Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

Form 10-Q

 

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

 

For the quarterly period ended September 30, 2011

 

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 x  No o

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of November 4, 2011, there were 223,284,460 Common Units of the registrant outstanding.

 

 

 



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KKR & CO. L.P.

 

FORM 10-Q

For the Quarter Ended September 30, 2011

 

INDEX

 

 

 

Page No.

 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

Item 2.

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

46

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

86

Item 4.

Controls and Procedures

86

 

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

87

Item 1A.

Risk Factors

87

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

87

Item 3.

Defaults Upon Senior Securities

87

Item 4.

(Removed and Reserved)

87

Item 5.

Other Information

87

Item 6.

Exhibits

87

SIGNATURES

88

 



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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 and Section 21E of the Securities Exchange Act of 1934, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “should,” “seek,” “approximately,” “predict,” “intend,” “will,” “plan,” “estimate,” “anticipate” or the negative version of these words or other comparable words. 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 but are not limited to those described under the section entitled “Risk Factors” in this report. These factors should not be construed as exhaustive and 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, except as required by applicable law.

 


 

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

 

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

 

In this report, the terms “assets under management” or “AUM” represent the assets from which KKR is entitled to receive fees or a carried interest and general partner capital. KKR calculates the amount of AUM as of any date as the sum of: (i) the fair value of the investments of KKR’s investment funds plus uncalled capital commitments from these funds; (ii) the fair value of investments in KKR’s co-investment vehicles; (iii) the net asset value of certain of KKR’s fixed income products; (iv) the value of outstanding structured finance vehicles and (v) the fair value of other assets managed by KKR. KKR’s definition of AUM is not based on any definition of AUM that is set forth in the agreements governing the investment funds, vehicles or accounts that it manages or calculated pursuant to any regulatory requirements.

 

In this report, the terms “fee paying assets under management” or “FPAUM” represent only those assets under management from which KKR receives fees. FPAUM is the sum of all of the individual fee bases that are used to calculate KKR’s fees and differs from AUM in the following respects: (i) assets from which KKR does not receive a fee are excluded (i.e., assets with respect to which it receives only carried interest); and (ii) certain assets, primarily in its private equity funds, are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments.

 

In this report, the terms “fee related earnings” or “FRE” is comprised of segment operating revenues, less segment operating expenses. The components of FRE on a segment basis differ from the equivalent U.S. GAAP amounts on a consolidated basis as a result of: (i) the inclusion of management fees earned from consolidated funds that were eliminated in consolidation; (ii) the exclusion of fees and expenses of certain consolidated entities; (iii) the exclusion of charges relating to the amortization of intangible assets; (iv) the exclusion of charges relating to carry pool allocations; (v) the exclusion of non-cash equity charges and other non-cash compensation charges borne by KKR Holdings or incurred under the KKR & Co. L.P. 2010 Equity Incentive Plan; (vi) the exclusion of certain reimbursable expenses; and (vii) the exclusion of certain non-recurring items.

 

In this report, the terms “economic net income (loss)” or “ENI” is a measure of profitability for KKR’s reportable segments and is comprised of: (i) FRE; plus (ii) segment investment income (loss), which is reduced for carry pool allocations and management fee refunds; less (iii) certain economic interests in KKR’s segments held by third parties. ENI differs from net income (loss) on a GAAP basis as a result of: (i) the exclusion of the items referred to in FRE above; (ii) the exclusion of investment income (loss) relating to noncontrolling interests; and (iii) the exclusion of income taxes.

 



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You should note that our calculations of AUM, FPAUM, FRE and ENI may differ from the calculations of other investment managers and, as a result, our measurements of AUM, FPAUM, FRE and ENI may not be comparable to similar measures presented by other investment managers.

 

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

 

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

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

 

(Amounts in Thousands, Except Unit Data)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and Cash Equivalents

 

$

821,769

 

$

738,693

 

Cash and Cash Equivalents Held at Consolidated Entities

 

439,252

 

695,902

 

Restricted Cash and Cash Equivalents

 

91,480

 

60,482

 

Investments

 

36,357,602

 

36,449,770

 

Due from Affiliates

 

158,417

 

136,556

 

Other Assets

 

765,242

 

309,754

 

Total Assets

 

$

38,633,762

 

$

38,391,157

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Debt Obligations

 

$

1,565,236

 

$

1,486,960

 

Due to Affiliates

 

41,272

 

18,047

 

Accounts Payable, Accrued Expenses and Other Liabilities

 

1,112,832

 

886,108

 

Total Liabilities

 

2,719,340

 

2,391,115

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

KKR & Co. L.P. Partners’ Capital (222,944,668 and 212,770,091 common units issued and outstanding as of September 30, 2011 and December 31, 2010, respectively)

 

1,264,636

 

1,324,530

 

Accumulated Other Comprehensive Income

 

603

 

1,963

 

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

 

1,265,239

 

1,326,493

 

Noncontrolling Interests in Consolidated Entities

 

30,360,258

 

30,327,161

 

Noncontrolling Interests held by KKR Holdings L.P.

 

4,288,925

 

4,346,388

 

Total Equity

 

35,914,422

 

36,000,042

 

Total Liabilities and Equity

 

$

38,633,762

 

$

38,391,157

 

 

See accompanying notes to condensed consolidated financial statements.

 

1



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KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

(Amounts in Thousands, Except Unit and Per Unit Data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues

 

 

 

 

 

 

 

 

 

Fees

 

$

164,808

 

$

96,018

 

$

514,263

 

$

289,119

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Compensation and Benefits

 

48,948

 

331,180

 

677,917

 

1,045,332

 

Occupancy and Related Charges

 

13,702

 

10,373

 

39,085

 

29,568

 

General, Administrative and Other

 

52,555

 

94,000

 

130,579

 

229,770

 

Fund Expenses

 

13,625

 

14,314

 

36,287

 

39,091

 

Total Expenses

 

128,830

 

449,867

 

883,868

 

1,343,761

 

 

 

 

 

 

 

 

 

 

 

Investment Income (Loss)

 

 

 

 

 

 

 

 

 

Net Gains (Losses) from Investment Activities

 

(3,339,020

)

1,450,124

 

467,278

 

4,768,245

 

Dividend Income

 

71,106

 

218,232

 

107,129

 

808,512

 

Interest Income

 

64,858

 

66,603

 

218,975

 

171,058

 

Interest Expense

 

(17,742

)

(10,432

)

(52,365

)

(34,393

)

Total Investment Income (Loss)

 

(3,220,798

)

1,724,527

 

741,017

 

5,713,422

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

(3,184,820

)

1,370,678

 

371,412

 

4,658,780

 

 

 

 

 

 

 

 

 

 

 

Income Taxes

 

11,535

 

16,263

 

67,923

 

60,998

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

(3,196,355

)

1,354,415

 

303,489

 

4,597,782

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities

 

(2,468,074

)

1,293,373

 

295,654

 

3,957,319

 

Net Income (Loss) Attributable to Noncontrolling Interests Held by KKR Holdings L.P.

 

(484,879

)

52,186

 

52,051

 

487,864

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(243,402

)

$

8,856

 

$

(44,216

)

$

152,599

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.10

 

$

0.15

 

$

0.42

 

$

0.31

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.09

)

$

0.04

 

$

(0.20

)

$

0.74

 

Diluted

 

$

(1.09

)

$

0.04

 

$

(0.20

)

$

0.74

 

Weighted Average Common Units Outstanding

 

 

 

 

 

 

 

 

 

Basic

 

222,733,648

 

204,902,226

 

218,501,107

 

204,902,226

 

Diluted

 

222,733,648

 

204,902,226

 

218,501,107

 

204,902,226

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



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KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

 

(Amounts in Thousands, Except Unit Data)

 

 

 

 

 

KKR & Co. L.P.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Noncontrolling

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

Other

 

Interests in

 

Interests

 

Total

 

 

 

 

 

Common

 

Partners’

 

Comprehensive

 

Consolidated

 

held by KKR

 

Comprehensive

 

Total

 

 

 

Units

 

Capital

 

Income

 

Entities

 

Holdings L.P.

 

Income

 

Equity

 

Balance at January 1, 2011

 

212,770,091

 

$

1,324,530

 

$

1,963

 

$

30,327,161

 

$

4,346,388

 

 

 

$

36,000,042

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

(44,216

)

 

 

295,654

 

52,051

 

$

303,489

 

303,489

 

Other Comprehensive Income- Currency Translation Adjustment

 

 

 

 

 

(1,465

)

(338

)

(3,165

)

(4,968

)

(4,968

)

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

$

298,521

 

298,521

 

Contribution of Net Assets of previously Unconsolidated Entities

 

 

 

 

69,600

 

 

 

 

69,600

 

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

 

10,157,372

 

103,695

 

85

 

 

(103,780

)

 

 

 

Deferred Tax Effects Resulting from Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units

 

 

1,530

 

20

 

 

 

 

 

1,550

 

Delivery of Common Units - Equity Incentive Plan

 

17,205

 

 

 

 

 

 

 

 

Equity-based Payments

 

 

11,165

 

 

 

375,368

 

 

 

386,533

 

Capital Contributions

 

 

 

 

3,808,158

 

4,698

 

 

 

3,812,856

 

Capital Distributions

 

 

(132,068

)

 

(4,139,977

)

(382,635

)

 

 

(4,654,680

)

Balance at September 30, 2011

 

222,944,668

 

$

1,264,636

 

$

603

 

$

30,360,258

 

$

4,288,925

 

 

 

$

35,914,422

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



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KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

(Amounts in Thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Cash Flows from Operating Activities

 

 

 

 

 

Net Income (Loss)

 

$

303,489

 

$

4,597,782

 

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

 

 

 

 

 

Non-Cash Equity-Based Payments

 

386,533

 

717,153

 

Net Realized (Gains) Losses on Investments

 

(2,906,193

)

(1,493,920

)

Change in Unrealized (Gains) Losses on Investments

 

2,438,915

 

(3,274,325

)

Other Non-Cash Amounts

 

(55,782

)

(18,150

)

Cash Flows Due to Changes in Operating Assets and Liabilities:

 

 

 

 

 

Change in Cash and Cash Equivalents Held at Consolidated Entities

 

268,555

 

35,032

 

Change in Due from / to Affiliates

 

(16,091

)

(112,585

)

Change in Other Assets

 

(29,892

)

(46,388

)

Change in Accounts Payable, Accrued Expenses and Other Liabilities

 

212,613

 

194,692

 

Investments Purchased

 

(6,958,884

)

(3,565,649

)

Cash Proceeds from Sale of Investments

 

7,248,851

 

4,131,619

 

Net Cash Provided (Used) by Operating Activities

 

892,114

 

1,165,261

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Change in Restricted Cash and Cash Equivalents

 

(30,998

)

22,757

 

Purchase of Furniture, Equipment and Leasehold Improvements

 

(4,801

)

(7,424

)

Net Cash Provided (Used) by Investing Activities

 

(35,799

)

15,333

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Distributions to Noncontrolling Interests in Consolidated Entities

 

(4,139,977

)

(3,297,565

)

Contributions from Noncontrolling Interests in Consolidated Entities

 

3,808,158

 

3,259,332

 

Distributions to KKR Holdings L.P.

 

(382,635

)

(251,627

)

Contributions from KKR Holdings L.P.

 

4,698

 

3,631

 

Distributions to Partners

 

(132,068

)

(60,520

)

Proceeds from Debt Obligations

 

79,476

 

642,406

 

Repayment of Debt Obligations

 

(1,356

)

(963,972

)

Deferred Financing Costs Incurred

 

(9,535

)

(3,666

)

Net Cash Provided (Used) by Financing Activities

 

(773,239

)

(671,981

)

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

83,076

 

508,613

 

Cash and Cash Equivalents, Beginning of Period

 

738,693

 

546,739

 

Cash and Cash Equivalents, End of Period

 

$

821,769

 

$

1,055,352

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



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KKR & CO. L.P.

 

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

 

(Amounts in Thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Payments for Interest

 

$

42,195

 

$

63,958

 

Payments for Income Taxes

 

$

59,680

 

$

55,579

 

Supplemental Disclosures of Non-Cash Activities

 

 

 

 

 

Non-Cash Contributions of Equity-Based Compensation

 

$

386,533

 

$

717,153

 

Restricted Stock Grant from Affiliate

 

$

2,358

 

$

 

Proceeds Due from Unsettled Investment Sales

 

$

379,154

 

$

6,417

 

Unsettled Purchases of Investments

 

$

80,523

 

$

12,616

 

Change in Contingent Carried Interest Repayment Guarantee

 

$

 

$

21,138

 

Unrealized Gains (Losses) on Foreign Exchange on Debt Obligations

 

$

 

$

2,343

 

Conversion of Interest Payable into Debt Obligations

 

$

 

$

2,100

 

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

 

$

401

 

$

943

 

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

 

$

103,780

 

$

 

Net Deferred Tax Effects Resulting from Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units including the effect of the tax receivable agreement

 

$

1,550

 

$

 

Contribution of Net Assets of previously Unconsolidated Entities

 

 

 

 

 

Investments

 

$

57,722

 

$

 

Cash and Cash Equivalents Held at Consolidated Entities

 

$

11,504

 

$

 

Due from Affiliates

 

$

4,244

 

$

 

Other Assets

 

$

4,164

 

$

 

Accounts Payable, Accrued Expenses and Other Liabilities

 

$

8,034

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

KKR & CO. L.P.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

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

 

1. ORGANIZATION

 

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

 

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

 

KKR & Co. L.P. both indirectly controls the KKR Group Partnerships and indirectly holds equity units in each KKR Group Partnership (collectively, “KKR Group Partnership Units”) representing economic interests in KKR’s business. The remaining KKR Group Partnership Units are held by KKR’s principals through KKR Holdings L.P. (“KKR Holdings”), which is not a subsidiary of KKR. As of September 30, 2011, KKR & Co. L.P. held 32.64% of the KKR Group Partnership Units and KKR’s principals held 67.36% of the KKR Group Partnership Units through KKR Holdings. From time to time, the percentage ownership in the KKR Group Partnerships will change as KKR Holdings and/or principals exchange KKR Group Partnership Units for KKR & Co. L.P. common units.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of KKR & Co. L.P. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) such that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its 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. These condensed consolidated financial statements should be read in conjunction with the audited consolidated and combined 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. KKR Holdings’ ownership interest in the KKR Group Partnerships is reflected as noncontrolling interests held by KKR Holdings in the accompanying condensed consolidated financial statements.

 

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

 

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Use of Estimates

 

The preparation of the condensed consolidated 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 condensed consolidated 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 condensed consolidated financial statements.

 

Consolidation

 

General

 

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

 

The majority of the entities consolidated by KKR are comprised of: (i) those entities in which KKR has majority ownership and has control over significant operating, financial and investing decisions; and (ii) the consolidated KKR Funds, which are those entities in which KKR holds substantive, controlling general partner or managing member interests. With respect to the consolidated KKR Funds, KKR generally has operational discretion and control, and limited partners have no substantive rights to impact ongoing governance and operating activities of the fund.

 

The KKR Funds are consolidated by KKR notwithstanding the fact that KKR has only a minority economic interest in those funds. KKR’s condensed consolidated financial statements reflect the assets, liabilities, fees, expenses, investment income (loss) and cash flows of the consolidated KKR Funds on a gross basis, and the majority of the economic interests in those funds, which are held by third party investors, are attributed to noncontrolling interests in consolidated entities in the accompanying condensed consolidated 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 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.

 

The KKR Funds are, for GAAP purposes, investment companies and therefore are not required to consolidate their majority owned and controlled investments in portfolio companies (“Portfolio Companies”). Rather, KKR reflects their investments in Portfolio Companies at fair value as described below.

 

All intercompany transactions and balances have been eliminated.

 

Variable Interest Entities

 

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

 

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and redemptions (either by KKR, affiliates of KKR or third parties) or amendments to the governing documents of the respective entities could affect an entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, KKR assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly. KKR’s accounting conclusion under the existing consolidation rules determined that effective January 1, 2011, KKR became the primary beneficiary of certain entities and consolidated such entities that were previously unconsolidated prior to that date.

 

As of September 30, 2011 and December 31, 2010, the maximum exposure to loss for those VIEs in which KKR is determined not to be the primary beneficiary but in which it has a variable interest is as follows:

 

 

 

September 30, 2011

 

December 31, 2010

 

Investments

 

$

59,344

 

$

35,867

 

Due from Affiliates, net

 

1,068

 

3,225

 

Maximum Exposure to Loss

 

$

60,412

 

$

39,092

 

 

For those unconsolidated VIEs that are funds in which KKR is the sponsor, KKR may have an obligation as general partner to provide commitments to such funds. As of September 30, 2011 and December 31, 2010, KKR did not provide any support other than its obligated amount.

 

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

 

Fair Value Measurements

 

Fair value is the amount 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 (i.e., the exit price). KKR measures and reports its investments and other financial instruments at fair value.

 

KKR has categorized and disclosed its investments and other financial instruments measured and reported at fair value based on the hierarchical levels as defined within GAAP. GAAP establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type and the characteristics specific to the asset or liability. Investments and other financial instruments for which fair value can be measured from quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Investments and other financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:

 

Level I—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The type of investments and other financial instruments included in Level I include publicly-listed equities, publicly-listed derivatives, and equity securities sold, but not yet purchased. KKR does not adjust the quoted price for these investments, even in situations where KKR holds a large position and a sale could reasonably affect the quoted price.

 

Level II—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is generally determined through the use of models or other valuation methodologies. Investments and other financial instruments which are included in this category generally include fixed income investments, convertible debt securities indexed to publicly-listed securities, fixed income securities sold, but not yet purchased and certain over-the-counter derivatives.

 

Level III—Pricing inputs are unobservable for the asset or liability and includes situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in this category generally include private Portfolio Companies and fixed income investments for which a sufficiently liquid trading market does not exist.

 

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

 

In cases where an investment or financial instrument is measured and reported at fair value is transferred into or out of Level III of the fair value hierarchy, KKR accounts for the transfer at the end of the reporting period.

 

For certain investments and other financial instruments, KKR has elected the fair value option. Such election is irrevocable and is applied on an investment by investment basis at initial recognition. KKR has applied the fair value option for certain loans and certain investments in debt and equity securities, that otherwise would not have been carried at fair value, with gains and losses recorded in Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. Loans, debt and equity securities for which the fair value option has been elected are recorded within Investments. The methodology for measuring the fair value of such investments is consistent with the methodology applied to private equity and fixed income investments. Interest income on interest bearing loans and debt securities for which the fair value option has been elected is based on stated coupon rates adjusted for the accretion of purchase discounts and the amortization of purchase premiums. Further disclosure is presented in Note 5 “Fair Value Measurements”.

 

The carrying amount of cash and cash equivalents, cash and cash equivalents held at consolidated entities, restricted cash and cash equivalents, due from / to affiliates, accounts payable, accrued expenses and other liabilities approximate fair value due to their short-term maturities. KKR’s debt obligations, except for KKR’s Senior Notes, bear interest at floating rates and therefore fair value approximates carrying value. Further information on KKR’s Senior Notes is presented in Note 8, “Debt Obligations.”

 

Investments

 

Investments consist primarily of private equity, fixed income, and other investments. Security and loan transactions are recorded on a trade date basis. Further disclosure on investments is presented in Note 4, “Investments.”

 

Private Equity

 

Private equity investments consist primarily of investments in Portfolio Companies of KKR Funds and other investment vehicles. The KKR Funds and other investment vehicles reflect investments 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.

 

Private equity investments 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.

 

The determination of fair value for those investments that do not have a readily observable market price may differ materially from the values that would have resulted if a ready market had existed. For these investments, KKR generally uses a market approach and an income (discounted cash flow) approach when determining fair value. Management considers various internal and external factors when applying these approaches, including the price at which the investment was acquired, the nature of the investment, current market conditions, recent public market and private transactions for comparable securities, and financing transactions subsequent to the acquisition of the investment. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches.

 

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 accompanying condensed consolidated statements of operations.

 

Fixed Income

 

Fixed income investments consist of investments in high yield bonds, syndicated bank loans, and interests in collateralized loan obligations. These investments are valued at the mean of the “bid” and “asked” prices obtained from third party pricing services. In the event that third party pricing service quotations are unavailable, values are obtained from dealers or market makers, and where those values are not available, fixed income investments are valued by KKR or KKR may engage a third party valuation firm to assist in such valuations.

 

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Derivatives

 

Derivative financial instruments include foreign currency forward and options contracts, total rate of return swap contracts and credit default swap contracts. All derivatives are recognized as either assets or liabilities in the condensed consolidated statements of financial condition and measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying condensed consolidated statements of operations. KKR’s derivative financial instruments contain credit risk to the extent that its bank counterparties may be unable to meet the terms of the agreements. KKR attempts to minimize this risk by limiting its counterparties to major financial institutions with strong credit ratings.

 

Noncontrolling Interests

 

Noncontrolling Interests in Consolidated Entities

 

Noncontrolling interests in consolidated entities represents the ownership interests that third parties hold in entities that are consolidated. The allocable share of income and expense attributable to those interests are accounted for as net income (loss) attributable to noncontrolling interests in consolidated entities.

 

Noncontrolling Interests held by KKR Holdings

 

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

 

Income (loss) of KKR after allocation to noncontrolling interests in consolidated entities, 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, the contribution of certain expenses borne entirely by KKR Holdings as well as the periodic exchange of KKR Holdings units for KKR & Co. L.P. common units causes the equity allocations shown in the condensed consolidated statement of changes in equity to differ from their respective pro-rata ownership interests in KKR’s net assets.

 

Fees

 

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

 

For the three and nine months ended September 30, 2011 and 2010, fees consisted of the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Monitoring and Consulting Fees

 

$

47,926

 

$

30,330

 

$

210,156

 

$

82,673

 

Transaction Fees

 

96,624

 

40,634

 

217,451

 

129,036

 

Management Fees

 

20,258

 

15,499

 

58,497

 

47,005

 

Incentive Fees

 

 

9,555

 

28,159

 

30,405

 

Total Fees

 

$

164,808

 

$

96,018

 

$

514,263

 

$

289,119

 

 

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Monitoring and Consulting Fees

 

Monitoring fees are earned by KKR for services provided to Portfolio Companies and are recognized as services are rendered. These fees are paid based on a fixed periodic schedule by the Portfolio Companies either in advance or in arrears and are separately negotiated for each Portfolio Company.

 

In connection with the monitoring of Portfolio Companies and certain unconsolidated funds, KKR receives reimbursement for certain expenses incurred on behalf of these entities. Costs incurred in monitoring these entities are classified as general, administrative and other expenses and reimbursements of such costs are classified as monitoring fees.

 

Consulting fees are earned by certain consolidated entities for other consulting services provided 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.

 

Transaction Fees

 

Transaction fees are earned by KKR primarily in connection with successful private equity and other investment transactions and capital markets activities. Transaction fees are recognized upon closing of the transaction. Fees are typically paid on or around the closing of a transaction.

 

In connection with pursuing successful Portfolio Company investments, KKR receives reimbursement for certain transaction-related expenses. Transaction-related expenses, which are reimbursed by third parties, are typically deferred until the transaction is consummated and are recorded in Other Assets on the condensed consolidated statements of financial condition on the date incurred. The costs of successfully completed transactions are borne by the KKR Funds and included as a component of the investment’s cost basis. Subsequent to closing, investments are recorded at fair value each reporting period as described in the section above titled “Investments”. Upon reimbursement from a third party, the cash receipt is recorded and the deferred amounts are relieved. No fees or expenses are recorded for these reimbursements.

 

Management Fees

 

Management fees are earned by KKR for management services provided to private equity funds, other investment funds, structured finance vehicles, separately managed accounts and a specialty finance company which are recognized in the period during which the related services are performed in accordance with the contractual terms of the related agreement. Management fees earned from private equity funds and certain investment vehicles are based upon a percentage of capital committed during the investment period, and thereafter based on remaining invested capital. For certain other investment vehicles, structured finance vehicles, separately managed accounts and a specialty finance vehicle, management fees are recognized in the period during which the related services are performed and are based upon the net asset value, gross assets or as otherwise defined in the respective agreements.

 

Management fees received from consolidated KKR Funds are eliminated in consolidation. However, because these amounts are funded by, and earned from, noncontrolling interests, KKR’s allocated share of the net income from consolidated KKR Funds is increased by the amount of fees that are eliminated. Accordingly, the elimination of these fees does not have an effect on the net income (loss) attributable to KKR or KKR partners’ capital.

 

Incentive Fees

 

KKR’s management agreement with a specialty finance company entitles KKR to quarterly incentive fees. The incentive fees are calculated and paid quarterly in arrears and are not subject to any hurdle or clawback provisions. The management agreement with the specialty finance company was renewed on January 1, 2011 and will automatically be renewed for successive one-year terms following December 31, 2011 unless the agreement is terminated in accordance with its terms.

 

Compensation and Benefits

 

Compensation and Benefits includes cash compensation consisting of salaries, bonuses, and benefits. In addition, Compensation and Benefits also includes equity-based payments consisting of charges associated with the vesting of equity-based awards and carry pool allocations.

 

All KKR principals and other employees of certain consolidated entities receive a base salary that is paid by KKR or its consolidated entities, and is accounted for as Compensation and Benefits expense. These employees are also eligible to receive discretionary cash bonuses based on performance, overall profitability and other matters. While cash bonuses paid to most employees are funded by KKR and certain consolidated entities and result in customary Compensation and Benefits expense, cash bonuses that are paid to certain of KKR’s most senior employees are funded by KKR Holdings with

 

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distributions that it receives on its KKR Group Partnership Units. To the extent that distributions received by these individuals exceed the amounts that they are otherwise entitled to through their vested units in KKR Holdings, this excess is funded by KKR Holdings and reflected in Compensation and Benefits in the condensed consolidated statements of operations.

 

Further disclosure regarding equity-based payments is presented in Note 10 “Equity-based Payments.”

 

Carried Interests

 

Carried interests entitle the general partner of a fund to a greater allocable share of the fund’s earnings from investments relative to the capital contributed by the general partner and correspondingly reduce noncontrolling interests’ attributable share of those earnings. Amounts earned pursuant to carried interests are included as investment income (loss) in Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations and are earned by the general partner of those funds to the extent that cumulative investment returns are positive. If these investment returns decrease or turn negative in subsequent periods, recognized carried interest will be reduced and reflected as investment losses. Carried interest is recognized based on the contractual formula set forth in the agreements governing the fund as if the fund was terminated at the reporting date with the then estimated fair values of the investments realized. Due to the extended durations of KKR’s private equity funds, KKR believes that this approach results in income recognition that best reflects the periodic performance of KKR in the management of those funds. Carried interest income (loss) recognized amounted to approximately $(366.4) million and $237.9 million for the three months ended September 30, 2011, and 2010, respectively, and $167.1 million and $790.6 million for the nine months ended September 30, 2011 and 2010, respectively.

 

The agreements governing KKR’s private equity funds generally include a “clawback” or, in certain instances, a “net loss sharing” provision that, if triggered, may give rise to a contingent obligation that may require the general partner to return or contribute amounts to the fund for distribution to investors at the end of the life of the fund. See Note 13 “Commitments and Contingencies”.

 

Carry Pool Allocation

 

With respect to KKR’s active and future funds and co-investment vehicles that provide for carried interest, KKR will allocate to its principals and other professionals a portion of the carried interest earned in relation to these funds as part of its carry pool. KKR currently allocates approximately 40% of the carry it earns from these funds and vehicles to its carry pool. These amounts are accounted for as compensatory profit-sharing arrangements in conjunction with the related carried interest income and recorded as an expense in the condensed consolidated statements of operations. For the three months ended September 30, 2011 and 2010, KKR recorded carry pool allocation expense (benefit) of $(151.2) million and $91.2 million, respectively.  For the nine months ended September 30, 2011 and 2010, KKR recorded carry pool allocation expense of $67.9 million and $286.6 million, respectively. To the extent previously recorded carried interest is adjusted to reflect decreases in the underlying funds’ valuations at period end, related profit sharing amounts previously accrued are adjusted and reflected as a benefit to current period expense.

 

Exchange Agreement

 

The exchange agreement provides for the exchange of KKR Group Partnership Units held by KKR Holdings for KKR & Co. L.P. common units.

 

Tax Receivable Agreement

 

Certain exchanges of KKR Group Partnership Units from KKR Holdings or transferees of its KKR Group Partnership Units pursuant to KKR’s exchange agreement are expected to result in an increase in Management Holdings Corp.’s and its corporate subsidiary’s share of the tax basis of the tangible and intangible assets of KKR Management Holdings, a portion of which is attributable to the goodwill inherent in our business, that would not otherwise have been available. This increase in tax basis may increase depreciation and amortization for U.S. federal income tax purposes and therefore reduce the amount of income tax that our intermediate holding companies would otherwise be required to pay in the future. KKR & Co. L.P. entered into a tax receivable agreement with KKR Holdings pursuant to which our intermediate holding companies will be required to pay to KKR Holdings or transferees of its KKR Group Partnership Units 85% of the amount of cash savings, if any, in U.S. federal, state and local income taxes that the intermediate holding companies actually realize as a result of this increase in tax basis, as well as 85% of the amount of any such savings the intermediate holding companies actually realize as a result of increases in tax basis that arise due to payments under the tax receivable agreement. Although KKR is not aware of any issue that would cause the IRS to challenge a tax basis increase, neither KKR Holdings nor its transferees will reimburse KKR for any payments previously made under the tax receivable agreement if such tax basis increase, or the benefits of such increases, were successfully challenged. No payments have been made under the tax receivable agreement for the three and nine months ended September 30, 2011.

 

KKR records any changes in basis as a deferred tax asset and the liability for any corresponding payments as amounts due to affiliates, with a corresponding net adjustment to equity at the time of exchange. KKR records any benefit of the reduced income tax the intermediate holding companies may recognize as such benefit is recognized.

 

Recently Issued Accounting Pronouncements

 

During the three and nine months ended September 30, 2011, there were no issued accounting pronouncements that were applicable and adopted by KKR.

 

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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. 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, 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:

 

 

 

Three Months Ended
September 30, 2011

 

Three Months Ended
September 30, 2010

 

Nine Months Ended
September 30, 2011

 

Nine Months Ended
September 30, 2010

 

 

 

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)

 

$

508,138

 

$

(3,888,713

)

$

931,012

 

$

731,048

 

$

2,839,163

 

$

(2,318,353

)

$

1,455,359

 

$

3,124,626

 

Fixed Income and Other (a)

 

(30,445

)

(190,040

)

22,083

 

47,160

 

19,634

 

(165,854

)

71,684

 

2,077

 

Foreign Exchange Contracts (b)

 

9,445

 

176,053

 

(623

)

(265,539

)

17,332

 

27,220

 

(17,916

)

171,513

 

Foreign Currency Options (b)

 

 

6,592

 

 

(3,871

)

 

(6,400

)

 

(8,676

)

Securities Sold Short (b)

 

35,177

 

18,720

 

(489

)

(8,440

)

25,704

 

24,885

 

(12,070

)

1,386

 

Other Derivative Liabilities (b)

 

3,959

 

(413

)

 

 

3,959

 

(413

)

(2,115

)

2,115

 

Contingent Carried Interest Repayment Guarantee (c)

 

 

13,885

 

 

 

 

 

 

(21,138

)

Debt Obligations (d)

 

 

 

 

(3,917

)

 

 

 

2,343

 

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

 

(1,378

)

 

 

1,700

 

401

 

 

(1,022

)

79

 

Total Net Gains (Losses) from Investment Activities

 

$

524,896

 

$

(3,863,916

)

$

951,983

 

$

498,141

 

$

2,906,193

 

$

(2,438,915

)

$

1,493,920

 

$

3,274,325

 

 


(a)                   See Note 4 “Investments”.

 

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

 

(c)                   See Note 13 “Commitments and Contingencies”.

 

(d)                   See Note 8 “Debt Obligations”.

 

(e)                   See Statement of Cash Flows Supplemental Disclosures.

 

4. INVESTMENTS

 

Investments consist of the following:

 

 

 

Fair Value

 

Cost

 

 

 

September 30, 2011

 

December 31, 2010

 

September 30, 2011

 

December 31, 2010

 

Private Equity

 

$

33,820,883

 

$

34,642,166

 

$

32,781,015

 

$

31,283,226

 

Fixed Income

 

2,068,561

 

1,633,289

 

2,042,846

 

1,486,782

 

Other

 

468,158

 

174,315

 

530,227

 

174,595

 

 

 

$

36,357,602

 

$

36,449,770

 

$

35,354,088

 

$

32,944,603

 

 

As of September 30, 2011 and December 31, 2010, Investments totaling $4,119,799 and $5,422,172, respectively, were pledged as direct collateral against various financing arrangements. See Note 8 “Debt Obligations.”

 

13



Table of Contents

 

Private Equity

 

The following table presents KKR’s private equity investments at fair value. The classifications of the private equity investments are based on its primary business and the domiciled location of the business.

 

 

 

Fair Value

 

Fair Value as a
Percentage of Total

 

 

 

September 30,
 2011

 

December 31,
 2010

 

September 30,
 2011

 

December 31,
 2010

 

 

 

 

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

 

 

Retail

 

$

6,058,306

 

$

5,419,908

 

17.9

%

15.6

%

Healthcare

 

3,533,193

 

4,163,435

 

10.4

%

12.0

%

Financial Services

 

2,611,589

 

2,625,310

 

7.7

%

7.6

%

Media

 

1,561,498

 

1,210,655

 

4.6

%

3.5

%

Energy

 

1,417,508

 

870,450

 

4.2

%

2.5

%

Consumer Products

 

1,061,552

 

779,921

 

3.1

%

2.3

%

Education

 

863,660

 

710,766

 

2.6

%

2.1

%

Technology

 

830,932

 

899,939

 

2.5

%

2.6

%

Manufacturing

 

482,395

 

 

1.5

%

0.0

%

Chemicals

 

224,600

 

426,527

 

0.8

%

1.2

%

Hotels/Leisure

 

 

6,232

 

0.0

%

0.1

%

North America Total

 

18,645,233

 

17,113,143

 

55.3

%

49.5

%

 

 

 

 

 

 

 

 

 

 

Europe

 

 

 

 

 

 

 

 

 

Healthcare

 

2,781,185

 

2,761,078

 

8.2

%

8.0

%

Manufacturing

 

1,618,321

 

2,493,885

 

4.8

%

7.2

%

Technology

 

1,544,389

 

2,281,137

 

4.6

%

6.6

%

Telecom

 

1,057,741

 

863,195

 

3.1

%

2.5

%

Retail

 

904,872

 

1,221,768

 

2.7

%

3.5

%

Media

 

758,010

 

708,916

 

2.2

%

2.0

%

Services

 

376,576

 

266,063

 

1.1

%

0.8

%

Consumer Products

 

249,712

 

249,395

 

0.7

%

0.7

%

Recycling

 

245,010

 

218,277

 

0.7

%

0.6

%

Energy

 

37,257

 

 

0.1

%

0.0

%

Europe Total

 

9,573,073

 

11,063,714

 

28.2

%

31.9

%

 

 

 

 

 

 

 

 

 

 

Asia - Pacific

 

 

 

 

 

 

 

 

 

Technology

 

1,952,890

 

2,852,393

 

5.8

%

8.2

%

Consumer Products

 

1,322,230

 

1,192,052

 

3.9

%

3.4

%

Financial Services

 

545,668

 

620,942

 

1.6

%

1.9

%

Services

 

411,923

 

286,523

 

1.2

%

0.8

%

Manufacturing

 

406,273

 

297,270

 

1.2

%

0.9

%

Recycling

 

286,783

 

165,399

 

0.8

%

0.5

%

Telecom

 

235,923

 

257,969

 

0.7

%

0.7

%

Media

 

169,358

 

619,772

 

0.5

%

1.8

%

Transportation

 

164,081

 

49,391

 

0.5

%

0.1

%

Retail

 

68,454

 

82,336

 

0.2

%

0.2

%

Energy

 

38,994

 

41,262

 

0.1

%

0.1

%

Asia - Pacific Total

 

5,602,577

 

6,465,309

 

16.5

%

18.6

%

 

 

 

 

 

 

 

 

 

 

Total Private Equity Investments

 

$

33,820,883

 

$

34,642,166

 

100

%

100

%

 

14



Table of Contents

 

As of September 30, 2011 and December 31, 2010 private equity investments which represented greater than 5% of total private equity investments included:

 

 

 

Fair Value

 

 

 

September 30, 2011

 

December 31, 2010

 

Dollar General Corporation

 

$

3,684,470

 

3,377,971

 

Alliance Boots GmbH

 

2,466,225

 

2,468,283

 

HCA, Inc.

 

1,696,427

 

2,429,808

 

 

 

$

7,847,122

 

$

8,276,062

 

 

The majority of the securities underlying KKR’s private equity investments are equity securities. As of September 30, 2011 and December 31, 2010, the aggregate amount of investments that were other than equity securities amounted to $1,754,031 and $1,986,160, respectively.

 

5. FAIR VALUE MEASUREMENTS

 

The following tables summarize the valuation of KKR’s investments and other financial instruments measured and reported at fair value by the fair value hierarchy levels described in Note 2 “Summary of Significant Accounting Policies” as of September 30, 2011 and December 31, 2010.

 

Assets, at fair value:

 

 

 

September 30, 2011

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Private Equity

 

$

10,426,289

 

$

1,772,350

 

$

21,622,244

 

$

33,820,883

 

Fixed Income

 

17,449

 

1,138,453

 

912,659

 

2,068,561

 

Other

 

273,108

 

130,388

 

64,662

 

468,158

 

Total Investments

 

10,716,846

 

3,041,191

 

22,599,565

 

36,357,602

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Forward Contracts

 

 

86,206

 

 

86,206

 

Other Derivatives

 

 

676

 

 

676

 

Total Assets

 

$

10,716,846

 

$

3,128,073

 

$

22,599,565

 

$

36,444,484

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Private Equity

 

$

9,386,259

 

$

2,083,110

 

$

23,172,797

 

$

34,642,166

 

Fixed Income

 

 

967,275

 

666,014

 

1,633,289

 

Other

 

75,596

 

53,531

 

45,188

 

174,315

 

Total Investments

 

9,461,855

 

3,103,916

 

23,883,999

 

36,449,770

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Forward Contracts

 

 

58,986

 

 

58,986

 

Foreign Currency Options

 

 

1,530

 

 

1,530

 

Total Assets

 

$

9,461,855

 

$

3,164,432

 

$

23,883,999

 

$

36,510,286

 

 

15



Table of Contents

 

Liabilities, at fair value:

 

 

 

September 30, 2011

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Options

 

$

 

$

4,870

 

$

 

$

4,870

 

Securities Sold, Not Yet Purchased

 

182,366

 

 

 

182,366

 

Total Liabilities

 

$

182,366

 

$

4,870

 

$

 

$

187,236

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

 

 

 

 

 

 

 

 

 

 

Securities Sold, Not Yet Purchased

 

$

89,820

 

$

2,006

 

$

 

$

91,826

 

Total Liabilities

 

$

89,820

 

$

2,006

 

$

 

$

91,826

 

 

The following table summarizes Level III investments and other financial instruments by valuation methodology as of September 30, 2011:

 

 

 

September 30, 2011

 

 

 

Private
Equity

 

Fixed
 Income

 

Other

 

Total Level III
Holdings

 

Third-Party Fund Managers

 

0.0

%

0.4

%

0.0

%

0.4

%

Public/Private Company Comparables and Discounted Cash Flows

 

95.7

%

3.6

%

0.3

%

99.6

%

Total

 

95.7

%

4.0

%

0.3

%

100.0

%

 

The following tables summarize changes in private equity, fixed income, and other investments measured and reported at fair value for which Level III inputs have been used to determine fair value for the three and nine months ended September 30, 2011 and 2010:

 

 

 

Three Months Ended
September 30, 2011

 

 

 

Private
Equity

 

Fixed
Income

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

21,065,234

 

$

938,944

 

$

81,468

 

$

22,085,646

 

Transfers In

 

 

787

 

 

787

 

Transfers Out

 

 

(35,630

)

(19,230

)

(54,860

)

Purchases

 

1,511,546

 

50,531

 

8,589

 

1,570,666

 

Sales

 

(72,931

)

(10,166

)

(1,102

)

(84,199

)

Settlements

 

 

(218

)

 

(218

)

Net Realized Gains (Losses)

 

38,456

 

194

 

 

38,650

 

Net Unrealized Gains (Losses)

 

(920,061

)

(31,783

)

(5,063

)

(956,907

)

Balance, End of Period

 

$

21,622,244

 

$

912,659

 

$

64,662

 

$

22,599,565

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(893,749

)

$

(26,917

)

$

(3,244

)

$

(923,910

)

 

The Transfers In noted above for fixed income are principally attributable to certain investments that experienced an insignificant level of market activity during the period and thus were valued in the absence of observable inputs.

 

16



Table of Contents

 

The Transfers Out noted above for fixed income and other are principally attributable to certain investments that experienced a significant level of market activity during the period and thus were valued using observable inputs.

 

 

 

Three Months Ended
September 30, 2010

 

 

 

Private
Equity

 

Fixed
Income

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

22,235,407

 

$

406,467

 

$

36,973

 

$

22,678,847

 

Transfers In

 

 

 

 

 

Transfers Out

 

(588,825

)

 

 

(588,825

)

Purchases

 

460,123

 

110,761

 

11,677

 

582,561

 

Sales

 

(1,137,334

)

(20,806

)

 

(1,158,140

)

Net Realized Gains (Losses)

 

850,854

 

938

 

(12

)

851,780

 

Net Unrealized Gains (Losses)

 

339,593

 

5,711

 

(1,216

)

344,088

 

Balance, End of Period

 

$

22,159,818

 

$

503,071

 

$

47,422

 

$

22,710,311

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,338,729

 

$

6,601

 

$

(1,155

)

$

1,344,175

 

 

The Transfers Out noted in the table above for private equity are attributable to a Portfolio Company that completed its initial public offering during the period.

 

 

 

Nine Months Ended
September 30, 2011

 

 

 

Private
Equity

 

Fixed
Income

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

23,172,797

 

$

666,014

 

$

45,188

 

$

23,883,999

 

Transfers In

 

 

129,428

 

 

129,428

 

Transfers Out

 

(4,622,552

)

(35,630

)

(23,060

)

(4,681,242

)

Purchases

 

2,999,121

 

307,874

 

52,934

 

3,359,929

 

Sales

 

(1,791,690

)

(72,279

)

(5,969

)

(1,869,938

)

Settlements

 

 

(88,946

)

 

(88,946

)

Net Realized Gains (Losses)

 

1,025,699

 

465

 

210

 

1,026,374

 

Net Unrealized Gains (Losses)

 

838,869

 

5,733

 

(4,641

)

839,961

 

Balance, End of Period

 

$

21,622,244

 

$

912,659

 

$

64,662

 

$

22,599,565

 

 

 

 

 

 

 

 

 

 

 

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

 

$

496,081

 

$

13,984

 

$

522

 

$

510,587

 

 

The Transfers In noted in the table above for fixed income are principally attributable to certain investments that experienced an insignificant level of market activity during the period and thus were valued in the absence of observable inputs.

 

The Transfers Out noted in the table above for private equity are attributable to Portfolio Companies that completed initial public offerings during the period. The Transfers Out noted above for fixed income and other are principally attributable to certain investments that experienced a significant level of market activity during the period and thus were valued using observable inputs.

 

17



Table of Contents

 

 

 

Nine Months Ended
September 30, 2010

 

 

 

Private
Equity

 

Fixed
Income

 

Other

 

Total Level III
Investments

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

19,324,961

 

$

77,640

 

$

14,435

 

$

19,417,036

 

Transfers In

 

 

181,846

 

730

 

182,576

 

Transfers Out

 

(588,825

)

 

 

(588,825

)

Purchases

 

2,209,485

 

259,893

 

18,641

 

2,488,019

 

Sales

 

(1,837,334

)

(36,253

)

(4,774

)

(1,878,361

)

Net Realized Gains (Losses)

 

727,978

 

2,109

 

3,321

 

733,408

 

Net Unrealized Gains (Losses)

 

2,323,553

 

17,836

 

15,069

 

2,356,458

 

Balance, End of Period

 

$

22,159,818

 

$

503,071

 

$

47,422

 

$

22,710,311

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,072,552

 

$

20,539

 

$

16,343

 

$

2,109,434

 

 

The Transfers In noted in the table above for fixed income and other are principally attributable to certain investments that experienced an insignificant level of market activity during the period and thus were valued in the absence of observable inputs.

 

The Transfers Out noted in the table above for private equity are attributable to a Portfolio Company that completed its initial public offering during the period.

 

Total realized and unrealized gains and losses recorded for Level III investments are reported in Net Gains (Losses) from Investment Activities in the accompanying condensed consolidated statements of operations. There were no significant transfers between Level I and Level II during the three and nine months ended September 30, 2011 and 2010.

 

6. EARNINGS PER COMMON UNIT

 

Basic earnings per common unit are calculated by dividing Net Income (Loss) Attributable to KKR & Co. L.P. by the total weighted average number of common units outstanding during the period.

 

Diluted earnings per common unit is calculated by dividing Net Income (Loss) Attributable to KKR & Co. L.P. by the weighted average number of common units outstanding during the period increased to include the number of additional common units that would have been outstanding if the dilutive potential common units had been issued.

 

For the three and nine months ended September 30, 2011 and 2010, basic and diluted earnings per common unit were calculated as follows:

 

 

 

Three Months Ended
September 30, 2011

 

Three Months Ended
September 30, 2010

 

Nine Months Ended
September 30, 2011

 

Nine Months Ended
September 30, 2010

 

 

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Basic

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(243,402

)

$

(243,402

)

$

8,856

 

$

8,856

 

$

(44,216

)

$

(44,216

)

$

152,599

 

$

152,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(1.09

)

$

(1.09

)

$

0.04

 

$

0.04

 

$

(0.20

)

$

(0.20

)

$

0.74

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Weighted-Average Common Units Outstanding

 

222,733,648

 

222,733,648

 

204,902,226

 

204,902,226

 

218,501,107

 

218,501,107

 

204,902,226

 

204,902,226

 

 

For the three and nine months ended September 30, 2011 and 2010, KKR Holdings units have been excluded from the calculation of diluted earnings per common unit given that the exchange of these units would proportionally increase KKR & Co. L.P.’s interests in the KKR Group Partnerships and would have an anti-dilutive effect on earnings per common unit as a result of certain tax benefits KKR & Co. L.P. is assumed to receive upon the exchange.

 

For the three and nine months ended September 30, 2011, equity awards granted under the KKR & Co. L.P. 2010 Equity Incentive Plan (the “Equity Incentive Plan”) have been excluded from the calculation of diluted earnings per common unit given the equity awards would have an anti-dilutive effect on earnings per common unit as a result of the net loss incurred for the respective periods.

 

18



Table of Contents

 

7. OTHER ASSETS AND ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES

 

Other assets consist of the following:

 

 

 

September 30,
2011

 

December 31,
2010

 

Unsettled Investment Trades (a)

 

$

390,430

 

$

10,695

 

Interest Receivable

 

106,080

 

83,577

 

Foreign Exchange Forward Contracts (b)

 

86,206

 

58,986

 

Fixed Assets, net (c)

 

48,705

 

49,260

 

Intangible Asset, net (d)

 

25,257

 

28,099

 

Deferred Financing Costs

 

16,396

 

8,272

 

Receivables

 

13,076

 

17,787

 

Prepaid Expenses

 

11,432

 

8,473

 

Deferred Tax Assets

 

9,187

 

6,831

 

Refundable Security Deposits

 

8,136

 

5,886

 

Deferred Transaction Costs

 

7,114

 

7,199

 

Foreign Currency Options (e) 

 

 

1,530

 

Other

 

43,223

 

23,159

 

 

 

$

765,242

 

$

309,754

 

 


(a)                                  Represents amounts due from third parties for investments sold for which cash settlement has not occurred.

 

(b)                                 Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign denominated investments. Such instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying condensed consolidated statements of operations. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments.

 

(c)                                Net of accumulated depreciation and amortization of $80,490 and $72,389 as of September 30, 2011 and December 31, 2010, respectively. Depreciation and amortization expense totaled $2,192 and $2,674 for the three months ended September 30, 2011 and 2010, respectively and $7,501 and $8,874 for the nine months ended September 30, 2011 and 2010.

 

(d)                               Net of accumulated amortization of $12,629 and $9,787 as of September 30, 2011 and December 31, 2010, respectively. Amortization expense totaled $947 for the three months ended September 30, 2011 and 2010 and $2,841 for the nine months ended September 30, 2011 and 2010.

 

(e)                                  Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign denominated investments. Such instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying condensed consolidated statements of operations. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments. The cost basis for these instruments at December 31, 2010 was $19,705. The fair value of these instruments as of September 30, 2011 is an unrealized loss of $4,870 and is reported in Accounts Payable, Accrued Expenses and Other Liabilities.

 

19



Table of Contents

 

Accounts Payable, Accrued Expenses and Other Liabilities consist of the following:

 

 

 

September 30,
2011

 

December 31,
2010

 

Amounts Payable to Carry Pool (a)

 

$

481,850

 

$

520,213

 

Securities Sold, Not Yet Purchased (b) 

 

182,366

 

91,826

 

Unsettled Investment Trades (c)

 

158,220

 

74,779

 

Accrued Compensation and Benefits

 

120,326

 

17,480

 

Interest Payable

 

96,462

 

93,422

 

Accounts Payable and Accrued Expenses

 

37,045

 

51,669

 

Taxes Payable

 

15,998

 

1,787

 

Deferred Revenue

 

11,370

 

3,322

 

Deferred Tax Liabilities

 

4,325

 

31,610

 

Foreign Currency Options (d) 

 

4,870

 

 

 

 

$

1,112,832

 

$

886,108

 

 


(a)                                  Represents the amount of carried interest payable to KKR’s principals, other professionals and selected other individuals with respect to KKR’s active funds and co-investment vehicles that provide for carried interest. See Note 10 “Equity Based Payments.”

 

(b)                                 Represents securities sold short, which are obligations of KKR to deliver a specified security at a future point in time. Such securities are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying condensed consolidated statements of operations. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments. The cost basis for these instruments at September 30, 2011 and December 31, 2010 were $197,374 and $81,949, respectively.

 

(c)                                  Represents amounts owed to third parties for investment purchases for which cash settlement has not occurred.

 

(d)                                 Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign denominated investments. The instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying condensed consolidated statements of operations. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments. The cost basis for these instruments at September 30, 2011 was $19,705. The fair value of these instruments as of December 31, 2010 was an unrealized gain of $1,530 and is reported in Other Assets.

 

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8. DEBT OBLIGATIONS

 

Debt obligations consist of the following:

 

 

 

September 30, 2011

 

December 31, 2010

 

Investment Financing Arrangements

 

$

1,067,108

 

$

988,988

 

Senior Notes

 

498,128

 

497,972

 

 

 

$

1,565,236

 

$

1,486,960

 

 

Investment Financing Arrangements

 

Certain of KKR’s investment vehicles have entered into financing arrangements with major financial institutions generally in connection with specific investments with the objective of enhancing returns. These financing arrangements are generally not direct obligations of the general partners of KKR’s investment vehicles or its management companies.

 

Approximately $796.4 million of financing was structured through the use of total return swaps which effectively convert third party capital contributions into borrowings of KKR. The total return swaps mature between October 2012 and February 2015. Upon the occurrence of certain events, including an event based on the value of the collateral and events of default, KKR may be required to provide additional collateral plus accrued interest, under the terms of certain of these financing arrangements. On May 4, 2011, the terms of one of the total return swaps were amended to extend the maturity, so that the total return swaps now expire in October 2012 and the per annum rate of interest was increased from LIBOR plus 1.35% to LIBOR plus 2.50%. As of September 30, 2011, the per annum rates of interest payable for the financings range from three-month LIBOR plus 1.75% to three-month LIBOR plus 2.50% (rates ranging from 2.0% to 2.75%). These financing arrangements are non-recourse to KKR beyond the specific assets pledged as collateral.

 

Approximately $182.2 million of financing was structured through the use of a syndicated term loan and a revolving credit facility (the “Term Facility”) that matures in August 2014. The per annum rate of interest for each borrowing under the Term Facility was equal to the Bloomberg United States Dollar Interest Rate Swap Ask Rate plus 1.75% at the time of each borrowing under the Term Facility through March 11, 2010. On March 11, 2010, the Term Facility was amended and the per annum rate of interest is the greater of the 5-year interest rate swap rate plus 1.75% or 4.65% for periods from March 12, 2010 to June 7, 2012. For the period June 8, 2012 through maturity, the interest rate is equal to one year LIBOR plus 1.75%. The interest rate at September 30, 2011 on the borrowings outstanding was 4.65%. This financing arrangement is non-recourse to KKR beyond the specific assets pledged as collateral.

 

In April 2011, one of KKR’s private equity investment vehicles entered into a revolving credit facility with a major financial institution (the “Revolver Facility”) with respect to a specific private equity investment.  The Revolver Facility provides for up to $50.1 million of financing and matures on the first anniversary of the agreement.  Upon the occurrence of certain events, including an event based on the value of the collateral and events of default, KKR may be required to provide additional collateral.  KKR has the option to extend the agreement for an additional two years provided the value of the investment meets certain defined financial ratios.  In addition, KKR may request to increase the commitment to the Revolver Facility up to $75.1 million, subject to lender approval and provided the value of the investment meets certain defined financial ratios. The per annum rate of interest for each borrowing under the Revolver Facility is equal to the Hong Kong interbank market (“HIBOR”) rate plus 3.75%. The interest rate at September 30, 2011 on the borrowings outstanding ranged from 4.07% to 4.09%.  As of September 30, 2011, $40.7 million of borrowings were outstanding under the Revolver Facility. This financing arrangement is non-recourse to KKR beyond the specific assets pledged as collateral.

 

In November 2010, a KKR investment vehicle entered into a five-year revolving credit agreement with a syndicate of lenders (the “Natural Resources Investment Credit Agreement”), which expires in November 2015. The Natural Resources Investment Credit Agreement was amended and entered into on May 13, 2011 to, among other things, decrease the credit facility commitment from $28.1 million to $26.8 million.  The Natural Resources Investment Credit Agreement now provides for up to $26.8 million of non-recourse, asset-based revolving credit subject to availability under a borrowing base determined by the value of certain specific assets pledged as collateral security for obligations under the agreement and a $5.3 million sub-limit for letters of credit. Based on the level of certain assets in the investment vehicle, as of September 30, 2011, KKR had availability under the facility of $17.9 million of which $13.5 million of borrowings were outstanding. In addition, there is a letter of credit of $0.6 million outstanding. As of September 30, 2011, the interest rates on borrowings outstanding under the Natural Resources Investment Credit Agreement ranged from 2.73% to 2.91%. This financing arrangement is non-recourse to KKR beyond the specific assets pledged as collateral.

 

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During May 2011, a KKR investment vehicle entered into a $200.0 million non-recourse multi-currency three-year revolving credit agreement that bears interest at LIBOR plus 2.75% (the “Mezzanine Investment Credit Agreement”). The Mezzanine Investment Credit Agreement is expected to be used to manage timing differences between capital calls from limited partners in the investment vehicle and funding of investment opportunities and to borrow in foreign currencies for purposes of hedging the foreign currency risk of non-U.S. dollar investments. As of September 30, 2011, $34.3 million of borrowings were outstanding under the Mezzanine Investment Credit Agreement. As of September 30, 2011, the interest rate on borrowings outstanding under the Mezzanine Investment Credit Agreement was 2.98%.  This financing arrangement is non-recourse to KKR beyond the specific assets and capital commitments pledged as collateral.

 

Senior Notes

 

On September 29, 2010, KKR Group Finance Co. LLC (the “Issuer”), a subsidiary of KKR Management Holdings Corp., issued $500 million aggregate principal amount of 6.375% Senior Notes (the “Senior Notes”), which were issued at a price of 99.584%. The Senior Notes are unsecured and unsubordinated obligations of the Issuer and will mature on September 29, 2020, unless earlier redeemed or repurchased. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by KKR & Co. L.P. and the KKR Group Partnerships. The guarantees are unsecured and unsubordinated obligations of the guarantors.

 

The Senior Notes bear interest at a rate of 6.375% per annum, accruing from September 29, 2010. Interest is payable semi-annually in arrears on March 29 and September 29 of each year, commencing on March 29, 2011. Interest expense on the Senior Notes was $8.0 million and $24.0 million for the three and nine months ended September 30, 2011, respectively. As of September 30, 2011, the fair value of the Senior Notes was $507.2 million.

 

The indenture, as supplemented by a first supplemental indenture, relating to the Senior Notes includes covenants, including limitations on the Issuer’s and the guarantors’ ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The indenture, as supplemented, also provides for events