KKR Profits Fall 61% in Third Quarter

Private equity shop Kohlberg Kravis Roberts & Co. saw its profits fall 61% to $317.3 million in the third quarter of 2010, compared with the same period last year, the company said Wednesday. The company’s assets under management, however, grew to $55.5 billion.

PRESS RELEASE
Consolidated Results
KKR’s consolidated GAAP results for the quarter and nine months ended September 30, 2010 included net income attributable to KKR & Co. L.P. of $8.9 million and $152.6 million, respectively, and net income attributable to KKR & Co. L.P. per common unit of $0.04 and $0.74, respectively. For the quarter and nine months ended September 30, 2009, net income attributable to KKR & Co. L.P. was $616.7 million and $927.9 million, respectively. The decrease from both prior periods was primarily due to the following factors that were not applicable in 2009: (i) the allocation of approximately 70% of the earnings of KKR to KKR Holdings L.P., (ii) the issuance of equity-based awards which resulted in the recognition of non-cash compensation charges, and (iii) the recognition of corporate income tax expense. These factors were partially offset by the inclusion of the results of our principal segment assets that were included in noncontrolling interests in the comparative prior periods.

Total Reportable Segments

Management makes operating decisions, assesses performance and allocates resources based on financial and operating data and measures that are presented without giving effect to the consolidation of any of the funds that KKR manages. In addition, there are other components of KKR’s reportable segment results that differ from the equivalent GAAP results on a consolidated basis. These differences are described in the Notes to KKR’s Unaudited Reportable Segments on page 23.

AUM was $55.5 billion as of September 30, 2010, an increase of $1.1 billion or 2.0% compared to AUM of $54.4 billion as of June 30, 2010. The increase was primarily due to an increase in the fair value of KKR’s private equity portfolio and new capital raised in KKR’s public markets segment, partially offset by distributions and, to a lesser extent, redemptions.

Fee paying assets under management (“FPAUM”) were $42.7 billion as of September 30, 2010, an increase of $1.1 billion or 2.5% compared to FPAUM of $41.6 billion as of June 30, 2010. The increase was primarily due to changes in foreign exchange related to Euro denominated commitments, new capital raised and increases in net asset values in certain vehicles within KKR’s public markets segment, partially offset by redemptions and, to a lesser extent, distributions.

FRE was $69.5 million for the quarter ended September 30, 2010, an increase of $2.5 million or 3.7% compared to pro forma FRE of $67.0 million for the quarter ended September 30, 2009. The increase is due primarily to higher capital markets fees as a result of increased overall activity and higher incentive fees earned in the public markets segment. These increases were partially offset by lower monitoring fees in the private markets segment as a result of a $26.1 million termination payment on a monitoring agreement with a portfolio company during the third quarter of 2009, which impacted FRE by $9.2 million net of associated fee credits.

For the nine months ended September 30, 2010, FRE was $223.2 million, an increase of $63.3 million or 39.6% compared to pro forma FRE of $160.0 million for the nine months ended September 30, 2009. The increase was due primarily to (i) higher capital markets fees as a result of increased activity, (ii) higher incentive fees earned in the public markets segment, and (iii) higher transaction fees in the private markets segment as a result of the closing of more fee generating investments. These increases were partially offset by higher compensation expense as a result of improved performance and the expansion of KKR’s business.

For the quarter ended September 30, 2010, ENI was $317.3 million, a decrease of $505.4 million or 61.4% compared to pro forma ENI of $822.7 million for the quarter ended September 30, 2009. The decrease primarily reflects lower levels of appreciation of KKR’s private equity portfolio when compared to the prior period. While the fair value of KKR’s investments increased during the third quarter of 2010, the amount of net unrealized gains were lower than in 2009.

For the nine months ended September 30, 2010, ENI was $1,425.2 million, a decrease of $13.5 million or 0.9% compared to pro forma ENI of $1,438.7 million for the nine months ended September 30, 2009. The decrease primarily reflects lower appreciation of KKR’s principal investments when compared to the prior period, partially offset by the increase in FRE explained above.

Private Markets

AUM in the private markets segment was $41.9 billion as of September 30, 2010, an increase of $0.8 billion or 2.1% compared to AUM of $41.0 billion as of June 30, 2010. The increase was primarily due to an increase in the fair value of KKR’s private equity portfolio, partially offset by distributions as a result of realizations.

FPAUM in the private markets segment was $36.0 billion as of September 30, 2010, an increase of $0.7 billion or 2.0% compared to FPAUM of $35.3 billion as of June 30, 2010. The increase was primarily due to changes in foreign exchange related to Euro denominated commitments and invested capital.

FRE in the private markets segment was $42.9 million for the quarter ended September 30, 2010, a decrease of $11.5 million or 21.1% compared to pro forma FRE of $54.3 million for the quarter ended September 30, 2009. The decrease was due primarily to (i) lower monitoring fees as a result of the recognition of a $26.1 million termination payment on a monitoring agreement with a portfolio company during the third quarter of 2009, which impacted FRE by $9.2 million net of associated fee credits, (ii) lower transaction fees as a result of the closing of fewer fee generating investments and (iii) higher compensation expense and other operating expenses in connection with the expansion of KKR’s business.

FRE in the private markets segment was $141.2 million for the nine months ended September 30, 2010, a decrease of $6.5 million or 4.4% compared to pro forma FRE of $147.7 million for the nine months ended September 30, 2009. The decrease was due primarily to higher compensation expense and other operating expenses in connection with the expansion of KKR’s business as well as lower monitoring fees as a result of the termination payment described above. These decreases were partially offset by higher transaction fees as a result of the closing of more fee generating investments.

ENI in the private markets segment was $173.7 million for the quarter ended September 30, 2010, a decrease of $129.9 million or 42.8% compared to pro forma ENI of $303.6 million for the quarter ended September 30, 2009. The decrease was due primarily to lower net carried interest. While the fair value of KKR’s investments increased during the third quarter of 2010, the amount of net unrealized gains was lower than the amount recorded during the third quarter of 2009.

ENI in the private markets segment was $522.6 million for the nine months ended September 30, 2010, an increase of $6.7 million or 1.3% compared to pro forma ENI of $515.9 million for the nine months ended September 30, 2009. The increase was due primarily to higher gross carried interest driven by certain private equity funds that were not in a carry earning position during the 2009 period earning carried interest in 2010. This increase was partially offset by increases in the allocation to KKR’s carry pool and management fee refunds. As of September 30, 2010, the amount subject to management fee refunds, which may reduce carried interest in future periods, totaled $67.8 million.

Public Markets

AUM in the public markets segment was $13.6 billion as of September 30, 2010, an increase of $0.3 billion or 1.9% compared to AUM of $13.4 billion as of June 30, 2010. The increase was primarily due to new capital raised during the quarter and increases in the net asset value of certain vehicles, partially offset by redemptions.

FPAUM in the public markets segment was $6.7 billion as of September 30, 2010, an increase of $0.3 billion or 5.5% compared to FPAUM of $6.3 billion as of June 30, 2010. The increase was primarily due to new capital raised during the quarter and increases in the net asset value of certain vehicles, partially offset by redemptions.

FRE in the public markets segment was $13.2 million for the quarter ended September 30, 2010, an increase of $6.5 million or 96.0% compared to pro forma FRE of $6.7 million for the quarter ended September 30, 2009. For the nine months ended September 30, 2010, FRE was $40.7 million, an increase of $31.3 million compared to pro forma FRE of $9.4 million for the nine months ended September 30, 2009. The increase in both comparative periods was due primarily to increased incentive fees earned from KKR Financial Holdings LLC (“KFN”) as a result of KFN’s financial performance exceeding certain required benchmarks, partially offset by increased compensation expense as a result of improved performance and the expansion of KKR’s business.

ENI in the public markets segment was $13.9 million for the quarter ended September 30, 2010, an increase of $9.5 million compared to pro forma ENI of $4.4 million for the quarter ended September 30, 2009. For the nine months ended September 30, 2010, ENI was $42.4 million, an increase of $37.4 million compared to pro forma ENI of $5.0 million for the nine months ended September 30, 2009. The increase in both comparative periods was due primarily to the increases in FRE explained above.

Capital Markets and Principal Activities

FRE in the capital markets and principal activities segment was $13.4 million for the quarter ended September 30, 2010, an increase of $7.5 million compared to pro forma FRE of $6.0 million for the quarter ended September 30, 2009. For the nine months ended September 30, 2010, FRE was $41.4 million, an increase of $38.5 million compared to pro forma FRE of $2.8 million for the nine months ended September 30, 2009. The increase in both comparative periods was due primarily to an increase in overall capital markets transaction activity resulting from an improved environment and the continued buildout of this business.

ENI in the capital markets and principal activities segment was $129.7 million for the quarter ended September 30, 2010, a decrease of $385.0 million or 74.8% compared to pro forma ENI of $514.7 million for the quarter ended September 30, 2009. For the nine months ended September 30, 2010, ENI was $860.2 million, a decrease of $57.5 million or 6.3% compared to pro forma ENI of $917.8 million for the nine months ended September 30, 2009. The decrease in both comparative periods was due primarily to lower appreciation of KKR’s principal investments when compared to the prior period.

CAPITAL AND LIQUIDITY

As of September 30, 2010, KKR had an available cash balance of $1.1 billion and $759.8 million of outstanding debt obligations. As of September 30, 2010, KKR’s availability for further borrowings was approximately $1.6 billion (which does not include a $500.0 million revolving credit facility for use in its capital markets business that was undrawn as of September 30, 2010).

On September 29, 2010, KKR issued $500 million in aggregate principal amount of 6.375% senior notes due in 2020. The notes are rated A- and A by Standard & Poor’s and Fitch, respectively. Subsequent to September 30, 2010, KKR repaid $154.1 million of outstanding borrowings under its revolving credit facilities using a portion of the proceeds from the senior notes offering.

As of September 30, 2010, KKR’s portion of total uncalled commitments to its investment funds was $1,129.4 million, consisting of the following (amounts in thousands):
Commitments

Private Markets

2006 Fund $ 438,909
European Fund III 399,150
Asian Fund 145,323
Infrastructure Fund 50,000
E2 Investors (Annex Fund) 30,833
Natural Resources I 7,500
Other Private Markets Commitments 532
Total Private Markets Commitments 1,072,247

Public Markets

Mezzanine Fund 42,100
Capital Solutions Vehicles 15,100
Total Public Markets Commitments 57,200
Total Uncalled Commitments $ 1,129,447

DISTRIBUTION

A distribution of $0.15 per common unit will be paid on November 26, 2010 to unitholders of record as of the close of business on November 12, 2010.

CONFERENCE CALL

A conference call to discuss KKR’s financial results will be held on Wednesday, November 3, 2010 at 10:00 a.m. EDT. The conference call may be accessed by dialing (888) 437-9315 (U.S. callers) or +1 (719) 325-2481 (non-U.S. callers); a pass code is not required. Additionally, the conference call will be broadcast live over the Internet and may be accessed through the Investor Relations section of KKR’s website at http://www.kkr.com/kkr_ir/kkr_events.cfm. A replay of the live broadcast will be available on KKR’s website or by dialing (888) 203-1112 (U.S. callers) and +1 (719) 457-0820 (non-U.S. callers), pass code 2324765, beginning approximately two hours after the broadcast.

From time to time, KKR may use its website as a channel of distribution of material company information. Financial and other important information regarding KKR is routinely posted on and accessible at Investor Relations section of KKR’s website at www.kkr.com. In addition, you may automatically receive email alerts and other information about KKR by enrolling your email by visiting the “Email Alerts” area in the Investment Relations section of KKR’s website.

ABOUT KKR

Founded in 1976 and led by Henry Kravis and George Roberts, KKR is a leading global alternative asset manager with $55.5 billion in assets under management as of September 30, 2010. With over 650 people and 14 offices around the world, KKR manages assets through a variety of investment funds and accounts covering multiple asset classes. KKR seeks to create value by bringing operational expertise to its portfolio companies and through active oversight and monitoring of its investments. KKR complements its investment expertise and strengthens interactions with investors through its client relationships and capital markets platforms. KKR is publicly traded on the New York Stock Exchange (NYSE: KKR). For additional information, please visit KKR’s website at www.kkr.com.