You're going to hear a lot today about our strategy at KFN. You're going to hear a lot today about our strategy at KFN, you are going to hear about the results and the businesses that we're in, but before you do let me just gave you a couple of reasons why I think that KFN is so important to KKR. First without a doubt, KFN is the public face to KKR and so many of the strategies across our firm, particularly everything that we do is touched on and plays an important role at KFN.It's a flagship of our capabilities and bank loans high yield, mezzanine special situations, natural resources and commercial real estate and you're going to hear from all the people that are part of KFN and part of KKR that cover these areas you'll hear about those today. And the one thing I also want you not to forget. If you have any doubts about how important it is to George Roberts and to myself and KFN, our name is on the door. And we put our name on the KFN door just as we have it on the KKR door for a reason and that's because we believe in it and we believe that this has an incredible future and a real opportunity to grow and to take advantage of the number of the dislocations in markets. And as we stress to all employees at KKR, which they are a little lower 900 employees today that we believe that people do business with people that they like and that they trust. Well, there is nothing really any different as far as what working the way we think for KFN. We want you to trust us and the way you are going to trust us is that we're going to give you the best results. And we're going always be straight forward with you, we will tell the good, we will tell with the bad. But we are going to give you the straight results.
And that means that earning that trust means delivering to all of you at investors at KFN. And another reason that KFN is so important to all of us is we believe that we have created something pretty unique at KFN and the world of specialty finance companies. We are not a franchise business, but rather we are people, the people at KFN who manage these different businesses are also very much the same people, the same investment people at KKR.We are one and we worked very well together. So we have complete attention at KFN of all the people at KKR. Now the one thing you also have to understand any of you that have come to the KKR Investor Day have to understand one of things we like to talk about a lot is the one firm concept. And that one firm concept is very important and that means that the people that KFN get all of the ideas that we have across a broader ray of products across KKR, not just in the US, not just in Europe, not just in Asia but globally and people help each other, work together and so you are getting that opportunity. We have over 400 investment professionals around the world and you will be surprised how many ideas actually percolate up from some other part of KKR. It could be an idea that's coming out of Asia that has nothing to do with KFN directly, but they find an idea and the way our compensation system works overall, they are incentivized to bring those ideas to KFN or to anybody else for that matter, but the focus is on how can they help KFN. We don't believe that there is any other $1.6 billion mid caps specialty finance company with a sourcing engine like we have and it's because of this one firm, it is because of the way we operate in working together. We are focused today at KFN, you are going to hear a lot about this. If on areas of really capital imbalances, supply demand imbalances that take place and that's where we think you find the most important and the most interesting ideas.
You don't just necessarily follow a macro trend, but fine is there is an imbalance, is there a dislocation in a capital market that we can take advantage of by doing the kind of in depth work that the people at KFN do and over and over again we find numerous opportunities in the whole area of capital imbalances.The good thing about it also as the world is becoming more and more global, we almost don't care where those ideas come from. If it is a good idea, get on a plane, we are going to go find it and work on it and we have people that can certainly help. So in short, all of us at KKR all of us at KFN are focused on one thing. And that is to get you the best returns that we possibly can by deploying capital where we have the highest conviction that those are the areas for good returns that you are going to hear today for example us talk about our commercial real estate opportunities, you are going to hear us talk about our commercial real estate opportunities. You're going to hear us talk about our natural resources, our special situations, our high yield and our other areas and these are areas that we are very high on at KFN and also very high on at KKR. So, I am going to turn it over to my partner, Bill Sonneborn, but before I do, let me just tell you how proud that George Roberts and I are of this team. The team is an incredible team and headed by Bill Sonneborn, Mike McFerran, you're going to hear from today, Fred Goltz, you will also hear from today and people that are on the trading desk. We have created an incredible team of people that have developed awfully good record and we're going to continue focusing on that. We're going to continue doing everything we can to make sure that record stays intact. So with that, let me turn it over to my partner, Bill Sonneborn.
Before we start to think about KFN and where it is today and where it's going, it helps to understand its past. And I was thinking you know flying over from Europe to New York yesterday, a little bit about where KFN has been and I remember 4.5 years ago when I was in a meeting when Henry Kravis's office here in New York, I saw a sign he had in his office. It said arrogance kills.I remembered that sign then I flew back to the West Coast after that meeting and I was greeted at the door of my house with my wife, she said you have to talk to your son, he did that thing again. I can't remember what that thing was but it probably involved beating up his little sister. So I went upstairs and sat on the bed of my son and I asked him what had happened and he said, well daddy because I know you and mommy say don't make the same mistake twice, but I have a big problem, I forget that I make the mistake, can you help me think of a process so I can record and remember when I make mistakes. So I don't do them again. And so the story of Henry Kravis and the sign in his office and a lesson my son taught me, all really implies a little bit in the context to the history of KFN. We started out in 2004 as a mortgage, it was a corporate structure that allowed us to focus on building our leverage credit capabilities and bank loans and high yield using [CLOs] as financing source, but the problem was that a lot of our assets were in the residential mortgages which we did not have a concrete expertise at the firm, it's lesson number one.
In 2007 with the beginning of the financial crisis, we are smart in the context to [de-reading], we sold majority of those [real] assets and converted to a publicly traded partnership, and then exclusively focused on things that we could know and understand related to corporate credit.That time we had to a lot of work on the right hand side of the balance sheet because we had a lot of market value leverage, total rates, returns, swap, market value, CLO structures and so we were trying to deal with that mismatch aspect of mismatch duration between assets and liabilities, that was cleaned up in 2009 and from 2010 onward it's a new strategy. Liabilities they are always in excess of length of the underlying assets in which we purchase. It's thinking about where the greatest supply demand and balances are globally and it's thinking about how we maximize individual investment returns using the KKR network to drive value creation, and it's thinking about what we are today which is the same thing we were three years ago. We are and will be a specialty finance company but we are focused not just on income like a lot of specialty finance companies that you may all follow, not just yield, we want growth. We want that yield to grow, we want our earnings to grow, our cash earnings to grow, our book value to grow and we are targeting returns of 1000 basis points in excess of the 10 year treasury on a consist basis similar to what we have been able to achieve in the past several years. And we don't want to be fixed in how we think about capital deployment. We want to be opportunistic and tactical. Right now we have focus on two core investment themes, financial assets in a broad sense and real assets.
Financial assets which is really the core of what we have done and we'll continue to do in bank loans, high yield and mezzanine and global distressed leveraging our credit teams in New York, San Francisco and Europe and real assets which is concrete points in natural resources in the energy space and commercial real estate probably we can add value and we combine that all together and leveraging the firms' intellect and in this one firm brain that Henry mentioned, we can create even further value for investors.I am going to talk a little bit these two core investment themes because they are not truly something that investors and finance companies typically see. Including the left hand side of the slide you see in front of you is relatively typical focus on lending high yield bonds, term finance in the context of the structure so that we don't have market-to-market leverage, moving down to more direct originated credit like your mezzanine in U.S. or Europe, which we can capture in a liquidity risk premium above and beyond what regular credit markets provide. And there are times tactically, when you want to move up in to the capital structures of businesses and hold that senior secured loan and finance it with low cost term liabilities and there are times when that liquidity risk premium is very, very high and you can get equal expected returns as you can in senior secured credit levered in a CLO. And we want to take advantage of those opportunities and then generally, virtually somewhere in the world there's some sort of stress and our global special situations capability has been built to find those places of distress, leveraging the same diligent framework of the firm and pursue those opportunities. On the right hand side of page is, some of the new things that we thought about. We thought about how financial assets and real assets play together to create negative correlation in terms of outcomes, improve effectively the risk of the overall business and help drive consistent cash flow in returns. And natural resources we referred to mid and upstream oil and natural gas assets predominantly. We're targeting similar mid-teens returns and a similar profile opportunistically focused on real estate entry points either through debt or equity predominantly in North America and Europe.
What you see on that previous slide is a large allocation to private equity. We've done some, we'll continue to do some, but it'll always be a small part of our capital allocation. We like the option value and the capabilities, of our private equity team but we're really focused on those key themes of predictable cash flow production and total return.I talked about not being static and thinking about how we allocate capital. We want to pit it opportunistically. There's times when energy is really attractive relative to credit and there's timed when commercial real estate is really attractive relative to mezzanine. And we think constantly about where is the best place to be in the context of generating those risks adjusted returns and really in the process of the exploiting supply demand imbalances. Credit markets in different aspects get unbalanced that we pursue opportunities similarly different parts of the commodities chain in the context to natural resources appear to be more interesting at different points in the cycle. If you look at the right hand side of the slide this is a very simplistic depiction. Just shows some macro variables and when some of these assets classes likely would come in or out of favor this does not reflect actual market dependencies, which means that market prices can not necessary reflect what the market Marco environment is. And really what the market's telling you is more important than what the macro environment is from perspective you can see like in a healthy economy we'd rather be very senior secured in the context of credit using CLOs, likely credit spreads on the liability side or very tight, we want to lock in on that options. Similarly in a difficult to troubled economy, real estate likely becomes even a more attractive assets class there's global distressed opportunities to rescue finance through restructurings and likely capital markets will be disrupted and more frequent periods that creates opportunities to just intermediate the high yield market with private mezzanine solutions.
But above and beyond all the three key things to take from how we think about allocating capital regardless of the economic environment is what we target. We want market agnostic consistent cash yield. We're driving cash earnings today of roughly 12% return on capital, total return on equity of 16% this past quarter, but we want to do that by reducing the cyclicality that normally affects financial services firms.We want o cut the mountain tops off and fill in the valleys so the predictability not only of our cash on cash returns but also our total rate of return goes up. But we would also don't just want to be a (inaudible) yield vehicles I mentioned before, we want opportunities for capital appreciation, substantial opportunities for capital appreciation, many of which we don't pay for through options. Want to talk about the business of KFN and collecting embedded miss-priced or free options. For example in our CLO strategy, where we lock in low-cost liabilities in periods of tight credit spreads. That allows today to participate any increase we have a free option in participating and having cash earnings and distribution growth if any increase in short-term rates LIBOR goes up by 100, we're going to start participating in any incremental increases in short-term rates. We also want to be protected in terms of our cash flow by rising long-term rates because we're targeting returns above a 10 year treasury real assets with a much a longer duration in the context of thinking about where they fit on the interest rate curve in terms of sensitivity help protect some of our cash flows on that longer end of the curve. Read the rest of this transcript for free on seekingalpha.com