Craig Larson - Managing Director of Investor Relations William J. Janetschek - Chief Financial Officer, Member, Member of Balance Sheet Committee, Member of Risk Committee and Member of Valuation Committee Scott C. Nuttall - Principal.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division Leon G. Cooperman - Omega Advisors, Inc. Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division M. Patrick Davitt - Autonomous Research LLP Marc S.

Irizarry - Goldman Sachs Group Inc., Research Division Brian Bedell - Deutsche Bank AG, Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Devin P. Ryan - JMP Securities LLC, Research Division Michael Carrier - BofA Merrill Lynch, Research Division.

Ladies and gentlemen, thank you for standing by. Welcome to KKR's Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead..

Thank you, Stephanie. Welcome to our Third Quarter 2014 Earnings Call. Thank you for joining us. As usual, I'm joined by Bill Janetschek, our CFO; and Scott Nuttall, Global Head of Capital and Asset Management. We would 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.

And this call will also contain forward-looking statements, which do not guarantee future events or performance. And finally, please refer to our SEC filings for cautionary factors related to these statements. To begin, I would like to highlight a new table on Page 2 of our press release titled Key Metrics.

These are summary statistics that track the financial performance of the firm. We thought that having this information all in one place would be helpful as we discuss our performance every quarter. Focusing first on our cash metrics.

We had a strong quarter with fees, realized cash carry and net realized investment income, all increasing nicely on a year-over-year basis contributing to total distributable earnings of $505 million, up over 100% from the third quarter last year.

This translates into $0.59 of distributable earnings per unit net of taxes and $2.03 per unit year-to-date. These figures are 84% and 60% above the corresponding figures for 2013.

And turning to the distribution, we've announced a third quarter distribution per unit of $0.45, up 96% year-over-year bringing our year-to-date distributions to $1.55 per unit, which compares to the $0.92 distributed through the first 9 months of last year.

Focusing on economic net income, we reported third quarter after-tax ENI of $419 million, which equates to $0.50 of after-tax ENI per unit.

And finally, we wanted to remind everyone that this is the first full quarter with KFN’s results running through our financial statements, and the impact of the KFN acquisition is particularly evident in our cash flow metrics. Fee and yield earnings.

So fee-related earnings plus net interest and dividends were $208 million for the quarter and $525 million for the first 9 months of 2014, 98% and 79% higher than the corresponding periods of 2013.

These increases were driven by both the strong fee-related earnings performance this quarter, in addition to a full quarter of net interest and dividend contribution from KFN.

And from a distribution standpoint, of the $0.45 distribution, the after-tax fee and yield component, so the more recurring portion of our distribution, was $0.18 this quarter versus $0.10 in the third quarter of 2013.

In talking about the KFN transaction, we've highlighted for some time, how KFN would help the more recurring component of our cash flow profile, and we've seen this flow through into our financial results this quarter, as KFN contributed $53 million or $0.07 per share of cash earnings in the third quarter.

And with that, I will turn it over to Bill to discuss our financial performance in more depth..

Thanks, Craig. As of September 30, our assets under management were $96 billion and fee-paying assets under management were $81 billion. Both figures were relatively flat quarter-over-quarter; however, our AUM and fee-paying AUM are up 7% and 11% from the same time last year.

Keep in mind, these figures do not reflect $4.8 billion of committed capital that will be included in AUM once it's invested. Turning to our segments. In Private Markets, our private equity portfolio appreciated 2.2% in the third quarter, outperforming the MSCI World, which was down 2.1% and the S&P 500, which was up 1.1%.

This was less than the 5% appreciation we had in the second quarter, which caused the decline in performance income quarter-over-quarter. However, this was offset by higher investment income, translating into ENI of $399 million, up 6% from the second quarter. Moving to Public Markets.

ENI in this segment was $48 million, down from $106 million last quarter, because of our mark-to-market investment performance was better in the second quarter than it was in the third.

However, our net cash interest and dividend increased $20 million in the third quarter because, as Craig mentioned, this is our first full quarter with KFN running through our financials. Also, this is the second time that Public Markets has contributed to our cash carry.

And the $10 million of realized carry in Public Markets in the third quarter contributed about a penny to $0.18 of cash carry. Touching on Capital Markets. We reported third quarter ENI of $62 million, over 3x the $20 million we reported in the second quarter.

This jump was driven by increased transaction fees, largely from the First Data equities indication. 2014 has been a record year so far for KCM, with year-to-date fees up over 75% to $184 millIon. Through September 30, fee-related earnings were $125 million, 70% above last year's figure.

Here, our diversification continues to drive the growth in this segment. In 2014, 35% of our revenues are from outside the U.S. and our third-party business contributed over 25% to KCM's year-to-date revenue. We reported a September 30 book value of $12.51 per unit, which is up 24% on a year-over-year basis.

Our book value includes a 30% increase in unrealized carry, bringing that figure to $1.2 billion, with about $80 million of that coming from a Public Market segment. Additionally, our balance sheet continues to perform, generating an ROE of 25% and a cash ROE of 23% for the last 12 months, with no net leverage. On the private equity exit front.

In the third quarter alone, we realized investments across the U.S., Europe and Asia, resulting in over 10 monetization events that returned $2 billion to our fund investors, including the sale of a 45% stake in Visma out of Europe, a final secondary of Modern Dairy in Asia and the sale of Ipreo in the U.S.

This activity helped drive our $0.45 distribution in the third quarter, $0.07 of which came from KFN. This $0.45 includes $0.18 of fee and yield earnings; $0.18 of realized carry, with the remainder coming from realized balance sheet gains.

Since June 30, we've also announced exits in Versatel and Wild, both from our Europe III Fund and the second step of the Alliance Boot transaction. And we have pending exits in U.S. Foods environment in the U.S., all of which assuming September 30 evaluations will lead to future cash carry, if and when they close.

Before I wrap up, I want to give you a peek at the fourth quarter distribution based upon where we stand today. Since September 30, we closed 2 of the strategic sales that I just mentioned, Versatel and Wild.

And we estimate those 2 exits will contribute about $0.15 to the fourth quarter distribution; $0.13 of that $0.15 will come from realized cash carry and the other $0.02 will come from realized balance sheet gains. And with that, I'll pass it over to Scott..

Renewables, water and wastewater treatment, communications and infrastructure, district heating and cooling, and parking. All of these are largely unaffected by changes in commodity prices. Also, our investment in Colonial Pipeline is insulated from commodity price movements, given the nature of the underlying contracts.

So we have no meaningful oil exposure in infrastructure. Where we do have direct exposure is through our Energy income and growth and Natural Resources funds. These products are purposely exposed to commodities. But let's look at the details. In aggregate, there's about $3 billion of committed capital in these funds.

And only $1 billion of the $3 billion is invested. Energy income and growth is a young strategy with a lot of dry powder and KKR Natural Resources is largely exposed to natural gas. And what oil exposure we do have is about 50% hedged.

So even in these strategies, we have 2/3 of our relevant capital or $2 billion in dry powder ready to be deployed and little net exposure to oil prices today. We also know a lot of you have questions about the recent volatility in the leverage credit markets and what higher high yield spreads mean for our firm. So let's address that.

While the leveraged credit markets have rallied over the past week, high yield spreads are approximately 115 basis points wider in the U.S. and Europe, relative to their lows in June. This change is not expected to have a big impact on our business. We're finding capital for new deals remains available at attractive all-in rates.

We still believe we could raise 10 plus billion of financing in this environment at an all-in cost of capital, around 6%. And we have aggressively refinanced our private equity portfolio company's debt over the last few years, so we don't feel that risk in the portfolio.

Also, remember, spreads increase, that's overall a good thing for our credit business, which manages $26 billion of non-investment grade credit and has been growing quickly. So overall, we view the latest pullback in markets and energy as a net positive for us, given our long-term locked up capital and dry powder.

Let me just spend a minute on how we're seeing the world more broadly. Overall, we continue to see a slow recovery in the U.S. and Europe. This recovery has been very bumpy. And if you think about the last few years, we have had the flash crash, the European contagion, China slowdown, and now an energy pullback and renewed concerns about Europe.

We view the last few weeks as the latest bump in an already bumpy road back from the credit crisis and great recession, and are optimistic we can take advantage of the anxiety again by investing into the uncertainty.

As investors, slow growth environments with periodic volatility and an overall improving economy has been a good environment in which to deploy capital and a good environment in which to monetize some of our mature investments. And with that, let's open the line to answer more of your questions..

[Operator Instructions] And before we take our first question, Craig, is there anything you would like to add..

Thanks, Stephanie. We -- looks like we have actually a sizable number of people in the queue. So if you could please limit yourself to one initial question and then rejoin the queue if necessary, we'd appreciate it..

Thank you. Our first question comes from Michael Kim with Sandler O'Neill..

I guess, my question is a bit more technical in nature, but if I look at the $207 million of total investment income in the third quarter, can you let us know how much of that was from KFN, just trying to get a sense of how that stacks up against the $53 million of net realized investment income from KFN for the quarter.

And then, stepping back, how do you see that ratio holding going forward? I think, in the second quarter it was something like 2/3 of KFN's investment income was realized..

Hi Michael, this is Bill. Thanks for the question. As it relates to KFN, you are right in that we do provide some realized information and so in the second quarter we showed in the distribution that $36 million came from KFN and in the third quarter that's $53 million, so roughly about $89 million year-to-date.

On a run rate basis, that's a realized return of about 9%. When you take into account unrealized returns, which is embedded in that $207 million, KFN right now is performing much better than we had expected.

That being said, KFN is a little complicated because when we closed the transaction, some of the assets were Public Market investments, CLOs, et cetera, while others were Private Market investments, which would have been Real Estate and Energy.

The way we look at it is we look at this more holistically because we put all of the results from KFN and KKR proper's balance sheet together, but the bottom line is, from a modeling perspective, the realized income is on pace or a little higher than we had expected and KFN is performing rather well to date..

Our next question comes from Lee Cooperman with Omega Advisors..

You guys are probably as sophisticated as any in valuing businesses.

And I'm curious as to how you value your business and at what price or point would it make sense for you to take some of that, I guess, it's $11.5 billion of cash investments on your balance sheet, which is about 65% of your market cap, to basically buy back your own shares, if you thought they were misvalued or do you think they misvalued?.

Thanks, Lee. Appreciate the kind comment. This is Scott. I think it's a great question. I think, today, the markets have been -- they are working to figure out how to value our business and other businesses that are somewhat like ours.

In terms of how we've thought about it to date, Lee, what we've really been looking at is valuing ourselves the same way that we value companies that we invest in. We like cash flow and we look at the return on capital and the return on equity, overall.

And as we've talked to our shareholders about how we think they should think about us, we have emphasized those metrics. Our perspective has been that you can't eat AUM, you can spend cash flow.

And so we have been focused on making sure we're driving the total cash flow up and we took you through the numbers, you can see total distributable earnings up 75-plus percent year-to-date. So we're making progress. So far, what we've determined to do is to share that cash flow back with our investors through a high payout ratio.

And year-to-date, that's been on the order of 76% of the cash flow we've paid out in the distribution, which has been also increasing rather significantly. When we looked at how to take these trade-offs views before, what we've looked at is year-to-date and over the last few years, our ROE has been 25-plus percent.

And so, when we've looked at opportunities to invest capital internally versus buying shares back, we've kind of put it all in the mixer and said, "All right, we can deploy our capital against opportunities we have and generate 25-plus percent returns on that capital," that's a pretty good return.

So while we think our stock does not properly reflect the cash flow we generate, we found attractive ways to deploy capital internally and have been to date returning capital to shareholders through a very high payout ratio and a very high dividend. I think you're asking a good question.

Is that the right approach for the long-term? And the answer is this is the approach we've taken so far, but we'll continue to look at it..

Our next question comes from Chris Kotowski with Oppenheimer..

Just 2 things.

One is the -- in the Public Markets, the unrealized investment losses, the $46 million that we see, is that primarily the mark-to-market on the CLOs and KFN, because you could see that they were marked prior -- slightly above cost in the second quarter and slightly below in the third?.

That's absolutely right, Chris..

Okay. And then just a kind of bigger picture. In the recent weeks, there were 3 kind of un-KKR like investments, smaller, more ventured capital kind of investments, Magic Leap, Lemon Restaurants, Ping Identity and things that I don't think have been down the center of the fairway for KKR.

And can you discuss that strategy and where they fit in the grand scheme of things?.

Yes, Chris, happy to. This is Scott. Look, I think, we have found across a number of the different industries that we spend time in, Chris, that periodically we've run across interesting smaller investment opportunities that are more growth equity in nature.

Historically, we have passed on those because it didn't fit into a private equity mandate or any of the other strategies that we manage, but we've found many of them to be quite interesting. And so there are some sectors. Technology, retail, healthcare have been those most active.

We're now with our balance sheet, we've taken the view that we can actually make some of those investments, which we're doing on balance sheet today. We'll see how this strategy evolves. As you recall, with our Real Estate strategy, that started as an on-balance sheet strategy that we dropped into a fund.

We may do that with growth equity down the line and we may not, but think of these as opportunities sourced by our investment teams that historically we passed on and now we have a way to monetize..

Our next question comes from Patrick Davitt with Autonomous..

You talked a lot about the growth in your strategies that are moving into their second generation of funds.

Can you give us an update on where each of those stand in terms of either raising that second generation or starting to raise that second generation?.

Sure, Patrick. So let me just run through a number of different strategies because this also feeds well into kind of what we're doing from a fundraising standpoint in the market. But if you kind of go around the world and across the different businesses, as you know, we recently raised our Asia II Fund for private equity.

So that was our private equity successor fund that was about $6 billion.

We have a number of Fund II strategies that we're actually in market with now or will be shortly, including infrastructure, our direct lending platform, where we're raising fund to special situations, which is also in the market with Fund II mezzanine II or a private credit II, is also a strategy that we're going to be raising here shortly.

So a number of different strategies that we're in the market with Fund II right now. And then, there's others that you'll see coming, including Real Estate. So as you kind of go across all the different strategies, and I think there is 7 or 8 different vehicles that we've built, where we had Fund Is.

A number of those have already launched Fund II and more are coming..

Our next question comes from Marc Irizarry from Goldman Sachs..

Scott, can you just address the environment in terms of what you might expect from strategic versus ECM exit outlook? I'm particularly curious how the recent volatility might play into maybe the mix of exits there?.

Great, happy to, Marc. Look, I think, if you look year-to-date, it's interesting. We've talked about this a lot over the course of last couple of years, that we've been seeing more and more of our exit activity, actually come from strategic exits or dividend recaps, et cetera.

And if you look at what's happened year-to-date -- if you look at what's actually closed, secondaries have been about 40% of the cash that we've returned, with strategic and dividend recaps making up the other 60% or so.

But if you actually kind of pro forma for a bunch of the strategic sales that we've had, remember, we've had 8 or so strategic sales announced over the course of this year. If you go back to Oriental Breweries, Sunrise, Avincis, Alliance Boots to Walgreens, Biomet, U.S. Food, Wild, Versatel.

We've had a lot of strategic sales announced this year and if -- you've got 5 strategic exits, couple of which are now closed, but 3 of which are still pending.

If you kind of pro forma the value that we've returned to investors, as a result of all of that, you see about 80% of that is strategic sales or dividend recaps, and only 20% or so is actually from the equity capital markets. So we have a lot of optionality as to how we exit investments and are not dependent on the Public Markets per se.

So what's been pleasing for us as we thought the strategic buyers would come back and we are starting to see that come through. And as I said, it's now that and the leverage credit markets are 80-plus percent of what we're returning. So it's moving in the direction we've anticipated..

Our next question comes from Brian Bedell with Deutsche Bank..

Scott, I appreciate the forward comments on the deployment opportunities.

Maybe if you could just go into a little bit more detail, obviously, seeing a little bit of a rebound in the markets here, but if you could talk a little bit about how aggressive you think you might be on deploying capital and then elaborate over the next, say, 1 to 2 quarters and then in 2015.

And then also a little bit more detail on the -- on some of the energy opportunities that you touched on..

Sure. Happy to, Brian. Look, I'd say, in terms of deployment, I think, it's important to keep in mind, we're a very global business, okay? So probably half -- over half of our investment teams are outside the United States and as I mentioned, we've actually been very active, in particular, over the course of last couple of quarters in Asia and Europe.

And as valuations we felt were a bit high in the U.S, we pulled back a bit, especially in private equity in the U.S. But in terms of what we're seeing right now, I'd say -- let me start with Asia, active. We deployed year-to-date nearly $2 billion in private equity. We've done our second deal in Japan this year.

And so we're starting to see that market open up a bit. We bought a stake in a public company in China called Haier. It's somewhere between 3 and 4x EBITDA, as that market was dislocating a little bit, so we were able to take advantage of that. But also if you look across Asia, we've been busy in special situations.

And in Real Estate, and -- so we're finding a lot of different opportunities in Asia and are particularly upbeat about the special situations and kind of a rescue opportunity in that market. So I'd say, let's start there.

I'd say -- I'd expect us to be quite active on the deployment front as those Capital Markets continue to develop and it's both kind of special assist, direct lending and the other areas that I mentioned. Then I'd go to Europe, the liquid markets had really started to run a bit in Europe. We've seen a bit of a pullback.

We did our first deal in Africa this year, so our MENA [ph] strategy is continuing to develop, but we're also continuing to see opportunities in private credit.

Special situations, direct lending, we have actually used all the capacity we have in our Real Estate Fund for European investments, so we're going to be launching a Real Estate Europe strategy as a consequence of that, and we've been expanding. We opened an office in Madrid.

We're adding talent and we think direct lending type strategies are a great opportunity in Europe. So where there is dislocation, I think, you will continue to see us being very active on the deployment front.

In the U.S., as I mentioned, we've been a little bit more cautious as of late, probably, more sellers than buyers in private equity, but we've continue to deploy capital in special situations, direct lending, Real Estate and Energy.

So overall, where there is a little bit of fear, we get excited and find opportunity and when valuations are a bit elevated, we have a big portfolio and the opportunity to access the markets. And so, we actually are pleased with the current environment. I think we'll find things to do.

In terms of your question around Energy, in particular, look, as I mentioned, we've been pretty quiet in Energy private equity for a long while because valuations had gone up so much. There's some sectors in the Energy market that have traded off in the public markets, 30% to 50%. And that will create opportunities for us, hopefully, going forward.

And we're continuing to stay busy in infrastructure, energy-related and otherwise, and also in our drilling and royalty strategies, which are more private market strategies. So this is a little bit of color for you, but it's active..

Our next question comes from Chris Harris with Wells Fargo..

So quick one on the exits. Bill, you talked about First Data, U.S. Foods and Biomet kind of in the queue.

Curious if you guys expect those to close in the fourth quarter, and then if maybe you can help us out with kind of a range of potential dividends that you would expect from those exits?.

Chris, this is Bill. With regard to the 3 that you mentioned, so I'll take them one by one. U.S. Food, we still haven't gotten clearance yet. We were cautiously optimistic that, that might close in the fourth quarter, but it could actually slip until the first quarter.

As far as Biomet is concerned, we're hoping that's going to close in January of 2015, and so that will be a first quarter event. And lastly, on Boots, we're expecting that to take place in the first quarter of '15 as well.

As far as giving any guidance on what the cash distribution would be, it's a little complicated and we'd much rather not give that type of guidance because each one of those transactions is part cash and part stock..

Our next question comes from Patrick Davitt with Autonomous..

I just want to follow-up on my question about the CLO marks. Just -- some of the pushback I get on the story is around perceived credit risk from taking on the KFN portfolio. Just wanted to make sure that, the marks that are occurring are purely market driven and there isn't any sort of credit deterioration going on in this portfolio..

Yes. And Patrick, this is Bill. You're absolutely right. The portfolios are performing fine, but when you have disruption in a credit market on a mark-to-market basis, the CLOs might be marked down, but the underlying performance is still there and nothing that we're worried about right now..

And I'd say critically, Patrick, the cash flow coming off the CLOs and overall credit platform is in line with or ahead of our expectations..

Which is why the results for KFN so far, both in the second quarter for the 2 months and the full third quarter, have been a little better than we actually expected..

Our next question comes from Chris Harris with Wells Fargo..

I guess I got back in the queue pretty quick. Scott, thanks for your comments about Energy, that's very helpful. Just had another question about an area that seems to be slowing down and that's China and Asia.

Are you guys seeing any stress at all in your portfolio of companies, as a result of things slowing down there -- I mean, it appears no, but just any comments you can give us there would be great..

No. Chris, we really haven't seen a slowdown that's noticeable. In fact, our revenue and EBITDA growth in our China portfolio has been good and our overall Asia portfolio has been very good.

So remember, we're focused on investing in private companies in China that have exposure to the consumer and so some of what you are seeing in the Public Markets has been disconnected from what we're experiencing in our private companies. So, so far so good on the overall portfolio in Asia, in particular.

And we're kind of viewing the dislocation and the slowdown as a buying opportunity for us..

Our next question comes from Devin Ryan with JMP Securities..

Appreciate the color on the capital deployment. Just a follow-up, I guess, on that topic.

Maybe more on the private side, but clearly, you guys want to put money to work when there is dislocations in the markets, but it hasn't been your experience that in volatile times it becomes harder to actually to get money deployed or to lock down terms just when prices have significant fluctuations? Just curious if -- clearly, you want to get the money into the market, but does it actually become harder to do when the markets are volatile?.

That's a great question, Devin. So the answer is it depends on how much volatility there is and it depends on the asset class.

So if it is extremely volatile and a lot of distress, then private equity, the buys are very attractive when you can make them, but only a few transactions happen if there is extreme distress, because you don't sell unless you absolutely have to, and there's not a lot of those opportunities out there.

But where you've got, what we've seen so far, which is this kind of asynchronous recovery, where you've got bumps in the road from time to time, we have actually continued to see deal flow in that environment because it's not such a severe dislocation.

So this has been the kind of dislocation where we're continuing to find opportunities as opposed to the market shutting down.

But when you go to the other end of the spectrum, you go to our liquid businesses, market dislocation is a very attractive buying opportunity as long as the markets remain somewhat liquid, when their price deterioration and a lot of participants in those markets have short-term capital and we have long-term capital.

And in the case of the balance sheet in some of the vehicles that we manage, we actually have permanent capital. So we can take advantage of those dislocations on the liquid side, and that's actually a market where we find that we can make some great buys, if the high-yield market, as an example, pulls back and becomes more attractive.

And then, you've got strategies that are in between. Think private credits, special situations, mezzanine, where if companies cannot access capital because of dislocation or a change in behavior from traditional lending institutions, that's a great environment for us.

So that's why this environment we've seen over the last few years of overlying kind of improving economic fundamentals, but these periodic periods of volatility are allowing us to be active across a number of our strategies and deploying capital into what we think are some pretty interesting risk/reward opportunities..

Our next question comes from Lee Cooperman from Omega Advisors..

I don't know if this is an appropriate question, but you guys put a significant amount of additional capital into First Data, and I was wondering if you felt it appropriate to discuss how the company is doing and et cetera..

Lee, it's Scott. I think, what we'll probably do on that one, Lee, is leave it to the First Data management to talk about on their earnings call.

But you're right, we did deploy significant incremental capital into that company as our largest investment, and I think it's fairly straightforward from our standpoint, we're big believers in the management team and the strategy and we wanted to have more exposure. But we'll leave it to them to give you an update on how the business is doing..

Our next question comes from Mike Carrier with Bank of America, Merrill Lynch..

Scott, maybe just on some of the investments that are going into Europe.

When you think about sort of the backdrop there and who knows how it plays out, but if the growth is on the slower side, how do you guys think about what you want to pay in terms of the valuation currently, when you're modeling the outlook, what the economic growth assumptions are? And then if it does slow, what can the portfolio companies do to offset it, meaning there are more on the cost side, are there revenue synergies? How do you guys think about that, because there is somewhat of a level of uncertainty in the region?.

Look, I think it's a great question. But we have -- we started with the perspective that Europe is not a monolith, right? So you've got a variety of different views depending on the market. So we're finding the peripheries doing a bit better, Ireland and the U.K.

are doing well; France, Netherlands, Italy, slightly better than they were, but still weak; Germany pulling back a bit. So you look at the underlying fundamentals of that company and the markets that they're exposed to.

And then what we've done is we've created in the middle of the firm, a global macro and asset allocation group that's working with the teams, so we have a view on how each of those underlining economies may perform over the course of our investment horizon. And then, we layer onto that, that we have very long-dated capital.

And so we're fortunate that we are in the long-dated option business so that we can create the option when we want and we can choose to exercise the option when we think it's appropriate. So we'll have a view as to when the markets may recover, but we have several years for that to happen.

So it's really the way we look at it is to say what is the right way to capitalize this enterprise once we have a view as to that growth profile, given that underlying backdrop? And what we're doing is we're capitalizing these companies conservatively from debt -- capital structure standpoint and really making sure that we've got leverage to pull, operationally.

The best run companies with the best management team in the industry and the highest margins, the returns probably aren't going to be there. So you need to have operational skills to actually invest in companies that you can make better.

And so you kind of mix all that together and develop a model as to what you think can happen over the long term, and then we've got to make sure, even after you do all that, that we're compensated appropriately from a reward standpoint for the risk we're taking.

And that analysis we do for private equity, but we also do it across our special situations platform, where we're creating some equity upside and a lot of the investments we're making, and even in direct lending type strategies, where we are more in the secure part of the capital structure, you have to think about the downside.

And so -- I mean, that gives you bit of a sense for how we approach it, but it's very much market-based grounds up..

Thank you, that concludes the Q&A session. I will now turn the call back over to Craig Larson for closing remarks..

Thanks, again, Stephanie. And thank you, everyone, for your interest. Happy to follow-up directly with any other questions that you might have. Thanks again..

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone, have a great day..