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KKR & Co LP (KKR) Q4 2018 Earnings Conference Call Transcript

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KKR & Co LP (NYSE: KKR)
Q4 2018 Earnings Conference Call
Feb. 01, 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. 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 opened 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 refer 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 ww.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 metrics slide the profiles of 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 our progress on the first two, and Bill will cover the remaining 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 2018 through September 30th, so for the first nine months of the year, the MSCI World appreciated 5.9% on a total return basis, only to see all of this and then some reverse in the fourth quarter as volatility spiked and the 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 off 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 off 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%, compared to the 8.2% decline in the MSCI World and the 4.4% decline in the S&P 500. In real assets our 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 our 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 declined 13.5%, but instead in a quarter where you saw this volatility we generated over $500 million in realized performance investment income, a record management fees, capital markets activity and fee-related earnings and ultimately reported $460 million (ph) 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 forced sellers during those periods.

Moving on to fundraising in our AUM roll forward. We reported $11.3 billion of new capital raised in Q4, that's our strongest quarter of the year. And of particular note, we held $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 into our leveraged 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 $1 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 performance fees. 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 toward future management fees.

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

William J. 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 $4.3 billion, the largest contributors were two 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 a combination of our real asset, growth equity and core equity platforms, showcasing the growing diversity of our firm.

In public markets, 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 situations strategies. Shifting to 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 monetizations, 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 that 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 Fiserv. This pending transaction would not be a realization of event for KKR, as our shares in First Data would be exchanged to Fiserv at close. Since December 31st 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 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 greater economics for our investors and our shareholders. Like up last quarter, which was discussed in detail, BMC, Envision and the French telecom tower investment were similar firmwide (ph) 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 all 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 of the firm and we saw 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 C. Nuttall -- Co-President, 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 have 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 to 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 have 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 are 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 in 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 under-performed to this extent was in the third quarter of 2011. The growth of our firm and business model has been significant since then. You'll see some of the stats on slide six 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 time frame and our capital markets team is more integrated across the firm and has expanded globally. We are 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.

Craig Larson -- Head of Investor Relations

Hey, Syndey, 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 can work our way through the queue. That would be great, thanks.

Questions and Answers:

Operator

Okay, wonderful. Thank you. (Operator Instructions) And our first question comes from Glenn Schorr with Evercore ISI. Your line is now open.

Glenn Schorr -- Evercore ISI -- Analyst

Thanks. Curious to get a little follow-up to Scott's comments on scaling real estate more broadly. Obviously, (inaudible) 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 the first or second generation fund, what type of opportunity are you looking at it in 2019 and 2020 in terms of for these capital raises? Thanks.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Thanks, Glenn. Let me try to take those in turn. I'd say for our real estate business is still very early innings. Most of the strategies under our real estate platform have been launched in the last two or three years. And the real -- the business itself was launched about six years ago and we continue to add a new strategies and 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, our 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.

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 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, but 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 are 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, a very large multiple of the $6 billion or so we manage today. And really pleased with the performance to-date.

Glenn Schorr -- Evercore ISI -- Analyst

Okay, great. Thanks very much.

Operator

Our next question comes from Patrick Davitt with Autonomous Research, your line is now open.

Patrick Davitt -- Autonomous Research -- Analyst

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 C. Nuttall -- Co-President, Co-Chief Operating Officer

Hey, Patrick, it's Scott. The short answer is, don't believe everything you read.

Patrick Davitt -- Autonomous Research -- Analyst

Okay.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

You know we're always -- we always have been and we always will be a meritocracy and an entrepreneurial place. I'd 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 we also see as others get promoted and new people join.

But just to put it in context, and we have about 13 -- approaching 1,300 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 is as ordinary course and healthy for a firm like ours.

Patrick Davitt -- Autonomous Research -- Analyst

Thank you.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Sure.

Operator

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

Alex Blostein -- Goldman Sachs -- Analyst

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 there are 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 rounding in on credit business specifically that's where some of the bigger decline sequentially came from again, just help us break the mark versus any sort of activity.

William J. Janetschek -- Chief Financial Officer

Yeah, 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 just from exiting some investments that were (ph) replaced so depending on strategy. But, you know, good amount of that was again just on a mark-to-market basis, some writedown in the portfolios. So when you look at the balance sheet, one of the biggest investments we have is First Data. First Data we're down 30% again on a mark-to-market basis we report that based upon the closing stock price.

But as I mentioned in prepared remarks, we actually saw First Data rebound, it was actually up 45%. And so had it closed at yesterday's price on December 31st, you wouldn't actually see as much of volatility, which is again one of the reasons why we are happy that we don't report on an E&I 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 that the prices we want to sell at.

As it relates to credit in particular you asked me to just focus little more on that. When you think about performance on a quarterly basis, those assets were marked down, but when you look about 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.

Alex Blostein -- Goldman Sachs -- Analyst

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 market business performed specifically in December and really sort of your ability to intermediate transactions at a time of dislocation. Obviously there is a question mark, how stable this business could be in a more challenging market backdrop. So I was wondering, if there is something we could learn from the December activity?

Craig Larson -- Head of Investor Relations

Alex it's Craig. Let's just start broadly in thinking about the business as a whole and then I can at least help frame how we think about the business in the portion of that, there may be 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.

You know, today, the revenues are meaningfully more diversified, it's not just private equity, it's across all our strategies, it's not US, its global and it's not just KKR, our 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 into 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 is a baseline business and then added to that baseline business, are 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 J. Janetschek -- Chief Financial Officer

Alex, just to add a little more color on the numbers on just capital markets, just to give you an idea or the breadth of the business. Number of transactions during 2018 over 200, and in that -- in the fourth quarter, 50. And when you think about the breadth again in the business, roughly 20% of the 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.

Alex Blostein -- Goldman Sachs -- Analyst

Yes, that's very helpful. Thanks guys.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Thank you.

Operator

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

Robert Lee -- KBW -- Analyst

Great, thanks. So good morning, everyone.

Craig Larson -- Head of Investor Relations

Good morning.

Robert Lee -- KBW -- Analyst

Just kind of curious, I mean certainly (inaudible) fundraising, but given the fourth quarter volatility and I guess concerns at least the very start and maybe not the last couple of weeks whether is around credit or trends or whatnot. I'm just curious if LPs or prospective LPs or 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 they're asking? Just trying to get a sense of how maybe their appetite has shifted suddenly 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 that you're now seeing pickup multiple strategies and kind of the broadening of your LP base?

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Sure. Hey Rob, 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 discussions. So the bottom line is to-date no real change in LP dialog. If anything, I think the LPs take a longer-term perspective and the general view is that we are entering a lower return environment for the markets more broadly.

And in that context, we have a lot of discussions around clients feeling like they're going to need more alternatives not less in order to hit their target. So, kind of 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 as 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 see any change to-date and if anything, we are 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 at broadening of the LP base, as you know, that continues to be a keen 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 is material opportunity to penetrate newer markets that we've talked about in the past and grow further in insurance, retail, sovereign wealth, etcetera.

Robert Lee -- KBW -- Analyst

Great, thank you.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Thank you.

Operator

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

Gerald O'Hara -- Jefferies -- Analyst

Great, thanks. Maybe picking up 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 then of course appetite and demand as well would be helpful. Thank you.

Craig Larson -- Head of Investor Relations

Hey Gerald, 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 banks, high net worth third-party platforms, where we'll sell our products through their sales force that's also been growing nicely.

So there is the direct component, there is a platform piece. And again, both of those are global. We also will work with partners, so we have a desire certainly to 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 has built out a lot of capabilities that we admire and have a few hundred people that's spending time focused on being in best-in-class as it relates through to their channel, and they are 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 expands also beyond just that in the long-term just simply BCs.

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've raise quarter-in, quarter-out, and I think as we think of that opportunity in particular with FS, the opportunity for us is even greater.

Gerald O'Hara -- Jefferies -- Analyst

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 the Asia platform, real state et cetera, kind of going forward. Thank you.

William J. Janetschek -- Chief Financial Officer

So I'll take it first, and then I'll let you Scott follow-up on the second one. As it relates to fee related earnings margin, when you take a look at Page 6, it's quite robust. And when you take the look at the way we define fee related earnings, those margins are roughly about 58%.

Craig Larson -- Head of Investor Relations

Yeah, in terms of the second question.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Yes, 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 seek -- to reach some maturity and generate incremental revenue. 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 Craig. 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 million 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 as you think about that apples-to-apples across the Group.

Gerald O'Hara -- Jefferies -- Analyst

Okay. Thanks for taking my questions.

Scott C. Nuttall -- Co-President, 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 Roger Carrier -- Bank of America Merrill Lynch -- Analyst

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

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Hey, Mike. It's Scott. The short answer is that really no change in portfolio fundamentals in Q4. I think there is some sectors, which had been seeing some kind of pullback 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 pulled forward a number of concerns about whether a recession was coming sooner or rather than later. And then in a number of the markets, there seem 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 and 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 is less competition and more attractive terms. So no fundamental difference in -- we continue to be busy on the large end.

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

Okay, thanks a lot.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Thank you.

Operator

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

William R. Katz -- Citigroup -- Analyst

Okay, thank you very much for taking the questions. Good morning, everybody. So two questions from me; one, is on the performance fees and incentive fees. Appreciate how you defined it by the way in the FRE that's great. But just how we think about pacing and the magnitude? Was 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 as more of a trend (inaudible) on that?

William J. Janetschek -- Chief Financial Officer

Sure, Bill. I'll take that question. When you look at Incentive fees overall for the entire year, it was about $140 million. Roughly $80 million of that came from Marshall Wace and when you think about, just a clarifying point, Marshall Wace incentive fees are crystallized on October 1st, so they are on a fiscal year basis. And so you're got to actually see that number come through as it has in the fourth quarter.

When you think about Franklin Square and the BDCs, 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 just 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 in between $12.5 million and $15 million. So I don't want to say that's a 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 have also 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 has actually been elevated.

William R. Katz -- Citigroup -- Analyst

Okay, it's very helpful. And then just the follow-up for me, thanks for taking both questions. Just in terms of capital management, you've been working down your authorization, I think you have a (inaudible) 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 return at this point in time? I was wondering if you could sort of address maybe the dividend policy as your fee-related earnings and committed capital grow versus buyback?

William J. 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 3 in the 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 25th we've been in the market either buying back shares or actually canceling shares that vested to our employees, but again the magnitude of that number is $160 million.

When you think about the dividends, remember we just changed 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 through the extent that the business continues to grow, and we continue to grow our management fees and more stable revenue from the balance sheet, 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 the share count. I just wanted to call out the fact that what we have done historically with 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 a 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 changed our capital allocation policy in the fourth quarter of 2015 we would make sure that it wouldn't be share creep 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 R. Katz -- Citigroup -- Analyst

Okay, thank you very much.

Scott C. Nuttall -- Co-President, 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 -- Analyst

Great day, good morning, everyone. First question here. Just a quick follow-up on operating expenses just given they were 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 the similar ballpark as prior year's at about 9%. So just trying to think about whether that's an appropriate level moving forward. And just also how to just think about the aggregate level of growth into 2019 over 2018?

Craig Larson -- Head of Investor Relations

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 mandates, it was private equity across all the regions and infrastructure and real estate we ran after a couple of investments that we ended up not doing in. So you see an elevated level of broken deal expenses in that number. In addition, capital markets as I mentioned was quite busy. The 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 as 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 have communicated, we said that we've got three income streams and really two expense bases. One is compensation and the other is G&A and occupancy. And as you could see, we're trying to strive for a margin of about 50% plus. As we've communicated the compensation number, we said it would be in the low 40s and if you take a look this quarter it was down about little less than 37%, but for the entire year it 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 the business, you should see margin improvement in that OpEx line over time.

Devin Ryan -- JMP Securities -- Analyst

Got it. I appreciate all that color. And then just a follow-up is a deployment question kind of bigger picture. In Asia, valuations have been pressured at least to some degree, probably because of slowing growth and I think that was also one of the factors that drove some of the volatility, kind of, in the US or at least (inaudible) 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 to find, 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 a 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, this is Craig, let me spend a minute, really I think on the two things we'd highlight as it relates to levels of activity. And then can just speak very briefly geographically, and this through a private equity lens. I think the -- when you look at our investment activity, you really see two things. 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 in investment or in some case, 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 global carve outs may even be probably even more complicated. And we have a -- 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 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 an industry with complexity. So, complexity and operational improvements that the first thing.

I think the second thing you see is really our activity in healthcare that we view as being a more defensive -- more defensive sector. So in the US certainly, it's an enormous market. Healthcare spending accounts for 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 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 PharMerica, there is a pending additional investment as PharMerica's announced a transaction with BrightSpring.

So again, I think all of that helps give you a sense of how busy our team has been. Activity is not limited just to private equity. So in 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, again it's 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 broadly and 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 investment is 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 into China have found its competitive 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 more specifically. So hopefully that again gives you a sense of where we are active.

Scott C. Nuttall -- Co-President, 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 our 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 if 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 the 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 that we have in our vehicles. And all the tools that are 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 repricing.

Devin Ryan -- JMP Securities -- Analyst

Yeah. All right, well I appreciate all the detail. Thanks guys.

Craig Larson -- Head of Investor Relations

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 -- Analyst

Hey, thanks guys. So when I look at your investment performance information on Slide 4, there's a lot of good detail here, but one of the thing 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're able to achieve that level of outperformance in what was a really challenging year for that industry?

Craig Larson -- Head of Investor Relations

Hey, Chris. It's Craig. Thanks for the question. Within the energy income and growth strategy, the type of opportunities that have been most interesting to us are acquiring, for instance non-core assets so investments where you are in the midst of the decline curve in partnership obviously with very strong management teams. 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, we'll 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 in crude prices much less though as it relates to natural gas. We're pretty equally split between crude and natural gas production. But it's that hedging program and action that you see there, that really was a -- is a real contributor relative to something like the E&P Index.

Chris Harris -- Wells Fargo -- Analyst

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 J. Janetschek -- Chief Financial Officer

Yeah, that's a good question. And 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 an election where 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, never mind quarter-to-quarter, but the simple rule of thumb is you should assume that the tax rates going to escalate roughly 3% a quarter.

The reason why it was down this quarter is that one of the assets got a very large step-up when it was sold. The tax is paid on that was minimal, which actually drove the tax rate down. So, the punchline is for modeling purposes, you should probably use a tax rate of anywhere in between 11%, 12% (inaudible) 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 -- Analyst

Right. Thank you.

Craig Larson -- Head of Investor Relations

Thank you.

Operator

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

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good morning. I was just hoping, if 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 I believe, which funds are those that you expect to be in the market with for 2019 and any color on how we should think about sizing?

Craig Larson -- Head of Investor Relations

Mike, it's Craig. Let me just review our current initiatives. So we're currently fundraising across European private equity impacts, 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 with fundraising for an additional two strategy is expected to be launched in the coming weeks. At the same time they were the areas where we look to raise capital on a more continuous basis that would include the CLO business. We actually priced our first 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 time 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 as that of the capital 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 -- Analyst

Great. Thanks for the color there. And just as a follow-up question. Circling back to Asia and area, you guys are targeting for expansion and growth, if you could just kind of flush out -- I think you could 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 those different countries understanding could be a bit different? Thanks.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Hey, Michael, it's Scott. So I'd say a 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 have eight offices in Asia, about 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 and 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 it kind of -- the answer to the 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 over time.

In terms of distribution of these new non-private equity strategies, it is not just an Asia distribution story. We are finding investors all around the world that are under allocated to Asia, and so our distribution approach for all of our Asia strategy is a really global one. And in fact, they 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 they will focus on these products and others, but we're using the global team to distribute.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. Thank you so much, appreciate the color.

Scott C. Nuttall -- Co-President, 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. If your phone is...

Patrick Davitt -- Autonomous Research -- Analyst

Hey, sorry. Thank you, good morning. It looks like the consensus realized carry expectations are still well above the current guided about, 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 the Fiserv shares once the FDC closes?

Craig Larson -- Head of Investor Relations

Well, Patrick we could only give you as much information as we know today, we're not going to project what second half of the year looks like, never mind even the second quarter. And so based upon the vision and the visibility we've got right now, we've communicated what we've got and signed and closed and what we've got and 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 simply on the public securities that we have, when you take a look at private equity roughly about 30% of the remaining value was in public securities. So to the extent that there is a rebound in the public markets and those stock prices get to attractive enough levels where we've already previously exited, you would expect to see us continue to do that again, if the market is there and again, it's 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 -- Analyst

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

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Once the transaction closes, there is a three month lockup 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 -- Analyst

Thank you.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Thank you.

Operator

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

Robert Lee -- KBW -- Analyst

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 the $23 billion of dry powder, call it $230 million potentially of incremental fees, it is almost 20% of what you've earned this year. But how about other pockets is that -- for example, you know, you now have a pretty big BDC platform of (inaudible) got the numbers $14 billion, $15 billion or so leverage rules changed on that effective shortly going forward and any thought about, hey, if you kind of adopted some of the change in leverage rules there? What incremental management fee potential could be over the next several years from just that pocket of assets?

William J. Janetschek -- Chief Financial Officer

Hey, Rob. This is Bill. There is nothing to call out specifically what we did want to make clear and Craig mentioned it 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 in our business, if you follow the AUM growth over the past few years and the growth certainly more importantly as it relates to management fees and the fee-paying AUM growth, as we continue to raise capital and bring that capital on line, you should hopefully expect with the tailwinds we've got with more capital coming into the alternative asset space and increase in management fees.

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

On the BDC platform, we'll let the management team for those entities speak for themselves on their call, Rob. But you're right, there is latent potential there. But we'll let them articulate their leverage strategy.

Robert Lee -- KBW -- Analyst

All right, 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, Syndey, and thank you everybody for joining us. Please, of course, follow-up 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.

Duration: 61 minutes

Call participants:

Craig Larson -- Head of Investor Relations

William J. Janetschek -- Chief Financial Officer

Scott C. Nuttall -- Co-President, Co-Chief Operating Officer

Glenn Schorr -- Evercore ISI -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Robert Lee -- KBW -- Analyst

Gerald O'Hara -- Jefferies -- Analyst

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

William R. Katz -- Citigroup -- Analyst

Devin Ryan -- JMP Securities -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

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