KKR & CO. INC. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements ofKKR & Co. Inc. , together with its consolidated subsidiaries, and the related notes included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed with theSEC onFebruary 18, 2020 (our "Annual Report"), including the audited consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under "Cautionary Note Regarding Forward-looking Statements," "Business Environment" and "Risk Factors" in this report, our Annual Report, and our other filings with theSEC . Actual results may differ materially from those contained in any forward-looking statements. The unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are hereafter referred to as the "financial statements." Additionally, the condensed consolidated statements of financial condition are referred to herein as the "consolidated statements of financial condition"; the condensed consolidated statements of operations are referred to herein as the "consolidated statements of operations"; the condensed consolidated statements of comprehensive income (loss) are referred to herein as the "consolidated statements of comprehensive income (loss)"; the condensed consolidated statements of changes in equity are referred to herein as the "consolidated statements of changes in equity"; and the condensed consolidated statements of cash flows are referred to herein as the "consolidated statements of cash flows." Overview We are a leading global investment firm that manages multiple alternative asset classes including private equity, credit and real assets, with strategic partners that manage hedge funds. We aim to generate attractive investment returns for our fund investors by following a patient and disciplined investment approach, employing world-class people, and driving growth and value creation with our portfolio companies. We invest our own capital alongside the capital we manage for fund investors and provide financing solutions and investment opportunities through our capital markets business. Our business offers a broad range of investment management services to our fund investors and provides capital markets services to our firm, our portfolio companies and third parties. Throughout our history, we have consistently been a leader in the private equity industry, having completed more than 360 private equity investments in portfolio companies with a total transaction value in excess of$630 billion as ofJune 30, 2020 . We have grown our firm by expanding our geographical presence and building businesses in areas such as leveraged credit, alternative credit, capital markets, infrastructure, energy, real estate, growth equity, core and impact investments. Our balance sheet has provided a significant source of capital in the growth and expansion of our business, and has allowed us to further align our interests with those of our fund investors. Building on these efforts and leveraging our industry expertise and intellectual capital have allowed us to capitalize on a broader range of the opportunities we source. Additionally, we have increased our focus on meeting the needs of our existing fund investors and in developing relationships with new investors in our funds. We seek to work proactively and collaboratively as one-firm across business lines, departments, and geographies, as appropriate, to achieve what we believe are the best results for our funds and the firm. Through our offices around the world, we have a pre-eminent global integrated platform for sourcing transactions, raising capital and carrying out capital markets activities. Our growth has been driven by value that we have created through our operationally focused investment approach, the expansion of our existing businesses, our entry into new lines of business, innovation in the products that we offer investors in our funds, an increased focus on providing tailored solutions to our clients and the integration of capital markets distribution activities. As a global investment firm, we earn management, monitoring, transaction and incentive fees and carried interest for providing investment management, monitoring and other services to our funds, vehicles, CLOs, managed accounts and portfolio companies, and we generate transaction-specific income from capital markets transactions. We earn additional investment income by investing our own capital alongside that of our fund investors, from other assets on our balance sheet and from the carried interest we receive from our funds and certain of our other investment vehicles. A carried interest entitles the sponsor of a fund to a specified percentage of investment gains that are generated on third-party capital that is invested. Our investment teams have deep industry knowledge and are supported by a substantial and diversified capital base; an integrated global investment platform; the expertise of operating professionals, senior advisors and other advisors; and a worldwide network of business relationships that provide a significant source of investment opportunities, specialized 63
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knowledge during due diligence and substantial resources for creating and realizing value for stakeholders. These teams invest capital, a substantial portion of which is of a long duration and not subject to redemption. As ofJune 30, 2020 , approximately 79% of our capital is committed for an average of 8 years or more, providing us with significant flexibility to increase the value of the investments and select exit opportunities. We believe that these aspects of our business will help us continue to expand and grow our business and deliver strong investment performance in a variety of economic and financial conditions. Our Business Lines Private Markets Through our Private Markets business line, we manage and sponsor a group of private equity funds that invest capital for long-term appreciation, either through controlling ownership of a company or strategic minority positions. In addition to our traditional private equity funds, we sponsor investment funds that invest in growth equity, core and impact investments. We also manage and sponsor investment funds that invest capital in real assets, such as infrastructure, energy and real estate. Our Private Markets business line includes separately managed accounts that invest in multiple strategies, which may include our credit strategies as well as our private equity and real assets strategies. These funds and accounts are managed byKohlberg Kravis Roberts & Co. L.P. , anSEC -registered investment adviser. As ofJune 30, 2020 , our Private Markets business line had$124.8 billion of AUM, consisting of$85.1 billion in private equity (including growth equity, core, and impact investments),$27.6 billion in real assets (including infrastructure, energy, and real estate) and$12.1 billion in other related strategies. The table below presents information as ofJune 30, 2020 , relating to our current private equity, growth equity, core investment and real asset funds and other investment vehicles in our Private Markets business line for which we have the ability to earn carried interest. This data does not reflect additional capital raised, acquisitions or disposals of investments, changes in investment values, or distributions occurring afterJune 30, 2020 . 64
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Investment Period (1) Amount ($ in millions)
Percentage
Committed Gross Accrued
Start End Uncalled by General Remaining Remaining Carried
Date Date Commitment (2) Commitments Partner Invested Realized Cost (3) Fair Value Interest
Private Equity and Growth
Equity Funds
Americas Fund XII 1/2017 1/2023 $ 13,500.0 $
6,593.7 5.8%
8,718.4 576.3 2.9% 9,579.6 11,501.4 5,101.5 8,217.1 582.0
2006 Fund (4) 9/2006 9/2012 17,642.2 247.4 2.1% 17,309.3 31,033.0 3,283.1 4,849.7 309.9
Millennium Fund (4) 12/2002 12/2008 6,000.0 - 2.5% 6,000.0 14,123.1 - 6.1 1.3
European Fund V 3/2019 7/2025 6,320.2 4,891.2 1.8% 1,429.0 - 1,429.0 1,449.2 -
European Fund IV 12/2014 3/2019 3,509.9 259.5 5.7% 3,372.9 2,840.4 2,208.3 3,211.3 187.8
European Fund III (4) 3/2008 3/2014 5,508.8 149.0 5.2% 5,359.8 10,463.6 396.9 296.8
(19.2 )
European Fund II (4) 11/2005 10/2008 5,750.8 - 2.1% 5,750.8 8,507.4 - 34.3 (0.2 )
Asian Fund IV 7/2020 7/2026 10,695.6 10,695.6 9.3% - - - - -
Asian Fund III 4/2017 7/2020 9,000.0 4,213.2 5.6% 5,146.2 1,233.5 4,774.1 6,042.5 246.9
Asian Fund II 4/2013 4/2017 5,825.0 36.5 1.3% 6,802.5 4,577.3 4,309.4 5,456.3 233.9
Asian Fund (4) 7/2007 4/2013 3,983.3 - 2.5% 3,974.3 8,687.9 93.2 68.3 4.8
China Growth Fund (4) 11/2010 11/2016 1,010.0 - 1.0% 1,010.0 815.4 541.9 449.8 (14.8 )
Next Generation
Technology Growth Fund II 12/2019 12/2025 2,088.3 1,810.3 7.2% 278.0 - 278.0 322.3 4.2
Next Generation
Technology Growth Fund 3/2016 12/2019 658.9 4.9 22.5% 658.3 45.9 630.9 1,125.8 50.0
Health Care Strategic
Growth Fund 12/2016 12/2021 1,331.0 917.9 11.3% 503.9 95.9 410.7 719.0 33.9
Global Impact Fund 2/2019 2/2025 1,242.2 1,081.9 8.1% 160.3 - 160.3 174.4 -
Private Equity and Growth 102,784.6 31,477.4 74,245.1 94,013.8 30,434.8 41,217.2 1,870.1
Equity Funds
Co-Investment Vehicles
and Other Various Various 9,834.3 2,915.7 Various 7,180.0 4,966.8 4,722.9 5,742.1 381.1
Total Private Equity and
Growth Equity Funds 112,618.9 34,393.1 81,425.1 98,980.6 35,157.7 46,959.3 2,251.2
Core Investment Vehicles Various Various 9,868.5 4,944.9 35.8% 4,923.6 - 4,923.6 6,829.8 56.7 Real Assets Energy Income and Growth Fund II 6/2018 6/2021 994.2 587.6 20.1% 416.3 9.6 407.1 407.0 - Energy Income and Growth Fund 9/2013 6/2018 1,974.2 59.3 12.9% 1,963.4 785.9 1,283.8 870.5 -Natural Resources Fund (4) Various Various 887.4 0.9 Various 886.5 123.2 194.2 71.3 - Global Energy Opportunities Various Various 914.1 170.3 Various 517.9 136.4 348.6 212.8 - Global Infrastructure Investors III 6/2018 6/2024 7,156.3 4,681.3 3.8% 2,623.4 148.3 2,584.8 2,427.3 - Global Infrastructure Investors II 10/2014 6/2018 3,040.0 162.2 4.1% 3,117.7 2,639.1 2,067.1 2,448.9 38.1 Global Infrastructure Investors 9/2011 10/2014 1,040.2 25.1 4.8% 1,046.7 2,093.1 129.3 117.8 1.8 Asia Pacific Infrastructure Investors 1/2020 1/2026 2,515.6 2,515.6 9.9% - - - - 2.7Real Estate Partners Americas II 5/2017 12/2020 1,921.2 885.5 7.8% 1,211.1 373.7 1,013.7 1,144.2 31.8Real Estate Partners Americas 5/2013 5/2017 1,229.1 148.2 16.3% 1,010.7 1,354.5 222.2 109.1 2.2Real Estate Partners Europe 9/2015 12/2019 708.7 211.5 9.5% 568.9 154.0 492.1 566.0 8.5 Real Estate Credit Opportunity Partners II 4/2019 6/2022 950.0 728.9 5.3% 221.1 - 221.1 202.2 - Real Estate Credit Opportunity Partners 2/2017 4/2019 1,130.0 122.2 4.4% 1,007.8 186.5 1,007.8 942.5 - Property Partners Americas 12/2019 (5) 2,012.5 1,817.2 24.8% 195.3 - 195.3 207.6 0.5 Co-Investment Vehicles and Other Various Various 4,033.2 2,023.3 Various 2,009.9 870.9 2,006.2 2,275.6 1.2 Real Assets 30,506.7 14,139.1 16,796.7 8,875.2 12,173.3 12,002.8 86.8 Other Unallocated Commitments (6) 1,449.6 1,449.6 Various - - - - - Private Markets Total$ 154,443.7 $ 54,926.7 $ 103,145.4 $ 107,855.8 $ 52,254.6 $ 65,791.9 $ 2,394.7
(1) The start date represents the date on which the general partner of the
applicable fund commenced investment of the fund's capital or the date of the
first closing. The end date represents the earlier of (i) the date on which
the general partner of the applicable fund was or will be required by the
fund's governing agreement to cease making investments on behalf of the fund,
unless extended by a vote of the fund investors, and (ii) the date on which
the last investment was made.
(2) The commitment represents the aggregate capital commitments to the fund,
including capital commitments by third-party fund investors and the general
partner. Foreign currency commitments have been converted into
based on (i) the foreign exchange rate at the date of purchase for each
investment and (ii) the exchange rate that prevailed on
case of uncalled commitments.
(3) The remaining cost represents the initial investment of the general partner
and limited partners, reduced for returns of capital, with the limited
partners' investment further reduced for any realized gains from which the
general partner did not receive a carried interest.
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(4) The "Invested" and "Realized" columns do not include the amounts of any
realized investments that restored the unused capital commitments of the fund
investors, if any.
(5) Open ended fund.
(6) "Unallocated Commitments" represent unallocated commitments from our
strategic investor partnerships.
The table below presents information as ofJune 30, 2020 , relating to the historical performance of certain of our Private Markets investment vehicles since inception, which we believe illustrates the benefits of our investment approach. This data does not reflect additional capital raised sinceJune 30, 2020 , or acquisitions or disposals of investments, changes in investment values or distributions occurring after that date. However, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of future results. Amount Fair Value of Investments Gross Multiple of Gross Net Invested Private Markets Investment Funds Commitment Invested Realized (4) Unrealized Total ValueIRR (5) IRR (5) Capital (5) ($ in millions) Legacy Funds (1) 1976 Fund$ 31.4 $ 31.4 $ 537.2 $ -$ 537.2 39.5 % 35.5 % 17.1 1980 Fund 356.8 356.8 1,827.8 - 1,827.8 29.0 % 25.8 % 5.1 1982 Fund 327.6 327.6 1,290.7 - 1,290.7 48.1 % 39.2 % 3.9 1984 Fund 1,000.0 1,000.0 5,963.5 - 5,963.5 34.5 % 28.9 % 6.0 1986 Fund 671.8 671.8 9,080.7 - 9,080.7 34.4 % 28.9 % 13.5 1987 Fund 6,129.6 6,129.6 14,949.2 - 14,949.2 12.1 % 8.9 % 2.4 1993 Fund 1,945.7 1,945.7 4,143.3 - 4,143.3 23.6 % 16.8 % 2.1 1996 Fund 6,011.6 6,011.6 12,476.9 - 12,476.9 18.0 % 13.3 % 2.1 Subtotal - Legacy Funds 16,474.5 16,474.5 50,269.3 - 50,269.3 26.1 % 19.9 %
3.1
Included Funds European Fund (1999) (2) 3,085.4 3,085.4 8,757.7 - 8,757.7 26.9 % 20.2 %
2.8
Millennium Fund (2002) 6,000.0 6,000.0 14,123.1 6.1 14,129.2 22.0 % 16.1 %
2.4
European Fund II (2005) (2) 5,750.8 5,750.8 8,507.4 34.3 8,541.7 6.1 % 4.5 % 1.5 2006 Fund (2006) 17,642.2 17,309.3 31,033.0 4,849.7 35,882.7 11.7 % 9.1 % 2.1 Asian Fund (2007) 3,983.3 3,974.3 8,687.9 68.3 8,756.2 18.9 % 13.7 % 2.2 European Fund III (2008) (2) 5,508.8 5,359.8 10,463.6 296.8 10,760.4 16.5 % 11.4 %
2.0
E2 Investors (Annex Fund) (2009) (2) 195.8 195.8 199.6 - 199.6 0.6 % 0.5 % 1.0 China Growth Fund (2010) 1,010.0 1,010.0 815.4 449.8 1,265.2 6.2 % 2.0 % 1.3 Natural Resources Fund (2010) 887.4 886.5 123.2 71.3 194.5 (27.7 )% (29.8 )% 0.2Global Infrastructure Investors (2011) (2) 1,040.2 1,046.7 2,093.1 117.8 2,210.9 17.6 % 15.6 %
2.1
North America Fund XI (2012) 8,718.4 9,579.6 11,501.4 8,217.1 19,718.5 22.2 % 17.6 %
2.1
Asian Fund II (2013) 5,825.0 6,802.5 4,577.3 5,456.3 10,033.6 13.4 % 9.6 %
1.5
Real Estate Partners Americas (2013) 1,229.1 1,010.7 1,354.5 109.1 1,463.6 17.0 % 12.2 %
1.4
Energy Income and Growth Fund (2013) 1,974.2 1,963.4 785.9 870.5 1,656.4 (5.7 )% (8.5 )%
0.8
Global Infrastructure Investors II (2014) (2) 3,040.0 3,117.7 2,639.1 2,448.9 5,088.0 19.1 % 16.4 % 1.6 European Fund IV (2015) (2) 3,509.9 3,372.9 2,840.4 3,211.3 6,051.7 24.7 % 19.1 % 1.8 Real Estate Partners Europe (2015) (2) 708.7 568.9 154.0 566.0 720.0 13.0 % 8.7 %
1.3
Next Generation Technology Growth Fund (2016) 658.9 658.3 45.9 1,125.8 1,171.7 30.4 % 24.5 %
1.8
Health Care Strategic Growth Fund (2016) 1,331.0 503.9 95.9 719.0 814.9 56.8 % 31.3 % 1.6 Americas Fund XII (2017) 13,500.0 6,910.2 89.0 8,794.3 8,883.3 16.9 % 11.0 % 1.3 Real Estate Credit Opportunity Partners (2017) 1,130.0 1,007.8 186.5 942.5 1,129.0 6.0 % 4.7 %
1.1
Core Investment Vehicles (2017) 9,868.5 4,923.6 - 6,829.8 6,829.8 18.7 % 17.1 % 1.4 Asian Fund III (2017) 9,000.0 5,146.2 1,233.5 6,042.5 7,276.0 34.3 % 24.0 % 1.4 Real Estate Partners Americas II (2017) 1,921.2 1,211.1 373.7 1,144.2 1,517.9 21.8 % 16.2 %
1.3
Global Infrastructure Investors III (2018) (2)(3) 7,156.3 2,623.4 - 2,427.3 2,427.3 - -
-
European Fund V (2019) (2)(3) 6,320.2 1,429.0 - 1,449.2 1,449.2 - -
-
Energy Income and Growth Fund II (2019) (3) 994.2 416.3 - 407.0 407.0 - -
-
Next Generation Technology Growth Fund II (2019) (3) 2,088.3 278.0 - 322.3 322.3 - - - Global Impact Fund (2019) (3) 1,242.2 160.3 - 174.4 174.4 - - - Asia Pacific Infrastructure Investors (2019) (3) 2,515.6 - - - - - - - Property Partners Americas (2019) (3) 2,012.5 195.3 - 207.6 207.6 - -
-
Real Estate Credit Opportunity Partners II (2019) (3) 950.0 221.1 - 202.2 202.2 - - - Asian Fund IV (2020) (3) 10,695.6 - - - - - - - Subtotal - Included Funds 141,493.7 96,718.8 110,681.1 57,561.4 168,242.5 15.6 % 11.6 % 1.8 All Funds$ 157,968.2 $ 113,193.3 $ 160,950.4 $ 57,561.4 $ 218,511.8 25.6 % 18.8 % 2.0 66
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(1) These funds were not contributed to KKR as part of the acquisition of the
assets and liabilities of
(2) The following table presents information regarding investment funds with
euro-denominated commitments. Such amounts have been converted into
dollars based on (i) the foreign exchange rate at the date of purchase for
each investment and (ii) the exchange rate prevailing on
the case of unfunded commitments.
Private Markets Investment Funds Commitment (€ in millions)
€ 196.5
European Fund II € 2,597.5
European Fund III € 2,882.8
E2 Investors (Annex Fund) € 55.5
Global Infrastructure Investors € 30.0
Global Infrastructure Investors II € 243.8
European Fund IV € 1,626.1
Real Estate Partners Europe € 276.6
Global Infrastructure Investors III € 987.0
European Fund V € 2,144.2
(3) The gross IRR, net IRR and gross multiple of invested capital are calculated
for our investment funds that made their first investment at least 24 months
prior to
European Fund V, Energy Income and Growth Fund II, Next Generation Technology
Growth Fund II,
Property Partners Americas, Real Estate Credit Opportunities Partners II, or
Asian Fund IV has invested for at least 24 months as of
therefore have not calculated gross IRRs, net IRRs and gross multiples of
invested capital with respect to those funds.
(4) An investment is considered realized when it has been disposed of or has
otherwise generated disposition proceeds or current income that has been
distributed by the relevant fund. In periods prior to the three months ended
dividends and interest. Realizations have not been shown for those investment
funds that have either made their first investment more recently than 24
months prior to
(5) IRRs measure the aggregate annual compounded returns generated by a fund's
investments over a holding period. Net IRRs are calculated after giving
effect to the allocation of realized and unrealized carried interest and the
payment of any applicable management fees and organizational expenses. Gross
IRRs are calculated before giving effect to the allocation of realized and
unrealized carried interest and the payment of any applicable management fees
and organizational expenses.
The gross multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the fund. Such amounts do not give effect to the allocation of realized and unrealized carried interest or the payment of any applicable management fees or organizational expenses. KKR's Private Markets funds may utilize third-party financing facilities to provide liquidity to such funds. The above net and gross IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund, and the use of such financing facilities generally decreases the amount of time that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. KKR's Private Markets funds also generally provide in certain circumstances, which vary depending on the relevant fund documents, for a portion of capital returned to investors to be restored to unused commitments as recycled capital. For KKR's Private Markets funds that have a preferred return, we take into account recycled capital in the calculation of IRRs and multiples of invested capital because the calculation of the preferred return includes the effect of recycled capital. For KKR's Private Markets funds that do not have a preferred return, we do not take recycled capital into account in the calculation of IRRs and multiples of invested capital. The inclusion of recycled capital generally causes invested and realized amounts to be higher and IRRs and multiples of invested capital to be lower than had recycled capital not been included. The inclusion of recycled capital would reduce the composite net IRR of all Included Funds by 0.1% and the composite net IRR of all Legacy Funds by 0.5% and would reduce the composite multiple of invested capital of Included Funds by less than 0.1 and the composite multiple of invested capital of Legacy Funds by 0.4.
Public Markets
Through our Public Markets business line, we operate our credit and hedge funds
platforms. Our credit business invests capital in (i) leveraged credit
strategies, including leveraged loans, high-yield bonds, opportunistic credit
and revolving credit strategies, and (ii) alternative credit strategies,
including special situations and private credit strategies such as direct
lending and private opportunistic credit (or mezzanine) investment strategies.
The funds, CLOs, separately managed accounts, investment companies registered
under the Investment Company Act of 1940 (the "Investment Company Act") and
alternative investment funds ("AIFs") in our leveraged credit and alternative
credit strategies are managed by KKR Credit Advisors (US) LLC , which is an
SEC -registered investment adviser, and KKR Credit Advisors (Ireland) Unlimited
Company , which is regulated by the Central Bank of Ireland ("CBI"). Our business
development company ("BDC") platform consists of BDCs advised by FS/KKR Advisor,
LLC ("FS/KKR Advisor"), which is an investment adviser jointly owned by KKR and
Franklin Square Holdings, L.P. ("FS Investments") following the completion of
our strategic partnership with FS Investments on April 9, 2018 . Our Public
Markets business line also includes our hedge funds platform, which consists of
strategic partnerships with third-party hedge fund managers in which KKR owns a
minority stake (which we refer to as "hedge fund partnerships"). Our
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hedge fund partnerships offer a variety of investment strategies, including equity hedge funds, hedge fund-of-funds and credit hedge funds. We intend to continue to grow the Public Markets business line by leveraging our global investment platform, experienced investment professionals and the ability to adapt our investment strategies to different market conditions to capitalize on investment opportunities that may arise at various levels of the capital structure and across market cycles. As ofJune 30, 2020 , our Public Markets business line had$96.9 billion of AUM, comprised of$41.2 billion of assets managed in our leveraged credit strategies (which include$5.3 billion of assets managed in our opportunistic credit strategy and$1.9 billion of assets managed in our revolving credit strategy),$6.8 billion of assets managed in our special situations strategy,$23.5 billion of assets managed in our private credit strategies,$24.6 billion of assets managed through our hedge fund platform, and$0.8 billion of assets managed in other strategies. Our private credit strategies include$17.0 billion of assets managed in our direct lending strategy and$6.5 billion of assets managed in our private opportunistic credit strategy. Our BDC platform has approximately$14.1 billion in combined assets under management, which are reflected in the AUM of our leveraged credit strategies and alternative credit strategies above. We report all of the assets under management of the BDCs in our BDC platform. We report only a pro rata portion of the AUM in our strategic partnership with third-party hedge fund managers based on KKR's percentage ownership in them. Credit
Performance
We generally review our performance in our credit business by investment strategy.
Our leveraged credit strategies principally invest through separately managed accounts, BDCs, CLOs and investment funds. In certain cases, these strategies have meaningful track records and may be compared to widely-known indices. The following table presents information regarding larger leveraged credit strategies managed by KKR from inception toJune 30, 2020 . However, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of any future result. Leveraged Credit Strategies: Inception-to-Date Annualized Gross Performance vs. Benchmark by Strategy Benchmark Leveraged Credit Gross Net Gross Strategy Inception Date Returns Returns Benchmark (1) Returns Bank Loans Plus 65% S&P/LSTA Loan Index, 35% High Yield Jul 2008 7.07 % 6.45 % BoAML HY Master II Index (2) 5.45 % Opportunistic 50% S&P/LSTA Loan Index, 50% Credit (3) May 2008 10.95 % 9.11 % BoAML HY Master II Index (3) 5.73 % Bank Loans Apr 2011 4.50 % 3.92 % S&P/LSTA Loan Index (4) 3.53 % High-Yield Apr 2011 6.44 % 5.86 % BoAML HY Master II Index (5) 5.49 % Bank Loans Conservative Apr 2011 3.99 % 3.41 % S&P/LSTA BB-B Loan Index (6) 3.62 % European Leveraged Loans CS Inst West European Leveraged (7) Sep 2009 4.40 % 3.88 % Loan Index (8) 3.24 % High-Yield Conservative Apr 2011 5.95 % 5.38 % BoAML HY BB-B Constrained (9) 5.64 % European Credit Opportunities S&P European Leveraged Loans (7) Sept 2007 4.87 % 3.94 % (All Loans) (10) 3.75 % Revolving Credit (11) May 2015 N/A N/A N/A N/A
(1) The benchmarks referred to herein include the S&P/LSTA Leveraged Loan Index
(the "S&P/LSTA Loan Index"), S&P/LSTA
"S&P/LSTA BB-B Loan Index"), the
Master II Index (the "BoAML HY Master II Index"), the BofA Merrill Lynch BB-B
US High Yield Index (the "BoAML HY BB-B Constrained"), the Credit Suisse
Institutional Western European Leveraged Loan Index (the "CS Inst West
European Leveraged Loan Index"), and S&P European Leveraged Loans (All
Loans). The S&P/LSTA Loan Index is a daily tradable index for the
market that seeks to mirror the market-weighted performance of the largest
institutional loans that meet certain criteria. The S&P/ LSTA BB-B Loan Index
is comprised of loans in the S&P/LSTA Loan Index, whose rating is BB+, BB,
BB-, B+, B or B-. The BoAML HY Master II Index is an index for high-yield
corporate bonds. It is designed to measure the broad high-yield market,
including lower-rated securities. The BoAML HY BB-B Constrained is a subset
of the BoAML HY Master II Index including all securities rated BB1 through
B3, inclusive. The CS Inst West European Leveraged Loan Index contains only
institutional loan facilities priced above 90, excluding TL and TLa
facilities and loans rated
Leveraged Loan Index reflects the market-weighted performance of
institutional leveraged loan portfolios investing in European credits. While
the returns of our leveraged credit strategies reflect the reinvestment of
income and dividends, none of the indices presented in the chart above
reflect such reinvestment, which has the effect of increasing the reported
relative performance of these strategies as compared to the indices.
Furthermore, these indices are not subject to management fees, incentive
allocations, or expenses.
(2) Performance is based on a blended composite of Bank Loans Plus High Yield
strategy accounts. The benchmark used for purposes of comparison for the Bank
Loans Plus High Yield strategy is based on 65% S&P/LSTA Loan Index and 35%
BoAML HY Master II Index.
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(3) The Opportunistic Credit strategy invests in high-yield securities and
corporate loans with no preset allocation. The benchmark used for purposes of
comparison for the Opportunistic Credit strategy presented herein is based on
50% S&P/LSTA Loan Index and 50% BoAML HY Master II Index. Funds within this
strategy may utilize third-party financing facilities to enhance investment
returns. In cases where financing facilities are used, the amounts drawn on
the facility are deducted from the assets of the fund in the calculation of
net asset value, which tends to increase returns when net asset value grows
over time and decrease returns when net asset value decreases over time.
(4) Performance is based on a composite of portfolios that primarily invest in
leveraged loans. The benchmark used for purposes of comparison for the Bank
Loans strategy is based on the S&P/LSTA Loan Index.
(5) Performance is based on a composite of portfolios that primarily invest in
high-yield securities. The benchmark used for purposes of comparison for the
High Yield strategy is based on the BoAML HY Master II Index.
(6) Performance is based on a composite of portfolios that primarily invest in
leveraged loans rated B-/Baa3 or higher. The benchmark used for purposes of
comparison for the Bank Loans Conservative strategy is based on the S&P/LSTA
BB-B Loan Index.
(7) The returns presented are calculated based on local currency.
(8) Performance is based on a composite of portfolios that primarily invest in
higher quality leveraged loans. The benchmark used for purposes of comparison
for the European Leveraged Loans strategy is based on the CS Inst West
European Leveraged Loan Index.
(9) Performance is based on a composite of portfolios that primarily invest in
high-yield securities rated B or higher. The benchmark used for purposes of
comparison for the High-Yield Conservative strategy is based on the BoAML HY
BB-B Constrained Index.
(10) Performance is based on a composite of portfolios that primarily invest in
European institutional leveraged loans. The benchmark used for purposes of
comparison for the European Credit Opportunities strategy is based on the
S&P European Leveraged Loans (All Loans) Index.
(11) This strategy has not called any capital as of
the gross and net return performance measures are not meaningful and are not
included above.
Our alternative credit strategies primarily invest in more illiquid instruments through private investment funds, BDCs and separately managed accounts. The following table presents information regarding our Public Markets alternative credit commingled funds where investors are subject to capital commitments from inception toJune 30, 2020 . Some of these funds have been investing for less than 24 months, and thus their performance is less meaningful and not included below. In addition, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of any future result. Alternative Credit Strategies: Fund Performance Amount Fair Value of Investments Multiple of Invested Gross Public Markets Total Gross Net Capital Accrued Investment Funds Inception Date Commitment Invested (1) Realized (1) Unrealized ValueIRR (2) IRR (2) (3) Carried Interest ($ in Millions) Dislocation Opportunities Fund May 2020$ 2,790.1 $ 209.3 $ -$ 264.8 $ 264.8 N/A N/A N/A $ 6.7 Special Situations Fund II Dec 2014 3,524.7 2,996.3 671.3 2,080.0 2,751.3 (3.4 )% (5.7 )% 0.9 - Special Situations Fund Dec 2012 2,274.3 2,273.0 1,552.4 510.0 2,062.4 (2.5 )% (4.8 )% 0.9 - Mezzanine Partners Mar 2010 1,022.8 920.1 1,081.8 154.6 1,236.4 9.8 % 6.6 % 1.3 (20.0 ) Private Credit Opportunities Partners II Dec 2015 2,245.1 1,587.4 123.8 1,536.0 1,659.8 3.3 % 1.7 % 1.0 - Lending Partners III Apr 2017 1,497.8 707.0 133.4 701.6 835.0 13.7 % 11.0 % 1.2 9.8 Lending Partners II Jun 2014 1,335.9 1,179.1 1,100.7 210.0 1,310.7 4.3 % 3.1 % 1.1 - Lending Partners Dec 2011 460.2 405.3 450.7 15.4 466.1 4.2 % 2.5 % 1.2 - Lending Partners Europe Mar 2015 847.6 604.9 178.6 369.5 548.1 (3.9 )% (6.9 )% 0.9 - Other Alternative Credit Vehicles Various 11,046.6 5,804.4 3,415.0 3,598.7 7,013.7 N/A N/A N/A 10.8 Unallocated Commitments (4) Various 174.3 - - - - N/A N/A N/A - All Funds$ 27,219.4 $ 16,686.8 $ 8,707.7 $ 9,440.6 $ 18,148.3 $ 7.3 (1) Recycled capital is excluded from the amounts invested and realized. (2) These credit funds utilize third-party financing facilities to provide liquidity to such funds, and in such event, IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund. The use of such financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period and are calculated taking into account recycled capital. Net IRRs presented are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees. Gross IRRs are calculated before giving effect to the allocation of carried interest and the payment of any applicable management fees. (3) The multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the investors. The use of financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate multiples of invested capital, which tends to increase multiples when fair value grows over time and decrease multiples when fair value decreases over time. Such 69
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amounts do not give effect to the allocation of any realized and unrealized returns on a fund's investments to the fund's general partner pursuant to a carried interest or the payment of any applicable management fees and are calculated without taking into account recycled capital. (4) "Unallocated Commitments" represent unallocated commitments from our
strategic investor partnerships.
Public Markets AUM and Vehicle Structures The table below presents information as ofJune 30, 2020 , based on the investment funds, vehicles or accounts offered by our Public Markets business line. Our funds, vehicles and accounts have been sorted based upon their primary investment strategies. However, the AUM and FPAUM presented for each line in the table includes certain investments from non-primary investment strategies, which are permitted by their investment mandates, for purposes of presenting the fees and other terms for such funds, vehicles and accounts. Typical Incentive Fee / Management Carried Preferred Duration ($ in millions) AUM FPAUM Fee Rate Interest Return of Capital Leveraged Credit: Leveraged Credit 0.10% - Subject to SMAs/Funds$ 23,289 $ 21,900 1.10% Various (1) Various (1) redemptions 0.40% - 10-14 Years CLOs 16,604 16,604 0.50% Various (1) Various (1) (2) Total Leveraged Credit 39,893 38,504 Alternative Credit: (3) 0.50% - 7-15 Years
Special Situations 7,140 4,026 1.75% (4) 10.00 - 20.00% 7.00 - 12.00% (2)
0.50% - 8-15 Years
Private Credit 11,158 6,135 1.50% 10.00 - 20.00% 5.00 - 8.00% (2)
Total Alternative
Credit 18,298 10,161
0.50% - Subject to
Hedge Funds (5) 24,611 20,182 2.00% Various (1) Various (1) redemptions
BDCs (6) 14,127 14,127 0.60% 8.00% 7.00% Indefinite
Total $ 96,929 $ 82,974 (1) Certain funds and CLOs are subject to a performance fee in which the manager
or general partner of the funds share up to 20% of the net profits earned by
investors in excess of performance hurdles (generally tied to a benchmark or
index) and subject to a provision requiring the funds and vehicles to regain
prior losses before any performance fee is earned.
(2) Duration of capital is measured from inception. Inception dates for CLOs were
between 2013 and 2020 and for separately managed accounts and funds investing
in alternative credit strategies from 2009 through 2020.
(3) Our alternative credit funds generally have investment periods of three to
five years and our newer alternative credit funds generally earn fees on
invested capital during the investment period.
(4) Lower fees on uninvested capital in certain vehicles.
(5) Hedge Funds represent KKR's pro rata portion of AUM and FPAUM of our hedge
fund partnerships.
(6) Consists of our BDC platform advised by FS/KKR Advisor. We report all of the
AUM of the BDCs in our AUM and FPAUM.
Capital Markets
Our Capital Markets business line is comprised of our global capital markets
business, which is integrated with KKR's other business lines, and serves our
firm, our portfolio companies and third-party clients by developing and
implementing both traditional and non-traditional capital solutions for
investments or companies seeking financing. These services include arranging
debt and equity financing, placing and underwriting securities offerings, and
providing other types of capital markets services that may result in the firm
receiving fees, including underwriting, placement, transaction and syndication
fees, commissions, underwriting discounts, interest payments and other
compensation, which may be payable in cash or securities, in respect of the
activities described above.
Our capital markets business underwrites credit facilities and arranges loan
syndications and participations. When we are sole arrangers of a credit
facility, we may advance amounts to the borrower on behalf of other lenders,
subject to repayment. When we underwrite an offering of securities on a firm
commitment basis, we commit to buy and sell an issue of securities and generate
revenue by purchasing the securities at a discount or for a fee. When we act in
an agency capacity or best efforts basis, we generate revenue for arranging
financing or placing securities with capital markets investors. We may also
provide issuers
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with capital markets advice on security selection, access to markets, marketing considerations, securities pricing, and other aspects of capital markets transactions in exchange for a fee. Our capital markets business also provides syndication services in respect of co-investments in transactions participated in by KKR funds or third-party clients, which may entitle the firm to receive syndication fees, management fees and/or a carried interest. The capital markets business has a global footprint, with local presence and licenses to carry out certain broker-dealer activities in various countries inNorth America ,Europe ,Asia-Pacific and theMiddle East . Our flagship capital markets subsidiary isKKR Capital Markets LLC , anSEC -registered broker-dealer and a member of theFinancial Industry Regulation Authority ("FINRA"). 71
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Principal Activities Through our Principal Activities business line, we manage the firm's own assets on our balance sheet and deploy capital to support and grow our business lines. Typically, the funds in our Private Markets and Public Markets business lines contractually require us, as general partner of the funds, to make sizable capital commitments from time to time. We believe making general partner commitments assists us in raising new funds from limited partners by demonstrating our conviction in a given fund's strategy. We also use our balance sheet to acquire investments in order to help establish a track record for fundraising purposes in new strategies. We may also use our own capital to seed investments for new funds, to bridge capital selectively for our funds' investments or finance strategic acquisitions and partnerships, although the financial results of an acquired business or hedge fund partnership may be reported in our other business lines. Our Principal Activities business line also provides the required capital to fund the various commitments of our Capital Markets business line when underwriting or syndicating securities, or when providing term loan commitments for transactions involving our portfolio companies and for third parties. Our Principal Activities business line also holds assets that may be utilized to satisfy regulatory requirements for our Capital Markets business line and risk retention requirements for our CLOs. We also make opportunistic investments through our Principal Activities business line, which include co-investments alongside our Private Markets and Public Markets funds as well as Principal Activities investments that do not involve our Private Markets or Public Markets funds. We endeavor to use our balance sheet strategically and opportunistically to generate an attractive risk-adjusted return on equity in a manner that is consistent with our fiduciary duties, in compliance with applicable laws, and consistent with our one-firm approach. The chart below presents the holdings of our Principal Activities business line by asset class as ofJune 30, 2020 : Holdings by Asset Class (1) [[Image Removed: chart-3081b10179245e22bee.jpg]]
(1) General partner commitments in our funds are included in the various asset
classes shown above. Assets and revenues of other asset managers with which
KKR has formed strategic partnerships where KKR does not hold more than 50%
ownership interest are not included in our Principal Activities business line
but are reported in the financial results of our other business lines.
Private Equity includes KKR private equity funds, co-investments alongside
such KKR-sponsored private equity funds, certain core equity investments, and
other opportunistic investments. Equity investments in other asset classes,
such as real estate, special situations and energy appear in these other
asset classes. Other Credit consists of certain leveraged credit and
specialty finance strategies.
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Business Environment
Economic and Market Conditions
Impact of COVID-19
The outbreak of a novel strain of coronavirus ("COVID-19") continues to impact
the United States and other countries throughout the world. In March 2020 , the
World Health Organization declared COVID-19 to be a pandemic and the United
States declared a national emergency due to the outbreak. In connection with
these declarations, various governments around the world have instituted
measures to slow the transmissions of COVID-19, which substantially restrict
individual and business activities. These measures have included, for example,
closures of non-essential businesses, limitations of crowd size, stay-at-home
orders, quarantines, heightened border controls and limitations on travel.
Governments in the United States and around the world have responded with fiscal
and monetary stimuli that aim to provide emergency assistance to individuals and
businesses negatively impacted by COVID-19. The outbreak of COVID-19 and the
actions taken in response have had far reaching impact on the U.S. and global
economies, contributing to significant volatility in the financial markets,
resulting in increased volatility in equity prices (including our common stock)
and lower interest rates, and causing furloughs and layoffs in the labor market.
While COVID-19 cases have declined in some parts of the United States , many
states in the Southern, Midwestern and Western regions saw sharp increases in
the infection rates as they began to allow businesses to reopen. COVID-19 cases
have also continued to surge in certain countries outside the United States , and
certain countries that were initially successful at containing the virus have
experienced renewed outbreaks in recent months.
We are monitoring developments relating to the global spread of COVID-19 and
continuing to assess the potential for adverse impact on our business, including
the investment funds we manage and the portfolio companies owned by us and our
funds. In addition, we have implemented various initiatives intended to reduce
the impact of COVID-19, such as employees working remotely from home, while also
seeking to maintain business continuity.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse
effects on our business, financial performance and operating results for the
quarterly periods and full fiscal year of 2020 and possibly beyond, and may be
material and affect us in ways that we cannot foresee at this time. Many of the
adverse ways in which COVID-19 may impact us have already materialized and
adversely affected (or may in the future materialize and adversely affect) our
stock price, our portfolio valuations, and the operations of our business and
the businesses of our portfolio companies, as well as the businesses of entities
of which we or our funds are creditors, and our and their other counterparties,
including suppliers and customers. These risks may, in the future, become even
more significant than is currently the case or than is currently anticipated.
Although it is impossible to predict with certainty the potential full magnitude
of the business and economic ramifications, COVID-19 has impacted, and may
further impact, our business in various ways, including but not limited to:
• Difficult market and economic conditions may adversely impact the
valuations of our and our funds' investments, particularly if the value of
an investment is determined in whole or in part by reference to public
equity markets. Valuations of our and our funds' investments are generally
correlated to the performance of the relevant equity and debt markets.
Although valuations across our investments generally improved in the
second quarter of 2020, driven by a strong rebound in equity and fixed
income markets, the continuing existence and further spread of the
COVID-19 pandemic, which among other things could result in a secondshutdown of businesses, may negatively affect the value of our investment
portfolio in the future and thereby adversely impact our book value per
share, accrued carried interest and assets under management;
• COVID-19 significantly increases the challenges associated with business
planning, strategy, execution, portfolio management, fundraising, and
other aspects of our business operations, the operation of our portfolio
companies' businesses, and the operation of entities to whom we or our
funds have loaned money or otherwise do business through supply or
customer relationships. None of us, our portfolio companies or our andtheir respective counterparties, vendors, or advisors have previously
faced a situation that we view as comparable to the current COVID-19
crisis, which, among other factors, involves a major simultaneous supply
and demand shock to global, regional and national economies and
significant outsize effects on particular business sectors. The future
trajectory of the COVID-19 crisis is subject to a complex interplay of
epidemiological, technological, social, psychological, economic and
political factors that are generally beyond our ability to forecast orcontrol. In this environment, historical comparisons may be of little or
no value, while the risk and uncertainty associated with a large number of
business decisions are materially increased;
• Limitation on travel and social distancing requirements implemented in
response to COVID-19 challenge our ability to market new or successor
funds as anticipated prior to COVID-19, potentially resulting in reduced
or delayed
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revenues. In addition, fund investors may become restricted by their asset
allocation policies to invest in new or successor funds that we provide, because
these policies often restrict the amount that they are permitted to invest in
alternative assets like the strategies of our investment funds when there is a
decline in public equity markets. Further, the COVID-19 crisis may cause fund
investors to change their investment strategies in manners that we cannot now
foresee, and that may additionally and negatively affect our ability to raise
funds from traditional or other sources;
• While the market dislocation caused by COVID-19 would expect to present
attractive investment opportunities, due to increased volatility in the
financial markets, we may not be able to complete those investments;
• If the impact of COVID-19 continues, we and our funds may have more
limited opportunities to successfully exit existing investments, due to,among other reasons, lower valuations, decreased revenues and earnings,
lack of potential buyers with financial resources to pursue an
acquisition, or limited or no ability to conduct initial public offerings
in equity capital markets, resulting in a reduced ability to realize value
from such investments;
• Our portfolio companies are facing or may face in the future increased
credit and liquidity risk due to volatility in financial markets, reduced
revenue streams, and limited or higher cost of access to preferred sources
of funding, which may result in potential impairment of our or our funds'
equity investments. Changes in the debt financing markets are impacting,
or, if the volatility in financial market continues, may in the future
impact, the ability of our portfolio companies to meet their respective
financial obligations. We and our funds may experience similar
difficulties, and certain funds have been subject to margin calls when the
value of securities that collateralize their margin loan decreased
substantially;
• Borrowers of loans, notes and other credit instruments in our credit
funds' portfolio are more likely to be unable to meet their principal or
interest payment obligations or satisfy financial covenants, and tenants
leasing real estate properties owned by our funds are more likely not to
be able to pay rents in a timely manner or at all, resulting in a decrease
in value of our funds' credit and real estate investments and lower than
expected return. In addition, for variable interest instruments, lowerreference rates resulting from government stimulus programs in response to
COVID-19 could lead to lower interest income for our credit funds;
• While the impact of COVID-19 on our portfolio companies has varieddepending on the location and industry in which they operate, many of our
portfolio companies operate in industries that have been, and continue to
be, materially affected by COVID-19, including but not limited to
healthcare, travel, entertainment, hospitality, senior living, energy and
retail industries. Many of these companies are facing operational and
financial hardships resulting from the spread of COVID-19 and related
governmental measures, such as the closure of stores, limitations on
business operations, restrictions on travel, quarantines or stay-at-home
orders. If the disruptions caused by COVID-19 continue and the
restrictions put in place are not lifted, the businesses of these
portfolio companies could suffer materially or become insolvent, which
would decrease the value of our funds' investments. For a discussion ofthe pandemic's impact on our energy investments, see "-Commodity Markets";
• COVID-19 may generate workplace, consumer, insurance, contract and other
forms of litigation that exposes us, our portfolio companies, suppliers,
customers, debtors and other counterparties to risks and claims of a
magnitude and nature that we cannot now anticipate;
• An extended period of remote working by our employees could strain ourtechnology resources and introduce operational risks, including heightened
cybersecurity risk. Remote working environments are less secure and more
susceptible to hacking attacks, including phishing and social engineering
attempts that seek to exploit the COVID-19 pandemic; and
• COVID-19 presents a significant threat to our employees' well-being and
morale. While we have implemented a business continuity plan to protect
the health of our employees and have contingency plans in place for key
employees or executive officers
perform their duties for an extended period of time, such plans cannot
anticipate all scenarios, and we may experience potential loss of
productivity or a delay in the roll out of certain strategic plans.
Given the ongoing nature of the outbreak, at this time we cannot reasonably predict the magnitude of the ultimate impact that COVID-19 will have on our business, financial performance and operating results. Economic downturn caused by COVID-19 may be prolonged and extend beyond the timeframe of the pandemic itself. We believe COVID-19's adverse impact on our business, financial performance and operating results will be significantly driven by a number of factors that we are unable to predict or control, including, for example: the severity and duration of the pandemic; the pandemic's impact on theU.S. and global economies; the timing, scope and effectiveness of additional governmental responses to the pandemic; the 74
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timing and speed of economic recovery, including the availability of a treatment or vaccination for COVID-19; and the negative impact on our fund investors, vendors and other business partners that may indirectly adversely affect us. See "Item 1A. Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition." in our Annual Report. The impact of COVID-19 may also exacerbate the other risks discussed in our Annual Report. Economic Conditions. As a global investment firm, we are affected by financial and economic conditions globally. Global and regional economic conditions, including those caused by the COVID-19 pandemic, have substantial impact on our financial condition and results of operations, impacting the values of the investments we make, our ability to exit these investments profitably, our ability to raise capital from investors, and our ability to make new investments. Financial and economic conditions inthe United States ,European Union ,Japan ,China , and other major economies are significant contributors to the global economy. TheU.S. economy experienced a sharp contraction in the second quarter of 2020, reflecting a full quarter of COVID-19's impact onU.S. businesses. Inthe United States , the real GDP contracted by 32.9%, on a seasonally adjusted annualized basis, for the quarter endedJune 30, 2020 , compared to contraction of 5% for the quarter endedMarch 31, 2020 ; theU.S. unemployment rate was 11.1% as ofJune 30, 2020 , up from 4.4% as ofMarch 31, 2020 ; theU.S. core consumer price index was 1.2% on a year-over-year basis as ofJune 30, 2020 , down from 2.1% on a year-over-year basis as ofMarch 31, 2020 ; and the effective federal funds rate set by theU.S. Federal Reserve was 0.1% as ofJune 30, 2020 , unchanged fromMarch 31, 2020 . TheEuropean Union's economy also suffered a significant decline in the second quarter of 2020 due to COVID-19, but some of its member states are showing signs of recovery after the quarter-end. In the Euro Area, real GDP contracted 12.1%, on a seasonally adjusted quarter-over-quarter basis, for the quarter endedJune 30, 2020 , compared to a contraction of 3.6%, on a seasonally adjusted quarter-over-quarter basis, for the quarter endedMarch 31, 2020 ; the Euro Area unemployment rate was 7.8% as ofJune 30, 2020 , up from 7.2% as ofMarch 31, 2020 ;Euro Area core inflation was 0.8% on a year-over-year basis as ofJune 30, 2020 , down from 1.0% on a year-over-year basis as ofMarch 31, 2020 ; and the short-term benchmark interest rate set by theEuropean Central Bank was 0.0% as ofJune 30, 2020 , unchanged fromMarch 31, 2020 .Japan's economy suffered in the second quarter of 2020 following the government's declaration of national emergency from early April to late May as a result of COVID-19. After experiencing a decline in the first quarter,China's economy returned to modest growth in the second quarter of 2020 as lock-down measures eased and businesses began to reopen. InJapan , the short-term benchmark interest rate set by the Bank of Japan was -0.1% as ofJune 30, 2020 , unchanged fromMarch 31, 2020 ; and inChina , reported real GDP growth was 11.5%, on a seasonally adjusted quarter-over-quarter basis, for the quarter endedJune 30, 2020 , compared to -10.0% in the quarter endedMarch 31, 2020 . These and other key issues could have repercussions across regional and global financial markets, which could adversely affect the valuations of our investments. Other key issues include (i) political uncertainty caused by, among other things, populist political parties, economic nationalist sentiments, tensions surrounding the current socioeconomic and inequality issues and the 2020 U.S. Presidential election, (ii) geopolitical uncertainty such asU.S. -China relations, (iii) regulatory changes regarding, for example, taxation, international trade, cross-border investments, immigration, and austerity programs, (iv) volatility or downturn in stock and credit markets, (v) any unexpected shift in the central banks' monetary policies and their impact on the markets, (vi) technological advancements and innovations that may disrupt marketplaces and businesses, and (vii) further developments regarding COVID-19 as discussed above. For a further discussion of how market conditions may affect our businesses, see "Risk Factors-Risks Related to Our Business-Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" in our Annual Report. Equity and Credit Markets. Global equity and credit markets have a substantial effect on our financial condition and results of operations. In general, a climate of reasonable interest rates and high levels of liquidity in the debt and equity capital markets provide a positive environment for us to generate attractive investment returns, which also impacts our ability to generate incentive fees and carried interest. Periods of volatility and dislocation in the capital markets, such as the present, raise substantial risks, but also can present us with opportunities to invest at reduced valuations that position us for future growth and investment returns. Low interest rates related to monetary stimulus and economic stagnation may negatively impact expected returns on all types of investments. Higher interest rates in conjunction with slower growth or weaker currencies in some emerging market economies have caused, and may further cause, the default risk of these countries to increase, and this could impact the operations or value of our investments that operate in these regions. Areas that have ongoing central bank 75
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quantitative easing campaigns and comparatively low interest rates relative tothe United States could potentially experience further currency volatility and weakness relative to theU.S. dollar. Many of our investments are in equities, so a change in global equity prices or in market volatility directly impacts the value of our investments and our profitability as well as our ability to realize investment gains and the receptiveness of fund investors to our investment products. For the quarter endedJune 30, 2020 , global equity markets were positive, with the S&P 500 Index up 20.5% and the MSCI World Index up 19.5% on a total return basis including dividends. Equity market volatility as evidenced by theChicago Board Options Exchange Market Volatility Index (the "VIX"), a measure of volatility, ended at 30.4 as ofJune 30, 2020 , decreasing from 53.5 as ofMarch 31, 2020 . For a discussion of our valuation methods, see "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report and see also "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies" in our Annual Report. Many of our investments are also in non-investment grade credit instruments, and our funds and our portfolio companies also rely on credit financing and the ability to refinance existing debt. Consequently, any decrease in the value of credit instruments that we have invested in or any increase in the cost of credit financing reduces our returns and decreases our net income. In particular due in part to holdings of credit instruments such as CLOs on our balance sheet, the performance of the credit markets has had an amplified impact on our financial results, as we directly bear the full extent of losses from credit instruments on our balance sheet. Credit markets can also impact valuations because a discounted cash flow analysis is generally used as one of the methodologies to ascertain the fair value of our investments that do not have readily observable market prices. In addition, with respect to our credit instruments, tightening credit spreads are generally expected to lead to an increase, and widening credit spreads are generally expected to lead to a decrease, in the value of these credit investments, if not offset by hedging or other factors. In addition, the significant widening of credit spreads is also typically expected to negatively impact equity markets, which in turn would negatively impact our portfolio and us as noted above. During the quarter endedJune 30, 2020 ,U.S. investment grade corporate bond spreads (BofA Merrill Lynch US Corporate Index) contracted by 145 basis points andU.S. high-yield corporate bond spreads (BofAML HY Master II Index) contracted by 233 basis points. The non-investment grade credit indices were up during the quarter endedJune 30, 2020 , with the S&P/LSTA Leveraged Loan Index up 9.7% and the BAML US High Yield Index up 9.6%. During the quarter endedJune 30, 2020 , 10-year government bond yields fell 1 basis points inthe United States , fell 18 basis points in theUnited Kingdom , rose 2 basis points inGermany , rose 26 basis points inChina , and rose 1 basis point inJapan . For a further discussion of how market conditions may affect our businesses, see "Risk Factors-Risks Related to Our Business-Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" and "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report. For further discussion of the impact of global credit markets on our financial condition and results of operations, see "Risk Factors-Risks Related to the Assets We Manage-Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income," "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" and "Risk Factors-Risks Related to the Assets We Manage-Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" in our Annual Report. For a further discussion of our valuation methods, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies" in our Annual Report. Foreign Exchange Rates. Foreign exchange rates have a substantial impact on the valuations of our investments that are denominated in currencies other than theU.S. dollar. Currency volatility can also affect our businesses and investments that deal in cross-border trade. The appreciation or depreciation of theU.S. dollar is expected to contribute to a decrease or increase, respectively, in theU.S. dollar value of our non-U.S. investments to the extent unhedged. In addition, an appreciatingU.S. 76
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dollar would be expected to make the exports ofU.S. based companies less competitive, which may lead to a decline in their export revenues, if any, while a depreciatingU.S. dollar would be expected to have the opposite effect. Moreover, when selecting investments for our investment funds that are denominated inU.S. dollars, an appreciatingU.S. dollar may create opportunities to invest at more attractiveU.S. dollar prices in certain countries outside ofthe United States , while a depreciatingU.S. dollar would be expected to have the opposite effect. For our investments denominated in currencies other than theU.S. dollar, the depreciation in such currencies will generally contribute to the decrease in the valuation of such investments, to the extent unhedged, and adversely affect theU.S. dollar equivalent revenues of portfolio companies with substantial revenues denominated in such currencies, while the appreciation in such currencies would be expected to have the opposite effect. For the quarter endedJune 30, 2020 , the euro rose 1.8%, the British pound fell 0.2%, the Japanese yen fell 0.4%, and the Chinese renminbi rose 0.2%, respectively, relative to theU.S. dollar. For additional information regarding our foreign exchange rate risk, see "Quantitative and Qualitative Disclosure About Market Risk-Exchange Rate Risk" in our Annual Report. Commodity Markets. Our Private Markets portfolio contains energy real asset investments, and certain of our other Private Markets and Public Markets strategies and products, including private equity, direct lending, special situations and CLOs, also have meaningful investments in the energy sector. The value of these investments is heavily influenced by the price of natural gas and oil. During the quarter endedJune 30, 2020 , the 3-year forward price of WTI crude oil increased approximately 3%, and the 3-year forward price of natural gas decreased approximately 1%. The 3-year forward price of WTI crude oil increased from approximately$41 per barrel to$43 per barrel, and the 3-year forward price of natural gas decreased from approximately$2.41 per mcf to$2.38 per mcf as ofMarch 31, 2020 andJune 30, 2020 , respectively. When commodity prices decline or if a decline is not offset by other factors, we would expect the value of our energy real asset investments to be adversely impacted, to the extent unhedged. In addition, because we hold certain energy real asset investments, which had a fair value of$0.6 billion as ofJune 30, 2020 on our balance sheet, these price movements would have an amplified impact on our financial results, to the extent unhedged, as we would directly bear the full extent of such gains or losses. For additional information regarding our energy real assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies-Real Asset Investments" in our Annual Report and see also "Risk Factors-Risks Related to the Assets We Manage-Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" in our Annual Report. Due in large part to the COVID-19 pandemic, oil prices experienced significant volatility during the second quarter of 2020, with the price of certain short-dated WTI futures contracts dropping below zero in late April. Although certain oil producers are taking measures to decrease output, which has resulted in some short-dated oil price recovery, if demand stays depressed and the shortage of storage capabilities continue, significant volatility in oil prices is expected to continue. While the impact to longer-term prices of crude oil and natural gas has been less pronounced, we expect downward price movements to have a negative impact on the fair value of our energy portfolio, all other things being equal, given those commodity prices are an input in our valuation models. However, we expect the impact of the decline will be mitigated by the existence of our near-term commodity price hedges, which make long-term oil and natural gas prices a more significant driver of the valuation of our energy investments than spot prices. As ofJune 30, 2020 , energy strategies make up approximately 1% of our assets under management, 2% of our total GAAP assets and 3% of our book assets. Business Conditions Our operating revenues consist of fees, performance income and investment income. Our ability to grow our revenues depends in part on our ability to attract new capital and investors, our successful deployment of capital including from our balance sheet and our ability to realize investments at a profit. Our ability to attract new capital and investors. Our ability to attract new capital and investors in our funds is driven, in part, by the extent to which they continue to see the alternative asset management industry generally, and our investment products specifically, as an attractive vehicle for capital appreciation or income. Since 2010, we have expanded into strategies such as real assets, credit, core, impact and, through hedge fund partnerships, hedge funds. In several of these strategies, our first time funds have begun raising successor funds, and we expect the cost of raising such successor funds to be lower. We have also reached out to new fund investors, including retail and high net worth investors. However, fundraising continues to be competitive. While our Americas Fund XII, Asian Fund III, European Fund V,Real Estate Partners Americas II, Global Infrastructure Investors III and Next Generation Technology Growth Fund II exceeded the size of their respective predecessor funds, there is no assurance that fundraises for our other flagship private equity funds or for our newer strategies and their successor funds will experience similar success. If we are unable to successfully raise comparably sized or larger funds, our AUM, FPAUM, and associated fees attributable to new capital raised in future periods may be lower than in prior years. See 77
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"Risk Factors-Risks Related to Our Business-Our inability to raise additional or successor funds (or raise successor funds of a comparable size as our predecessor funds) could have a material adverse impact on our business" in our Annual Report Our ability to successfully deploy capital. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital available to us and participate in capital markets transactions. Greater competition, high valuations, increased overall cost of credit and other general market conditions may impact our ability to identify and execute attractive investments. Additionally, because we seek to make investments that have an ability to achieve our targeted returns while taking on a reasonable level of risk, we may experience periods of reduced investment activity. We have a long-term investment horizon and the capital deployed in any one quarter may vary significantly from the capital deployed in any other quarter or the quarterly average of capital deployed in any given year. Reduced levels of transaction activity also tends to result in reduced potential future investment gains, lower transaction fees and lower fees for our Capital Markets business line, which may earn fees in the syndication of equity or debt. Our ability to realize investments. Challenging market and economic conditions may adversely affect our ability to exit and realize value from our investments and result in lower-than-expected returns. Although the equity markets are not the only means by which we exit investments, the strength and liquidity of theU.S. and relevant global equity markets generally, and the initial public offering market specifically, affect the valuation of, and our ability to successfully exit, our equity positions in our private equity portfolio companies in a timely manner. We may also realize investments through strategic sales. When financing is not available or becomes too costly, it may be more difficult to find a buyer that can successfully raise sufficient capital to purchase our investments.
Basis of Accounting
We consolidate the financial results ofKKR Group Partnership and their consolidated entities, which include the accounts of our investment management and capital markets companies, the general partners of unconsolidated funds and vehicles, general partners of certain funds and vehicles that are consolidated and their respective consolidated funds and certain other entities including certain CLOs and CMBS. We refer to CLOs and CMBS as collateralized financing entities ("CFEs"). When an entity is consolidated, we reflect the accounts of the consolidated entity, including its assets, liabilities, revenues, expenses, investment income, cash flows and other amounts, on a gross basis. While the consolidation of a consolidated fund or entity does not have an effect on the amounts of Net Income Attributable to KKR or KKR's stockholders' capital that KKR reports, the consolidation does significantly impact the financial statement presentation under GAAP. This is due to the fact that the accounts of the consolidated entities are reflected on a gross basis while the allocable share of those amounts that are attributable to third parties are reflected as single line items. The single line items in which the accounts attributable to third parties are recorded are presented as noncontrolling interests on the consolidated statements of financial condition and net income (loss) attributable to noncontrolling interests on the consolidated statements of operations. For a further discussion of our consolidation policies, see Note 2 "Summary of Significant Accounting Policies" to the financial statements included elsewhere in this report.
Key Financial Measures Under GAAP
Revenues
Fees and Other
Fees and other consist primarily of (i) management and incentive fees from
providing investment management services to unconsolidated funds, CLOs, other
vehicles, and separately managed accounts; (ii) transaction fees earned in
connection with successful investment transactions and from capital markets
activities; (iii) monitoring fees from providing services to portfolio
companies; (iv) expense reimbursements from certain investment funds and
portfolio companies; (v) revenue earned by oil and gas entities that are
consolidated; and (vi) consulting fees. These fees are based on the contractual
terms of the governing agreements and are recognized when earned, which
coincides with the period during which the related services are performed and in
the case of transaction fees, upon closing of the transaction. Monitoring fees
may provide for a termination payment following an initial public offering or
change of control. These termination payments are recognized in the period when
the related transaction closes.
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Capital Allocation-Based Income (Loss) Capital allocation-based income (loss) is earned from those arrangements whereby KKR serves as general partner and includes income from KKR's capital interest as well as "carried interest" which entitles KKR to a disproportionate allocation of investment income from investment funds' limited partners. For a further discussion of our revenue policies, see Note 2 "Summary of Significant Accounting Policies" to the financial statements included elsewhere in this report. Expenses Compensation and Benefits Compensation and benefits expense includes (i) cash compensation consisting of salaries, bonuses, and benefits, (ii) equity-based compensation consisting of charges associated with the vesting of equity-based awards and (iii) carry pool allocations. The amounts allocated to the carry pool are accounted for as compensatory profit-sharing arrangements and recorded as compensation and benefits expenses. All employees receive a base salary that is paid by KKR or its consolidated entities, and is accounted for as compensation and benefits expense. These employees are also eligible to receive discretionary cash bonuses based on performance, overall profitability, and other matters. While cash bonuses paid to most employees are borne by KKR and certain consolidated entities and result in customary compensation and benefits expense, in the past cash bonuses that are paid to certain employees have been borne byKKR Holdings . These bonuses have historically been funded with distributions thatKKR Holdings receives on KKR Group Partnership Units held byKKR Holdings but are not then passed on to holders of unvested units ofKKR Holdings . Because employees are not entitled to receive distributions on units that are unvested, any amounts allocated to employees in excess of an employee's vested equity interests are reflected as employee compensation and benefits expense. These compensation charges are currently recorded based on the amount of cash expected to be paid byKKR Holdings . Because KKR makes only fixed quarterly dividends, the distributions made on KKR Group Partnership Units underlying any unvestedKKR Holdings units are generally insufficient to fund annual cash bonus compensation to the same extent as in periods prior to the fourth quarter of 2015. In addition, substantially all remaining units inKKR Holdings have been allocated and, while subject to a 5 year vesting period, will become fully vested by 2021, thus decreasing the amount of distributions received byKKR Holdings that are available for annual cash bonus compensation. We, therefore, expect to pay all or substantially all of the cash bonus payments from KKR's cash from operations and the carry pool, although, from time to time,KKR Holdings may contribute to the cash bonus payments in the future. See "Risk Factors-Risks Related to Our Business-If we cannot retain and motivate our principals and other key personnel and recruit, retain and motivate new principals and other key personnel, our business, results and financial condition could be adversely affected" in our Annual Report regarding the adequacy of such distributions to fund future discretionary cash bonuses. KKR uses several methods, which are designed to yield comparable results, to allocate carried interest. With respect to KKR's funds that provide for carried interest, KKR allocates 40% or 43%, depending on the fund's vintage, of the carry it earns from these funds and vehicles to its carry pool. Upon a reversal of carried interest income, the related carry pool allocation, if any, is also reversed. Accordingly, such compensation expense is subject to both positive and negative adjustments. The percentage of carried interest allocable to the carry pool is subject to change from time to time. See "-Fair Value Measurements-Recognition of Carried Interest in the Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Key Financial Measures Under GAAP-Expenses-Compensation and Benefits" in our Annual Report.
General, Administrative and Other
General, administrative and other expense consists primarily of professional
fees paid to legal advisors, accountants, advisors and consultants, insurance
costs, travel and related expenses, communications and information services,
depreciation and amortization charges, expenses (including impairment charges)
incurred by oil and gas entities that are consolidated, costs incurred in
connection with pursuing potential investments that do not result in completed
transactions ("broken-deal expenses"), and other general operating expenses. A
portion of these general administrative and other expenses, in particular
broken-deal expenses, are borne by fund investors.
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Investment Income (Loss)Net Gains (Losses) from Investment Activities Net gains (losses) from investment activities consist of realized and unrealized gains and losses arising from our investment activities as well as income earned from certain equity method investments. Fluctuations in net gains (losses) from investment activities between reporting periods is driven primarily by changes in the fair value of our investment portfolio as well as the realization of investments. The fair value of, as well as the ability to recognize gains from, our investments is significantly impacted by the global financial markets, which, in turn, affects the net gains (losses) from investment activities recognized in any given period. Upon the disposition of an investment, previously recognized unrealized gains and losses are reversed and an offsetting realized gain or loss is recognized in the current period. Since our investments are carried at fair value, fluctuations between periods could be significant due to changes to the inputs to our valuation process over time. For a further discussion of our fair value measurements and fair value of investments, see "-Critical Accounting Policies-Fair Value Measurements." Dividend Income Dividend income consists primarily of distributions that we and our consolidated investment funds receive from portfolio companies in which they invest. Dividend income is recognized primarily in connection with (i) dispositions of operations by portfolio companies, (ii) distributions of cash generated from operations from portfolio investments, and (iii) other significant refinancings undertaken by portfolio investments. Interest Income Interest income consists primarily of interest that is received on our credit instruments in which we and our consolidated funds and other entities invest as well as interest on our cash and other investments.
Interest Expense
Interest expense is incurred from debt issued by KKR, including debt issued by KFN, credit facilities entered into by KKR, debt securities issued by consolidated CFEs, and financing arrangements at our consolidated funds entered into primarily with the objective of managing cash flow. KFN's debt obligations are non-recourse to KKR beyond the assets of KFN. Debt securities issued by consolidated CFEs are supported solely by the investments held at the CFE and are not collateralized by assets of any other KKR entity. Our obligations under financing arrangements at our consolidated funds are generally limited to our pro rata equity interest in such funds. However, in some circumstances, we may provide limited guarantees of the obligations of our general partners in an amount equal to its pro rata equity interest in such funds. Our management companies bear no obligations with respect to financing arrangements at our consolidated funds. We also may provide other kinds of guarantees. See "-Liquidity."
Income Taxes
KKR & Co. Inc. is a corporation forU.S. federal income tax purposes and thus is subject toU.S. federal, state and local corporate income taxes at the entity level on KKR's share of net taxable income. In addition,KKR Group Partnership and certain of its subsidiaries operate inthe United States as partnerships forU.S. federal income tax purposes and as corporate entities in certain non-U.S. jurisdictions. These entities, in some cases, are subject toU.S. state or local income taxes or non-U.S. income taxes. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties. We review our tax positions quarterly and adjust our tax balances as new information becomes available. For a further discussion of our income tax policies, see Note 2 "Summary of Significant Accounting Policies" and Note 11 "Income Taxes" to the financial statements included elsewhere in this report. Net Income (Loss) Attributable to Noncontrolling Interests Net income (loss) attributable to noncontrolling interests primarily represents the ownership interests that certain third parties hold in entities that are consolidated in the financial statements as well as the ownership interests inKKR Group Partnership that are held byKKR Holdings . The allocable share of income and expense attributable to these interests is 80
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accounted for as net income (loss) attributable to noncontrolling interests. Given the consolidation of certain of our investment funds and the significant ownership interests inKKR Group Partnership held byKKR Holdings , we expect a portion of net income (loss) will continue to be attributed to noncontrolling interests in our business. For a further discussion of our noncontrolling interests policies, see Note 2 "Summary of Significant Accounting Policies" to the financial statements included elsewhere in this report. Key Non-GAAP and Other Operating and Performance Measures The key non-GAAP and other operating and performance measures that follow are used by management in making operational and resource deployment decisions as well as assessing the overall performance of KKR's businesses. They include certain financial measures that are calculated and presented using methodologies other than in accordance with GAAP. These non-GAAP measures, including after-tax distributable earnings, distributable revenues, distributable expenses, distributable operating earnings, fee related earnings, book assets, book liabilities, book value and book value per adjusted shares, are presented prior to giving effect to the allocation of income (loss) betweenKKR & Co. Inc. andKKR Holdings L.P. and as such represent the business in total. In addition, these non-GAAP measures are presented without giving effect to the consolidation of the investment funds and CFEs that KKR manages as well as other consolidated entities that are not subsidiaries ofKKR & Co. Inc. We believe that providing these non-GAAP measures on a supplemental basis to our GAAP results is helpful to stockholders in assessing the overall performance of KKR's businesses. These non-GAAP measures should not be considered as a substitute for, or superior to, financial measures calculated in accordance with GAAP. We caution readers that these non-GAAP measures may differ from the calculations of other investment managers, and as a result, may not be comparable to similar measures presented by other investment managers. These non-GAAP measures are presented in this report as KKR's operating results, which were previously referred to as KKR's segment results. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included under "-Reconciliations to GAAP Measures." Adjusted Shares Adjusted shares represents shares of common stock ofKKR & Co. Inc. outstanding under GAAP adjusted to include shares issuable upon exchange of all units ofKKR Holdings L.P. We believe providing adjusted shares is useful to stockholders as it provides insight into the calculation of amounts available for distribution as dividends on a per adjusted share basis. Weighted average adjusted shares is used in the calculation of after-tax distributable earnings per adjusted share and adjusted shares is used in the calculation of book value per adjusted share. After-tax Distributable Earnings After-tax distributable earnings is a non-GAAP performance measure of KKR's earnings excluding mark-to-market gains (losses) after interest expense, preferred dividends, noncontrolling interests and income taxes paid. It is used by management to assess the net realized earnings of KKR for a given reporting period, after deducting equity-based compensation under the Equity Incentive Plans and adjusting to exclude the impact of nonrecurring items, if any. KKR believes that after-tax distributable earnings is useful to stockholders as it aligns KKR's net realization performance with the manner in which KKR receives its revenues and determines the compensation of its employees. After-tax distributable earnings does not represent and is not used to calculate actual dividends under KKR's dividend policy. Equity-based compensation expense is included in after-tax distributable earnings as a component of compensation expense in order to reflect the dilutive nature of these non-cash equity-based awards. Income taxes paid represents the implied amount of income taxes that would be paid assuming that all pre-tax distributable earnings were allocated toKKR & Co. Inc. , which would occur following an exchange of allKKR Holdings units for shares of common stock ofKKR & Co. Inc. Income taxes paid also includes amounts paid pursuant to the tax receivable agreement. Assets Under Management ("AUM") Assets under management represent the assets managed or advised by KKR from which KKR is entitled to receive fees or a carried interest (either currently or upon deployment of capital), general partner capital, and assets managed or advised by our strategic BDC partnership and the hedge fund and other managers in which KKR holds an ownership interest. We believe this measure is useful to stockholders as it provides additional insight into the capital raising activities of KKR and its hedge fund and other managers and the overall activity in their investment funds and other managed capital. KKR calculates the amount of 81
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AUM as of any date as the sum of: (i) the fair value of the investments of KKR's investment funds; (ii) uncalled capital commitments from these funds, including uncalled capital commitments from which KKR is currently not earning management fees or carried interest; (iii) the fair value of investments in KKR's co-investment vehicles; (iv) the par value of outstanding CLOs (excluding CLOs wholly-owned by KKR); (v) KKR's pro rata portion of the AUM of hedge fund and other managers in which KKR holds an ownership interest; (vi) all AUM of the strategic BDC partnership with FS Investments; and (vii) the fair value of other assets managed by KKR. The pro rata portion of the AUM of hedge fund and other managers is calculated based on KKR's percentage ownership interest in such entities multiplied by such entity's respective AUM. 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. Book Assets Book assets is a non-GAAP performance measure that represents cash and short-term investments, investments, net unrealized carried interest, tax assets, and other assets of KKR presented on a basis that deconsolidates (i) KKR's investment funds and collateralized financing entities that KKR manages and (ii) other consolidated entities that are not subsidiaries ofKKR & Co. Inc. We believe this measure is useful to stockholders as it provides additional insight into the assets of KKR that are used to operate its business lines. As used in this definition, cash and short-term investments represent cash and liquid short-term investments in high-grade, short-duration cash management strategies used by KKR to generate additional yield. Book Liabilities Book liabilities is a non-GAAP performance measure that represents the debt obligations of KKR (including KFN), tax liabilities, and other liabilities of KKR presented on a basis that deconsolidates (i) KKR's investment funds and collateralized financing entities that KKR manages and (ii) other consolidated entities that are not subsidiaries ofKKR & Co. Inc. We believe this measure is useful to stockholders as it provides additional insight into the liabilities of KKR excluding the liabilities that are allocated to noncontrolling interest holders and to the holders of the Series A and Series B Preferred Stock. Book Value Book value is a non-GAAP performance measure of the net assets of KKR and is used by management primarily in assessing the unrealized value of KKR's book assets after deducting for book liabilities, noncontrolling interests and preferred stock. We believe this measure is useful to stockholders as it provides additional insight into the net assets of KKR excluding those net assets that are allocated to noncontrolling interest holders and to the holders of the Series A and Series B Preferred Stock. KKR's book value includes the net impact of KKR's tax assets and liabilities as prepared under GAAP. Capital Invested Capital invested is the aggregate amount of capital invested by (i) KKR's investment funds, (ii) KKR's Principal Activities business line as a co-investment, if any, alongside KKR's investment funds, and (iii) KKR's Principal Activities business line in connection with a syndication transaction conducted byKKR's Capital Markets business line, if any. Capital invested is used as a measure of investment activity at KKR during a given period. We believe this measure is useful to stockholders as it provides a measure of capital deployment across KKR's business lines. Capital invested includes investments made using investment financing arrangements like credit facilities, as applicable. Capital invested excludes (i) investments in certain leveraged credit strategies, (ii) capital invested by KKR's Principal Activities business line that is not a co-investment alongside KKR's investment funds, and (iii) capital invested by KKR's Principal Activities business line that is not invested in connection with a syndication transaction byKKR's Capital Markets business line. Capital syndicated byKKR's Capital Markets business line to third parties other than KKR's investment funds or Principal Activities business line is not included in capital invested. See also syndicated capital. Distributable Revenues Distributable revenues is a non-GAAP performance measure that represents the realized revenues (which excludes unrealized carried interest and unrealized net gains (losses)) generated by KKR and is the sum of (i) fees and other, net, (ii) realized performance income (loss) and (iii) realized investment income (loss). KKR believes that distributable revenues is useful to stockholders as it provides insight into the realized revenue generated by KKR's business lines. 82
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Distributable Expenses
Distributable expenses is a non-GAAP performance measure that represents the
expenses of KKR and is the sum of (i) compensation and benefits (excluding
unrealized performance income compensation), (ii) occupancy and related charges
and (iii) other operating expenses. KKR believes that distributable expenses is
useful to stockholders as it provides insight into the costs expended in
connection with generating KKR's distributable revenues.
Distributable Operating Earnings
Distributable operating earnings is a non-GAAP performance measure that
represents after-tax distributable earnings before interest expense, preferred
dividends, income (loss) attributable to noncontrolling interests and income
taxes paid. We believe distributable operating earnings is useful to
stockholders as it provides a supplemental measure of our operating performance
without taking into account items that we do not believe relate directly to
KKR's operations.
Fee Paying AUM ("FPAUM")
Fee paying AUM represents only the AUM from which KKR is entitled to receive
management fees. We believe this measure is useful to stockholders as it
provides additional insight into the capital base upon which KKR earns
management fees. FPAUM is the sum of all of the individual fee bases that are
used to calculate KKR's and its hedge fund and BDC partnership management fees
and differs from AUM in the following respects: (i) assets and commitments from
which KKR is not entitled to receive a management fee are excluded (e.g., assets
and commitments with respect to which it is entitled to receive only carried
interest or is otherwise not currently entitled to receive a management fee) 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.
Fee Related Earnings ("FRE")
Fee related earnings is a non-GAAP supplemental performance measure of earnings
of KKR before performance income and investment income. KKR believes this
measure may be useful to stockholders as it may provide additional insight into
the profitability of KKR's fee generating management companies and capital
markets businesses. Fee related earnings is calculated as KKR's total Fees and
Other, Net, multiplied by KKR's distributable operating margin. For purposes of
the fee related earnings calculation, distributable operating margin is
calculated as distributable operating earnings, before equity-based
compensation, divided by total distributable revenues.
Syndicated Capital
Syndicated capital is the aggregate amount of capital in transactions originated
by KKR and its investment funds and carry-yielding co-investment vehicles, which
has been distributed to third parties, generally 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 capital
invested, (ii) debt capital that is arranged as part of the acquisition
financing of transactions originated by KKR investment funds, and (iii) debt
capital that is either underwritten or arranged on a best efforts basis.
Syndicated capital is used as a measure of investment activity for KKR during a
given period, and we believe that this measure is useful to stockholders as it
provides additional insight into levels of syndication activity in KKR's Capital
Markets business line and across KKR's investment platform.
Uncalled Commitments
Uncalled commitments is the aggregate amount of unfunded capital commitments
that KKR's investment funds and carry-paying co-investment vehicles have
received from partners to contribute capital to fund future investments. We
believe this measure is useful to stockholders as it provides additional insight
into the amount of capital that is available to KKR's investment funds to make
future investments. Uncalled commitments are not reduced for investments
completed using fund-level investment financing arrangements.
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Unaudited Consolidated Results of Operations (GAAP Basis)
The following is a discussion of our consolidated results of operations for the three months endedJune 30, 2020 and 2019. You should read this discussion in conjunction with the financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected our non-GAAP operating results in these periods, see "-Analysis of Non-GAAP Operating Results." See "-Business Environment" for more details on the potential adverse effects of COVID-19 on our business, financial performance, operating results and valuations.
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