KKR - 2015.6.30 10-Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
 
 
 
 
 
Form 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended June 30, 2015
 
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 57th 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 ý 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 ý 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
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of August 4, 2015, there were 450,396,361 Common Units of the registrant outstanding
 


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KKR & CO. L.P.
 
FORM 10-Q
 
For the Quarter Ended June 30, 2015
 
INDEX
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, 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. Without limiting the foregoing, statements regarding the expected synergies from the acquisitions of KKR Financial Holdings LLC, Avoca Capital, Prisma Capital Partners LP, and their affiliates may constitute forward-looking statements that are subject to the risk that the benefits and anticipated synergies from such transactions are not realized. 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on February 27, 2015. 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. ("Group Holdings") 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. On August 5, 2014, KKR International Holdings L.P. became a KKR Group Partnership. Each KKR Group Partnership has an identical number of partner interests and, when held together, one Class A partner interest in each of the KKR Group Partnerships together represents one KKR Group Partnership Unit.

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 and other employees and non-employee operating consultants in respect of the carried interest from KKR's business as part of our "carry pool" and certain minority interests. References to "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 our senior employees who hold interests in our Managing Partner entitling them to vote for the election of its directors.

References to non-employee operating consultants include employees of KKR Capstone and are not employees of KKR. KKR Capstone refers to a group of entities that are owned and controlled by their senior management. KKR Capstone is not a subsidiary or affiliate of KKR. KKR Capstone operates under several consulting agreements with KKR and uses the "KKR" name under license from KKR.

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 "GAAP" refers to accounting principles generally accepted in the United States of America.

We disclose certain financial measures in this report that are calculated and presented using methodologies other than in accordance with GAAP. We believe that providing these performance measures on a supplemental basis to our GAAP results is helpful to unitholders in assessing the overall performance of KKR's businesses. These financial measures should not be

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considered as a substitute for similar financial measures calculated in accordance with GAAP, if available. We caution readers that these non-GAAP financial measures may differ from the calculations of other investment managers, and as a result, may not be comparable to similar measures presented by other investment managers. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included within "Condensed Consolidated Financial Statements (Unaudited)—Note 13. Segment Reporting" and later in this report under "Management's Discussion and Analysis of Financial Condition and Results of Operations — Segment Balance Sheet."

This report uses the terms total distributable earnings, net realized investment income, assets under management or AUM, fee paying assets under management or FPAUM, fee related earnings or FRE, fee and yield earnings, economic net income or ENI, equity invested, gross dollars invested and syndicated capital. You should note that our calculations of these financial measures and other financial measures may differ from the calculations of other investment managers and, as a result, our financial measures may not be comparable to similar measures presented by other investment managers. These and other financial measures are defined in the section "Management's Discussion and Analysis of Financial Condition & Results of Operations—Key Financial Measures under GAAP—Segment Operating and Performance Measures" and "— Segment Balance Sheet —Liquidity—Liquidity Needs."

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 including CLO and CMBS vehicles, unless context requires otherwise. They do not include investment funds, vehicles or accounts of any hedge fund manager in which we may acquire a non-controlling interest.

Unless otherwise indicated, references in this report to our fully exchanged and diluted common units outstanding, or to our common units outstanding on a fully exchanged and 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, (iii) common units issuable in respect of exchangeable equity securities issued in connection with the acquisition of Avoca Capital ("Avoca"), and (iv) 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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KKR & CO. L.P.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
 
(Amounts in Thousands, Except Unit Data)
 
 
June 30,
2015
 
December 31,
2014
Assets
 

 
 

Cash and Cash Equivalents
$
1,824,686

 
$
918,080

Cash and Cash Equivalents Held at Consolidated Entities
2,085,126

 
1,372,775

Restricted Cash and Cash Equivalents
157,886

 
102,991

Investments
64,515,178

 
60,167,626

Due from Affiliates
109,209

 
147,056

Other Assets
3,001,612

 
3,164,217

Total Assets
$
71,693,697

 
$
65,872,745

 
 
 
 
Liabilities and Equity
 

 
 

Debt Obligations
$
15,889,573

 
$
10,837,784

Due to Affiliates
144,706

 
131,548

Accounts Payable, Accrued Expenses and Other Liabilities
3,543,283

 
3,199,352

Total Liabilities
19,577,562

 
14,168,684

 
 
 
 
Commitments and Contingencies

 


 
 
 
 
Redeemable Noncontrolling Interests
118,070

 
300,098

 
 
 
 
Equity
 

 
 

KKR & Co. L.P. Partners’ Capital (450,396,361 and 433,330,540 common units issued and outstanding as of June 30, 2015 and December 31, 2014, respectively)
5,977,190

 
5,403,095

Accumulated Other Comprehensive Income (Loss)
(29,775
)
 
(20,404
)
Total KKR & Co. L.P. Partners’ Capital
5,947,415

 
5,382,691

Noncontrolling Interests
46,050,650

 
46,004,377

Appropriated Capital

 
16,895

Total Equity
51,998,065

 
51,403,963

Total Liabilities and Equity
$
71,693,697

 
$
65,872,745

 
See notes to condensed consolidated financial statements.


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KKR & CO. L.P.
 
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued) (UNAUDITED)
 
(Amounts in Thousands)
 
The following presents the portion of the consolidated balances presented in the condensed consolidated statements of financial condition attributable to consolidated variable interest entities (“VIEs”) as of June 30, 2015 and December 31, 2014. The assets of consolidated collateralized financing entities (“CFEs”) holding collateralized loan obligations ("CLOs") and commercial real estate mortgage-backed securities ("CMBS”), which comprise the majority of KKR’s consolidated VIEs, are held solely as collateral to satisfy the obligations of the CFEs. KKR has no right to the benefits from, nor does KKR bear the risks associated with, the assets held by these CFEs beyond KKR’s beneficial interest therein and any fees generated from the CFEs. The assets in each CFE can be used only to settle the debt of the related CFE. The noteholders and other creditors of the CFEs have no recourse to KKR’s general assets. There are neither explicit arrangements nor does KKR hold implicit variable interests that would require KKR to provide any ongoing financial support to the CFEs.
 
 
June 30, 2015
 
December 31, 2014
Assets
 

 
 
Cash and Cash Equivalents Held at Consolidated Entities
$
1,501,385

 
$
1,046,018

Investments
10,810,954

 
8,559,967

Other Assets
251,312

 
129,949

Total Assets
$
12,563,651

 
$
9,735,934

 
 

 
 
Liabilities
 

 
 
Debt Obligations
$
10,410,812

 
$
7,615,340

Accounts Payable, Accrued Expenses and Other Liabilities
830,661

 
638,953

Total Liabilities
$
11,241,473

 
$
8,254,293

 
See notes to condensed consolidated financial statements.


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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,
 
2015
 
2014
 
2015
 
2014
Revenues
 

 
 

 
 

 
 

Fees and Other
$
255,874

 
$
249,370

 
$
547,219

 
$
552,296

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 

 
 

Compensation and Benefits
411,691

 
358,730

 
776,690

 
689,768

Occupancy and Related Charges
16,172

 
16,059

 
31,904

 
31,467

General, Administrative and Other
126,314

 
210,536

 
260,616

 
337,261

Total Expenses
554,177

 
585,325

 
1,069,210

 
1,058,496

 
 
 
 
 
 
 
 
Investment Income (Loss)
 

 
 

 
 

 
 

Net Gains (Losses) from Investment Activities
3,110,604

 
1,971,850

 
5,030,429

 
3,944,030

Dividend Income
360,556

 
272,902

 
439,371

 
369,606

Interest Income
302,985

 
215,872

 
599,143

 
377,832

Interest Expense
(139,427
)
 
(65,997
)
 
(251,390
)
 
(100,728
)
Total Investment Income (Loss)
3,634,718

 
2,394,627

 
5,817,553

 
4,590,740

 
 
 
 
 
 
 
 
Income (Loss) Before Taxes
3,336,415

 
2,058,672

 
5,295,562

 
4,084,540

 
 
 
 
 
 
 
 
Income Taxes
30,547

 
6,176

 
46,685

 
27,878

 
 
 
 
 
 
 
 
Net Income (Loss)
3,305,868

 
2,052,496

 
5,248,877

 
4,056,662

Net Income (Loss) Attributable to Redeemable Noncontrolling Interests
(891
)
 
(6,809
)
 
1,042

 
3,828

Net Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital
2,930,453

 
1,881,090

 
4,601,022

 
3,664,578

 
 
 
 
 
 
 
 
Net Income (Loss) Attributable to KKR & Co. L.P.
$
376,306

 
$
178,215

 
$
646,813

 
$
388,256

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

 
 

 
 

 
 

Basic
$
0.84


$
0.47

 
$
1.47

 
$
1.16

Diluted
$
0.78


$
0.43

 
$
1.35

 
$
1.06

Weighted Average Common Units Outstanding
 

 
 

 
 

 
 

Basic
446,794,950


377,542,161

 
440,867,813

 
335,748,498

Diluted
482,651,491

 
410,179,838

 
477,467,220

 
367,877,049

 
See notes to condensed consolidated financial statements.

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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,
 
2015
 
2014
 
2015
 
2014
Net Income (Loss)
$
3,305,868

 
$
2,052,496

 
$
5,248,877

 
$
4,056,662

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
4,999

 
(514
)
 
(17,427
)
 
4,829

 
 
 
 
 
 
 
 
Comprehensive Income (Loss)
3,310,867

 
2,051,982

 
5,231,450

 
4,061,491

 
 
 
 
 
 
 
 
Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interests
(891
)
 
(6,809
)
 
1,042

 
3,828

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital
2,932,747

 
1,880,668

 
4,592,311

 
3,668,428

 
 
 
 
 
 
 
 
Comprehensive Income (Loss) Attributable to KKR & Co. L.P.
$
379,011

 
$
178,123

 
$
638,097

 
$
389,235

 
See notes to condensed consolidated financial statements.

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KKR & CO. L.P.
 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
 
(Amounts in Thousands, Except Unit Data)
 
 
KKR & Co. L.P.
 
 
 
 
 
 
 
 
 
Common
Units
 
Partners’
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Appropriated Capital
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance at January 1, 2014
288,143,327

 
$
2,727,909

 
$
(5,899
)
 
$
43,235,001

 
$

 
$
45,957,011

 
$
627,807

Net Income (Loss)
 

 
388,256

 
 

 
3,644,450

 
20,128

 
4,052,834

 
3,828

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

 
 

 
979

 
3,841

 
9

 
4,829

 
 

Exchange of KKR Holdings L.P. Units and Other Exchangeable Securities to KKR & Co. L.P. Common Units and transfers of CLO beneficial interests to appropriated capital
18,478,290

 
217,275

 
(429
)
 
(244,522
)
 
27,676

 

 
 

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

 
28,974

 
506

 
 

 
 
 
29,480

 
 

Net Delivery of Common Units-Equity Incentive Plan
4,507,807

 
(1,733
)
 
 

 
 

 
 
 
(1,733
)
 
 

Equity Based Compensation
 
 
80,230

 
 

 
90,255

 
 
 
170,485

 
 

Acquisitions
104,340,028

 
2,369,559

 
 
 
435,478

 
 
 
2,805,037

 
 
Capital Contributions
 

 
 
 
 

 
7,145,096

 
 
 
7,145,096

 
87,718

Capital Distributions
 

 
(313,750
)
 
 

 
(8,361,626
)
 
 
 
(8,675,376
)
 
(442,269
)
Balance at June 30, 2014
415,469,452

 
$
5,496,720

 
$
(4,843
)
 
$
45,947,973

 
$
47,813

 
$
51,487,663

 
$
277,084

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KKR & Co. L.P.
 
 
 
 
 
 
 
 
 
Common
Units
 
Partners’
Capital
 
Accumulated
 Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Appropriated
Capital
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance at January 1, 2015
433,330,540

 
$
5,403,095

 
$
(20,404
)
 
$
46,004,377

 
$
16,895

 
$
51,403,963

 
$
300,098

Net Income (Loss)
 

 
646,813

 
 

 
4,601,022

 
 
 
5,247,835

 
1,042

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

 
 

 
(8,716
)
 
(8,711
)
 
 
 
(17,427
)
 
 

Cumulative-effect adjustment from adoption of accounting guidance
 
 
(307
)
 
 
 
 
 
(16,895
)
 
(17,202
)
 
 
Exchange of KKR Holdings L.P. Units and Other Securities to KKR & Co. L.P. Common Units
9,898,971

 
127,396

 
(893
)
 
(126,503
)
 
 
 

 
 

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

 
13,928

 
238

 
 

 
 

 
14,166

 
 

Net Delivery of Common Units-Equity Incentive Plan
7,166,850

 
40,559

 
 
 


 
 
 
40,559

 
 
Equity Based Compensation
 

 
100,718

 
 

 
45,310

 
 

 
146,028

 
 

Capital Contributions
 

 
0

 
 

 
2,668,360

 
 

 
2,668,360

 
116,993

Capital Distributions
 

 
(355,012
)
 
 

 
(7,133,205
)
 
 

 
(7,488,217
)
 
(300,063
)
Balance at June 30, 2015
450,396,361

 
$
5,977,190

 
$
(29,775
)
 
$
46,050,650

 
$

 
$
51,998,065

 
$
118,070

 
See notes to condensed consolidated financial statements.

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KKR & CO. L.P.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(Amounts in Thousands) 
 
Six Months Ended June 30,
 
2015
 
2014
Operating Activities
 

 
 

Net Income (Loss)
$
5,248,877

 
$
4,056,662

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities:
 

 
 

Equity Based Compensation
146,028

 
170,485

Net Realized (Gains) Losses on Investments
(3,311,927
)
 
(3,888,183
)
Change in Unrealized (Gains) Losses on Investments
(1,718,502
)
 
(55,847
)
Other Non-Cash Amounts
(94,761
)
 
(57,251
)
Cash Flows Due to Changes in Operating Assets and Liabilities:


 
 

Change in Cash and Cash Equivalents Held at Consolidated Entities
(763,002
)
 
(1,351,516
)
Change in Due from / to Affiliates
33,534

 
11,997

Change in Other Assets
683,953

 
27,521

Change in Accounts Payable, Accrued Expenses and Other Liabilities
270,182

 
(106,289
)
Investments Purchased
(14,650,372
)
 
(20,307,521
)
Proceeds from Sale of Investments and Principal Payments
15,155,278

 
23,366,999

Net Cash Provided (Used) by Operating Activities
999,288

 
1,867,057

 
 
 
 
Investing Activities
 

 
 

Change in Restricted Cash and Cash Equivalents
(54,895
)
 
878

Purchase of Furniture, Computer Hardware and Leasehold Improvements
(5,214
)
 
(4,715
)
Development of Oil and Natural Gas Properties
(75,478
)
 

Proceeds from Sale of Oil and Natural Gas Properties
4,863

 

Net Cash Acquired (Paid for Acquisitions)

 
151,491

Net Cash Provided (Used) by Investing Activities
(130,724
)
 
147,654

 
 
 
 
Financing Activities
 

 
 

Distributions to Partners
(355,012
)
 
(313,750
)
Distributions to Redeemable Noncontrolling Interests
(300,063
)
 
(442,269
)
Contributions from Redeemable Noncontrolling Interests
116,993

 
87,718

Distributions to Noncontrolling Interests
(7,133,205
)
 
(8,361,626
)
Contributions from Noncontrolling Interests
2,668,360

 
7,145,096

Net Delivery of Common Units - Equity Incentive Plan
40,559

 
(1,733
)
Proceeds from Debt Obligations
7,289,657

 
2,006,534

Repayment of Debt Obligations
(2,266,621
)
 
(924,947
)
Financing Costs Paid
(22,626
)
 
(11,912
)
Net Cash Provided (Used) by Financing Activities
38,042

 
(816,889
)
 
 
 
 
Net Increase/(Decrease) in Cash and Cash Equivalents
906,606

 
1,197,822

Cash and Cash Equivalents, Beginning of Period
918,080

 
1,306,383

Cash and Cash Equivalents, End of Period
$
1,824,686

 
$
2,504,205

 
See notes to condensed consolidated financial statements.

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KKR & CO. L.P.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (UNAUDITED)
 
(Amounts in Thousands)
 
 
Six Months Ended June 30,
 
2015
 
2014
Supplemental Disclosures of Cash Flow Information
 

 
 

Payments for Interest
$
203,610

 
$
73,623

Payments for Income Taxes
$
24,617

 
$
15,923

Supplemental Disclosures of Non-Cash Investing and Financing Activities
 

 
 

Non-Cash Contributions of Equity Based Compensation
$
146,028

 
$
170,485

Acquisitions
$

 
$
2,805,037

Cumulative effect adjustment from adoption of accounting guidance
$
(17,202
)
 
$

Debt Obligations-Foreign Exchange Gains (Losses), Translation and Other
$
28,498

 
$
(25,360
)
Tax Effects Resulting from Exchange of KKR Holdings L.P. Units and delivery of KKR & Co. L.P. Common Units
$
14,166

 
$
29,480

Net Assets Acquired
 

 
 

Cash and Cash Equivalents Held at Consolidated Entities
$

 
$
765,231

Restricted Cash and Cash Equivalents
$

 
$
35,038

Investments
$

 
$
9,225,660

Other Assets
$

 
$
885,314

Debt Obligations
$

 
$
7,538,726

Accounts Payable, Accrued Expenses and Other Liabilities
$

 
$
616,979

 
See notes to condensed consolidated financial statements.


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KKR & CO. L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(All Amounts 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 manages investments across multiple asset classes including private equity, energy, infrastructure, real estate, credit and hedge funds. KKR aims to generate attractive investment returns by following a patient and disciplined investment approach, employing world class people, and driving growth and value creation at the asset level. KKR invests its own capital alongside the capital it manages for fund investors and brings debt and equity investment opportunities to others through its capital markets business.
 
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, (ii) KKR Fund Holdings L.P. (“Fund Holdings”) 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, and (iii) KKR International Holdings L.P. (“International Holdings”, and together with Management Holdings and Fund Holdings, the “KKR Group Partnerships”) directly and through KKR Fund Holdings GP Limited. 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 Class A partner 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 Holdings L.P. (“KKR Holdings”), which is not a subsidiary of KKR. As of June 30, 2015, KKR & Co. L.P. held approximately 55% of the KKR Group Partnership Units and principals through KKR Holdings held approximately 45% of the KKR Group Partnership Units. The percentage ownership in the KKR Group Partnerships will continue to change as KKR Holdings and/or principals exchange units in the KKR Group Partnerships for KKR & Co. L.P. common units or when KKR & Co. L.P. otherwise issues new KKR & Co. L.P. common units.





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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 (referred to hereafter as the “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, 2014 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, 2014, 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”).
 
KKR & Co. L.P. consolidates the financial results of the KKR Group Partnerships and their consolidated subsidiaries, which include (i) the accounts of KKR’s investment management and capital markets companies, (ii) the general partners of certain unconsolidated funds and vehicles, (iii) general partners of consolidated funds and their respective consolidated funds and (iv) certain other entities including CFEs.

References in the accompanying financial statements to “principals” are to KKR’s senior employees and non-employee operating consultants who hold interests in KKR’s business through KKR Holdings, and references to “Senior Principals” are to KKR’s senior employees who hold interests in the Managing Partner entitling them to vote for the election of the Managing Partner’s directors.
 
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.
 
Principles of Consolidation
 
The types of entities KKR assesses for consolidation include (i) subsidiaries, including management companies, broker-dealers and general partners of investment funds that KKR manages, (ii) entities that have all the attributes of an investment company, like investment funds, (iii) CFEs and (iv) other entities, including entities that employ non-employee operating consultants. Each of these entities is assessed for consolidation on a case by case basis depending on the specific facts and circumstances surrounding that entity.
 
Pursuant to its consolidation policy, KKR first considers whether an entity is considered a VIE and therefore whether to apply the consolidation guidance under the VIE model.  Entities that do not qualify as VIEs are generally assessed for consolidation as voting interest entities (“VOEs”) under the voting interest model.
 
The consolidation rules were revised effective January 1, 2010 which had the effect of changing the criteria for determining whether a reporting entity is the primary beneficiary of a VIE.  However, the adoption of these new consolidation rules was indefinitely deferred (the “Deferral”) for a reporting entity’s interests in certain entities. In particular, entities that have all the attributes of an investment company such as investment funds generally meet the conditions necessary for the Deferral. Entities that are securitization or asset-backed financing entities such as CFEs would generally not qualify for the Deferral. Accordingly, when making the assessment of whether an entity is a VIE, KKR considers whether the entity being assessed meets the conditions for the Deferral and therefore would be subject to the rules that existed prior to January 1, 2010.  Under both sets of rules, VIEs for which KKR is determined to be the primary beneficiary are consolidated and such VIEs generally include certain CFEs and entities that employ non-employee operating consultants.
 
An entity in which KKR holds a variable interest is a VIE if any one of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial

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support, (b) the holders of equity investment at risk (as a group) lack either the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the success of the legal entity or the obligation to absorb the expected losses or right to receive the expected residual returns, or (c) the voting rights of some investors are disproportionate to their obligation to absorb the expected losses of the legal entity, their rights to receive the expected residual returns of the legal entity, or both and substantially all of the legal entity’s activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.

With respect to VIEs such as KKR’s investment funds that qualify for the Deferral and therefore apply the previous consolidation rules, KKR is determined to be the primary beneficiary if its involvement, through holding interests directly or indirectly in the VIE or contractually through other variable interests (e.g., carried interest), would be expected to absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. In cases where two or more KKR related parties hold a variable interest in a VIE, and the aggregate variable interest held by those parties would, if held by a single party, identify that party as the primary beneficiary, then KKR is determined to be the primary beneficiary to the extent it is the party within the related party group that is most closely associated with the VIE.
 
Under the voting interest model, KKR consolidates those entities it controls through a majority voting interest or through other means, including those VOEs in which the general partner is presumed to have control. KKR does not consolidate those VOEs in which the presumption of control by the general partner has been overcome through either the granting of substantive rights to the unaffiliated fund investors to either dissolve the fund or remove the general partner (“kick-out rights”) or the granting of substantive participating rights.
 
The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE depends on the facts and circumstances surrounding each entity and therefore certain of KKR’s investment funds may qualify as VIEs whereas others may qualify as VOEs.
 
With respect to KKR’s consolidated funds that are not CFEs, KKR meets the criteria for the Deferral and therefore applies the consolidation rules that existed prior to January 1, 2010.  For these funds, 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 a 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. 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 considered to be a VOE and KKR generally consolidates the fund under the VOE model.
 
With respect to CFEs, which are generally VIEs, the criteria for the Deferral are not met and therefore KKR applies the consolidation rules issued on January 1, 2010.  

With respect to CLOs, in its role as collateral manager, KKR generally has the power to direct the activities of the CLO entities that most significantly impact the economic performance of the entity.  In some, but not all cases, KKR, through both its residual interest in the CLO and the potential to earn an incentive fee, may have variable interests that represent an obligation to absorb losses of, or a right to receive benefits from, the CLO that could potentially be significant to the CLO.  In cases where KKR has both (a) the power to direct the activities of the CLO that most significantly impact the CLOs economic performance and (b) the obligation to absorb losses of the CLO or the right to receive benefits from the CLO that could potentially be significant to the CLO, KKR consolidates the CLO.

With respect to CMBS vehicles, KKR holds the residual interest in the CMBS and generally has the right to unilaterally name and remove the special servicer for the CMBS. These rights give KKR the ability to direct activities that could most significantly impact the economic performance of the CMBS. In some, but not all cases, KKR through its interest in the CMBS, may have a variable interest that represents an obligation to absorb losses of, or a right to receive benefits from, the CMBS that could potentially be significant to the CMBS. In cases where KKR has both (a) the power to direct the activities of the CMBS that most significantly impact the economic performance of the CMBS and (b) the obligation to absorb losses of the CMBS or the right to receive benefits from the CMBS that could potentially be significant to the CMBS, KKR consolidates the CMBS.
 
Certain of KKR’s funds and CFEs are consolidated by KKR notwithstanding the fact that KKR has only a minority economic interest in those funds and CFEs. KKR’s financial statements reflect the assets, liabilities, fees, expenses, investment income (loss) and cash flows of the consolidated KKR funds and CFEs on a gross basis. With respect to KKR's consolidated funds, the majority of the economic interests in those funds, which are held by fund investors or other third parties, are

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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. With respect to consolidated CFEs, interests held by third party investors are recorded in debt obligations.
 
KKR’s funds are, for GAAP purposes, investment companies and therefore are not required to consolidate their investments in portfolio companies even if majority-owned and controlled. Rather, the consolidated funds and vehicles reflect their investments at fair value as described below in “Fair Value Measurements”.
 
All intercompany transactions and balances have been eliminated.
 
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 recorded in Other Assets in the accompanying condensed consolidated 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 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 is assessed for impairment annually or more frequently if circumstances indicate impairment may have occurred. Goodwill is recorded in Other Assets in the accompanying 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. Fund investors interests subject to redemption as described above are presented as Redeemable Noncontrolling Interests in the accompanying condensed consolidated statements of financial condition and presented as Net Income (Loss) Attributable to Redeemable Noncontrolling Interests in the accompanying 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 accompanying 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 accompanying 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.
 




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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;
(ii)
third parties holding 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 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’ tenure with KKR prior to October 1, 2009;
(iv)
certain principals 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;
(v)
third parties in KKR’s capital markets business;
(vi)
holders of exchangeable equity securities representing ownership interests in a subsidiary of a KKR Group Partnership issued in connection with the acquisition of Avoca; and
(vii)
holders of the 7.375% Series A LLC Preferred Shares of KFN whose rights are limited to the assets of KFN.
 
Noncontrolling Interests held by KKR Holdings
 
Noncontrolling interests held by KKR Holdings include economic interests held by principals in the KKR Group Partnerships. Such 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,
 
2015
 
2014
 
2015
 
2014
Balance at the beginning of the period
$
4,719,963

 
$
5,118,491

 
$
4,661,679

 
$
5,116,761

Net income (loss) attributable to noncontrolling interests held by KKR Holdings (a)
325,703

 
186,776

 
564,711

 
487,590

Other comprehensive income (loss), net of tax(b)
3,545

 
872

 
(7,532
)
 
3,341

Impact of the exchange of KKR Holdings units to KKR & Co. L.P. common units (c) 
(67,413
)
 
(100,001
)
 
(125,553
)
 
(244,522
)
Equity based compensation
17,117

 
45,161

 
37,634

 
80,312

Capital contributions
300

 
388

 
550

 
848

Capital distributions
(171,831
)
 
(169,032
)
 
(304,105
)
 
(361,675
)
Balance at the end of the period
$
4,827,384

 
$
5,082,655

 
$
4,827,384

 
$
5,082,655

 
 
 
 
 
(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

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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.

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,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
3,305,868

 
$
2,052,496

 
$
5,248,877

 
$
4,056,662

Less: Net income (loss) attributable to Redeemable Noncontrolling Interests
(891
)
 
(6,809
)
 
1,042

 
3,828

Less: Net income (loss) attributable to Noncontrolling Interests in consolidated entities and appropriated capital
2,604,750

 
1,694,314

 
4,036,311

 
3,176,988

Plus: Income taxes attributable to KKR Management Holdings Corp.
17,558

 
688

 
23,611

 
11,635

Net income (loss) attributable to KKR & Co. L.P. and KKR Holdings
$
719,567

 
$
365,679

 
$
1,235,135

 
$
887,481

 
 
 
 
 
 
 
 
Net income (loss) attributable to noncontrolling interests held by KKR Holdings
$
325,703

 
$
186,776

 
$
564,711

 
$
487,590

 
Investments
 
Investments consist primarily of private equity, real assets, credit, investments of consolidated CFEs, 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 equity investments in operating businesses.
 
Real Assets — Consists primarily of investments in (i) energy related assets, principally oil and natural gas producing properties held through consolidated investment vehicles, (ii) infrastructure assets, and (iii) real estate, principally residential and commercial real estate assets and businesses.
 
Credit — 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 unconsolidated CLOs.
 
Investments of Consolidated CFEs — Consists primarily of (i) investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans) held directly by the consolidated CLOs and (ii) investments in newly originated, fixed-rate mortgage loans held directly by the consolidated CMBS vehicles.
 
Other — Consists primarily of (i) investments in common stock, preferred stock, warrants and options of companies that are not private equity, real assets, credit or investments of consolidated CFEs and (ii) equity method investments.

Energy Investments Held Through Consolidated Investment Vehicles

Certain energy investments are made through KKR’s consolidated investment funds, including investments in working and royalty interests in oil and natural gas producing properties as well as investments in operating companies that operate in the energy industry. Since these investments are held through investment funds, such investments are reflected at fair value as of the end of the reporting period. 

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Investments in operating companies that are held through KKR’s investment funds are generally classified within private equity investments and investments in working and royalty interests in oil and natural gas producing properties are generally classified as real asset investments. See also "Energy Investments held directly by KKR" within this footnote.

Equity Method
 
Equity method investments include (i) certain investments in private equity funds, real assets funds and credit funds, which are not consolidated, and (ii) certain investments in operating companies in which KKR is deemed to exert significant influence. 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 are reported at fair value, the carrying value of these equity method investments representing KKR’s interests in unconsolidated funds approximates fair value. The carrying value of equity method investments in certain operating companies, which KKR is determined to exert significant influence, is determined based on the amounts invested by KKR, adjusted for the equity in earnings or losses of the investee allocated based on KKR’s respective ownership percentage, less distributions. In some cases, KKR has elected the fair value option to account for certain of these equity method 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 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 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. In addition, KKR has elected the fair value option for the investments of consolidated CFEs.
 
The carrying amounts of Other Assets, Accounts Payable, Accrued Expenses and Other Liabilities recognized on the condensed consolidated statements of financial condition (excluding fixed assets, goodwill, intangible assets, oil & gas assets, net, contingent consideration and certain debt obligations) approximate fair value due to their short term maturities. Further information on KKR’s debt obligations are presented in Note 9, “Debt Obligations.”
 
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 fair 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, debt and securities sold short.
 




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Level II
 
Inputs are 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 credit investments, investments and debt obligations of consolidated CMBS vehicles and consolidated CLO entities (beginning on January 1, 2015), convertible debt securities indexed to publicly-listed securities, less liquid and restricted equity securities and certain over-the-counter derivatives such as foreign currency option and forward contracts.
 
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, credit investments and debt obligations of consolidated CLOs (prior to January 1, 2015) 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.
 
Management’s determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are management’s best estimates after consideration of a variety of internal and external factors.

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity
 
As of January 1, 2015, KKR has adopted the measurement alternative included in ASU 2014-13, “Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity” (“ASU 2014-13”), and has applied the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of January 1, 2015. Refer to the condensed consolidated statements of changes in equity for the impact of this adjustment. Pursuant to ASU 2014-13, KKR measures both the financial assets and financial liabilities of the consolidated CFEs in its condensed consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities.
Prior to the adoption of ASU 2014-13, KKR elected the fair value option for the assets and liabilities of the consolidated CLO vehicles. As of January 1, 2015, KKR did not hold any beneficial interests in any CMBS vehicle, and consequently did not consolidate any CMBS vehicles. KKR accounted for the difference between the fair value of the assets and the fair value of the liabilities of the consolidated CLOs in Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. This amount was attributed to KKR and third party beneficial interest holders based on each beneficial holder’s residual interest in the consolidated CLOs. The amount attributed to third party beneficial interest holders

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was reflected in the condensed consolidated statements of operations in Net Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital and in the condensed consolidated statements of financial condition in Appropriated Capital within Equity. The amount was recorded as Appropriated Capital since the other holders of the CLOs’ beneficial interests, not KKR, received the benefits or absorbed the losses associated with their proportionate share of the CLOs’ assets and liabilities.
Pursuant to the adoption of ASU 2014-13, KKR is required to determine whether the fair value of the financial assets or financial liabilities are more observable. For the consolidated CLO entities, KKR has determined that the fair value of the financial assets of the consolidated CLOs, which are Level II assets within the GAAP hierarchical levels, are more observable than the fair value of the financial liabilities of the consolidated CLOs, which are Level III liabilities. As a result, the financial assets of the consolidated CLOs are being measured at fair value and the financial liabilities are being measured in consolidation as: (1) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets that are incidental to the operations of the CLOs less (2) the sum of the fair value of any beneficial interests retained by KKR (other than those that represent compensation for services) and KKR’s carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interests retained by KKR).
For the consolidated CMBS vehicles, KKR has determined that the fair value of the financial liabilities of the consolidated CMBS vehicles, which are Level II liabilities within the GAAP hierarchical levels, are more observable than the fair value of the financial assets of the consolidated CMBS vehicles, which are Level III assets. As a result, the financial liabilities of the consolidated CMBS vehicles are being measured at fair value and the financial assets are being measured in consolidation as: (1) the sum of the fair value of the financial liabilities (other than the beneficial interests retained by KKR), the fair value of the beneficial interests retained by KKR and the carrying value of any nonfinancial liabilities that are incidental to the operations of the CMBS vehicles less (2) the carrying value of any nonfinancial assets that are incidental to the operations of the CMBS vehicles. The resulting amount is allocated to the individual financial assets.
Under the measurement alternative pursuant to ASU 2014-13, KKR’s condensed consolidated net income (loss) reflects KKR’s own economic interests in the consolidated CFEs including (i) changes in the fair value of the beneficial interests retained by KKR and (ii) beneficial interests that represent compensation for services rendered.
Level II Valuation Methodologies
 
Financial assets and liabilities categorized as Level II consist primarily of credit investments, investments and debt obligations of consolidated CFEs, convertible debt securities indexed to publicly-listed securities, less liquid and restricted equity securities and certain over-the-counter derivatives such as foreign currency option and forward contracts.
 
Credit investments, investments of consolidated CLOs and CMBS debt obligations: These instruments 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 instrument. Ask prices represent the lowest price that KKR and others are willing to accept for an instrument. 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 to the point within the bid-ask range that meets KKR’s best estimate of fair value.
 
Securities indexed to publicly listed securities: 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.

Restricted Equity Securities: The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction.

Derivatives: The valuation incorporates observable inputs comprising yield curves, foreign currency rates and credit spreads.


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CLO Debt Obligations: Beginning on January 1, 2015 with the adoption of ASU 2014-13, KKR measures CLO debt obligations on the basis of the fair value of the financial assets of the CLO.

Investments of consolidated CMBS vehicles: KKR measures the investments of CMBS vehicles on the basis of the fair value of the financial liabilities of the CMBS.

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 in both methodologies. However, when a definitive agreement has been executed to sell an investment, KKR generally considers a significant determinant of fair value to be the consideration to be received by KKR pursuant to the executed definitive agreement.
 
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, except that the value may be higher or lower than such range in the case of investments being sold pursuant to an executed definitive agreement.
 
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, the expected hold period and manner of realization for the investment, and in the case of investments being sold pursuant to an executed definitive agreement, the probability of such sale being completed. 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 76.7% 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 an illiquidity discount is to be applied, KKR seeks to take 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 KKR holds 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: Real asset investments in infrastructure, energy and real estate are valued using one or more of the discounted cash flow analysis, market comparables analysis and direct income capitalization, which in each case incorporates significant assumptions and judgments. Infrastructure investments are generally valued using the discounted cash flow analysis. Key inputs used in this methodology include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. Energy investments are generally valued using a discounted cash flow analysis. Key inputs used in this methodology that require estimates include the weighted average cost of capital. In addition, the valuations of energy investments generally incorporate both commodity prices as quoted on indices and long-term commodity price forecasts, which may be substantially different from, and are currently higher than, commodity prices on

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certain indices for equivalent future dates. Certain energy investments do not include an illiquidity discount. Long-term commodity price forecasts are utilized to capture the value of the investments across a range of commodity prices within the energy investment portfolio associated with future development and to reflect a range of price expectations. Real estate investments are generally valued using a combination of direct income capitalization and discounted cash flow analysis. Key inputs used in such methodologies that require estimates include an unlevered discount rate and current capitalization rate, and certain real estate investments do not include a minimum illiquidity discount. The valuations of real assets investments also use other inputs.

Credit Investments: Credit investments are valued using values obtained from dealers or market makers, and where these values are not available, credit investments are valued by KKR based on ranges of valuations determined by an independent valuation firm. 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.

Other Investments: With respect to other investments including equity method investments for which the fair value election has been made, KKR generally employs the same valuation methodologies as described above for private equity investments when valuing these other investments.

CLO Debt Obligations: Prior to January 1, 2015 and the adoption of ASU 2014-13, collateralized loan obligation senior secured and subordinated notes were initially valued at the transaction price and were subsequently valued using a third party valuation service. The approach used to estimate the fair values was the discounted cash flow method, which includes consideration of the cash flows of the debt obligation based on projected quarterly interest payments and quarterly amortization. The debt obligations were discounted based on the appropriate yield curve given the debt obligation's respective maturity and credit rating. The most significant inputs to the valuation of these financial instruments were default and loss expectations and discount margins. As described above in Fair Value Measurements - Summary of Significant Accounting Policies - Level II Valuation Methodologies, beginning on January 1, 2015, with the adoption of ASU 2014-13, KKR measures CLO debt obligations on the basis of the fair value of the financial assets of the CLO.
 
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 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 credit and credit-related investments. The Private Markets valuation committee is assisted by subcommittees in the valuation of real asset investments, and is also assisted by a valuation team. Except as noted below, the Private Markets valuation committee is comprised only of employees who are not investment professionals responsible for preparing preliminary valuations or for oversight of the investments being valued. The valuation teams and subcommittees for real asset investments, however, include investment professionals who participate in the preparation of preliminary valuations or are responsible for oversight for those investments. The credit valuation committee is also assisted by a valuation team. The credit valuation teams include investment professionals responsible for preparing preliminary valuations or for oversight of the investments being valued. The credit valuation committee is comprised of investment professionals with no responsibility for preparing preliminary valuations, but certain committee members are responsible for oversight of the investments being valued. The valuation committees and teams are responsible for coordinating and consistently implementing KKR’s quarterly valuation policies, guidelines and processes. For Private Markets 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 annually for all Level III investments in Private Markets and quarterly for investments other than certain investments, which are less than pre-set value thresholds and which in the aggregate comprise less than 5% of the total value of KKR’s Level III Private Markets investments. For most investments classified as Level III in credit, in general, an independent valuation firm is engaged by KKR to provide third party valuations, or ranges of valuations from which KKR’s investment professionals select a point in the range to determine the preliminary valuation, or an independent

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valuation firm is engaged by KKR to perform certain procedures in order to assess the reasonableness and provide positive assurance of KKR’s valuations. These preliminary valuations are reviewed by senior investment professionals for each credit strategy. All preliminary valuations in Private Markets and Public Markets are then reviewed by the applicable valuation committee, and after reflecting any input by their respective valuation committees, the preliminary valuations are presented to the firm’s management committee. When these valuations are approved by this 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.
Energy Investments Held Directly by KKR
KKR makes certain energy investments directly in working and royalty interests in oil and natural gas producing properties outside its investment funds, which as a result of the acquisition of KKR Financial Holdings LLC ("KFN") on April 30, 2014 became more significant.  Oil and natural gas producing activities are accounted for under the successful efforts method of accounting and such working interests are consolidated based on the proportion of the working interests held by KKR.  Accordingly, KKR reflects its proportionate share of the underlying statements of financial condition and statements of operations of the consolidated working interests on a gross basis and changes in the value of these working interests are not reflected as unrealized gains and losses in the condensed consolidated statements of operations. Under the successful efforts method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs and costs of certain nonproducing leasehold costs are charged to expense as incurred.
 
Expenditures for repairs and maintenance, including workovers, are charged to expense as incurred.
 
The capitalized costs of producing oil and natural gas properties are depleted on a field-by-field basis using the units-of production method based on the ratio of current production to estimated total net proved oil, natural gas and natural gas liquid reserves. Proved developed reserves are used in computing depletion rates for drilling and development costs and total proved reserves are used for depletion rates of leasehold costs.
 
Estimated dismantlement and abandonment costs for oil and natural gas properties, net of salvage value, are capitalized at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves.

Whenever events or changes in circumstances indicate that the carrying amounts of oil and natural gas properties may not be recoverable, KKR evaluates the proved oil and natural gas properties and related equipment and facilities for impairment on a field-by-field basis. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. Unproved oil and natural gas properties are assessed periodically and, at a minimum, annually on a property-by-property basis, and any impairment in value is recognized when incurred and is recorded in General, Administrative, and Other expense in the condensed consolidated statements of operations.

Fees and Other
 
Fees and other consist primarily of (i) transaction fees earned in connection with successful investment transactions and from capital markets activities, (ii) management and incentive fees from providing investment management services to unconsolidated funds, CLOs, other vehicles, and separately managed accounts, (iii) monitoring fees from providing services to portfolio companies, (iv) revenue earned by oil and gas-producing entities that are consolidated and (v) consulting fees earned by entities that employ non-employee operating consultants.


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For the three and six months ended June 30, 2015 and 2014, respectively, fees and other consisted of the following:    
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Transaction Fees
$
88,070

 
$
71,822

 
$
180,675

 
$
226,976

Monitoring Fees
65,887

 
39,064

 
177,412

 
91,413

Management Fees
51,537

 
58,683

 
99,742

 
108,868

Oil and Gas Revenue
35,700

 
56,208

 
60,644

 
73,989

Consulting Fees
8,853

 
12,134

 
17,280

 
22,485

Incentive Fees
5,827

 
11,459

 
11,466

 
28,565

Total Fees and Other
$
255,874

 
$
249,370

 
$
547,219

 
$
552,296

 
All fees presented in the table above, except for oil and gas revenue, are earned from KKR investment funds, vehicles and portfolio companies. Consulting fees are earned by certain consolidated entities that employ non-employee operating consultants from providing advisory and other services to portfolio companies and other companies and are recognized as the services are rendered. These fees are separately negotiated with each company for which services are provided and are not shared with KKR.

Transaction, Monitoring, Management, Consulting, and Incentive Fees Recognition
 
Transaction, monitoring, management, consulting and incentive fees are recognized when earned based on the contractual terms of the governing agreements and coincides with the period during which the related services are performed. In the case of transaction fees, the fees are recognized upon closing of the transaction. Monitoring fees may provide for a termination payment following an initial public offering or change of control. These termination payments are recognized in the period when the related transaction closes.
 
Oil and Gas Revenue Recognition
 
Oil and gas revenues are recognized when production is sold to a purchaser at fixed or determinable prices, when delivery has occurred and title has transferred and collectability of the revenue is reasonably assured. The oil and gas producing entities consolidated by KKR follow the sales method of accounting for natural gas revenues. Under this method of accounting, revenues are recognized based on volumes sold, which may differ from the volume to which the entity is entitled based on KKR’s working interest. An imbalance is recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under-produced owners to recoup their entitled share through future production. Under the sales method, no receivables are recorded when these entities have taken less than their share of production and no payables are recorded when it has taken more than its share of production unless reserves are not sufficient.
 
Recently Issued Accounting Pronouncements
 
Revenue from Contracts with Customers
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers Topic 606 (“ASU 2014-09”) which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Revenue recorded under ASU 2014-09 will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. Early adoption will be permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. A full retrospective or modified retrospective approach is required. KKR is currently evaluating the impact the adoption of this guidance may have on its financial statements, including with respect to the timing of the recognition of carried interest.
 
Measurement of Financial Assets and Liabilities - Consolidated Collateralized Financing Entities
 
In August 2014, the FASB issued ASU 2014‑13, “Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity” (“CFE”), such as CLO and CMBS vehicles. ASU 2014‑13 provides an entity with an election to measure the financial assets and financial liabilities of a consolidated CFE on the basis of either the fair

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value of the CFE’s financial assets or financial liabilities, whichever is more observable. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted and this guidance was early adopted by KKR on January 1, 2015 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period. Refer above to Variable Interest Entities - Collateralized Loan Obligations.
Going Concern
 
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).  The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early adoption is permitted, and a prospective approach is required. The adoption of this guidance is not expected to have a material impact on KKR’s financial statements.

Derivatives and Hedging

In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity ("ASU 2014-16"). The guidance in ASU 2014-16 states that implied substantive terms and features of a hybrid financial instrument issued in the form of a stock should weigh each term and feature on the basis of relevant facts and circumstances. An entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. ASU 2014-16 is effective for reporting periods starting after December 15, 2015 and for interim periods within the fiscal year. Early adoption is permitted, and a retrospective approach is permitted but not required. The adoption of this guidance is not expected to have a material impact on KKR's financial statements.

Consolidation

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). The guidance in ASU 2015-02 eliminates the presumption that a general partner should consolidate a limited partnership and also eliminates the consolidation model specific to limited partnerships. The amendments also clarify how to treat fees paid to an asset manager or other entity that makes the decisions for the investment vehicle and whether such fees should be considered in determining when a variable interest entity should be reported on an asset manager's balance sheet. ASU 2015-02 is effective for reporting periods starting after December 15, 2015 and for interim periods within the fiscal year. Early adoption is permitted, and a full retrospective or modified retrospective approach is required. KKR is evaluating the impact on its financial statements and expects to deconsolidate a significant number of investment funds, vehicles and entities upon adoption of this guidance.

Interest - Imputation of Interest

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The guidance in ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted, and a retrospective approach is required. The adoption of this guidance is not expected to have a material impact on KKR’s financial statements.

Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share

In May 2015, the FASB issued amended guidance on the disclosures for investments in certain entities that calculate net asset value per share (or its equivalent). The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also

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remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those years. The guidance shall be applied retrospectively for all periods presented. Early application is permitted. The guidance is not expected to have a material impact on KKR’s financial statements.


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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, 2015 and 2014, respectively:
 
 
Three Months Ended
June 30, 2015
 
Three Months Ended
June 30, 2014
 
Six Months Ended
June 30, 2015
 
Six Months Ended
June 30, 2014
 
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)
$
1,357,037

 
$
1,479,057

 
$
2,906,053

 
$
(1,015,495
)
 
$
2,976,913

 
$
1,750,335

 
$
3,541,122

 
$
29,964

Credit and Other (a)
51,473

 
241,550

 
42,965

 
129,980

 
94,299

 
(34,425
)
 
202,745

 
264,825

Investments of Consolidated CFEs (a)
(8,882
)
 
(15,509
)
 
6,605

 
22,620

 
(26,153
)
 
77,394

 
6,380

 
39,070

Real Assets (a)
7,505

 
164,012

 
200,699

 
(293,145
)
 
7,505

 
63,900

 
203,354

 
(303,498
)
Foreign Exchange Forward Contracts and
      Options (b)
73,419

 
(284,187
)
 
(3,356
)
 
33,567

 
207,350

 
39,123

 
(11,795
)
 
42,850

Securities Sold Short (b)
(7,582
)
 
34,000

 
(6,774
)
 
(12,929
)
 
(9,219
)
 
12,198

 
(22,787
)
 
11,060

Other Derivatives
19,202

 
12,282

 
1,080

 
(5,655
)
 
11,523

 
21,721

 
(16,929
)
 
(494
)
Foreign Exchange Gains (Losses) on Debt
       Obligations (c)

 
(30,054
)
 
(1,070
)
 
(5,437
)
 
11,017

 
(138,565
)
 
(3,306
)
 
(8,319
)
Foreign Exchange Gains (Losses) and Other (d)
13,968

 
3,313

 
(8,646
)
 
(19,212
)
 
38,692

 
(73,179
)
 
(10,601
)
 
(19,611
)
Total Net Gains (Losses) from Investment
       Activities
$
1,506,140

 
$
1,604,464

 
$
3,137,556

 
$
(1,165,706
)
 
$
3,311,927


$
1,718,502

 
$
3,888,183

 
$
55,847

 
 
 
 
 
(a)
See Note 4 “Investments.”
(b)
See Note 7 “Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities.”
(c)
See Note 9 "Debt Obligations."
(d)
Foreign Exchange Gains (Losses) primarily includes foreign exchange gains (losses) on cash and cash equivalents and cash and cash equivalents held at consolidated entities.
 
4. INVESTMENTS
 
Investments consist of the following:
 
 
Fair Value
 
Cost
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
Private Equity
$
38,159,906

 
$
38,222,255

 
$
27,505,178

 
$
29,317,314

Credit
6,592,674

 
6,702,740

 
6,976,175

 
6,906,583

Investments of Consolidated CFEs
10,810,954

 
8,559,967

 
10,981,157

 
8,815,286

Real Assets
4,058,717

 
3,130,404

 
6,215,465

 
5,354,191

Other
4,892,927

 
3,552,260

 
4,351,650

 
3,182,917

Total Investments
$
64,515,178

 
$
60,167,626

 
$
56,029,625

 
$
53,576,291

 
As of June 30, 2015, investments which represented greater than 5% of total investments consisted of Walgreens Boots Alliance, Inc. of $4.6 billion and First Data Corporation of $4.5 billion. As of December 31, 2014, investments which represented greater than 5% of total investments consisted of Walgreens Boots Alliance, Inc. of $5.5 billion and First Data Corporation of $3.8 billion. In addition, as of June 30, 2015 and December 31, 2014, investments totaling $13.1 billion and $11.4 billion, respectively, were pledged as direct collateral against various financing arrangements. See Note 9 “Debt Obligations.”

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The following table represents private equity investments by industry as of June 30, 2015 and December 31, 2014:
 
 
Fair Value
 
June 30, 2015
 
December 31, 2014
Health Care
$
9,931,606

 
$
10,269,605

Financial Services
6,582,399

 
5,691,815

Technology
4,535,766

 
4,262,800

Retail
4,178,767

 
4,141,276

Manufacturing
4,150,658

 
4,227,859

Other
8,780,710

 
9,628,900

 
$
38,159,906

 
$
38,222,255

 
In the table above, other investments represent private equity investments in the following industries: Consumer Products, Education, Energy, Forestry, Media, Services, Telecommunications, Transportation, Hotel/Leisure, Packaging, Mining, Agriculture and Recycling. None of these industries represents more than 10% of total private equity investments as of June 30, 2015.
 
The majority of the securities underlying private equity investments represent equity securities. As of June 30, 2015 and December 31, 2014, the fair value of private equity investments that were other than equity securities amounted to $147.1 million and $577.0 million, respectively.
 
5. FAIR VALUE MEASUREMENTS
 
The following tables summarize the valuation of KKR’s assets and liabilities reported at fair value by the fair value hierarchy levels described in Note 2 “Summary of Significant Accounting Policies” as of June 30, 2015 and December 31, 2014 including those investments, other financial instruments and debt obligations of consolidated CFEs for which the fair value option has been elected. Equity Method Investments for which the fair value option has not been elected have been excluded from the tables below.
 
Assets, at fair value:
 
June 30, 2015
 
Quoted Prices in
Active Markets for
Identical Assets
(Level I)
 
Significant Other
Observable Inputs
(Level II)
 
Significant
Unobservable Inputs
(Level III)
 
Total
Private Equity
$
8,384,536

 
$
4,661,928

 
$
25,113,442

 
$
38,159,906

Credit

 
1,886,828

 
4,705,846

 
6,592,674

Investments of Consolidated CFEs

 
10,810,954

 

 
10,810,954

Real Assets

 

 
4,058,717

 
4,058,717

Other
888,983

 
468,523

 
2,961,039

 
4,318,545

Total
9,273,519

 
17,828,233

 
36,839,044

 
63,940,796

 
 
 
 
 
 
 
 
Foreign Exchange Contracts and Options

 
601,805

 

 
601,805

Other Derivatives

 
9,992

 

 
9,992

Total Assets
$
9,273,519

 
$
18,440,030

 
$
36,839,044

 
$
64,552,593


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Table of Contents

 
December 31, 2014
 
Quoted Prices in
Active Markets for
Identical Assets
(Level I)
 
Significant Other
Observable Inputs
(Level II)
 
Significant
Unobservable Inputs
(Level III)
 
Total
Private Equity
$
5,940,470

 
$
6,005,764

 
$
26,276,021

 
$
38,222,255

Credit

 
2,510,038

 
4,192,702

 
6,702,740

Investments of Consolidated CFEs

 
8,467,472

 
92,495

 
8,559,967

Real Assets

 

 
3,130,404

 
3,130,404

Other
573,983

 
276,051

 
2,133,001

 
2,983,035

Total
6,514,453

 
17,259,325

 
35,824,623

 
59,598,401

 
 
 
 
 
 
 
 
Foreign Exchange Contracts and Options

 
517,088

 

 
517,088

Other Derivatives
2,246

 
9,651

 

 
11,897

Total Assets
$
6,516,699

 
$
17,786,064

 
$
35,824,623

 
$
60,127,386



Liabilities, at fair value:
 
June 30, 2015
 
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
$
424,400

 
$

 
$

 
$
424,400

Foreign Exchange Contracts and Options

 
119,882

 

 
119,882

Unfunded Revolver Commitments

 
6,909

 

 
6,909

Other Derivatives

 
45,292

 

 
45,292

Debt Obligations of Consolidated CFEs

 
10,410,812

 

 
10,410,812

Total Liabilities
$
424,400

 
$
10,582,895

 
$

 
$
11,007,295



 
December 31, 2014
 
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
$
630,794

 
$
2,338

 
$

 
$
633,132

Foreign Exchange Contracts and Options

 
71,956

 

 
71,956

Unfunded Revolver Commitments

 
3,858

 

 
3,858

Other Derivatives

 
75,150

 

 
75,150

Debt Obligations of Consolidated CFEs

 

 
7,615,340

 
7,615,340

Total Liabilities
$
630,794

 
$
153,302

 
$
7,615,340

 
$
8,399,436



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Table of Contents

The following tables summarize changes in assets and liabilities 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, 2015, and 2014, respectively:
 
Three Months Ended June 30, 2015
 
 
 
Level III Assets
 
Level III Liabilities
 
Private
Equity
 
Credit
 
Investments of
Consolidated
CFEs
 
Real Assets
 
Other
 
Total Level III Assets
 
Debt Obligations of
Consolidated CFEs
Balance, Beg. of Period
$
26,132,215

 
$
4,226,225

 
$
153,656

 
$
3,874,099

 
$
2,381,303

 
36,767,498

 
$

Transfers In (1)

 

 

 

 

 

 

Transfers Out (2)
(2,352,752
)
 

 
(153,656
)
 

 

 
(2,506,408
)
 

Acquisitions

 

 

 

 

 

 

Purchases
462,995

 
898,886

 

 
20,606

 
477,011

 
1,859,498

 

Sales
(495,623
)
 
(526,414
)
 

 
(7,505
)
 
(49,511
)
 
(1,079,053
)
 

Settlements

 
100,348

 

 

 
(1,969
)
 
98,379

 

Net Realized Gains (Losses)
199,600

 
1,342

 

 
7,505

 
2,266

 
210,713

 

Net Unrealized Gains (Losses)
1,167,007

 
1,765

 

 
164,012

 
148,679

 
1,481,463

 

Change in Accounting Principle (3)

 

 

 

 

 

 

Change in Other Comprehensive Income

 
3,694

 

 

 
3,260

 
6,954

 

Balance, End of Period
$
25,113,442

 
$
4,705,846

 
$

 
$
4,058,717

 
$
2,961,039

 
36,839,044

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities related to Level III Assets and Liabilities still held as of the Reporting Date
$
1,297,037

 
$
(10,766
)
 
$

 
$
171,016

 
$
120,417

 
$
1,577,704

 
$


 
Three Months Ended June 30, 2014
 
 
 
Level III Assets
 
Level III Liabilities
 
Private
Equity
 
Credit
 
Investments of
Consolidated
CFEs
 
Real Assets
 
Other
 
Total Level III Assets
 
Debt Obligations of
Consolidated CFEs
Balance, Beg. of Period
$
30,876,329

 
$
2,317,366

 
$

 
$
3,780,928

 
$
778,638

 
$
37,753,261

 
$
1,152,790

Transfers In (1)

 

 

 

 

 

 

Transfers Out (2)

 
(1,230
)
 

 

 
(195,719
)
 
(196,949
)
 

Acquisitions
82,986

 
539,247

 
97,996

 
197,471

 
52,502

 
970,202

 
5,663,666

Purchases
1,030,249

 
432,396

 
3,557

 
202,285

 
58,880

 
1,727,367

 
720,964

Sales
(2,841,399
)
 
(307,561
)
 
(6,097
)
 
(286,449
)
 
(18,662
)
 
(3,460,168
)
 
(197,015
)
Settlements

 
45,238

 
(574
)
 

 

 
44,664

 
3,298

Net Realized Gains (Losses)
2,019,686

 
(32,766
)
 

 
198,652

 
(445
)
 
2,185,127

 

Net Unrealized Gains (Losses)
(253,689
)
 
56,709

 
821

 
(293,687
)
 
37,996

 
(451,850
)
 
12,975

Change in Other Comprehensive Income

 
(1,987
)
 

 

 

 
(1,987
)
 

Balance, End of Period
$
30,914,162

 
$
3,047,412

 
$
95,703

 
$
3,799,200

 
$
713,190

 
$
38,569,667

 
$
7,356,678

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities related to Level III Assets and Liabilities still held as of the Reporting Date
$
1,860,197

 
$
50,873

 
$
205

 
$
(293,687
)
 
$
40,031

 
$
1,657,619

 
$
12,975



30

Table of Contents

<
 
Six Months Ended June 30, 2015
 
 
 
Level III Assets
 
Level III Liabilities
 
Private
Equity
 
Credit
 
Investments of
Consolidated
CFEs
 
Real Assets
 
Other
 
Total Level III Assets
 
Debt Obligations of
Consolidated CFEs
Balance, Beg. of Period
$
26,276,021

 
$
4,192,702

 
$
92,495

 
$
3,130,404

 
$
2,133,001

 
35,824,623