00:00Let's start with the history of our regime change. What did we used to do that's maybe dated right
00:07now? So pre-COVID, if you think about it, coming out of the GFC, we had secular stagnation, right?
00:14The central banks could not engender inflation in the system. So what would you do? You'd lower
00:19rates, try to increase borrowing, and then that would lead to consumption. When COVID hit, you
00:24had a huge amount of fiscal stimulus come in the system. The money multiplier started to work,
00:29and we went into what we call a regime change. Bigger deficits, governments are spending more,
00:35more geopolitics, messy energy transition, and more things that get a bump in the net.
00:40And into Bloomberg money, a messy bond transition as well. I want to go to this one quote. This is
00:45a
00:45really sophisticated report, folks. Get it from KKR. I can't say enough about it right now,
00:51and it's simple. Productivity-driven growth and increasing economic choke points for political
00:58gains. It reinforces Henry McVeigh's view. We are indeed in a regime change, and it moves to private
01:05equity. Why does Scarlet Fu need private equity in her IRA? Well, ultimately, I think you're,
01:12if you believe in compounding, which we think is the eighth one to the world, you guys talk about it
01:17all
01:17the time. That's what private equity does. The second big point is that it actually lends itself
01:23to operational improvements in companies, making them better. So you're not buying beta of the
01:27market. You're actually buying alpha that's generated by making companies better. We typically own,
01:32at any time, 200 companies. We're using the network of what we're seeing across
01:36all those companies to share best practices and to drive growth for our owners.
01:41Does Mr. McVeigh know that if there's a third Greek letter mentioned, the trap door opens?
01:45Oh, yeah, yeah. But it's a Friday, so we'll let him off easy. What happens in a higher interest
01:50rate environment, though, for private equity? Because they've had a hard time being able to
01:53exit some of their investments with borrowing costs elevated, and it's only going to get more
01:58elevated. Look, I'd say there are a couple of things, which is interest rates is not your only
02:02lever, right? Your best thing is how you run the business. There's going to be a vintage of private
02:07equity that came through 2021, and you see this in some of the software deals where you paid high
02:13prices. That will be a little bit of a bump in the night, but that's ultimately why you need to
02:18diversify where you invest, and ultimately, I think we have not been seeing that. I know this
02:24catches the media's attention all the time, but if you look at our exits, and we're publicly traded,
02:28you can see we've had pretty substantial exits of late.
02:31What's the most common mistake or misunderstanding that individual investors have
02:35when they allocate to private markets? Because this idea of getting some private assets into
02:40your portfolio is kind of new for individuals. Kind of new. Revolutionary. It's to be long-term.
02:47Private equity is predicated on an illiquidity premium. What, is long-term five years, ten years?
02:52Somewhere between five and ten years. If you're coming in and you need the money in six months,
02:57that's not the best. Okay, this is the heart of the matter. Good morning, Blackstone. Love you.
03:00Good morning. Is there any other companies besides Blackstone or BlackRock? The heart of the matter,
03:04Henry, is this liquidity issue? Do we need to set up sensible guardrails within ERISA programs,
03:11retirement programs, to make it efficacious to wait five years to get that gross up from private equity?
03:19I was around when we actually introduced the 401ks into the public markets in the 1990s when we took
03:25a lot of these asset managers public. If you think about somebody who's 35, they're going to be in the
03:29workforce for 25 to 30 years. Taking some small proportion of your savings and having that compound
03:35over time where you don't have a threat of illiquidity, that is, in my opinion...
03:41Totally agree. Have you seen evidence that people will be adults and do that? Or do they sell or ask
03:46to sell
03:47on the first dress?
03:48I think it gets to, a lot of this gets to investor education, which is, what's the right vehicle?
03:54Where are you, what is your long-term goal? And ultimately, what's the best vehicle for getting you there?
04:01Henry, Tom talked about your regime change framework, and that goes back to the end of COVID.
04:06I think 2022 is when you really started talking about it. But a lot has changed since 2022, right?
04:10NVIDIA kicked off the AI boom. You have the return of a new president or old president, Trump,
04:16and his many policies, which have proven to be inflationary, whether it's tariffs, the war, or immigration,
04:22or the one big, beautiful bill. So how do you fold those developments into this framework?
04:27Yeah. So a couple of things I'd say. At the heart of what we're talking about is that stocks and
04:31bonds
04:31are now positively correlated. So if you think about Liberation Day, what happened? The dollar went
04:36down, bonds sold off, and stocks sold off. For the prior 20 years, you had, when stocks sold off,
04:43bonds rallied. And that's how you diversified yourself. Our view is that is a more sustainable trend.
04:48What's happened, I would say, probably geopolitics has accelerated. That was one of our key
04:53foundations. The second is the deficits have accelerated. We have not left the call that
04:59you're in this higher resting heart rate for inflation. And so if you think about what KKR
05:03has done, more operational improvement in private equity, more real assets in the portfolio,
05:07and then credit be up in the capital structure where you're not stuck in just a fixed investment.
05:12In your brilliant regime change report, there's a chart of the Sharpe ratio. William Sharpe,
05:17Stanford, X-Beta, you learn three risks with the CFA three. Sharpe, Traynor, Jensen. Let's go to
05:24the very Sharpe ratio with Henry McVeigh. It's irrefutable with private equity, you pick up
05:31an efficacious Sharpe ratio that will benefit someone in wealth management. Why the struggle now?
05:38In terms of, let me drill down. Selling it to the public. Yeah. Look, I think when you look at,
05:44I mean, I don't think that anybody at KKR, I think we think that it should go into the wealth
05:48business, individual investor business, but it doesn't have to be accomplished overnight. Again,
05:52I get back to, we want to be thoughtful stewards. We want to think about education. But when you think
05:58about long-term retirement savings, that's the business KKR is in. We're in the retirement
06:02security business. And if you can extend that beyond just pensions and sovereign wealth funds
06:07and family offices, it makes sense for individuals to have some portion of their portfolio in that.
06:13But I don't think you want to do this irresponsibly. And I think where you've seen,
06:16you've seen this go back to Janice in the 1999. It's like taking way too much money in way too
06:20quickly.
06:21It's hard. That happened in the dot-com era. Everybody learned a lesson. We've seen that in
06:25different areas. And so just slow and steady wins the race. This is our 50th year at KKR.
06:29This isn't our first rodeo. We've been around. And I think you know our founders. Ultimately,
06:36you've got to have a long-term focus. It's too much Janice. He's throwing massive shade at Denver.
06:42But ultimately, concentration, all the things that apply to the public markets apply to the
06:47private markets, which is have linear deployment, think about concentration, think about leverage.
06:53We want to ask you how you invest. What would surprise people about your personal investment strategy?
06:57So, I mean, obviously, with all the guardrails that I serve as the KKR, CIO of the balance sheet,
07:03look, what I would extrapolate is we do a lot in Asia, particularly in Japan. And I think there's
07:08a lot going on in Japan and Korea around corporate reform. Most investors, I think when they look at
07:14their individual accounts, they're highly concentrated in the U.S. So that would be one thing that I would
07:18keep in mind. The second is when I think about what's going on in the infrastructure around the
07:24world. That's something that we think is a big theme where the public sector is having to hand
07:29that off to the private sector. So that's been a big part of what we're doing at KKR. And then
07:33I
07:33think we hit on this earlier. I'm much more inclined in stocks over bonds. If we're in this higher
07:39resting heart rate for inflation, I probably will be trimming down my government bond holdings.
07:43To how small? I'm not going to comment specifically on that. But to me, equities are a great inflation
07:52hedge. And a lot of what we're doing on the private side is doing that, but also in a way
07:57that you're improving the outlook for the company. How about housing? How about property and real
08:00assets? I mean, look, I think the American dream, in my view, is changing, which is I think
08:07home ownership is important, but I also think having employee ownership is important. And we've been
08:12doing that at KKR through our program. So I think that's an important part of the story.
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