00:00Is it turning? Is it turning or not?
00:04No, we feel pretty good about what we're seeing across our portfolio.
00:08And we're vested from the public side to the private side.
00:11Seniors are subordinated. We cover close to 2,000 issuers.
00:15We're still seeing revenue growth and EBITDA growth across our portfolio.
00:19And that 50,000 foot view.
00:21And I think as you get a little bit closer, for sure we're seeing some slowing in pockets of sectors
00:27in certain companies.
00:28But to the extent to worry about a big mass credit cycle, that's not what we're seeing currently in the
00:34portfolio.
00:36Chris, you say you're feeling pretty good.
00:37But you must assess that the credit risk is higher, right, on the back of the Iran war, on stickier
00:45inflation, on expectations of slower growth.
00:48How are you assessing that credit risk?
00:51Sure. For many reasons, we're looking at the credit risk.
00:56But a big part of what we're focused more on is portfolio construction.
01:00I think where you're going to see more and more dispersion, whether it be in credit performance, where you're going
01:05to be certain in manager performance, it's going to be about portfolio construction.
01:10So in areas where there has been maybe a little bit more exuberance, diversify a lot those portfolios.
01:16Take smaller positions.
01:18Keep it high quality.
01:19You know, one thing that we've been saying at KKR is sort of high grade your portfolio a lot.
01:24That doesn't necessarily mean go to investment grade, but it does mean go up in quality.
01:29This is not the time to reach for risk, reach for that incremental yield.
01:34It's diversify where that supply and demand imbalance is a little bit out of your favor.
01:39And then add other asset types, other asset classes where that supply and demand is in your favor.
01:46What are the most recent changes you've made to your portfolio?
01:51A big part of what we're doing across our multi-asset private credit portfolios is really add asset-based finance
01:57to the mix.
01:59A lot of it is inflation protected, a lot more diversified across the underlying assets,
02:05in addition to multiple different asset types.
02:09So a big part of what we're seeing in our portfolios and where we're seeing growth is this demand for
02:16multi-asset private credit,
02:18both course, you know, direct lending, all the way to asset-based finance.
02:24So a lot of different types of risk within that, which is ultimately my earlier point,
02:29which is diversify the portfolio a lot in this environment.
02:33And in terms of adjustments that you're making due to the price shocks that could potentially happen,
02:39you know, on the back of the risk we're saying from the Iran war, how is that looking?
02:46Yeah, I mean, I do think that creating the ability to have liquidity when liquidity is taken out of the
02:54market is super important.
02:56So the ability to have liquidity in the portfolio, to be able to play offense when you need to play
03:02defense,
03:04taking advantage of what you're seeing in terms of some of these redemptions you're seeing,
03:09to be able to build incrementally more diverse portfolios.
03:13So it's a big part of what we want to do is be able to play offense when other people
03:17are playing defense.
03:19You talk about the redemptions.
03:21We're hearing reports about rising redemption requests.
03:24I mean, that's impacting how investors are now unwilling to put more money into the space.
03:29How might this play out eventually?
03:34Yeah.
03:34And the big part of what we're talking about with regards to redemption is just on the individual investor,
03:39on the wealth side of the business.
03:41We really are not seeing really redemptions on our institutional side of the business.
03:47And that KKR wealth is a much smaller percentage of our overall credit AUM.
03:52But one thing we're watching is really looking at the growth of wealth that we have seen in senior secured
04:00direct lending.
04:02It's not most of that growth is in that senior secured direct lending, not broader parts of private credit.
04:09And we're keeping an eye on the redemptions and the use of the 5% caps.
04:14And I think a big part of what we're focused on is looking at that portfolio construction of what we're
04:21seeing across some of these portfolios.
04:23And I do think it's going to be hard for many of the market participants to be able to differentiate
04:29what they're seeing in a certain manager's portfolio versus what is actually market.
04:35And I think a big difference is there's a lot of lessons learned from being in credit for three decades,
04:43from being in the markets for a while around this portfolio construction.
04:47And there is a lot of new entrants that might have not had all those lessons learned from the previous
04:51cycles.
04:52So I do think there's going to be a lot of manager dispersion between what we're seeing and what's in
04:58these portfolios.
05:00And Chris, as we talk about the spillover, I'm just wondering whether it is more, I guess, more apparent in
05:08Asia, given that the asset clause is less developed compared to the U.S.
05:13Are you seeing that playing out more in Asia?
05:18In terms of the redemptions, we're not really seeing it, given it's only 1% of our credit AUM is
05:24sitting in these non-traded BDCs that have access to redemptions.
05:28We're not really seeing this region as a big part of the redemptions.
05:35I do think that this market, from a lending standpoint, is actually one of the more attractive places to be,
05:41just given the supply and demand imbalance in terms of capital needed for growth businesses here.
05:5080% of the financing is done by banks, and the growth for flexible capital is so much more powerful
05:57in this region.
05:58However, there have been a lot of flows going into these non-traded BDCs from this region for investing in
06:05the U.S. or investing in Europe.
06:09Chris, of course, we heard from Jamie Dimon.
06:11He talked about how the private credit losses may be higher than expected, and that's due to the weakenings of
06:19credit standards.
06:20How do you respond to that?
06:22Look, we are seeing a slowing in the economy.
06:25I mean, we have seen up-click and downgrades and defaults, but this is not something like immediate today.
06:31This has been going on for the last few years.
06:33We've been a big proponent.
06:35You've been in this rolling recession where you have had elevated sort of defaults in the market.
06:40However, if you're running diversified portfolios and you're earning close to 10% cash on cash, you have to make
06:49a lot of mistakes to actually lose money.
06:52And I think that's the big point I really want to get across is the fact that if you're taking
06:583%, 4%, 5% positions in a credit book, that's where you're going to have real elevated losses or elevated
07:05defaults as a percentage because of that portfolio construction.
07:09So a big part of what we believe is diversification right now, have really breadth and scale, have differentiated origination
07:20to make sure you're actually seeing the deals you want to see rather than waiting for deals to show up
07:25on your table is the key to outperformance.
07:28And there's going to be a big dispersion between performance in managers and in portfolios is our view.
07:36There's a lot of financing going into the AI space.
07:40And in my conversation with GQG just earlier this week, my guest talked about how he sees the Iran war
07:48perhaps contributing to the bubble bursting.
07:52Is there a sense that that might happen if this Iran war continues?
07:57If this continues and elongates, for sure, when you're having $100 plus oil and it costs the consumer a ton
08:07to fill their SUV in the United States, it's going to impact the consumer and it's going to impact the
08:13economy.
08:14You're already starting to see some early signs of potentially in the supply chain in terms of inventory levels, in
08:22terms of cost of inputs and the like.
08:24So the longer this goes, for sure it's going to impact the businesses, it's going to impact the growth of
08:30the economy.
08:32And that's something we're constantly talking about in all of our investment committees, in all of our portfolio reviews.
08:38And you do have an opportunity right now, even in this private credit, to be able to sell assets, diversify
08:47the portfolio.
08:49In periods like this, when there still is a lot of demand for credit, you can move and reposition the
08:57portfolio as a result.
08:58It's definitely something we're looking at.
09:00It's not necessarily our base case right now.
09:04Right. It's not your base case, but it may happen.
09:06And the chances of that happening is rising because of the war.
09:10In the worst case scenario, if that bubble burst, given that trillions of dollars have been invested in it, I'm
09:16just wondering how that picture might look like.
09:19Yeah. And just to be clear, from a bubble bursting, we don't see some natural massive force selling on the
09:26market.
09:27Outside the wealth vehicles, which have these caps of 5% per quarter, they're structurally set up to manage these
09:36redemptions over a long period of time.
09:38In all of our institutional pools of capital, we don't have that redemption process even in place.
09:46And so, in terms of a bubble bursting, that's not how I would necessarily classify it.
09:52I think you could have economies slowing.
09:54You could have defaults and downgrades continuing to increase.
09:58But I don't see necessarily previous cycles where you've seen a four-cell of assets, which creates incremental volatility and
10:09an asset liability mismatch.
10:12Chris, you talked about being still upbeat in this asset class.
10:16Where are the biggest opportunities, particularly in Asia?
10:21The best opportunities that we see, particularly in Asia, is flexible capital.
10:27With 80% of the market being banked by traditional banks and the huge amount of growth of private equity
10:35in this region, there's demand for flexible capital.
10:39That could mean senior secured direct lending.
10:41That could be asset-based finance.
10:43That could be capital solutions.
10:44And bringing a multi-asset approach to that, to be a solutions provider, to a borrower or a company or
10:53a sponsor, that's where we see a huge amount of growth in this market.
10:58And are you seeing capital rotation from the West to Asia as investors, global investors, diversify their holdings?
11:08For sure.
11:10For sure.
11:10We're seeing it as a way to add incremental yield or pick up in yield to your portfolio.
11:16We're also seeing it as a diversifier to your existing book.
11:20And so we're seeing definitely growth in the asset class, in portfolio allocations.
11:26And we're a big believer that this market, this credit market in Asia, is going to be too big to
11:31ignore over the next few years.
11:33Which is why we're focused a lot here.
11:36Yeah.
11:38Yeah.
11:39Go ahead.
11:40Finish your sentence, Chris.
11:41Oh, I was just saying this is why we're focused here and making sure that we have the market position
11:46to be a first mover advantage here.
11:49Right.
11:49And do you see mispricings in Asia?
11:51Where might they be?
11:52Because these are opportunities.
11:55I'm sorry.
11:56Could you repeat the question?
11:56I didn't catch it.
11:58Do you see mispricings in Asia?
12:00Because these are opportunities.
12:02For sure.
12:03I mean, I think there's certain pockets of mispricing as a result of not having enough capital to take advantage
12:10of the opportunity.
12:12You know, in the more developed credit markets like Australia, it's more of a structure and a slight yield pickup.
12:18But if there's places like in Southeast Asia or in capital solutions or growth capital where we're seeing incremental pickup
12:27in yield and what we think potentially mispricings.
12:30No.
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