KKR expects about $2 billion of profit when Aon completes its $17 billion purchase of USI, most of it earned on the firm's own capital. On the same day Blackstone said it would not replace its departing private equity chief. The classic buyout fund is no longer where the listed giants make their best money.
The quarter's biggest private equity exit and the most notable management change at the largest alternative asset manager point in the same direction. Buyout funds raised from pension plans were once the core of these firms. At the listed giants they are turning into one business line among several, and the best returns are going more and more to the managers' own shareholders.
KKR said on Friday it expects about $3.3 billion of after-tax proceeds from selling USI Insurance Services to Aon, adding roughly $2 billion, or more than $2 a share, to adjusted net income. The $17 billion all-cash deal, announced on August 31, is due to close in the fourth quarter, subject to regulatory approval. KKR and Canada's CDPQ bought USI in 2017 for $4.3 billion. According to Reuters, USI roughly tripled its revenue under KKR, to about $3 billion.
KKR's own deal presentation shows where the money goes. It calls USI its "inaugural Core Private Equity investment" and a significant realisation for Strategic Holdings, the unit through which KKR owns businesses directly with its own capital. KKR put more money in during 2020, 2023 and 2025. It reports a return of about six times on the original 2017 stake and 3.4 times on all the balance-sheet capital invested over the holding period. USI fit that model. KKR says most of USI's revenue is recurring and renews at about 90%, that it made more than 90 acquisitions, and that revenue grew at a 12% compound annual rate from 2017, with adjusted EBITDA growing at 13%. Steady compounding like that is exactly what a permanent owner wants, and a fund with a ten-year life struggles to hold. That explains why a single sale can add $2 billion to KKR's earnings. In a conventional fund KKR would collect a share of the carried interest, and most of the profit would go to its investors. Here it owns the gain itself.
The price is another detail worth noting. KKR says the sale price is about 33% above USI's unaffected valuation at June 30. So a mark on a steady, cash-generative insurance broker was a third below what a strategic buyer would pay three months later. That is the reverse of the complaint usually made about private assets, and it cuts in KKR's favour: conservative marks on assets it plans to hold for a long time make its Strategic Holdings look cheap in its share price. KKR aims to lift Strategic Holdings operating earnings from more than $350 million this year to more than $1.1 billion by 2030. USI shows it can also produce large capital gains.
Aon took on the risk. It is paying for USI with new debt, has halted share buybacks and is heading for leverage of almost five times earnings, according to analysts, and S&P Global has moved its outlook to negative. Its shares fell 6% on the day the deal was announced. Earlier consolidation in brokerage, including Gallagher's $13.5 billion purchase of AssuredPartners and Brown & Brown's roughly $10 billion deal for Accession, shows that strategic buyers will still pay up for recurring commission income. In this deal the seller captured most of that premium.
Blackstone's announcement points the same way. Joe Baratta, who has worked at the firm for 28 years and ran its private equity business from 2012, will leave by the end of the year. Bloomberg reported that an internal memo from Steve Schwarzman and Jon Gray said the firm does not intend to replace his role. The Wall Street Journal said Baratta became interested in public service and began talking about leaving six months ago. He sits on Blackstone's board alongside Schwarzman and Gray, and the FT reported that he took home $81.6 million last year, including dividends on his shares.
Leaving the post empty is the telling part. Private equity at Blackstone now covers about $450 billion, spread across flagship buyouts, secondaries, infrastructure and tactical opportunities, each with its own leader. The flagship buyout fund no longer carries the franchise. Bloomberg reported that Blackstone's four most recent flagship funds to finish investing all had net internal rates of return of 12% or less at the end of June, and that the latest raised $21 billion against hopes of $30 billion. For an asset class sold on outsized gains, that is ordinary. Blackstone's growth is coming from wealth products, insurance and infrastructure. It no longer needs, or pays for, one person at the top of buyouts.
Balance-sheet investing is not new. The listed firms have run it for years, Blackstone's private equity assets grew 17% in the second quarter, and KKR's second quarter was the biggest for realisations in its history. All of that is true, but the direction matters more than any single quarter. KKR first invested in USI in 2017 alongside co-investors, then kept adding its own capital as the business compounded. If the firm's best long-term holdings increasingly sit on its own balance sheet, limited partners should ask how deals are divided between KKR's funds and KKR itself. Those allocation policies deserve more attention from investors than any fee negotiation.
Managers' shareholders are the clearest winners. KKR stock gives investors access to a portfolio of permanent holdings valued conservatively, and USI has shown what those holdings can realise. Blackstone shareholders get a leaner cost base in a business line that has become a mature franchise.
We expect USI to close before year-end and KKR's fourth-quarter results in early February to show a gain of more than $2 a share. Strategic Holdings will then be the unit investors watch most closely. Blackstone will keep its private equity verticals under separate heads, and the next flagship buyout fund will be marketed as one product among many.