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move in the ten year treasury rate, interest rates remain low and the combination of those things results in high prices.

KKR & Co (KKR), C-1-8, Buy

- Bill Janetschek, Chief Financial Officer, presented for KKR. Overall, Mr. Janetschek believes that KKR's balance sheet gives them the ability to take advantage of market dislocations, sees opportunities to grow in certain areas (e.g. infrastructure and real estate), and noted that they don't need to grow the headcount to bring on more assets.

- When asked “What would get you more interested in investing in KKR stock?” the most common response was a market pullback for better deployment/returns (50%). Respondents also felt that attractive returns and book value growth (33%), and stronger fee related earnings (17%) were also important. Less important for investors was improving energy markets and overall market confidence (0%).

Chart 63: What would get you more interested in investing in KKR stock?

60%
50%
40%
30%
20%
10%
0%

17% - Stronger fee related earnings
33% - Attractive returns and book value growth
0% - Improving energy markets and overall market confidence
50% - A market pullback for better deployment/returns

Source: BofA Merrill Lynch Global Research

- Overall, KKR likes the publicly traded partnership structure today. If comprehensive tax reform includes an elimination of carried interest tax, the income would still get passed through in that scenario which avoids a second level of taxation, so it still may not be attractive to change the structure. But, if the corporate rate is also lowered significantly, it could potentially make sense to go to a c-corp.

- Bill sees infrastructure as a real growth area for KKR. 7-8 years ago it was difficult to raise an infrastructure fund as the asset class didn't do very well in the financial crisis; today there is more interest. KKR's first infrastructure fund was around $1B and the second one was around $3B. Infrastructure needs are tremendous long-term, with $1-2 trillion capital needed for projects over the next decade, and infrastructure spend is one area of consistency across the two major parties.

- Management thinks that investors understand the reason for the change in the distribution policy. KKR likes to pay out the stable dividend and redeploy capital into the balance sheet. As part of the year-end process, KKR will likely review the level of the fixed distribution and determine whether it should be changed. KKR would like to have around 40% of the balance sheet invested in private equity over time.

- KKR will manage concentration risk, and it is unlikely that the firm will make another investment as big as First Data again. The biggest advantage to having a

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2016 Future of Financials Conference | 17 November 2016
Bank of America Merrill Lynch
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