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KKR & Co LP (NYSE:KKR)
Q3 2019 Earnings Call
Oct 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to KKR's Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

Following managements prepared remarks, the conference will be open for questions. [Operator Instructions]

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

Craig Larson -- Head of Investor Relations

Thanks, Norma. Welcome to our Third quarter 2019 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 and the call will 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 also posted a supplementary presentation on our website that we'll be referring to, over the course of the call. And I'm going to begin by referencing Pages 2 and 3 of that deck. In summary, we're pleased with our fundamentals and how we're positioned looking forward. Focusing on Page 2 of the deck most importantly, the earnings power of the firm continues to grow nicely as can be seen by the charts on the left hand side of the page.

Our AUM is now $208 billion while book value is $18.23 per adjusted share. As you know we are big believers in the power of compounding and we've been seeing that power through our book value. Over the last year, book value per share grew 9%, well ahead of equity and fixed income indices. And over the last three years we've compounded book value per share 15% each year, although paying out dividends alongside of this.

Looking at the top right-hand chart on Page 2, management fees have grown steadily, up 16% year-over-year on an LTM basis due to asset growth in addition to a modest increase in the blended management fee rate in both private markets and public markets. And after-tax distributable earnings totaled $1.5 billion for the trailing 12 months. It's worth noting that strong investment performance has helped drive a 46% increase in the net unrealized carry figure on our balance sheet year-to-date, despite generating over $800 million in realized carried interest over the nine months. This increase in the net unrealized carried balance should bode well over time, in terms of realized carry and in turn our distributable earnings.

Turning to Page 3 of the deck, you'll see some additional detail on our financial results, and please remember, as you look through these, that we do include equity-based compensation charges within our operating expenses, as well as within our after-tax distributable earnings, as we report our results. After-tax DE came in at $389 million for the quarter or $0.46 on a per adjusted share basis. Our compensation margin came in right at that 40% level and our pre-tax distributable operating earnings margin was a healthy 51%. Fee related earnings for the quarter were $250 million and on an LTM basis are $1.1 billion.

As we evaluate our performance there are five things we're focused on. We need to generate investment performance, raise capital, find attractive new investments, monetize existing investments, and finally, use our model to capture more economics from everything that we do. I'll let the -- progress on the first two and Bill will cover the remaining three.

Let's start with investment performance. I'll be referencing Page 4, the deck. So, beginning with private equity -- the private equity portfolio in its entirety appreciated 12% over the trailing 12 months. This compares favorably to the MSCI World, that appreciated 2.4% on a total return basis, where we saw a notable performance within our flagship private equity funds, as you see on the page. The blended performance across these funds, these are our more recent vintages that have been investing for at least two years, was quite strong appreciating 26% driven by Asia III.

Our flagship real estate and infrastructure funds appreciated 21% and 9% respectively, while the commodity environment pressured our benchmark energy fund. Energy Income and Growth declined 15% on an LTM basis but performed well ahead of its benchmark, and credit alternative and leverage credit strategies at both appreciated 4% on a blended basis.

Turning to fundraising, capital inflows totaled $5 billion in the quarter and $29 billion over the last 12 months. We held the first close in the successor to our technology growth strategy and that inflows across our European PE, real estate, credit and in fact strategies, as well as the number of credit strategies including CLOs and leverage credit. Capital inflows of the trailing 12 months have contributed to $57 billion of dry powder at quarter end. Importantly, we also have approximately $20 billion of capital commitments that become fee-paying when they are either invested or -- investment period at a weighted average rate of around 110 basis points, providing direct line of site toward future management fees.

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

William J. Janetschek -- Chief Financial Officer

Thanks, Craig. I'll start with the third thing we need to do well, which is invest in new opportunities. Deployment this quarter in private markets was $2 billion, largely coming from our private credit strategies. Year-to-date public mortgage deployment is $6 billion, up over 20% compared to the first nine months of '18. In private markets we invested $2.4 billion in the quarter driven by private equity investments in Europe and the U.S., in addition to $400 million across our real estate strategies. During the first nine months of 2019, private markets deployment is $10 billion, up 8% year-over-year.

Now let's turn to monetization activity in the quarter. As reported in our monetization update in late December, activity this quarter was driven by both strategic transactions in secondary sales. We had just over $500 million of realized carried interest and investment income this quarter. We had our final exit in this quarter in both PRA Healthcare and National Vision, and a blended multiple of five times our cost. And we're beginning to see realized carry from public markets with $15 million in Q3 and $10 million last quarter.

Finally, last thing we need to do well is use our model to capture greater economics for our investors and the firm. In capital markets this quarter transaction fee is totaled $84 million. Now periodically, we'll have transactions that can lift capital markets fee in the quarter. We had two of those in the third quarter of last year that contributed over $100 million, while we didn't have any transactions of this size this quarter -- overall fundamentals remain quite healthy. This quarter, we generated approximately 50 transactions, 25% of revenue in the quarter and year-to-date came from third parties and a little over 40% of revenue this quarter was generated from outside the U.S. and year-to-date that percentage is 55%.

So we are continuing to see diversification across the capital markets platform. Finally, let me give you a little bit color on monetization activities as we stand here today. Transactions that have closed or have been signed and are expected to close should contribute $925 million in realized carried interest and realized investment income in Q4 '19 or early 2020. Of that $925 million, we expect $375 million to close in Q4, and it's only the end of October.

Turning to Page 5 of the supplement, you'll see a summary of our core fundamentals across the five categories. The power of our model is evident in our results and we are quite pleased with the momentum we're seeing.

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

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Thanks, Bill, and thank you everybody for joining our call. Our results this quarter are straightforward, so I'm going to be brief. Last quarter, I discussed the powerful combination of more mature track records and an expanding investor base. As a reminder, 18 of our current 22 investment strategies were launched in the last 10 years. And in our experience it takes about a decade to start to achieve scale. So we have a lot of growth ahead. But it is also important to remember that as we were building new investment businesses over the last 10 years, we've been simultaneously building our distribution capabilities. The results have been encouraging with our investor base growing from 275 investors 10 years ago to over 1,000 today. But we still have a long way to go.

We see an opportunity to expand distribution to all channels, institutional, insurance and the retail and high net-worth market. As we continue to generate investment performance, mature our track records, expand our distribution footprint and create new products, we see significant growth ahead. I want to put this in perspective. Please take a look at Page 6 of the supplement. There you will see that our management fees have grown 50% over the last three years from about $800 million to $1.2 billion.

Over these three years organic new capital raised exceeded $90 billion. This was done with a significant number of first time funds and a young distribution effort. Now look at the right-hand side of the chart. This shows the strategies where we expect to be fundraising over the next three years. You will see the list includes our three largest funds, Asia PE, Americas PE and Global Infrastructure, which aggregated $30 billion in their last vintage. But it also shows, there is over 20 other strategies we expect to have in the market. So given what's coming to market, plus our ongoing distribution efforts, if the fundraising environment cooperates and we continue to perform, we believe we can grow our management fees by at least 50%, again over the next three years.

With that, we're happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Alex Blostein of Goldman Sachs. Your line is open.

Alexander Blostein -- Goldman Sachs -- Analyst

Hey, good morning guys. So Scott, maybe on the last point that you mentioned, starting on Slide 6, definitely encouraging to hear the 50% management fee growth over the next three years, but how should we think about the incremental margin on that growth given the fact, so much of the investments, I guess are already in place?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Thanks for the question, Alex. To be clear, I just I said at least 50% is what we're expecting, if the market cooperates. And I think as we've been talking about for the last several years, you're right, we've been investing and bringing on new teams and a lot of that investment -- is coming ahead of the revenues. So we would expect there to be positive operating leverage over that period of time. And we will continue to be making investments in a variety of new products and other initiatives for the firm, including building out distribution further, but even net of those new investment we'd still expect the operating margin to increase somewhat.

Alexander Blostein -- Goldman Sachs -- Analyst

Great. That's helpful. And then my follow-up for Bill or Craig. Looking at $375 million and $925 million in carry and realized income that you guys highlighted in 4Q, and then into early 2020. Does that include any sort of utilization from Fiserv and the margin loan arrangement? Do you guys have setup or any of that monetization activity would be on top of the numbers you provided?

William J. Janetschek -- Chief Financial Officer

hey Alex, this is Bill. Embedded in the $925 million is some portion of an expected Fiserv dividend in the fourth quarter. But keep in mind that's only one monetization out of a total of 11 when I count. And so when you think about that $925 million, two were already secondaries that had been completed which is [Indecipherable] in train lines. But more importantly we have several strategic sales that have been signed that are expected to close in between now and Q1 of 2020, and that's both in the U.S. and in Japan and Korea. So a lot of opportunity from the monetization point of view.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Yeah. Now -- this is Scott. Just appreciate the question on Fiserv, because we've been getting this question a bit from our shareholders. And I think people have noted that the merger of Fiserv and First Data has caused Fiserv stock to increase materially this year. To be clear from our standpoint, we think the market is still, just beginning to understand the opportunity from that merger. And we don't think the upside is yet reflected in Fiserv stock price. And so, to your point, we did put in place a modest margin loan, so we could return some capital back to our investors, but keep the upside on those shares, because we think there is quite a bit remaining.

Alexander Blostein -- Goldman Sachs -- Analyst

Yeah. Makes perfect sense. Great. Thanks guys.

Operator

Thank you. And our next question comes from Robert Lee of KBW. Your line is open.

Robert Lee -- Keefe, Bruyette, & Woods -- Analyst

Great. Thanks. Good morning guys. Thanks for taking my questions.

Craig Larson -- Head of Investor Relations

Hey Rob.

Robert Lee -- Keefe, Bruyette, & Woods -- Analyst

Hey. So maybe following up on kind of, you know the fundraising and I know you've -- maybe Scott, you talked about this in the past. But can you maybe update us on -- kind of where your LP base sits now and maybe the success you have had so far and kind of getting investors -- invested in kind of multiple platforms? I was trying to see some updated numbers.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Sure, Rob, just -- thanks for the question. Look, I think we continue to make good progress, so we're now bit over 1,000 investors. On average the cross-sell is about 1.9 products per client. But as you know, when you're meaningfully expanding your investor base that tends to happen in one product at a time. So even today we still only have 41% of our investors that are in more than one product. But just to give you a sense for the opportunity the Top 70 average 4.5 products. So that we think there is a significant amount of opportunity not only to expand the investor base, but also further -- but also that cross-sell statistic. And as we said in prepared remarks, I think there is opportunity institutionally -- there is also opportunity in insurance we've gone from $8 billion to $26 billion from the insurance market since 2015. There is also opportunity in the retail on high net worth market we've gone from $9 billion there to $35 billion, since 2015. And those are areas where we see significantly more opportunity ahead. So that's -- those are some stats for you, but long story short, we still see a lot of upside.

Robert Lee -- Keefe, Bruyette, & Woods -- Analyst

Great. And maybe follow up for Bill, a little bit of a modeling question, but in tax rate it was pretty low and I know it's hard to forecast quarter-to-quarter. But if I look at the balance sheet it looks like tax assets come down pretty -- utilize a bunch of the tax assets in the last several quarters. Should we be thinking that this changes or maybe accelerate the path to kind of a more normalized tax rate, is that you're maybe realizing some of the assets bit faster?

William J. Janetschek -- Chief Financial Officer

Hey, Rob, that's a good question and one that we spend a lot of time on each quarter. But based upon what we had originally said was where we thought that the tax rate was going to be in the high single-digit and walk its way all the way up to 21% from the federal corporate level over a five to six year period, that's still going to be the case. However, to your point, it's a very good point, to the extent that we actually have monetizations that are accelerating. And we're using that tax asset up in years one and two. We might have [Technical Issue] and you could see it then go up. So that's why you could see that last quarter our effective tax rate was 15%, this quarter for a whole host of different reasons it was actually only 9%. Again I would say this probably on every call, it's incredibly hard to model out. But I would still stick with something in probably the low teens for the next year or two, but again we'll try to make sure that you have as much information as us and we'll update that number, probably just about every quarter.

Robert Lee -- Keefe, Bruyette, & Woods -- Analyst

Great. Thanks, Bill. Thanks for taking my questions.

Craig Larson -- Head of Investor Relations

Thanks, Rob.

Operator

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

Benjamin Herbert -- Citi -- Analyst

Hey, good morning. Thanks for taking the question. First one would just be, could you provide, I know performance is very strong in the quarter, and this is Ben Herbert on for Bill. Just maybe some portfolio company health update, just metrics, quarter-over-quarter and year-over-year?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Yes, sure Ben, it's Scott. I mean, the bottom line is, it's been pretty consistent, so last 12 months, about 10% revenue growth in the global PE portfolio and about 10% EBITDA growth. And it's been in that area for the last several quarters.

Benjamin Herbert -- Citi -- Analyst

Great. Thank you. And then a follow-up would just be, how are you thinking about the fixed dividend policy currently and just kind of -- in light of pretty substantial cash build on the balance sheet -- year-to-date?

Craig Larson -- Head of Investor Relations

No news at this moment. It's the topic we've historically address on the fourth quarter call, but as we think about the dividend level, remember that we have a disposition toward compounding, so retaining capital to invest back in the firm is always going to be important to us. And we want to preserve our flexibility for share repurchases. That said, we should see an upward bias to the dividend over time. So the punch line is stay tune to next quarter.

Benjamin Herbert -- Citi -- Analyst

Great. Thanks for taking the question.

Craig Larson -- Head of Investor Relations

Thank you.

Operator

Thank you. Our next question comes from Craig Siegenthaler with Credit Suisse. Your line is open.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks. Good morning everyone.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Good morning.

Craig Siegenthaler -- Credit Suisse -- Analyst

So just first on Asia, can you update us on your strategy to broaden out the Asia business outside of the upcoming expected raise in the Asia buyout fund, including infrastructure private debt and real estate?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Sure. It's Scott. So thanks for the question. You're right. A big priority for the firm this year was expanding our Asia platform outside of private equity and the summary is that, we're on track. We have launched efforts across infrastructure, real estate, credit and we're also going to be launching an effort in technology growth as well with an Asia focus. So I think for new businesses focused on Asia, leveraging the footprint we already have, so you'll see us add people, but to be able to do that -- but we were leveraging the team on the ground in the eight offices we have in the region.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks. And I just CFO question here for Bill, on the FRE math. I'm just wondering in the quarter, how much base comp and non-comp expense was allocated against investment income in the quarter?

William J. Janetschek -- Chief Financial Officer

Hey, Craig, it's the same methodology that we've been using, you take the fee income over the total income and then you take our operating expenses, backing out stock-based comp. And whatever that percentage is, is the amount allocated to fee related earnings. You take your fee income minus that number and that's how you -- that's how you get to the fee related earnings numbers. So nothing has changed this quarter.

Craig Siegenthaler -- Credit Suisse -- Analyst

Got it. Thanks, Bill.

Operator

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

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Good morning and thanks for taking the questions. Maybe first, just overall investment performance is strong across the Board, and that's the energy you pointed out. How are some of the trade concerns impact to your performance or not in the Asia strategy because it doesn't look like it has. Or has it increased the demand in some of the private strategies, given that some of the public markets have been more impact?

Craig Larson -- Head of Investor Relations

Hey, Mike, it's Craig. Thanks for the question. Yeah I think when we look at and again this is something that we've -- we've looked at very closely as you'd expect. In the investments we've made in China have tended to be very focused on domestic consumption and not are really subject to the whims of trade negotiations. So when we look across the overall private equity portfolio revenues, as well as costs, the exposure to us is in that low single digit range on both of those. And I think there is a -- on the flip side of that coin, I think you're right, there can be opportunities resulting from what's going on from the trade front as it relates to investment opportunities. So I think the -- the overall impact on the portfolio was one that is, is one that's pretty small. And at the same point in time, we're trying to find ways to pursue opportunities if they are companies that have decided to exit the region.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

All right. That's helpful. And then just as a follow-up, you guys mentioned some of the fundraising in the growth equity area -- just more curious whether it's investment opportunities or like fundraising traction like how that's been going with some of the recent -- like IPO issues relative to some of the private market that are out there in the growth phase?

Craig Larson -- Head of Investor Relations

Look, I think there are our two aspects of that. There is the performance question within healthcare growth as well as the TMT growth. And the statistics there on the first funds is a very positive answer on both of those. Again where we're fundraising on TMT's, so that's again, you can certainly get a sense, by looking at the fund table for the returns that we've seen, but I think it's been a very pleasant experience today, as it relates to our LPs. And on the IPO market question, look, I think a couple of thoughts overall. First look, the IPO market is marketed windows. And it always has been in and they're going to be times when the market feels more accessible than others. So remembering that current dynamics overall don't really feel all that out of the ordinary, and when investors are pushing back, I think from our standpoint, that can be a sign of a healthy functioning market.

I think the second point to be clear, the IPO window was not shut. So at the end of last week, we priced the IPO software one [Phonetic], a European portfolio company of ours that IPO raised approximately $700 million, so it was a sizable IPO, the book was well oversubscribed and the stock traded up 3% in its first day of trading. So investor is may be more selective at the moment. But again, the window is not shot. And then Mike just add a little bit of flavor, and this is not really related to the growth portfolio, but in the framework of the firm overall, I think when we were asked about the IPO market, the underlying question often relates to the outlook for future monetizations and ultimately whether the coverage there and if we're going to be able to generate future DE. And from that standpoint what's the bigger factor here actually isn't the IPO market, remember we're typically not selling stock in an IPO, is the significance as well as the performance of the public holdings as a whole.

So from that standpoint, the publics are about 25% of the PE portfolio as a whole, year to date the publics are up 45%, so performance has been very strong. Now a statistic like that is always going to be held to new largest holding is up over 80%. But just to be clear performance is actually quite broad. So if you take First Data-Fiserv out of that math, the publics are still up 27%, through 9/30. So again performance overall has been, has been quite good.

William J. Janetschek -- Chief Financial Officer

The only thing I would add Mike is that, the only thing I would add is that, we have seen some push back on a couple of Australian IPOs, but to Craig's point, it's a global market and I wouldn't extrapolate from that. There is a positive to the extent we do see the IPO market difficult, if I mean it's less fun to be a public company. And so that means there is more investment opportunities for us across the firm.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Right. Thanks a lot.

Operator

Thank you. And our next question comes from Glenn Schorr of Evercore. Your line is open.

Glenn Schorr -- Evercore ISI -- Analyst

Hello there. It might be related to Mike's question. If you look at your macro team, the great Henry McVeigh [Phonetic]. If you look at their outlook of something, whether it'd be one like recession formerly or something like a slowdown in 11, 12. His comments are interesting about a tipping point underscoring that low interest rates are not going to be to help for you to credit creation or equity valuation. So that's a long-winded lead up to the question of how does that factor into both your capital deployment and capital markets activity and I'll do my follow up separate.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Thanks, Glenn. Thanks for giving and now that's the great Henry McVeigh. I will, I'd say, here is what we're seeing. I'd say we see and basically industrial recession we think now, in the U.S. and Europe to great extent. Consumer and services look OK, but we're watching the data closely. So to be clear, we are expecting whatever is coming to be kind of more of a normal recession, but we're seeing a bit of a rolling recession right now, we believe really starting with the industrial sector U.S. and Europe, Asia is a bit of a different story. So we do see opportunity coming out of all of this, but as we think about, your question on deployment, as we think about how to invest into it. What we're seeing is, there is more volatility in the market. There is more dispersion in the market. So we continue to see a have, have-not market and to some extent to have, have-not economy. And so as a result of that where we are spending time, is where the market is undervaluing companies. So we're finding complexity is punished any change in outlook is punished and the market overall is quite skittish. And so what we're seeing as a result of that is, at the FIFO [Phonetic] level where we operate, it was more interesting companies going private. There is interest from companies that want to make themselves a simpler, so they're selling non-core assets, that's a global trend, we continue to see. Our strategy continues to be by complexity and sell simplicity and we think that's a strategy that works as we go into this part of the cycle, which we think is going to be far more of a normal recession then what happened last time.

Glenn Schorr -- Evercore ISI -- Analyst

Very clear. Thanks. Just a quick follow-up, when you look, you talk about the statistics that you mentioned earlier on the penetration rates in the number of products. I'm curious about how your relationship management function is going to change to improve those numbers and sell into your current LP base, while you have 20 plus new strategies being rolled over them or raising capital some of them brand new, over the next three years like -- in other words you raised $94 billion in the last three years. Should we be thinking semi-steady markets that's a lot more over the next three years given all the additional strategies and the penetration rate efforts?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Well I think if you look at the last three years, we did not have the big three funds that I mentioned -- on the right-hand, upper right-hand side of Slide 6 in the market, in the way we will over the next three. So that's the first thing I would say. So all else equal, you would expect that to have a positive bias on that $90 plus billion number. And you're right on the bottom right hand side, there is more strategies than we had the last three years as well. So I think what we're saying to you is, all else equal, we would expect to exceed that number for the next three years, if the market cooperates.

I think in terms of your question about relationship management part of that, is that our relationships continue to mature and broaden. And we actually have an approach from a marketing standpoint where the relationship management team that calls on an investor actually is calling with all KKR products in their bag and then they're supplemented by product specialists that can help go deeper on any individual fund or strategy. And so we think we're set up to be able to increase our cross-sell stats, because you don't have to have five KKR people be successful in one client. You need one to build trust and then to deliver the rest of the firm.

Craig Larson -- Head of Investor Relations

And I think Glenn, if you think of the way that works day-to-day, so for our first 35 years we probably only had a dialog with a handful of people at a pension plan, and that was very private equity focused. And if you think of our team now, that dialog will have expanded to the liquid credit professional, so the alternative credit professionals within real assets infrastructure, real estate credit and equity energy etc. And at the same time having a dialog above that with the CIO, is it relates to potential partnership opportunities. So I think there is an aspect of that, that actually as Scott said building like and trust in that cross-sell focus is something that when it works can happen very naturally.

William J. Janetschek -- Chief Financial Officer

Yeah, and I think the other thing that it's hard to give you a number on this, Glenn, but I think it's a positive bias back to the points I made about insurance in retail. Kind of four years ago, roughly $17 billion of AUM, now $60 [Phonetic] billion and we continue to invest in distribution in those areas, and I think hopefully that's -- well it's a positive bias to the numbers as well.

Glenn Schorr -- Evercore ISI -- Analyst

Thank you. Appreciate it.

William J. Janetschek -- Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from Patrick Davitt of Autonomous. Your line is open.

Patrick Davitt -- Autonomous Research -- Analyst

Hi, good morning guys, how are you?

Craig Larson -- Head of Investor Relations

Hey. How are you doing?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Good morning, Patrick.

Patrick Davitt -- Autonomous Research -- Analyst

Good. Just to double check the $375 million, you expect in the fourth quarter, would that include kind of the normal pop in the normal 4Q pop and public markets incentive fees?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

No. So that does not include incentive fees at all. What we're talking about is realized carry and realized balance sheet income. There is nothing to do with incentive fees.

Patrick Davitt -- Autonomous Research -- Analyst

Awesome. Thanks. And then on the -- I guess flagship private equity LTM performance, I think you highlighted Asia III is being a big driver of that. I guess could you kind of walk there is maybe some more specifics into what drove such a big move in that number from last quarter?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Patrick, it's really broad performance across the portfolio. I think the broad trends we're seeing within Asia continues and again experienced with LPs continues to be one I think that's very positive. And that number is as a whole, as it relates to Asia III specifically. And Patrick one other thing to keep in mind when you're thinking about going from the second quarter to the third quarter in that big pop, when I was talking earlier about the $925 million do come either in the fourth quarter over the first quarter. [Indecipherable] who are strategics in Asia III. And so we've had them properly remarked from a valuation point of view. But we did a little better on each of those exits and that's what actually, really drove as they've increase in the IRR quarter-over-quarter.

Patrick Davitt -- Autonomous Research -- Analyst

So if the -- that 26% you're showing includes 4Q '18, it's fair to assume that's probably going to come up pretty significantly again when that rolls-off?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

No. So -- from an IRR perspective, Patrick, is that, as we got close to it, it was strategic sales happening, that was embedded in the valuation that was done as of September 30. And so you actually saw some of the uplift in those positions in the third quarter. So on the mark-to-market basis, a good amount of it but not all of it is embedded in our valuation. That being said, the monetization will take place in the fourth quarter and first quarter.

Patrick Davitt -- Autonomous Research -- Analyst

Okay, I get that. I'll follow up later. Thank you.

Operator

Thank you. And our next question comes from Michael Cyprys of Morgan Stanley. Your line is open.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good morning, and thanks for taking the question. Just curious, your perspectives on purchase price multiples today on new transactions. As we look across the industry, I think on average we're seeing new deals at around 11 times EBITDA, in terms of purchase price multiples, which is a little bit above we were pre-crisis with some folks site is a riskier late cycle. But arguably the mix and growth profile are perhaps a little bit different today. So just curious, your perspective looking on through the hood there, on that for the industry and then also for KKR specifically?

Craig Larson -- Head of Investor Relations

Yeah, Mike, let me start there and then Scott or Bill may chime in. But I think one of the thing that's interesting when you look at private equity deployment is, we continue to see more dislocation, more opportunity and better risk reward outside of the U.S. And part of that is exactly what you're talking about which is valuation related. So if you look at total returns over the last five years returns for S&P is more than two times that of the MSCI Asia Pacific. And so overall, we are seeing greater value overall in the region. And so if you look year-to-date in terms of investment activity, again it's interesting, the dollars invested in Asia, together with the Europe are actually over 2.5 times that of the U.S. And again, I think what you're seeing is give an overall valuation levels, a pretty disciplined approach as it relates to U.S. investments most specifically.

William J. Janetschek -- Chief Financial Officer

And just to give you a little more color on the $2.4 billion that we've invested, this quarter in private markets, only $400 million was in the US. And so to Craig's point, a majority of the capital that we're deploying right now is certainly outside the U.S. And when you look into -- what's in the pipeline right now on transactions that are signed, but yet to close on the buy side, again the amount in certainly U.S. private equity is more component of the capital that we're deploying.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. Just as a quick follow-up question, maybe just on the comp ratio, curious your latest thinking around that, I think it was around 40% in the quarter, at a time when the realizations were a little bit higher off the balance sheet. So just curious given the 50% growth in management fees, you're expecting over the next three years, how would you expect the comp ratio to trend from here?

William J. Janetschek -- Chief Financial Officer

Hey Michael, this is Bill. I'll echo what Scott said earlier. As we continue to grow the platforms, and as we continue to raise more capital. And to the extent that those management fees go up, you will see margin improvement. That being said, when you look at where we are in 2019 and probably the early part of 2020, a lot of R&D going through our P&L, as we continue to expand a lot of the platforms, especially in Asia. So I would say that 40% comp ratio that was reported in the third quarter is probably going to be close to that, of certainly the next couple of quarters. But again, as we continue to grow our business, there will certainly be operating improvement and you should see margin expansion.

Michael Cyprys -- Morgan Stanley -- Analyst

Thank you.

Craig Larson -- Head of Investor Relations

Thank you.

Operator

Thank you. And our next question comes from Chris Harris of Wells Fargo. Your line is open.

Christopher Harris -- Wells Fargo -- Analyst

Thanks guys. For the flagship funds to be launched over the coming 12 months, I just want to clarify, does that mean when you expect to start the fundraising or when those funds could potentially go live?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

So I think we'll launch all three of those in the coming 12 months, Chris. Then the question in terms of when they're going to be turned on, is ultimately going to be a deployment question. And so we'll have to -- we'll have to play it by year, so I think in terms of your models as you think over the next 12 to 18 months, again knock on wood should be helpful from an AUM standpoint and then the fee-paying aspect will depend when those ones to get turned on.

Craig Larson -- Head of Investor Relations

But just to be clear, Chris, I think the expectation, we shared with you before in terms of the trajectory for management fees incorporates when we expect them to turn on as opposed to when their dollars are raised, just when they hit revenue.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

And the ones that will be [Indecipherable] is three large flagship funds that we're talking about. The management fees get turned on, based upon committed capital and not invested capital.

Christopher Harris -- Wells Fargo -- Analyst

Got it. Okay. And just a quick one on the quarter, what drove the upside to the guidance you previously gave on gross carry and realized investment income?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Between its -- actually sent out the press release, which was probably a week before quarter end, we ended up having some activity that was unknown to us, that week earlier. And so I would take that as nothing but good news.

Christopher Harris -- Wells Fargo -- Analyst

Okay, great. Thank you.

Craig Larson -- Head of Investor Relations

Thank you.

Operator

Thank you. And our next question comes from Devin Ryan of JMP Securities. Your line is open.

Devin Ryan -- JMP Securities -- Analyst

Great. Good morning, everyone.

Craig Larson -- Head of Investor Relations

Good morning.

William J. Janetschek -- Chief Financial Officer

Good morning.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Hey, Devin.

Devin Ryan -- JMP Securities -- Analyst

Just a follow-up on some of the commentary on the distribution investments you're making. You spoke, I guess to some of the specifics on the institutional side but you alluded to and I guess is referenced investments on the retail and high net-worth effort. So I'm just curious what specifically is incremental there I guess reading between the lines, it sounds like maybe there are some new initiatives that, that maybe haven't launched yet or just trying to think about what exactly that is and also expectations for fundraising in that channel?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Hey Devin, it's Scott. So, great question. So there is two channels that we were referring to. One is the insurance market where we've seen a significant amount of growth and interest and what we're doing. And I'd say if you back-up even to a higher level for a second, given we have $17 trillion or $18 trillion of negative rates in the world, we are seeing a number of investors in all channels struggle with how to make money in this environment. So as we travel around the world and talk to a number of different types of investors, the basic theme is, it's very hard to make money in a negative rate world. We believe we need more alternatives in order to achieve our objectives. So I'd say before this dynamic in this more recent significant increase in negative rates we had a lot of wind at our back, I would say the velocity of the wind in our back is an industry has only increased as a result of that dynamic.

As part of that, there is the institutional piece, which we talked a lot about historically. There is insurance, which we really began to focus on -- really in earnest over the course of the last four or five years, and we're seeing significant early returns, both in our regular way products but also structured products, that are packaged in a way that is easier for insurance companies to invest in. So think about taking portfolio of alternatives using structure and trying to figure out how to create investment grade notes, off the back of a portfolio. Those are the types of things that we're doing in the insurance space that we think is broadening the investor interest in what we are doing, aided by that overall backdrop. So that $8 billion going to $26 billion in insurance, the last four years is with just a few people in our firm focused on this space.

So the point is, if we increase the staffing in that area and increase the global focus on the insurance space, we think there is significant upside for their regular way and structured. And in the retail and high net worth, that space is to give you a sense year-to-date 22% of the capital we've raised, has been from the retail and high net-worth market. And as we've been tracking that stat over the last several years, we kind of steadily seeing that statistic go up from about 10% to 15%, and now the last several quarters in excess of 20% of the money we're raising from retail and high net-worth. That is across, it's virtually everything you're going to see on the right hand side of Page 6, both individual product format and then in a lot of cases, we're basically packaging several different types of strategies together and selling into the high net-worth and retail market.

There again, we have a very small team internally, which we think with incremental investment in the size of that team, that number of $35 billion in that channel, which is up from $9 billion four years ago, we think the $35 billion, can go up meaningfully from here. And a lot of it just incremental staffing, and incremental focus on this space. At the same time we're finding investor interest in what we do only increase.

Devin Ryan -- JMP Securities -- Analyst

Okay. Great color. Thanks. And then just a quick follow-up on AUM today, that's above cost but not yet paying carry interest, I'm not sure if I missed it. But can you just give an update of kind of where that stands and then how we should think about the trajectory of those assets contributing to carried interest longer term?

William J. Janetschek -- Chief Financial Officer

Hey Devin, this is Bill. We actually put out in the supplement in the first quarter that information is pretty much in line with where it was in the first quarter, so no new news. To the extent that we see an acceleration in that number we will certainly update you.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Yeah, the only thing I would add, Devin, is last summer we did an Investor Day and Joe Bae and I put up a slide that kind of showed that we believe we're under-earning our carry relative to our potential. And that slide show we've been at about $1.3 billion give or take at that point of trailing 12 months carry, and we saw an opportunity for that to go to $2 billion or more over the next five this year's. And so we still think that is -- is the case actually, we're more confident in that outlook today than we were last summer. And even more broadly that event we put up numbers for book value per share and total distributable earnings, out five years and 10 years. So as a chart in there that actually plays out that outlook for the firm with what we thought were pretty conservative assumptions at the time. And there again, I would tell you that we're more confident in being able to exceed that outlook today than we were even at that day last summer.

William J. Janetschek -- Chief Financial Officer

And just very specifically on Page 13 when you take a look at the investment table, right now we've got carry interest eligible mandates of approximately $130 billion. That's actually up from the $123 billion that reported in the first quarter. And again, just to give you reference with the number in the first quarter it was about $88 billion. So $88 billion of the $123 billion was eligible to start receiving carry. And so like I said that that number is certainly a little north of that, but certainly with more capital being raised we expect that number to go up, based upon obviously performance still being there.

Devin Ryan -- JMP Securities -- Analyst

Okay, terrific. Thanks for all the color. I appreciate it guys.

Craig Larson -- Head of Investor Relations

Thank you.

Operator

Thank you. And our next question comes from Brian Bedell of Deutsche Bank. Your line is open.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks. Good morning guys.

Craig Larson -- Head of Investor Relations

Good morning.

Brian Bedell -- Deutsche Bank -- Analyst

Just -- most of my questions have been asked. But maybe just a follow-up on the insurance side, just in terms of that growth dynamic and thanks Scott for the comment on sort of the efforts there. Do you expect that to be more of a blocking and tackling type of increase in penetration or is it possible you might have some strategic agreements that could really step that insurance penetration dramatically in the next couple of years?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

We're pursuing both. Brian, I'd say, definitely on the blocking and tackling and a number of the relationships that we've developed in the insurance space, I would put more in the strategic partnership category where they are now invested with us across multiple different products in scale. And our cross-sell statistics across the insurance space are actually better than the firm as a whole despite the use of our -- relative use of our effort in the insurance space. So I think it's definitely brought blocking and tackling. And we have done some things quietly on the strategic front, that it's also supplying the firm with AUM and we continue to spend time looking at doing more of those. And some of them may be modest but we're looking at some bigger moves as well. Far too early to be able to predict if anything happens. But I think you should expect both blocking and tackling and strategic efforts on the front.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Okay, that's helpful. And then just a clarification on the $375 million and the $925 million, that includes the price or margin loan in 4Q? And then into

1Q and is that roughly expected to be nearly the same level as it was in 3Q?

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Not going to really comment on very specific granular numbers on that other than the say that there will be an additional distribution made to our LPs in order to return capital to them in the offshoot of that it's more carry being paid to the firm as well as some balance sheet realizations.

William J. Janetschek -- Chief Financial Officer

I'd say those numbers include what we expect to do on the margin line over the next few quarters.

Brian Bedell -- Deutsche Bank -- Analyst

Did you. Okay, great. All right. Great. Thank you.

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Thank you.

Operator

Thank you. And I'm currently showing no further questions, I'd like to turn the call back over to Mr. Craig Larson for closing comments.

Craig Larson -- Head of Investor Relations

Thank you, Norma. Thank you everybody. If you're joining our call, please feel free of course to follow up directly with any follow-ups, and we'll talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Craig Larson -- Head of Investor Relations

William J. Janetschek -- Chief Financial Officer

Scott C. Nuttall -- Co-President and Co-Chief Operating Officer of KKR

Alexander Blostein -- Goldman Sachs -- Analyst

Robert Lee -- Keefe, Bruyette, & Woods -- Analyst

Benjamin Herbert -- Citi -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Glenn Schorr -- Evercore ISI -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

Christopher Harris -- Wells Fargo -- Analyst

Devin Ryan -- JMP Securities -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

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