Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

Form 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2013

 

Or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the Transition period from              to              .

 

Commission File Number 001-34820

 

KKR & CO. L.P.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

26-0426107

(State or other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

9 West 57 th Street, Suite 4200

New York, New York 10019

Telephone: (212) 750-8300

(Address, zip code, and telephone number, including

area code, of registrant’s principal executive office.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of August 5, 2013, there were 277,834,343 Common Units of the registrant outstanding.

 

 

 


 


Table of Contents

 

KKR & CO. L.P.

 

FORM 10-Q

 

For the Quarter Ended June 30, 2013

 

INDEX

 

 

 

Page No.

 

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

57

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

116

 

 

 

Item 4.

Controls and Procedures

116

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

117

 

 

 

Item 1A.

Risk Factors

117

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

117

 

 

 

Item 3.

Defaults Upon Senior Securities

117

 

 

 

Item 4.

Mine Safety Disclosures

117

 

 

 

Item 5.

Other Information

117

 

 

 

Item 6.

Exhibits

117

 

 

 

SIGNATURES

 

118

 



Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “should,” “seek,” “approximately,” “predict,” “intend,” “will,” “plan,” “estimate,” “anticipate,” the negative version of these words, other comparable words or other statements that do not relate strictly to historical or factual matters. Forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include those described under the section entitled “Risk Factors” in this report. These factors should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 


 

In this report, references to “KKR,” “we,” “us,” “our” and “our partnership” refer to KKR & Co. L.P. and its consolidated subsidiaries. Prior to KKR & Co. L.P. becoming listed on the New York Stock Exchange (“NYSE”) on July 15, 2010, KKR Group Holdings L.P. consolidated the financial results of KKR Management Holdings L.P. and KKR Fund Holdings L.P. (together, the “KKR Group Partnerships”) and their consolidated subsidiaries.

 

References to “our Managing Partner” are to KKR Management LLC, which acts as our general partner and unless otherwise indicated, references to equity interests in KKR’s business, or to percentage interests in KKR’s business, reflect the aggregate equity of the KKR Group Partnerships and are net of amounts that have been allocated to our principals in respect of the carried interest from KKR’s business as part of our “carry pool” and certain minority interests. References to our “principals” are to our senior employees and non-employee operating consultants who hold interests in KKR’s business through KKR Holdings L.P., which we refer to as “KKR Holdings,” and references to our “senior principals” are to principals who also hold interests in our Managing Partner entitling them to vote for the election of its directors.

 

Prior to October 1, 2009, KKR’s business was conducted through multiple entities for which there was no single holding entity, but were under common control of senior KKR principals, and in which senior principals and KKR’s other principals and individuals held ownership interests (collectively, the “Predecessor Owners”). On October 1, 2009, we completed the acquisition of all of the assets and liabilities of KKR & Co. (Guernsey) L.P. (f/k/a KKR Private Equity Investors, L.P. or “KPE”) and, in connection with such acquisition, completed a series of transactions pursuant to which the business of KKR was reorganized into a holding company structure. The reorganization involved a contribution of certain equity interests in KKR’s business that were held by KKR’s Predecessor Owners to the KKR Group Partnerships in exchange for equity interests in the KKR Group Partnerships held through KKR Holdings. We refer to the acquisition of the assets and liabilities of KPE and to our subsequent reorganization into a holding company structure as the “KPE Transaction.”

 

In this report, the term “assets under management,” or “AUM”, represents the assets from which KKR is entitled to receive fees or a carried interest and general partner capital. We believe this measure is useful to unitholders as it provides additional insight into KKR’s capital raising activities and the overall activity in its investment funds and vehicles. KKR calculates the amount of AUM as of any date as the sum of: (i) the fair value of the investments of KKR’s investment funds plus uncalled capital commitments from these funds; (ii) the fair value of investments in KKR’s co-investment vehicles; (iii) the net asset value of certain of KKR’s fixed income products; (iv) the value of outstanding structured finance vehicles and (v) the fair value of other assets managed by KKR. KKR’s definition of AUM is not based on the definitions of AUM that may be set forth in agreements governing the investment funds, vehicles or accounts that it manages and is not calculated pursuant to any regulatory definitions.

 

In this report, the term “fee paying assets under management,” or “FPAUM”, represents only those assets under management from which KKR receives fees. We believe this measure is useful to unitholders as it provides additional insight into the capital base upon which KKR earns management fees. This relates to KKR’s capital raising activities and the overall activity in its investment funds and vehicles, for only those funds and vehicles where KKR receives fees (i.e., excluding vehicles that receive only carried interest or general partner capital). FPAUM is the sum of all of the individual fee bases that are used to calculate KKR’s fees and differs from AUM in the following respects: (i) assets from which KKR does not receive a fee are excluded (i.e., assets with respect to which it receives only carried interest); and (ii) certain assets, primarily in its private equity funds, are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments.

 

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Table of Contents

 

In this report, the term “fee related earnings,” or “FRE”, is comprised of segment operating revenues less segment operating expenses (other than certain compensation and general and administrative expenses incurred in the generation of net realized principal investment income). This measure is used by management as an alternative measurement of the operating earnings of KKR and its business segments before investment income. We believe this measure is useful to unitholders as it provides additional insight into the operating profitability of our fee generating management companies and capital markets businesses. The components of FRE on a segment basis differ from the equivalent GAAP amounts on a consolidated basis as a result of: (i) the inclusion of management fees earned from consolidated funds that were eliminated in consolidation; (ii) the exclusion of fees and expenses of certain consolidated entities; (iii) the exclusion of charges relating to the amortization of intangible assets; (iv) the exclusion of charges relating to carry pool allocations; (v) the exclusion of non-cash equity charges and other non-cash compensation charges borne by KKR Holdings or incurred under the KKR & Co. L.P. 2010 Equity Incentive Plan; (vi) the exclusion of certain reimbursable expenses; and (vii) the exclusion of certain non-recurring items.

 

In this report, the term “economic net income (loss),” or “ENI”, is a measure of profitability for KKR’s reportable segments and is used by management as an alternative measurement of the operating and investment earnings of KKR and its business segments. We believe this measure is useful to unitholders as it provides additional insight into the overall profitability of KKR’s businesses inclusive of investment income and carried interest. ENI is comprised of: (i) FRE plus (ii) segment investment income (loss), which is reduced for carry pool allocations, management fee refunds, interest expense and certain compensation and general and administrative expenses incurred in the generation of net realized principal investment income; less (iii) certain economic interests in KKR’s segments held by third parties. ENI differs from net income (loss) on a GAAP basis as a result of: (i) the exclusion of the items referred to in FRE above; (ii) the exclusion of investment income (loss) relating to noncontrolling interests; and (iii) the exclusion of income taxes.

 

In this report, “syndicated capital” is the aggregate amount of debt or equity capital in transactions originated by KKR investment funds and vehicles, which has been distributed to third parties in exchange for a fee. It does not include (i) capital committed to such transactions by carry-yielding co-investment vehicles, which is instead reported in committed dollars invested and (ii) debt capital that is arranged as part of the acquisition financing of transactions originated by KKR investment funds and vehicles. Syndicated capital is used as a measure of investment activity for KKR and its business segments during a given period, and we believe that this measure is useful to unitholders as it provides additional insight into levels of syndication activity in KKR’s Capital Markets and Principal Activities segment and across its investment platform.

 

You should note that our calculations of AUM, FPAUM, FRE, ENI, syndicated capital and other financial measures may differ from the calculations of other investment managers and, as a result, our measurements of AUM, FPAUM, FRE, ENI, syndicated capital and other financial measures may not be comparable to similar measures presented by other investment managers.  For important information regarding these and other financial measures, please see “Management’s Discussion and Analysis of Financial Condition & Results of Operations—Segment Operating and Performance Measures.”

 

References to “our funds” or “our vehicles” refer to investment funds, vehicles and/or accounts advised, sponsored or managed by one or more subsidiaries of KKR, unless context requires otherwise.

 

In this report, the term “GAAP” refers to generally accepted accounting principles in the United States.

 

Unless otherwise indicated, references in this report to our fully diluted common units outstanding, or to our common units outstanding on a fully diluted basis, reflect (i) actual common units outstanding, (ii) common units into which KKR Group Partnership Units not held by us are exchangeable pursuant to the terms of the exchange agreement described in this report and (iii) common units issuable pursuant to any equity awards actually issued under the KKR & Co. L.P. 2010 Equity Incentive Plan, which we refer to as our “Equity Incentive Plan,” but do not reflect common units available for issuance pursuant to our Equity Incentive Plan for which grants have not yet been made.

 

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Table of Contents

 

 KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

 

(Amounts in Thousands, Except Unit Data)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and Cash Equivalents

 

$

1,167,413

 

$

1,230,464

 

Cash and Cash Equivalents Held at Consolidated Entities

 

465,515

 

587,174

 

Restricted Cash and Cash Equivalents

 

21,515

 

87,627

 

Investments

 

41,142,537

 

40,697,848

 

Due from Affiliates

 

134,725

 

122,185

 

Other Assets

 

1,875,940

 

1,701,055

 

Total Assets

 

$

44,807,645

 

$

44,426,353

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Debt Obligations

 

$

1,706,010

 

$

1,123,414

 

Due to Affiliates

 

92,793

 

72,830

 

Accounts Payable, Accrued Expenses and Other Liabilities

 

2,104,264

 

1,824,655

 

Total Liabilities

 

3,903,067

 

3,020,899

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interests

 

580,840

 

462,564

 

 

 

 

 

 

 

Equity

 

 

 

 

 

KKR & Co. L.P. Partners’ Capital (277,834,343 and 253,363,691 common units issued and outstanding as of June 30, 2013 and December 31, 2012, respectively)

 

2,293,542

 

2,008,965

 

Accumulated Other Comprehensive Income (Loss)

 

(6,153

)

(4,606

)

Total KKR & Co. L.P. Partners’ Capital

 

2,287,389

 

2,004,359

 

Noncontrolling Interests

 

38,036,349

 

38,938,531

 

Total Equity

 

40,323,738

 

40,942,890

 

Total Liabilities and Equity

 

$

44,807,645

 

$

44,426,353

 

 

See notes to condensed consolidated financial statements.

 

3



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 KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

(Amounts in Thousands, Except Unit Data)

 

 

 

Three Months Ended
 June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues

 

 

 

 

 

 

 

 

 

Fees

 

$

166,376

 

$

112,360

 

$

317,616

 

$

228,667

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation and Benefits

 

200,602

 

280,640

 

531,723

 

653,050

 

Occupancy and Related Charges

 

13,878

 

14,095

 

28,399

 

29,292

 

General, Administrative and Other

 

77,542

 

54,004

 

171,230

 

111,655

 

Total Expenses

 

292,022

 

348,739

 

731,352

 

793,997

 

 

 

 

 

 

 

 

 

 

 

Investment Income (Loss)

 

 

 

 

 

 

 

 

 

Net Gains (Losses) from Investment Activities

 

98,537

 

1,601,688

 

2,368,354

 

4,688,553

 

Dividend Income

 

209,486

 

79,919

 

248,955

 

252,858

 

Interest Income

 

128,020

 

87,892

 

237,389

 

164,091

 

Interest Expense

 

(24,614

)

(16,884

)

(47,637

)

(34,889

)

Total Investment Income (Loss)

 

411,429

 

1,752,615

 

2,807,061

 

5,070,613

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

285,783

 

1,516,236

 

2,393,325

 

4,505,283

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

8,525

 

11,093

 

17,881

 

28,165

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

277,258

 

1,505,143

 

2,375,444

 

4,477,118

 

Net Income (Loss) Attributable to Redeemable Noncontrolling Interests

 

(7,800

)

3,285

 

16,823

 

8,557

 

Net Income (Loss) Attributable to Noncontrolling Interests

 

269,924

 

1,355,597

 

2,150,048

 

4,131,864

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to KKR & Co. L.P.

 

$

15,134

 

$

146,261

 

$

208,573

 

$

336,697

 

 

 

 

 

 

 

 

 

 

 

Distributions Declared per KKR & Co. L.P. Common Unit

 

$

0.42

 

$

0.13

 

$

0.69

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to KKR & Co. L.P. Per Common Unit

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

0.62

 

$

0.79

 

$

1.45

 

Diluted

 

$

0.05

 

$

0.58

 

$

0.72

 

$

1.37

 

Weighted Average Common Units Outstanding

 

 

 

 

 

 

 

 

 

Basic

 

271,983,811

 

235,781,983

 

264,555,267

 

232,440,659

 

Diluted

 

298,078,764

 

252,507,802

 

290,104,942

 

245,169,954

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

(Amounts in Thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

277,258

 

$

1,505,143

 

$

2,375,444

 

$

4,477,118

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustments

 

(4,929

)

(9,033

)

(6,172

)

(5,406

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

272,329

 

1,496,110

 

2,369,272

 

4,471,712

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interests

 

(7,800

)

3,285

 

16,823

 

8,557

 

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests

 

266,310

 

1,348,640

 

2,145,064

 

4,127,778

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss) Attributable to KKR & Co. L.P.

 

$

13,819

 

$

144,185

 

$

207,385

 

$

335,377

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

 

(Amounts in Thousands, Except Unit Data)

 

 

 

KKR & Co. L.P.

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Redeemable

 

 

 

Common

 

Partners’

 

Comprehensive

 

Noncontrolling

 

Total

 

Noncontrolling

 

 

 

Units

 

Capital

 

Income (Loss)

 

Interests

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

227,150,182

 

$

1,330,887

 

$

(2,189

)

$

36,080,445

 

$

37,409,143

 

$

275,507

 

Net Income (Loss)

 

 

 

336,697

 

 

 

4,131,864

 

4,468,561

 

8,557

 

Other Comprehensive Income (Loss)- Foreign Currency Translation (Net of Tax)

 

 

 

 

 

(1,320

)

(4,086

)

(5,406

)

 

 

Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units

 

10,367,520

 

107,029

 

(113

)

(106,916

)

 

 

 

Tax Effects Resulting from Exchange of KKR Holdings L.P. Units and delivery of KKR & Co. L.P. Common Units

 

 

 

1,177

 

(59

)

 

 

1,118

 

 

 

Net Delivery of Common Units- Equity Incentive Plan

 

637,455

 

 

 

 

 

 

 

 

 

 

 

Equity Based Compensation

 

 

 

30,314

 

 

 

177,566

 

207,880

 

 

 

Capital Contributions

 

 

 

 

 

 

 

1,334,910

 

1,334,910

 

173,868

 

Capital Distributions

 

 

 

(107,603

)

 

 

(3,870,336

)

(3,977,939

)

(332

)

Balance at June 30, 2012

 

238,155,157

 

$

1,698,501

 

$

(3,681

)

$

37,743,447

 

$

39,438,267

 

$

457,600

 

 

 

 

 

KKR & Co. L.P.

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Redeemable

 

 

 

Common

 

Partners’

 

Comprehensive

 

Noncontrolling

 

Total

 

Noncontrolling

 

 

 

Units

 

Capital

 

Income (Loss)

 

Interests

 

Equity

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

253,363,691

 

$

2,008,965

 

$

(4,606

)

$

38,938,531

 

$

40,942,890

 

$

462,564

 

Net Income (Loss)

 

 

 

208,573

 

 

 

2,150,048

 

2,358,621

 

16,823

 

Other Comprehensive Income (Loss)- Foreign Currency Translation (Net of Tax)

 

 

 

 

 

(1,188

)

(4,984

)

(6,172

)

 

 

Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units

 

20,592,345

 

244,173

 

(530

)

(243,643

)

 

 

 

Tax Effects Resulting from Exchange of KKR Holdings L.P. Units and delivery of KKR & Co. L.P. Common Units

 

 

 

9,834

 

171

 

 

 

10,005

 

 

 

Net Delivery of Common Units- Equity Incentive Plan

 

3,878,307

 

17,262

 

 

 

 

 

17,262

 

 

 

Equity Based Compensation

 

 

 

53,354

 

 

 

108,614

 

161,968

 

 

 

Capital Contributions

 

 

 

 

 

 

 

2,237,168

 

2,237,168

 

108,375

 

Capital Distributions

 

 

 

(248,619

)

 

 

(5,149,385

)

(5,398,004

)

(6,922

)

Balance at June 30, 2013

 

277,834,343

 

$

2,293,542

 

$

(6,153

)

$

38,036,349

 

$

40,323,738

 

$

580,840

 

 

See notes to condensed consolidated financial statements.

 

6



Table of Contents

 

KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

(Amounts in Thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

Operating Activities

 

 

 

 

 

Net Income (Loss)

 

$

2,375,444

 

$

4,477,118

 

Adjustments to Reconcile Net Income (Loss)

 

 

 

 

 

to Net Cash Provided (Used) by Operating Activities:

 

 

 

 

 

Equity Based Compensation

 

161,968

 

207,880

 

Net Realized (Gains) Losses on Investments

 

(1,625,493

)

(2,008,160

)

Change in Unrealized (Gains) Losses on Investments

 

(742,861

)

(2,680,393

)

Other Non-Cash Amounts

 

(35,253

)

(23,020

)

Cash Flows Due to Changes in Operating Assets and Liabilities:

 

 

 

 

 

Change in Cash and Cash Equivalents Held at Consolidated Entities

 

122,181

 

574,850

 

Change in Due from / to Affiliates

 

(13,312

)

(11,440

)

Change in Other Assets

 

248,368

 

60,523

 

Change in Accounts Payable, Accrued Expenses and Other Liabilities

 

232,598

 

222,755

 

Investments Purchased

 

(13,850,467

)

(5,803,035

)

Cash Proceeds from Sale of Investments

 

15,465,372

 

7,719,314

 

Net Cash Provided (Used) by Operating Activities

 

2,338,545

 

2,736,392

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Change in Restricted Cash and Cash Equivalents

 

66,112

 

56,488

 

Purchase of Furniture, Computer Hardware and Leasehold Improvements

 

(4,535

)

(17,439

)

Net Cash Provided (Used) by Investing Activities

 

61,577

 

39,049

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Distributions to Partners

 

(248,619

)

(107,603

)

Distributions to Redeemable Noncontrolling Interests

 

(6,922

)

(332

)

Contributions from Redeemable Noncontrolling Interests

 

108,375

 

173,868

 

Distributions to Noncontrolling Interests

 

(5,149,385

)

(3,831,967

)

Contributions from Noncontrolling Interests

 

2,237,168

 

1,334,910

 

Net Delivery of Common Units - Equity Incentive Plan

 

17,262

 

 

Proceeds from Debt Obligations

 

814,790

 

295,348

 

Repayment of Debt Obligations

 

(230,882

)

(736,192

)

Financing Costs Paid

 

(4,960

)

(7,776

)

Net Cash Provided (Used) by Financing Activities

 

(2,463,173

)

(2,879,744

)

 

 

 

 

 

 

Net Increase/(Decrease) in Cash and Cash Equivalents

 

(63,051

)

(104,303

)

Cash and Cash Equivalents, Beginning of Period

 

1,230,464

 

843,261

 

Cash and Cash Equivalents, End of Period

 

$

1,167,413

 

$

738,958

 

 

See notes to condensed consolidated financial statements.

 

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KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

 

(Amounts in Thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Payments for Interest

 

$

32,978

 

$

107,235

 

Payments for Income Taxes

 

$

69,448

 

$

41,582

 

Supplemental Disclosures of Non-Cash Investing and Financing Activities

 

 

 

 

 

Non-Cash Contributions of Equity Based Compensation

 

$

161,968

 

$

207,880

 

Non-Cash Distributions to Noncontrolling Interests

 

$

 

$

38,369

 

Foreign Exchange Gains (Losses) on Debt Obligations

 

$

1,497

 

$

3,343

 

Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units

 

$

243,643

 

$

106,916

 

Tax Effects Resulting from Exchange of KKR Holdings L.P. Units and delivery of KKR & Co. L.P. Common Units

 

$

10,005

 

$

1,118

 

 

See notes to condensed consolidated financial statements.

 

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KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

1. ORGANIZATION

 

KKR & Co. L.P. (NYSE:KKR), together with its consolidated subsidiaries (“KKR”), is a leading global investment firm that offers a broad range of investment management services to fund investors and provides capital markets services for the firm, its portfolio companies and third parties. Led by Henry Kravis and George Roberts, KKR conducts business with offices around the world, which provides a global platform for sourcing transactions, raising capital and carrying out capital markets activities. KKR operates as a single professional services firm and carries out its investment activities under the KKR brand name.

 

KKR & Co. L.P. was formed as a Delaware limited partnership on June 25, 2007 and its general partner is KKR Management LLC (the “Managing Partner”). KKR & Co. L.P. is the parent company of KKR Group Limited, which is the non-economic general partner of KKR Group Holdings L.P. (“Group Holdings”), and KKR & Co. L.P. is the sole limited partner of Group Holdings. Group Holdings holds a controlling economic interest in each of (i) KKR Management Holdings L.P. (“Management Holdings”) through KKR Management Holdings Corp., a Delaware corporation which is a domestic corporation for U.S. federal income tax purposes, and (ii) KKR Fund Holdings L.P. (“Fund Holdings” and together with Management Holdings, the “KKR Group Partnerships”) directly and through KKR Fund Holdings GP Limited, a Cayman Island limited company which is a disregarded entity for U.S. federal income tax purposes. Group Holdings also owns certain economic interests in Management Holdings through a wholly owned Delaware corporate subsidiary of KKR Management Holdings Corp. and certain economic interests in Fund Holdings through a Delaware partnership of which Group Holdings is the general partner with a 99% economic interest and KKR Management Holdings Corp. is a limited partner with a 1% economic interest. KKR & Co. L.P., through its indirect controlling economic interests in the KKR Group Partnerships, is the holding partnership for the KKR business.

 

KKR & Co. L.P. both indirectly controls the KKR Group Partnerships and indirectly holds equity units in each KKR Group Partnership (collectively, “KKR Group Partnership Units”) representing economic interests in KKR’s business. The remaining KKR Group Partnership Units are held by KKR’s principals through KKR Holdings L.P. (“KKR Holdings”), which is not a subsidiary of KKR. As of June 30, 2013, KKR & Co. L.P. held 40.3% of the KKR Group Partnership Units and KKR’s principals held 59.7% of the KKR Group Partnership Units through KKR Holdings. The percentage ownership in the KKR Group Partnerships will continue to change as KKR Holdings and/or KKR’s principals exchange units in the KKR Group Partnerships for KKR & Co. L.P. common units.

 

The following table presents the effect of changes in the ownership interest in the KKR Group Partnerships on KKR & Co. L.P.’s equity:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to KKR & Co. L.P.

 

$

15,134

 

$

146,261

 

$

208,573

 

$

336,697

 

Transfers from noncontrolling interests:

 

 

 

 

 

 

 

 

 

Exchange of KKR Group Partnership units held by KKR Holdings L.P. (a)

 

156,569

 

61,226

 

249,623

 

108,034

 

Change from net income (loss) attributable to KKR & Co. L.P. and transfers from noncontrolling interests held by KKR Holdings

 

$

171,703

 

$

207,487

 

$

458,196

 

$

444,731

 

 


(a) Increase in KKR & Co. L.P. partners’ capital for exchange of 13,019,034 and 5,819,496 for the three months ended June 30, 2013 and 2012, respectively, and 20,592,345 and 10,367,520 for the six months ended June 30, 2013 and 2012, respectively, KKR Group Partnership units held by KKR Holdings L.P., inclusive of deferred taxes.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of KKR & Co. L.P. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) such that the condensed consolidated financial statements are presented fairly and that estimates made in preparing the condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The December 31, 2012 condensed consolidated balance sheet data was derived from audited consolidated financial statements included in KKR’s Annual Report on Form 10-K for the year ended December 31, 2012, which include all disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in KKR & Co. L.P.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

 

The condensed consolidated financial statements (referred to hereafter as the “financial statements”) include the accounts of KKR’s management and capital markets companies, the general partners of certain unconsolidated funds and vehicles, general partners of consolidated funds and their respective consolidated funds and certain other entities.

 

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Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

 

KKR & Co. L.P. consolidates the financial results of the KKR Group Partnerships and their consolidated subsidiaries. KKR Holdings’ ownership interest in the KKR Group Partnerships is reflected as noncontrolling interests in the accompanying financial statements.

 

References in the accompanying financial statements to KKR’s “principals” are to KKR’s senior employees and non-employee operating consultants who hold interests in KKR’s business through KKR Holdings, including those principals who also hold interests in the Managing Partner entitling those principals to vote for the election of the Managing Partners’ directors (the “Senior Principals”).

 

Use of Estimates

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of fees, expenses and investment income (loss) during the reporting periods. Such estimates include but are not limited to the valuation of investments and financial instruments. Actual results could differ from those estimates, and such differences could be material to the financial statements.

 

Consolidation

 

General

 

KKR consolidates (i) those entities in which it holds a majority voting interest or has majority ownership and control over significant operating, financial and investing decisions of the entity, including the KKR funds and vehicles in which KKR, as general partner, is presumed to have control, or (ii) entities determined to be variable interest entities (“VIEs”) for which KKR is considered the primary beneficiary.

 

With respect to KKR’s consolidated funds and vehicles, KKR generally has operational discretion and control, and fund investors have no substantive rights to impact ongoing governance and operating activities of the fund, including the ability to remove the general partner, also known as kick-out rights. As result, a fund should be consolidated unless KKR has a nominal level of equity at risk. To the extent that KKR commits a nominal amount of equity to a given fund and has no obligation to fund any future losses, the equity at risk to KKR is not considered substantive and the fund is typically considered a VIE as described below.  In these cases, the fund investors are generally deemed to be the primary beneficiaries and KKR does not consolidate the fund.  In cases when KKR’s equity at risk is deemed to be substantive, the fund is generally not considered to be a VIE and KKR generally consolidates the fund.

 

KKR’s funds and vehicles are consolidated by KKR notwithstanding the fact that KKR has only a minority economic interest in those funds. KKR’s financial statements reflect the assets, liabilities, fees, expenses, investment income (loss) and cash flows of the consolidated KKR funds and vehicles on a gross basis, and the majority of the economic interests in those funds, which are held by third party fund investors, are attributed to noncontrolling interests in the accompanying financial statements. All of the management fees and certain other amounts earned by KKR from those funds are eliminated in consolidation. However, because the eliminated amounts are earned from, and funded by, noncontrolling interests, KKR’s attributable share of the net income (loss) from those funds is increased by the amounts eliminated. Accordingly, the elimination in consolidation of such amounts has no effect on net income (loss) attributable to KKR or KKR partners’ capital.

 

KKR’s funds and vehicles are, for GAAP purposes, investment companies and therefore are not required to consolidate their investments, including investments in portfolio companies, even if majority-owned and controlled. Rather, the KKR funds and vehicles reflect their investments at fair value as described in the Fair Value Measurements section. All intercompany transactions and balances have been eliminated.

 

Variable Interest Entities

 

KKR consolidates all VIEs in which it is considered the primary beneficiary. An enterprise is determined to be the primary beneficiary if it has a controlling financial interest under GAAP. A controlling financial interest is defined as (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The consolidation rules which were revised effective January 1, 2010, require an analysis to determine (a) whether an entity in which KKR has a variable interest is a VIE and (b) whether KKR’s involvement, through the holding of equity interests directly or indirectly in the entity or contractually through other variable interests unrelated to the holding of equity interests, would give it a controlling financial interest under GAAP. Performance of that analysis requires the exercise of judgment. Where KKR has an interest in an entity that has qualified for the deferral of the consolidation rules, the analysis is based on consolidation rules prior to January 1, 2010. These rules require an analysis to determine (a) whether an entity in which KKR has a variable interest is a VIE and (b) whether KKR’s involvement, through the holding of equity interests directly or indirectly in the entity or contractually through other variable interests would be expected to absorb a majority of the variability of the entity. Under both guidelines, KKR determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether KKR is the primary beneficiary, KKR evaluates its economic interests in the entity held either directly by KKR or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that KKR is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either

 

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Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

by KKR, affiliates of KKR or third parties) or amendments to the governing documents of the respective entities could affect an entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, KKR assesses whether it is the primary beneficiary and will consolidate or not consolidate accordingly.

 

As of June 30, 2013 and December 31, 2012, the maximum exposure to loss, before allocations to the carry pool, if any, for those VIEs in which KKR is determined not to be the primary beneficiary but in which it has a variable interest is as follows:

 

 

 

June 30,
2013

 

December 31,
2012

 

Investments

 

$

199,081

 

$

188,408

 

Due from Affiliates, net

 

18,178

 

2,266

 

Maximum Exposure to Loss

 

$

217,259

 

$

190,674

 

 

For those unconsolidated VIEs in which KKR is the sponsor, KKR may have an obligation as general partner to provide commitments to such funds. As of June 30, 2013 and December 31, 2012, KKR did not provide any support other than its obligated amount.

 

KKR’s investment strategies differ by investment fund; however, the fundamental risks have similar characteristics, including loss of invested capital and loss of management fees and carried interests. Accordingly, disaggregation of KKR’s involvement by type of VIE would not provide more useful information.

 

Business Combinations

 

Acquisitions are accounted for using the acquisition method of accounting. The purchase price of an acquisition is allocated to the assets acquired and liabilities assumed using the estimated fair values at the acquisition date. Transaction costs are expensed as incurred.

 

Intangible Assets

 

Intangible assets consist primarily of contractual rights to earn future fee income, including management and incentive fees, and are included in Other Assets within the statements of financial condition. Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and amortization expense is included within General, Administrative and Other in the accompanying condensed consolidated statements of operations. Intangible assets are reviewed for impairment when circumstances indicate an impairment may exist. KKR does not have any indefinite-lived intangible assets.

 

Goodwill

 

Goodwill represents the excess of acquisition cost over the fair value of net tangible and intangible assets acquired in connection with an acquisition. Goodwill will be assessed for impairment annually or more frequently if circumstances indicate impairment may have occurred. Goodwill is recorded in Other Assets within the condensed consolidated statements of financial condition.

 

Redeemable Noncontrolling Interests

 

Redeemable Noncontrolling Interests represent noncontrolling interests of certain investment vehicles and funds that are subject to periodic redemption by fund investors following the expiration of a specified period of time (typically between one and three years), or may be withdrawn subject to a redemption fee during the period when capital may not be otherwise withdrawn. Limited partner interests subject to redemption as described above are presented as Redeemable Noncontrolling Interests within the condensed consolidated statements of financial condition and presented as Net Income (Loss) attributable to Redeemable Noncontrolling Interests within the condensed consolidated statements of operations. When redeemable amounts become legally payable to fund investors, they are classified as a liability and included in Accounts Payable, Accrued Expenses and Other Liabilities in the condensed consolidated statements of financial condition. For all consolidated investment vehicles and funds in which redemption rights have not been granted, noncontrolling interests are presented within Equity in the condensed consolidated statements of financial condition as Noncontrolling Interests.

 

Noncontrolling Interests

 

Noncontrolling interests represent (i) noncontrolling interests in consolidated entities and (ii) noncontrolling interests held by KKR Holdings.

 

Noncontrolling Interests in Consolidated Entities

 

Noncontrolling interests in consolidated entities represent the non-redeemable ownership interests in KKR that are held primarily by:

 

(i)      third party fund investors in KKR’s funds;

 

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Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

(ii)        a former principal and such person’s designees representing an aggregate of 1% of the carried interest received by the general partners of KKR’s funds and 1% of KKR’s other profits (losses) until a future date;

 

(iii)       certain of KKR’s former principals and their designees representing a portion of the carried interest received by the general partners of KKR’s private equity funds that was allocated to them with respect to private equity investments made during such former principals’ previous tenure with KKR;

 

(iv)       certain of KKR’s current and former principals representing all of the capital invested by or on behalf of the general partners of KKR’s private equity funds prior to October 1, 2009 and any returns thereon; and

 

(v)        a third party in KKR’s capital markets business (representing approximately 2% of the equity in the capital markets business).

 

Noncontrolling Interests held by KKR Holdings

 

Noncontrolling interests held by KKR Holdings include economic interests held by KKR’s principals in the KKR Group Partnerships. KKR’s principals receive financial benefits from KKR’s business in the form of distributions received from KKR Holdings and through their direct and indirect participation in the value of KKR Group Partnership Units held by KKR Holdings. These financial benefits are not paid by KKR and are borne by KKR Holdings.

 

The following table presents the calculation of noncontrolling interests held by KKR Holdings:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

4,950,914

 

$

4,560,614

 

$

4,981,864

 

$

4,342,157

 

Net income (loss) attributable to noncontrolling interests held by KKR Holdings (a)

 

28,106

 

292,833

 

362,218

 

697,024

 

Other comprehensive income (loss) (b)

 

(3,430

)

(6,863

)

(4,750

)

(4,193

)

Impact of the exchange of KKR Holdings units to KKR & Co. L.P. units (c) 

 

(152,628

)

(60,687

)

(243,643

)

(106,916

)

Equity based compensation

 

54,382

 

79,489

 

108,614

 

177,566

 

Capital contributions

 

328

 

507

 

799

 

1,221

 

Capital distributions

 

(178,558

)

(70,196

)

(505,988

)

(311,162

)

Balance at the end of the period

 

$

4,699,114

 

$

4,795,697

 

$

4,699,114

 

$

4,795,697

 

 


(a)       Refer to the table below for calculation of Net income (loss) attributable to noncontrolling interests held by KKR Holdings.

 

(b)       Calculated on a pro rata basis based on the weighted average KKR Group Partnership Units held by KKR Holdings during the reporting period.

 

(c)        Calculated based on the proportion of KKR Holdings units exchanged for KKR & Co. L.P. common units pursuant to the exchange agreement during the reporting period. The exchange agreement provides for the exchange of KKR Group Partnership Units held by KKR Holdings for KKR & Co. L.P. common units.

 

Net income (loss) attributable to KKR & Co. L.P. after allocation to noncontrolling interests held by KKR Holdings, with the exception of certain tax assets and liabilities that are directly allocable to KKR Management Holdings Corp., is attributed based on the percentage of the weighted average KKR Group Partnership Units held by KKR and KKR Holdings, each of which hold equity of the KKR Group Partnerships. However, primarily because of the (i) contribution of certain expenses borne entirely by KKR Holdings, (ii) the periodic exchange of KKR Holdings units for KKR & Co. L.P. common units pursuant to the exchange agreement and (iii) the contribution of certain expenses borne entirely by KKR associated with the KKR & Co. L.P. 2010 Equity Plan (“Equity Incentive Plan”), equity allocations shown in the condensed consolidated statement of changes in equity differ from their respective pro-rata ownership interests in KKR’s net assets.

 

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Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

 

The following table presents Net income (loss) attributable to noncontrolling interests held by KKR Holdings:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income (loss)

 

$

277,258

 

$

1,505,143

 

$

2,375,444

 

$

4,477,118

 

Less: Net income (loss) attributable to Redeemable Noncontrolling Interests

 

(7,800

)

3,285

 

16,823

 

8,557

 

Less: Net income (loss) attributable to Noncontrolling Interests in consolidated entities

 

241,818

 

1,062,764

 

1,787,830

 

3,434,840

 

Plus: Income taxes attributable to KKR Management Holdings Corp.

 

3,215

 

7,773

 

9,874

 

21,117

 

Net income (loss) attributable to KKR & Co. L.P. and KKR Holdings

 

$

46,455

 

$

446,867

 

$

580,665

 

$

1,054,838

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to noncontrolling interests held by KKR Holdings

 

$

28,106

 

$

292,833

 

$

362,218

 

$

697,024

 

 

Investments

 

Investments consist primarily of private equity, real assets, fixed income, equity method and other investments. Investments are carried at their estimated fair values, with unrealized gains or losses resulting from changes in fair value reflected as a component of Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. Investments denominated in currencies other than the U.S. dollar are valued based on the spot rate of the respective currency at the end of the reporting period with changes related to exchange rate movements reflected as a component of Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. Security and loan transactions are recorded on a trade date basis.  Further disclosure on investments is presented in Note 4, “Investments.”

 

The following describes the types of securities held within each investment class.

 

Private Equity —Consists primarily of investments in companies with operating businesses.

 

Real Assets —Consists primarily of investments in (i) oil and natural gas properties (“natural resources”), (ii) infrastructure assets, and (iii) residential and commercial real estate assets and businesses (“real estate”).

 

Fixed Income —Consists primarily of investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans), distressed and opportunistic debt and interests in collateralized loan obligations.

 

Equity Method —Consists primarily of investments in unconsolidated investment funds and vehicles that are accounted for using the equity method of accounting. Under the equity method of accounting, KKR’s share of earnings (losses) from equity method investments is reflected as a component of Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. Because the underlying investments of unconsolidated investment funds and vehicles are reported at fair value, the carrying value of KKR’s equity method investments approximates fair value.

 

Other —Consists primarily of investments in common stock, preferred stock, warrants and options of companies that are not private equity, real assets or fixed income investments.

 

Fair Value Measurements

 

Investments and other financial instruments are measured and carried at fair value. The majority of investments and other financial instruments are held by the consolidated funds and vehicles. KKR’s funds and vehicles are, for GAAP purposes, investment companies and reflect their investments and other financial instruments at fair value. KKR has retained the specialized accounting for the consolidated funds and vehicles in consolidation. Accordingly, the unrealized gains and losses resulting from changes in fair value of the investments held by KKR’s funds and vehicles are reflected as a component of Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations.

 

For investments and other financial instruments that are not held in a consolidated fund or vehicle, KKR has elected the fair value option since these investments and other financial instruments are similar to those in the consolidated funds and vehicles. Such election is irrevocable and is applied on an investment by investment basis at initial recognition. Unrealized gains and losses resulting from changes in fair value are reflected as a component of Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. The methodology for measuring the fair value of such investments and other financial instruments is consistent with the methodologies applied to investments and other financial instruments that are held in consolidated funds and vehicles.

 

The carrying amounts of Other Assets, Accounts Payable, Accrued Expenses and Other Liabilities recognized on the statements of financial condition (excluding Fixed Assets, Goodwill, Intangible Assets, contingent consideration and certain debt obligations) approximate fair value due to their short term maturities. Further information on Fixed Assets is presented in Note 7, “Other Assets and Accounts Payable,

 

13



Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

Accrued Expenses and Other Liabilities”. Further information on Goodwill and Intangible Assets is presented in Note 14 “Goodwill and Intangible Assets.” Further information on contingent consideration is presented in Note 13 “Acquisitions.” KKR’s debt obligations, except for KKR’s 2020 and 2043 Senior Notes, bear interest at floating rates and therefore fair value approximates carrying value.  Further information on KKR’s 2020 and 2043 Senior Notes are presented in Note 8, “Debt Obligations.” The fair value for KKR’s 2020 and 2043 Senior Notes were derived using Level II inputs similar to those utilized in valuing fixed income investments.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve varying levels of management estimation and judgment, the degree of which is dependent on a variety of factors. See Note 5, “Fair Value Measurements” for further information on KKR’s valuation techniques that involve unobservable inputs. Assets and liabilities recorded at fair value in the statements of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets and liabilities. The hierarchical levels defined under GAAP are as follows:

 

Level I

 

Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The type of investments and other financial instruments included in this category are publicly-listed equities and debt and securities sold short.

 

Level II

 

Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level II inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. The type of investments and other financial instruments included in this category are fixed income investments, convertible debt securities indexed to publicly-listed securities, and certain over-the-counter derivatives.

 

Level III

 

Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The types of assets and liabilities generally included in this category are private portfolio companies, real assets investments and fixed income investments for which a sufficiently liquid trading market does not exist.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. KKR’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.

 

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

 

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of instrument, whether the instrument has recently been issued, whether the instrument is traded on an active exchange or in the secondary market, and current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by KKR in determining fair value is greatest for instruments categorized in Level III. The variability and availability of the observable inputs affected by the factors described above may cause transfers between Levels I, II, and III, which KKR recognizes at the beginning of the reporting period.

 

Investments and other financial instruments that have readily observable market prices (such as those traded on a securities exchange) are stated at the last quoted sales price as of the reporting date. KKR does not adjust the quoted price for these investments, even in situations where KKR holds a large position and a sale could reasonably affect the quoted price.

 

Level II Valuation Methodologies

 

Financial assets and liabilities categorized as Level II consist primarily of securities indexed to publicly-listed securities and fixed income and other investments. Fixed income investments generally have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that KKR and others are willing to pay for an asset. Ask prices represent the lowest price that KKR and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices obtained from third party pricing services, fair value may not always be a predetermined point in the bid-ask range. KKR’s policy is generally to allow for mid-market pricing and adjusting

 

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(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

to the point within the bid-ask range that meets KKR’s best estimate of fair value. For securities indexed to publicly listed securities, such as convertible debt, the securities are typically valued using standard convertible security pricing models. The key inputs into these models that require some amount of judgment are the credit spreads utilized and the volatility assumed. To the extent the company being valued has other outstanding debt securities that are publicly-traded, the implied credit spread on the company’s other outstanding debt securities would be utilized in the valuation. To the extent the company being valued does not have other outstanding debt securities that are publicly-traded, the credit spread will be estimated based on the implied credit spreads observed in comparable publicly-traded debt securities. In certain cases, an additional spread will be added to reflect an illiquidity discount due to the fact that the security being valued is not publicly-traded. The volatility assumption is based upon the historically observed volatility of the underlying equity security into which the convertible debt security is convertible and/or the volatility implied by the prices of options on the underlying equity security.

 

Level III Valuation Methodologies

 

Financial assets and liabilities categorized as Level III consist primarily of the following:

 

Private Equity Investments: KKR generally employs two valuation methodologies when determining the fair value of a private equity investment. The first methodology is typically a market comparables analysis that considers key financial inputs and recent public and private transactions and other available measures. The second methodology utilized is typically a discounted cash flow analysis, which incorporates significant assumptions and judgments. Estimates of key inputs used in this methodology include the weighted average cost of capital for the investment and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. Other inputs are also used.

 

Upon completion of the valuations conducted using these methodologies, a weighting is ascribed to each method, and an illiquidity discount is typically applied where appropriate. The ultimate fair value recorded for a particular investment will generally be within a range suggested by the two methodologies.

 

When determining the weighting ascribed to each valuation methodology, KKR considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among investments in the portfolio and in certain instances may result in up to a 100% weighting to a single methodology. Across the Level III private equity investment portfolio, approximately 90% of the fair value is derived from investments that are valued based exactly 50% on market comparables and 50% on a discounted cash flow analysis. Less than 5% of the fair value of the Level III private equity investment portfolio is derived from investments that are valued either based 100% on market comparables or 100% on a discounted cash flow analysis.

 

When determining the illiquidity discount to be applied, KKR takes a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments. KKR then evaluates such private equity investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include (i) whether KKR is unable to sell the portfolio company or conduct an initial public offering of the portfolio company due to the consent rights of a third party or similar factors, (ii) whether the portfolio company is undergoing significant restructuring activity or similar factors and (iii) characteristics about the portfolio company regarding its size and/or whether the portfolio company is experiencing, or expected to experience, a significant decline in earnings. These factors generally make it less likely that a portfolio company would be sold or publicly offered in the near term at a price indicated by using just a market multiples and/or discounted cash flow analysis, and these factors tend to reduce the number of opportunities to sell an investment and/or increase the time horizon over which an investment may be monetized. Depending on the applicability of these factors, KKR determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time we hold the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by KKR in its valuations.

 

Real Assets Investments: For natural resources and infrastructure investments, KKR generally utilizes a discounted cash flow analysis, which incorporates significant assumptions and judgments. Estimates of key inputs used in this methodology include the weighted average cost of capital for the investment and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. For real estate investments, KKR generally utilizes a combination of direct income capitalization and discounted cash flow analysis, which incorporates significant assumptions and judgments. Estimates of key inputs used in these methodologies include an unlevered discount rate and terminal capitalization rate. The valuations of real assets investments also use other inputs. Certain investments in real estate and natural resources generally do not include a minimum illiquidity discount.

 

Fixed Income Investments: Fixed income investments are valued using values obtained from dealers or market makers, and where these values are not available, fixed income investments are valued by KKR using internally developed valuation models. Valuation models are based on discounted cash flow analyses, for which the key inputs are determined based on market comparables, which incorporate similar instruments from similar issuers.

 

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(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

Other Investments: KKR generally employs the same valuation methodologies as described above for private equity investments when valuing these other investments.

 

Key unobservable inputs that have a significant impact on KKR’s Level III investment valuations as described above are included in Note 5 “Fair Value Measurements.” KKR utilizes several unobservable pricing inputs and assumptions in determining the fair value of its Level III investments. These unobservable pricing inputs and assumptions may differ by investment and in the application of KKR’s valuation methodologies. KKR’s reported fair value estimates could vary materially if KKR had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if KKR only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies.

 

Level III Valuation Process

 

The valuation process involved for Level III measurements for private equity, real assets, fixed income, and other investments is completed on a quarterly basis and is designed to subject the valuation of Level III investments to an appropriate level of consistency, oversight, and review. KKR has a Private Markets valuation committee for private equity and real assets investments and a valuation committee for fixed income and other investments. The Private Markets valuation committee may be assisted by subcommittees for example in the valuation of real estate investments. Each of the Private Markets valuation committee and the fixed income valuation committee is assisted by a valuation team, which, except as noted below, is comprised only of employees who are not investment professionals responsible for preparing preliminary valuations or for oversight of any of the investments being valued. The valuation teams for natural resources, infrastructure and real estate investments contain investment professionals who participate in the preparation of preliminary valuations and oversight for those investments. The valuation committees and teams are responsible for coordinating and consistently implementing KKR’s quarterly valuation policies, guidelines and processes. For investments classified as Level III, investment professionals prepare preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and other factors. These preliminary valuations are reviewed with the investment professionals by the applicable valuation team and are also reviewed by an independent valuation firm engaged by KKR to perform certain procedures in order to assess the reasonableness of KKR’s valuations for all Level III investments, except for certain investments other than KKR private equity investments. All preliminary valuations are then reviewed by the applicable valuation committee, and after reflecting any input by their respective valuation committees, the preliminary valuations are presented to a single committee consisting of Senior Principals involved in various aspects of the KKR business. When these valuations are approved by this single committee after reflecting any input from it, the valuations of Level III investments, as well as the valuations of Level I and Level II investments, are presented to the audit committee of KKR’s board of directors and are then reported on to the board of directors.

 

Derivatives

 

Derivative contracts include forward, swap and option contracts related to foreign currencies and credit standing of reference entities to manage foreign exchange risk and credit risk arising from certain assets and liabilities. All derivatives are recognized in Other Assets or Accounts Payable, Accrued Expenses and Other Liabilities and are presented gross in the condensed consolidated statements of financial condition and measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying condensed consolidated statements of operations. KKR’s derivative financial instruments contain credit risk to the extent that its counterparties may be unable to meet the terms of the agreements. KKR attempts to minimize this risk by limiting its counterparties to major financial institutions with strong credit ratings.

 

Fees

 

Fees consist primarily of (i) monitoring and consulting fees from providing advisory and other services, (ii) management and incentive fees from providing investment management services to unconsolidated funds, a specialty finance company, structured finance and other vehicles, and separately managed accounts, and (iii) transaction fees earned in connection with successful investment transactions and from capital markets activities. These fees are based on the contractual terms of the governing agreements and are recognized when earned, which coincides with the period during which the related services are performed.

 

For the three and six months ended June 30, 2013 and 2012, fees consisted of the following:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Transaction Fees

 

$

58,295

 

$

43,460

 

$

96,720

 

$

87,122

 

Monitoring & Consulting Fees

 

49,067

 

44,277

 

102,028

 

87,047

 

Management Fees

 

43,591

 

20,566

 

84,615

 

40,771

 

Incentive Fees

 

15,423

 

4,057

 

34,253

 

13,727

 

Total Fees

 

$

166,376

 

$

112,360

 

$

317,616

 

$

228,667

 

 

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(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

Substantially all fees presented in the table above are earned from affiliates.

 

Recently Issued Accounting Pronouncements

 

Disclosures About Offsetting Assets and Liabilities

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), which requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. In February 2013, the FASB issued ASU 2013-01, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. ASU 2011-11 was effective for KKR’s fiscal year beginning January 1, 2013 and was applied retrospectively.  The adoption of this guidance did not have a material impact on KKR’s financial statements.

 

Disclosures About Reclassification Adjustments Out of Accumulated Other Comprehensive Income

 

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”),” which requires entities to disclose additional information about reclassification adjustments, including: (i) changes in AOCI balances by component and (ii) significant items reclassified out of AOCI. ASU 2013-02 was effective for KKR’s fiscal year beginning January 1, 2013. The adoption of this guidance, which is related to disclosure only, did not have a material impact on KKR’s financial statements. With respect to KKR, AOCI is comprised of only one component, foreign currency translation adjustments and for the three and six months ended June 30, 2013 and 2012, there were no items reclassified out of AOCI. See KKR’s condensed consolidated statements of comprehensive income and changes in equity.

 

Foreign Currency Matters

 

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters,” which indicates that the entire amount of a cumulative translation adjustment (“CTA”) related to an entity’s investment in a foreign entity should be released when there has been a (i) sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, (ii) loss of a controlling financial interest in an investment in a foreign entity, or (iii) step acquisition for a foreign entity.  This guidance is effective for KKR’s fiscal year beginning January 1, 2014, and is to be applied prospectively. The adoption of this guidance is not expected to have a material impact on KKR’s financial statements.

 

Amendments to Investment Company Scope, Measurement, and Disclosures

 

In June 2013, the FASB issued ASU 2013-08, Financial Services — Investment Companies Topic 946 (“ASU 2013-08”) which amends the scope, measurement, and disclosure requirements for investment companies. ASU 2013-08 (i) amends the criteria for an entity to qualify as an investment company, (ii) requires an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting, and (iii) introduces new disclosures. This guidance is effective for KKR’s fiscal year beginning January 1, 2014. Earlier application is prohibited. The adoption of this guidance is not expected to have a material impact on KKR’s financial results and consolidated financial statements.

 

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(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

3. NET GAINS (LOSSES) FROM INVESTMENT ACTIVITIES

 

Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations consist primarily of the realized and unrealized gains and losses on investments (including foreign exchange gains and losses attributable to foreign denominated investments and related activities) and other financial instruments, including those for which the fair value option has been elected. Unrealized gains or losses result from changes in the fair value of these investments and other financial instruments during a period. Upon disposition of an investment or financial instrument, previously recognized unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period.

 

The following table summarizes total Net Gains (Losses) from Investment Activities for the three and six months ended June 30, 2013 and 2012, respectively:

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

June 30, 2013

 

June 30, 2012

 

 

 

Net Realized
Gains (Losses)

 

Net Unrealized
Gains (Losses)

 

Net Realized
Gains (Losses)

 

Net Unrealized
Gains (Losses)

 

Net Realized
Gains (Losses)

 

Net Unrealized
Gains (Losses)

 

Net Realized
Gains (Losses)

 

Net Unrealized
Gains (Losses)

 

Private Equity (a)

 

$

595,200

 

$

(502,234

)

$

1,333,443

 

$

165,854

 

$

1,487,127

 

$

513,566

 

$

1,861,419

 

$

2,720,523

 

Fixed Income and Other (a)

 

46,959

 

(71,307

)

6,473

 

(88,031

)

139,591

 

(52,263

)

57,086

 

45,543

 

Real Assets (a)

 

14,855

 

50,822

 

54,419

 

(46,983

)

14,855

 

86,557

 

54,419

 

(145,257

)

Equity Method (a)

 

20,597

 

(7,870

)

34,411

 

42,503

 

25,516

 

14,740

 

34,411

 

67,248

 

Foreign Exchange Forward Contracts (b)

 

9,193

 

(48,122

)

1,325

 

111,060

 

24,936

 

158,749

 

16,155

 

44,620

 

Foreign Currency Options (b)

 

 

6,228

 

 

(1,294

)

 

11,834

 

(10,740

)

6,536

 

Securities Sold Short (b)

 

(18,535

)

12,897

 

21,385

 

8,771

 

(41,807

)

2,126

 

(5,444

)

(3,610

)

Other Derivatives

 

(4,881

)

(388

)

4,102

 

(2,015

)

(18,398

)

3,678

 

1,039

 

(2,216

)

Contingent Carried Interest Repayment Guarantee (c)

 

 

 

 

(47,250

)

 

 

 

(55,937

)

Foreign Exchange Gains (Losses) on Debt Obligations

 

(900

)

(1,290

)

 

3,983

 

(900

)

2,397

 

233

 

3,110

 

Foreign Exchange Gains (Losses) on Cash and Cash Equivalents held at Consolidated Entities

 

273

 

53

 

(418

)

(50

)

273

 

249

 

(418

)

(167

)

Foreign Exchange Gains (Losses) on Cash and Cash Equivalents

 

(3,514

)

501

 

 

 

(5,700

)

1,228

 

 

 

Total Net Gains (Losses) from Investment Activities

 

$

659,247

 

$

(560,710

)

$

1,455,140

 

$

146,548

 

$

1,625,493

 

$

742,861

 

$

2,008,160

 

$

2,680,393

 

 


(a)            See Note 4 “Investments.”

 

(b)            See Note 7 “Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities.”

 

(c)            See Note 15 “Commitments and Contingencies.”

 

4. INVESTMENTS

 

Investments consist of the following:

 

 

 

Fair Value

 

Cost

 

 

 

June 30, 2013

 

December 31, 2012

 

June 30, 2013

 

December 31, 2012

 

Private Equity

 

$

33,032,610

 

$

34,114,623

 

$

26,746,434

 

$

28,336,315

 

Fixed Income

 

4,397,697

 

3,396,067

 

4,320,529

 

3,266,846

 

Real Assets

 

2,198,427

 

1,775,683

 

4,199,709

 

3,861,792

 

Equity Method

 

424,652

 

200,831

 

229,897

 

20,847

 

Other

 

1,089,151

 

1,210,644

 

1,035,208

 

1,161,569

 

Total Investments

 

$

41,142,537

 

$

40,697,848

 

$

36,531,777

 

$

36,647,369

 

 

As of June 30, 2013, investments which represented greater than 5% of total investments consisted of Alliance Boots GmbH of $3.8 billion. As of December 31, 2012, investments which represented greater than 5% of the total investments consisted of Alliance Boots GmbH of $3.5 billion and HCA, Inc. of $2.1 billion. In addition, as of June 30, 2013 and December 31, 2012, investments totaling $2.2 billion and $2.1 billion, respectively, were pledged as direct collateral against various financing arrangements. See Note 8 “Debt Obligations.”

 

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(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

The following table represents private equity investments by industry as of June 30, 2013 and December 31, 2012, respectively:

 

 

 

Fair Value

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

 

 

 

 

Health Care

 

$

7,525,389

 

$

7,708,080

 

Retail

 

4,506,621

 

4,970,092

 

Technology

 

4,485,462

 

4,566,236

 

Manufacturing

 

3,681,576

 

3,240,474

 

Other

 

12,833,562

 

13,629,741

 

Total

 

$

33,032,610

 

$

34,114,623

 

 

 

In the table above, other investments represents private equity investments in the following industries: Education, Financial Services, Forestry, Consumer Products, Media, Services, Telecommunications, Transportation and Recycling. None of these industries represents more than 10% of total private equity investments as of June 30, 2013.

 

The majority of the securities underlying private equity investments represent equity securities. As of June 30, 2013 and December 31, 2012, the fair value of investments that were other than equity securities amounted to $537.3 million and $364.5 million, respectively.

 

Equity Method

 

Equity method investments include certain investments in private equity and real assets funds, funds of hedge funds, and alternative credit funds, which are not consolidated, but in which KKR is deemed to exert significant influence for accounting purposes.  See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these investments.

 

KKR evaluates each of its equity method investments to determine if any were significant as defined by guidance from the United States SEC. As of and for the three and six months ended June 30, 2013 and 2012, KKR’s equity method investments did not meet the significance criteria either on an individual or group basis. As such, presentation of separate financial statements for any of its equity method investments or summarized financial information on an individual or group basis is not required.

 

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(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

5. FAIR VALUE MEASUREMENTS

 

The following tables summarize the valuation of KKR’s investments and other financial instruments measured and reported at fair value by the fair value hierarchy levels described in Note 2 “Summary of Significant Accounting Policies” as of June 30, 2013 and December 31, 2012 including those investments and other financial instruments for which the fair value option has been elected.  Equity Method Investments have been excluded from the tables below.

 

Assets, at fair value: 

 

 

 

June 30, 2013

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level I)

 

Significant Other
Observable Inputs
(Level II)

 

Significant
Unobservable Inputs
(Level III)

 

Total

 

Private Equity

 

$

6,502,686

 

$

537,302

 

$

25,992,622

 

$

33,032,610

 

Fixed Income

 

 

2,981,681

 

1,416,016

 

4,397,697

 

Real Assets

 

 

 

2,198,427

 

2,198,427

 

Other

 

674,946

 

229,992

 

184,213

 

1,089,151

 

Total

 

7,177,632

 

3,748,975

 

29,791,278

 

40,717,885

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Forward Contracts

 

 

153,831

 

 

153,831

 

Foreign Currency Options

 

 

15,965

 

 

15,965

 

Other Derivatives

 

35

 

2,645

 

 

2,680

 

Total Assets

 

$

7,177,667

 

$

3,921,416

 

$

29,791,278

 

$

40,890,361

 

 

 

 

December 31, 2012

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level I)

 

Significant Other
Observable Inputs
(Level II)

 

Significant
Unobservable Inputs
(Level III)

 

Total

 

Private Equity

 

$

8,015,680

 

$

364,543

 

$

25,734,400

 

$

34,114,623

 

Fixed Income

 

 

1,809,021

 

1,587,046

 

3,396,067

 

Real Assets

 

 

 

1,775,683

 

1,775,683

 

Other

 

648,108

 

323,306

 

239,230

 

1,210,644

 

Total

 

8,663,788

 

2,496,870

 

29,336,359

 

40,497,017

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Forward Contracts

 

 

137,786

 

 

137,786

 

Foreign Currency Options

 

 

4,992

 

 

4,992

 

Other Derivatives

 

 

882

 

 

882

 

Total Assets

 

$

8,663,788

 

$

2,640,530

 

$

29,336,359

 

$

40,640,677

 

 

20



Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

Liabilities, at fair value:

 

 

 

June 30, 2013

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level I)

 

Significant Other
Observable Inputs
(Level II)

 

Significant
Unobservable
Inputs
(Level III)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Securities Sold Short

 

$

481,232

 

$

40,523

 

$

 

$

521,755

 

Foreign Currency Options

 

 

2,501

 

 

2,501

 

Foreign Exchange Forward Contracts

 

 

86,610

 

 

86,610

 

Unfunded Revolver Commitments

 

 

2,657

 

 

2,657

 

Other Derivatives

 

 

2,041

 

 

2,041

 

Total Liabilities

 

$

481,232

 

$

134,332

 

$

 

$

615,564

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level I)

 

Significant Other
Observable Inputs
(Level II)

 

Significant
Unobservable
Inputs
(Level III)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Securities Sold Short

 

$

321,977

 

$

28,376

 

$

 

$

350,353

 

Foreign Currency Options

 

 

3,362

 

 

3,362

 

Foreign Exchange Forward Contracts

 

 

229,314

 

 

229,314

 

Unfunded Revolver Commitments

 

 

2,568

 

 

2,568

 

Other Derivatives

 

 

3,751

 

 

3,751

 

Total Liabilities

 

$

321,977

 

$

267,371

 

$

 

$

589,348

 

 

The following tables summarize changes in private equity, fixed income, real assets and other investments measured and reported at fair value for which Level III inputs have been used to determine fair value for the three and six months ended June 30, 2013 and 2012, respectively:

 

21



Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

 

 

Three Months Ended
June 30, 2013

 

 

 

Private
Equity

 

Fixed
Income

 

Real Assets

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

26,673,255

 

$

1,443,494

 

$

1,995,970

 

$

228,632

 

$

30,341,351

 

Transfers In (1)

 

 

 

 

 

 

Transfers Out (2)

 

(915,612

)

(156,502

)

 

 

(1,072,114

)

Purchases

 

939,207

 

319,504

 

192,980

 

3,825

 

1,455,516

 

Sales

 

(1,026,753

)

(214,017

)

(56,275

)

(37,615

)

(1,334,660

)

Settlements

 

 

15,096

 

 

 

15,096

 

Net Realized Gains (Losses)

 

633,589

 

(10,292

)

14,930

 

(4,590

)

633,637

 

Net Unrealized Gains (Losses)

 

(311,064

)

18,733

 

50,822

 

(6,039

)

(247,548

)

Balance, End of Period

 

$

25,992,622

 

$

1,416,016

 

$

2,198,427

 

$

184,213

 

$

29,791,278

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities (including foreign exchange gains and losses attributable to foreign-denominated investments) related to Investments still held at Reporting Date

 

$

246,829

 

$

18,094

 

$

86,188

 

$

(6,039

)

$

345,072

 

 

 

 

Three Months Ended
June 30, 2012

 

 

 

Private
Equity

 

Fixed
Income

 

Real Assets

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

22,325,516

 

$

1,156,349

 

$

1,433,209

 

$

122,461

 

$

25,037,535

 

Transfers In (1)

 

 

 

 

 

 

Transfers Out (2)

 

 

 

 

(613

)

(613

)

Purchases

 

208,605

 

52,393

 

175,435

 

10,227

 

446,660

 

Sales

 

(225,037

)

(48,131

)

(54,419

)

(2,661

)

(330,248

)

Settlements

 

 

12,060

 

 

 

12,060

 

Net Realized Gains (Losses)

 

91,860

 

1,009

 

54,419

 

1,179

 

148,467

 

Net Unrealized Gains (Losses)

 

1,282,137

 

(37,221

)

(46,983

)

9,426

 

1,207,359

 

Balance, End of Period

 

$

23,683,081

 

$

1,136,459

 

$

1,561,661

 

$

140,019

 

$

26,521,220

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities (including foreign exchange gains and losses attributable to foreign-denominated investments) related to Investments still held at Reporting Date

 

$

1,376,598

 

$

(36,456

)

$

(5,867

)

$

9,642

 

$

1,343,917

 

 


(1)                                       There were no Transfers In for the three months ended June 30, 2013 and 2012.

 

(2)                                       The Transfers Out noted in the tables above for private equity investments are attributable to a portfolio company that completed an initial public offering during the period. The Transfers Out noted above for fixed income and other investments are principally attributable to certain investments that experienced a higher level of market activity during the period and thus were valued using observable inputs.

 

22



Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)

 

(All Dollars are in Thousands, Except Unit, Per Unit Data, and Except Where Noted)

 

 

 

Six Months Ended
June 30, 2013

 

 

 

Private
Equity

 

Fixed
Income

 

Real Assets

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

25,734,400

 

$

1,587,046

 

$

1,775,683

 

$

239,230

 

$

29,336,359

 

Transfers In (1)

 

 

8,936

 

 

 

8,936

 

Transfers Out (2)

 

(915,612

)

(234,729

)

 

(19,264

)

(1,169,605

)

Purchases

 

1,274,318

 

451,322

 

377,457

 

10,652

 

2,113,749

 

Sales

 

(1,026,753

)

(417,749

)

(56,275

)

(54,666

)

(1,555,443

)

Settlements

 

 

43,041

 

 

 

43,041

 

Net Realized Gains (Losses)

 

633,589

 

(4,923

)

14,930

 

2,354

 

645,950

 

Net Unrealized Gains (Losses)

 

292,680

 

(16,928

)

86,632

 

5,907

 

368,291

 

Balance, End of Period

 

$

25,992,622

 

$

1,416,016

 

$

2,198,427

 

$

184,213

 

$

29,791,278

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities (including foreign exchange gains and losses attributable to foreign-denominated investments) related to Investments still held at Reporting Date

 

$

850,573

 

$

(8,567

)

$

121,998

 

$

5,907

 

$

969,911

 

 

<

 

 

Six Months Ended
June 30, 2012

 

 

 

Private
Equity

 

Fixed
Income

 

Real Assets

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

20,384,253

 

$

1,016,759

 

$

1,526,732

 

$

96,179

 

$

23,023,923

 

Transfers In (1)

 

 

311

 

 

1,061

 

1,372

 

Transfers Out (2)

 

 

(12,627

)