Craig Larson - Head of Investor Relations William Janetschek - Member and Chief Financial Officer Scott Nuttall - Member and Head of Global Capital and Asset Management Group.

Michael Kim - Sandler O'Neill Bill Katz - Citi Patrick Davitt - Autonomous Chris Kotowski - Oppenheimer Brian Bedell - Deutsche Bank Michael Cyprys - Morgan Stanley Glenn Schorr - Evercore ISI Robert Lee - KBW Michael Carrier - Merrill Lynch Devin Ryan - JMP Securities.

Welcome to KKR's fourth quarter 2014 earnings conference call. [Operator Instructions] I would now like to hand the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead..

Thank you, Andrew. Welcome to our fourth 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.

This call will also contain forward-looking statements, which do not guarantee future events or performance. And please refer to our SEC filings for cautionary factors related to these statements. This morning, we reported fourth quarter and full year 2014 results.

Economic net income per unit was $0.05 in the fourth quarter and $1.84 for the full year. Turning to our cash metrics, we reported fee and yield earnings of $208 million for the fourth quarter and $733 million for the full year, which is up 69% year-over-year.

Total distributable earnings were $376 million in Q4 and $2 billion for the year, which translates into $0.44 of distributable earnings per unit net of taxes for the quarter and $2.47 per unit for all of 2014, which is 25% above the full year figure for 2013.

And in terms of the distribution, we have announced our fourth quarter distribution per unit of $0.35, which brings our full year distribution to $1.90 per unit, which is up 36% from the $1.40 per unit we distributed in 2013. And with that, I'll now turn it over to Bill, to discuss our performance in more depth.

And then Scott is going to walk you through how we think about this performance in the context of our 2014 results..

Thanks, Craig. Before I walk through our segments, let me take you back to the KFN acquisition, as I think it helps frame our performance this quarter. One of the key reasons we acquired KFN was to generate more recurring cash income from our balance sheet, and we continue to see this through our financials.

As Craig highlighted, our fee and yield earnings continue to grow nicely. And focusing on our distribution, fee and yield earnings contributed $0.18 towards our fourth quarter distribution. At the same time, we increased the size of our balance sheet and today have $11 billion of cash and investments.

And as we mark-to-market our balance sheet investments, changes in these mark have a dollar-for-dollar impact on our investment income and our ENI. So in quarters where there is volatility, there is a potential to see swings in our ENI, and that is what you saw this quarter, and we're going to walk you through it.

As we walk through ENI, it is important to remember, that mark-to-market moves do not impact the cash flow of our business and cash flow remains our focus. Let me begin with our segments.

In private market, our private equity portfolio appreciated 2.7% in the fourth quarter, outperforming the MSCI World by 160 basis points and resulted in gross carry of $233 million.

That said, overall investment income within private market came in a loss of $92 million, driven by the lower marks on our balance sheet energy investments, which resulted in a net unrealized loss of a little over $200 million. Scott is going to touch on our energy investments in a few minutes.

As a result, we reported fourth quarter ENI in this segment of $77 million, bringing the full year ENI figure to $1.3 billion. Touching on public markets. ENI in this segment was negative $11 million in the fourth quarter, down from $48 million last quarter.

Similar to Q3, unrealized losses within public market were driven by the mark-to-market write-down on our CLO portfolio on our balance sheet in the quarter. And this unrealized loss offset net interest and dividends, which were up about 17% in the fourth quarter. Moving to capital markets, we reported fourth quarter ENI of $21 million.

We had higher transaction fees in the third quarter, largely from the First Data equity syndication, which caused the ENI decline in this segment. However, for the full year 2014, KCM revenues were up about 50% to $218 million.

We continue to benefit from diversification in this segment, as about 40% of these revenues are from outside the United States and 30% are from our third-party business. We reported at December 31 book value of $12.07 per unit, which is up 11% on a year-over-year basis.

Keep in mind, the 11% increase or $1.24 per unit is after paying out over $2 per unit in distributions during the year. So our balance sheet is compounding at an attractive rate. Overall, our balance sheet generated cash ROE of 21% for 2014.

As Craig mentioned, our distribution in the fourth quarter is $0.35 per unit, which includes $0.18 of fee and yield earnings, $0.15 of realized carry, with the remainder coming from realized balance sheet gains.

In the third quarter, which was the first full quarter with KFN in our results, fee and yield earnings also contributed $0.18 towards our distribution. So from a cash standpoint, despite the challenging environment, the business has continued to perform and the more recurring part of our distribution held steady.

On the realized carry front, our sale of Versatel and WILD in the fourth quarter at 2.8x and 3.3x cost, respectively, contributed to the majority of the $0.15 of cash carry that we reported. In addition, I'd like to give you a preview of the first quarter distribution based upon where we stand today.

Since December 31, we closed on the second step on the Alliance Boots transaction, where we received 30% of the proceeds in cash and 70% of the proceeds in stock. We also sold Fotolia, a Europe III investment to Adobe at 2x our cost, after owning the company only two-and-a-half years.

We estimate that those exits will contribute approximately $0.22 to the first quarter distribution, $0.20 will come from Boots; and of that amount, $0.14 will come from realized carry and $0.06 will come from balance sheet gains. The other $0.02 will come from the realized cash carry associated with the Fotolia transaction.

Finally, in terms of AUM and fee-paying AUM as of December 31, our assets under management were $99 billion and fee-paying assets under management were $83 billion. Both figures benefited from $500 million of investment activity in Direct Lending II, and first closing of $2 billion of capital and Infrastructure II, and $1.6 billion in Europe IV.

Since December 31 we raised an additional $700 million for Europe IV bringing the total fund size to date to $2.3 billion. And keep in mind, these figures do not reflect approximately $6 billion of committed capital, that will be included in AUM, once it's invested. And with that, I'll turn it over to Scott..

natural resources, infrastructure, energy income and growth, mezzanine, direct lending, special situations, real estate and China growth. Those eight strategies, or first-time funds, manage $10 billion of committed capital. Performance has been mostly strong.

Carry is starting to be generated and we're in the process of raising Fund II for a number of these efforts, including Infrastructure II, where during the fourth quarter we closed on $2 billion and are working towards the final close of $2.5 billion to $3 billion; Direct Lending II and Special Situations II.

We also expect several other successive vehicles to get launched this year on the back of good performance and a strong fund raising environment In addition to the Fund I launches over the last few years we acquired Avoca and Prisma and took stakes in Nephila and BlackGold.

These investments were accretive and we're pleased with the performance so far. And we're still creating new strategies adjacent to the businesses we've started or acquired, with a near-term launch of our European direct lending and European real estate efforts and two new products in our hedge fund platform.

And we continue to invest in growth selectively, recently hiring a real estate credit team to further expand our real estate platform and efforts. Lastly, as you know we've been building a broader sales and marketing team over the last five years. Since we began that effort, we've grown from 300 investors to 825 or so.

In addition, we've been increasing the number of investors who trust us in multiple products. In effect, we've been building new relationships, largely by marketing first-time funds over the last few years.

We have a lot of opportunity on the distribution front, to find new investors and to cross-sell to existing investors, with the backdrop of successor funds, good performance and a strong fund raising environment. Our firm debt is at an inflection point.

We think we are scaling our newer businesses at an opportune time, we're generating strong performance in cash flow from our private equity and capital markets businesses, and our model of balance sheet, capital markets and third-party capital is working. Thanks for joining our call. Operator, please open the line for any questions..

Ladies and gentlemen, we're going to go ahead and begin the question-and-answer session.

Craig, is there anything you would like to add before we open the line?.

Thanks, Andrew. Just looking on the screen, we have quite a few people in the queue, so if everyone could please ask only one question and then get back into the queue, if you have any follow-ups, would be helpful..

[Operator Instructions] And we'll take our first question from the line of Michael Kim from Sandler O'Neill..

So I know you gave some guidance in terms of thinking about the distribution for the first quarter, but aside from fee-related earnings and realized investment income from KFN, which both seem pretty steady, just trying to frame the longer term upside opportunity, if you will, related to realized cash carry and realized investment income off the balance sheet away from KFN.

Just in the context of some of the tailwinds around sizable embedded gains across funds that are seemingly continue to mature.

So any color related to that would be helpful?.

I'll give you just a little more color around the distribution for '15. It's hard to predict, but as you did mentioned, I mean one of the main reasons why we did that KFN transaction was to have that more recurring distribution component, and so as you know in the third quarter that amounted to $0.18, and in the fourth quarter it was $0.18 as well.

And so hopefully, based upon continue to perform, that would be a more regular component of our distribution.

Then added to that would be these realizations, so we mentioned the Boots transaction as well Fotolia, but what we also have in the Q when we made this comment either last quarter or the quarter before was we are seeing some strategic opportunities and we announced the Zimmer-Biomet transaction and that is expected to close probably in the second quarter.

And if you might have noticed, a week ago we announced a Big Heart Pet Brands transaction with Smucker's where that is a part cash part stock transaction. And once that monetizes, from the cash side, targeted in the second quarter that will add to the recurring, hopefully as we have more of these sales either strategic or secondary throughout 2015.

Also, want to point out, if you look at our private equity portfolio, right now about 20% is in public securities, and now that we have the Boots Walgreen's transaction pro forma for that, it's about 30%. So during the quarter, if the secondary market is available, we also have ways to monetize some of our positions that way..

Our next question is from the line of Bill Katz from Citi..

It's Bill Katz. Just coming back to the performance metrics in terms of managing credit, just sort of curious, when you look across your peers, you give some good absolute returns.

I was sort of wondering how you performed at a relative basis? And what if any impact might this have on capital raising in '15? Obviously, it paint a very optimistic brush, but wondering tactically if there's any headwinds here?.

I think if you break it into individual components, the overall credit performance we've had continues to be top cortile versus across virtually every strategy we managed. And so we can see a good fund raising pipeline for our credit efforts.

We mentioned the Direct Lending II closed, Special Situations II is in the market, and we've actually been very active issuers in the CLO market as well. So I would take the marks in Q4 as moment in time marks. The overall loan market was down in Q4, so if you look through the credit marks, we're about $17 million right down in our CLO book.

Given, we have about at $1.5 billion give or take of CLO exposure on the balance sheet, that's 4 to 5 points in the quarter. Most of which frankly is explained by just the market trading off a bit, given the leverage in those underlying structures.

So credit, I'd say, a good fund raising pipeline and we are optimistic about our ability to scale in that business both in the CLO front and alternative front. In energy, you really have to break it into its component parts. The strategies that led to the mark down in the quarter are relatively small strategies for us in terms of our third-party AUM.

So you're really talking about our energy income and growth fund, which is about 25% invested, so we have a lot of dry powder to invest into this dislocation. And we think that that is going to provide us with some very interesting return opportunities on a go-forward basis.

And if you look at the portfolio broadly across our direct energy exposure, even the $700 million or so direct energy that we have on balance sheet, that portfolio was really down net 15% for the year. So we generated a lot of cash flow. We had some positive marks in prior quarters.

So if you isolate Q4, obviously you get one answer, but I think if you look for the whole year, you get a different one. And our perspective is that we feel pretty well-positioned, given how much dry powder we have across the franchise in energy..

Our next question is from the line of Patrick Davitt from Autonomous..

It looked like there was a pretty big uptick in the dividend and interest income sequentially from the third quarter.

Was there any kind of one-time item in there that drove that? Or is the reinvestment of kind of the KFN assets is starting to kick into the higher yielding type strategies? I don't know if you can walk us through maybe what the key drivers of that improvement were?.

Some of that was performance and some of that is just recurring distributions from the assets that we're managing. Obviously, you said it, that to the extent that that portfolio gets larger, and we're generating the same return, that distribution will be higher quarter-over-quarter.

But there really isn't anything big embedded in that number, which would be something I'd want to call out..

Our next question is from the line of Chris Kotowski from Oppenheimer..

Just looking at Page 11 in the press release and your on-balance sheet energy exposure, the cost basis, I mean that we see that the fair value went down, but the cost basis went up by about $104 million in the most recent quarter.

And so I'm wondering, a, can you break that down? Was that one investment? Was that the bunch of different things? And then, b, given all the kind of cash flow that you're going to be generating from Boots and Biomet, and God willing, U.S.

Foods in the coming year, how much of the cash that's created by those maturing investments would you be willing to reinvest in the energy sector?.

I'll take this first. So when you look at energy, you are right, you can see the cost going up by roughly a $100 million-plus. That's really from two of the strategies in our energy platform.

One is, what we call PDP, proved developed producing, and we've actually invested roughly about $60 million in that strategy with FDL, a new relationship we have in that space. And then the other $40 million-plus is investments that we're making side-by-side with the energy income growth fund, in what I would say, drilling assets..

And then just as a point of clarification, the Alliance Boots gain that you cited for the first quarter, that's just on the cash portion, isn't it? And can you remind us of how much of the shares you're going to own, both on balance sheet and the funds..

And so the number that I gave you as far as that distribution, the $0.20, I mentioned, is just in relationship to the cash. I mentioned in prepared remarks that when the transaction closed in second step, 70% was in stock and 30% was in cash. And so the number I gave you just represents that 30% tranche..

Just one thing to add on, just to clarify. So if you look at Page 11, which you brought us to, really energy shows up in a couple of places. First, is in the private equity section. So if you look at the funds, energy is about 3% of our look-through exposure for our balance sheet in the private equity funds, direct energy.

If you look at the co-invest line, which you see shows up at about $3.1 billion of fair value, energy is less than 1% of that co-invest line. And to be clear, Samson is now held at $0.05 on the $1, and so that's been written down over the course of the last 18-plus months, so that economic write-off is largely behind us.

And then the other place it obviously shows up is the $695 million we have in the direct energy line in that table, which really is a combination of the assets that builds up..

Maybe you can't say, but within the case of First Data, you've willing to make follow-on investments in attempts to kind of restructure the balance sheet, and is that an option for Samson, if you can say?.

We're really not going to comment on individual companies..

Our next question is from the line of Brian Bedell from Deutsche Bank..

Maybe, Scott, if you could walk through, I guess just a little bit more granularly, the drivers of the write-downs on the CLO book, the $70 million, and then the non- CLO credit assets, I think you mentioned the loan market declined to energy and then credit selection on that $50 million.

If you could just maybe get a little bit more granular on that? And then what you think the outlook is coming into the first quarter for that?.

So I think here is how we think about it. Let's focus on the CLOs first. As I mentioned, we've got about a $1.5 billion of our balance sheet in CLO equity, its combination of newer transactions and then older runoff books, so they're levered at about 5.5x on average.

And in Q4, what you really saw was, as I mentioned, the $70 million write-down, which equates to 4 to 5 points in the quarter. That same portfolio generated about $40 million of cash flow in the quarter, which is inline with our expectations. So think of it as about $30 million net. So the mark-to-market, most of that was market movements.

So if the loan market is off 50 basis points or 60 basis points and you think about sitting underneath 5.5x leverage, you can get a sense for how much comes from just the market trading off on broad basis, but also there is some positions that frankly we like more than the market, and the market traded down a bit in the quarter and that explains the rest.

But we are still believers in those underlying names. For the total year, the CLO performance has been very strong. We generated $120 million of cash flow from the CLO portfolio for the eight months, since the KFN acquisition closed. So if you think about that on a cash yield basis, its about 11.5% cash yield for the year.

So I'd say, overall that KFN portfolio, including the CLO equity has cash flowed in excess of our expectation since closing. In terms of the non-CLO exposure, there is really nothing too much to point to.

There is one or two investments that have derivative exposure to the energy markets that we think appropriately, and we think ultimately, hopefully will prove to be conservative. It's a moment in time, none of that's realized.

What we're really focused on is the cash flow that we're getting from that overall book, which overall credit portfolio last year generated about a 9% cash yield with the CLOs we talked about and alternative credit performing quite well.

More broadly on CLOs, Brian, I think one thing that we are focused on, and I think particularly optimistic about, is with the risk-retention rules being adopted in Europe and the U.S. our balance sheet strategy we think positions us well..

It sounds like you're continuing to actually try to grow that business on your balance sheet, is that your statement?.

Yes, we think we have an opportunity to grow that business and also generate more third-party fee paying capital with the equity that we have exposed to that business. So we could actually, hopefully, overtime raise more third-party assets against the equity that we have underneath these CLOs.

So we were quite busy as an issuer last year and I think you'll continue to see us be active this year..

Our next question is from the line of Michael Cyprys from Morgan Stanley..

I was just wondering if you could talk to some of the balance sheet philosophy in the quarter, just in terms of the moving pieces off the balance sheet, realizations, deployment.

And then anything you could comment on the forward look in terms of redeploying into some of the higher ROE generating investments, particularly around the KFN as those investments mature..

I think the general philosophy that we've implemented is one of thinking about how do we generate a very attractive cash return on equity by deploying our balance sheet and raising third-party capital side-by-side, so the general approach we've taken is to look at the cash ROE of every single investment that we make.

And we if we can generate as an example an investment opportunity, which we think can have a 15% return, and we can raise capital alongside, that investment that pays us a fee and a carry, if you take the 15% and you have the fee and the carry attached, you get to a 20%-plus cash return on equity by investing our capital side by side with our limited partners.

And so our balance sheet doesn't work in competition with our limited partners. There's no prop team at KKR, it really just invests alongside our limited partners. And so that's the approach that we've taken and we focus on generating an attractive cash ROE and have a diversified set of exposures.

And as you look at Page 11 of the press release you'll see how we've diversified the book across our different asset classes. But the simple way to think about it is our balance sheet is our own largest investor in everything that we do.

What we have been doing is also operating the business with some liquidity and some liquid investments where we can access more liquidity.

So to your point, when we see dislocations like we're seeing right now in the energy space, we can rotate capital into those opportunities, both to be able to capitalize on short-term investments that we think are attractive and also to see new strategies that allow us to hopefully accelerate the third-party capital raising that allows us to exploit the opportunity, and so that's how we've been approaching it.

The KFN transaction gave us more capital, with which to implement that strategy and more liquidity with which to do as well. And so, so far it's behaving as expected..

Our next question is from the line of Glenn Schorr from Evercore ISI..

So I guess my question is looking for a walk-through kind of like the way you did for energy for us across Europe. You have several funds. They're in the build mode.

Curious on how much dry powder do you have across the funds and what you're seeing the, what I would call, just economic malaise and some volatility over there?.

With the focus side, you cut out there for a second, Glenn.

Your focus is on Europe?.

On the European funds, the dry powder they have across the funds and your investment outlook across the funds, given what I would just call economic malaise?.

I'd be happy to take you through it. So let's maybe go through it. This is the high-level first, then I'll take you through kind of by business. I'd say the economic picture in Europe is a bit more positive than it's been, right.

So we've got low oil, low euro, expansionary monetary policy, consumer sentiments seems to be getting a bit better, and so the overall macro picture feels a bit better. The risk is obviously much more political, but we think a lot of that's priced in. We're seeing opportunities in private equity.

We need to be selective, given that the markets are competitive, but we're seeing opportunities there. And where we see a big opportunity is in private credit in Europe, which I'll come back in a minute to how we're thinking about that. So a lot of opportunities coming out of the low oil price particularly, benefiting our credit business.

Real estate, both continent and Germany are also attractive and so we're continuing to be quite active on the ground in Europe. To your question about how are we set up to be able to take advantage of the opportunity, it's in the few different ways. First, it pertains to our private equity business.

And so we had finished investing our Europe III funds last year and we're in the process of raising Europe IV. Bill mentioned where we stand in terms of that capital raise, but where we are today x investment from employees is about $2.3 billion, give or take that we've raised thus far for Europe IV.

And we have been seeding that fund on the balance sheet and doing some investments on balance sheet that are getting dropped into that fund now that we've had our first closing.

If you think across private markets we are also investing in Europe through our infrastructure funds, and so we've got available capital in Infra II, where we've thus far closed on $2 billion. We've also been investing there through our real estate funds.

And our first real estate fund has actually filled this European basket, and so we've been quite busy. And as I mentioned, we'll be raising some money for real estate Europe in a dedicated format and before then we'll probably be doing some of those transactions on balance sheet for dropping those down into a fund.

If you go into the credit side of the business, we have quite a bit of available capital. Our special situation strategy has an ability to invest heavily in Europe. And if you look at the first Special Sits fund, it was a significant area of investment for that fund, which has performed very nicely so far.

We're raising a European direct lending vehicle, because we think the private credit opportunity is so significant. And then overtime I think we'll have our other alternative credit pools that will allow us to access the opportunity on the ground. So we think we're particularly well-situated.

We've got the teams in Europe working together cross-functionally and cross-asset class to take advantage of the opportunity. And we'll be judicious, but we have capital to take advantage of what we think will be an interesting few years..

One just quick follow-up on the European direct lending vehicle, who is the target market? What size client base are we looking at?.

I guess, it depends if you're talking investors or companies we --.

Investments being made -- sorry, loans being made..

Think of it as similar to our U.S. direct lending strategy. So it's largely going to be middle-market corporates that have good companies, bad capital structures, their traditional lending institutions are busy elsewhere.

And so we've been able to build some of those relationships and step-in on the private credit front, but think of it as mid-market corporates largely..

Our next question is from the line of Robert Lee from KBW..

In public markets, I guess, one or two things. It did look like, I think, the way you disclosed it, the redemptions from fund investors, it looked like they picked up in the quarter.

And I don't know if you maybe give some color around, which strategies maybe you saw some pickup there, if there was maybe seasonality that drove it? And I guess related to that, maybe an update on Prisma, its performance last year, and if that's at all impacting some of the fund redemptions?.

Before we actually go into fund redemptions and distributions, I just want to highlight that we actually did raise $2.2 billion during the quarter just in public market, and that came from the mix of additional capital being raised in special situations as well as CLOs, Direct Lending II, and we actually raised about $400 million in that number for Prisma.

What you see on the distribution side is, and I'll give you a high-level component, we had a maturity of a CLO for $600 million.

We actually have now committed funds on the public market side and as we sell those investments and we return both gain and cost, you see that reduction as well, and that's a component of that distribution of roughly about $300 million. But more to your point, we actually saw redemptions in Prisma of about $900 million this quarter.

I do want to point out, though, that in the first quarter, we actually saw an inflow coming in for Prisma in the first week of $400 million.

So when you think about it, and that's why I went through the contribution as well, it's $300 million in the fourth quarter plus another $400 million in the first couple of weeks in the first quarter of '15 with redemptions of $900 million. So we lost a little capital to manage, but still feel quite optimistic about the Prisma strategy..

The only thing I'd add Robert is, look, I think a lot of that, the Prisma number, is just timing. Actually, it was the same investor for a lot of the money that redeemed out of one place in their structure and invested new money out of another. It just so happened, the redemption fell in Q4 and the investment is following in Q1.

So I think that's probably why it looks a little elevated relative to what you would expect..

Our next question is a follow-up from Michael Carrier from Merrill Lynch..

I guess this is for either Scott or Bill. When we think about the balance sheet investments, just want to get a sense, and I know a quarter doesn't make a trend, and if we look over the past two to three years, the returns have been very attractive.

But when you guys are making those investments, how do you think about either concentration limits you're hedging in certain exposures? I guess just if we're going to be in a more volatile environment, I'm just trying to understand how you guys look at the balance sheet versus investments in funds, given a certain strategy that LPs are looking for? And then just one, like, follow-up on that.

Just given the nuance and the difference in performance on investment income versus performance fees, just wanted to understand like what drove that? Meaning, was it just the certain exposures on balance sheet versus the funds or was there anything else driving that?.

Let me try to take that. I mean I think the way that we look at the balance sheet investments is, one, we have an asset allocation policy that we put in place. We have a balance sheet committee of the firm that oversees how the balance sheet is deployed.

And really a lot of what we're doing with the balance sheet is investing alongside our limited partners in fund format. So we're making investments in those vehicles, tracking the ROE, as I mentioned in the answer to an earlier question.

We do have concentration limits within that asset allocation policy, and we have been obviously looking at how we're exposed across the portfolio. We do call out for you in the table, a couple of the bigger exposures, for example, First Data and Walgreens are two of our biggest investments on the balance sheet.

So where we kind of go above a certain number, we want to make sure we call that out for you. Hedging is something that we have used both at the strategy level. And I mentioned that we do use hedging as it pertains to our natural resources and energy income and growth investments.

And that we'll also periodically do hedging for the balance sheet as a whole, and so we do implement those strategies. I guess the way I think about it is it's hard in our business with our firm to look at any given quarter.

If you think about what happened last year, the book value per share went from $10.83 to $12.07 over the course of the year, so it was up about 11%. And that's after we paid out, it was about $2 in cash dividends for the year. So away from those dividends, the balance sheet would be $14-plus book value per share.

And so although we did have marks in the quarter, we tend to look at how we're doing point-to-point year-to-year.

And we're actually very pleased with how the balance sheet has been performing, both on an absolute basis, and then also how it's facilitating our ability to raise third-party capital and monetize our capital markets capabilities as well, where we also use our balance sheet. So that gives you a little bit of flavor for it.

In terms of the investment income versus performance fees, Craig, why don't you take that?.

Yes, sure. Look I think Mike if you look at when you think through carry funds and when you look at invested capital within the real assets, you actually see, the largest component of that is our infrastructure investments. It's actually a little over half of that total amount of invested capital.

And so one of other stats that Scott had talked about in terms of the script, and the performance of the infrastructure was highlighting that infrastructure, those investments were actually up 13% in 2014. So what we actually have, when you compare that versus the balance sheet on Page 11, is you do see little bit of a mix.

So when you look on Page 11, you see that we're more heavily skewed in terms of the balance sheet investments more towards direct energy as opposed to the infrastructure piece. So I think that probably is the central thing as it relates to the difference you're seeing..

And Michael, just really quickly, when you think about performance fees and you talk about balance sheet, you see an increase in performance in PE, and so that's going to drive the performance fee.

However, when you take a look at the two assets that we're managing, third-party capital, KNR and its energy income, both of those funds, energy income is pretty close to cost, it's a new strategy. KNR is actually below cost.

And so as those assets are marked down for the capital that we're managing, you're not going to see that hit our performance fee. So as Scott mentioned, when you look at balance sheet performance, we made money in PE that was offset by energy.

When you look at our performance fee, we still carry on our PE, but didn't have the write-down with respect to any sort of performance fee offset on those energy assets..

Our next question is from the line of Patrick Davitt from Autonomous..

More broadly on the excitement around the investment opportunity in energy.

I guess, I'm curious, is there a house view on where prices are going? And how do you get comfortable that you're not catching a falling knife by throwing a lot of money into that market right now?.

That's a great question, Patrick. I think house view -- no, we're not in the business of predicting commodity prices per se. But I will give you a little bit of color that it does feel to us like we're in the second inning in terms of how this is playing out, and so we're being cautious.

As I mentioned, we've kind of organized this internal swat team across businesses and across geographies to make sure that we're attacking this holistically. I think one of the ways to make sure you're not catching a falling knife is focus on where you're investing in the capital structure.

And so the two areas where we've been most busy thus far is in private credit, where largely the opportunities are of the second lien variety. So you're behind a first, but you're still somewhat secured.

And we feel that a lot of the structures that we're going to be able to put in place, they will protect us against a commodity price path that's very hard to predict. So we're trying to move up the capital structure.

And the other thing that we're doing is working on drilling partnerships, where there are some market participants who have drilling rights and don't have access to the capital to actually begin the drilling, and without drilling they'll lose the rights.

And so we think we can structure those deals as well to protect ourselves relative to the underlying commodity. Really, if you look back, I mean 2012 through 2014 was largely a time to sell into the energy froth, and now we're kind of viewing it as largely a good time to invest, but we want to be cautious about how we do it.

So we're making sure we're doing it in a way where we're protected..

Our next question is from the line of Robert Lee from KBW..

Scott, I just really wanted to follow-up. You I guess in your original comments had mentioned about the expansion in the number of LPs and more LPs I guess buying multiple products. So maybe kind of drilldown into that a little bit, just would be interested in a little bit more incremental color, how you're seeing kind of the demand, U.S.

versus non-U.S., how that's kind of shifting for you guys? And also be interested in getting a little more color on how maybe the LP set or investors set is shifting itself may be away from U.S.

public pensions, kind of what's the contribution currently from high net worth and maybe sovereign wealth funds, that type of thing?.

I'd say a couple of comments. One, we have been investing heavily in building out our relationships around the world. We finished the year with about, literally, 824 investors. That was up about 19% year-over-year. We've kind of got a cross-sell stat that is still 1.6 products per investor.

That has actually held quite steady over the course of the last few years, which if you think about it, is hard to keep it steady if you're adding all these investors, usually with one product. So we've been able to keep it at 1.6x. And hopefully we can continue to achieve that or grow it.

If you look at some of our bigger investors, our biggest investors actually on average have between 3.5 and 4 products with us. And so we think there's a lot of opportunity on that cross-sell statistic.

Another statistic we look at is what percent of our investors are actually in more than one product with us today, which is just another way of looking at the progress we're making. And there again, we see a lot of opportunity.

We have about a-third of our investors in more than one product, so if you think about that 1.6, it's heavily concentrated in the third, and then we have two-thirds that are in one product with us.

So we think that we have a lot of opportunity to continue to increase the total number of investors we have and also increase the number of products that we're selling to the investors that do trust us today. In terms of the LP set and how it's shifting, a couple comments on that.

I think we have always enjoyed great relationships with pension funds in the United States. We continue to see a lot of support from that group, which we're grateful for. But if you look at kind of where we've seen a couple of developing trends, one has been sovereign wealth funds.

So there has been more activity in Asia, Middle East, parts of Europe, in that regard. And then also, the retail or the individual investor, those high net worth mass affluent.

And on that statistic, it's worth sharing, over the last two years, just shy of 20% of the money we raised, I think it's 19% of the money we've raised globally, has come from individuals, direct high net worth and through platforms. And so we continue to see that opportunity continue to grow. So I would say overall, the global set is increasing.

And number of investors around the world, if you look where we raise money, has become increasingly global, and it's moved from just institutions to institutions and individuals..

If I were to just add on in terms of some of the other broad trends that we're thinking of when we look at the fund raising numbers, I guess, I'd point to four things within that. It was certainly an active for us and we raised a little over $14 billion in fee paying AUM.

First point, I'd say, is really the breadth and diversity, which I think you got a good sense of from Scott. Only about 10% of that actually came from one of our benchmark private equity funds, because we were fund raising for North America or Asian private equity, so that only includes that initial close from Europe IV.

And when you look at that, about $9 billion of it came from public markets, which almost definitionally are newer strategies for us, that's up from $7.9 billion a year before. Second thing is on Europe IV, which we've spoken about, but we're pleased to have the first closing on E-IV.

And Bill mentioned that the $1.6 that's in the numbers with subsequent closings were at $2.3 billion, or if you include employees at about $2.5 billion. So that's nice to see. Third point, and this is actually an important one, is one of the things we talked about for some time is the scaling of our first-time funds.

And the opportunity that we have with performance to scale these, and there are some good data point. So Infra I was $1 billion fund. Infra II we've now raised to and we're working towards the final close of $2.5 billion to $3 billion. Direct Lending II, we've held a second close and we're already at 2.5x Fund I.

Special Situations II, early days, we're pleased with our progress. And obviously Special Situations, as a strategy, has been among our best performing. Special Sits I was up 24% in the year. And then the fourth thing, are those additional statistics. The number of LP is up 19%, it's a great stat.

We see continued flows into CCT or private BC, which as of yearend was just over $3 billion, and that's all with shadow AUM, as Bill talked about, being at about $6 billion. So you put that altogether, and I think it's a good story..

Our next question is from the line of Devin Ryan from JMP Securities..

Most of my questions were asked, but just a question on transaction fees. I know that they were light in the quarter with very little in private markets.

And that can be lumpy, but how should we think about the backlog and trajectory there? And then within capital markets, can you maybe give a little more detail around the outlook for that business, looking out over the next year? I know, it's a smaller driver, but you're coming off of a big year of growth, so any additional perspective or context would be helpful..

Devin, this is Bill. I'll tackle the first part of that question which is transaction fees. You are right, the transaction fees this particular quarter in private markets was pretty light, owing to the fact that we deployed only approximately $800 million in the quarter, and of that $800 million only $300 million came from private equity.

We did deploy capital in energy, and in energy we typically don't take a transaction fee. And that's why, even though you're looking at $800 million number, the ability to take a transaction fee is actually even on a much lower number.

As it relates to the first quarter, second quarter, we generally don't give a lot of guidance, but we do have several investments that we have signed either in the fourth quarter or the first month of 2015. And I would say that the total enterprise value of those transactions is roughly about $2 billion.

So as those investments close, you'll see the transaction fees flow through our P&L. As it relates to capital market, I'll turn that over to Scott..

Yes, Devin, it's hard to give you much guidance on the capital markets revenues frankly. To think about the business, 70% last year was related to KKR deal activity and 30% was our third-party business.

So it's going to move in line with frankly our deal activity as a firm, private equity and other asset classes, and also how we do in terms of continuing to build relationships with third-parties. We've invested in origination capabilities on the third-party front, so we're hopeful we can continue to scale our efforts there.

But it is very difficult to give you any sense for where things go until we see how the pipeline develops and how deal activity develops for the firm through the course of this year. But we'll keep you updated in terms of color..

And our last question for today is going come from the line of Bill Katz from Citi..

You sort of talked about this a little bit. I'm sort of curious, Scott, when you think about the cash ROE opportunity for the balance sheet in 2015, you obviously have some investments versus realizations and some mix of dynamics going on as well.

What do you think is a reasonable target for '15, given all these closed cards?.

We don't have a target, Bill, per se. And as you know, we don't share guidance or our budgets. I think what I would point to is a couple of things. One, as we talked about, there is an increasing percentage of our cash flow, which is now something that you can more or less count on quarter-to-quarter.

And if you look at that fee and yield earnings statistic that we shared with you, that $0.18 that we shared, we think that is something to continue to stay focused on, and we're focused on continuing to grow that. So the baseline of recurring cash we have will continue to grow. And so that's something that we're quite focused on as a firm.

The second thing that I would point you to is how our private equity portfolios continue to mature. Over 50% of our private equity portfolio is now marked at 1.5x cost or more.

That statistic continues to increase quarter-to-quarter, which is something that we watch, and that should provide us with more opportunities for exits on a go-forward basis, which obviously will also contribute to the cash ROE.

And as a consequence of the maturation of the private equity portfolio, it's also the case that our private equity portfolio on our balance sheet is continuing to mature. So it's very hard to predict, as I say, quarter-to-quarter or even completely year-to-year with respect to where cash is going to come from.

But if you look for 2014, and this is the metric we focus most on, our cash flow, our TDE was $2 billion, and that was up 40% from 2013. And it's really come from a variety of different places, fee and yield, carry, balance sheet gains.

And we're hopeful that, as we continue to implement our strategy of balance sheet, capital markets and third-party capital, we'll continue to have a lot of ways to win and a lot of ways to generate quite a bit of cash flow, which should result in a very attractive cash ROE..

Can I ask just one more, if you don't mind? There has been a lot of sort of back and forth in the media about the regulatory backdrop and the relationship between the GP and the LP.

Maybe step back and just holistically talk a little bit about where you are in terms of any type of fee concessions or pricing shifts relative to LP demands?.

Craig, why don't you take that one?.

Yes, sure. Bill, look given the recent articles in the press and let me answer things, your first point in terms of regulatory environment and the backdrop of that generally, before we talk about things like fee pressures.

Given the recent articles in the press, specifically on the topic of some refunds to our LPs, we thought a question like this might come up, but to add, I thought it'd be helpful to add some thoughts. First, we have interactions with various regulators and this includes the SEC, where our dialogs are ongoing.

And as I know you'll appreciate, we don't plan to detail these on a call. In terms of these recent articles, we refunded about $800 million to our LPs in early 2014, and that was in connection with a routine SEC exam in 2013 of one of our registered investor advisors.

Now, the majority of this amount related to the allocation of expenses, between what we call our flagship private equity funds and co-investment in other vehicles that invest alongside of those funds.

We can't comment now on what additional developments may occur on this in the future, but we look at our reserve each quarter, and as of yearend believe we're adequately reserved for our legal risks. Obviously, if and when, there are any material updates, we disclose them as you'd expect is appropriate.

And on this topic, unfortunately, there really isn't much else beyond this that we're going to be able to comment on other than saying, look, certainly we take our fiduciary responsibilities to our fund LPs very seriously. So these types of issues are very important to us..

As relates to fee pressure, remember, keep in mind that at KKR, transaction to monitoring fees either gets shared with your LPs, 80% to the LP or 20% to KKR or we also have an option where LPs could pay us an incremental amount of management fee and they could capture 100% on the transaction monitoring fees.

And so when you think about fee pressure, taking a fee or not taking a fee, when you're selling an investment where if it's profitable investment its going 80/20, as opposed to you taking the transaction fee or monitoring fee, where again the economic is going to 80/20, its really not applicable to KKR, because of the fee sharing arrangements that we currently have and will continue to have with our LPs..

Ladies and gentleman, that's all the questions that we have for today, I'd like to turn the call back over to the speakers for closing remarks. End of Q&A.

Thank you, everybody, for listening to the call. To the extent you have any follow-up questions, please naturally follow-up with us directly and we'll speak with you next quarter..

Ladies and gentlemen, thank you, again, for your participation in today's conference. This now concludes the program. And you may all disconnect your telephone lines. Everyone, have a great day..