Testing the Limits of Reflation Testing the Limits of Reflation

INSIGHTS GLOBAL MACRO TRENDS

VOLUME 11.3 • MAY 2021 Testing the Limits of Reflation Testing the Limits of Reflation

If ever there were a time to champion the mantras of our founders George R. Roberts and Henry R. Kravis to build like and trust, act with integrity, and lead by example, we believe that now is that time. The re-opening we are envisioning will not be a straight line, and the pandemic has KKR GLOBAL MACRO & ASSET ALLOCATION TEAM laid bare multiple inefficiencies – and more importantly, Henry H. McVey inequalities – that need immediate fixing, particularly in Head of Global Macro & Asset Allocation +1 (212) 519.1628 developing countries. However, there are also reasons [email protected] to be optimistic. Vaccine roll-outs are accelerating, and Frances B. Lim +1 (212) 401.0451 economic growth is poised to surge, which should boost [email protected] both employment trends and income levels. Consistent David R. McNellis +1 (212) 519.1629 with this view, we are upgrading our earnings forecast and [email protected] year-end target for the S&P 500 and boosting our 10- Brian C. Leung +1 (212) 763.9079 year interest rate forecast for the next few years to reflect [email protected] stronger growth in nominal GDP. At the same time, we Rebecca J. Ramsey +1 (212) 519.1631 also have completed a refresh of our long-term expected [email protected] returns, an important exercise that leads us to believe we have entered a new, more complicated era for global

Special thanks to Dante Mangiaracina for asset allocation. Against this backdrop, we continue to rely research assistance. heavily on our Another Voice framework, which continues to suggest sizeable positions in Public Equities, Collateral- Based Cash Flows, and Private Investments.

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© 2021 Kohlberg Kravis Roberts & Co. L.P. All2 Rights Reserved.KKR INSIGHTS While author Tom Wolfe’s famous quote about how easily New York fair value forecast to 4,320 from 4,050, based on S&P 500 City can cast its spell on those who visit might seem somewhat out- earnings per share of $185, compared to $174 previously and a dated amidst the COVID-19 pandemic, we are increasingly confident current consensus of $181. We also introduce a 2022 forecast of that ‘Gotham’ – and many other global urban centers across Asia, 4,620, along with $207 in earnings next year versus a consensus Europe, and Latin America – are poised to begin to once again assert forecast of $205. Our new price target assumes a forward P/E of themselves as important hubs of interconnectivity and economic 20.9x (approximately 1.8x below current level). As we detail be- output. Modernization, industrialization, collaboration, and the arts low, the composition of earnings is shifting heavily towards more and culture are still valid concepts of human society that – even in a cyclical parts of the economy, we believe. Importantly, though, post pandemic world – will again lure individuals back to large cities, while we are boosting our target for 2021 and 2022, we would we believe. not be surprised to see some consolidation after such a strong first four months of the year. However, the re-opening we are envisioning will not be a straight line, and the pandemic has laid bare multiple inefficiencies – and, 2. We are also increasing our U.S. 10-year interest rate forecast more importantly, inequalities – that need immediate fixing. Just for 2021 to 1.75% from 1.50%. Our 2022 forecast goes to consider that today nearly 44% of those unemployed in the United 2.25% from 2.00%. We model rates, GDP, and inflation out to States have been so for 27 or more weeks. Statistically speaking, 2025 to better understand the path of interest rates. We still this sub-segment of the U.S. population typically has only a one in do not see rates getting unglued at the long-end of the curve, but five chance of successfully securing a permanent position. Unfortu- we do expect that faster growth, more government spending, and nately, such socioeconomic inequalities are not restricted to just the complications linked to supply chain disruptions (think the Suez United States. In Europe, for example, my colleague Aidan Corco- Canal) all combine to make us want to take a slightly more con- ran’s estimates suggest that the COVID shock may have undone fully servative approach to rates. That said, we are not changing our five years of progress on income inequality. Outside the developed long-held framework that predicts some ongoing consistency in economies, our concerns about human safety and well-being in the relationship between nominal GDP and nominal interest rates. several countries like India, Brazil, and Turkey are now even more Also, there are some important technical offsets we have found pronounced. that may limit the upward pressure we are forecasting for rates. Details below. Yet, there are also reasons to be optimistic. Authorities in most major economic regions are pushing hard on the fiscal impulse designed to 3. While nominal rates are increasing, real rates – which we ameliorate these inequalities as well as spur growth at a time when believe are key to financial conditions – will remain at attrac- financial conditions are quite accommodative. Moreover, vaccinations tive levels for the foreseeable future. As part of our deep dive are ramping upwards in many places, and global savings are now on real rates, we compare to past periods to see what it means high enough to encourage a sustained increase in spending across for asset class returns. See below for details, but our punch line both small towns and big cities, we believe. In fact, our work shows is that we are still in an extremely accommodative backdrop that the recovery is likely to be much more front-end loaded than for financial assets, Equities, Real Estate, and Infrastructure in what we saw after the Global Financial Crisis (GFC). particular. To be sure, our sentiment indicators are signaling an increased risk of a near-term correction after such a strong start So, while the human element remains raw and there are many les- to the year (Exhibit 13), but our work gives us additional confi- sons to be learned, we must also look ahead, particularly those of us dence that now is the time in the cycle to maintain overweight who are charged with managing retirement money on behalf of pen- positions in collateral-based cash flows (e.g., Infrastructure and sioners, first responders, teachers, and non-profits. Indeed, if there Real Estate) and Equities (Exhibit 51). was ever a time to champion the mantras of our founders George R. Roberts and Henry R. Kravis to build like and trust, act with integrity, 4. Given the changes we have made to our equity and interest rate and lead by example, now is that time. forecasts, we have refreshed our expected return forecast for the next five year period; not surprisingly, sporty margins, high Consistent with this approach, we have updated our macro frame- multiples, and low interest rates still all suggest lower returns works to share, discuss, and debate with our fellow workers, our ahead. That said, we still see opportunity in many portions of the existing limited partners, and our prospective clients. The good news market. In particular, as part of our shift towards including more for those with whom we interact on the macro front is that we now Real Assets in portfolios via our focus on collateral-based cash have even more confidence in our Another Voice thesis for 2021, as flows, we think that the case for Infrastructure and Real Estate our top-down framework argues for a more reflationary tilt on the have strengthened materially. We also see significant differentia- portfolio construction front. tion in the Public Equity markets, as we expect Small Cap and Emerging Markets to finally best the S&P 500. See below for In terms of what is new in this latest piece, we drill down on four details. key areas of macro focus that we think warrant investor attention, as fiscal and monetary policies test the limits of reflation. They are as follows:

1. We are upgrading both our earnings forecast and our year-end target for the S&P 500. Specifically, we are lifting our 2021

KKR INSIGHTS 3 EXHIBIT 1 backdrop of rising cyclical inflation, more stimulus, and higher We Believe That a Changing of the Guard Is Occurring commodity prices. Across Global Equity Markets • Given record low rates and the campaign against austerity, investors should back fiscal beneficiaries, particularly as it PRICE PERFORMANCE, % relates to ESG. Climate change and the transition to cleaner Past Week Past Month YTD 1-Year energy, which we think could be a three trillion dollars per year global investment, are clear areas of focus for many investors. Russell 2000 0.9 -3.2 14.6 92.1 This transition will implicate multiple industries as companies and consumers embrace more sustainable products, more energy S&P 500 1.4 5.3 11.4 49.5 efficient real estate, and more innovative transportation. We also MSCI All-Country World 1.5 3.9 9.1 50.6 continue to prioritize opportunities that benefit from COVID-related structural tailwinds across areas like education/work-force Nasdaq 100 1.4 6.4 9.0 60.3 development, waste management, public and private health, and industrial technology. Finally, given rising geopolitical tensions MSCI EAFE 1.6 3.1 7.1 45.3 as well as the more frequent weather-related events such as oc- MSCI Emerging Markets 0.7 0.4 4.4 52.4 curred in Texas in February 2021, we see infrastructure ‘resiliency’ as an influential investment theme, particularly as it relates Data as at April 16, 2021. Source: Bloomberg. to supply chains and power distribution.

• The rise of the global millennial is upon us. In the United States, EXHIBIT 2 the 68 million millennials are now at an age where they are buy- Our Macro Framework Argues for More Portfolio ing houses, spending on their families, and shifting their consum- Diversification in 2021 and Beyond er preferences. Moreover, in Asia there are now more than 800 million millennials; their changing behavior at a time of huge tech- Performance Relative to the S&P 500: nological transformation will have significant implications for all Indexed: 2019 Jan = 100 aspects of the global economy. If we are right, then our nesting theme has more room to run. The millennial consumer will also 150 Russell 2000 / S&P 500 reinforce the ESG and sustainability trends mentioned earlier. Emerging Market Equities / S&P 500 140 Nasdaq 100 / S&P 500 • Though COVID-19 is only accelerating this trend, local bias 130 preferences by both governments and corporations are leading to major shifts in the global supply chain, including an 120 intensifying focus on resiliency. Our strong belief remains to 110 invest behind this transformation. Reshoring of property, plant, supply chains, and equipment will be an attractive investment 100 area; already, we note that announcements linked to supply chain 90 expansion in the U.S. are up a sizeable 176% year-over-year in 2021, based on research from the investment bank UBS. 80 • Not 70 We think that more volatility and more dispersion lie ahead. surprisingly, we favor flexible mandates such as Opportunistic Liquid Credit, particularly managers who can toggle between High Jul-20 Jul-19 Jul-18 Jan-21 Jan-20 Jan-19 Jan-18 Oct-20 Oct-19 Oct-18 Apr-21 Apr-20 Apr-19 Apr-18 Yield, Loans and Structured Credit, as well as Real Estate Credit Data as at April 16, 2021. Source: KKR Global Macro & Asset Allocation funds, including those that can move up and down the capital analysis, S&P 500, Bloomberg, Factset. structure. Funds that also benefit from market dislocations and can deliver capital solutions should do well in the environment that we envision. In terms of the key macro themes embedded in our Another Voice framework, we continue to focus on the Big Six mega themes we • Despite our desire to ride the cyclical wave in the economic originally laid out in January. They are as follows: growth we are forecasting, we do not believe that Growth investing behind secular winners should abate. Our distinct • We are bullish on collateral-based cash flows. Asset-Based preference is less for Venture Capital and more towards Growth Finance, Infrastructure, and many parts of Real Estate should ideas in sectors such as Healthcare, Technology, and Consumer. perform well in the faster nominal GDP environment we are The reality is that Technology is no longer a distinct sector; envisioning. The value of the sound collateral that backs the cash rather, it is now woven through every industry in which we flows can further enhance performance, particularly if invest- invest, a backdrop that creates an attractive environment to back ments have strong pricing power characteristics and are linked to long-term champions of innovation. However, unlike the last some of our key themes (e.g., nesting, growth in data, resiliency). 2009-2019 economic cycle, valuation will now matter more on a This remains a table pounder for us, especially given the unusual go-forward basis.

4 KKR INSIGHTS Looking at the bigger picture, we think that we are entering a period EXHIBIT 4 of higher short-term inflation (Exhibit 3). Not surprisingly, in the Although Money Supply Is Booming, the Money near-term this view is likely to put upward pressure on interest rates. Multiplier Is Not That outcome, as we show in Exhibit 5, is actually wholly consistent with most prior cycles. It is also worth noting that the Treasury mar- Money Multiplier, M2/Monetary Base kets historically have overestimated the persistence of early-cycle inflation, as 10-year yields and break-even inflation actually surged U.S. Euro Area the most in the early parts of the last two recoveries. Moreover, as 10 we show in Exhibit 4, the money multiplier – which we view as a key 9 ingredient to inflation – has yet to accelerate. 8 EXHIBIT 3 7 Year-Over-Year Inflation Readings Will Surge in April- August Due to Easy Comparisons, But Then Decelerate 6 5 U.S. Inﬂation, Y/y Headline CPI Core CPI 4

3 3.5% 2 3.0% 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

2.5% Data as at February 28, 2021. Source: BEA, Federal Reserve, Haver 2.0% Analytics. 1.5%

1.0% EXHIBIT 5 0.5% U.S. 10-Year Yields: A Bounce of About 150 Basis Points 0.0% Over 12-16 Months Has Been Typical. We Are Now At +100 Basis Points Over Eight Months Jul-20 Jan-21 Jan-20 Jul-21e Mar-20 Nov-20 Sep-20 May-20 Mar-21e Nov-21e Sep-21e May-21e U.S. Nominal 10-Year Treasury Yield, % Data as at February 21, 2021. Source: KKR Global Macro & Asset Allocation analysis, Census Bureau, Bloomberg. 7.0%

6.0% Jun-04 5.0% 4.7% Apr-10 3.9% 4.0% 100bp + 3.0% Jun-03 in 8mo 3.3% Dec-08 Mar-21 2.0% +140bp All told, my colleague Dave 2.4% 1.6% in 12mo +150bp 1.0% Jul-20 McNellis estimates consumers in 16mo 0.6% will have banked about $2.5 0.0% Jul-13 Jul-19 Jul-16 Jul-10 trillion in extra savings by Jul-01 Jul-07 Jan-15 Jan-18 Jul-04 Jan-12 Jan-21 Jan-03 Jan-09 Jan-06 Jan-00

year end, equivalent to 17% Data as at March 31, 2021. Source: Bloomberg. of pre-pandemic annual consumption spending. Not all of those dollars will get spent at once; rather we think that they will support a multi- year expansion.

KKR INSIGHTS 5 To be sure, we will be watching interest rates closely and there is EXHIBIT 7 a risk that Treasury supply overwhelms demand (Exhibit 23), but …Which Seems Inconsistent With Rising Input Costs. As we do not see rising interest rates as the Achilles heel that derails Such, We Favor Pricing Power Stories at This Point in the the current recovery. As we detail later, rising rates – when ac- companied with strong growth – are not to be feared, particularly Cycle if financial conditions remain accommodative. Moreover, the dollar U.S CPI and PPI, Y/y % Change remains well bid, which is important for maintaining grounded inflation expectations at the long-end of the curve. Importantly, foreign CPI: All Items PPI: All Items buyers, including China, have started to buy U.S. Treasuries again 5% 4.3% (Exhibit 29), which should help to dampen some of the glut of supply we are forecasting (Exhibit 23). So, ultimately, we see rates increas- 4% ing and we definitely expect more volatility along the way. However, 3% 2.6% the outlook for 2021 and beyond for those who embrace our Another Voice thesis is still quite compelling, we believe, particularly for those 2% individuals and institutions that have the flexibility to harness both the illiquidity premium in the private markets and lean into dislocation 1% in the public markets. 0%

The other key variable on which we all need to focus is pricing -1% power. We have now entered a period where input costs are increas- -2% ing faster than consumer prices. One can see this in Exhibit 7. This

type of environment, which is really quite different from the 2009 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-12 recovery (when input costs were slow to increase), heavily favors companies with pricing power. Indeed, we think we have entered a Data as at March 31, 2021. Source: Evercore ISI. world where companies with pricing power, or what we term price makers, will be re-rated upward at the same time that price takers will be de-rated. This bifurcation is not to be underestimated, as the consensus now suggests that almost all the companies in the S&P Yet, there are also reasons to 500 will deliver improving margins (Exhibit 6). In our humble opinion, be optimistic. Authorities in these forecasts will prove way too optimistic, leading to heightened volatility during the summer months, as margin estimates are ratch- most major economic regions eted down. are pushing hard on the fiscal EXHIBIT 6 impulse designed to ameliorate Consensus Margin Expectations Appear at Extremes, these inequalities as well as Particularly Relative to History… spur growth at a time when S&P 500: Operating Margin, % of S&P 500 Companies with Improving Margin financial conditions are quite

86% accommodative. Moreover, 76% vaccinations are ramping 70% 64% 61% 59% 61% 59% 60% upwards in many places, 58% 57% 60% 60%58% 57% 56% 52% 57% 52% and global savings are now 43% 48% high enough to encourage a sustained increase in spending across both small towns and big cities, we believe. In fact, our work shows that the 2011 2017 2013 2019 2015 2018 2016 2014 2012 2010 2007 2003 2009 2005 2008 2006 2004 2002 2020 2021e 2022e recovery is likely to be much Data as at April 16, 2021. Source: Factset. more front-end loaded than what we saw after the Global Financial Crisis.

6 KKR INSIGHTS SECTION I EXHIBIT 9 We Are Upgrading Our EPS and Most of the EGLI Inputs Are Positive, Suggesting S&P 500 Target to Reflect Stronger Continued Strong Growth in 2022 S&P 500 Earnings Growth Leading Indicator: Growth Components of December 2021 Forecast -0.5% -1.2% +16.0% +5.0% If there has been a ‘north star’ that we have followed since starting in macro at Morgan Stanley in early 2004, it has been our Earnings Growth Lead Indicator or EGLI. It has consistently helped to capture +4.0% major turning points in growth cycles and importantly, when we look at it today, is pointing up and to the right. One can see this in +2.8% Exhibit 8. Key inputs such as housing, financial conditions (i.e., credit +0.4% +0.2% spreads), and consumer confidence all suggest more and faster +5.3% growth ahead.

EXHIBIT 8 Our Earnings Growth Leading Indicator Suggests a

Massive Rebound in Growth in 2021 USD Apprec. ISM PMI Baseline Forecast G7 ex US G7 ex Oil Prices Consumer

S&P 500 EPS Growth: 12-Month Leading Indicator Confidence Credit Spreads Credit Trade-Weighted Monetary Policy Monetary Real Home Price Real ACTUAL PREDICTED (3mo MA) 40% The Earnings Growth Leading Indicator (EGLI) is a statistical synthesis of seven important leading indicators to S&P 500 Earnings Per Share. 30% Henry McVey and team developed the model in early 2006. a = Actual; p = model predicted. Data as at February 28, 2020. Source: KKR Global 20% Dec-21 Macro & Asset Allocation analysis, Bloomberg. 16.0% 10% Dec-20 0% 3.2% We also want to flag that our model does not directly capture the ad- Dec-19 ditional pandemic-related stimulus that has been layered into the U.S. -10% 2.0% economy. All told, my colleague Dave McNellis estimates consumers will have banked about $2.5 trillion in extra savings by year end, -20% equivalent to 17% of pre-pandemic annual consumption spending.

-30% May-09a Not all of those dollars will get spent at once; rather we think that Jan-10 -30.9% they will support a multi-year expansion. Importantly, much of the -38.9% -40% extra savings have built up at the high end, as lockdowns have cur- 00 03 06 09 12 15 18 21 tailed upper-income spending on travel and leisure. Excess savings The Earnings Growth Leading Indicator (EGLI) is a statistical synthesis therefore should help catalyze big-ticket discretionary spending amid of seven important leading indicators to S&P 500 Earnings Per Share. re-opening. Henry McVey and team developed the model in early 2006. a = Actual; p = model predicted. Data as at March 31, 2021. Source: KKR Global Macro Also, there is the potential for more spending. Indeed, after passage & Asset Allocation analysis, Bloomberg. of a $1.9 trillion COVID relief package in March, all eyes in Washing- ton, DC are now turned towards at least an approximate four trillion infrastructure package. While President Biden has set the debate in motion, Democrats in Congress must now do the difficult work of crafting a package that can pass both the House and Senate with their razor thin majorities. For the moment, they are pursuing a dual-track approach, each of which aligns expenditure components The other key variable on with proposed offsets from tax increases. The first track, which contains approximately $2.4 trillion in outlays, bundles conventional, which we all need to focus is physical infrastructure – roads, bridges, water projects, etc. – with pricing power. We have now increases to corporate tax rates. The second tranche of about $1.8 trillion in outlays, or the ‘human’ infrastructure component, focuses entered a period where input on a broad assemblage of social programs and spending – including child and health care – and is bundled with increases in personal tax costs are increasing faster than rates, particularly for upper income earners. The potential political consumer prices. and policy permutations of a deal are innumerable at this stage and

KKR INSIGHTS 7 will likely come in lower than the initial projections. However, the EXHIBIT 10 key fact on which to focus is that the Democrats – to the extent that Our Projected Path Has S&P 500 Ending 2021e At they can stick together – intend to ‘go big’ (i.e., expect more spend- Around 4,320 on $185 of EPS and Ending 2022e At ing, sooner), having learned a hard lesson during the Global Financial Crisis when policy makers did not go nearly ‘big’ enough. Democrats About 4,620 on $207 of EPS also appear to have learned from climate action’s failure in 2009 S&P 500 Price Target and EPS when some Democratic legislators from industrial regions came to view cap and trade as a threat to their jobs. This time, by comparison, Price EPS (RHS) 2022e President Biden’s climate proposal emphasizes green infrastructure, 5,000 including for the electric vehicle, which will create U.S. industrial 2021e 4,620 Current 4,320 220 4,500 jobs. 4,125 200 4,000 2022e So what do all these monetary and fiscal tailwinds mean for the S&P $207 180 500? Despite growing concerns about a potential near-term correc- 3,500 2021e tion (Exhibit 13), we are raising our S&P 500 2021 fair value estimate $185 3,000 160 to 4,320 (up from 4,050 previously), on the back of higher 2021 EPS of $185 versus $174 previously and a current consensus of $181. The 2,500 2020a 140 approximately $11 upgrade reflects greater fiscal stimulus (Biden has $142 exceeded expectations by a wide margin), acceleration in consumer 2,000 120 2019 2020 2021 2022 2023 spending, and stronger-than-expected 4Q20 earnings (15% above consensus expectations). Rising rates and steeper yield curves ac- Data as at April 18, 2021. Source: S&P 500, KKR Global Macro & Asset crue to the benefit of Financials, while bull markets in copper and Allocation analysis. oil are a boon to Industrials, Energy and Materials. All told, these four cyclical sectors plus consumer discretionary are expected to drive over two-thirds of the EPS growth this year and close to 60% EXHIBIT 11 in 2022e (Exhibit 11). This is a marked departure from the 2012-19 Cyclicals Are Expected to Drive Almost Two Thirds of period when the three ‘secular growth’ sectors – Technology, Com- 2021-22 EPS Growth, a Reversal From the 2012-19 Period munications and Healthcare – accounted for 64% of the earnings When Secular Growth Sectors Reigned Supreme growth. S&P 500 Earnings Growth Contribution by Sector We are also introducing our 2022 EPS estimate of $207. Our EGLI actually suggests growth of 15%, but we have moderated our official Cyclicals* Secular Growth^ Defensive^^ 100% outlook to 11.5%, or $207 per share, to account for the combined 10% 4% impact from higher taxes, rising input costs, and higher wages (our 90% channel checks suggest this issue will be a major one through at 80% 34% 70% least September 30th). The consensus for 2022 is $205, but we do 60% not think it is fully tax-rate adjusted. We are also establishing a 2022 64% 50% forecast for the S&P 500 of 4,620. Our new price target assumes a 40% forward P/E of 20.9x (approximately 1.8x below current levels), as 30% 62% we expect strong earnings growth, rather than multiple expansion, to 20% drive the next leg of the equity rally (Exhibit 10). 10% 26% 0% 2012-19a 2021-22e * Cyclicals = industrials, energy, materials, financials and discretionary

However, the key fact on which ^ Secular growth = technology, communications and healthcare to focus is that the Democrats – ^^ Defensive = staples, utilities and REITs. Data as at April 18, 2021. to the extent that they can stick Source: S&P 500, KKR Global Macro & Asset Allocation analysis. together – intend to ‘go big’ (i.e., While price-to-earnings multiples appear high in absolute terms, expect more spending, sooner), our valuation models suggest that the equity risk premium (ERP) is not yet out of whack. In fact, while today’s implied equity risk pre- having learned a hard lesson mium is low relative to the post-GFC period, it is still quite elevated during the Global Financial versus its longer history. Strong housing, pent-up demand, historically high savings, and a Fed that is committed to overshooting its Crisis when policy makers did two percent inflation target should support a higher risk appetite. As not go nearly ‘big’ enough. such, we are lowering our ERP estimate to 4.70% from five percent previously. Importantly, risk appetite is nowhere near the exuberant

8 KKR INSIGHTS levels (two to three percent) leading up to the tech bubble burst in EXHIBIT 13 2000 (Exhibit 12). Our Proprietary Sentiment Indicator Now Suggests That Sentiment Is Quite Ebullient We also want to underscore that the impact of higher rates does not derail our thesis. In terms of specifics, we are embedding a U.S. Capitulation Indicator higher 10-year U.S. Treasury yield of 1.75% in 2021 and 2.25% in 2 26-Apr 2022. While the impact of higher rates can sometimes be a head- 1.34 wind to valuations, interest rates are going up for the right reasons 1 (i.e., higher growth expectations and pricing power). Similar to past cycles, better growth increases cash flow and pushes credit spreads lower, which should more than offset the adverse impact from a 0 higher risk-free rate, we believe. -1 EXHIBIT 12

Today’s Implied ERP Appears Low Relative to the Post- Composite Score -2 Sep-01 GFC Period, but Actually Quite Elevated Relative to the Buy -1.6 Longer History. We Now Assume a 4.70% ERP for 2021e, below -2 Sep-02 -3 -2.2 Sep-11 Down From Five Percent Previously Oct-08 -2.5 Aug-15 Mar-20 -2.5 Aug-98 -2.7 Dec-18 -2.9 S&P 500: Implied Equity Risk Premium, % -4 -3.2 -3.1 Today: 4.6% Post-GFC Avg: 5.5% 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 Long-Term Avg: 4.2% 2021 Forecast 4.70% Data as at April 27, 2021. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis. 6.5%

5.5% EXHIBIT 14 2021e 4.5% 4.70% We Raise Our S&P 500 2021 Fair Value Estimate to 4,320, Which Suggests Another Four to Five Percent of Upside

3.5% From Today’s Level S&P 500 Fair Value (2021e) Sensitivity Table 2.5% Implied Equity Risk Premium (%)

1.5% 5.45% 5.20% 4.95% 4.70% 4.45% 4.20% 3.95% 1975 1995 1970 1985 1965 1990 1980 2015 2010 2025 2030 2005 2020 2000 2.50% 3,427 3,595 3,780 3,985 4,213 4,468 4,755

Data as at April 2021. Source: S&P 500, Professor Damodaran, KKR Global Macro & Asset Allocation analysis. 2.25% 3,520 3,693 3,884 4,095 4,330 4,593 4,888

2.00% 3,615 3,793 3,990 4,207 4,449 4,719 5,024

1.75% 3,711 3,895 4,097 4,320 4,569 4,848 5,161

1.50% 3,809 3,998 4,206 4,436 4,692 4,978 5,301

While price-to-earnings multiples yield, % Treasury US 10y appear high in absolute terms, 1.25% 3,909 4,103 4,317 4,553 4,816 5,111 5,443 our valuation models suggest 1.00% 4,010 4,210 4,429 4,673 4,943 5,246 5,587

that the equity risk premium Data as at April 2021. Source: S&P 500, Professor Damodaran, KKR is not yet out of whack. In fact, Global Macro & Asset Allocation analysis. while today’s implied equity risk premium is low relative to the post-GFC period, it is still quite elevated versus its longer history.

KKR INSIGHTS 9 EXHIBIT 15 If U.S. Growth Is Improving, Real Yields Are Also Likely Headed Higher (Albeit from Depressed Levels). Unlike Defensive and Growth Sectors, Cyclicals Such as Financials, Industrials and Energy Are Actually Positively Correlated with Changes in Real Yields

Real Rates (10y UST - Inflation Expectations Term Premium Nominal Risk-Free Rate Sector 5y Inflation Swap) (5y Inflation Swap) (ACM 10y) (10yr UST)

Financials Cyclical 57.9% 25.9% 38.6% 54.1%

Industrials Cyclical 38.3% 39.8% 35.7% 40.8%

Healthcare Defensive 19.1% -48.4% -10.2% 1.5%

Energy Cyclical 13.0% 57.5% 7.5% 50.2%

Discretionary Cyclical 8.3% -2.6% 23.7% -19.6%

Materials Cyclical -5.1% 52.4% 22.4% 6.5%

Technology Growth -31.8% -10.1% -21.2% -25.8%

Utilities Defensive -37.0% -43.5% -59.6% -13.9%

Staples Defensive -40.5% -50.7% -47.2% -38.3%

Real Estate Defensive -44.5% -25.3% -62.4% -9.1%

Communications Growth -67.7% -9.8% -35.7% -58.3%

Data as at March 15, 2021. Source: Bloomberg, Haver, S&P, Evercore/ISI.

EXHIBIT 16 Multiples Often Contract on the Heels of Rising Rates While regimes have varied, what and Strong Economic Growth. We Don’t Think This Cycle we think stands out is that in the Will Be Any Different

U.S., interest rates have tended S&P 500: EPS, MULTIPLES AND RATES to run moderately below the EPS GROWTH, % TRAILING P/E CHG IN 10-YEAR level of nominal GDP growth as MULTIPLE UST YIELD, BPS long as the Fed was not actively 1994 18% (17%) +203

trying to suppress run-away 2004 21% (10%) -3 inflation. It was only during 2005 14% (9%) +17 the Chairman Paul Volcker Fed era of the 1980s that rates ran 2010 38% (18%) -54 notably above nominal GDP for 2011 14% (13%) -142 a sustained period. Put more 2021E 30% (12%) +84 simply, we view Fed policy and 2022E 11% (4%) +50

corresponding interest rates as a Data as at April 30, 2021. Source: KKR Global Macro & Asset Allocation function of nominal GDP growth. analysis, Haver Analytics, Bloomberg, S&P 500.

10 KKR INSIGHTS SECTION II tion investors need to get right in today’s environment of unprec- We Are Also Lifting Our Interest edented monetary and fiscal stimulus, then we think it is linked to the direction of U.S. interest rates. At its core, we view interest rate Rate Forecast, but We Now Have policy as being inherently linked to nominal GDP growth. Importantly, though, while U.S. interest rates and U.S. nominal GDP growth are More Conviction That Rates Are highly correlated, the relationship is not static over time. To this end, Exhibit 17 illustrates the different regimes of yields relative to nominal Not Going to Get Unglued At the GDP that have existed since the 1950s. While regimes have varied, what we think stands out is that in the U.S., interest rates have tend- Long-End ed to run moderately below the level of nominal GDP growth as long as the Fed was not actively trying to suppress run-away inflation. As we indicated earlier, we are boosting our interest rate forecast It was only during the Chairman Paul Volcker Fed era of the 1980s to 1.75% this year from 1.50% and our forecast for next year goes that rates ran notably above nominal GDP for a sustained period. Put to 2.25% from 2.00%. By 2025, we see yields at 2.50%, or maybe more simply, we view Fed policy and corresponding interest rates as a little higher. In updating our forecasts, we spent a considerable a function of nominal GDP growth. When growth is too weak, then in- amount of time pressure testing our traditional interest rate frame- terest rates are held below nominal GDP to accelerate growth. When work, which we describe below in some detail. We also researched growth and inflation are strong, interest rates are often held above a few other strategies to forecast rates, given the complexity of the nominal GDP growth. current macroeconomic environment. In addition, we looked at some technical factors, including supply and demand, which support our So, where do we see interest rates going? In our Base Case, we view that U.S. 10-yields are not on the verge of unraveling. Impor- envision a continued robust economic recovery underpinned by fis- tantly, all our models suggest higher rates, but they do not suggest cal stimulus, excess savings, housing, and a heated inventory cycle. a surge in either near-term or long-term rates the way some bond Inflation runs above two percent in 2021-22 before slowing back bears are now growling. towards the Fed’s two percent target. Longer-term inflation remains well-controlled. Our High Case envisions a fiscally-driven overheat- Our Traditional Framework As one might expect, we think getting ing as stimulus and excess savings are drawn down faster than interest rates right is one of the most important drivers of outperfor- expected, which resets inflation expectations higher on a structural mance in the macro and asset allocation arena. Key to our thinking basis. Finally, our Downside Case envisions that the recovery disap- is that government bond yields form the base for price discovery in points, as COVID variants keep case counts elevated, and trade ten- almost all other fixed income asset classes, and as such, they shape sions dent global growth. Longer-term disruptions result in economic how and where investors allocate capital across the global fixed in- scarring. As ‘secular stagnation’ concerns reassert themselves, come universe, in both liquid and illiquid markets. Interest rates also inflation remains stuck below two percent and Fed Funds pinned at impact cap rates and drive equity multiples. So, if there is one ques- the zero bound.

EXHIBIT 17 We Have Used Scenario Planning to Attack a Complex Outlook for Interest Rates

7% U.S. Nominal 10-Year Yield,% Points Above/(Below) 3-Year Average Nominal GDP 5% Era of Falling Inflation and 3% End of Controlled Re-leveraging Inflation and 1% Deleveraging 2026e High Case -0.6% -1% Base Case -1.5% -3% Low Case Post-GFC Median, -1.5% Dec-19 -2.6% Era of Rising -2.8% -5% Inflation and Readings around 2023 are Fed Policy Error artificially depressed by initial -7% post-2020 nominal GDP bounce 1981 1957 1975 1978 1987 1972 1963 1995 1998 1989 1969 1992 1954 1966 1984 1960 2013 2019 2016 2001 2010 2007 2024 2022 2004

e = KKR GMAA estimates. Data as at April 18, 2021. Source: Bureau of Economic Analysis, Federal Reserve, Haver Analytics.

KKR INSIGHTS 11 EXHIBIT 18 Fed Funds/Yield Curve Framework We also tried other approaches Given Rising Debt Loads and Surging Deficits, There Are to assess where longer-term rates might be headed. To this end, Now Greater Tail Risks in Our High and Low Cases for we looked at ten previous Fed hiking cycles to better understand how much Fed Funds typically increase and the resulting impact on U.S. Interest Rates the long end. One can see this in Exhibit 20, which shows that rate KKR GMAA U.S. 10-Year Treasury Forecast Scenarios, % cycles have historically taken the short rates up by an average of 387 basis points. Interestingly, long rates typically go up ‘only’ by about Base Low Growth High Growth 30-40% relative to what the short end does. Our work suggests that, 5.0% were this relationship to hold this cycle, long-rates would go up by 70-100 basis points (depending on whether you look at the average 4.0% 2026e or median) to around three percent or so, which is above both what 3.50% we and the forward curve are forecasting. We can take some comfort that three percent is not that far above our base case analysis, but 3.0% 2.50% we certainly will be watching this relationship more closely in the future to make sure that we are not being too optimistic with the 2.0% traditional model we described earlier.

1.0% 0.50%

0.0% 06 08 10 12 14 16 18 20 22 24 26 28 30 Long rates typically go up ‘only’

e = KKR GMAA estimates. Data as at April 17, 2021. Source: Bureau of by about 30-40% relative to what Economic Analysis, Bureau of Labor Statistics, Bloomberg, KKR Global Macro & Asset Allocation analysis. the short end does.

EXHIBIT 19 We See the U.S. 10-Year Yield Rising to 2.5% in Our Base Case

BASE CASE MEMO

INFLATION (GDP NOMINAL GDP: 10YR: SPREAD IMPLIED 10YR IMPLIED REAL REAL GDP DEFLATOR) NOMINAL GDP 3YR TRAILING VS. GDP TREND YIELD YIELD FED FUNDS

2016 1.7% 1.0% 2.8% 3.8% (1.3%) 2.44% 1.40% 0.625%

2017 2.3% 1.9% 4.3% 3.7% (1.3%) 2.41% 0.50% 1.330%

2018 3.0% 2.4% 5.5% 4.2% (1.5%) 2.68% 0.30% 2.400%

2019 2.2% 1.8% 4.0% 4.6% (2.7%) 1.92% 0.11% 1.550%

2020 -3.5% 1.2% -2.4% 2.4% (1.5%) 0.91% (0.25%) 0.090%

2021E 6.5% 2.8% 9.4% 3.7% (1.9%) 1.75% (1.00%) 0.125%

2022E 4.0% 2.3% 6.3% 4.5% (2.2%) 2.25% — 0.125%

2023E 3.0% 2.0% 5.1% 6.9% (4.4%) 2.50% 0.50% 0.625%

2024E 2.5% 2.0% 4.6% 5.3% (2.8%) 2.50% 0.50% 1.375%

2025E 2.0% 2.0% 4.0% 4.5% (2.0%) 2.50% 0.50% 2.125%

2026E 1.5% 2.0% 3.5% 4.0% (1.5%) 2.50% 0.50% 2.125%

2020-26 ‘20-26 AVER- 2.2% 2.0% 4.3% 4.5% 2.1% 0.1% 0.9% CAGR AGE

e = KKR GMAA estimates. Data as at April 17, 2021. Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg, KKR Global Macro & Asset Allocation analysis.

12 KKR INSIGHTS EXHIBIT 20 Our Fed Funds/Yield Curve Analysis Implies the 10-Year UST Yield Could Reach the Three Percent Range by 2025e, Which Is Higher Than Our Base Case. As Such, We Will Be Watching This Relationship More Closely

Analysis Using Strict Start and End Dates to Measure Change in 10-Year UST Yield Fed Hiking Cycles Fed Funds Rate (%) 10y US Treasury Yield (%)

Dates Duration (# years) Start Rate End Rate Total Chg (bps) Start Rate End Rate Total Chg (bps)

Feb’72 - Aug’73 1.5 3.3% 10.5% 721 6.0% 7.3% 121

Feb’74 - Jun’74 0.3 9.0% 11.9% 296 7.0% 7.6% 63

Nov’76 - Mar’80 3.3 5.0% 17.2% 1,224 7.0% 12.6% 563

Jul’80 - May’81 0.8 9.0% 18.5% 949 10.8% 13.5% 274

Apr’83 - Aug’84 1.3 8.8% 11.6% 284 10.3% 12.8% 250

Nov’86 - Feb’89 2.2 6.0% 9.4% 332 7.1% 9.3% 216

Jan’94 - Feb’95 1.1 3.1% 5.9% 287 5.6% 7.2% 156

May’99 - May’00 1.0 4.7% 6.3% 153 5.6% 6.3% 65

May’04 - Jun’06 2.1 1.0% 5.0% 399 4.6% 5.1% 49

Nov’16 - Dec’18 2.1 0.4% 2.3% 186 2.4% 2.7% 30

Average 1.3 387 125

Median 1.4 314 138

Next Tightening Cycle 2022e 2025e Chg 2022e 2025e Chg

Regression-Implied 0.125% 2.125% 200bps 2.25% 3.0% 78bps

Average-Implied 0.125% 2.125% 200bps 2.25% 2.9% 65bps

Median-Implied 0.125% 2.125% 200bps 2.25% 3.1% 88bps

Forward curve 2.05% 2.6% 53bps

Note: ‘strict’ start/end dates refer to dates that match up with month-end Fed hiking decisions. Data as at April 16, 2021. Source: Haver Analytics, Bloomberg.

EXHIBIT 21 Our Base Case Assumes the Fed Funds Rate Stays Pinned at 0.125% Thru 2022e Before Rising to 2.125% in 2025e So, where do we see interest GMAA Base Case: Fed Funds Rate Estimate rates going? In our Base Case,

2.5% we envision a continued robust 2.125% economic recovery underpinned 2.0% by fiscal stimulus, excess 1.5% 1.375% savings, housing, and a heated inventory cycle. Inflation runs 1.0% 0.625% above two percent in 2021-22 0.5% before slowing back towards the 0.090% 0.125% 0.125% 0.0% Fed’s two percent target. Longer- 2020a 2021e 2022e 2023e 2024e 2025e term inflation remains well- Data as at April 16, 2021. Source: Haver Analytics, Bloomberg. controlled.

KKR INSIGHTS 13 EXHIBIT 22 Point #1: U.S. Rates Look Attractive Relative to Their Global Peers: Over the Long Term, the 10-Year-Fed Funds Yield Curve On the technical side, we see the incredibly low global rates environ- Has Averaged About 115 Basis Points ment as a further constraint on U.S. rates. Consider for example that if today’s U.S. 10-year yield feels low on an absolute basis at 1.7%, Yield Curve: 10-Year UST Less Fed Funds Rate it actually offers a lot of relative value for a German investor, as an example, whose local market bonds yield negative -0.3%. The spread Long-Term Average (115bps) between U.S. and German rates is at 167 basis points and although 400 the spread may further widen this year, we don’t see it approaching the rarely reached 250 basis points threshold (Exhibit 25). 200 EXHIBIT 24 0 U.S. Real Rates Have Crashed Into Negative Territory, -200 Converging With European Levels

-400 Real 10-Year Yield Implied by Inﬂation Indexed Bonds, %

-600 U.S. Germany 1.5 -800 1.0 1971 1991 1981 2011 1976 1996 1986 2016 2021 2001 2006 0.5

Data as at April 16, 2021. Source: Haver Analytics, Bloomberg. 0.0

-0.5 As we have heard described by some investors, the bear case on -1.0 interest rates centers around the risk that supply could overwhelm demand amidst heavy deficits. All told, as Exhibit 23 shows, there is -1.5 $1.7 trillion of supply coming to market just this year on a net basis -2.0 (i.e., after buybacks). No doubt, this risk is real, and it is one on Oct-19 Oct-18 Apr-19 Feb-19

which we will be laser focused as a macro team. Jun-19 Jun-18 Dec-19 Dec-18 Aug-19 Aug-18 Oct-20 Apr-20 Feb-20 Jun-20 Dec-20 Aug-20

EXHIBIT 23 Data as at April 16, 2021. Source: Bloomberg. Almost Under Any Scenario, Net Issuance Is Poised to Increase in 2021 and Beyond EXHIBIT 25 Annual U.S. Treasury Supply, Net of Central Bank Purchases, US$ Millions Relative Rates Matter, and Our View Is That the German Bund Will Act as Somewhat of an Anchor on U.S. Rates 2021e 2000 1,747 U.S. - Germany 10-Year Rate Spread, %

1500 3.0 Apr-21 1000 2.5 1.84 Apr-89 May-99 500 2.0 2.16 1.51 1.5 Sep-05 +1 St. Dev 0 1.18 1.46 1.0 Average -500 0.5 0.58 -1000 0.0 -0.5 -1 St. Dev 2011

2017 -0.29 2013 2019 2015 2018 2016 2014 2012 2010 2007 2009 2008 2020 2021e -1.0 Data as at March 15, 2021. Source: Morgan Stanley Research estimates. -1.5 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 20 However, there are some important offsets to the supply-driven bear Data as at April 16, 2021. Source: Bloomberg. case that rates spiral out of control, or frankly, even the more modest upward pressure we are forecasting in our base case. We note the following points for investors to consider:

14 KKR INSIGHTS Point #2: The U.S. Dollar Is Not Collapsing, Which Keeps Inflation EXHIBIT 27 at Bay: According to our models, the U.S. dollar is currently only The U.S Dollar Index Shows That the Greenback Is Not about three percent overvalued, after falling from its approximate Collapsing, as Growth Prospects Have Outweighed Fatter 10% peak in mid-2020. We think that this is important for maintaining grounded inflation expectations at the long-end of the curve and Deficits believe that it suggests that the USD will not collapse the way it did U.S. Dollar Index during some prior inflationary cycles. The reality is that U.S. growth 96 is stronger than that in many other parts of the world, and the nominal yields on U.S. Treasuries are becoming competitive again. 95

EXHIBIT 26 94 After Weakening in Late 2020, the USD Has Begun to 93 Slowly Strengthen 92 Real Broad Trade-Weighted U.S. Dollar REER: 91 % Over (Under) Valued 90 40% Mar-85 89 30% 34.2% Feb-02 +2 σ 17.8% 88 20% Mar-21 +1 σ Apr-21 Feb-21 Feb-21 Jan-21 Jan-21 Jan-21 Mar-21 Mar-21 3.0% Oct-20 Oct-20 Nov-20 Nov-20 Sep-20 10% Dec-20 Dec-20 Avg Data as at April 14, 2021. Source: Bloomberg. 0%

-10% –1 σ Oct-78 Jun-95 -20% -12.1% -12.0% Jul-11 –2σ -15.9% -30% 70 75 80 85 90 95 00 05 10 15 20 Specifically, the Fed has Data as at March 31, 2021. Source: Haver Analytics, Bloomberg, KKR incorporated maximum Global Macro & Asset Allocation estimates. unemployment, which is now viewed as a ‘broad and Point #3: Average Inflation Targeting (AIT) Means the Short End of the Curve Will Not Be as Reactionary to Growth as In the Past: expansive’ goal, along with Recall that the Fed changed its policy last fall and now has a higher inflation above two percent bar for raising short rates. Specifically, it has incorporated maximum unemployment, which is now viewed as a ‘broad and expansive’ goal, (and the potential it stays along with inflation above two percent (and the potential it stays there for some time) as part of its mandate. To that end, the Fed there for some time) as part of wants not only to drive unemployment back down to 3.5%, but also its mandate. To that end, the to do so in a way that is inclusive by race, gender, and income. This approach gives them a lot of wiggle room to be able to tell the mar- Fed wants not only to drive kets that ‘we are not there yet’ in terms of tightening financial condi- unemployment back down to tions. So, our bottom line is that, while the yield curve can steepen, the chance of the Fed abruptly hiking the short end (as it did in 1994) 3.5%, but also to do so in a way is extremely remote only a year into its new strategy. that is inclusive by race, gender, and income. This approach gives them a lot of wiggle room to be able tell the markets that ‘we are not there yet’ in terms of tightening financial conditions.

KKR INSIGHTS 15 EXHIBIT 28 EXHIBIT 29 FOMC Projections Continue to Suggest Little Near Term The Good News Is That Foreign Entities, Including Change in Fed Funds. As Such, We Do Not See the China, Have Begun to Again Buy Treasuries Yield Curve Steepening Much Further in Our Base Case U.S. Treasuries Held in Custody for Foreign Oﬃcial and Scenario International Accounts, US$ Millions 3,200 Distribution of Fed Estimates for the Fed Funds Rate 3,150 3,118 High Fed Estimate 3,100 Low Fed Estimate 1.2 3,050 Weighted Avg of Fed Dots 1.125 3,000 1.0 U.S. Election 2,950 0.8 2,900

0.6 0.625 2,850 2,800 0.4 0.403 0.194 Jul-19 Jul-20 Mar-19 Jan-21 Nov-19 Sep-19 Mar-21 May-19 Jan-20 Mar-20 Nov-20 Sep-20 0.2 0.125 May-20 0.125 0.125 Data as at April 14, 2021. Source: St. Louis Fed. 0.0 2021 2022 2023 EXHIBIT 30 Data as at March 17, 2021. Source: Bloomberg. The Fed Has Recently Been Buying More Than Expected, Though… Point #4: China Is Beginning to Buy Treasuries Again, and the Fed May Be Doing More Than Some Folks Think: Foreign buyers, includ- 4-WEEK CHANGE IN FED’S ing China, have started to buy U.S. Treasuries again, which should SECURITIES PORTFOLIO, US$B help to dampen some of the supply glut we are forecasting. As one 2020 - JUL 125 can see in Exhibit 29, the start of Chinese buying coincided with the election of President Biden. We do not view this as only a response 2020 - AUG 79 to the U.S. election, but also China taking action to build foreign exchange reserves and slow appreciation of its currency. Meanwhile, 2020 - SEP 103 the Fed recently has been ‘overshooting’ its $40 billion per month 2020 - OCT 107 objective, although we acknowledge much of the increase was linked to the increase in rates. 2020 - NOV 67

2020 - DEC 107

2021 - JAN 77

2021 - FEB 137

2021 - MAR 142

Data as at March 31, 2021. Source: Federal Reserve, Deutsche Bank, Haver Analytics.

Foreign buyers, including China, have started to buy U.S. Treasur- ies again, which should help to dampen some of the supply glut we are forecasting.

16 KKR INSIGHTS EXHIBIT 31 Our bottom line: We think that rates have bottomed, but we do not …We Acknowledge That Some of This Is Tied to the see the rate market suffering a 1994-type unwind. For starters, Direction of Prepayments, Which Are Typically Linked to the sizeable spike in inflation that we are seeing is likely to prove transitory. Also, the Fed’s new Average Inflation Targeting regime Yields should keep the short end of the curve lower for longer. Implicit in MBS and Treasury Holdings, 3-Month Average of M/m our forecast and the Fed’s forecast is that the participation rate will Change, US$ Millions start to increase again in 2022, as unemployment benefits start to wane. Moreover, we note that the Treasury markets historically have U.S. Treasury Securities Held Outright overestimated the persistence of early-cycle inflation, as 10-year 600,000 MBS Held Outright yields and break-even inflation actually peaked in the early years of the last two recoveries. We also see technological change as inflation dampening at the same time that the money multiplier remains 400,000 stagnant. Besides downward pressure on inflation from technological change, we do not see the money multiplier accelerating the way 200,000 some have feared.

-200,000 Jul-19 Jul-20 Jan-21 Nov-19 Sep-19 Mar-21 Jan-20 Mar-20 Nov-20 Sep-20 May-20 Data as at March 31, 2021. Source: Federal Reserve, Deutsche Bank, We think that rates have Haver Analytics. bottomed, but we do not see

Point #5: Most Everyone Is Already Bearish On Rates: Fully 90% the rate market suffering a of investors in a recent Evercore/ISI survey said that U.S. 10-year 1994-type unwind. For starters, yields were headed higher, and attribute the move in yields to data and headline risks as well as the volume of investors short the 10- the sizeable spike in inflation year. If investing is about mean reversion, then clearly this percent- that we are seeing is likely to age should be lower than 90%. prove transitory. Also, the Fed’s EXHIBIT 32 new Average Inflation Targeting We’re Skeptical of Consensus Thinking regime should keep the short Do You Expect the Next 25 Basis Point Move in the U.S. 10-Year Treasury Yields to Be... end of the curve lower for February 26 April 9 100% longer. Implicit in our forecast 90% and the Fed’s forecast is that 80% 70% the participation rate will start 60% to increase again in 2022, as 50% unemployment benefits start 40% 30% to wane. Moreover, we note 20% that the Treasury markets 10% 0% historically have overestimated Higher Lower the persistence of early-cycle Data as at April 15, 2021. Source: Evercore/ISI. inflation, as 10-year yields and break-even inflation actually peaked in the early years of the last two recoveries.

KKR INSIGHTS 17 SECTION III EXHIBIT 33 We See Overall Lower Expected Future Returns Will Be Significantly Different From Past Returns, but We Do See Significant Returns, Particularly in the Liquid Markets Past and Expected Returns by Asset Class, % Opportunity, Including the Poten- CAGR Past 5 Years CAGR Next 5 Years tial to Own More Collateral-Based 17.3 Cash Flows 14.9 14.9 12.8 10.7 As one might expect in today’s highly fluid macroeconomic environ- 10.1 ment, we have been spending an increasing amount of time with 7.5 our clients discussing future expected returns. Interest in this topic 6.9 6.5 6.7 5.9 makes a lot of sense to us, given that margins and multiples are 5.3 5.9 3.5 high and interest rates low. Despite a tougher starting point, the 2.5 2.8 good news is that, as we describe in more detail below, there is still 1.3 2.1 0.9 significant opportunity to generate returns above most hurdle rates if one is willing to adopt our Another Voice framework, a tool kit that -0.3 relies much more heavily on embracing dislocation and collateral- US US Global S&P Private Russell Real EM Private Private based cash flows. We also think the impact of the illiquidity premium 10Yr Cash Agg 500 Credit 2000 Estate Equities Infra Equity to overall returns in today’s generally low rate environment has likely Tsy (unlev) increased in value – even with rates moving up off record lows in Cambridge historical data as at 3Q2020 (latest available), NCREIF recent months. Finally, given the recent rip upward in liquid mar- historical as at 4Q2020 (latest available). Data as at April 16, 2021. kets after the pandemic-induced liquidity surge, we have also spent Source: KKR Global Macro & Asset Allocation analysis. some extra time analyzing whether now is a good time or bad time to allocate more towards Private Markets. Looking at past performance as a guide, we believe there are quite compelling arguments to be made as to why we expect Private Equity to outperform Public Markets in the coming years. However, Private Equity is not alone, as we see significant opportunity across many alternative asset classes, particularly for capable managers, to meaningfully outperform liquid indexes. Despite a tougher starting point,

So how did we go about this exercise? Using our rate change in Sec- the good news is that there is tion II as a catalyst, we asked Frances Lim, who has been forecasting still significant opportunity to expected returns since the Barton Biggs/Byron Wien era at Morgan Stanley, to update her longer-term forecasting models. What follows generate returns above most is a discussion by asset class of the direction of expected returns hurdle rates if one is willing over the next five years. The totality of this work is shown in Exhibit 33, which illustrates that future returns will be quite different than to adopt our ‘Another Voice’ past returns. framework, a tool kit that U.S. Large Cap Equities: Return to Normalcy, Which Likely Means relies much more heavily on Lower Returns While we expect strong S&P 500 returns over the next 12 months, the longer term outlook is less certain as valuations embracing dislocation and are high and as interest rates rise, earnings multiples will shrink. At collateral-based cash flows. We 26.8x trailing earnings, the S&P 500 is 70% above its historic average of 15.8x. Given our out-year forecast for interest rates, we think also think the impact of the the trailing P/E could de-rate by about 29% to 19.0x in 2025e. This decline is driven by our expectations for higher interest rates, a lower illiquidity premium to overall dividend payout ratio that normalizes back to pre-pandemic levels, returns in today’s generally and lower EPS growth back to post-GFC levels, with slight offsets from higher nominal GDP growth and a lower equity risk premium. low rate environment has likely All told, our net adjustment represents an annualized hit of seven increased in value – even with percent just from multiple compression. The good news is that we expect a robust profit recovery from current levels of an annualized rates moving up off record lows 9.1% which results in a five year expected return of 3.5% including in recent months. dividends.

18 KKR INSIGHTS EXHIBIT 34 In terms of important details at the asset class level to consider, we Multiple Compression to Weigh on S&P 500 Equities… note the following:

S&P 500 Trailing P/E Russell 2000: Improving Outlook While a handful of equities (i.e., Base 2025 P/E 19.0 FAAMG) outperformed almost all indices last year, the Russell 2000 Bear 2025 P/E 17.0 actually outperformed the S&P 500 in aggregate in 2020 (20.0% 32 Bull: 2025 P/E 22.0 vs. 18.4%). Looking ahead, we think that small caps as measured by the Russell 2000 will retain their leadership position. In fact, we 28 see annualized book value growth of 6.9%, and a yearly cash yield of 1.5%, partially offset by -2.5% price-to-book multiple compression 24 Bull per year. These inputs result in an annualized total return of 5.9% over the next five years (well above our S&P 500 return during the Base 20 same period). Bear 16 Emerging Market Equities: Looking Attractive from a Strategic Avg since Perspective There are several positive macro factors to consider. 1960 ex-98- 12 00 = 15.8 First, the composition of the EM index is different today than in the past, which should help to boost returns, we believe. Just consider 8 that in 2010, the index was 29% Energy and Materials versus just 90 95 00 05 10 15 20 25 13% Technology. Today, by comparison, the index is only 13% Energy and Materials versus 20% Technology. Second, current valuations Data as at April 16, 2021. Source: KKR Global Macro & Asset Allocation analysis. are about 20% lower than the S&P 500, even though Technology should receive a higher multiple than cyclical commodity related sectors. Third, the emerging markets of today are much better at EXHIBIT 35 managing inflation, with much less volatility than the past, so the risk premium should likely be lower. Finally, pre-pandemic, emerging …But Profit Trajectory Is Strong markets return on equity was structurally bottoming. So, for EM, we have a strong expected earnings trajectory of an annualized 9.2%, S&P 500 LTM Earnings Per Share 2.5% income return and 0.5% annual currency appreciation versus 300 Base: Returns to trend in 2025 the U.S. dollar leading to an annualized expected five year return of Bear: 10% below trend in 2025 Bull 6.7%. However, we are watching closely the current COVID wave 250 Bull: 10% above trend in 2025 impacting Asia, Latin America, Africa and the Middle East, and as one Base might expect, the disease could impact the pace of recovery. 200 Bear EXHIBIT 36

150 Trend The Shift in Composition of the EM Index Warrants a Higher Multiple… 100 MSCI Emerging Market: % of Market Cap

50 Energy & Materials Info Tech

0 EM Equities are now less 00 02 04 06 08 10 12 14 16 18 20 22 24 29 commodity centric and earnings will be less cyclical

Data as at April 16, 2021. Source: S&P, Bloomberg, Factset, IBES, KKR 20 Global Macro & Asset Allocation analysis.

13 13

Looking ahead, we think that small caps as measured by the 2010 2020 Russell 2000 will retain their Data as at December 31, 2020. Source: MSCI, Factset. leadership position.

KKR INSIGHTS 19 EXHIBIT 37 roughly five percent, less capital expenditures (which is roughly 14% …And Will Also Enable Earnings to Breakout of Its of net operating income). The net economic cap rate of 4.3% is then Cyclical Past compounded at the expected growth rate of income. EXHIBIT 38 MSCI EM EPS Base 10% below trend in 2025 Infrastructure Valuations Are Likely at the Top of the 120 Bear 25% below trend in 2025 Bull: At trend in 2025 Range Bull 100 S&P Global Infrastructure: Price-to-Book Trend Base 2.6

80 Bear 2.4

Trend growth 2.2 60 1996 -2018 of Bull 4.9% 2.0 Base 40 1.8 Bear

1.6 20 1.4

0 1.2 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 1.0 07 09 11 13 15 17 19 21 23 25 Data as at April 16, 2020. Source: MSCI, Factset. Data as at April 16, 2021. Source: S&P, Bloomberg.

Private Equity: There Is Still Value in the Illiquidity Premium With robust Public Equity valuations, the Private Equity illiquidity premium EXHIBIT 39 could be even more attractive, as we head into a lower return world, The Infrastructure Illiquidity Premium Is Negatively we believe. Indeed, as we outlined in our 2018 Insights note Rethink- Correlated With Listed Infrastructure Performance ing Asset Allocation, the illiquidity premium is negatively correlated with the performance of the listed market. In other words and as we Infrastructure: 2005-2020, % discuss in greater detail below, Private Equity underperforms when 30 the market is on a tear, such as during 2003 and 2009, and more 2008 20 recently in 2017 and 2019. However, during periods of Listed Equi- ties underperformance, the average return for Private Equity is about 10 16%. The only exceptions to this strong double digit outperformance 2006 were the tech bubble collapse and 9/11 in 2001, and the Global Finan- 0 cial Crisis of 2009. The key reason for the outperformance is the focus on value creation through operational improvement as opposed -10 to depending on multiple expansion. PPT Premium, Illiquidity -20 R² = 0.8966 Private Credit: We Continue to See Opportunities Given the low -30 level of rates and the ongoing disintermediation of the traditional -60 -40 -20 0 20 40 60 banking system, we continue to view Private Credit as an attractive Listed Infrastructure Returns, % asset class. Within the Private Credit arena, we prefer moving up in size and maintaining a diverse portfolio. In terms of returns, we now Data as at April 16, 2021. Source: Cambridge Associates, S&P, look for 5.3% annualized returns, down from 6.9% previously. The Bloomberg. catalyst for this change is driven largely by our High Yield forecasts, as Private Credit returns are often closely linked to High Yield returns – albeit with an added illiquidity premium. So, driving the more Private Infrastructure: Some Exciting Developments Unfolding in subdued forecasts are the reality that spreads in High Yield have this Asset Class Unlike ‘traditional’ infrastructure of the past, which tightened sharply of late on the tailwinds of both outsized monetary was synonymous with roads, rail and toll roads, today’s infrastructure and fiscal support. supports growth sectors like 5G technology with high speed com- munication towers and data centers, electric vehicles and electrifica- Real Estate: Stay the Course In Real Estate, we anticipate an tion via new transmission lines and distribution centers, and clean unlevered expected return in private Real Estate of 6.5%, which energy initiatives like wind and solar infrastructure. As such, there are makes it amongst the most attractive performing asset classes – and certainly several ways to invest in infrastructure, but we are focused with some inflation protection. Our logic starts with the view that a on Private Infrastructure where returns are higher and the growth buy-and-hold type investment should probably earn its cap rate of is often faster. In terms of returns, we note that, within the listed

20 KKR INSIGHTS infrastructure markets, the observed book value per share growth has with our framework, also tends to foreshadow better returns for been an annualized 5.6%, with valuation at 2.2x book value, return on Private relative to Public Equities. One can see this in Exhibit 41. This equity (ROE) at a low of 2.3%, and dividend yield of 3.2%. Assuming relationship makes sense to us because buyout deals are generally a slight multiple compression to 2.0x, ROE normalizing to six percent tied to some sort of value-unlocking thesis, so it tracks that the asset and dividend yield rising to 3.8%, we have annualized listed infra- class tends to outperform best when markets are rewarding more structure expected returns of 3.1% over the next five years. Similar than just secular growth stories. to Private Equity and Private Credit, there is a negative relationship between the illiquidity premium and listed market returns. One can EXHIBIT 40 see this in Exhibit 39. This relationship is significant, as it implies Private Equity Tends to Show the Strongest Long-Term an illiquidity premium of 4.4% for the asset class, and as such, we Outperformance at Times When Public Markets Are Flat- forecast annualized private market infrastructure expected returns of to-Down… 7.5% over the next five years. Importantly, though, we expect there is the opportunity for sizeable differentiation in this asset class (i.e., the Average 3-Year Annualized Excess Total Return of spread between top quartile managers and bottom quartile managers U.S.PE Relative to S&P 500 in Various is quite high), and we would not be surprised to see top-tier manag- Public Market Return Regimes ers deliver almost Private Equity returns in certain instances.

Bonds: A Tougher Road Ahead As we discussed in Section II, the Where we think we are headed outlook for traditional bonds is challenged, which results in U.S. 10- 9.9% year returns of close to zero: 7.2% Where we • Global Bonds earn a spread above U.S. 10-year yields, which 5.7% have been leads to a return of 2.4% 3.5%

• High Yield has a slightly lower return of two percent as losses 0.1% are still impacting returns < -5% -5% to 5% 5% to 10% 10% to 15% > 15%

After updating our forecasted returns for all the various asset classes S&P 500 3-Year Annualized Total Return that we track, we then turned our attention to whether now is actually a good time – given the recent rip upward in liquid markets after Observation Period = 1Q86-3Q20. Source: Cambridge Associates, S&P, KKR Global Macro & Asset Allocation analysis. the pandemic-induced liquidity surge – to allocate more towards private markets. What we found is that private market asset classes actually tend to perform better as mid-to-late cycle asset classes, EXHIBIT 41 which helps to boost their overall performance statistics relative to liquid markets over the life of a fund. One can see this in Exhibit 40. …and When Value Is Keeping Up With or Outperforming In particular, when public markets returns are less than 15% per year Growth (which is clearly what we are forecasting), then Private Equity as an asset class almost always outperforms Public Equities. In fact, the Average 3-Year Annualized Excess Total Return of illiquidity premium actually moves above its 500 basis point historical U.S. PE Relative to S&P 500 in Various Growth vs. Value Regimes average to 6-10% when Public Equity market returns are less than 10%. Meanwhile, we also looked at whether investment climate or regime makes a difference in light of our Another Voice thesis calling Where we think we are headed for a shift in portfolio construction. What we found was encourag- ing. Specifically, a stronger backdrop for Value, which is consistent 9.8% Where we What we found is that private have been

market asset classes actually 3.1% tend to perform better as mid- 2.6% to-late cycle asset classes, which helps to boost their < -5% -5% to 5% > 5% Russell Growth vs. Value, overall performance statistics 3-Year Annualized Relative Performance Observation Period = 1Q86-3Q20. Source: Cambridge Associates, S&P, relative to liquid markets over KKR Global Macro & Asset Allocation analysis. the life of a fund.

KKR INSIGHTS 21 The level of interest rates also matters. Specifically, our work shows cant opportunity for portfolio managers who are willing to spend the that the illiquidity premium is also more valuable in today’s low rate time needed to create funds that give exposure to the most dynamic environment, as its contribution to the overall total return increases sectors in the global economy. Just consider that Indonesia, one of as expected returns decline. One can see this in Exhibit 42, which the fastest growth stories in South East Asia, has zero exposure to shows the absolute and relative importance of the illiquidity premium the Technology sector in its benchmark. In Europe, the Technology in Credit. However, it is not just Private Credit. Our work shows that sector is just eight percent of the public market index. Hence, the illiquid investments have performed better than liquid market invest- potential for portfolio managers in the Private Equity industry to ‘win’ ments in a low rate environment across a variety of asset classes for through sound portfolio construction, including by ensuring exposure several specific reasons. First, investments in the private markets are to companies that actually are linked to rising GDP-per-capita stories, not passive investments but are actively managed, especially as the is a major differentiator, we believe. importance of operational improvement has grown steadily over time. Second, illiquid markets by definition are not as efficient as they also EXHIBIT 43 provide an embedded option on when to buy and when to sell, which On a Global Basis, Buyout Dry Powder Amounts to Just is quite valuable relative to the traditional liquid markets. Third, there 80 Basis Points of Total Public Market Cap is often much better alignment between management, investors and shareholders as the ability to have a long-term view and execute on Buyout Dry Powder, % of World Market Cap that vision to create value, regardless of the short-term fluctuations Global Buyout Dry Powder ($Bn, Right Axis) in the markets, is a competitive advantage. Thus, it is not surprising 1.2% 950 in today’s environment that more and more companies in the U.S. 865 1.0% Tech sector are staying private. 1.0% 850 0.9% 0.9% 0.8% 0.8% EXHIBIT 42 0.8% 750 0.8% 0.7% 0.7% 0.7% 0.7%0.7% In Private Credit, We Expect Mid-to High Single Digit 650 0.6% Returns, Which Remains Nicely Above the Liquid Market, 550 High Yield in Particular 0.4% 450 Weighted Average Yield of Originated Senior Subordinated Term 0.2% 350

Debt 368 12-Month Average Yield of US Traded High Yield 0.0% 250

16% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

14% Source: Dry powder for 2010-19 per “RBC Private Equity Playbook,” dated April 1, 2020. 2020 per EY PE Pulse 4Q20. World market cap as 12% per Bloomberg. 10%

2% 0% Clients with whom we speak 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 do often share their concerns Data as at April 16, 2021. Source: Ares 10-K filings, KKR Global Macro & Asset Allocation analysis. – or frankly, fears – that the value of the illiquidity Clients with whom we speak do often share their concerns – or frankly, fears – that the value of the illiquidity premium is being com- premium is being compressed. pressed. In particular, they worry about this risk because of increas- In particular, they worry about ing flows into the asset class; however, industry data does not yet suggest this concern is one on which to be focused. In fact, buyout this risk because of increasing dry powder amounts to just 80 basis points of the total public market capitalization, which is actually right about in-line with the long-term flows into the asset class; average (Exhibit 43). Moreover, as Exhibits 44 and 45 illustrate, Global however, industry data does Private Equity has pretty consistently outperformed Public Equities over time. This outperformance makes sense to us, given that many not yet suggest this concern is global public equity markets often lack exposure to key growth verti- one on which to be focused. cals. This mismatch of exposure is a big deal, and it creates signifi-

22 KKR INSIGHTS EXHIBIT 44 EXHIBIT 46 Global PE Has Generally Outperformed Global Public Part of European Public Equities Lagging the U.S. of Equities Over Time… Late Can Be Attributed to a Structural Underweight to Technology Rolling 3-Year Annualized Excess Total Return: Global Private Equity Relative to MSCI ACWI Info Tech Contribution to MSCI Europe and MSCI USA Index Returns, 2012 to 2020, Local Currency 20%

15% Info Tech Weighting of Index +1 StDev Contribution of Info Tech to Index Return 10% 11.2% Avg. Sep-20 56.0% 5% 6.2% 6.6% -1 StDev 0% 1.2%

-5% 27.5% 20.4% -10% 8.0% -15%

1989 1991 1993 1996 1998 2000 2003 2005 2007 2010 2012 2014 2017 2019 MSCI Europe MSCI USA Observation Period = 1Q86-3Q20. Source: Cambridge Associates, MSCI, KKR Global Macro & Asset Allocation analysis. Data as at December 31, 2020. Source: MSCI, Factset.

EXHIBIT 45 EXHIBIT 47 …And Under a Variety of Public Market Performance A Similar Story Holds for Many Asian Indexes, Which Environments Tend to Be Heavily Weighted in Financials Relative to Technology Average 3-Year Annualized Excess Total Returnof Global PE Relative to MSCI ACWI, in Various Market Environments MSCI SECTOR WEIGHT, % INFO TECH FINANCIALS 12.0% CHINA 5 18 7.4% 6.1% SINGAPORE 2 47 4.7% 4.6% AUSTRALIA 1 33 HONG KONG 1 39 < -5% -5% to 5% 5% to 10% 10% to 15% > 15% MALAYSIA 0 27 MSCI ACWI 3-Year Annualized Total Return THAILAND 0 11 Observation Period = 1Q86-3Q20. Source: Cambridge Associates, MSCI, INDONESIA 0 44 KKR Global Macro & Asset Allocation analysis. PHILIPPINES 0 17

Data as at December 31, 2020. Source: MSCI, Factset.

To be sure, the ‘story’ To be sure, the ‘story’ surrounding private markets’ outperformance is not just about index composition. Rather, there is also a significant surrounding private markets’ argument to be made for investing with ‘best in class’ managers in the alternative space. Indeed, as one can see in Exhibit 48, the delta outperformance is not just about between the various quartiles is much more significant in the private index composition. Rather, there markets. In a world of lower expected returns, the ‘premium’ on the ability to garner top quartile returns has – as one might expect – is also a significant argument increased significantly. to be made for investing with ‘best in class’ managers in the alternative space.

KKR INSIGHTS 23 EXHIBIT 48 The Range of Outcomes Across Private Managers Vary a Lot More Than Within Liquid Markets

Performance: Net IRR: Inception to Date, % Vintage Years 2000-2015

25% Upper Middle Bottom Quartiles Median

20% 14 ppt between 15% top and bottom 10% quartile

-5% U.S. All U.S. U.S. Venture Growth Real Natural Distress Buyout Fixed Global Large Small Capital Equity Estate Resources Securities Income Equities Cap Cap Equities Equities

Traditional Asset Classes Alternative Asset Classes Data as at 3Q2017. Data for alternative investments based on the average since-inception-IRR for vintage years 2000-2015 from Cambridge Associates. Data for traditional asset classes based on average CAGR for time periods 2000-3Q17, 2001-3Q17, etc. through 2010-3Q16 from eVestment Alliance database to match the alternative asset class time frame. Source: Cambridge Associates, eVestment.

Our bottom line: We are likely entering a new, more challenging for active management in both liquid and illiquid markets. Dispersions period for expected returns. Equity multiples are high and credit are wide within most asset classes, and index composition is poorly spreads are tight at a time when input costs could degrade margins skewed towards last decade’s winners, many of whom we believe more than some investors now think. Against the macroeconomic will be laggards this cycle if our thesis remains on track. backdrop we envision, we think that all asset allocators will need to do more to embrace volatility as well as to leverage the value of the EXHIBIT 49 illiquidity premium across various alternative investments. Govern- The Largest U.S. Stocks Hold a Record Concentration of ment bonds may still play a role in portfolios, but we believe that Market Capitalization. Our Another Voice Thesis Argues their effectiveness as both yield enhancers and diversifiers are now This Concentration Is Sustainable somewhat compromised, given such a low starting rate and aggres- sive monetary/fiscal policy. Market Cap of Five Largest Companies as a Share of S&P 500 Total Beyond the need to shift asset allocation across portfolios, we also 26 % think that there is a significant opportunity to shift stances within 25% 24 % portfolios. Specifically, we think we are entering a compelling period 22 % 21% 20 % 18% 18 %

16 % We are likely entering a new, Average = more challenging period for 14 % 14% expected returns. Equity 12 % multiples are high and credit 10 % spreads are tight at a time 1980 1985 1990 1995 2000 2005 2010 2015 2020 when input costs could degrade Data as at April 18, 2021. Source: Goldman Sachs. margins more than some investors now think.

24 KKR INSIGHTS SECTION IV At the moment, real rates are negative 78 basis points, which often Conclusion coincides with a positive outlook for financial assets at this point in the cycle. However, as we described above, the current level of real rates is actually not that negative relative to history. More- Pride makes us artificial; humility makes us real. Thomas Merton over, though policy is certainly accommodative, it does not ensure that runaway inflation must occur, we believe. In our view, a major As we have detailed in this piece, a strong global recovery is unfold- increase in the money multiplier or a dramatic fall in the U.S. dollar ing. It will, however, remain uneven and possibly uncomfortable at will be required to elevate rates in a disorderly way. Said differently, times, particularly given the socioeconomic inequalities that have stronger economic growth – in isolation – will not be enough to roil become even more pronounced since the onset of COVID-19. Against the bond market. this backdrop, now is a time for all, particularly those in the investment management industry, to remember that they are also in the While the current macroeconomic backdrop is complex, and in community service business. Humility, focus, and empathy – along spite of the many cross currents, we remain highly confident in our with a thoughtful understanding and application of science – are Another Voice thesis, a differentiated approach that represents a shift what is needed to make the next chapter a better one. away from the secular growth bull market that dominated the prior decade. To be sure, we are not advocating that portfolio managers Against this backdrop, we remain optimistic that continued strong re- own only cyclical exposure; but we do think that the combination of turns in the global capital markets can help. To this end, we forecast looser monetary and fiscal policy, faster nominal GDP growth, and that surging earnings growth should more than offset any increase in accommodative financial conditions argues that there is opportu- interest rates that may occur. However, despite favorable near-term nity in pursuing themes beyond just digitalization and e-commerce. conditions, we have likely ‘pulled forward’ returns, which is consis- Chunkier allocations to our key themes, including nesting, resiliency, tent with Frances Lim’s more muted longer-term forecast. The good and savings all make sense to us. And as part of our diversification news is that three factors – a sturdy illiquidity premium, wide disper- effort, we would also continue to increase exposure to Infrastructure, sions, and heightened volatility – should give macro professionals Asset-Based Finance, Real Estate Credit, and value-added Private and asset allocators the ability to earn returns sufficient to meet their Equity (e.g., corporate carve-outs). Equities too make sense, as our stated obligations. We also think that certain asset classes, particu- bottom line continues to be that we must create portfolios that will larly collateral-based cash flows, could see a favorable re-rating if we thrive as politicians and central bankers test the limits of reflation. are right about faster nominal GDP growth and higher input costs.

EXHIBIT 50 Key Indicators Continue to Support Our View That We Are Largely Early Cycle

U.S. Business Cycle Indicators (Historical Percentile) Current (3m avg) Dec-19 50th Percentile ate-Cycle 100th percentile 85% 3.5% 0.1 110 -112bp 2.7% 18bp 100% 3.6%

97 22bp 75% 359bp 2.2% 0.7 392bp 50% 6.2%

Percentile 127bp 77% 80 25% 1.7% 75% 1.6 0% arly-Cycle 66% 13.0 % 2.6 5 279bp 0.5% 1809bp 0 ercentile Economy Labor Market Equity (Earnings Consumer Rates (2s10s Yield Inﬂation (10y Credit (Capacity Util) (U-3) Revision Ratio) (Confidence) Curve) Breakevens) (HY spreads) Data as at March 31, 2021. Source: Bloomberg, Haver Analytics.

KKR INSIGHTS 25 EXHIBIT 51 To be sure, we are not When CPI Increases in a Low Real Rate Environment, the advocating that portfolio Message Is to Overweight Collateral/Assets With Cash Flows, Not Government Bonds managers own only cyclical exposure; but we do think PERFORMANCE IN DIFFERENT REAL YIELD ENVIRONMENTS that the combination of REAL TOTAL RETURNS looser monetary and fiscal REAL YIELD ΔCPI Y/Y +3 S&P +3 UST +3 policy, faster nominal GDP <-1% 1.8% 10.4% -2.2% growth, and accommodative -1 - 0% 1.0% 11.9% -0.5% financial conditions argues 0 - 2% -0.1% 8.0% 1.1% that there is opportunity in 2 - 4% 1.2% 7.8% 2.4% pursuing themes beyond just >4% 2.2% 8.7% 7.3% digitalization and e-commerce. Data as at March 31, 2021. Source: Bloomberg, Haver Analytics. Chunkier allocations to our key themes, including nesting, resiliency, and savings all make sense to us.

26 KKR INSIGHTS Important Information

References to “we”, “us,” and “our” refer to Mr. McVey ment is not intended to, and does not, relate specifically as of the date indicated. There is no assurance that such and/or KKR’s Global Macro and Asset Allocation team, as to any investment strategy or product that KKR offers. It events or targets will be achieved, and may be signifi- context requires, and not of KKR. The views expressed is being provided merely to provide a framework to as- cantly different from that shown here. The information in reflect the current views of Mr. McVey as of the date sist in the implementation of an investor’s own analysis this document, including statements concerning financial hereof and neither Mr. McVey nor KKR undertakes and an investor’s own views on the topic discussed market trends, is based on current market conditions, to advise you of any changes in the views expressed herein. which will fluctuate and may be superseded by subse- herein. Opinions or statements regarding financial quent market events or for other reasons. Performance market trends are based on current market conditions This publication has been prepared solely for informa- of all cited indices is calculated on a total return basis and are subject to change without notice. References to tional purposes. The information contained herein is with dividends reinvested. The indices do not include a target portfolio and allocations of such a portfolio refer only as current as of the date indicated, and may be any expenses, fees or charges and are unmanaged and to a hypothetical allocation of assets and not an actual superseded by subsequent market events or for other should not be considered investments. portfolio. The views expressed herein and discussion of reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this docu- The investment strategy and themes discussed herein any target portfolio or allocations may not be reflected ment has been developed internally and/or obtained may be unsuitable for investors depending on their spe- in the strategies and products that KKR offers or invests, from sources believed to be reliable; however, neither cific investment objectives and financial situation. Please including strategies and products to which Mr. McVey KKR nor Mr. McVey guarantees the accuracy, adequacy note that changes in the rate of exchange of a currency provides investment advice to or on behalf of KKR. It or completeness of such information. Nothing contained may affect the value, price or income of an investment should not be assumed that Mr. McVey has made or will herein constitutes investment, legal, tax or other advice adversely. make investment recommendations in the future that are nor is it to be relied on in making an investment or other consistent with the views expressed herein, or use any decision. Neither KKR nor Mr. McVey assumes any duty to, nor or all of the techniques or methods of analysis described undertakes to update forward looking statements. No herein in managing client or proprietary accounts. Fur- There can be no assurance that an investment strategy representation or warranty, express or implied, is made ther, Mr. McVey may make investment recommendations will be successful. Historic market trends are not reliable or given by or on behalf of KKR, Mr. McVey or any other and KKR and its affiliates may have positions (long or indicators of actual future market behavior or future per- person as to the accuracy and completeness or fairness short) or engage in securities transactions that are not formance of any particular investment which may differ of the information contained in this publication and consistent with the information and views expressed in materially, and should not be relied upon as such. Target no responsibility or liability is accepted for any such this document. allocations contained herein are subject to change. information. By accepting this document, the recipient There is no assurance that the target allocations will acknowledges its understanding and acceptance of the The views expressed in this publication are the personal be achieved, and actual allocations may be significantly foregoing statement. views of Henry H. McVey of Kohlberg Kravis Roberts & different than that shown here. This publication should Co. L.P. (together with its affiliates, “KKR”) and do not not be viewed as a current or past recommendation or a The MSCI sourced information in this document is the necessarily reflect the views of KKR itself or any invest- solicitation of an offer to buy or sell any securities or to exclusive property of MSCI Inc. (MSCI). MSCI makes no ment professional at KKR. This document is not research adopt any investment strategy. express or implied warranties or representations and and should not be treated as research. This document shall have no liability whatsoever with respect to any does not represent valuation judgments with respect to The information in this publication may contain projec- MSCI data contained herein. The MSCI data may not be any financial instrument, issuer, security or sector that tions or other forward-looking statements regarding further redistributed or used as a basis for other indices may be described or referenced herein and does not future events, targets, forecasts or expectations regard- or any securities or financial products. This report is not represent a formal or official view of KKR. This docu- ing the strategies described herein, and is only current approved, reviewed or produced by MSCI.

KKR INSIGHTS 27 www.kkr.com