectations are still well above the current guide and obviously there'll be more stuff announced and completed as we go along. Do you think that's achievable now that markets are back up and more open and then in that vein as we look into the second half, are there any restrictions on your selling your Pfizer shares once the FTC share closes?

[Scott Nuttall, Co-President and Co-Chief Operating Officer]

Well, Patrick, we could only give you as much information as we know today. We're not going to project what the end of the second half of the year looks like, never mind even the second quarter. And so based upon additions and the visibility we've got right now, we've communicated what we've gotten signed and closed and what we've gotten signed and yet to close. So I wouldn't want to even comment on anything around what future expectations would be, but when you think about quite typically on the public securities that we have, when you look at private equity, roughly about 30% of the remaining value is in public security, so to the extent that there is a rebound in the public market and those stock prices get to attracted enough levels where we already previously exited, you would expect to see us continue to do that again if the market is there. And again, as I said earlier, the one good thing about our model is we get to time our exits and so we will certainly time it appropriately.

[Patrick Davitt, Autonomous Research]

And are there restrictions on the Pfizer shares once it closes?

[Craig Larson, Head of Investor Relations]

Once the transaction closes there is a three month lock up on the shares, but that's the only contractual restriction. But I'd say Patrick, we expect the transaction to close in the second half of this year, so we'll be talking about that over the long-term, but I wouldn't expect any activity this year.

[Patrick Davitt, Autonomous Research]

Thank you.

[Craig Larson, Head of Investor Relations]

Thank you.

[Operator]

Thank you. We have another follow up question from Robert Lee. Your line is now open.

[Robert Lee, KBW]

Great, thank you for taking my follow up. Maybe guys, just going back to kind of the pipeline of potential management fees, obviously you have 23 billion of dry powder, call it 230 million potentially of incremental fees, it is almost 20% of what you earned this year. But how about other pockets, for example, you now have a pretty big BDC platform of - I forgot the numbers, 14 billion, 15 billion or so leverage rules changed on that effective shortly going forward and - any thought about how you kind of adopted some of the change in leverage rules there? What incremental management fees potential could be over the next several years from just that pocket of assets?

[William Janetschek, Chief Financial Officer]

Hey, Rob, this is Bill. Nothing to call out specifically, what we did want to make clear and Craig mentioned this earlier is that we do have that 23 billion and so that's going to turn on probably over the next two, three, four years. But remember our business, if you follow the AUM growth over the past few years and the growth certainly more importantly as relates to management fees and the fee paying AUM growth, as we continue to raise capital and bring that capital online, you should hopefully expect with the challenge we've got, with more capital coming in for the alternative asset space, an increase in management fees.

[Craig Larson, Head of Investor Relations]

Yeah and the BDC pipeline, we'll let the management team for those entity speak for themselves on their call Rob, but you're right, there's latent potential there. But we'll let them articulate their leverage strategy.

[Robert Lee, KBW]

That was it. Thanks for taking my question.

[Craig Larson, Head of Investor Relations]

Thank you.

[Operator]

Thank you. I'm showing no further questions at this time. I would now like to turn the call back to your speakers for any closing remarks.

[Craig Larson, Head of Investor Relations]

Okay, great. Thank you, Sydney and thank you everybody for joining us. Please of course follow us with anything as you reflect on the quarter. Thanks again.

[Operator]

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