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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 March 31, 2014

 

Or

 

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

 

For the Transition period from           to           .

 

Commission File Number 001-34820

 

KKR & CO. L.P.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

26-0426107

(State or other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

9 West 57 th Street, Suite 4200

New York, New York 10019

Telephone: (212) 750-8300

(Address, zip code, and telephone number, including
area code, of registrant’s principal executive office.)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of May 2, 2014, there were 408,004,049 Common Units of the registrant outstanding.

 

 

 



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KKR & CO. L.P.

 

FORM 10-Q

 

For the Quarter Ended March 31, 2014

 

INDEX

 

 

 

Page No.

 

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

6

 

 

 

Item 2.

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

62

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

117

 

 

 

Item 4.

Controls and Procedures

117

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

117

 

 

 

Item 1A.

Risk Factors

117

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

118

 

 

 

Item 3.

Defaults Upon Senior Securities

118

 

 

 

Item 4.

Mine Safety Disclosures

119

 

 

 

Item 5.

Other Information

119

 

 

 

Item 6.

Exhibits

119

 

 

 

SIGNATURES

120

 

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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 acquisition of KKR Financial Holdings LLC and Avoca Capital and its affiliates may constitute forward-looking statements that are subject to the risk that the benefits and anticipated synergies from such transactions are not realized and in the case of KFN, the impact on our distribution policy. 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, 2013, filed with the Securities and Exchange Commission on February 24, 2014, and in this report. These factors should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We do not undertake any obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.

 


 

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

 

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. 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 in respect of the carried interest from KKR’s business as part of our “carry pool” and certain minority interests. References to our “principals” are to our senior employees and non employee operating consultants who hold interests in KKR’s business through KKR Holdings L.P., which we refer to as “KKR Holdings,” and references to our “senior principals” are to principals who also hold interests in our Managing Partner entitling them to vote for the election of its directors.

 

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

 

In this report, the term “total distributable earnings” is the sum of (i) fee related earnings, as defined below, (ii) carry distributions received from KKR’s investment funds which have not been allocated as part of its carry pool and (iii) net realized principal investment income; less (i) applicable local income taxes, if any, and (ii)

 

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noncontrolling interests. We believe this measure is useful to unitholders as it provides a supplemental measure to assess performance, excluding the impact of mark-to-market gains (losses), and also assess amounts available for distribution to KKR unitholders. However, total distributable earnings is not a measure that calculates actual distributions under KKR’s current distribution policy.

 

In this report, the term “assets under management,” or “AUM,” represent the assets from which KKR is entitled to receive fees or a carried interest and general partner capital. We believe this measure is useful to unitholders as it provides additional insight into KKR’s capital raising activities and the overall activity in its investment funds.  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 credit products; (iv) the value of outstanding collateralized loan obligations; 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 may be set forth in the agreements governing the investment funds, vehicles or accounts that it manages or calculated pursuant to any regulatory definitions.

 

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

 

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

 

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

 

In this report, “syndicated capital” is generally the aggregate amount of capital in transactions originated by KKR investment funds and carry-yielding co-investment vehicles, which has been distributed to third parties in exchange for a fee.  It does not include (i) capital invested in such transactions by KKR investment funds and carry-yielding co-investment vehicles, which is instead reported in committed dollars invested and (ii) debt capital that is arranged as part of the acquisition financing of transactions originated by KKR investment funds. Syndicated capital is used as a measure of investment activity for KKR and its business segments during a given period, and we believe

 

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that this measure is useful to unitholders as it provides additional insight into levels of syndication activity in KKR’s Capital Markets and Principal Activities segment and across its investment platform.

 

You should note that our calculations of the financial measures described above 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. For important information regarding these and other financial measures, please see “Management’s Discussion and Analysis of Financial Condition & Results of Operations—Segment Operating and Performance Measures.”

 

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

 

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) exchangeable equity securities issued in connection with the acquisition of Avoca Capital 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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PART I—FINANCIAL INFORMATION

 

Item 1.                               Financial Statements (Unaudited).

 

KKR & CO. L.P.

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

 

(Amounts in Thousands, Except Unit Data)

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Cash and Cash Equivalents

 

$

1,324,925

 

$

1,306,383

 

Cash and Cash Equivalents Held at Consolidated Entities

 

917,051

 

440,808

 

Restricted Cash and Cash Equivalents

 

65,442

 

57,775

 

Investments

 

51,433,451

 

47,383,697

 

Due from Affiliates

 

161,317

 

143,908

 

Other Assets

 

2,500,480

 

2,094,630

 

Total Assets

 

$

56,402,666

 

$

51,427,201

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Debt Obligations

 

$

3,241,751

 

$

1,908,606

 

Due to Affiliates

 

110,624

 

93,851

 

Accounts Payable, Accrued Expenses and Other Liabilities

 

3,502,084

 

2,839,926

 

Total Liabilities

 

6,854,459

 

4,842,383

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interests

 

665,576

 

627,807

 

 

 

 

 

 

 

Equity

 

 

 

 

 

KKR & Co. L.P. Partners’ Capital (300,354,288 and 288,143,327 common units issued and outstanding as of March 31, 2014 and December 31, 2013, respectively)

 

3,016,677

 

2,727,909

 

Accumulated Other Comprehensive Income (Loss)

 

(4,994

)

(5,899

)

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

 

3,011,683

 

2,722,010

 

Noncontrolling Interests

 

45,863,240

 

43,235,001

 

Appropriated Capital

 

7,708

 

 

Total Equity

 

48,882,631

 

45,957,011

 

Total Liabilities and Equity

 

$

56,402,666

 

$

51,427,201

 

 

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 (“VIE”) as of March 31, 2014 resulting from the acquisition of Avoca Capital during the three months ended March 31, 2014. The assets of consolidated collateralized loan obligation (“CLO”) vehicles are held solely as collateral to satisfy the obligations of the CLO entities. KKR has no right to the benefits from, nor does KKR bear the risks associated with, the assets held by these CLO vehicles beyond KKR’s beneficial interest therein and management fees generated from the entities. The noteholders and other creditors of the CLO vehicles 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 CLO vehicles.

 

 

 

March 31, 2014

 

Assets

 

 

 

Cash and Cash Equivalents Held at Consolidated Entities

 

$

119,461

 

Investments

 

1,210,965

 

Other Assets

 

35,932

 

Total Assets

 

$

1,366,358

 

 

 

 

 

Liabilities

 

 

 

Debt Obligations

 

$

1,152,790

 

Accounts Payable, Accrued Expenses and Other Liabilities

 

90,212

 

Total Liabilities

 

$

1,243,002

 

 

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 March 31,

 

 

 

2014

 

2013

 

Revenues

 

 

 

 

 

Fees

 

$

302,926

 

$

151,240

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Compensation and Benefits

 

331,038

 

331,121

 

Occupancy and Related Charges

 

15,408

 

14,521

 

General, Administrative and Other

 

126,725

 

93,688

 

Total Expenses

 

473,171

 

439,330

 

 

 

 

 

 

 

Investment Income (Loss)

 

 

 

 

 

Net Gains (Losses) from Investment Activities

 

1,972,180

 

2,269,817

 

Dividend Income

 

96,704

 

39,469

 

Interest Income

 

161,960

 

109,369

 

Interest Expense

 

(34,731

)

(23,023

)

Total Investment Income (Loss)

 

2,196,113

 

2,395,632

 

 

 

 

 

 

 

Income (Loss) Before Taxes

 

2,025,868

 

2,107,542

 

 

 

 

 

 

 

Income Taxes

 

21,702

 

9,356

 

 

 

 

 

 

 

Net Income (Loss)

 

2,004,166

 

2,098,186

 

Net Income (Loss) Attributable to Redeemable Noncontrolling Interests

 

10,637

 

24,623

 

Net Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital

 

1,783,488

 

1,880,124

 

 

 

 

 

 

 

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

 

$

210,041

 

$

193,439

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

$

0.72

 

$

0.75

 

Diluted

 

$

0.65

 

$

0.69

 

Weighted Average Common Units Outstanding

 

 

 

 

 

Basic

 

293,490,461

 

257,044,184

 

Diluted

 

325,104,229

 

282,042,521

 

 

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 March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net Income (Loss)

 

$

2,004,166

 

$

2,098,186

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustments

 

5,343

 

(1,243

)

 

 

 

 

 

 

Comprehensive Income (Loss)

 

2,009,509

 

2,096,943

 

 

 

 

 

 

 

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

 

10,637

 

24,623

 

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital

 

1,787,760

 

1,878,754

 

 

 

 

 

 

 

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

 

$

211,112

 

$

193,566

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Redeemable

 

 

 

Common

 

Partners’

 

Comprehensive

 

Noncontrolling

 

Appropriated

 

Total

 

Noncontrolling

 

 

 

Units

 

Capital

 

Income (Loss)

 

Interests

 

Capital

 

Equity

 

Interests

 

Balance at January 1, 2013

 

253,363,691

 

$

2,008,965

 

$

(4,606

)

$

38,938,531

 

$

 

$

40,942,890

 

$

462,564

 

Net Income (Loss)

 

 

 

193,439

 

 

 

1,880,124

 

 

 

2,073,563

 

24,623

 

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

 

 

 

 

 

127

 

(1,370

)

 

 

(1,243

)

 

 

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

 

7,573,311

 

91,188

 

(173

)

(91,015

)

 

 

 

 

 

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

 

 

 

1,997

 

42

 

 

 

 

 

2,039

 

 

 

Net Delivery of Common Units-Equity Incentive Plan

 

844,301

 

15,027

 

 

 

 

 

 

 

15,027

 

 

 

Equity Based Compensation

 

 

 

27,418

 

 

 

54,232

 

 

 

81,650

 

 

 

Capital Contributions

 

 

 

 

 

 

 

715,021

 

 

 

715,021

 

34,668

 

Capital Distributions

 

 

 

(177,355

)

 

 

(2,392,513

)

 

 

(2,569,868

)

(4,021

)

Balance at March 31, 2013

 

261,781,303

 

$

2,160,679

 

$

(4,610

)

$

39,103,010

 

$

 

$

41,259,079

 

$

517,834

 

 

 

 

KKR & Co. L.P.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Redeemable

 

 

 

Common

 

Partners’

 

Comprehensive

 

Noncontrolling

 

Appropriated

 

Total

 

Noncontrolling

 

 

 

Units

 

Capital

 

Income (Loss)

 

Interests

 

Capital

 

Equity

 

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)

 

 

 

210,041

 

 

 

1,775,868

 

7,620

 

1,993,529

 

10,637

 

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

 

 

 

 

 

1,071

 

4,184

 

88

 

5,343

 

 

 

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

 

11,011,561

 

144,795

 

(274

)

(144,521

)

 

 

 

 

 

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

 

 

 

4,508

 

108

 

 

 

 

 

4,616

 

 

 

Net Delivery of Common Units-Equity Incentive Plan

 

1,199,400

 

28,379

 

 

 

 

 

 

 

28,379

 

 

 

Equity Based Compensation

 

 

 

39,353

 

 

 

38,175

 

 

 

77,528

 

 

 

Equity Issued in Connection with Acquisitions

 

 

 

 

 

 

 

56,495

 

 

 

56,495

 

 

 

Capital Contributions

 

 

 

 

 

 

 

4,564,205

 

 

 

4,564,205

 

45,418

 

Capital Distributions

 

 

 

(138,308

)

 

 

(3,666,167

)

 

 

(3,804,475

)

(18,286

)

Balance at March 31, 2014

 

300,354,288

 

$

3,016,677

 

$

(4,994

)

$

45,863,240

 

$

7,708

 

$

48,882,631

 

$

665,576

 

 

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)

 

 

 

Three Months Ended March
31,

 

 

 

2014

 

2013

 

Operating Activities

 

 

 

 

 

Net Income (Loss)

 

$

2,004,166

 

$

2,098,186

 

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

 

 

 

 

 

Equity Based Compensation

 

77,528

 

81,650

 

Net Realized (Gains) Losses on Investments

 

(750,627

)

(966,246

)

Change in Unrealized (Gains) Losses on Investments

 

(1,221,553

)

(1,303,571

)

Other Non-Cash Amounts

 

(16,433

)

(23,963

)

Cash Flows Due to Changes in Operating Assets and Liabilities:

 

 

 

 

 

Change in Cash and Cash Equivalents Held at Consolidated Entities

 

(325,902

)

116,746

 

Change in Due from / to Affiliates

 

(12,768

)

(28,465

)

Change in Other Assets

 

(49,654

)

246,337

 

Change in Accounts Payable, Accrued Expenses and Other Liabilities

 

402,910

 

207,586

 

Investments Purchased

 

(10,400,657

)

(3,505,768

)

Cash Proceeds from Sale of Investments

 

9,389,630

 

4,587,626

 

Net Cash Provided (Used) by Operating Activities

 

(903,360

)

1,510,118

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Change in Restricted Cash and Cash Equivalents

 

(7,667

)

61,720

 

Purchase of Furniture, Computer Hardware and Leasehold Improvements

 

(1,888

)

(1,283

)

Cash Paid for Acquisitions, Net of Cash Acquired

 

(58,922

)

 

Net Cash Provided (Used) by Investing Activities

 

(68,477

)

60,437

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Distributions to Partners

 

(138,308

)

(177,355

)

Distributions to Redeemable Noncontrolling Interests

 

(18,286

)

(4,021

)

Contributions from Redeemable Noncontrolling Interests

 

45,418

 

34,668

 

Distributions to Noncontrolling Interests

 

(3,666,167

)

(2,392,513

)

Contributions from Noncontrolling Interests

 

4,564,205

 

715,021

 

Net Delivery of Common Units - Equity Incentive Plan

 

28,379

 

15,027

 

Proceeds from Debt Obligations

 

308,435

 

568,280

 

Repayment of Debt Obligations

 

(133,297

)

(54,494

)

Financing Costs Paid

 

 

(4,960

)

Net Cash Provided (Used) by Financing Activities

 

990,379

 

(1,300,347

)

 

 

 

 

 

 

Net Increase/(Decrease) in Cash and Cash Equivalents

 

18,542

 

270,208

 

Cash and Cash Equivalents, Beginning of Period

 

1,306,383

 

1,230,464

 

Cash and Cash Equivalents, End of Period

 

$

1,324,925

 

$

1,500,672

 

 

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)

 

 

 

Three Months Ended March
31,

 

 

 

2014

 

2013

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Payments for Interest

 

$

40,143

 

$

23,190

 

Payments for Income Taxes

 

$

7,656

 

$

20,013

 

Supplemental Disclosures of Non-Cash Investing and Financing Activities

 

 

 

 

 

Non-Cash Contributions of Equity Based Compensation

 

$

77,528

 

$

81,650

 

Foreign Exchange Gains (Losses) and Translation on Debt Obligations

 

$

(7,356

)

$

3,687

 

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

 

$

4,616

 

$

2,039

 

Net Assets Acquired

 

 

 

 

 

Cash and Cash Equivalents Held at Consolidated Entities

 

$

150,302

 

$

 

Investments

 

$

1,247,079

 

$

 

Other Assets

 

$

109,557

 

$

 

Debt Obligations

 

$

1,150,551

 

$

 

Accounts Payable, Accrued Expenses and Other Liabilities

 

$

153,892

 

$

 

 

See notes to condensed consolidated financial statements.

 

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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 capital of the fund investors and brings 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, and (ii) KKR Fund Holdings L.P. (“Fund Holdings” and together with Management Holdings, the “KKR Group Partnerships”) directly and through KKR Fund Holdings GP Limited, a Cayman Island limited company which is a disregarded entity for U.S. federal income tax purposes. Group Holdings also owns certain economic interests in Management Holdings through a wholly owned Delaware corporate subsidiary of KKR Management Holdings Corp. and certain economic interests in Fund Holdings through a Delaware partnership of which Group Holdings is the general partner with a 99% economic interest and KKR Management Holdings Corp. is a limited partner with a 1% economic interest. KKR & Co. L.P., through its indirect controlling economic interests in the KKR Group Partnerships, is the holding partnership for the KKR business.

 

KKR & Co. L.P. both indirectly controls the KKR Group Partnerships and indirectly holds equity units in each KKR Group Partnership (collectively, “KKR Group Partnership Units”) representing economic interests in KKR’s business. The remaining KKR Group Partnership Units are held by KKR’s current and former principals through KKR Holdings L.P. (“KKR Holdings”), which is not a subsidiary of KKR. As of March 31, 2014, KKR & Co. L.P. held approximately 43% of the KKR Group Partnership Units and KKR’s principals held approximately 57% of the KKR Group Partnership Units through KKR Holdings. The percentage ownership in the KKR Group Partnerships will continue to change as KKR Holdings and/or KKR’s current and former principals exchange units in the KKR Group Partnerships for 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, 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, 2013 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, 2013, 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 the accounts of KKR’s management and capital markets companies, the general partners of certain unconsolidated funds and vehicles, general partners of consolidated funds and their respective consolidated funds and certain other entities including certain consolidated CLOs. References in the accompanying financial statements to KKR’s “principals” are to KKR’s senior employees and non-employee operating consultants who hold interests in KKR’s business through KKR Holdings, including those principals who also hold interests in the Managing Partner entitling those principals to vote for the election of the Managing Partner’s directors (the “Senior Principals”).

 

Use of Estimates

 

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

 

Principles of Consolidation

 

The types of entities with which KKR is involved generally 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 and (iii) CLOs. 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 CLOs 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.

 

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 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.

 

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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 CLOs, 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 CLOs, which are generally VIEs, the criteria for the Deferral are not met and therefore KKR applies the consolidation rules issued on January 1, 2010.  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 KKR.  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.

 

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

 

KKR’s funds are, for GAAP purposes, investment companies and therefore are not required to consolidate their investments, including investments in portfolio companies, even if majority-owned and controlled. Rather, the 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.

 

Variable Interest Entities — Collateralized Loan Obligations (“CLOs”)

 

For the assets and liabilities of the consolidated CLO vehicles, KKR has elected the fair value option. KKR accounts 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 is attributed to KKR and third party interest holders based on each beneficial holder’s residual interest in the consolidated CLO vehicles. The amount attributed to third party interest holders is 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 is recorded as appropriated capital since the other holders of the CLOs’ beneficial interests, not KKR, will receive the benefits or absorb the losses associated with their proportionate share of the CLOs’ assets and liabilities.

 

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Table of Contents

 

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 an impairment may exist. KKR does not have any indefinite-lived intangible assets.

 

Goodwill

 

Goodwill represents the excess of acquisition cost over the fair value of net tangible and intangible assets acquired in connection with an acquisition. Goodwill 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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Table of Contents

 

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

 

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

 

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

 

(v)                                 third parties in KKR’s capital markets business; and

 

(vi)                              exchangeable equity securities representing ownership interests in a subsidiary of a KKR Group Partnership issued in connection with the acquisition of Avoca.

 

Noncontrolling Interests held by KKR Holdings

 

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

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2014

 

2013

 

Balance at the beginning of the period

 

$

5,116,761

 

$

4,981,864

 

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

 

300,814

 

334,112

 

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

 

2,469

 

(1,320

)

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

 

(144,521

)

(91,015

)

Equity based compensation

 

35,150

 

54,232

 

Capital contributions

 

460

 

471

 

Capital distributions

 

(192,642

)

(327,430

)

Balance at the end of the period

 

$

5,118,491

 

$

4,950,914

 

 


(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

 

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Table of Contents

 

of which hold equity of the KKR Group Partnerships. However, primarily because of the (i) contribution of certain expenses borne entirely by KKR Holdings, (ii) the periodic exchange of KKR Holdings units for KKR & Co. L.P. common units pursuant to the exchange agreement and (iii) the contribution of certain expenses borne entirely by KKR associated with the KKR & Co. L.P. 2010 Equity Plan (“Equity Incentive Plan”), equity allocations shown in the condensed consolidated statement of changes in equity differ from their respective pro-rata ownership interests in KKR’s net assets.

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2014

 

2013

 

Net income (loss)

 

$

2,004,166

 

$

2,098,186

 

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

 

10,637

 

24,623

 

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

 

1,482,674

 

1,546,012

 

Plus: Income taxes attributable to KKR Management Holdings Corp.

 

10,947

 

6,659

 

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

 

$

521,802

 

$

534,210

 

 

 

 

 

 

 

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

 

$

300,814

 

$

334,112

 

 

Investments

 

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

 

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

 

Private Equity —Consists primarily of equity investments in operating businesses.

 

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

 

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 CLOs — Consists primarily of investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans) held directly by the consolidated CLO vehicles.

 

Equity Method —Consists primarily of investments in which KKR has significant influence, including investments in unconsolidated investment funds.

 

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

 

Equity Method

 

Equity method investments include (i) certain investments in private equity funds, real assets funds, funds of hedge 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

 

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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. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these 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 and debt obligations of the consolidated CLO vehicles.

 

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, contingent consideration and certain debt obligations) approximate fair value due to their short term maturities. Further information on Fixed Assets and contingent consideration is presented in Note 7, “Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities”. Further information on Goodwill and Intangible Assets is presented in Note 15 “Goodwill and Intangible Assets.” KKR’s debt obligations, except for KKR’s 2020 and 2043 Senior Notes, bear interest at floating rates and therefore fair value approximates carrying value. Further information on KKR’s 2020 and 2043 Senior Notes are presented in Note 9, “Debt Obligations.” The fair values for KKR’s 2020 and 2043 Senior Notes were derived using Level II inputs similar to those utilized in valuing credit investments.

 

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

 

Level I

 

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

 

Level II

 

Inputs 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, convertible debt securities indexed to publicly-listed securities, and certain over-the-counter derivatives.

 

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Level III

 

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

 

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

 

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

 

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

 

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

 

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.

 

Level II Valuation Methodologies

 

Financial assets and liabilities categorized as Level II consist primarily of securities indexed to publicly-listed securities and credit and other investments. Credit investments generally have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that KKR and others are willing to pay for an asset. Ask prices represent the lowest price that KKR and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices obtained from third party pricing services, fair value may not always be a predetermined point in the bid-ask range. KKR’s policy is generally to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets KKR’s best estimate of fair value. For securities indexed to publicly listed securities, such as convertible debt, the securities are typically valued using standard convertible security pricing models. The key inputs into these models that require some amount of judgment are the credit spreads utilized and the volatility assumed. To the extent the company being valued has other outstanding debt securities that are publicly-traded, the implied credit spread on the company’s other outstanding debt securities would be utilized in the valuation. To the extent the company being valued does not have other outstanding debt securities that are publicly-traded, the credit spread will be estimated based on the implied credit spreads observed in comparable publicly-traded debt securities. In certain cases, an additional spread will be added to reflect an illiquidity discount due to the fact that the security being valued is not publicly-traded. The volatility assumption is based upon the historically observed volatility of the underlying equity security into which the convertible debt security is convertible and/or the volatility implied by the prices of options on the underlying equity security.

 

Level III Valuation Methodologies

 

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

 

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

 

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

 

When determining the weighting ascribed to each valuation methodology, KKR considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among investments in the portfolio and

 

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in certain instances may result in up to a 100% weighting to a single methodology. Across the Level III private equity investment portfolio, approximately 82% of the fair value is derived from investments that are valued based exactly 50% on market comparables and 50% on a discounted cash flow analysis. Less than 5% of the fair value of the Level III private equity investment portfolio is derived from investments that are valued either based 100% on market comparables or 100% on a discounted cash flow analysis.

 

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

 

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

 

CLO Debt Obligations: The senior secured and subordinated notes of the consolidated CLOs are valued based on dealer quotes and in situations where third party quotes are unavailable, a discounted cash flow analysis. When discounted cash flow analyses are utilized, the significant unobservable inputs used in the fair value measurement of the senior secured and subordinated notes include the discount rate, default rate and recovery rates applied in the valuation models.

 

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 (including investments held by consolidated CLOs) and other investments. The Private Markets valuation committee may be assisted by subcommittees for example in the valuation of real estate investments. Each of the Private Markets valuation committee and the credit valuation committee is assisted by a valuation team, which, except as noted below, is comprised only of employees who are not investment professionals responsible for preparing preliminary valuations or for oversight of the investments being valued. The valuation teams for energy, infrastructure and real estate investments contain investment professionals who participate in the preparation

 

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of preliminary valuations and oversight for those investments. The valuation committees and teams are responsible for coordinating and consistently implementing KKR’s quarterly valuation policies, guidelines and processes. For 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 at least a majority of such investments. For most investments classified as Level III in Public Markets, 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 preliminary valuation, or an independent valuation firm is engaged by KKR to perform certain procedures in order to assess the reasonableness of KKR’s valuations. 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.

 

Fees

 

Fees 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, a specialty finance company, CLOs and other vehicles and separately managed accounts, (iii) monitoring fees from providing services to portfolio companies, and (iv) consulting and other fees earned by consolidated entities from providing advisory and other services.

 

For the three months ended March 31, 2014 and 2013, respectively, fees consisted of the following:

 

 

 

Three Months Ended
March 31,

 

 

 

2014

 

2013

 

Transaction Fees

 

$

155,154

 

$

38,425

 

Management Fees

 

50,185

 

41,024

 

Monitoring Fees

 

52,349

 

38,648

 

Consulting and Other Fees

 

28,132

 

14,313

 

Incentive Fees

 

17,106

 

18,830

 

Total Fees

 

$

302,926

 

$

151,240

 

 

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

 

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Recently Issued Accounting Pronouncements

 

Foreign Currency Matters

 

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters,” which indicates that the entire amount of a cumulative translation adjustment (“CTA”) related to an entity’s investment in a foreign entity should be released when there has been a (i) sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, (ii) loss of a controlling financial interest in an investment in a foreign entity, or (iii) step acquisition for a foreign entity. This guidance was effective as of January 1, 2014. The adoption of this guidance did not have a material impact on KKR’s financial statements for the three months ended March 31, 2014.

 

Amendments to Investment Company Scope, Measurement, and Disclosures

 

In June 2013, the FASB issued ASU 2013-08, Financial Services—Investment Companies Topic 946 (“ASU 2013-08”) which amends the scope, measurement, and disclosure requirements for investment companies. ASU 2013-08 (i) amends the criteria for an entity to qualify as an investment company, (ii) requires an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting, and (iii) introduces new disclosures. This guidance was effective as of January 1, 2014. The adoption of this guidance did not have a material impact on KKR’s financial statements for the three months ended March 31, 2014.

 

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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 months ended March 31, 2014 and 2013, respectively:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2014

 

March 31, 2013

 

 

 

Net Realized 
Gains (Losses)

 

Net Unrealized 
Gains (Losses)

 

Net Realized 
Gains (Losses)

 

Net Unrealized 
Gains (Losses)

 

Private Equity (a)

 

$

635,069

 

$

1,045,459

 

$

891,927

 

$

1,015,800

 

Credit and Other (a)

 

157,389

 

130,886

 

92,632

 

19,044

 

Investments of Consolidated CLOs (a)

 

(225

)

16,450

 

 

 

Real Assets (a)

 

2,655

 

(10,353

)

 

35,735

 

Equity Method (a)

 

2,391

 

3,959

 

4,919

 

22,610

 

Foreign Exchange Forward Contracts (b)

 

(8,454

)

8,646

 

15,743

 

206,871

 

Foreign Currency Options (b)

 

15

 

637

 

 

5,606

 

Securities Sold Short (b)

 

(16,013

)

23,989

 

(23,272

)

(10,771

)

Other Derivatives

 

(18,009

)

5,161

 

(13,517

)

4,066

 

Foreign Exchange Gains (Losses) (c)

 

(4,191

)

(3,281

)

(2,186

)

4,610

 

Total Net Gains (Losses) from Investment Activities

 

$

750,627

 

$

1,221,553

 

$

966,246

 

$

1,303,571

 

 


(a)         See Note 4 “Investments.”

 

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

 

(c)          Foreign Exchange Gains (Losses) includes foreign exchange gains (losses) on debt obligations, cash and cash equivalents, and cash and cash equivalents held at consolidated entities.

 

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4. INVESTMENTS

 

Investments consist of the following:

 

 

 

Fair Value

 

Cost

 

 

 

March 31, 2014

 

December 31, 2013

 

March 31, 2014

 

December 31, 2013

 

Private Equity

 

$

38,236,975

 

$

36,875,693

 

$

27,507,672

 

$

27,191,849

 

Credit

 

5,427,704

 

5,023,253

 

5,253,919

 

4,841,913

 

Investments of Consolidated CLOs

 

1,210,965

 

 

1,205,890

 

 

Real Assets

 

3,837,457

 

3,353,605

 

5,862,117

 

5,367,912

 

Equity Method

 

530,790

 

546,422

 

306,919

 

310,709

 

Other

 

2,189,560

 

1,584,724

 

1,951,812

 

1,485,417

 

Total Investments

 

$

51,433,451

 

$

47,383,697

 

$

42,088,329

 

$

39,197,800

 

 

As of March 31, 2014 and December 31, 2013, investments which represented greater than 5% of total investments consisted of Alliance Boots GmbH of $4.8 billion and $4.6 billion, respectively. In addition, as of March 31, 2014 and December 31, 2013, investments totaling $4.6 billion and $3.3 billion, respectively, were pledged as direct collateral against various financing arrangements. See Note 9 “Debt Obligations.”

 

The following table represents private equity investments by industry as of March 31, 2014 and December 31, 2013, respectively:

 

 

 

Fair Value

 

 

 

March 31, 2014

 

December 31, 2013

 

Health Care

 

$

8,955,650

 

$

8,480,933

 

Technology

 

5,112,401

 

5,192,488

 

Retail

 

4,976,175

 

4,582,846

 

Manufacturing

 

4,300,833

 

4,459,220

 

Consumer Products

 

3,958,660

 

3,795,851

 

Financial Services

 

3,941,432

 

3,714,657

 

Other

 

6,991,824

 

6,649,698

 

 

 

$

38,236,975

 

$

36,875,693

 

 

In the table above, other investments represent private equity investments in the following industries: Education, Forestry, Media, Services, Telecommunications, Transportation, Hotel/Leisure and Recycling. None of these industries represents more than 10% of total private equity investments as of March 31, 2014.

 

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The majority of the securities underlying private equity investments represent equity securities. As of March 31, 2014 and December 31, 2013, the fair value of investments that were other than equity securities amounted to $539.7 million and $548.5 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 March 31, 2014 and December 31, 2013 including those investments, other financial instruments and debt obligations of consolidated CLOs for which the fair value option has been elected. Equity Method Investments have been excluded from the tables below.

 

Assets, at fair value:

 

 

 

March 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

 

$

6,820,925

 

$

539,721

 

$

30,876,329

 

$

38,236,975

 

Credit

 

 

3,110,338

 

2,317,366

 

5,427,704

 

Investments of Consolidated CLOs

 

 

1,210,965

 

 

1,210,965

 

Real Assets

 

56,529

 

 

3,780,928

 

3,837,457

 

Other

 

982,309

 

428,613

 

778,638

 

2,189,560

 

Total

 

7,859,763

 

5,289,637

 

37,753,261

 

50,902,661

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Forward Contracts

 

 

96,959

 

 

96,959

 

Foreign Currency Options

 

 

4,375

 

 

4,375

 

Other Derivatives

 

 

8,325

 

 

 

8,325

 

Total Assets

 

$

7,859,763

 

$

5,399,296

 

$

37,753,261

 

$

51,012,320

 

 

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Table of Contents

 

 

 

December 31, 2013

 

 

 

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

 

Significant Other 
Observable Inputs
(Level II)

 

Significant 
Unobservable Inputs
(Level III)

 

Total

 

Private Equity

 

$

7,244,643

 

$

548,545

 

$

29,082,505

 

$

36,875,693

 

Credit

 

 

3,078,789

 

1,944,464

 

5,023,253

 

Investments of Consolidated CLOs

 

 

 

 

 

Real Assets

 

52,931

 

 

3,300,674

 

3,353,605

 

Other

 

943,976

 

292,262

 

348,486

 

1,584,724

 

Total

 

8,241,550

 

3,919,596

 

34,676,129

 

46,837,275

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Forward Contracts

 

 

85,750

 

 

85,750

 

Foreign Currency Options

 

 

3,340

 

 

3,340

 

Other Derivatives

 

 

5,080

 

 

5,080

 

Total Assets

 

$

8,241,550

 

$

4,013,766

 

$

34,676,129

 

$

46,931,445

 

 

Liabilities, at fair value:

 

 

 

March 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

 

$

939,376

 

$

57,063

 

$

 

$

996,439

 

Foreign Currency Options

 

 

4,989

 

 

4,989

 

Foreign Exchange Forward Contracts

 

 

412,754

 

 

412,754

 

Unfunded Revolver Commitments

 

 

1,587

 

 

1,587

 

Debt Obligations of Consolidated CLOs

 

 

 

1,152,790

 

1,152,790

 

Other Derivatives

 

 

18,296

 

 

18,296

 

Total Liabilities

 

$

939,376

 

$

494,689

 

$

1,152,790

 

$

2,586,855

 

 

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December 31, 2013

 

 

 

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

 

Significant Other 
Observable Inputs
(Level II)

 

Significant 
Unobservable 
Inputs
(Level III)

 

Total

 

Securities Sold Short

 

$

624,653

 

$

51,491

 

$

 

$

676,144

 

Foreign Currency Options

 

 

4,591

 

 

4,591

 

Foreign Exchange Forward Contracts

 

 

410,191

 

 

410,191

 

Unfunded Revolver Commitments

 

 

1,902

 

 

1,902

 

Debt Obligations of Consolidated CLOs

 

 

 

 

 

Other Derivatives

 

 

14,177

 

 

14,177

 

Total Liabilities

 

$

624,653

 

$

482,352

 

$

 

$

1,107,005

 

 

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 months ended March 31, 2014 and 2013, respectively:

 

 

 

For the Three Months Ended March 31, 2014

 

 

 

Level III Assets

 

Level III Liabilities

 

 

 

Private
Equity

 

Credit

 

Real Assets

 

Other

 

Total Level III
Investments

 

Debt Obligations of
Consolidated CLOs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

29,082,505

 

$

1,944,464

 

$

3,300,674

 

$

348,486

 

$

34,676,129

 

$

 

Acquisition

 

 

 

 

 

 

1,150,551

 

Transfers In (1)

 

 

 

 

 

 

 

Transfers Out (2)

 

(1,258,584

)

 

 

 

(1,258,584

)

 

Purchases

 

2,122,439

 

453,205

 

496,219

 

406,465

 

3,478,328

 

 

Sales

 

(24,131

)

(134,166

)

(4,669

)

(19,207

)

(182,173

)

 

Settlements

 

 

15,720

 

 

 

15,720

 

 

Net Realized Gains (Losses)

 

(695,318

)

28,734

 

2,655

 

176

 

(663,753

)

 

Net Unrealized Gains (Losses)

 

1,649,418

 

9,409

 

(13,951

)

42,718

 

1,687,594

 

2,239

 

Balance, End of Period

 

$

30,876,329

 

$

2,317,366

 

$

3,780,928

 

$

778,638

 

$

37,753,261

 

$

1,152,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

954,100

 

$

38,032

 

$

(13,951

)

$

43,665

 

$

1,021,846

 

$

2,239

 

 

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Table of Contents

 

 

 

Three Months Ended March 31, 2013

 

 

 

Level III Assets

 

Level III Liabilities

 

 

 

Private
Equity

 

Credit

 

Real Assets

 

Other

 

Total Level III 
Investments

 

Debt Obligations of
Consolidated CLOs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, Beginning of Period

 

$

25,734,400

 

$

1,587,046

 

$

1,775,683

 

$

239,230

 

$

29,336,359

 

$

 

Transfers In (1)

 

 

8,936

 

 

 

8,936

 

 

Transfers Out (2)

 

 

(78,227

)

 

(19,264

)

(97,491

)

 

Purchases

 

335,111

 

131,818

 

184,477

 

6,827

 

658,233

 

 

Sales

 

 

(203,732

)

 

(17,051

)

(220,783

)

 

Settlements

 

 

27,945

 

 

 

27,945

 

 

Net Realized Gains (Losses)

 

 

5,369

 

 

6,944

 

12,313

 

 

Net Unrealized Gains (Losses)

 

603,744

 

(35,661

)

35,810

 

11,946

 

615,839

 

 

Balance, End of Period

 

$

26,673,255

 

$

1,443,494

 

$

1,995,970

 

$

228,632

 

$

30,341,351

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

603,744

 

$

(26,661

)

$

35,810

 

$

11,946

 

$

624,839

 

$

 

 


(1)                        The Transfers In noted in the tables above for credit investments 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.

 

(2)                        The Transfers Out noted in the tables above for private equity investments are attributable to portfolio companies that are now valued using their publicly traded market price. The Transfers Out noted above for credit and other investments are principally attributable to certain investments that experienced a higher level of market activity during the period and thus were valued using observable inputs.

 

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 was one transfer between Level I and Level II for private equity investments during the three months ended March 31, 2014 attributable to a portfolio company that is now valued using its publicly traded market price. There were no transfers between Level I and Level II during the three months ended March 31, 2013.

 

29



Table of Contents

 

The following table presents additional information about valuation methodologies and significant unobservable inputs used for investments that are measured at fair value and categorized within Level III as of March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact to Valuation

 

 

 

Fair Value

 

Valuation

 

 

 

Weighted

 

 

 

from an

 

 

 

March 31, 2014

 

Methodologies

 

Unobservable Input(s) (1)

 

Average (2)

 

Range

 

Increase in Input (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Equity Investments

 

$

30,876,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

$

7,304,191

 

Inputs to both market comparable

 

Illiquidity Discount

 

7

%

5% - 15%

 

Decrease

 

 

 

 

 

and discounted cash flow

 

Weight Ascribed to Market Comparables

 

50

%

50% - 50%

 

(4)

 

 

 

 

 

 

 

Weight Ascribed to Discounted Cash Flow

 

50

%

50% - 50%

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market comparables

 

Enterprise Value/LTM EBITDA Multiple

 

11

x

10x - 14x

 

Increase

 

 

 

 

 

 

 

Enterprise Value/Forward EBITDA Multiple

 

10

x

10x - 12x

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted cash flow

 

Weighted Average Cost of Capital

 

10

%

9% - 13%

 

Decrease

 

 

 

 

 

 

 

Enterprise Value/LTM EBITDA Exit Multiple

 

11

x

9x - 12x

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

$

4,170,652

 

Inputs to both market comparable

 

Illiquidity Discount

 

11

%

5% - 20%

 

Decrease

 

 

 

 

 

and discounted cash flow

 

Weight Ascribed to Market Comparables

 

50

%

50% - 50%

 

(4)

 

 

 

 

 

 

 

Weight Ascribed to Discounted Cash Flow

 

50

%

50% - 50%

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market comparables

 

Enterprise Value/LTM EBITDA Multiple

 

12

x

5x - 14x

 

Increase

 

 

 

 

 

 

 

Enterprise Value/Forward EBITDA Multiple

 

11

x

6x - 13x

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted cash flow

 

Weighted Average Cost of Capital

 

11

%

9% - 14%

 

Decrease

 

 

 

 

 

 

 

Enterprise Value/LTM EBITDA Exit Multiple

 

9

x

6x - 11x

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

3,982,083

 

Inputs to both market comparable

 

Illiquidity Discount

 

8

%

5% - 20%

 

Decrease

 

 

 

 

 

and discounted cash flow

 

Weight Ascribed to Market Comparables

 

50

%

0% - 50%

 

(4)

 

 

 

 

 

 

 

Weight Ascribed to Discounted Cash Flow

 

50

%

50% -100%

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market comparables

 

Enterprise Value/LTM EBITDA Multiple

 

12

x

8x - 13x(6)

 

Increase

 

 

 

 

 

 

 

Enterprise Value/Forward EBITDA Multiple

 

10

x

7x - 11x(6)

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted cash flow

 

Weighted Average Cost of Capital

 

11

%

9% - 23%

 

Decrease

 

 

 

 

 

 

 

Enterprise Value/LTM EBITDA Exit Multiple

 

8

x

6x - 9x

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Products

 

$

3,888,266

 

Inputs to both market comparable

 

Illiquidity Discount

 

11

%

10% - 15%

 

Decrease

 

 

 

 

 

and discounted cash flow

 

Weight Ascribed to Market Comparables

 

49

%

0% - 50%

 

(4)

 

 

 

 

 

 

 

Weight Ascribed to Discounted Cash Flow

 

51

%

50% - 100%

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market comparables

 

Enterprise Value/LTM EBITDA Multiple

 

13

x

8x - 18x

 

Increase

 

 

 

 

 

 

 

Enterprise Value/Forward EBITDA Multiple

 

12

x

8x - 16x

 

Increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted cash flow

 

Weighted Average Cost of Capital

 

13

%

10% - 26%

 

Decrease