This interview with Joe Bae, Co-CEO of KKR, provides valuable insights into the firm's strategic outlook in a volatile global landscape, its ambitious growth plans, and its increasingly diversified business model, drawing parallels to Berkshire Hathaway.
Bae addresses the current environment of uncertainty surrounding trade tariffs, noting that it's not a new phenomenon but rather an ongoing consideration for long-term investors. KKR has been proactive in mitigating risks related to supply chain security and resilience for its 150+ private equity portfolio companies, focusing on multiple sourcing avenues. For new investments, KKR strategically targets sectors less exposed to tariff risk, such as healthcare services, domestic services like home maintenance, and IT services. This approach allows them to navigate the complexities of trade policies while minimizing potential negative impacts.
Bae acknowledges the inflationary pressures of tariffs, potentially slowing GDP growth and impacting the Federal Reserve's policies. KKR already anticipates higher inflation due to broader trends like energy transition and data investment. However, he emphasizes the varying impact across markets and the Fed's need to remain nimble in its response, acknowledging that stagflation is a real risk.
From a global perspective, KKR highlights Japan as a particularly attractive investment destination. With positive wage growth, modest inflation, and rising interest rates, Japan represents a unique opportunity for investors seeking to diversify away from deflationary environments. Furthermore, shareholder and corporate governance reforms are making the Japanese market even more appealing.
Regarding China, KKR acknowledges geopolitical tensions but emphasizes its focus on high-quality domestic businesses catering to domestic consumption and services. They are avoiding sensitive sectors. This strategy aims to capitalize on the growing Chinese middle class's demand for higher-quality goods and services. While acknowledging the slower economic growth and real estate challenges in China, Bae sees value in the current market's multiples for well-chosen investments.
Bae also touched on the concept of American exceptionalism, suggesting that the US strength lies in the resiliency of the economy, strength of capital markets, labor productivity, technology and innovation.
The discussion then shifts to KKR's evolving business model, with a key focus on its strategic holdings business. Modeled after Berkshire Hathaway, this segment involves owning large stakes in companies that KKR intends to hold long-term, generating consistent, growing cash flow. Currently, this business consists of 18 companies and KKR intends to redeploy its cash flow into similar business.
Bae drew a parallel between Berkshire Hathaway, highlighting Global Atlantic as KKR's own "Geico" and future infrastructure holdings potentially becoming their "BNSF," with private equity holdings resembling their stock portfolio. The goal is to compound value over time through defensive, cash-oriented businesses. KKR expects the portfolio to generate significant after-tax dividends in the coming years, projecting $1.1 billion by 2030.
Bae also addresses the growing trend of retail investors accessing private assets. In the past, it was only ultra high-net-worth families and family offices that could access. KKR has introduced private wealth products for individual investors who are accredited investors, offering semi-liquid options. The firm is also collaborating with Capital Group to create hybrid products in a mutual fund format, making private credit more accessible to mass affluent investors.
He touches on the possibility of private assets in 401K plans and that policy changes will be required.