THE POWER OF PARTNERSHIP

2010 ANNUAL REPORT

KKR

2010 ANNUAL REPORT

A

01 THE POWER OF PARTNERSHIP 18 LETTER TO UNITHOLDERS 25 FINANCIAL OVERVIEW 30 BUSINESS OVERVIEW 32 ENVIRONMENTAL, SOCIAL AND GOVERNANCE OVERVIEW 34 VALUES 36 KKR LEADERSHIP 37 CONSOLIDATED FINANCIAL REVIEW 100 UNITHOLDER INFORMATION

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KKR

2010 ANNUAL REPORT

Partnership
POWERS MOVES CONNECTS PAYS ENERGIZES FLAVORS GROWS CARES NOURISHES COMFORTS FERMENTS BUILDS SECURES AND GUIDES

everything we do.

pennsylvania 2 KKR 2010 ANNUAL REPORT .INVESTMENT EXPANDED DEVELOPMENT FROM 1 WELL TO NEW WELLS 75 POWERS PARTNERSHIP East Resources mansfield.

compared to only one horizontal well prior to KKR’s investment. Royal Dutch Shell Plc acquired East for $4. our energy team identified East Resources.000 net acres of highly contiguous. operated acreage in some of the most attractive areas of the Marcellus Shale in Pennsylvania. This expanded development demonstrated the value of East’s asset position. KKR invested $330 million in East through a convertible security. which enabled the company to expand development — drilling 75 horizontal wells. East’s regional concentration and entrepreneurial approach provided operational and cost advantages that made it an attractive invest­ ment.2 billion gain for KKR and our investors. KKR 2010 ANNUAL REPORT 3 . Recognizing this revolutionary change. Inc.New technology has transformed the world’s energy supply by enhancing successful and safe exploration for natural gas from shale rock formations.. In June 2009. In late 2010.7 billion. a leading oil and gas company with a stable portfolio of produc­ ing assets and more than 650. a $1.

BMG has grown to be the world’s largest independent music publisher. including top artists such as Allison Krause.000 recording artists and songwriters. an international media company active in more than 50 countries. BMG’s experience in licensing and music rights administration and KKR’s transaction capabilities. Billy Idol. The company now manages more than 250. Cee­Lo Green and ZZ Top.000 copy­ rights and recorded master rights from over 1. germany BMG Rights Management (“BMG”) is a joint venture between KKR and Bertelsmann. signing new and iconic artists and expanding its catalogue acquisitions. The partnership benefits from Bertelsmann’s know­ how in media and publishing.BMG Rights Management berlin. financial expertise and global network. to develop a global music rights management business. 4 KKR 2010 ANNUAL REPORT . As a result of our partnership.

Avago has been a leader in innovation and engineering expertise. Over the course of the next four years. Avago holds more than 5. KKR and our partner Silver Lake saw an opportu­ nity for Avago to thrive as an independent company and in 2005 led the carve­out from Agilent. The focus on long­term performance has benefited the public owners of the stock as Avago has outperformed market indices. In August of 2009. NASDAQ and the S&P 500 since the IPO. we and KKR Capstone partnered with Avago’s management to create a stand­alone company that was significantly more effective and efficient than the historical model. as well as other key executives and by divesting several non­core businesses. Avago achieved annual growth of 11. Throughout its history. developer and supplier of analog semiconductors. We strengthened the company by hiring new CEO Hock Tan. including the SOX (Semiconductor Index). the new management team improved the business by re­focusing the product portfolio and redeploying R&D spending in core areas such as wireless.S. data networks. computer peripherals and supercom­ puters.000 U.1 percent and increased profitability by 25. as a captive subsidiary (first of HP and later Agilent). Avago was listed on the NASDAQ stock exchange in an IPO supported by KKR Capital Markets. KKR 2010 ANNUAL REPORT 5 .8 percent annually. With a 50­year history of innovation.500 employees globally. an experienced semiconductor executive. and foreign patents and patent applications and employs more than 3. fiber optics and networking. it was not managed to its full potential. In the nine months that followed the carve­ out.Avago san jose. california Avago Technologies is a leading global designer. The company’s products can be found in a wide range of devices including smartphones. However. From 2007 to 2010.

which was required to dispose of the asset by European regulators following the UK government’s bail­out. As a result of its close relationship with Bain Capital and Advent International. which facilitated an open dialogue and deep partic­ ipation in due diligence. 6 KKR 2010 ANNUAL REPORT . The business was acquired for a total consideration of approx­ imately $3 billion from the RBS. This relationship was further developed by working exclusively with them from the beginning of the process.PAYS PARTNERSHIP WorldPay london. The WorldPay investment is the largest mezzanine investment KKR has led to date and is one of six deals in which affiliate funds or clients managed by KKR Asset Management provided mezzanine financing in 2010. a consortium formed by Advent International and Bain Capital agreed to acquire 80% of WorldPay (formerly RBS WorldPay). WorldPay is the #1 merchant acquirer in the UK and #4 globally by transaction volume. england In August 2010. Furthermore. RBS retained a 20% equity stake in the business. a leading global payment services business pro­ viding merchant acquiring and processing services to national. KKR Mezzanine Partners underwrote and led the $470 million mezzanine loan to facilitate the acquisition of WorldPay. KKR provided committed financing in a tight time frame which was a key in successfully securing this transaction. international and SME (small and medium enterprise) merchants.

Café Coffee Day. KKR developed and invested through an $80 million structured equity solution. owned by Coffee Day Resorts. Café Coffee Day has more than four times the stores of its nearest competitor. With more than 1.000 cafes in 150 cities across India. VG Siddhartha. MORE STORES ADDED SINCE KKR INVESTMENT 200 Café Coffee Day bangalore. india KKR 2010 ANNUAL REPORT 7 . This unmatched scale has enabled the company to develop a fully integrated supply chain with stand­ ardized product offerings across the country. including recently opened cafes in Vienna and Prague. required capital to take advantage of extraordinary growth opportunities in Coffee Day as well as other businesses. Working in collaboration with manage­ ment. Proceeds from KKR’s investment are supporting Café Coffee Day’s continued growth and business expansion. is one of India’s strongest consumer and retail brands. Coffee Day’s promoter.

WILD is a leading manufacturer of natural flavor and ingredient solutions for the food and beverage industry. after nearly 80 years of running WILD as a successful family business. we are partnering with WILD’s management to grow the business in emerging markets through both acquisition and new market development. For example. With healthy products. Founded in 1931. Wild to recruit additional management talent to support the company’s global growth initiatives. WILD is well positioned for global growth. supply chain and lean manufacturing. the KKR team has worked with Dr. market­leading innovation and strong customer relationships. In addition to providing the Wild family with capital. Wild and the management team to prepare the company for the capital markets and position it as a global fully integrated leader in the flavors sector. Hans­Peter Wild entered a partnership with KKR as a minority investor in the company. In July 2010. We have also worked closely with Dr. our team is working with management on global purchasing. FLAVORS WILD Flavors GmbH zug. KKR has a long track record of partnering with family businesses to assist them in accelerating value creation. Through our global network.Over the past 35 years. switzerland PARTNERSHIP 8 KKR 2010 ANNUAL REPORT . Dr.

grew sales and improved margins. the company expanded its stores. Dollar General grew revenue by 37 percent while increasing adjusted EBITDA by 126 percent. With revenues of $13 billion for the fiscal year 2010. tennessee KKR 2010 ANNUAL REPORT 9 . redesigning core merchandising pro­ cesses. the company went public in the largest retail IPO in 14 years. approximately 15. we focused on improving store standards and product sourcing. In November 2009. Dollar General is now one­ and­a­half times larger than its nearest direct­retail competitor.6 billion.372 GROWS PARTNERSHIP Dollar General goodlettsville.000 positions were created.194 TO 9. KKR purchased Dollar General for $7. Working together with Dollar General CEO Rick Dreiling and a highly experienced management team. Through operating initiatives and renewed focus on retailing discipline. During this same period.000 metric tons of greenhouse gas emissions through participation in KKR’s Green Portfolio Program. In 2007. The 72­year­old company offers a wide variety of everyday merchandise and unique items at low prices in convenient locations. From 2007 to the end of its 2010 fiscal year. expanding the private label business and reducing out­of­stocks. Dollar General’s partnership with KKR has been a story of growth. and the company avoided 160. Since then. with KKR Capital Markets serving as one of the lead bookrunners. STORE GROWTH FROM 8.Dollar General is the largest small­box discount retailer by revenue in the United States.

10 KKR 2010 ANNUAL REPORT . Harden found that the significant debt it had incurred to fund a previous acquisition was inhibiting its ability to grow. while KKR Capital Markets arranged the placement and syndication of the balance. To support this transaction.000 Harden Healthcare provides home healthcare. KKR Asset Management provided approximately $140 million of this financing. assisted living and skilled nursing services. expanding its presence in the hospice market and extending its geographic reach to four new states. Harden acquired Voyager Hospice Care. Shortly after the transaction closed in March of 2010.000 seniors across the United States in 2010.S. hospice. In late 2009.CARES Harden Healthcare austin. SENIORS SERVED BY HARDEN HEALTHCARE IN 2010 PARTNERSHIP 40. KKR stepped in as a partner to recapitalize the company with $235 million of new funding. including a $35 million revolving credit line. Harden served nearly 40. KKR invested an addi­ tional $50 million and KKR Capital Markets raised an additional $40 million of senior secured debt. Along with its subsidiaries. texas U. With KKR’s investment. Harden not only overcame the immediate financial stress placed upon it by an inflexible capital structure but was able to grow and expand its operations.

Through KKR’s global network. and high­ quality milk that nourishes and protects the public. KKR invested $150 million in Ma Anshan in the beginning of 2009. productivity and profitability. the team worked with the company’s purchasing managers across all 14 farms to implement an end­to­end procurement process that could meet the increasing demand for high­ quality feeds.8 MILLION TONS OF MILK PER YEAR PRODUCES NOURISHES Ma Anshan Modern Farming ma anshan city. for example. The company is now the largest publicly listed dairy farm in China. Ma Anshan Modern Farming raises dairy cows and sells raw milk to dairy companies that produce branded consumer products. KKR has worked with Ma Anshan’s leader­ ship team to apply the latest farming techniques and supply chain enhancements for the benefit of Chinese consumers. and it is planning continued growth to strengthen its industry­leading position at the forefront of a shift toward large­scale dairy farms in China. KKR Capstone has worked on the ground at remote farms for 16 months to develop and implement initiatives ranging from optimized feed purchasing to improved breeding management. Recognizing a growing concern and interest in food safety and quality in China.Founded in 2005. In November 2010. construction and operations. more productive cows. and to improve farms’ milk quality. Ma Anshan was able to work with world­class dairy farm experts to develop and introduce best prac­ tices in farm design. china PARTNERSHIP KKR 2010 ANNUAL REPORT 11 . raising $448 million. These processes accelerated the herd’s growth and led to healthier. 1. On corn silage purchasing. Ma Anshan Modern Farming successfully completed its initial public offering. The company currently has 14 farms across China.

Pets at Home handforth. united kingdom 12 KKR 2010 ANNUAL REPORT .

product innovation and new services (such as the roll­out of grooming.800 employees. KKR is partnering with Pets at Home management to continue to grow the business. veterinary and insurance offerings).22 MILLION PETS IN THE UK Pets at Home is the UK’s leading specialist retailer of pet food and pet­related services and acces­ sories. primarily through investments in: new store openings (with a total of 25 in 2010). and advertising. Pets at Home currently operates over 280 stores with 4. supported by a well­ differentiated retail proposition and experience. and its rapid growth captured KKR’s interest. as well as 70 veterinary surgical centers under the brand name Companion Care. KKR 2010 ANNUAL REPORT 13 . training and development opportunities. Founded in 1991. and the firm acquired the company in January 2010. The company’s strong market position.

reduce energy use and improve procurement processes. Oriental Brewery grew volume by 4. 14 KKR 2010 ANNUAL REPORT .Oriental Brewery seoul. During 2010.8% of market share in South Korea.4% and gained 1. upgrade IT infrastructure. south korea Founded in 1933. With a market share greater than 40%. Since the acquisition. KKR and Affinity Equity Partners purchased Oriental Brewery for $1. Oriental Brewery sells more than 800 million cases of beer annually in South Korea. In 2009. Oriental Brewery also became the first company in Asia to participate in KKR’s Green Portfolio Program. Oriental Brewery is South Korea’s second largest beer producer. the company’s first full year under new ownership. expand production capacity.8 billion from Anheuser Busch­InBev. we have worked side­by­side with Oriental Brewery management to strengthen brand marketing. significantly reducing green­ house gas emissions in its production facilities.

4% stake for $1. Colonial Pipeline is the largest refined petroleum products pipeline in North America.BUILDS PARTNERSHIP Colonial Pipeline alpharetta. National Pension Service of Korea. the fourth largest public pension fund in the world. a strong commitment to environmental and workplace safety. KKR 2010 ANNUAL REPORT 15 . Koch Capital and Shell as one of the five shareholders of Colonial. The investment was jointly funded by KKR and a separately managed account for our limited partner. georgia MILES OF PIPELINE UNDER OPERATION 5. In October 2010. acquiring Chevron’s 23.600 miles of pipeline under operation. and enjoys access to attractive sources of supply and end­ market connectivity. KKR joined ConocoPhillips. IFM (US). KKR’s 20­plus year history of investing in the energy and infrastructure space and expertise in global public affairs greatly aided the successful closure of the deal. Colonial has a history of stable earnings and cash flow growth.600 NEARLY With a network of nearly 5.1 billion. and such expertise and experience remain assets to the company today.

sovereign wealth. university and other endowments and foundations — have for decades invested with KKR as limited partners. firefighters. expand access to education. 16 KKR 2010 ANNUAL REPORT . The returns on our investments improve the retirement security and well being of current and future generations of beneficiaries.Leading fiduciaries around the world — including large public and corporate pension plans. state and municipal employees and many others. including teachers. help fund important activities and help meet the needs of our state and municipal budgets. police officers. financial institutions. insurance companies.

$6 BILLION OF COMMITTED AND INVESTED CAPITAL WE ARE OUR OWN LARGEST INVESTOR: SECURES PARTNERSHIP Our Investment Partners KKR 2010 ANNUAL REPORT 17 .

As a company whose public listing came without the benefit of a traditional IPO process. we want to thank you for your partnership. we com­ pleted a highly successful inaugural $500 million public bond offering. our unit­ holders. While market stability remains uncertain in many parts of the world. where we had traded since our October 2009 combination with KKR Private Equity Investors (KPE). Two years ago. We are grateful for the support you have shown us in our first full year as a public company. we have seemingly turned a corner. creating nearly $4 billion of market value. And during the course of the year. investor education is a 18 KKR 2010 ANNUAL REPORT . we continue to find it remarkable how quickly the world and market sentiment can change. we delisted from the Euronext Amsterdam exchange. and the price of our publicly traded units increased by 72%. China growth equity. and mezzanine.LETTER TO UNITHOLDERS Dear Fellow Unitholders 2010 UNIT PRICE INCREASE 72% GEORGE R. we raised over $5 billion of new capital. In July. In September. it appears that markets have started to recover. and began trading on the New York Stock Exchange. special situations. 2010 proved to be a year of significant value creation for the investors across all of our businesses and for you. 2010 was a pivotal year for our firm. however. We have been energized by your eagerness and patience in understanding our business. we received investment grade ratings of A and A­ from Fitch and S&P. respectively. just about every measure of value and health in global markets was in freefall. and while world economies have not fully rebounded. Amid these new beginnings. natural resources. Today. Our private equity funds increased in value by 33%. more than $4 billion of which was for our five new investment strategies: infrastructure. KRAVIS After four decades as investors. In August. These strategies build on the core competencies of our firm and facilitate KKR’s diversification into areas where we can create scale and earn attractive returns for our partners. our credit strategies outperformed their benchmark indices. ROBERTS HENRY R.

It began investing in 2004 with a focus on liquid investments in leveraged loans and high yield bonds. which had $46 billion of assets under management as of December 31. and investable trends in the markets in which we operate. and has since expanded to include dedicated mezzanine and special situations strategies. the success of these endeavors will ultimately be judged by the returns we can deliver to our partners. as well as the firm’s balance sheet. we provide much more than private equity to our partners.“ Today. which we began in 2007.7 billion in permanent capital to invest behind KKR’s future growth. People often see KKR’s name and assume private equity is our sole business — after all. and develop direct relationships with providers of capital. and with the men and women we’ve been able to attract to KKR whose expertise drives the value we create. with our limited partners and others who commit capital alongside our own as we make investments. which focus on below­investment­grade strategies. Our Capital Markets team brings opportunities originated throughout KKR to our investors. Each of these segments performed extraordinarily well in 2010. or unitholders. Our balance sheet provides us with $5. It is a franchise which remains and always will remain core to our company. We missed out on many attractive opportunities for all of our partners. Public Markets. from management teams to investors. the needs of our partners over time. whether manage­ ment teams. our annual report is focused on the power of partnership. for 35 years. had $15 billion of assets under management as of December 31. we are able to convert more of the ideas and relationships gen­ erated by our “sourcing engine” into investments. “ researching companies and building industry relationships that did not lead to investable opportunities. retain more economics from our content. These partnerships are the lifeblood of our business. we’ve made a name for ourselves in that business. The result was that a lot of intel­ lectual capital and effort went unused. To mitigate this trend. The first and largest of these is Private Markets. taking advantage of a rebound in capital markets to generate out­ sized results. In early 2011. Public Markets. enabling us to speak for more capital. limited partners. Capital Markets and Principal Activities. Financial Highlights critical area of focus for us. As we move forward. has two main components: the KKR Capital Markets business. because our private equity capital was not sufficiently flexible to act on all of our good ideas. KKR 2010 ANNUAL REPORT 19 . however. Our longevity in the investment business has convinced us that our most important assets are our partnerships — with companies and management teams around the world to whom we provide advice. our vision for KKR is to convert all of our ideas and relationships into opportunities for our partners. 2010. Of course. Notably. Our second segment. because of the very low hit­ rate nature of the only business we were in — private equity — we spent a great deal of time Our business is comprised of three segments: Private Markets. Our third segment. This means enhancing our offerings and evolving our approach based on changes in the economy and capital markets. and we continue to evolve and enhance our global private equity capabil­ ities. and solutions. 2010. Private Markets includes our global private equity and our energy and infra­ structure businesses. Historically. we are able to convert more of the ideas and relationships generated by our ‘sourcing engine’ into investments. Today. protecting and enhancing them over the long term is our highest priority. we hired a team of public equity investors who are building a long/ short equity capability within this segment. and we believe that our broader capabilities enrich each of these partnerships. and Capital Markets and Principal Activities. This segment houses our credit investing businesses. we organically built new businesses such that today. capital.

8x and 0. including three new transactions in China. active strategic buyers and the more open public equity markets enabled us to return approximately $3 billion of capital to the limited partners in our North American funds during 2010. The European Fund III. Our mature funds. we raised a $1 billion 20 KKR 2010 ANNUAL REPORT . from 5. the European Fund and European Fund II. Collec­ tively. so equity checks in Asia are often smaller. we continue to find compelling growth opportunities in Asia — especially in China and India. Our 2006 Fund. and two­thirds matures in or after 2015.9x cost on a gross basis. and our first traditional buyout in Japan. we sourced a number of exciting North American opportunities in 2010. our three European private equity funds saw consistent growth during 2010. our economic net income increased 19%. increased in value by 29% during the year and was marked at 1. It also began the process of returning capital to limited partners with the 2010 initial public offering of Ma Anshan Modern Farming. appreciated by 2% and was marked at cost. To continue to capitalize upon those relationships. from $661 million in 2009 to $785 million in 2010. 15% for the S&P 500 year. We invested over $900 million in equity capital during the year.5 billion in equity capital. In aggregate. On the new investment side of the equation. deploying or committing to deploy approximately $1. Our approach to private equity investing in developing Asian markets is somewhat different than the buyout­focused approach we take in more mature economies.0x cost on a gross basis. a trend which has continued in 2011. such that nearly 85% of our portfolio companies’ debt now matures in or after 2014.5x to 4. our funds were up 33% for the year — more than double the S&P 500’s return of 15%. Every investment in the Asian Fund is marked at or above cost. The predecessor to the 2006 Fund. We returned over $650 million of capital to the limited partners in our European funds during the 2010 INCREASE IN VALUE OF PRIVATE EQUITY FUNDS 33 % vs. saw a similar increase in value of 27% during the year and was marked at 2. two in India. Importantly. The key driver of this improvement was carried interest generated by appreciation in our private equity funds. From an investing perspective.4x cost on a gross basis.8x. we also made great progress on the capital structures of our portfolio companies by extending. or eliminating over $46 billion of debt in 2009 and 2010. We tend to partner with local entrepreneurs to build their companies into world­leading businesses. Our portfolio has benefitted from strong operating performance and the Western European economic recovery. retiring. With the focus of our investment and capital markets teams. our Millennium Fund. respectively. Despite European macroeconomic headwinds this year.2x cost on a gross basis. focused on private equity investments primarily in North America. increasing in value by 51% to reach 1. We also invested additional capital in three existing investments to pursue attractive growth opportunities. appreciated by 48% and 39% during the year and were marked at 2. Our private equity funds’ performance was driven by strong operational accomplishments in our portfolio companies as well as improved equity markets. which we are still investing.Private Markets Our Private Markets segment saw strong results for the year. while aggregate leverage decreased 14%. Through April 2011. Our inaugural Asian private equity fund had a remarkable 2010. respectively. We attribute much of this improvement to the work of our world­class portfolio company management teams as well as the great work of KKR Capstone’s operational experts. The more solid post­recession outlook in parts of Europe laid a strong foundation for deal activity in 2010. the companies in our portfolio increased revenue and EBITDA for the year by 7% and 15%. Thanks to increasing transaction activity and value creation. especially in Germany. giving us the confidence to deploy over $2 billion in equity capital. we have extended a further $23 billion.

KKR 2010 ANNUAL REPORT 21 . high yield bonds. We take the same approach to value creation through active ownership that we do in private equity. We raised approximately $250 million of capital dedicated to our natural resources strategy in 2010 and invested approximately $70 million. In special situations.1 billion through an infrastructure­related separately managed account. In energy more broadly. but it is also home to our energy and infrastructure investing businesses. which takes advantage of the shift in market interest from conventional to unconventional oil and natural gas assets by acquiring conventional properties that are non­ core to their current owners and improving their operations to generate attractive risk­adjusted and current cash returns for our investors. In keeping with our goal of better utilizing all of the intellectual capital we have at KKR. This segment includes our liquid credit.S.4 billion China Growth Fund in 2010 in partnership with both existing and new KKR investors to make smaller investments in that country. We characterize our mezzanine and special situations businesses as alternative credit strategies due to their private equity­like structure. In liquid credit.in 2010 and also invested $1. providing attractive opportunities to invest in less mature shale plays with a risk/return profile more akin to private equity. On the other side of this coin. with longer investment horizons and capital lock­ ups. One example is our natural resources strategy. and “opportunistic credit. We invested or committed to invest approximately $1. The thorough bottoms­up industry group approach we employ in each of our investing platforms provides us with distinctive viewpoints on global industries. Across these platforms. This new pool of capital gives us flexibility to participate in more of the exciting transactions we are sourcing in China. Our Private Markets segment today is predominantly comprised of our private equity investing business. (coverage of which Wall Street all but eliminated during the resource­strapped recession years). Public Markets 2010 NEW CAPITAL RAISED $5. we focus on investing in long­lived assets that provide critical functions services. the development of uncon­ ventional basins has created an enormous capital need. Fee related earnings were up to $57 million in 2010 from $12 million in 2009.” which is flexible across a range of sub­investment­grade credit investments. we have the ability to invest behind many of the industry trends we are seeing today.2 billion across our mezzanine and special situations businesses during 2010. we have flexibility to invest in companies that do not have access to traditional funding sources. demonstrating top­quartile performance. we announced this year that we intend to launch a long/short public equities investing business within our Public Markets segment. we got off to a strong start in 2010 by raising approximately $1. We continued to outperform bench­ marks in each of these strategies during 2010. We are excited about the scalability and growth potential for this effort. Our mezzanine transactions have thus far focused primarily on Europe (where the high­yield markets remain less efficient) and on the mid­market segment in the U. and special situations investing platforms. we have four primary strat­ egies: investing in bank loans. We held a first close of approx­ imately $500 million on our infrastructure fund Our Public Markets segment also had a successful 2010. and economic net income grew by $54 million to $60 million. a combination of bank loans and high yield bonds. In infrastructure.3 billion. mezzanine.

And in today’s low interest­rate and volatile equity market environ­ ment. We believe strongly in demonstrating our confidence in new businesses in the same way our investors do — through a financial commitment. our Capital Markets and Principal Activities segment had an equally strong year. With permanent balance sheet capital. Looking Ahead What we find most exciting about our progress and performance in 2010 is the momentum it provides going into 2011. We plan to scale these businesses through active fundraising and top­tier track records. and finding that over the last decade. Importantly. we paid out 60 cents per unit in distributions derived from 2010 results. with fee related earnings of $79 million in 2010. To achieve this. however. Many large institutional investors are assessing where the financial crisis left their investment portfolios. we expect to continue building alignment with our partners by investing behind every new business we create in the future. our book value per unit was $8. which has the responsibility of building deeper relationships with our existing investors and 22 KKR 2010 ANNUAL REPORT . we had only long­biased. Capital Markets and Principal Activities Finally. or growth of $60 million over 2009. From our dialogue with limited partners. resulting in investment income of $1. we could express those opinions through investments in both liquid and illiquid markets on the credit side. this trend appears likely to continue. we created our Client & Partner Group. we expect a consolidation of manager relationships. and other large pools of capital are thus increasing their alter­ native allocations both to account for the current environment and to make up for lost returns. With the recent creation of KKR Equity Strategies. sovereign entities.38. facilitating true partnership and alignment between investor and manager. we have added the capability of public equity market investing. To drive our ability to help our investors. we are also committing balance sheet capital to all of our new strategies. Initially this strategy was intended to diversify exposure.2 billion for the year. As of December 31. This was driven by increased transaction activity that benefited from stronger markets and our team continuing to gain traction across our global activities. We want to continue to be more valuable to all of our partners — to our investors and to the companies and management teams with whom we have relationships.Historically. But on the equity side. We have also found that investors’ allo­ cations were spread among too many managers. traditional asset 2010 INCREASE IN BOOK VALUE PER UNIT 38% classes failed to achieve the returns needed to match their growth in liabilities. Principal Activities — our balance sheet — saw appreciation in the year commen­ surate with the performance of our overall private equity portfolio. Our distribution policy dictates that we distribute our fee and realized carry earnings quarterly. As a result of fee related earnings growth as well as the ramp­up in fund realizations. Our Capital Markets business continues to scale. Our biggest focus. but the result was the burden of monitoring an exorbitant number of funds and a lack of relationship depth. long­duration. We believe secular trends will provide tailwinds as KKR continues to expand. we’ll assess adding investment strategies and businesses that can help us better leverage the core competencies of our firm and bring greater depth to our investment insights. Many pension funds. will be on building the new business lines we have already launched. and illiquid Private Markets capital to put behind our ideas. an increase of 38% from the end of 2009.

education and quality of life. as well as other stakeholders. As co­founders and co­CEOs. we established our Global Public Affairs team three years ago to formalize our approach to managing these issues throughout the invest­ ment process. Responsible investment is not just the right thing to do. which is structured to encourage teamwork: there is one P&L at KKR. our portfolio companies’ employees and their bottom lines. which have brought with them changing public expectations. This cultivation of talent and leadership skills will sustain KKR into the future. because we feel that alignment with unitholders outside the firm is as important as internal alignment. In addition. Each and every employee owns KKR units. KKR 2010 ANNUAL REPORT 23 . but because we believe that thoughtful management of these issues is critical to value creation. and the opera­ tions of our portfolio companies affect and are affected by the communities in which they do business around the world. profit­ able solutions for all of our partners. Since 2008. And we’ve held back over 30 million units to compensate rising stars as they grow at the firm. Together with our investment performance. natural resource scarcity. finding opportunities in these changes and partnering with key stakeholders on important corporate sustainability issues. Ensuring that our people are incentivized toward alignment with one another. of the firm we’re building together. By promoting teamwork throughout the firm in such a tangible way. These executives receive only their salary and a portion of the 40% KKR carry pool from the public company. including globalization. urbanization. over $4 billion was raised for new strategies and approximately 35% came from investors who had never before invested with KKR. entrepreneurial culture thrives. the 55 or so most senior executives at KKR have not received a cash bonus at the public company. We have grown this group from five to nearly 40 people in the last three years in order to be best positioned for the trends we’re seeing. preparing us and our portfolio companies for regulatory changes. The ultimate aligner of interests is equity ownership. we each personally hold only 13% of the company. These units are already included in the total unit count. and with our unitholders is critical to our success. Ignoring such trends could increase our risks as investors. the environment and society in general. with 30% of its units held by the public and 70% held by KKR and KKR Capstone employees. information technology and demographic changes. we’ve been exceedingly attentive to our compensation system at KKR. the companies in which we invest employ hundreds of thousands of people. We simply cannot under­ score the importance of this enough. Their cash “bonus” comes in the form of distributions on their units. regulatory demands and market forces. Sustainable Value People and Alignment Supporting the growth of KKR has required hiring new team members as well as strengthening our firm’s management processes. These challenges can result from mega trends. we believe we are better able to translate KKR’s intellectual capital into actionable. Because all employees share in success together. We have already begun to see results: of the more than $5 billion we raised in 2010. This approach is also consistent with the Institutional Limited Partner Association principles that we have endorsed. sourced from the same earnings that fund your distributions as a unitholder. we are committed to integrating the consideration of ESG issues into the way we make our investments. Aligning our employees with one another is a central element of our compensation framework. we have augmented and institution­ alized development of our people at every stage of their careers. The combination with KPE in 2009 resulted in KKR trading publicly. they are encouraged to help one another across business lines and around the globe. KKR makes investment decisions that can have an enormous impact: millions of individuals depend upon strong returns from our investments for their retirements. To ensure that training and teambuilding are aligned with financial incentives. KKR invests in a wide variety of companies around the world that increasingly face diverse challenges to their long­ term sustainability. it is also essential for smart investing. We believe that we have an obligation to these stakeholders and to ourselves to invest in a responsible way—to address the environmental. so they can be allocated without dilution. while understanding regulatory and public expec­ tations and thoughtfully managing ESG issues can help us protect and grow value. Recognizing this opportunity. We win when and in the same way that you win. our Client & Partner Group’s deep relationships will position us well in the current environment. We consider ESG issues not only because it makes us good citizens. which is the result of an intentional effort to make everyone more meaningful owners As a global investor with a long­term horizon. As a start. social and governance (ESG) issues surrounding our investments. with our investment partners. In order to ensure that our high­performance. Our approach focuses on creating shared value through initiatives that benefit our limited partners and investors.sourcing capital from new limited partners across all of our strategies. this team has developed a comprehensive program dedicated to engaging with stakeholders and analyzing ESG issues in current and prospective investments.

We are at the beginning of a journey. enabling our portfolio companies to focus on the relent­ less pursuit of mutually agreed­upon objectives. we have completed our first­ever responsible investor report. We must continue to execute our goals as we maintain performance leadership in existing busi­ nesses and build attractive track records in new areas. we have the ability to share best practices in a way that impacts multiple companies. because of the breadth of our private equity portfolio. which is available on KKR’s website. We expect that the same focus and access to resources that has made many portfolio companies more productive and efficient will also help make them better global citizens. We are not flawless and we may make choices that do not satisfy everyone. complex organizations around the world. HENRY R. Co-Chairman and Co-CEO GEORGE R. Co-Chairman and Co-CEO 24 KKR 2010 ANNUAL REPORT . While we are committed to considering ESG issues in our investment processes. the hurdles before us are formidable. some of them controversial. KRAVIS Co-Founder. For these reasons. We look forward to your feedback on all of our efforts. industries and geographies. Because we invest in diverse companies in multiple industries around the world. but we also understand that considering ESG issues in the private equity investment process is essential to creating sustainable value. the outcome of the process will tend to be different from year to year and investment to investment. but we are committed to engaging constructively with stakeholders and thought leaders in order to make informed decisions that are consistent with global protocols and standards. Addi­ tional details about our performance and goals for the future can be found in the online version of this report. and we and our portfolio companies are regularly faced with making trade­offs. We thank you sincerely for your partnership and look forward to growing together. excerpts of which are included in this annual report. the process through which we address and continuously improve on these issues is critical to ensuring ongoing value creation. We invest in large. the challenges are not insignificant. However. In addition.We believe that one of the key strengths of the private equity governance model is that the alignment of interests between investors and company management teams is for the long term rather than from quarter to quarter. ROBERTS Co-Founder. Though the direction of our firm has never been clearer.

FINANCIAL OVERVIEW KKR’s unit price appreciated by 72% during 2010. compared to 15% for the S&P 500 % 80 60 40 KKR S&P 500 20 00 2010: Q1 Q2 Q3 Q4 -20 KKR 2010 ANNUAL REPORT 25 .

2 13.5 $44. PUBLIC PENSION 20% FINANCIAL INSTITUTION/ INSURANCE 04 05 06 07 08 09 10 26 KKR 2010 ANNUAL REPORT .7 31.8 AUM BY INVESTOR TYPE 3% CORPORATE PENSION $52.9 $23.Cross-asset class capabilities built on a solid foundation of organic AUM growth and strong relationships DOLLARS IN BILLIONS $61.8 36.S.8 14.8 37% U. 19.1 31.4 3.8 46.4 25% SOVEREIGN WEALTH FUNDS/ OTHER GOVERNMENT ENTITIES $47.0 5.9 13.2 38.1 0.7 1% ENDOWMENT FOUNDATION 8% FUND OF FUNDS $15.0 14.1 $37.4 6% FAMILY OFFICE/HNW PUBLIC MARKETS AUM PRIVATE MARKETS AUM Assets under management (AUM) are presented pro forma for the combination with KPE and therefore exclude the net asset value (NAV) of KPE and its former commitments to KKR’s investment funds.2 10.

Significant earnings power derived from an increasingly diversified business 25% FEE RELATED EARNINGS 57% 18% 37% ECONOMIC NET INCOME 60% 3% PRIVATE MARKETS PUBLIC MARKETS CAPITAL MARKETS & PRINCIPAL ACTIVITIES KKR 2010 ANNUAL REPORT 27 .

2% 9.3 2008 29% 28 KKR 2010 ANNUAL REPORT .Driving Growth… Private Markets: Aggregate Private Equity Portfolio Company 2010 Performance REVENUE +7% to $204b EBITDA +15% to $38b 19.2% SECURED CREDIT MODEL INCEPTION 9/2004 HIGH-YIELD CARVE-OUT INCEPTION 9/2004 BANK LOANS & HIGH YIELD INCEPTION 7/2008 OPPORTUNISTIC CREDIT INCEPTION 5/2008 Building Businesses… Capital Markets: Fee Related Earnings Performance DOLLARS IN MILLIONS $79.9% Driving Returns… Public Markets: Liquid Credit Strategy Inception-to-Date Annualized Returns Benchmark Gross 11.1% 5. 7.1% 8.4% 11.0% References to gross returns do not take into consideration the payment of applicable fees and expenses. Consequently.7 2009 55% $5. See our Annual Report on Form 10­K for important information regarding each benchmark.2% 12. net returns would be lower.1 2010 75% MARGIN $18.

23 JUN 10 0.63 $7.38 $7.56 KKR 2010 ANNUAL REPORT 29 .Building Value Book Value per Unit IN DOLLARS $8.53 SEP 10 0. 98) for a reconciliation of such measures to financial results prepared in accordance with GAAP. 0. See Appendix I (p.38 ACCRUED CARRY/ ADJUSTED UNIT 0.08 38% Y-O-Y GROWTH BOOK VALUE/ ADJUSTED UNIT Adjusted units represent the fully diluted unit count using the if­converted method. Adjusted units are not presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).37 $6.77 DEC 10 DEC 09 MAR 10 0.93 $6.

infrastructure. 30 KKR 2010 ANNUAL REPORT .BUSINESS OVERVIEW Over the course of 35 years. we have consistently been a leader in the private equity industry. In recent years. capital markets. KKR has established itself as a leading global investment firm. and natural resources. These newer efforts build on our core competencies and industry expertise. having completed more than 185 private equity investments with a total transaction value in excess of $435 billion. allowing us to leverage the intellectual capital and synergies in our businesses to capitalize on a broader range of the opportunities we source. but by building complementary businesses in areas such as fixed income. Private Markets KKR Public Markets Capital Markets and Principal Activities Throughout our history. we have grown our firm not only by expanding our geographical presence.

compared to the 11.6% gross IRR achieved by the S&P 500 Index over the same period. structuring new investment products and providing capital markets services. as well as our senior advisors. Principal Activities Principal Activities refers to other principal activities at our firm.8%. 2010. structured finance vehicles and separately managed accounts that invest capital in liquid credit strategies. this segment had $14. Together. This strategy seeks to generate returns through the production of the underlying natural resources while providing investors with exposure to com­ modity prices. 2010. despite the cyclical and sometimes challenging environments in which we have operated.9 billion of assets managed in structured finance vehicles and $5. Our investment approach leverages our capital base. and less liquid credit products such as mezzanine debt and special situations investments. global network and industry knowledge. We believe that the global infrastructure market provides an opportunity for the firm’s combination of private investment. we are registered or authorized to carry out certain broker­dealer activities in various countries in North America. Our capital markets services include arranging debt and equity financing for transactions. Europe and Asia. to different market conditions to capitalize on investment opportunities that may arise at every level of the capital structure and across market cycles. including below investment grade corporate debt. such as oil and natural gas properties. KKR Asset Management LLC manages specialty finance company KKR Financial Holdings LLC (NYSE: KFN). To allow us to carry out these activities. 2010. 2010. increase our participation in our existing port­ folio of businesses and further align our interests with those of our investors and other stakeholders. we had received $250 million of commitments to this strategy. These funds. which include investments in our private equity funds as well as co­investments in certain portfolio companies of those funds. our investment funds with at least 36 months of investment activity generated a cumulative gross IRR of 25. sourcing advantage. Additionally. placing and underwriting securities offerings. We invest in industry­leading franchises which attract world­class management teams.Private Markets Private Equity We are a world leader in private equity.4 billion of capital commitments through December 31. whose majority­ owned subsidiaries finance and invest in financial assets. many of whom are former chief executive officers and leaders of the busi­ ness community. vehicles and accounts are managed by KKR Asset Management LLC. such as leveraged loans and high yield bonds. a number of investment funds. these investments provide us with a significant source of capital to further grow and expand our business.8 billion of AUM. It also leverages our sizeable team of operating consultants who work exclu­ sively with our portfolio companies. comprised of $1. $7.4 billion of assets managed in KFN. Infrastructure We manage investments in infrastructure assets in order to capitalize on the growing demand for global infrastructure investment. and stakeholder engagement skills.5 billion of assets managed in other types of investment vehicles and separately managed accounts. we manage a specialty finance company. Capital Markets and Principal Activities Capital Markets Our capital markets business supports our firm. having raised 16 funds with approximately $60. This strategy seeks to achieve returns through the acquisition and operational improvement of assets important to the functioning of the economy and also to provide current income to investors. our portfolio companies and our clients by providing tailored capital markets advice and developing and implementing both traditional and nontraditional capital solutions for investments and companies seeking financing. operational improvement. As of December 31. Natural Resources We manage direct investments in natural resources assets. We believe that the market experience and skills of professionals in our capital markets business and the investment expertise of professionals in our Private Markets and Public Markets segments will allow us to continue to grow and diversify this asset base over time. experienced investment professionals and the ability to adapt our investment strategies KKR 2010 ANNUAL REPORT 31 . Public Markets Through our Public Markets segment. marketable equity securities and private equity. From our inception in 1976 through December 31. As of December 31. KFN has and may make additional investments in other asset classes including natural resources and real estate. We intend to continue to grow this business by leveraging our global investment platform.

their employees and the communities in which they operate. we will continue to focus our attention on integrating ESG considerations in our diligence efforts. “ We are active private equity investors who partner with our portfolio company management teams to achieve growth and improve productivity. Building stronger. in 2009 we became signato­ ries of the globally recognized voluntary framework of the United Nations­backed Principles for Responsible Investment and helped lead the devel­ opment of the Private Equity Growth Capital Council’s Guidelines on Responsible Investment. more productive companies is to partner with our port­ folio companies on key environmental. However.ENVIRONMENTAL. resources and attention needed to grow the company and provides a unique opportunity for us to partner with our portfolio companies to enhance their management of ESG issues. transparency. In 2010. throughout our private equity investment process. Each potential private equity investment undergoes significant review by our industry teams as well as by industry and issue experts and a com­ mittee of our most senior executives. We have made important progress on our commit­ ments in 2010. or concerns with the environmental impact of a company’s key product. We believe that part of ensuring that we help build better. In 2011. such as environmental and social impacts of business practices or stakeholder expectations. through measures that reduce costs. the portfolio companies in which we invest. anti­corruption and other issues Communicated our com­ mitment to responsible investment to our portfolio companies and invest­ ment partners Expanded the Green Portfolio Program. Selected 2010 Highlights Educated KKR investment professionals on our commitment to responsible private equity investment and their role in implementation Trained private equity investment and operational professionals on key ESG issues for consideration Increased the number of professionals focused on ESG management and stakeholder engagement Grew our network of exter­ nal partners and expert advisors on environment. In some cases we may decide that an ESG issue poses too great a risk for an investment. SOCIAL AND GOVERNANCE OVERVIEW “ Responsible investment is critical to building better companies and creating long-term value for us and all of our partners. to 16 portfolio companies globally and identified $160 million of costs and 345. three areas of progress are partic­ ularly noteworthy: environmental performance.000 metric tons of CO2 avoided at eight portfolio companies Integrating ESG in the Investment Process In recent years. This longer time horizon often allows our portfolio companies to invest the time. because these concerns are often intertwined with other issues that may make the business less attractive for investment. due to historically high levels of corruption in a country where the target company operates. responsible sourcing. depending on our investment thesis and market conditions. for example. Considering ESG Issues in the Pre-Investment Phase We conduct a thorough diligence exercise before we make any private equity investment. Relevant Partnering with the Portfolio on ESG Issues During Stewardship From initial investment to the point of realizing value. for example. better companies creates value for our investment partners. companies are usually part of our private equity portfolio for an average of five to seven years. 32 KKR 2010 ANNUAL REPORT . social and governance (ESG) issues. ESG considerations are part of this due diligence for our private equity investments. with particular focus on the due diligence and steward­ ship phases. we have taken steps to formally integrate and track ESG considerations. a decision not to invest is rarely exclusively due to ESG issues. Because we believe that considering these issues is critical to our long­term private equity investment success. We increasingly see that there can also be potential for creating value through a focus on ESG issues. employee engagement and responsible sourcing. including by providing for private equity invest­ ment professionals and by implementing a diligence team that assesses every potential investment specifically for ESG risks or opportunities. through our partnership with Environmental Defense Fund. improve risk manage­ ment and enhance competitiveness.

before we make new private equity investments. In 2010. to provide resources to portfolio companies on supply chain sustainability Organized training and best practice summits for portfolio company human resource officers. By doing so.com for more information Responsible Sourcing In today’s global economy. In addition. we can better ensure that our approach is sound and informed by a broad range of insights and experiences. we carefully assess the relationship between workers and management. We participate in thoughtful constructive dialogue with the many individuals.2 million reducing paper use by fewer tons of waste. we will continue to develop opportunities to partner with company management teams on employee engagement. with Business for Social Responsibility. stronger companies creates jobs and opportunities for workers and economic growth for the communities in which those com­ panies operate. eight Green Portfolio Program companies avoided an estimated $160 million in costs by collectively: avoiding 345.A Greener Portfolio In 2008. Therefore. We encourage and support our portfolio companies on maintaining constructive dialogue throughout our investment period. Suppliers’ failure to achieve these expectations can result in unacceptable human impacts and operational risks. One critical component of achieving sustainable growth is effective. we strive to work with management to identify opportunities to improve employee engagement and productivity where possible. chief purchasing officers and others that included ESG issues Created “ESG Round Tables” to engage with and learn from our limited partners and portfolio com­ panies on critical ESG issues Created our inaugural sus­ tainability report and integrated key portions in our annual review Engaging Employees Building better. We see an opportunity to expand our efforts on employee engagement and to share best practices across the portfolio. and 8. with a particular focus on issues and shared solutions related to health and wellness. We are very pleased that in 2010. Transparency and Engagement Launched the Responsible Sourcing Initiative.kkr. Recognizing that we have a unique oppor­ tunity to partner with our portfolio companies on this issue. a leading nonprofit organization that works with a network of more than 250 global organizations to develop sustainable business strategies and solutions and has particular expertise in facilitating supply chain sustainability programs. These companies have already produced significant results on many fronts. general counsels. our private equity portfolio grew and many of our portfolio companies added new jobs. The companies in which we are invested today employ hundreds of thousands of people around the world. including. notwithstanding a very volatile and challenging environment. organized labor and work councils. in 2011. which today helps drive innovation and business improvements at 16 companies globally. investors. we have completed our first­ ever sustainability report. collaborative rela­ tionships between company management and employees. KKR and the Environmental Defense Fund launched the Green Portfolio Program. which is excerpted here. Therefore. it can be increasingly challenging for companies to ensure that their — and their customers’ — expectations for sustain­ ability performance are met by their suppliers in distant geographies.500 tons Visit http://green. To enhance this effort. in 2010. we launched our Responsible Sourcing Initiative to work with our portfolio companies to develop effective tools to address this shared challenge. organiza­ tions and community groups affecting and affected by our business decisions. KKR 2010 ANNUAL REPORT 33 . we partnered with Business for Social Responsibility. where relevant. We look forward to your feedback on this inaugural effort. As part of this.000 producing metric tons of greenhouse gas emissions 1.

Our founders established the firm in 1976 based on these beliefs. evaluate and reward people. Values 34 KKR 2010 ANNUAL REPORT .VALUES The bedrock of KKR’s culture is a unique spirit of partnership and a shared sense of ownership across all of our businesses. The same core values are ingrained in the organization today. they are also fundamental to how we recruit. Not only are they well understood throughout the firm. as well as their own unique partnership and lifelong friendship.

We are self­starters with a “can­do” approach and a willingness to take prudent risks. We deliver on our commitments — to our stake­ holders. no matter the issue or where the opportunity resides. We strive for diversity. inactions and decisions. results­oriented people and invest heavily in their development. We set high standards — each of us as individuals and the firm as whole — and consistently try to exceed them. As a Relationship-Driven firm. We work hard to understand and align the interests of all stakeholders. These deeply rooted. and never resting on our laurels. while one can be ruined in just a few minutes. every person at KKR is an owner of our firm and shares in our success. and we treat others as we would like to be treated — with fairness. and also drive a culture committed to exceptional performance and results for our investors and other stakeholders. both individually and as a firm. we are deeply committed to building and sustaining long­term partnerships — internally and externally — grounded in trust and transparency. we are self­ critical — acknowledging our mistakes and trying always to learn from them. our partners and one another. and perspectives make us a stronger and more effective organization. People do business with people they like and trust. highly capable. We continually look for ways to help one another. We subscribe to the ethos that we can achieve much more collectively than any of us could individually. core values make KKR a very special place to work. We pride ourselves on our one­firm approach. compassion and respect. In our pursuit of Excellence. Success KKR 2010 ANNUAL REPORT 35 . Our reputations — as individuals and as a firm — are paramount. We attract self­motivated.Teamwork is at the heart of how we operate. directly linking individual performance with the firm’s success. We work passionately to retain the entrepreneurial spirit that created our firm and to fight against politics and bureaucracy. As a learning organization. recognizing that people with different backgrounds. we aspire to be the best at what we do and lead by example. In keeping with this approach. creating new ideas and new approaches. We also have the fortitude to say “no. We also embrace the implied responsibilities of our one­firm approach: the obligation to speak up and say what we think and to respect and listen to those who do the same. We believe that “arrogance kills” and has no place at KKR. We readily accept Accountability for our actions. working proactively and collaboratively across businesses and geographies to achieve the best possible results. We constantly strive to be Innovative — questioning accepted wisdom. Our focus on impact and results creates a vibrant and meritocratic environment. Our word is our bond — we say what we mean and we do what we say we will do. experi­ ences.” even at the eleventh hour. We know it takes years to build a strong partnership. We conduct ourselves with Integrity in everything we do.

RUSSO Independent Director THOMAS M. ROBERTS Co-Chairman and Co-Chief Executive Officer DIETER RAMPL Co-Chairman and Co-Chief Executive Officer TODD A. GRUNDFEST GEORGE R. KRAVIS Co-Chairman and Co-Chief Executive Officer JOSEPH A. SORKIN Chief Financial Officer WILLIAM J. SCULLY Independent Director General Counsel Independent Director 36 KKR 2010 ANNUAL REPORT . ROBERTS Co-Chairman and Co-Chief Executive Officer Independent Director PATRICIA F. SCHOEWE Chief Administrative Officer DAVID J. FISHER GEORGE R. JANETSCHEK Independent Director ROBERT W. KRAVIS Executive Officers HENRY R.KKR LEADERSHIP Board of Directors HENRY R.

Consolidated Financial Review 38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 64 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 65 CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 70 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS KKR 2010 ANNUAL REPORT 37 .

We intend to continue to grow this business 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 every level of the capital structure and across market cycles. managed accounts. specialty finance company and portfolio companies. In addition. L. The historical consolidated and combined financial data discussed below reflects the historical results and financial position of KKR for the year ended December 31. As a global investment firm. Throughout our history. a number of investment funds.1 billion as of December 31. innovation in the products that we offer investors. we are a leading global investment firm with $61. vehicles. including a patient and disciplined investment process. from $15.. we have increased our focus on servicing our existing investors and have invested meaningfully in developing relationships with new investors. transaction and incentive fees for providing investment management. an SEC registered investment adviser. and the related notes included elsewhere in this report. These investment funds and co­investment vehicles are managed by Kohlberg Kravis Roberts & Co. The following discussion and analysis should be read in conjunction with the consolidated and combined financial statements of KKR & Co. our entry into new lines of business. Public Markets Our business offers a broad range of investment management services to our investors and provides capital markets services to our firm.. 2004 to $61. L. 2010. infrastructure and natural resources. either through controlling ownership of a company or strategic minority positions. BUSI N ESS SE G M E N TS Private Markets OVE RVIE W Led by Henry Kravis and George Roberts. In recent years. innovation and investment excellence.P. To allow us to carry out these activities. We earn additional investment income from investing our own capital alongside that of our investors and from the carried interest we receive from our funds and certain of our other investment vehicles. Our growth has been driven by value that we have created through our operationally focused investment approach. 2010 and a 34­year history of leadership. monitoring and other services to our funds. and to capitalize on a broader range of the opportunities we source. representing a compounded annual growth rate of 26.0 billion in AUM as of December 31. vehicles and accounts are managed by KKR Asset Management LLC (which we refer to as “KAM”). 2011. the expertise of operating consultants and senior advisors and a worldwide network of business relationships that provide a significant source of investment opportunities. this discussion and analysis contains forward looking statements and involves numerous risks and uncertainties. specialized knowledge during due diligence and substantial resources for creating and realizing value for stakeholders. When our founders started our firm in 1976. 2010. Through our Public Markets segment. we earn management. such as fixed income. we have grown our firm by expanding our geographical presence and building businesses in new areas. and a focus on attracting world class talent. such as leveraged loans and high yield bonds. providing us with a pre­eminent global platform for sourcing transactions.P. including those described under “Cautionary Note Regarding Forward Looking Statements” in this report and “Risk Factors” in our Annual Report on Form 10­K and our other reports filed with the SEC. These funds. Our capital markets services include arranging debt and equity financing for transactions. For current information. 2011. and it has not been updated. an increased focus on providing tailored solutions to our clients and the integration of capital markets distribution activities. monitoring. Actual results may differ materially from those contained in any forward looking statements. structured finance vehicles and separately managed accounts that invest capital in liquid credit strategies. Our investment teams have deep industry knowledge and are supported by a substantial and diversified capital base. raising capital and carrying out capital markets activities. We conduct our business through 14 offices on four continents. together with its consolidated subsidiaries. the expansion of our existing businesses. the alignment of our interests with those of our investors. We also manage investments in infrastructure and in natural resources. and less liquid credit products such as mezzanine debt and special situations investments. portfolio companies and other stakeholders. capital markets. Our new efforts build on our core principles and industry expertise. having completed more than 185 private equity investments with a total transaction value in excess of $435 billion. we manage a specialty finance company. we manage and sponsor a group of private equity funds and co­investment vehicles that invest capital for long­term appreciation. following a patient and disciplined investment approach and driving growth and value creation in the assets we manage. we have consistently been a leader in the private equity industry. structuring new investment products and providing capital markets services. placing and underwriting securities offerings. A carried interest entitles the sponsor of a fund to a specified percentage of investment gains that are generated on third­party capital that is invested. Additionally. 2010. 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. 38 KKR 2010 ANNUAL REPORT . please refer to our other reports filed with the SEC subsequent to March 7. The following discussion and analysis is presented only with respect to the year ended December 31. our portfolio companies and our clients by providing tailored capital markets advice and developing and implementing both traditional and non­traditional capital solutions for investments and companies seeking financing. Capital Markets and Principal Activities Our Capital Markets and Principal Activities segment combines the assets we acquired in the Combination Transaction with our global capital markets business. Europe and Asia. We seek to consistently generate attractive investment returns by employing world­class people. our portfolio companies and our clients. an integrated global investment platform.0 billion as of December 31. and we generate transaction­specific income from capital markets transactions. they established the principles that guide our business approach today. Through our Private Markets segment.MANAGEMENT’S DISCUSSION AND ANALYSIS Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is an excerpt from our Annual Report on Form 10­K filed with the Securities and Exchange Commission (“SEC”) on March 7. a registered investment adviser. We have grown our AUM significantly. we are registered or authorized to carry out certain broker­ dealer activities in various countries in North America. allowing us to leverage the intellectual capital and synergies in our businesses. Our capital markets business supports our firm.1%.

1% for the full year.P.3% for the fourth quarter and full year 2010. high yield bonds and mezzanine debt. our Capital Markets and Principal Activities segment generates fees through a variety of activities in connection with the issuance and placement of equity and debt securities and credit facilities. Against a stronger.P. as equity prices significantly impact the valuation of our portfolio companies and. For our private equity investments that are publicly listed and thus have readily observable market prices. The below investment grade credit markets also performed well. The Combination Transaction involved the contribution of all of KPE’s assets and liabilities to the KKR Group Partnerships in exchange for a 30% interest in the KKR Group Partnerships.P. conditions in global credit markets have a direct impact on both the performance of these investments as well as the ability to make additional investments on favorable terms in the future. 2010. based on a group consisting of KKR & Co. and TDC (OMX: TDC). Global equity markets carried positive momentum from the third quarter of 2010 through the end of the year.1% and 15. KKR Guernsey contributed its 30% interest held through Group Holdings to KKR & Co. Finally. equity prices rallied as robust corporate earnings and improving investor sentiment outweighed concerns over lingering weak economic indicators such as unemployment and housing prices. As a result.” Our financial information for periods prior to the Transactions is.” Immediately following the Transactions.2% over the same periods. L I ST I N G On July 15. BUSINESS E N V I RO N ME N T As a global investment firm. therefore.1% for the fourth quarter and full year 2010. On October 1. We refer to the acquisition of the assets and liabilities of KKR Guernsey as the “Combination Transaction. impacts our ability to realize investment gains.S. KKR completed the Reorganization Transactions. but were under common control of senior KKR principals (“Senior Principals”). 2010. KKR’s business was conducted through multiple entities for which there was no single holding entity. this may negatively impact the operating performance of those portfolio companies and. completed the Combination Transaction to combine the investment management business of KKR with the assets and liabilities of KPE. in connection with such acquisition. To the extent that conditions in the credit markets render such financing difficult to obtain or more expensive. yet still mixed economic backdrop. the “Predecessor Owners”).V. as well as subsequent equity offerings by companies already public. and the BofA Merrill Lynch High Yield Master II Index increasing 3. 2009. R EO RG A N I Z AT I O N A N D CO M BI N AT I O N TRANSACTIO NS Prior to October 1. Conditions in global credit markets also have a substantial effect on our financial condition and results of operations. In addition. We refer to the Reorganization Transaction and Combination Transaction together as the “Transactions. and KKR Private Equity Investors. KKR & Co.P. which include investments in our private equity funds and co­investments in certain portfolio companies of such funds. we are affected by financial and economic conditions in the United States. KKR & Co. L. KPE changed its name to KKR & Co.” to our reorganization into a holding company structure as the “Reorganization Transactions” and to the Combination Transaction and the Reorganization Transactions collectively as the “Transactions. China Modern Dairy Holdings Ltd. L. (Nasdaq: NXPI). based on a group of certain combined and consolidated entities under common control of our senior principals and under the common ownership of our principals and certain other individuals who have been involved in our business. U . In addition.P. respectively. L. Upon completion of the Combination Transaction. we completed IPOs of three portfolio companies: NXP Semiconductors N. 2009. pursuant to which KKR’s business was reorganized under two partnerships. conditions in commodity markets may impact the performance of our portfolio companies in a variety of ways. Global equity markets were similarly strong. KKR 2010 ANNUAL REPORT 39 .2% and 10. (HKG: 1117).P. respectively. We rely on the ability of our funds to obtain committed debt financing on favorable terms in order to complete new private equity transactions. L. KKR Management Holdings L. provide us with a significant source of capital to further grow and expand our business. Asia and elsewhere in the world. therefore. the investment income that we recognize. with the size of fees generally correlated to overall transaction sizes. the conditions in global equity and credit markets impacts both the frequency and size of fees generated by this segment. increase our participation in our existing portfolio of businesses and further align our interests with those of our investors and other stakeholders. including through direct or indirect impact on the cost of the inputs used in their operations as well as the pricing and profitability of the products or services that they sell. during economic downturns or periods of slow economic growth. in exchange for NYSE­listed common units of KKR & Co.P. we completed the acquisition of all of the assets and liabilities of KKR Guernsey and. these markets have an indirect impact on valuation as we typically utilize a market multiples valuation approach as one of the methodologies to ascertain fair value. for accounting purposes. KKR Guernsey held a 30% economic interest in the KKR Group Partnerships through KKR Group Holdings L. and distributed those common units to holders of KKR Guernsey units (referred to hereafter as the “In­Kind Distribution”). our portfolio companies regularly require access to the global credit markets in order to obtain financing for their operations and to refinance or extend the maturities of their outstanding indebtedness. Global equity markets have a substantial effect on our financial condition and results of operations.P.P. In connection with the NYSE listing. the inability to refinance or extend the maturities of portfolio company debt (and thereby extend our investment (1) On October 1. and in which Senior Principals and KKR’s other principals and individuals held ownership interests (collectively. The S&P 500 gained 10. (“KKR Guernsey”) and was traded publicly on Euronext Amsterdam under the symbol “KKR” until the NYSE listing on July 15. L. In order to facilitate the Combination Transaction. with the S&P/LSTA Leveraged Loan index increasing 3. holding period) can be significant to our ability to realize investment gains from these portfolio companies when economic conditions improve. completed a series of transactions pursuant to which the business of KKR was reorganized into a holding company structure.8% in the fourth quarter and finished 2010 up 15. Similarly. Because the assets of KKR Guernsey consisted solely of its interests in Group Holdings. or IPOs. the receptivity of equity markets to initial public offerings. (“Group Holdings”) and our principals retained a 70% economic interest in the KKR Group Partnerships through KKR Holdings L. with the MSCI World Index up 9. 2009.P. and its consolidated subsidiaries.P. including leveraged loans. and our financial information for periods subsequent to the Transactions is. In addition. (“KPE”).1% and 12. Our Public Markets segment manages a number of funds and other accounts that invest capital in a variety of credit products.. As a result.” The reorganization involved a contribution of certain equity interests in KKR’s businesses that were held by KKR’s Predecessor Owners to the KKR Group Partnerships in exchange for 100% of the interests in the KKR Group Partnerships. and KKR Fund Holdings L. For other private equity investments. for accounting purposes. Europe. We believe that the market experience and skills of professionals in our capital markets business and the investment expertise of professionals in our Private Markets and Public Markets segments will allow us to continue to grow and diversify this asset base over time. (“KKR Holdings”). which are collectively referred to as the “KKR Group Partnerships. During 2010. our investment returns on our funds. the In­Kind Distribution resulted in the dissolution of KKR Guernsey and the delisting of its units from Euronext Amsterdam. L. global equity markets have a direct impact on valuation. (Guernsey) L. became listed on the New York Stock Exchange (“NYSE”).MANAGEMENT’S DISCUSSION AND ANALYSIS The assets that we acquired in the Combination Transaction(1).

and as of December 31. KKR PEI Investments. provide an additional means for allowing us to incentivize. expenses and investment income attributable to noncontrolling interests are recorded are presented as noncontrolling interests in consolidated entities on the statements of financial condition and net income attributable to noncontrolling interests in consolidated entities on the statements of operations. the noncontrolling interests attributable to the ownership of KPE’s investment partnership. bonuses. which include vested and unvested interests in the KKR Group Partnerships. Our employees are also eligible to receive discretionary cash bonuses based on performance. and funded by. our employee compensation and benefits expense has consisted of base salaries and bonuses paid to employees who were not our Senior Principals. because these interests were contributed to KKR in the Transactions. The majority of our consolidated funds consist of those funds in which we hold a general partner or managing member interest that gives us substantive controlling rights over such funds.MANAGEMENT’S DISCUSSION AND ANALYSIS As of July 15. because those fees are eliminated in consolidation. our principals and other employees received equity and equity based awards in KKR Holdings.P. the percentage ownership in the KKR Group Partnerships may continue to change as KKR Holdings and/or KKR’s principals exchange KKR Group Partnership Units for KKR & Co. L. The single line items in which the assets. the general partners of certain unconsolidated co­investment vehicles and the general partners of our private equity and fixed income funds and their respective consolidated funds. Historically.85% through KKR Holdings. While cash bonuses paid to most employees are funded by us and result in customary employee compensation and benefits charges. Payments made to our Senior Principals included partner distributions that were paid to our Senior Principals and accounted for as capital distributions rather than employee compensation and benefits expense. liabilities. (ii) management and incentive fees from providing investment management services to unconsolidated funds. 40 KKR 2010 ANNUAL REPORT . fees. BAS IS OF F INA NCIAL PR ES E N TAT I O N The consolidated and combined financial statements include the accounts of our management and capital markets companies. liabilities. a substantial number of our funds are consolidated notwithstanding the fact that we hold only a minority economic interest in those funds. Expenses Employee Compensation and Benefits Expense In accordance with accounting principles generally accepted in the United States of America (“GAAP”). Prior to October 1. Following the completion of the Transactions. Accordingly. we continue to consolidate KPE’s investment partnership and its economic interests are no longer reflected as noncontrolling interests as of the date of the Transactions. fees. Subsequent to the Transactions.P. by KPE were included in our financial statements. When a fund is consolidated. While the consolidation of a consolidated fund does not have an effect on the amounts of net income attributable to KKR or KKR’s partners’ capital that KKR reports. liabilities.P. KKR & Co. motivate and retain qualified professionals that will help us continue to grow our business over the long­term. In connection with and subsequent to the Transactions.. L. 2010. KKR Holdings has also funded all of the equity and equity based awards that have been granted to our employees to the date of the filing of our Annual Report on Form 10­K. structured finance vehicles. cash bonuses that are paid to certain of our most senior personnel are funded by KKR Holdings with distributions that it receives on its KKR Group Partnership Units. L. both indirectly controlled the KKR Group Partnerships and indirectly held KKR Group Partnership units representing at that time a 30% economic interest in KKR’s business. The majority of the economic interests in the consolidated fund. KKR Holdings and our principals exchanged a portion of their interests in the KKR Group Partnerships for common units. From time to time. equity based compensation and profit sharing plans as described below. Employee compensation and benefits expense includes salaries. two separately managed accounts and one specialty finance company. and separately managed accounts. because those management fees are earned from. L. However. Any distributions received by KKR Holdings in excess of amounts that principals are otherwise entitled to through their vested interests in KKR Holdings are reflected in compensation expense in the statement of operations.P. where applicable. our overall profitability and other matters. KKR & Co. we reflect the assets. all of our Senior Principals and other personnel receive a base salary that is paid by us and accounted for as employee compensation and benefits expense. 2009. 2010. our private markets segment included eight consolidated investment funds and ten unconsolidated co­investment vehicles. This is due to the fact that the assets. are reflected as noncontrolling interests. Fees reported in our consolidated and combined financial statements do not include the management fees that we earn from consolidated funds. a specialty finance company. The awards were granted in connection with the Transactions and were issued in exchange for interests that our Predecessor Owners contributed to our holding companies as part of the Transactions as well as to promote broad ownership of our firm among our personnel and further align their interests with those of our investors. expenses. 2009. third­ party investors who hold noncontrolling interests in the consolidated funds. With respect to our consolidated funds. we generally have operational discretion and control over the funds and investors do not hold any substantive rights that would enable them to impact the funds’ ongoing governance and operating activities. which are held by third party investors. we did not record any employee compensation and benefits charges for payments made to our Senior Principals for periods prior to the completion of the Transactions.15% of the KKR Group Partnership units and our principals owned 68. Accordingly. A substantial portion of monitoring and transaction fees earned in connection with managing portfolio companies are shared with fund investors. it does not affect the ultimate amount of net income attributable to KKR or KKR’s partners’ capital. 2010. These noncontrolling interests were removed from the financial statements on October 1. net income attributable to KKR is increased by the amount of the management fees that are eliminated in consolidation. Subsequent to the NYSE listing. while the consolidation of funds impacts the amount of fees that are recognized in our financial statements. the consolidation does significantly impact the financial statement presentation. and (iii) fees from capital markets activities. KKR holds 100% of the economic and controlling interests in KPE’s investment partnership. Our public markets segment included five consolidated investment funds and six unconsolidated vehicles comprised of three investment funds. These fees are based on the contractual terms of the governing agreements. K E Y F I N A N C I A L M E A SU R ES Fees Fees consist primarily of (i) monitoring and transaction fees from providing advisory and other services to our portfolio companies. fees. expenses and investment income of the consolidated funds are reflected on a gross basis while the allocable share of those amounts that are attributable to noncontrolling interests are reflected as single line items. Therefore. investment income and cash flows of the consolidated fund on a gross basis. common units. The remaining 70% of the KKR Group Partnership units were held by KKR’s principals through KKR Holdings. We believe that grants to our principals and other employees. owned 31. As of December 31.

the KKR Group Partnerships and certain of their subsidiaries have continued to operate in the United States as partnerships for U. previously recognized unrealized gains and losses are reversed and an offsetting realized gain or loss is recognized in the current period. travel and related expenses. Because these amounts are funded by KKR Holdings and not by us. communi­ cations and information services. income taxes.MANAGEMENT’S DISCUSSION AND ANALYSIS While we do not bear the economic costs associated with the equity and equity based grants that KKR Holdings has made to our personnel or the cash bonuses that it pays to any of our principals with distributions received on its KKR Group Partnership Units. Accordingly. we capitalize debt financing costs incurred in connection with new debt arrangements. see “— Critical Accounting Policies — Fair Value of Investments. income was not subject to U.S. As and when investment income is recognized with respect to this carried interest. we hold our interest in one of the KKR Group Partnerships through KKR Management Holdings Corp. General. Interest Expense Interest expense is incurred from credit facilities entered into by KKR. interests in KKR Holdings were granted to our operating consultants in connection with and subsequent to the Transactions. we are permitted to allocate to our principals.. our private equity investments is significantly impacted by the global equity markets. which. adjusted for the lack of distribution participation and estimated forfeitures of awards not expected to vest. accountants. state and local corporate income taxes at the entity level and the related tax provision attributable to KKR’s share of this income is reflected in the financial statements. we are required to recognize employee compensation and benefits expense with respect to a significant portion of these items. we operated as a partnership for U. federal income tax purposes. we are required to recognize general. federal and state income taxes. Accordingly. In addition to these interest costs. While we do not bear the economic costs associated with the equity and equity based grants that KKR Holdings has made to our operating consultants. The majority of our net gains (losses) from investment KKR 2010 ANNUAL REPORT 41 . Subsequent to the Transactions. and debt outstanding at our consolidated funds entered into with the objective of enhancing returns. advisors and consultants. as appropriate. adminis­ trative and other expense in the statements of operations. Additionally. Fund Expenses Interest income consists primarily of interest that is received on our cash balances. General. We recognize non­cash charges relating to equity and equity based grants that are funded by KKR Holdings based on the grant­date fair value of the award.S. other professionals and selected other individuals a portion of the carried interest that we earn from our current and future funds that provide for carried interest payments.S. A substantial portion of fund expenses are borne by fund investors. these expenses represent non­cash charges for us and do not impact our distributable earnings. Senior Notes issued by KKR. Upon the disposition of an investment. As a result. Accordingly. Since our investments are carried at fair value. administrative and other expense recognized on unvested units is calculated based on the fair value of an interest in KKR Holdings (determined using the closing price of KKR’s common units) on each reporting date and subsequently adjusted for the actual fair value of the award at each vesting date. including KKR Management Holdings Corp. The vesting of these interests gives rise to periodic general.” Dividend Income Dividend income consists primarily of distributions that private equity funds receive from portfolio companies in which they invest.S. General. we record a corre­ sponding amount of employee compensation and benefits expense. Interest Income General. jurisdictions. and certain other wholly owned subsidiaries of the KKR Group Partnerships are treated as corporations for U. Income taxes shown on the statements of operations prior to the Transactions are attributable to the New York City unincorporated business tax and other income taxes on certain entities located in non­U. Because these amounts are funded by KKR Holdings and not by us. (ii) distributions of excess cash generated from operations from portfolio companies and (iii) other significant refinancings undertaken by portfolio companies. Following the Transactions. federal income tax purposes and as corporate entities in non­U. Historically. administrative and other expense is not borne by fund investors and is not offset by credits attributable to fund investors’ noncontrolling interests in consolidated funds. federal income tax purposes. continue to be subject to New York City unincorporated business taxes. the tax liability related to income earned by us represented obligations of our principals and has not been reflected in the historical financial statements. these entities. the calculation of the compensation expense considers estimated forfeitures of awards not expected to vest. and the KKR Group Partnerships. such wholly owned subsidiaries of KKR. deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets Fund expenses consist primarily of costs incurred in connection with pursuing potential investments that do not result in completed trans­ actions (such as travel expenses. fluctuations between periods could be significant due to changes to the inputs to our valuation process over time. we use the liability method to account for income taxes in accordance with GAAP. In addition. the measured value of these interests will not be finalized until each vesting date. For a further discussion of our fair value measurements and fair value of investments. Income Taxes Prior to the completion of the Transactions.S. as well as the ability to recognize gains from. However. Under this method. these expenses represent non­ cash charges for us and do not impact our distributable earnings. Investment Income (Loss) Net Gains (Losses) from Investment Activities Net gains (losses) from investment activities consist of realized gains and losses and unrealized gains and losses arising from our investment activities. administrative and other expense consists primarily of professional fees paid to legal advisors. in turn. Such costs are amortized into interest expense using either the interest method or the straight­line method. Administrative and Other Expense activities are related to our private equity investments. federal income tax purposes and mainly as a corporate entity in non­U.S. which is treated as a corporation for U.S. depreciation and amortization charges and other general and operating expenses. 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. Awards that do not require the satisfaction of future service or performance criteria (vested awards) are expensed immediately. principal assets and fixed income instruments in which consolidated funds invest. which are not direct obligations of the general partners of our private equity funds or management companies. insurance costs. jurisdictions. We expect to record additional non­cash charges in future periods as and when interests in KKR Holdings vest and when new equity is granted. in some cases. affects the net gains (losses) from investment activities recognized in any given period. are subject to federal.. The fair value of. or non­U.S. Private equity funds recognize dividend income primarily in connection with (i) dispositions of operations by portfolio companies. jurisdictions. administrative and other expense with respect to a significant portion of these items.S. professional fees and research costs) and other costs associated with administering our private equity funds. Awards that require the satisfaction of future service or performance criteria are expensed over the relevant service period. In addition.

KKR’s definition of AUM is not based on any definition of AUM that is set forth in the agreements governing the investment funds. assess performance and allocate resources. and now own 100% of this business. (ii) the fair value of investments in KKR’s co­investment vehicles. Historically. On May 30.e. KKR’s definition of FPAUM is not based on any definition of FPAUM that is set forth in the agreements governing the investment funds. 2008. You should note that KKR’s calculation of FPAUM may differ from the calculations of other investment managers and. • noncontrolling interests that allocate to a former principal and such person’s designees an aggregate of 1% of the carried interest received by general partners of our funds and 1% of our other profits until a future date. primarily in its private equity funds. Our management makes operating decisions. noncontrolling interests consisted primarily of: • noncontrolling interests that third party investors held in consolidated funds. This guidance is based on a management approach. assets with respect to which it receives only carried interest). • noncontrolling interests attributable to the ownership of KPE’s investment partnership by KPE’s unitholders. because these assets are now owned by us and are no longer managed on behalf of a third­party investor. The components of FRE on a segment basis differ from the equivalent GAAP amounts on a combined basis as a result of: (i) the inclusion of management fees earned from consolidated funds that were eliminated in consolidation. the NAV of KPE is excluded from our calculation of FPAUM. noncontrolling interests include: • noncontrolling interests that third party investors hold in consolidated funds. 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 we manage. Segment Operating and Performance Measures Fee Related Earnings Fee related earnings (“FRE”) is comprised of segment operating revenues.. as a result. the amount of net income (loss) attributable to noncontrolling interests has been substantial and has resulted in significant charges and credits in the statements of operations. 2008. We believe such adjustments are meaningful because management makes operating decisions and assesses the performance of our business based on financial and operating metrics and data that are presented without the consolidation of any funds. In addition. • a noncontrolling interest that allocates to a third party approximately of approximately 2% of the equity in our capital markets business. its measurements of FPAUM may not be comparable to similar measures presented by other investment managers.MANAGEMENT’S DISCUSSION AND ANALYSIS and liabilities and their respective tax basis using currently enacted tax rates. AUM represents the assets from which KKR is entitled to receive fees or carried interest and general partner capital. vehicles or accounts that it manages. which requires segment presentation based on internal organization and the internal financial reporting used by management to make operating decisions. All inter segment transactions are eliminated in the segment presentation. • noncontrolling interests that allocate to certain of our former principals and their designees a portion of the carried interest received by the general partners of the private equity funds with respect to private equity investments made during such former principals’ tenure with us. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties. FPAUM is the sum of all of the individual fee bases that are used to calculate KKR’s fees and differs from AUM in the following respects: (i) assets from which KKR does not receive a fee are excluded (i. We review our tax positions quarterly and adjust our tax balances as new information becomes available. the NAV of KPE and its commitments to our investment funds are excluded from our calculation of AUM. and • noncontrolling interests that allocated 35% of the net income (loss) generated by the manager of our Public Markets segment to certain of its principals on an annual basis through May 30. 2010 to KKR Holdings representing 70% of the equity in the KKR Group Partnerships at that time. its measurements of AUM may not be comparable to similar measures presented by other investment managers. we acquired all outstanding noncontrolling interests in KPE’s investment partnership. Segment Reporting. These differences are described below. vehicles or accounts that it manages. Assets Under Management (“AUM”) Net Income (Loss) Attributable to Noncontrolling Interests Net income (loss) attributable to noncontrolling interests represents the ownership interests that third parties hold in entities that are consolidated in the financial statements. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. For periods subsequent to the completion of the Transactions. FPAUM reported prior to the Transactions reflected the NAV of KPE. and • noncontrolling interests representing the KKR Group Partnership Units that KKR Holdings holds in the KKR Group Partnerships. The AUM reported prior to the date of consummation of the Transactions reflected the NAV of KPE and its commitments to our investment funds. the manager of our Public Markets segment. and (iv) the value of outstanding structured finance vehicles. For periods prior to the Transactions. there are other components of our reportable segment results that differ from the equivalent GAAP results on a consolidated basis. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. You should note that KKR’s calculation of AUM may differ from the calculations of other investment managers and. Fee Paying Assets Under Management (“FPAUM”) FPAUM represents only those assets under management from which KKR receives fees. less segment operating expenses. (iii) the net asset value of certain of KKR’s fixed income products. The allocable share of income and expense attributable to those interests is accounted for as net income (loss) attributable to noncontrolling interests. • a noncontrolling interest that allocated to a third party an aggregate of approximately 2% of the equity in our capital markets business. Subsequent to the Transactions. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Segment Results We present the results of our reportable business segments in accordance with FASB Accounting Standards Codification Section 280. which interests were allocated on October 1. which is a wholly owned subsidiary of KKR. we acquired all outstanding noncontrolling interests of KKR Asset Management LLC. • noncontrolling interests that allocate to certain of our current and former principals all of the capital invested by or on behalf of the general partners of the private equity funds before the completion of the Transactions and any returns thereon. 42 KKR 2010 ANNUAL REPORT . as a result. KKR calculates the amount of AUM as of any date as the sum of: (i) the fair value of the investments of KKR’s investment funds plus uncalled capital commitments from these funds. and (ii) certain assets. Subsequent to the Transactions. are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments. In connection with the Transactions.

204.090 1.761) — $ (1. You should read this discussion in conjunction with the consolidated and combined financial statements and related notes included elsewhere in this report. 2010. Economic net income (“ENI”) is a measure of profitability for KKR’s reportable segments and is comprised of: (i) FRE.013 264. Prior to October 1. At such time as the fund recognizes a carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof.099) 9.360 7.601 (125.178 $ 331.055.762. 2009 and 2008.072 38. Gross carried interest is reduced for carry pool allocations and refunds of management fees payable upon the recognition of carried interest. Investment Income (Loss) Certain of our investment funds require that we refund up to 20% of any cash management fees earned from limited partners in the event that the funds recognize a carried interest.P.369 1.673 59.441 129.831 75.250. as well as interest income and interest expense. ENI differs from net income on a U.544. 2010 2009 2008 Revenues Fees Expenses $ 435.MANAGEMENT’S DISCUSSION AND ANALYSIS (ii) the exclusion of expenses of consolidated funds.” The following tables set forth information regarding our results of operations for the years ended December 31. and (iii) the exclusion of income taxes. Uncalled Commitments Uncalled commitments represents unfunded capital commitments that KKR’s investment funds and carry paying co­investment vehicles have received from partners to contribute capital to fund future investments.239) (13.229 1.277 $ 333.181 149. (iv) the exclusion of charges relating to carry pool allocations. 2009 and 2008. allocations to our carry pool consisted only of allocations to our employee profit sharing program.998 6. L.685 (12.850. 7.344.048.108 7. Such amounts include: (i) capital invested by fund investors and co­investors with respect to which we are entitled to a carried interest and (ii) capital invested by us.016 899.455 39. Committed Dollars Invested Committed dollars invested is the aggregate amount of capital commitments that have been invested by our investment funds and carry­yielding co­investment vehicles during a given period. see “— Segment Analysis. Allocations to our carry pool represent approximately 40% of carried interest earned in funds and vehicles eligible to receive carry distributions to be allocated to our principals plus any allocation of carried interest to our other personnel as part of our profit sharing plan.117 (79.271 838. (iii) the exclusion of charges relating to the amortization of intangible assets. 2010.382 (116.944. GAAP basis as a result of: (i) the exclusion of the items referred to in FRE above. No carry pool allocations are recorded in funds and vehicles that are in either a clawback position or a net loss sharing position and therefore carry pool allocations may not always equal 40% of gross carried interest.776.386 1. ($ in thousands) Years Ended December 31.P.005 186.471) KKR 2010 ANNUAL REPORT 43 . not to exceed 20% of management fees earned. For a more detailed discussion of the factors that affected the results of operations of our three business segments in these periods.696) $ 849.505.103 418.396 55. carried interest is reduced. Carried interests entitle the general partner of our private equity funds to a greater allocable share of the fund’s earnings from investments relative to the capital contributed by the general partner and correspondingly reduces third party investors’ share of those earnings.471 6. Administrative and Other Fund Expenses Total Expenses Investment Income (Loss) Net Gains (Losses) from Investment Activities Dividend Income Interest Income Interest Expense Total Investment Income (Loss) Income (Loss) Before Taxes Income Taxes Net Income (loss) Less: Net Income (loss) Attributable to Noncontrolling Interests in Consolidated Entities Less: Net Income (Loss) Attributable to Noncontrolling Interests in KKR Holdings L. (vi) the exclusion of certain reimbursable expenses and (vii) the exclusion of certain non­recurring items.324 142. If these investment returns decrease or turn negative in subsequent periods.710 $ 235.179.808 6. recognized carried interests will be reduced and reflected as investment losses.755.663 7.865. Carried interests are earned on realized and unrealized gains (losses) on fund investments as well as dividends received by our funds.369 36.851.786 (13. (v) the exclusion of non­cash equity charges and other non­cash compensation charges borne by KKR Holdings. Amounts earned pursuant to carried interests are included in investment income to the extent that cumulative investment returns in a given fund are positive. which is reduced for carry pool allocations and management fee refunds. (ii) the exclusion of investment income relating to noncontrolling interests.720) 75. Other investment income (loss) is comprised of realized and unrealized gains (losses) and dividends on capital invested by the general partners of our funds and by us.824 (53.371 6.388 Employee Compensation and Benefits Occupancy and Related Charges General. 2009.638) 7. Economic Net Income Investment income is composed of net carried interest and other investment income (loss).147 67.195. plus (ii) segment investment income. CONSOLIDAT E D A N D CO MB I N E D RES ULTS O F OPE R AT I O N S The following is a discussion of our consolidated and combined results of operations for the years ended December 31.430 179.S.446) 6.753.182 30. Net Income (Loss) Attributable to KKR & Co. less (iii) certain economic interests in KKR’s segments held by third parties.889.119.293 226.561) (12.232) (11.852.692 311.

The decrease was primarily due to lower average outstanding borrowings resulting from the repayment of borrowings under our revolving credit agree­ ments.484.7 million. from the year ended December 31. 2009.4 million increase in gross transaction fees received from transaction fee­ generating investments.9%. 2010. Expenses The majority of our net gains (losses) from investment activities relate to our private equity portfolio.5 billion for the year ended December 31. partially offset by the issuance of senior notes during 2010.696. an increase of $1. 2009. Interest Income Interest income was $226. 2010.6 billion. an increase of $104.213 (2.7 million as a result of the hiring of additional personnel and the continued expansion of our businesses.7 million. For the year ended December 31. During the year ended December 31. 2010.090 $ 7.2 billion of dividends from two portfolio companies and an aggregate of $42. Expenses were $1.340 479. we received $1. 2010. These types of termination payments may occur in the future. these items resulted in charges recorded in employee compensation and benefits relating to principals and other personnel amounting to $1. 2010. Partially offsetting these increases was a decrease in monitoring fees of $55. Net Gains (Losses) from Investment Activities Dividend Income Dividend income was $1. During the year ended December 31. compared to interest income of $142. 2010.721 (482. or 6.4 million for the year ended December 31.1 million increase in reimbursable expenses. 2010.299) (473.6 million of comparatively smaller dividends from other investments. The increase in allocations to our carry pool was due to (i) a higher level of gross carried interest recognized in 2010 and (ii) the allocation of a portion of carried interest to our carry pool for the full year in 2010 versus only one quarter in 2009.3 million for the year ended December 31. or 3. In addition. from the year ended December 31. and charges recorded in general.523. 2010 2009 Realized Gains Unrealized Losses from Sales of Investments and Realization of Gains (a) Realized Losses Unrealized Gains from Sales of Investments and Realization of Losses (b) Unrealized Gains from Changes in Fair Value Unrealized Losses from Changes in Fair Value Net Gains (Losses) from Investment Activities — Private Equity Investments $ 2. 2009 Fees Fees were $435.750 $7. compared to interest expense of $79.1 million of comparatively smaller dividends from other investments.4%. primarily due to $72. 2009. 2010. The increase was primarily due to an increase in fees relating to underwriting. 2009.1 million.1 billion.474. 44 KKR 2010 ANNUAL REPORT .375.144. from the year ended December 31. income before taxes was $7.947 129. an increase of $0. Allocations to the carry pool were not made prior to the Transactions on October 1. (b) Amounts represent the reversal of previously recognized unrealized losses in connection with realization events where such losses become realized. Dollar General Corporation and Avago Technologies Limited and partially offset by a $16.505. 2010.2 million.1 billion compared to dividend income of $186. however.874 10. syndication.8 million associated with the closing of the Transactions in the prior period.005 Net income attributable to noncontrolling interests in consolidated entities was $6. Incentive fees from KFN increased $34. reflecting an increase in the number of transaction fee­generating investments during the period.3 billion. Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities 2010 2009 Private Equity Investments Other Net Gains (Losses) from Investment Activities Net Gains (Losses) from Investment Activities $ 7. 2009 relating to the termination of monitoring agreements in connection with the IPOs of two portfolio companies.8 million for the year ended December 31.269) 157. 2010. 2009.375. 2010. an increase of $0. they are infrequent in nature and are generally correlated with initial public offering activity in our private equity portfolio.402) $ 7.584 (2. The following is a summary of net gains (losses) from investment activities: ($ in thousands) Year Ended December 31. other employee compensation and benefits expense. or 31. a decrease of $26.3%. there was a $57. 2009. The increase primarily reflects an increase in the level of fixed income instruments in our fixed income vehicles and our private equity portfolio.511. an increase of $84.4 billion.1 million for the year ended December 31.0%. an increase of $1.876) $ 299.5 million. and other expense relating to operating consultants amounting to $143.4 million as a result of KFN’s financial performance exceeding certain required benchmarks for each of the four quarters during the year ended December 31. The following is a summary of the components of net gains (losses) from investment activities for Private Equity Investments which illustrates the significant variances from the prior period.6 million for the year ended December 31. we received $179.0 billion.3 billion for the year ended December 31. ($ in thousands) Year Ended December 31. Income (Loss) Before Taxes Net gains from investment activities were $7. other employees and operating consultants as well as increases in the allocations to our carry pool of $278.947 (a) Amounts represent the reversal of previously recognized unrealized gains in connection with realization events where such gains become realized. and transaction related expenses increased $10. In addition.010. or 47. KFN only earned an incentive fee in one quarter during the year ended December 31.038 (2.8 billion for the year ended December 31. 2010 compared to year ended December 31. or 14. Due to the factors described above.2 million of dividends from two portfolio companies and an aggregate of $7.617 9. 2009.878) (122. from the year ended December 31. The increase was primarily due to an increase in non­cash equity based charges of $261. 2009.511.4%.340 243.8 million associated with the issuance of interests in KKR Holdings to our principals.8 billion for the year ended December 31. See “— Segment Analysis — Private Markets Segment” for further information regarding significant gains and losses in our private equity portfolio. 2009. Interest Expense Interest expense was $53. 2009.2 million in fees received during the year ended December 31.7 million.9 billion for the year ended December 31.MANAGEMENT’S DISCUSSION AND ANALYSIS Year ended December 31.1 million for the year ended December 31. administrative. from the year ended December 31. The increase was primarily driven by the overall increase in the components of net gains (losses) from investment activities described above.036) $ 7. an increase of $0.1 million as a result of a higher level of unconsummated transactions during the period. Offsetting these increases was a decrease related to non­recurring charges of $34.755. increased $29. 2009.2 million driven by an increase in the number of capital markets transactions during the period.058 $7. comprised primarily of salaries and incentive compensation. and other capital markets services of $71.

excluding one time fees received from the termination of monitoring fee contracts. 2009 compared to year ended December 31.6 million primarily reflecting the opening of new offices subsequent to December 31. an increase of $12.2 billion during 2008.9 billion for the year ended December 31.2 million of dividends from two portfolio companies and an aggregate of $1. 2009. from the year ended December 31.696 9.4 million for the year ended December 31.2 million to $14. from the year ended December 31.9 million compared with 33 portfolio companies that were paying an average fee of $3. (ii) a decrease relating to the receipt in the prior period of a non­recurring $15.2 million reflecting the net impact of (i) an increase of $72. which resulted in a net unfavorable variance in realization activity from the prior period of $0. non­cash employee compensation and benefits relating to principals amounted to $644. The remainder of the net increase in expenses is the result of the net impact of the following: (i) a $34. (iii) a decrease in transaction related expenses attributable to unconsummated transactions during the period of $14. 2008. Offsetting the increase in unrealized gains (losses) was realization activity that represented a net loss for 2009 of $0.MANAGEMENT’S DISCUSSION AND ANALYSIS Net Income (Loss) Attributable to Noncontrolling Interests in KKR Holdings L.8 million non­recurring charge associated with the closing of the Transactions. in occupancy costs of $7. 2009.3 million for the year ended December 31. (iii) a $6. The following is a summary of the components of net gains (losses) from investment activities: ($ in thousands) Year Ended December 31.681.717) (345.446) 683.4 billion compared to net losses from investment activities of $12. Transaction fees are negotiated separately for each completed transaction based on the services that we provide and will also vary depending on the nature of the investment being made.3 billion compared with a net gain of $0.4 million for the year ended December 31. In addition.5 billion in 2008. we had 30 portfolio companies that were paying an average fee of $2.9%. During the year ended December 31. (b) Amounts represent the reversal of previously recognized unrealized losses in connection with realization events where such losses become realized. (ii) an $11. Monitoring fees increased $39. 2008.7 million for the year ended December 31.005 $ 101. This change in net unrealized gains and losses resulted in a net favorable variance in unrealized investment activity from the prior period of $21. and (iii) a $5. or 9.1 billion compared to four transaction­fee generating transactions with a combined transaction value of $4.766) (12. (ii) an increase (a) Amounts represent the reversal of previously recognized unrealized gains in connection with realization events where such gains become realized. and non­cash charges recorded in general and administrative expenses relating to operating consultants amounted to $85. Dividend Income Dividend income was $186. 2008. The increase was primarily due to non­cash charges associated with the issuance of interests in KKR Holdings to our principals and operating consultants. 2008 as well as an increase in existing office space. 2009. we received $74. 2009.3 million to $91.1 million for the year ended December 31. an increase of $1. For the year ended December 31.0 billion compared to loss attributable to noncontrolling interests in KKR Holdings of $0. During the year ended December 31. an increase of $110. Net income attributable to noncontrolling interests in KKR Holdings was $0.310 $ 446.720) Expenses were $1.0 million advisory fee from one of our portfolio companies in connection with equity raised by that company. or KFN. we received $179.831.3 million for the year ended December 31. The majority of our net gains (losses) from investment activities are related to our private equity investments. During the year ended December 31. from $28. Our dividends are generally earned in connection with sales of significant operations undertaken by our portfolio companies resulting in available cash that is distributed to our private equity funds. 2009. or 40. 2008 Fees Fees were $331. respectively reflecting an increase in transaction­fee generating private equity investments during the period.8 million increase in incentive compensation in connection with higher bonuses in 2009 reflecting improved overall financial performance of our management companies when compared to the prior period. The increase was primarily due to a $50.789) $ 7. 2008. No such fee was earned in the prior period.0 million during the year ended December 31. an increase of $20. as a result of KFN’s financial performance exceeding certain required benchmarks. In addition.4 million due to (i) a $26. 2009.6 billion.1 million. 2009. Interest Income Interest income was $142. an increase of $96. 2009 2008 Realized Gains Unrealized Losses from Sales of Investments and Realization of Gains (a) Realized Losses Unrealized Gains from Sales of Investments and Realization of Losses (b) Unrealized Gains from Changes in Fair Value Unrealized Losses from Changes in Fair Value Net Gains (Losses) from Investment Activities $ 393. we completed twelve transaction­fee generating transactions with a combined transaction value of $5.P.2 million relating to fees received for the termination of monitoring fee contracts in connection with public equity offerings of two of our portfolio companies. Net Gains (Losses) from Investment Activities Year ended December 31. The increase primarily reflects an increase of $38.1 million of comparatively smaller dividends from other investments. During the year ended December 31. 2008. as compared to expenses of $418.5 million earned from KKR Financial Holdings LLC (NYSE: KFN). 2008 and 2009.8 billion resulting primarily from increases in the market value of our investment portfolio during 2009 compared to net unrealized losses of $13. 2008.3 million.0 million.9 million compared to dividend income of $75.5 million increase in transaction fees. 2008. 2008 and 2009.344 (2.5 billion for the year ended December 31. 2009. from $41. an increase of $777.0 million. The increase is primarily due to the change in net gains (losses) from investment activities described above. 2009.1 million at one of our fixed income vehicles resulting from a KKR 2010 ANNUAL REPORT 45 .839) (707. 2009.635.195.505. other employee compensation and benefits expenses increased $44.5 million.477) (193.0 million reflecting expense reductions across the majority of our businesses. during 2009 fees were increased by a third quarter incentive fee of $4.2 million for the years ended December 31. respectively.944.2 million of dividends from two portfolio companies and an aggregate of $7. and (iv) decreases in other operating expenses of $25. Expenses Net gains from investment activities were $7.711 (15.9 million increase in profit sharing costs in connection with an increase in the value of our private equity portfolio.2 million of comparatively smaller dividends from other investments. 2010.2 million in fees received from certain portfolio companies due primarily to a decline in the number of portfolio companies paying a fee and to a lesser extent lower average fees received.3 billion for 2008.8 million for the years ended December 31.0 billion. The increase in net gains (losses) from investment activities from the prior period was primarily attributable to net unrealized gains of $7.7%.856 (498.7 million increase in salaries and other benefits reflecting the hiring of additional personnel in connection with the expansion of our business.1 billion for the year ended December 31.196.8 million net decrease in reimbursable expenses and (iv) a net decrease of $11.5 million.9 billion for the year ended December 31.402 2.

392 839 $ 784.9 billion compared to loss before taxes of $13.747 134.027 347.0 billion for the year ended December 31.673) 785.752 (1.521) $35.596 159.395 148.900 $ 38.048 135.872) (143. (ii) a $2.700 $ 4.900) 142.6 million for the year ended December 31. Interest Expense Income (Loss) Before Taxes Due to the factors described above. 2009 and 2008.555. You should read this discussion in conjunction with the information included under “— Basis of Financial Presentation — Segment Results” and the consolidated and combined financial statements and related notes included elsewhere in this report.193 (57. Offsetting this increase was (i) a decrease of $19. 2009 and 2008.121 497 $ 1.030 $ 396. 2008.158 240.394 — 396.202. 2008.387) 8. Average outstanding borrowings remained unchanged from the year ended December 31.728. however the weighted average interest rate was lower during the year ended December 31.6%.070 (453.244.900 1.9 billion for the year ended December 31.700 $ 3.484.553 $46. which interests were not contributed to the KKR Group Partnerships in connection with the Transactions.159. 2008.243 57.900 $36.930. 2010. 2009.9 billion for the year ended December 31. Private Markets Segment The following tables set forth information regarding the results of operations and certain key operating metrics for our Private Markets segment for the years ended December 31.389.528 874.624 $38.109 $ 415.720) 745.223.113.053) (1.971) (22.227 — 396.357 344.091 826. an increase of $19.9 million.042 557.561 36.563) 130.168.665 185.699 (73.801 34.0 billion compared to net loss attributable to noncontrolling interests in consolidated entities of $11. S EGME NT ANA LYSIS The following is a discussion of the results of our three reportable business segments for the years ended December 31.249 147.654 504.800 $ 14.000 (52.502 128.MANAGEMENT’S DISCUSSION AND ANALYSIS higher average level of debt investments during the period.700 $39.400 $ 2. 2010.521) — $ (1.896 156.197.932 96.611 (1.842.283 1. or 36.7 million decrease at our management companies and private equity funds resulting from lower average cash balances.114. 2010 2009 2008 Fees Management and Incentive Fees: Management Fees Incentive Fees Total Management and Incentive Fees Net Monitoring and Transaction Fees: Monitoring Fees Transaction Fees Total Fee Credits Net Transaction and Monitoring Fees Total Fees Expenses Employee Compensation and Benefits Occupancy and Related Charges Other Operating Expenses Total Expenses Fee Related Earnings Investment Income (Loss) Gross Carried interest Less: Allocation to KKR carry pool Less: Management fee refunds Net carried interest Other investment income (loss) Total Investment Income (Loss) Income (Loss) before Income (Loss) Attributable to Noncontrolling Interests Income (Loss) Attributable to Noncontrolling Interests Economic Net Income Assets under management (period end) Fee paying assets under management (period end) Committed Dollars Invested Uncalled Commitments (period end) $ 396.620) (230. and (iii) a $3.1 billion for the year ended December 31.227 86. The increase was primarily driven by the overall changes in the components of net gains (losses) from investment activities described above.283.700 $ 12. 2009 a decrease of $45.700 $ 13.186.446) 604.369 526. Net income attributable to noncontrolling interests in consolidated entities was $6.625.698) 107. ($ in thousands) Years Ended December 31.156 29.207 158.107.142 46 KKR 2010 ANNUAL REPORT . from the year ended December 31. income before taxes was $6.9 million at the KPE Investment Partnership due to a decrease in interest income­yielding investments. Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities Interest expense was $79. 2009 as compared to the prior year period.313 182.256 23.207 — 415.100 (1.394 97.096 (12.233.0 million decrease as a result of the exclusion of the general partners of the 1996 Fund in the fourth quarter of 2009.610 317.152 (1.204 27.643) 603. 2009. 2008. an increase of $18.233.

A.028 Expenses were $344. the 1996 Fund was no longer included in our results and therefore no unrealized gains (losses) of carried interest attributable to the 1996 Fund are included for the year ended December 31. approximately 33% of net unrealized gains from changes in value were attributable to increased share prices of various publicly held investments.301 826.0%.3 million primarily reflecting an increase in the number of transaction fee­generating investments during the period and (ii) a $21.8 million and (ii) other investment income (loss) of $(1. 2010.3 million for the year ended December 31. (healthcare sector).768 968 — $ 593. the most significant of which were Dollar General Corporation (NYSE: DG) and Legrand Holdings S.926 21. 2009 consists primarily of the write­off of our investment in Masonite International.4 million net decrease due primarily to a reduction in fee paying capital at our private equity funds in connection with realization activity offset by new fee paying capital raised.574 593.6%. 2010. 2010..098 70. or 24.872) (143. ($ in thousands) Year Ended December 31. 2009. investment income (loss) included (i) net carried interest of $604.7 million primarily reflecting an increase in transaction related expenses of $10. and (iv) the exclusion of investment gains and losses on capital invested by or on behalf of the general partners of our private equity funds.S.r.3 million decrease in credits earned by limited partners under fee sharing arrangements in our private equity funds due primarily to the decline in gross transaction and monitoring fees. The decrease was primarily driven by certain adjustments related to the Combination Transaction that were applicable for the full year of 2010 versus only one quarter in 2009.183 — — 47.a. Dollar General Corporation and Avago Technologies Limited. 2009 relating to the termination of monitoring agreements in connection with the IPOs of two portfolio companies. or 8.502 Net realized gains (losses) for the year ended December 31. they are infrequent in nature and are generally correlated with initial public offering activity in our private equity portfolio.A. 2010 or the three months ended December 31.6 million for the year ended December 31. approximately 40% of unrealized gains were attributable to increased share prices of various publicly held investments. including (i) the exclusion of carried interest from the 1996 Fund. Fee related earnings in our Private Markets segment were $182. For the year ended December 31.762 22. 2010.752 $ $ (44. 2009. In addition. (ii) a decrease of $10. Investment Income Investment income was $603. 2010.0 million for the year ended December 31.9 million primarily relating to fee paying capital that was transferred from a fee paying private equity fund (European Fund III) to a non­fee paying private equity fund (E2 Investors) subsequent to September 30. Our private portfolio contributed the remainder of the unrealized gains. The following table presents net unrealized gains (losses) of carried interest by fund for the years ended December 31. Our private portfolio contributed the remainder of the net unrealized gains from changes in value. and (iv) an increase of $25.7 million. the most significant of which were HCA Inc. The increased valuations. For the year ended December 31.202. generally related to both improvements in market comparables and individual company performance. management fees decreased $19.2 million in fees received during the year ended December 31.446) 604.1 million attributable to unconsummated transactions during the period. For the year ended December 31. 2009. (healthcare sector). In addition. (iii) a $5. and Eastman Kodak Company.A.8 million. Avago Technologies Limited (NYSE: AVGO).971 $ 203. which was comprised primarily of losses from unfavorable changes in foreign exchange rates. Alliance Boots GmbH (healthcare sector) and U. The decrease was primarily due to a $71.525 1. 2010 2009 2006 Fund Asian Fund Millennium Fund European Fund Co­Investment Vehicles European Fund III E2 Investors 1996 Fund (a) Total (a) $216. (manufacturing sector) when the loss became realized.834 57.028 35. 2010.8 million reflecting the hiring of additional personnel and the continued expansion of our business.971 187. 2009 Fees ($ in thousands) Year Ended December 31. and Avago Technologies Limited. The net decrease in fees was partially offset by (i) an increase in gross transaction fees of $38. employee compensation and benefits expense increased $11. Net realized gains (losses) for the year ended December 31. and Alliance Boots GmbH (healthcare sector). generally related to both improvements in market comparables and individual company performance. however. a decrease of $57. in the aggregate. 2010 compared to year ended December 31.0 million resulting primarily from the net impact of the following: (i) a $28. 2009. or 31. (NYSE: ROC). (ENXTPA: LR). from the year ended December 31. KKR Debt Investors S. This decrease was primarily due to the absence in 2010 of $72. 2010 consists primarily of the sales of East Resources Inc.5%. (ENXTPA: LR). Sealy Corporation (NYSE: ZZ) and Rockwood Holdings. 2010 and 2009. offset by realized gains on initial public offerings of Avago Technologies Limited and Dollar General Corporation. Inc. from the year ended December 31. 2009. KKR 2010 ANNUAL REPORT 47 .091 40. and partial sales of Dollar General Corporation.2 million. These types of termination payments may occur in the future. 2009. 2009. Legrand Holdings S. a decrease of $30. a decrease of $270.422 380. Fee Related Earnings (a) The above table excludes any funds for which there were no unrealized gains (losses) of carried interest during either of the periods presented. (financial services sector). (ii) the exclusion of carried interest allocated to certain of our former principals. Foodservice (retail sector).193 (57. (iii) the allocation of a portion of carried interest to the carry pool. or 5. The following table presents the components of net carried interest for the years ended December 31. Expenses Net Realized Gains (Losses) Net Unrealized Gains (Losses) Dividends and Interest Gross carried interest Less: Allocation to KKR carry pool Less: Management fee refunds Net carried interest $ $ 420.5 million associated with a reduction in waived management fees during 2010. The increased valuations. an increase of $27.3 million for the year ended December 31. subsequent to the Transactions.1 million for the year ended December 31.3 million decrease in gross monitoring fees. 2010 2009 Fees were $526. from the year ended December 31. 2009.526 73. Inc.6) million. there was a significant unrealized gain due to the reversal of a previously recognized unrealized loss in connection with the write­off of our investment in Masonite International Inc. the most significant of which were HCA Inc.720) 745. In addition.136) 835. In addition.773 $ 835.594 170.2 million decrease in management fees as fees which were previously earned from KPE have been eliminated as a result of the Transactions on October 1.9 million.070 (453.971) (22. 2010 and 2009.MANAGEMENT’S DISCUSSION AND ANALYSIS Year ended December 31. the most significant of which were Legrand Holdings S. in the aggregate. compared to investment income of $874.054 123.1%. The decrease was due to the decline in fees and increase in expenses described above. The increase was primarily due to an increase in other operating expenses of $13.l.

800) 39. 2008 Fees AUM in our Private Markets segment was $46. and $0.0%. These unrealized gains were partially offset by significant unrealized losses related to Energy Future Holdings Corp. Economic Net Income (Loss) Fee Paying Assets Under Management The following table reflects the changes in our Private Markets FPAUM from December 31. we had 30 portfolio companies that were paying an average monitoring fee of $2.600 (650. 2010 FPAUM $36.0 billion of new capital raised. an increase of $7. a decrease of $329. Asian Fund and European Fund.N Ro­Ro (transportation sector). 2009. The net unrealized investment gains in our private equity funds were driven primarily by net unrealized gains of $3. (energy sector) and U. Millennium Fund. an increase of $120.200) (274. 2008.5 billion at December 31.1 billion for the year ended December 31.2 billion at December 31. 2009 to December 31. 2010 was attributable to changes in share prices of various publicly listed investments.A.4 million for the year ended December 31. an increase of $2. excluding one time fees received from the termination of monitoring fee contracts.8 billion of return of original cost. Year ended December 31.6 million reflecting an increase in transaction­fee generating private equity investments during the period (we completed twelve transaction­fee generating transactions with a combined transaction value of $5. 2009. Fees in our Private Markets segment were $557.2 million relating to fees received for the termination of monitoring fee contracts in connection with public equity offerings of two of our portfolio companies and a net $11. The amount of carried interest earned during the year ended December 31. $1. (media sector).1 million compared to economic net income of $1. compared with 33 portfolio companies that were paying an average fee of $3.2 million for the year ended December 31. The decrease in investment income described above was the main contributor to the period over period decline in economic net income. 2009. which was comprised of $3. of which the carry pool was allocated approximately 40% and the remaining portion was allocated to KKR and KKR Holdings based on their respective ownership percentages.900 3.5 billion). including $0.4 million increase in net transaction and monitoring fees.7 million from the year ended December 31.900 As of December 31.MANAGEMENT’S DISCUSSION AND ANALYSIS Dividend and interest income for the year ended December 31. 2010. 2009 FPAUM New Capital Raised Distributions Foreign Exchange Change in Value December 31. with the largest contributor being unrealized gains relating to HCA Inc. Dividend and interest income for the year ended December 31. (healthcare sector). or 10.A.6 million for the year ended December 31. European Fund II. 2010 our Private Markets segment had $12. $1.715. compared to $36.2 billion at December 31. The increase was primarily attributable to $8.8 billion in our 2006 Fund. Legrand Holdings S. Uncalled Commitments December 31. Management fee refunds amounted to $143. The increase in net transaction and monitoring fees was primarily the result of (i) an increase in gross transaction fees of $34. an increase of $53. 2010 AUM $38.2 billion.0 million during the year ended December 31. (ii) an increase in gross monitoring fees of $61. The increase was partially offset by distributions of $0.2 million due to the increase in transaction and monitoring fees. notably increases in Dollar General Corporation (NYSE: DG). which was taken public during the third quarter of 2010. 2008. (healthcare sector) and Visant Inc.9 billion for our China Growth Fund and $1. from the year ended December 31.7 billion decrease related to foreign exchange adjustments on foreign denominated commitments and invested capital. or 19.085. The increase was primarily attributable to new fee paying capital raised during 2010. 48 KKR 2010 ANNUAL REPORT .223. 2009 consists primarily of dividends earned from Dollar General Corporation and Legrand Holdings S. The increased valuations.500 (4. Transaction fees are negotiated separately for each completed transaction based on the services that we provide and will also vary depending on the nature of the investment being made.1 billion.8 million increase in management fees which was primarily the result of a full year of fees associated with the European III fund which began earning fees in the second quarter of 2008. 2010.7 billion.6 billion of remaining uncalled capital commitments that could be called for investment in new transactions. 2009 primarily reflecting the 2006 Fund becoming carry­earning in 2010. $0.4 billion from the year ended December 31.9 billion.9 million. 2010 consists primarily of dividends earned from HCA Inc. 2010 for those funds and vehicles eligible to receive carried interest amounted to $1. In addition there was an $18.8 billion at December 31. Assets Under Management FPAUM in our Private Markets segment was $38. 2009.3 billion of realized gains and $0. Partially offsetting these increases were distributions from our funds totaling $4. an increase of $1. 2009. 2009 to December 2010: ($ in thousands) December 31. Approximately 40% of the net change in value for the year ended December 31.971.0 million reflecting the net impact of an increase of $72. and (iii) an increase in credits earned by limited partners under fee sharing arrangements in our private equity funds of $61. or 4. During the year ended December 31.800) 8.700 Economic net income in our Private Markets segment was $784. 2009. in the aggregate. 2010: ($ in thousands) Committed dollars invested were $4.7 billion of net unrealized gains resulting from changes in the market values of our private equity portfolio companies.2 million decrease in fees received from certain portfolio companies due primarily to a decline in the number of portfolio companies paying a monitoring fee and a lower average fee received.2 million.4 billion. (ENXTPA: LR) and NXP Semiconductors NV (NASDAQ: NXPI).1 billion in 2009 compared to four transaction­fee generating transactions in 2008 with a combined transaction value of $4.1 billion for an infrastructure separately managed account.7 billion and a $0.6 billion for the year ended December 31.842.3 billion. 2009 AUM New Capital Raised Distributions Foreign Exchange Change in Value December 31. 2010. as well as $3.1 billion.800 $ 38. 2010. respectively. Committed Dollars Invested The following table reflects the changes in our Private Markets AUM from December 31. generally related to both improvements in market comparables and individual company performance.484.300) (658. compared to $38.6%.500 $46.400 2. 2009 compared to year ended December 31.186. Our private portfolio contributed the remainder of the change in value.7%.025. 2010. The increase was primarily due to a $34.4 billion.

Dividend income for the year ended December 31.l (financial services sector). 2009 consists primarily of dividends earned from Dollar General Corporation and Legrand Holdings S. net unrealized gains (losses) of carried interest attributable to the 1996 Fund are only included through September 30. or 8. KKR 2010 ANNUAL REPORT 49 .762 123.136) 835. 2008.834 57. On a consolidated basis. 2009.5 million.193 (57.2 million for the years ended December 31. 2009 2008 Millennium Fund 2006 Fund European Fund Co­Investment Vehicles 1996 Fund (a) Asian Fund European Fund II Total (a) $380.4 million (excluding the non­recurring charge described below) primarily as a result of a reduction in professional and other service provider fees due to our efforts to actively manage our expense base in a deteriorating economic environment. which includes net gains from investment activities of $106. (media sector). (NYSE: ROC).1 Media AG (media sector).088) — (50.156 29. 2008.159. The amount of carried interest earned during the fourth quarter of fiscal year 2009 for those funds and vehicles eligible to receive carried interest amounted to $92. Inc.6 million.028 $ (512. Investment Income (Loss) Investment income was $874. fee related earnings in our Private Markets segment were $240. Due primarily to the increase in fees described above. and Alliance Boots GmbH (healthcare sector). and (iv) an increase in employee compensation and benefits expense of $12. each of our business segments. The increased valuations.4 billion for the year ended December 31. 2009 consists primarily of the write­off of our investment in Masonite International.028 35.885) 3.2 million for the year ended December 31. (ENXTPA: LR). the most significant of which were Capmark Financial Group Inc. (ENXTPA: LR).773 22. KKR Debt Investors S. from the year ended December 31. 2008 and 2009. (NYSE: ROC) and Sealy Corporation (NYSE: ZZ). dividends of $23.709 (1. 2008 is primarily due to an increase in net unrealized gains from increases in the market value of capital invested by or on behalf of the general partners of our private equity funds. In addition.4 million. an increase of $2.3 million of which the carry pool was allocated 40% and the remaining portion was allocated to KKR Group Holdings and KKR Holdings based on their respective ownership percentages.422 — $ 835. Our Private Markets expenses exclude a $34. generally related to both improvements in market comparables and individual company performance. 2008.A.MANAGEMENT’S DISCUSSION AND ANALYSIS Expenses Expenses were $317. Sealy Corporation (NYSE: ZZ) and Rockwood Holdings. or 53. ($ in thousands) Year Ended December 31. Alliance Boots GmbH (healthcare sector). the 1996 Fund was no longer included in our results.6 million resulting from an increase in salaries reflecting the hiring of additional personnel in connection with the expansion of our business as well as an increase in incentive compensation in connection with higher bonuses in 2009 reflecting improved overall financial performance of our private markets management company when compared to the prior period.611 $ (1.0 million for the year ended December 31. a decrease of $30. For the years ended December 31. offset by realized gains in connection with the initial public offerings of Avago Technologies Limited and Dollar General Corporation.7 million and net interest expense of $1.3 billion compared to investment losses of $1.720) $ 745.A. these excluded funds were the European Fund III and KKR E2 Investors (Annex Fund). 2008 consists primarily of the partial sale of Rockwood Holdings.564) (305.9 million.8%.387) 8. 2009 and 2008. and is non­recurring in nature. and the sale of Demag Holdings S. (financial services sector). Our private portfolio contributed the remainder of the unrealized losses. PagesJaunes Groupe S.358) 14. in the aggregate.l. 2009.358) (a) The above table excludes any funds for which there were no unrealized gains (losses) of carried interest during either of the periods presented.971) (22.7%.. The decreased valuations. Fee Related Earnings The following table presents net unrealized gains (losses) of carried interest by fund for the years ended December 31.7 million.á r.616) $(1. Inc. For the year ended December 31. from the year ended December 31. generally related to deterioration in market comparables and to a certain extent individual company performance. Rockwood Holdings. Avago Technologies Limited (NYSE: AVGO).244 (145. For the year ended December 31. For the year ended December 31. 2008 consists primarily of dividends earned from Legrand Holdings S. (manufacturing sector) when the loss became realized. Inc. subsequent to the Transactions. ($ in thousands) Year Ended December 31. 2009 2008 Net Realized Gains (Losses) Net Unrealized Gains (Losses) Dividends and Interest Gross carried interest Less: Allocation to KKR carry pool Less: Management fee refunds Net carried interest $ (44. approximately 40% of unrealized gains were attributable to increased share prices of various publicly held investments.1 million reflecting the opening of new offices subsequent to December 31.301 826. Net realized gains (losses) for the year ended December 31.620) Net realized gains (losses) for the year ended December 31. the most significant of which were HCA Inc. in the aggregate. investment income (loss) was comprised of (i) net carried interest of $745.5 million and (ii) other investment income (loss) of $128. an increase of $83. Dividend income for the year ended December 31.279. and ProSieben SAT.6 million from the year ended December 31. there was a significant unrealized gain due to the reversal of a previously recognized unrealized loss in connection with the write­off of our investment in Masonite International Inc.A. 2008 as well as an increase in existing office space.2 million to $14.279. 2009.449) (268. 2009 and 2008. administrative and other expenses.054 203. 2009. 2009. approximately 40% of unrealized losses were attributable to decreased share prices of various publicly held investments.á r. from $28.197. Inc.502 $ 67.A. Management has excluded this charge from our segment financial information as such amount will be not be considered when assessing the performance of or allocating resources to.1 million for the year ended December 31. the most significant of which were Legrand Holdings S. 2009 and 2008. Our private portfolio contributed the remainder of the unrealized gains. The decrease was primarily due to the net impact of the following: (i) a decrease in transaction related expenses of $14. respectively.183 47. the most significant of which were Legrand Holdings S. (ii) decreases in operating expenses of $36.262 (1. 2008. (iii) an increase in occupancy costs of $7. this charge is included in general.0 million attributable to unconsummated transactions during the period. The following table presents the components of net carried interest for the years ended December 31. 2009. (healthcare sector). The increase in other investment income of $358.A. As such. In addition.8 million charge incurred in connection with the Transactions.

900 $38. 2009. 2009 AUM $35. 2008 FPAUM Exclusion of KPE (a) New Capital Raised European Fund III/E2 Investors Distributions Change in Value December 31. E2 Investors and separately managed accounts.514.3 billion at December 31. Millennium Fund. $1.283. (energy sector). or 33. with the largest contributors being unrealized gains relating to HCA Inc. European Fund II.1 billion for the year ended December 31.A. a $2. which went public in the third quarter of 2009. 2009. In addition. in the aggregate.8 billion comprised of $0. AUM in our Private Markets segment was $38. and Legrand Holdings S.600) (325.7 billion decrease.1 billion.5 billion reduction representing the exclusion of the NAV of KPE and its commitments to our investment funds. These decreases were partially offset by new capital raised of $0. compared to $35.7 billion.8 billion at December 31.700 (3.6 billion in our European III Fund and separately managed accounts and $0. with all other funds also recording net realized gains during the period. please see “Business” in our Annual Report on Form 10­K.244.198. In addition.600) 7.2 billion of net unrealized gains resulting from changes in the market values of our portfolio companies. 2009. 2008.3 billion compared to economic net loss of $1.MANAGEMENT’S DISCUSSION AND ANALYSIS Economic Net Income (Loss) Fee Paying Assets Under Management Economic net income in our Private Markets segment was $1. The increased investment income described above was the main contributor to the period over period increase in economic net income. Over 50% of the change in value for the year ended December 31. 2009: ($ in thousands) December 31.9%. Subsequent to the Transactions. or 6. For additional discussion of our private equity funds and other Private Markets investment vehicles. $0. the decrease was attributable to distributions of $0.400 (a) The FPAUM reported prior to the Transactions reflected the NAV of KPE. Subsequent to the Transactions. The increased valuations. FPAUM in our Private Markets segment was $36. 2008. $0.8 billion and $0.5 billion. as well as $0. generally related to both improvements in market comparables and individual company perfor­ mance. Our private portfolio contributed the remainder of the change in value.2 billion for the year ended December 31.5 billion at December 31. 2008. 2009. the NAV of KPE is excluded from our calculation of fee paying assets under management.1 billion for the year ended December 31.842.6 billion related to capital that was transferred from a fee paying private equity fund (European Fund III) to a non­fee paying private equity fund (E2 Investors). because these assets are now owned by us and no longer managed on behalf of a third party investor. an increase of $2. Committed Dollars Invested Committed dollars invested were $2.8 billion. This increase was partially offset by distributions from our funds totaling $0. 2009. the change in AUM included a $3. 2008 to December 31. The decrease was primarily attributable to a $3. from the year ended December 31.3 billion primarily representing the reduction of capital associated with realization activity and $0.158 $36.058) 703. the NAV of KPE and its commitments to our funds are excluded from our calculation of assets under management.7 billion.5%.900) 609. The decrease was due primarily to a decrease in both the size and transaction volume of private equity investments closed during 2009 as compared with 2008. European Fund and Asian Fund. compared to $39.800 (3. respectively. or 9.5 billion of realized gains and $0. our Private Markets segment had $13.2 billion reduction representing the exclusion of the NAV of KPE and its commitments to our investment funds. coupled with an overall improvement in global markets. Assets Under Management The following table reflects the changes in our Private Markets fee paying assets under management from December 31. 50 KKR 2010 ANNUAL REPORT .300 (808. which we took public in the fourth quarter of 2009.400) 683.7 billion of foreign exchange adjustments on foreign denominated committed and invested capital. The net unrealized investment gains were driven by net unrealized gains of $2.3 billion of return of original cost. 2008 to December 31.484. 2008 AUM Exclusion of KPE (a) New Capital Raised Distributions Change in Value December 31.000 (571.175. 2009 FPAUM $39. (a) The AUM reported prior to the Transactions reflected the NAV of KPE and its commitments to our funds.9%. (healthcare sector) and Alliance Boots GmbH (healthcare sector).900 December 31. notably Dollar General Corporation (NYSE: DG).2 billion at December 31.4 billion in our 2006 Fund.7 billion in new capital raised in our European III Fund. 2008. Uncalled Commitments As of December 31. an increase of $3. These unrealized gains were partially offset by a significant unrealized loss relating to Energy Future Holdings Corp. 2009: ($ in thousands) The following table reflects the changes in our Private Markets assets under management from December 31.7 billion of remaining uncalled capital commitments that could be called for investments in new transactions. a decrease of $1. 2009 was attributable to increased share prices of various publicly held investments. because these assets are now owned by us and are no longer managed on behalf of a third party investor. Avago Technologies Limited (NYSE: AVGO). The increase was primarily attributable to $7. (ENXTPA: LR).

2010.8 million reflecting the hiring of additional personnel and the continued growth of this segment.0 million of expenses by KFN and the Strategic Capital Funds.715 56. 2009. 2009.000 $ 4. This decrease in other operating expenses was partially offset by increased general and administrative expenses resulting from the expansion of our business. from $4.554 — — — (5. In 2009.824.6 million for the year ended December 31.8 million for the year ended December 31.167.576 — — — 10. The increase in incentive fee income is a result of KFN’s financial performance exceeding the required benchmark.300 $ 6.117 (12. ($ in thousands) Years Ended December 31. 2010 2009 2008 Fees Management and Incentive Fees: Management Fees Incentive Fees Total Management and Incentive Fees Net Transaction Fees: Transaction Fees Total Fee Credits Net Transaction Fees Total Fees Expenses Employee Compensation and Benefits Occupancy and Related Charges Other Operating Expenses Total Expenses Fee Related Earnings Investment Income (Loss) Gross Carried interest Less: Allocation to KKR carry pool Net carried interest Other investment income (Loss) Total Investment Income (Loss) Income (Loss) before Income (Loss) Attributable to Noncontrolling Interests Income (Loss) Attributable to Noncontrolling Interests Economic Net Income Assets under management (period end) Fee paying assets under management (period end) Committed Dollars Invested Uncalled Commitments (period end) $ 57. 2010.7 million for the year ended December 31.400 $ 697.3 million. The increase in fees is also attributable to increased fee paying assets under management associated with new capital raised (see “Fee Paying Assets Under Management” table below) and $6.7 million for the year ended December 31. KKR 2010 ANNUAL REPORT 51 .5 million for the year ended December 31. received only $1. versus only $1.260) $ 59. The increase was primarily due to an increase in employee compensation and benefits expense of $5.167.430 45.342 — — — 59.000 (2.3%.566 2.0 million for the year ended December 31.672 29.6 million which was primarily attributable to an $11.342 20.342 — 59.3 million of such fees in 2010. we elected to temporarily receive management fees from structured finance vehicles in lieu of being reimbursed $13. 2010. as noted above.800 5.8 million of net transaction fees earned during the year ended December 31.421 $ 36.260) (5.3 million in 2010. an increase of $46.957 5.138 $14.294 15 $ 5. or 2. 2010. 2010.483 18.327 43.MANAGEMENT’S DISCUSSION AND ANALYSIS Public Markets Segment The following tables set forth information regarding the results of operations and certain key operating metrics for our Public Markets segment for the years ended December 31. 2010.754 4.448. These increases in fees were partially offset by an $11.279 $13.842 $13.472 55.687 60.832 95.4 million from $10.263 6.375 13.059 38.000) 3.066 26.226 24.718 $ 50. The increase in fee related earnings is primarily due to the increase in fees described above.361.766 32. as a result.672 10.5 million.910 2.891 19.295. 2010 compared to year ended December 31.134 4. We waived $13.7 million for the year ended December 31.000 718 3. No transaction fees were earned during the year ending December 31.9%. from the year ended December 31.000 $ — $ — Year ended December 31.7 million decrease in waived expense reimbursements. Partially offsetting the increase in employee compensation and benefits was a decrease in other operating expenses of $4. Expenses in our Public Markets segment were $45. 2009.781 102. 2009. an increase of $1. or 85.675 537 $ 60. We ceased electing to receive management fees in lieu of the expense reimbursement in the first quarter of 2010 and.0 million of expense reimbursements during 2009 from KFN and the Strategic Capital Funds.400 $ — $ 816.336) 6.086 2.773. Fee Related Earnings Fee related earnings in our Public Markets segment were $57. 2009 and 2008.600 $ 1.0 million.600 $ 7. 2009 Fees Expenses Our Public Markets segment earned fees of $102.103 44.7 million decrease in management fees from structured finance vehicles. an increase of $47. 2009 to $38. The increase is primarily the result of an increase in incentive fee income from KFN of $34. from $44.687 10.226 — — — 55.

2010: ($ in thousands) December 31.7 billion for the year ended December 31. 2010 FPAUM $6.7 million for the year ended December 31. The increase was primarily driven by net carried interest from certain special situations separately managed accounts earned in the year ended December 31. however. Additionally. 2009. 2008. Expenses in our Public Markets segment were $44.281. The reduction in management fees from the Strategic Capital Funds was partially due to a lower average net asset value during the year ended December 31. 2009. Management fees were reduced for all investor classes within the Strategic Capital Funds in conjunction with the mandatory redemption and restructuring of the funds. Beginning in 2009 we elected to temporarily receive management fees from structured finance vehicles in lieu of being reimbursed $13. an increase of $9. the average equity value for the year ended December 31.3 million for the year ended December 31. 2010 AUM $ 13.5 million. there was a $10.700) — 723.700 $ 7. The increase in fee related earnings described above was the main contributors to the period over period increase in economic net income.3 million for the year ended December 31. 2010. Separately. as well as a $0. an increase of $1.000 (1.2 million decrease in fees received from KFN due primarily to a lower average equity value during the year ended December 31. or 66.4 billion. the incentive fee at KFN is calculated on a quarterly basis and is earned solely based on KFN’s financial performance in a given quarter.824. 2008 Fees The following table reflects the changes in our Public Markets AUM from December 31. an increase of $54.8 billion at December 31. thereby providing incremental cash flow. KFN’s equity value increased during the year ended December 31.5 million.100 (1. which otherwise would have been unavailable. or 24.281. The increase was driven by $2. which was effective December 1.8 billion at December 31. 2008.900 $14. 2009. the incentive fee can be earned in one quarter of a given year even if KFN experiences negative financial performance for other quarters during that same year. 2008. an increase of $17.3 billion of redemptions in our liquid credit separately managed accounts.300 1.0 million of expenses by KFN and the Strategic Capital Funds. or 6.0 billion of new capital raised across our various Public Markets strategies. 2009 which resulted in a reduction of fees of $7.600 Our Public Markets segment earned fees of $55. effective December 1.1 million for the year ended December 31. Uncalled Commitments Economic net income in our Public Markets segment was $60. The increase was primarily attributable to our waiving of $13. 2009 was lower than the average equity value for the year ended December 31.MANAGEMENT’S DISCUSSION AND ANALYSIS Investment Income (Loss) Committed Dollars Invested Our Public Markets segment had investment income of $3. from the year ended December 31.8 million from economic net income of $5. 2008.1 million. from $6. There were no committed dollars invested to any of our public markets investment vehicles for the year ended December 31.9%. to the investors in these entities. an increase of $1. 2009. 2010.361. from $13. 2009. Additionally. Expenses AUM in our Public Markets segment totaled $14.6%.0 million from investment losses of $5. 52 KKR 2010 ANNUAL REPORT .0 million of expense reimbursements during 2009 from KFN and the Strategic Capital Funds. As a result. 2009 compared to year ended December 31.0 million. In addition to the reduced fees from the Strategic Capital Funds. 2010 our Public Markets segment had $1. 2010. a decrease of $4. please see “Summary of Significant Accounting Policies.3%. 2009 FPAUM New Capital Raised Distributions Foreign Exchange Change in Value December 31. 2009 to December 31. These increases were partially offset by $1. 2009. The increase was driven by $1. 2009 AUM New Capital Raised Distributions Foreign Exchange Change in Value December 31. 2009.7 billion increase in the net asset value of KFN and certain other fixed income vehicles.3 billion at December 31. Economic Net Income Committed dollars invested were $0. 2010.400 FPAUM in our Public Markets segment totaled $7. as noted above. Fee Paying Assets Under Management The following table reflects the changes in our Public Markets FPAUM from December 31.9 billion of new capital raised across our various Public Markets strategies. Assets Under Management As of December 31. These increases were partially offset by $1.9 billion increase in the net asset value of KFN and certain other fixed income vehicles. or 10. For additional discussion of the KFN incentive fee.400 1.893. 2010. employee compensation and benefits expense increased by $3. The decrease is primarily the result of a $15.773.7 million for the year ended December 31.970.4 billion of uncalled capital commitments that could be called for investments in new transactions.4 billion at December 31.3 million increase in management fees resulting from an increase in capital managed on behalf of third party investors and an increase in management fees from structured finance vehicles totaling $14. which resulted in a further reduction of fees of $7.2 million decrease in management fees received from the Strategic Capital Funds.5 billion. 2010.700) — 917.3 billion of redemptions in our liquid credit separately managed accounts. 2009. because KFN’s equity value had declined significantly in the fourth quarter of 2008.9 million.9% from the year ended December 31.295. 2009 to December 31.7 million. 2008.” These decreases were offset by a $7. The election to receive management fees in lieu of expense reimbursements had an insignificant cash flow impact on us.2 million for the year ended December 31. 2009. the fees for all investor classes of the Strategic Capital Funds were reduced. which was primarily due to increased headcount. offset by an incentive fee received in 2009. as well as a $0. 2010: ($ in thousands) December 31. Year ended December 31.

please see “Business” in our Annual Report on Form 10­K.295.3 million for the year ended December 31. In addition to the unrealized appreciation on the portfolios noted above. Uncalled Commitments December 31.300 (2.4 billion of net unrealized gains resulting from improvements in the overall credit markets.000) (634. Our portfolios for KFN (including its majority owned subsidiaries). an increase of $0.000 (62. 2009 AUM $ 13.300 $ 13. or 1.5 billion of net unrealized gains resulting from improvement in the overall credit markets.2 billion at December 31.80 at December 31. Offsetting these increases was the restructuring and distribution of one of our structured finance vehicles. Further offsetting the increases to our AUM were redemptions of $0.700 $6. including leveraged loans and high yield bonds. a decrease of $22. we raised $1. The following table reflects the changes in our Public Markets assets under management from December 31.167.9 million from the year ended December 31.000 (62.700) 1. 2008 to December 31.6 million compared to economic net income of $36.3 million for the year ended December 31.6 billion from our Strategic Capital Funds. including leveraged loans and high yield bonds. 2008. Our stock based commitments to employees are tied to the stock price of KFN.4 billion in new capital for our separately managed accounts. 2009.2 billion at December 31. with both asset classes experiencing material price appreciation in the fiscal year ended December 31.3 billion at December 31. compared to $13. 2009. As of December 31. the NAV of KPE and its commitments to our funds are excluded from our calculation of assets under management.0%.8 million for the year ended December 31. a decrease of $31.58 at December 31. or 50. 2009. 2008 to December 31. 2009. KKR 2010 ANNUAL REPORT 53 .475. The increase was driven by $1.MANAGEMENT’S DISCUSSION AND ANALYSIS Investment Income (Loss) Fee Paying Assets Under Management Our Public Markets segment had an investment loss of $5.5%. Our portfolios for KFN (including its majority owned subsidiaries). 2008. 2009: ($ in thousands) FPAUM in our Public Market segment was $6. 2009. and our separately managed accounts primarily consisted of corporate debt. 2009. because those items are now owned by us and are no longer managed on behalf of a third party investor. Offsetting the increases to our FPAUM were redemptions of $0. 2008. Economic Net Income December 31. a decrease of $15.6 million for the year ended December 31. The stock price of KFN appreciated in 2009 from a price of $1. an increase of $2. with both asset classes experiencing material price appreciation in the fiscal year ended December 31.425.167.361. and a rising stock price of KFN increases our liability to employees. the NAV of KPE is excluded from our calculation of fee paying assets under management. the Strategic Capital Funds. 2008. 2008. Subsequent to the Transactions.4 billion at December 31. because those items are now owned by us and no longer managed on behalf of a third party investor. compared to $4. The decrease in fee related earnings described above was the main contributor to the period over period decrease in economic net income. This decrease was primarily driven by an increase in non­cash stock based compensation expense associated with equity grants received from KFN.6 billion from our Strategic Capital Funds. 2009. the Strategic Capital Funds. which decreased our AUM by $2.000.2 billion.000 — (634. AUM in our Public Markets segment was $13. our Public Markets segment had $816. 2008 AUM Exclusion of KPE (a) New Capital Raised Distributions Investor Redemptions Change in Value December 31. and our separately managed accounts primarily consisted of corporate debt.400 Economic net income in our Public Markets segment was $5. and separately managed accounts.600) 1. 2009. Subsequent to the Transactions. structured finance vehicles. fee related earnings in our Public Markets segment were $10. 2009: ($ in thousands) Due primarily to the increase in expenses described above. In addition to the unrealized appreciation on the portfolios noted above.0 million compared to fee related earnings of $32. We restructured and distributed this structured finance vehicle in 2009 as we believed the underlying collateral maintenance requirements and financing terms of this structured finance vehicle were no longer attractive. Assets Under Management (a) The FPAUM reported prior to the Transactions reflected the NAV of KPE. This increase was driven primarily by $1. For additional discussion of our investment funds. we raised $1.600) 1. Fee Related Earnings The following table reflects the changes in our Public Markets fee paying assets under management from December 31. 2009. 2008 to a price of $5.4 billion in new capital for our separately managed accounts. 2008 FPAUM Exclusion of KPE (a) New Capital Raised Distributions Investor Redemptions Change in Value December 31.400.0 billion. 2009 FPAUM $ 4.1 billion.700) 1.3 million of remaining uncalled capital commitments that could be called for investments in new transactions.300 (a) The AUM reported prior to the Transactions reflected the NAV of KPE and its commitments to our funds.416.6 million for the year ended December 31.

2%. as compared to 11 transactions in 2009.129 9. 2010 and 2009.751 $ — — — 18.184 79. 2009. While each of the capital markets transactions that we undertake in this segment is separately negotiated. fee related earnings in our Capital Markets and Principal Activities segment were $79.298. 2009 Fees Fee Related Earnings Fees in our Capital Markets and Principal Activities segment were $105.205 Year ended December 31.211 18. 2009. or 69. ($ in thousands) Year Ended December 31.129) (4.476 18. 2010.102 $ — — — 34.2 million for the year ended December 31.653 — — — 349. Accordingly. an increase of $10. The Capital Markets and Principal Activities segment was formed upon completion of the Transactions by combining our capital markets business with the assets and liabilities of KPE.104 (14.238 15. Our capital markets business is dependent on the overall capital markets environment. 2009 and 2008.1 million for the year ended December 31.4 million. As a result. Expenses Due primarily to the increase in fees described above. 2010 2009 2008 Fees Management and Incentive Fees Management Fees Incentive Fees Total Management and Incentive Fees Net Monitoring and Transaction Fees: Monitoring Fees Transaction Fees Total Fee Credits Net Transaction and Monitoring Fees Total Fees Expenses Employee Compensation and Benefits Occupancy and Related Charges Other Operating Expenses Total Expenses Fee Related Earnings Investment Income (Loss) Gross Carried interest Less: Allocation to KKR carry pool Net carried interest Other investment income (loss) Total Investment Income (loss) Income (Loss) before Income (Loss) Attributable to Noncontrolling Interests Income (Loss) Attributable to Noncontrolling Interests Economic Net Income $ — — — 105.616 25.679 368.053 1.219.033 $1.117) $349.297 — — — (4. 2010 compared to year ended December 31.168 (37) $ 1. 2010.219.679 The first nine months of 2009 did not include the results of the net assets acquired from KPE since the Transactions were completed on October 1. as compared to fee related earnings of $18. Investment Income (Loss) The following table presents the components of other investment income (loss) for the years ended December 31.266 16.332 581 $ 367.082 — — — 1. 2009.419) $1.211 — 18. 2010 2009 Expenses were $26.053 $ $ 24.578 598 5. from the year ended December 31. We completed 45 capital markets transactions in 2010. Net Realized Gains (Losses) Net Unrealized Gains (Losses) Dividend Income Interest Income Interest Expense Other Investment Income (Loss) 26. 2010.MANAGEMENT’S DISCUSSION AND ANALYSIS Capital Markets and Principal Activities Segment The following table sets forth information regarding the results of operations and certain key operating metrics for our Capital Markets and Principal Activities segment for the years ended December 31.053 1.295.516 333.2 million.746 (26.3 million for the year ended December 31. The increase was primarily due to a $7. our fee rates are generally higher with respect to underwriting the offerings of equity securities than with respect to the issuance of debt securities.211 7. the 2009 amounts reflect investment income for the fourth quarter of 2009 and the remainder of 2009 activity primarily relates to interest expense at our capital markets business.129 — 34. from $34.376 26.135 3.914 5. credit spreads and volatility.869 226. 2009.7 million during the year ended December 31. 2010.093 12. an increase of $71. we have reclassified the results of our capital markets business since inception into this segment.679 349.455 783 5.241 966.4 million increase in employee compensation and benefits expense relating primarily to increased headcount in connection with the expansion of our business as well as to an increase in incentive compensation resulting from the improved overall financial performance of our capital markets business. which is influenced by equity prices.1 million for the year ended December 31.266 105.863 945 8.219.129 34.266 105. ($ in thousands) Year Ended December 31.129) 1.7 million. and the amount of fees that we collect for like transactions generally correlates with overall transaction sizes. an increase of $60.094 727 5. 54 KKR 2010 ANNUAL REPORT .

from the year ended December 31.a. net unrealized gains were comprised of $293.3 during the year ended December 31. 2009 and 2008.8 million of net unrealized gains from private equity investments. as compared to 9 transactions in 2008.5 million for the year ended December 31.MANAGEMENT’S DISCUSSION AND ANALYSIS In 2010.3 million of realized gains from the sale of certain private equity investments. (healthcare sector).V. Substantially all of the increase was comprised of an increase in employee compensation and benefits expense resulting from an increase in salaries and bonuses in 2009 in connection with increased revenues when compared to the prior period and. and HCA Inc. These transactions generated $34. the most significant of which were Dollar General Corporation (NYSE: DG) and NXP Semiconductors NV (NASDAQ: NXPI). In 2009. an increase of $927.516 333. and $124. 2009 compared to year ended December 31. and HCA Inc.2 million for the year ended December 31. as compared to fee related earnings of $5. 2009 as compared to $1. or 87. 2009.8 million of net unrealized gains from private equity investments.597) $ (4. Fee Related Earnings Due primarily to the increases in fees as mentioned above. our fee rates are generally higher with respect to underwriting the offerings of equity securities than with respect to the issuance of debt securities.6 million.r. We completed 11 capital markets transactions in 2009.578 598 5. as well as $145.129) The first nine months of 2009 did not include the results of the net assets acquired from KPE since the Transactions were completed on October 1. ($ in thousands) Year Ended December 31. 2008. 2009. as well as $39.l.4 million.4%. 2008 Fees Economic net income in our Capital Markets and Principal Activities segment was $367. 2008. syndication and other capital markets services fees in 2009. an increase of $2.1 million of underwriting. or 19. as compared to economic net income of $367. The increase in investment income described above was the main contributor to the growth in economic net income. 2010. While each of the capital markets transactions that we undertake in this segment is separately negotiated. The increase was due to an increase in the number of capital markets transactions during the period.8%. 2009 2008 Net Realized Gains (Losses) Net Unrealized Gains (Losses) Dividend Income Interest Income Interest Expense Other Investment Income (Loss) $ 24. Economic Net Income (Loss) Investment Income (Loss) The following table presents the components of other investment income (loss) for the years ended December 31. The increase in investment income as described above was the main contributor to the increase in economic net income.117) $349. Dividend income of $226. which went public in the fourth quarter of 2009.8 million of net unrealized gains from non­private equity investments. (healthcare sector). 2009. Economic Net Income (Loss) Economic net income in our Capital Markets and Principal Activities segment was $1. 2009. net unrealized gains were comprised of $293. an increase of $15.8 million for the year ended December 31. NXP Semiconductors N.9 million.8 million of net unrealized gains from private equity investments. the 2009 amounts reflect investment income for the fourth quarter of 2009 and the remainder of 2009 activity primarily relates to interest expense at our capital markets business..V. the most significant of which was the partial sale of Dollar General Corporation. fee related earnings in our Capital Markets and Principal Activities segment were $18. the net unrealized gains were comprised of $821.6 million in 2010 primarily consisted of dividends earned from HCA Inc. Expenses Expenses were $15.1 million of net unrealized gains from non­private equity investments (total net unrealized gains included reversals of previously recorded unrealized losses of $216. In 2009.4 million. (industrial sector).7 million related to the sale of investments during the year). 2008. and the amount of fees that we collect for like transactions generally correlates with overall transaction sizes.3 billion for the year ended December 31. which went public in the third quarter of 2010.679 $ (21) — — 489 (4. the most significant of which were Dollar General Corporation (NYSE: DG). 2008. NXP Semiconductors N. Year ended December 31.8 million for the year ended December 31. which went public in the fourth quarter of 2009. from the year ended December 31.7 million for the year ended December 31. 2009. an increase of $13. the most significant of which were Dollar General Corporation (NYSE: DG).2 million in 2008. KKR 2010 ANNUAL REPORT 55 .1 million for the year ended December 31. which related primarily to the write­off of our investment in Aero Technical Support & Services S. an increase in headcount.1 million of realized losses from the sale of non­private equity investments. to a lesser extent. Accordingly.8 million of net unrealized gains from non­private equity investments. Net realized gains were comprised of $150. compared to $18. as well as $39.104 (14. The 2008 amounts primarily reflect interest expense from our capital markets business. Fees in our Capital Markets and Principal Activities segment were $34.

• On February 27.248 (1. etc. provides for revolving borrowings of up to $500 million with a $500 million sublimit for letters of credit.278 15.837 16. 2010: Private Markets Segment Public Markets Segment Capital Markets and Principal Activities Segment Total Reportable Segments Cash and cash equivalents Investments Unrealized carry Other assets Total assets Debt obligations Other liabilities Total liabilities Noncontrolling interests Partners’ capital Total Reportable Segments Partners’ Capital $ 229. 2013.346. 2010.0 million sublimit for swing­line notes and a $25.831. including the fees earned from our funds.457 $ 500.000 45. The borrowing base is subject to certain investment concentration limitations and the value of the investments Sources of Cash Our principal sources of cash consist of cash and cash equivalents consists of amounts received from: (i) our operating activities. the Senior Notes and other borrowing arrangements. The following is a summary of the principal terms of these facilities and other borrowing arrangements: 56 KKR 2010 ANNUAL REPORT . The facility had a term of five years that expired on February 26.825. 2008.280 4. Partners’ Capital L I QU IDIT Y We have managed our historical liquidity and capital requirements by focusing on our cash flows before the consolidation of our funds and the effect of normal changes in short term assets and liabilities.553 $ 5.493 Plus: Equity impact of Management Holdings Corp.MANAGEMENT’S DISCUSSION AND ANALYSIS Segment Partners’ Capital The following table presents our segment statement of financial condition as of December 31.424 $ 947.002 194. During 2010.657 $ 10.401.831.750) $ 844.544 4. As of December 31. Revolving Credit Agreements As of December 31. • On February 26. The Principal Credit Agreement provides for up to $925. entered into a credit agreement with a major financial institution (the “Corporate Credit Agreement”).072 $ 500. L. In addition. The KCM Credit Agreement has a maturity date of February 27. interest payments and repayments under credit agreements.193 766 $ 55.388 $ 1. the counterparty returned approximately $1. Carried interest is distributed to the general partner of a vehicle with a clawback or net loss sharing provision only after all of the following are met: (i) a realization event has occurred (e. sale of a portfolio company. On March 1. portfolio companies.g.626 $ 5. and (iii) all of the cost has been returned to investors with respect to investments with a fair value below remaining cost. managed accounts.271 $ 516.837 545. (ii) realizations on carried interest from our investment funds. (iii) funding capital commitments that we have made to our funds.725.003 287.0 million sublimit for letters of credit.537 $4. the KPE Investment Partnership entered into a five­ year revolving credit agreement with a syndicate of lenders (the “Principal Credit Agreement”). Total KKR & Co. so that the facility now expires on March 1. In March 2009.376 $ 6.001 53. dividend.000 160.278 660.). Our primary cash flow activities on an unconsolidated basis involve: (i) generating cash flow from operations.P. which we anticipate will be settled for cash within one year. 2016. utilize these facilities prospectively in the normal course of our operations. (iii) realizations from principal investments. we had an available cash balance of approximately $0.P. as amended. there were no amounts outstanding under the KCM Credit Agreement. and (iv) borrowings under our credit facilities and other borrowing arrangements described below.007 — 3. which reduced availability for borrowings under the facility from $1.P.729 — 523. We have access to funding under various credit facilities and other borrowing arrangements that we have entered into with major financial institutions or which we receive from the capital markets.8 billion. and the Issuer (as defined below) of the Senior Notes became guarantors of the Corporate Credit Agreement. • In June 2007.730 $5.388.626 (52. During 2010. (ii) generating income from investment activities. As a result of this amendment. and other Less: Noncontrolling Interests held by KKR Holdings L.798 526.155 $ — 104.725. L.0 million.798 — 39. Kohlberg Kravis Roberts & Co. however. and KKR & Co. and (vi) borrowings. with a $50. 2013. We may. the terms of the Corporate Credit Agreement were amended. (iv) funding our growth initiatives. a significant amount of cash and cash equivalents was contributed to the KKR Group Partnerships as part of the Transactions. The KCM Credit Agreement. the KCM Credit Agreement was amended to reduce the amounts available on revolving borrowings from $700 million to $500 million.222 $ 66.193 10. 2008.698 $ 756.326.248 104. together with certain general partners of our private equity funds. The Corporate Credit Agreement provided for revolving borrowings of up to $1. capital markets transactions and other investment products. 2011. In addition. amounts outstanding under the Corporate Credit Agreement ranged from zero to $98..P.0 billion.6 million in financing costs. Borrowings under this facility may only be used for our capital markets business. no borrowings were outstanding on any of the revolving credit agreements described below. (v) distributing cash flow to our owners. (ii) the vehicle has achieved positive overall investment returns since its inception.230 $ — 10. 2010.0 million of senior secured credit subject to availability under a borrowing base determined by the value of certain investments pledged as collateral security for obligations under the agreement. L.745) 4. KKR Capital Markets entered into a revolving credit agreement with a major financial institution (the “KCM Credit Agreement”). the KKR Group Partnerships became co­borrowers of the facility.0 billion to $700 million and extended the maturity.

Liquidity Needs We expect that our primary liquidity needs will consist of cash required to: (i) continue to grow our business. As the payments reflect actual tax savings received by KKR entities. We and our intermediate holding company. During 2010. by KKR & Co. As such. amounts outstanding under the Principal Credit Agreement ranged from zero to $810. accruing from September 29.” We believe that the sources of liquidity described above will be sufficient to fund our working capital requirements for the next 12 months. A termination of the agreement or a change of control could give rise to similar payments based on tax savings that we would be deemed to realize in connection with such events.0 million. as well as any contingent liabilities that may give rise to future cash payments. The Senior Notes bear interest at a rate of 6. See “— Liquidity — Contractual Obligations. This payment obligation is an obligation of our intermediate holding company and not of either KKR Group Partnership. primarily attributable to a portion of the goodwill inherent in our business that would not otherwise have been available.584%.264 876. and an indirect subsidiary of KKR & Co. KKR Group Finance Co. L.000 30. We have entered into a tax receivable agreement with KKR Holdings requiring our intermediate holding company to pay to KKR Holdings or transferees of its KKR Group Partnership Units 85% of the amount of cash savings. unless earlier redeemed or repurchased. may be required to acquire KKR Group Partnership Units from time to time pursuant to our exchange agreement with KKR Holdings. we have funded commitments with cash from operations that otherwise would be distributed to our principals. in U. (iv) pay amounts that may become due under our tax receivable agreement with KKR Holdings.833 8. we are responsible for the uncalled commitments once attributable to KPE’s investment partnership as a partner in our private equity funds. made an election under Section 754 of the Internal Revenue Code that will remain in effect for each taxable year in which an exchange of KKR Group Partnership Units for common units occurs.413 1. which usually range from 2% to 4% of a fund’s total capital commitments at final closing. (iii) fund cash operating expenses. The guarantees are unsecured and unsubordinated obligations of the guarantors. 2010: KKR 2010 ANNUAL REPORT 57 .100 $ 923. 2020. proceeds from realizations of principal assets and other sources of liquidity available to us. LLC (the “Issuer”). The Senior Notes are unsecured and unsubordinated obligations of the Issuer and will mature on September 29. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. state and local income tax purposes. Certain of these exchanges are expected to result in an increase in our intermediate holding company’s share of the tax basis of the tangible and intangible assets of the KKR Group Partnerships. at which time such short­term lines of credit would close. jointly and severally.506 5. 2010. The agreements governing our active investment funds generally require the general partners of the funds to make minimum capital commitments to the funds. federal. No cash payments were made in 2010 under the tax receivable agreement. In addition.0 million. which were issued at a price of 99.MANAGEMENT’S DISCUSSION AND ANALYSIS constituting the borrowing base is subject to certain advance rates based on type of investment.P. We expect to fund future commitments with available cash. 2006 Fund European Fund III Asian Fund Infrastructure Fund E2 Investors (Annex Fund) China Growth Fund Natural Resources I Other Private Markets Commitments Total Private Markets Commitments Public Markets $ 362. as well as 85% of the amount of any such savings the intermediate holding company actually realizes as a result of increases in tax basis that arise due to future payments under the agreement. KKR Management Holdings L. L. a wholly owned subsidiary of KKR assumed $65.P.S. From time to time.375% Senior Notes (the “Senior Notes”).736 Mezzanine Fund Capital Solutions Vehicles Total Public Markets Commitments Total Uncalled Commitments Historically. There were no such borrowings as of December 31. state and local income tax that the intermediate holding company actually realizes as a result of this increase in tax basis.396 50. and the KKR Group Partnerships. Senior Notes ($ in thousands) Uncalled Commitments Private Markets • On September 29. which has effectively reduced KKR’s availability under the Principal Credit Agreement on a consolidated basis to $860. the cash distributions to common unitholders may vary from holders of KKR Group Partnership Units (held by KKR Holdings and others) to the extent payments are made under the tax receivable agreements to selling holders of KKR Group Partnership Units. which may result in an increase in our intermediate holding company’s share of the tax basis of the assets of the KKR Group Partnerships at the time of an exchange of KKR Group Partnership Units. a taxable corporation for U. The following table presents our uncalled commitments to our active investment funds as of December 31.375% per annum. there may be a timing difference between the tax savings received by KKR entities and the cash payments to selling holders of KKR Group Partnership Units.540 117. In September 2009.S. and (v) make cash distributions in accordance with our distribution policy.684 300. including funding our capital commitments made to existing and future funds and any net capital requirements of our capital markets companies. This increase in tax basis may increase depreciation and amortization deductions for tax purposes and therefore reduce the amount of income tax our intermediate holding company would otherwise be required to pay in the future. Commitments and Contingencies on an Unconsolidated Basis.000 47. issued $500 million aggregate principal amount of 6. These amounts are generally repaid within 30 days. if any.100 13. 2010. The Senior Notes are fully and unconditionally guaranteed. We may also require cash to fund contingent obligations including those under clawback and net­loss sharing arrangements.. 2010. (ii) service debt obligations.636 34. we may borrow amounts to satisfy general short­ term needs of our business by opening short­term lines of credit with established financial institutions.0 million of commitments on the Principal Credit Agreement from one of the counterparties to the agreement. federal.P. as a result of the Transactions. a subsidiary of KKR Management Holdings Corp.

and (iii) certain tax distributions.6 $ 923. our distributions are expected to consist of an amount consisting of (i) FRE. There can be no assurance that distributions will be made as intended or at all or that such distributions will be sufficient to pay any particular KKR & Co. Contractual Obligations. Accordingly. or non­U. we expect that the capital commitments presented above will be called over a period of several years. L. 2010. Carry distributions arising subsequent to the Transactions may give rise to clawback obligations that will be allocated generally to carry pool participants and the KKR Group Partnerships in accordance with the terms of the instruments governing the KKR Group Partnerships. given the size of such commitments and the rates at which our investment funds make investments.7 500.P. Had the investments in such funds been liquidated at their December 31. The following table sets forth information relating to anticipated future cash payments as of December 31.9 $ $ — — 66. Future interest rates have been calculated using rates in effect as of December 31. These additional distributions. or if we become taxable as a corporation for U. See “— Liquidity — Liquidity Needs.6 million would be borne by our principals. of which $55. 58 KKR 2010 ANNUAL REPORT . L. if triggered. 2010. This amount is expected to be reduced by (i) corporate and applicable local taxes if any.9 223. the above commitments have been presented as falling due within one year. 2010 relating to indemnification obligations. the amount of carried interest distributed that would be subject to this clawback provision would be $697. In connection with the “net loss sharing provisions.9 994. and the terms of its limited partnership agreement.6 50. federal income tax purposes. the net loss sharing obligation would have been approximately $1. we enter into contractual arrangements that may require future cash payments. However.5 million.P.2 $ 747.7 — 40.” certain of our private equity vehicles allocate a greater share of their investment losses to us relative to the amounts contributed by us to those vehicles. other than certain additional distributions that KKR may determine to make. In the event that other of our current or future subsidiaries become taxable as corporations and acquire KKR Group Partnership Units in the future. may give rise to a contingent obligation that may require the general partners to contribute capital to the fund.094. 2010. The instruments governing certain of our private equity funds may also include a “net loss sharing provision. the clawback obligation would have been $61. In the normal course of business. no amounts have been included in our consolidated and combined financial statements as of December 31.6 million is due from noncontrolling interest holders.6 (1) These uncalled commitments represent amounts committed by us to fund a portion of the purchase price paid for each investment made by our investment funds. of which $473.S. The partnership documents governing our private equity funds generally include a “clawback” provision that. to fund 20% of the net losses on investments attributed to the limited partners of such fund. (ii) noncontrolling interests. 2010 fair values.” that. 2010 on an unconsolidated basis.P. to make appropriate investments in our business and our investment funds and to comply with applicable law and any of our debt instruments or other agreements.3 30. (3) These interest obligations on debt represent estimated interest to be paid over the maturity of the related debt obligation. including both variable and fixed rates provided for by the relevant debt agreements. tax liability.MANAGEMENT’S DISCUSSION AND ANALYSIS We expect our intermediate holding company to benefit from the remaining 15% of cash savings. are intended to cover certain tax liabilities. 2010. if triggered. as calculated by KKR. The amounts presented above include accrued interest on outstanding indebtedness. and (iii) amounts determined by KKR to be necessary or appropriate for the conduct of our business and other matters as discussed above. may give rise to a contingent obligation that may require the general partner to return amounts to the fund for distribution to investors at the end of the life of the fund.6 million. KKR Holdings receives its pro rata share of such distributions from the KKR Group Partnerships. the KKR Group Partnerships will be responsible for amounts due under net loss sharing arrangements and will indemnify our principals for personal guarantees that they have provided with respect to such amounts.S. assuming that all applicable private equity funds were liquidated at no value.0 million as of December 31. Based on the fair market values as of December 31.S.0 million. we expect that each will become subject to a tax receivable agreement with substantially similar terms.4 million would be borne by KKR and $223. if any.971. if any. such losses would be required to be paid by us to the limited partners in those vehicles in the event of a liquidation of the fund regardless of whether any carried interest had been previously distributed. If the vehicles were liquidated at zero value. there would have been no net loss sharing obligation. As of December 31. if any. we also enter into contractual arrangements that contain a variety of representations and warranties and that include general indemnification obligations. Our maximum exposure under such arrangements is unknown due to the fact that the exposure would relate to claims that may be made against us in the future. Because capital contributions are due on demand. KKR does not intend to distribute gains on principal investments.9 million is recorded in due from affiliates and $5. L.4 96. which has been calculated assuming no prepayments are made and the related debt is held until its final maturity date. in income tax that it realizes.” (2) Represents Senior Notes which are presented gross of unamortized discount.6 45. unitholder’s actual U.2 $ — 500.9 $ $ — — 66.0 $ 1. We intend to make quarterly cash distributions in amounts that in the aggregate are expected to constitute substantially all of the cash earnings of our investment management business each year in excess of amounts determined by KKR to be necessary or appropriate to provide for the conduct of our business.0 151. receives distributions from the KKR Group Partnerships. Unlike the “clawback” provisions. For the purposes of KKR’s distribution policy. In these vehicles. (ii) carry distributions received from KKR’s investment funds which have not been allocated as part of our carry pool. When KKR & Co. The declaration and payment of any distributions are subject to the discretion of the board of directors of the general partner of KKR & Co. Payments due by Period Types of Contractual Obligations ($ in millions) <1 Year 1–3 Years 3–5 Years >5 Years Total Uncalled commitments to investment funds (1) Debt payment obligations (2) Interest obligations on debt (3) Lease obligations Total $ $ 923.3 116.6 112. The terms of the Transactions require that our principals remain responsible for any clawback obligation relating to carry distributions received prior to the Transactions up to a maximum of $223. Commitments and Contingencies on an Unconsolidated Basis In the ordinary course of business.0 324.

074.3) billion and $(2. given the size of such commitments and the rates at which our investment funds make investments.7 1. respectively. (3) These interest obligations on debt represent estimated interest to be paid over the maturity of the related debt obligation. However. Our net cash provided by (used in) investing activities was $(1. Our investing activities included the purchases of furniture.4 55.4 million of financing provided through total return swaps and $192. on a gross basis. 2009 and 2008. Off Balance Sheet Arrangements Net Cash Provided by (Used in) Financing Activities Other than contractual commitments and other legal contingencies incurred in the normal course of our business. and (iii) change in unrealized gains on investments of $5. Principles of Consolidation Our policy is to consolidate (i) those entities in which we hold a majority voting interest or have majority ownership and control over significant operating. expenses and investment income. 2010.332.8) million.0 $16.3 billion during the years ended December 31. $0.5 million during the years ended December 31. $21. respectively. $(0. 2009 and 2008. Payments due by Period Types of Contractual Obligations ($ in millions) <1 Year 1–3 Years 3–5 Years >5 Years Total Uncalled commitments to investment funds (1) Debt payment obligations (2) Interest obligations on debt (3) Lease obligations Total $14.2 50. (ii) using the capital of fund investors to make investments.5 $ — 817. KKR 2010 ANNUAL REPORT 59 . the above commitments have been presented as falling due within one year. respectively. respectively. 2009 and 2008.1 billion. of $0. as well as a (decrease) increase in restricted cash and cash equivalents that primarily funds collateral requirements of $(11.MANAGEMENT’S DISCUSSION AND ANALYSIS Contractual Obligations.” (2) Certain of our consolidated fund investment vehicles have entered into financing arrangements in connection with specific investments with the objective of enhancing returns. (ii) net realized gains (losses) on investments of $2.3) million.6 million of financing provided through a term loan and revolving credit facilities.074.1 30. These amounts are reflected as operating activities in accordance with investment company accounting. 2009 and 2008.1 million.1 billion. Net Cash Provided by (Used in) Operating Activities Our net cash provided by (used in) financing activities was $(0.1 billion during the years ended December 31. and reported amounts of fees.6 billion.3 billion and $0. financial and investing decisions of the entity including those KKR funds in which the general partner is presumed to have control or (ii) entities determined to be variable interest entities (“VIEs”) for which we are considered the primary beneficiary. 2009 and 2008. have a substantial effect on the cash flows reflected in our combined statements of cash flows. This table differs from the table presented above which sets forth contractual commitments on an unconsolidated basis principally because this table includes the obligations of our consolidated funds. The amounts presented above include accrued interest on outstanding indebtedness. The amount for Senior Notes offering is presented gross of unamortized discount.7) million during the years ended December 31. Please see the notes to the consolidated and combined financial statements included elsewhere in this report for further detail regarding our critical accounting policies. However.6 192. respectively.0 500.7 billion and $2. $0.7 171. 2010.6 (1) These uncalled commitments represent amounts committed by us and our fund investors to fund the purchase price paid for each investment made by our investment funds. 2010. Because capital contributions are due on demand. 2010.9) billion during the years ended December 31. The following table sets forth information relating to anticipated future cash payments as of December 31.1 $ $ — — 102. $0. these cash flow amounts are included in our cash flows from operations. revisions are included in the consolidated and combined financial statements in the period in which the actual amounts become known. (iii) financing certain investments with indebtedness. 2010. respectively. 2010. 2009 and 2008.2 billion during the years ended December 31.0) million and $(61. 2010. and $(1. Because our consolidated funds are treated as investment companies for accounting purposes. equipment and leasehold improvements of $13.9 $ 14. we and our consolidated funds enter into contractual arrangements that may require future cash payments.9 223. Our net cash provided by (used in) operating activities was $0. respectively. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying estimates. judgments and assumptions are often subjective and may be impacted negatively based on changing circumstances or changes in our analyses. Future interest rates have been calculated using rates in effect as of December 31. $(0.0 151. Net Cash Provided by (Used in) Investing Activities C R I T I C A L ACCO U N T I N G PO L I C I ES The preparation of our consolidated and combined financial statements in accordance with GAAP requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities. $(1. $(43. disclosure of contingent assets and liabilities.3) billion and $0. $0.4 billion during the years ended December 31. 2010. and (v) distributing cash flows from the realization of investments to fund investors. respectively.4) billion during the years December 31. and (iii) distributions net of contributions to our equity holders of $0. judgments or assumptions. The primary cash flow activities of our consolidated funds involve: (i) raising capital from fund investors.489. Such financing arrangements include $796. made to noncontrolling interests.2) billion.6 $14. these estimates.055. These amounts primarily included: (i) proceeds from sales of investments net of purchases of investments by our funds of $0.2 45.3 billion.9 million and $4. which has been calculated assuming no prepayments are made and the related debt is held until its final maturity date. Consolidated Statement of Cash Flows The accompanying consolidated and combined statements of cash flows include the cash flows of our consolidated funds despite the fact that we have only a minority economic interest in those funds.8 billion during the years ended December 31.7 billion. 2010.4 billion. 2009 and 2008.8 billion and $(13. The assets of consolidated funds. are substantially larger than the assets of our business and. historical experience and other assumptions that we believe are reasonable under the circumstances. judged or assumed.2) billion during the years ended December 31. $21. accordingly. These financing arrangements have been entered into with the objective of enhancing returns and are not direct obligations of the general partners of our private equity funds or our management companies. If actual amounts are ultimately different from those estimated.6 $ 1. respectively.5) billion.4 $ — 500. respectively. we do not have any off­balance sheet financings or liabilities.287. 2009 and 2008. 2010.4 96. See “— Liquidity — Liquidity Needs. (iv) generating cash flows through the realization of investments. Our management bases these estimates and judgments on available information. 2009 and 2008. Our financing activities primarily included: (i) contributions net of distributions. we expect that the capital commitments presented above will be called over a period of several years.2 $ 747. 2010.1 million and $13.3 billion.8 billion and $2. 2010.3 152. Commitments and Contingencies on a Consolidated Basis In the ordinary course of business. (ii) repayment of debt obligations net of proceeds received of $0. $7. including both variable and fixed rates provided for by the relevant debt agreements.2 billion and $0. 2009 an 2008.1 million.

if sold short. However. Other factors such as the applicability of a control premium or illiquidity discount. liabilities. Investments that are included in this category generally include private portfolio companies held through our private equity funds. including the type of investment and the characteristics specific to the investment. investment income and cash flows of the consolidated KKR funds on a gross basis. We measure and report our investments in accordance with fair value accounting guidance. quotations from dealers. In certain cases. and we consider factors specific to the investment. and fair value is determined through the use of models or other valuation methodologies. the inputs used to measure fair value may fall into different levels of the fair value hierarchy. We classified 65. Investments which are generally included in this category include corporate bonds and loans. The type of investments included in Level I include publicly listed equities and publicly listed derivatives. With respect to the consolidated KKR funds. convertible debt indexed to publicly listed securities and certain over­the­counter derivatives. The majority of our private equity investments are valued utilizing unobservable pricing inputs. financial and investing decisions and (ii) the consolidated KKR funds. with unrealized gains or losses resulting from changes in fair value reflected as a component of investment income in the consolidated and combined statements of operations. corporate governance structure. The inputs into the determination of fair value require significant management judgment or estimation. the elimination in consolidation of such amounts has no effect on net income (loss) attributable to KKR or KKR’s partners’ capital. pricing services may use certain information with respect to transactions in such investments. When determining fair values of investments. We classified 26. Level III — Pricing inputs are unobservable for the investment and include situations where there is little. which establishes a hierarchical disclosure frame­ work that prioritizes and ranks the level of market price observability used in measuring investments at fair value. even in situations where we hold a large position and a sale could reasonably affect the quoted price. debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. The valuation of our Level III investments at December 31. adjusted for issues related to achieving liquidity including size. those investments are accounted for as investments and carried at fair value as described below. the “asked” price at the close of business on that date day. 2010. We classified 8. and funded by. The consolidated KKR funds do not consolidate their majority owned and controlled investments in portfolio companies. The second methodology utilized is typically a discounted cash flow approach. We generally employ two valuation methodologies when determining the fair value of a private equity investment. Investments measured and reported at fair value are classified and disclosed in one of the following categories: Level I — Quoted prices are available in active markets for identical investments as of the reporting date. strategic buyer or a transaction consummated through a combination of any of the above. Level II — Pricing inputs are other than quoted prices in active markets. we use the “bid” price at the close of business on that date and. The KKR funds are consolidated notwithstanding the fact that we have only a minority economic interest in those funds. In this approach. which might include an initial public offering. The consolidated and combined financial statements reflect the assets. capital structure and other factors are employed in this approach. but not yet purchased and call options are included in Level I. In certain cases. revenues. Rather. timing. private equity investor. an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.MANAGEMENT’S DISCUSSION AND ANALYSIS The majority of the entities consolidated by us are comprised of: (i) those entities in which we have majority ownership and have control over significant operating. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. and the majority of the economic interests in those funds. which are either directly or indirectly observable as of the reporting date. controlling general partner or managing member interests. Noncontrolling interests represent the ownership interests held by entities or persons other than KKR. our attributable share of the net income from those funds is increased by the amounts eliminated. we generally have operational discretion and control. 2010 represents management’s best estimate of the amounts that we would anticipate realizing on the sale of these investments at such date. 2010. registration process. which are held by third party investors. Substantially all of the management fees and certain other amounts earned by us from those funds are eliminated in consolidation. terminal values. 60 KKR 2010 ANNUAL REPORT . The first methodology is typically a market multiples approach that considers a specified financial measure (such as EBITDA) and recent public market and private transactions and other available measures for valuing comparable companies. In addition. because the eliminated amounts are earned from. Forward contracts are valued based on market rates or prices obtained from recognized financial data service providers. Estimates of assumed growth rates. The ultimate fair value recorded for a particular investment will generally be within the range suggested by the two methodologies. as a result. we incorporate significant assumptions and judgments in determining the most likely buyer. reflect their investments on the consolidated and combined statement of financial condition at fair value. the presence of significant unconsolidated assets and liabilities and any favorable or unfavorable tax attributes are also considered in arriving at a market multiples valuation. or market participant for a hypothetical sale. securities sold. Accordingly. noncontrolling interests. market transactions in comparable investments and various relationships between investments.5% of total investments measured and reported at fair value as Level II at December 31. Market price observability is affected by a number of factors. expenses.5% of total investments measured and reported at fair value as Level III at December 31. Management’s determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are management’s best estimates after consideration of a variety of internal and external factors. which are those entities in which we hold substantive. are attributed to noncontrolling interests in the accompanying consolidated and combined financial statements. If no sales occurred on such day. we use the last reported market price as of the statement of financial condition date for investments that have readily observable market prices. In determining the value of a particular investment. pricing matrices. market activity for the investment. an initial public offering discount and Fair Value of Investments Our consolidated funds are treated as investment companies under investment company accounting guidance for the purposes of GAAP and. We do not adjust the quoted price for these investments. Investments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. and limited partners have no substantive rights to impact ongoing governance and operating activities of the fund. if any. discount rates. In such cases. 2010.0% of total investments measured and reported at fair value as Level I at December 31. We have retained the specialized accounting of the consolidated funds.

which consisted of certain limited procedures that we identified and requested it to perform. 2010 and December 31. the investment income that KKR retains in its net income. or $6. to increase or decrease over time. or $9. it affects the manner in which we classify our gains and losses for reporting purposes. we estimate that an immediate 10% decrease in the fair value of the funds’ investments generally would result in a 10% immediate change in net gains (losses) from the funds’ investment activities (including carried interest when applicable). in accordance with the respective fund agreements. regardless of whether the investment was valued using observable market prices or management estimates with significant unobservable pricing inputs. These unobservable pricing inputs and assumptions may differ by investment and in the application of our valuation methodologies. 2010 and December 31. of the value of our investments were valued using quoted market prices.4 billion. We recognize investment income with respect to our carried interests in investments of our private equity funds and co­investment vehicles. and the liabilities relieved. The majority of the value of the investments in our consolidated fixed income funds were valued using observable market parameters. As of December 31. which may create volatility in our earnings and the amounts of assets and partners’ capital that we report from time to time. KKR’s private equity funds require the management company to refund up to 20% of any cash management fees earned from limited partners in the event that the funds recognize a carried interest. Instead.4 billion. Because the substantial majority of our funds are consolidated and because we hold only a minority economic interest in our funds’ investments.5 billion. they concluded that the fair value. these fees would not be returned to the funds’ limited partners. or $27. While this reversal generally does not significantly impact the net amounts of gains (losses) that we recognize from investment activities. which have not been adjusted. 2010. at such time that the underlying investments are sold and the associated carried interests are realized. the share of our funds’ investment income that is allocable to our carried interests and capital investments is not shown in the consolidated and combined financial statements. These fees are based upon the contractual terms of the management and other agreements that we enter into with the applicable funds. Our reported fair value estimates could vary materially if we had chosen to incorporate different unobservable pricing inputs and other assumptions. valued at $2. portfolio companies and third parties. a liability to the fund’s limited partners is recorded and revenue is reduced for the amount of the carried interest recognized.5 billion. Revenue Recognition Fees consist primarily of (i) monitoring and transaction fees that we receive from our portfolio companies and capital markets activities and (ii) management and incentive fees that we receive directly from our unconsolidated funds. 2009. Upon disposition of an investment. Incentive fees are accrued either annually or quarterly after all contingencies have been removed. As of December 31. dividend and interest income received from investments and interest expense incurred in connection with investment activities. We recognize fees in the period during which the related services are performed and the amounts have been contractually earned in accordance with the relevant management or other agreements.0 billion. as determined by us.” Based on the investments of our private equity funds as of December 31. As discussed above. the capital invested by or on behalf of the general partners of our private equity funds and the noncontrolling interests that third­party fund investors hold in our consolidated funds.6 billion. 2009. the amount subject to refund for which no liability has been recorded approximates $58. Quoted market prices. respectively. not to exceed 20% of the management fees earned. In the event that a fund’s carried interest is not sufficient to cover all or a portion of the amount that represents 20% of the earned management fees. The majority of these investments were valued using internal models with significant unobservable market parameters and our determinations of the fair values of these investments may differ materially from the values that would have resulted if readily observable market prices had existed. of the value of our investments were valued in the absence of readily observable market prices as of December 31. of those investments subjected to their limited procedures was reasonable. Changes in the fair value of the investments of our consolidated private equity funds may impact the net gains (losses) from investment activities of our private equity funds as described under “— Key Financial Measures — Investment Income (Loss) — Net Gains (Losses) from Investment Activities. and (iii) HCA Inc. Additional external factors may cause those values. we estimate the impact that the consequential decrease in investment income would have on net income attributable to KKR would be significantly less than the amount described above. and the limited procedures performed by an independent valuation firm are supplementary to the inquiries and procedures that the general partner of each fund is required to undertake to determine the fair value of the investments. KKR 2010 ANNUAL REPORT 61 . The general partners of our funds are responsible for determining the fair value of investments in good faith.0%. as of December 31.6%. our share of the investment income generated by our funds’ investment activities is significantly less than the total amount of investment income presented in its consolidated and combined financial statements. private equity investments which represented greater than 5% of the net assets of consolidated private equity funds included: (i) Dollar General valued at $3. compilation or any other form of examination or attestation under generally accepted auditing standards. previously recognized unrealized gains or losses are reversed and a corresponding realized gain or loss is recognized in the current period. after allocating amounts to noncontrolling interests. Approximately 74. and the values of investments for which readily observable market prices exist. and 22. 2009. The refunds to the limited partners are paid. At such time as the fund recognizes a carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof. Unrealized gains or losses result from changes in the fair value of our funds’ investments during a period as well as the reversal of unrealized gains or losses in connection with realization events. Recognition of Investment Income Investment income consists primarily of the unrealized and realized gains (losses) on investments (including the impacts of foreign currency on non­dollar denominated investments).0%. represents the portion of its investment income that is allocable to us. 2010. we utilize several unobservable pricing inputs and assumptions in determining the fair value of our private equity investments. are not adjusted. which may include quoted market prices.4%. Upon completion of such limited procedures.MANAGEMENT’S DISCUSSION AND ANALYSIS other factors. given that a majority of the change in fair value would be attributable to noncontrolling interests. if applicable. and 77. 2010 and December 31.4 billion. 2010. as of December 31. (ii) Alliance Boots valued at $2. or $22. However. Our calculations of the fair values of private company investments were reviewed by an independent valuation firm. who provided third party valuation assistance to us. The limited procedures did not involve an audit. Approximately 26. Due to the consolidation of the majority of our funds.7 million as a result of certain funds not yet recognizing sufficient carried interests. respectively. when used. review.

Accordingly. In addition. KFN. the general partner is required to return. As a result. “Related Party Transactions” for financial information related to KFN. KKR consolidates the same entities both before and after adopting these new rules. KKR Index Fund Investments L. in certain instances. KKR consolidated a substantial majority of its investment vehicles except for KKR Strategic Capital Overseas Fund Ltd. the revised consolidation rules have not resulted in the consolidation or deconsolidation of any entities. recognized carried interest will be reduced and reflected as investment losses. The instruments governing our private equity funds generally include a “clawback” or. these entities have qualified for the deferral of the revised consolidation rules and the consolidation analysis was based on the previous consolidation rules.P. Prior to the revision of the consolidation rules. management believes that this approach results in income recognition that best reflects our periodic performance in the management of those funds.” certain of our private equity funds allocate a greater share of their investment losses to us relative to the amounts contributed by us to those vehicles. With respect to these entities. changing the approach taken by companies in identifying which entities are VIEs and in determining which party is the primary beneficiary. the contingent obligations of the general partners of the private equity funds to repay amounts to fund limited partners pursuant to the general partners’ clawback obligations. The terms of the Transactions require that KKR principals remain responsible for clawback obligations relating to carry distributions received prior to the Transactions up to a maximum of $223. In connection with the “net loss sharing provisions. On January 1. may give rise to a contingent obligation that may require the general partner to return or contribute amounts to the fund for distribution to investors at the end of the life of the fund. (b) the reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity. to fund 20% of the net losses on investments. except for the disclosures Net Loss Sharing Provision The instruments governing certain of our private equity funds may also include a “net loss sharing provision. if triggered. if triggered. If these investment returns decrease or turn negative in subsequent periods. The guidance requires additional disclosure on transfers in and out of Levels I and II fair value measurements in the fair value hierarchy and the reasons for such transfers. The guidance requires continuous assessment of the reporting entity’s involvement with such VIEs. sales. we will be responsible for amounts due under net loss sharing arrangements and will indemnify our principals for personal guarantees that they have provided with respect to such amounts. 2009. upon the liquidation of a private equity fund. Due to the extended durations of our private equity funds. The revised guidance also enhances the disclosure requirements for a reporting entity’s involvement with VIEs. In addition. With respect to the unconsolidated investment vehicles.MANAGEMENT’S DISCUSSION AND ANALYSIS Recognition of Carried Interests in Statement of Operations Carried interests entitle the general partner of a fund to a greater allocable share of the fund’s earnings from investments relative to the capital contributed by the general partner and correspondingly reduce noncontrolling interests’ attributable share of those earnings. due to the diminished performance of later investments. Recent Accounting Pronouncements Clawback Provision Under a “clawback” provision. and (c) the entity is not a securitization entity. asset backed financing entity or an entity that was formerly considered a qualifying special purpose entity. In January 2010. The reporting entity is required to perform a consolidation analysis for entities that qualify for the deferral in accordance with previously issued guidance on VIEs. a “net loss sharing” provision that.P. the FASB issued guidance on improving disclosures about fair value measurements. the primary beneficiary was determined to be KFN. The guidance is effective for interim and annual periods beginning after December 15. certain KKR principals who received carried interest distributions with respect to the private equity funds had personally guaranteed. in connection with the adoption of the new consolidation rules. Disclosures relating to KKR’s involvement with VIEs are disclosed within this Note. The new guidance also requires enhanced disclosures on the fair value hierarchy to disaggregate disclosures by each class of assets and liabilities. KKR adopted guidance issued by the Financial Accounting Standards Board (“FASB”) related to VIEs. Carried interest is recognized based on the contractual formula set forth in the instruments governing the fund as if the fund was terminated at the reporting date with the then estimated fair values of the investments realized. Unlike the “clawback” provisions. The guidance provides a limited scope deferral for a reporting entity’s interest in an entity that meets all of the following conditions: (a) the entity has all the attributes of an investment company as defined under AICPA Audit and Accounting Guide.. the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled. Amounts earned pursuant to carried interests in the KKR funds are included as investment income in Net Gains (Losses) from Investment Activities and are earned by the general partner of those funds to the extent that cumulative investment returns are positive. 2010. on a several basis and subject to a cap. with separate disclosure of gross purchases. KKR considered whether it was appropriate to consolidate five structured finance vehicle subsidiaries of KFN. Investment Companies.. Prior to the Transactions. The amendments significantly affect the overall consolidation analysis. the reconciliation of beginning and ending balances shall be presented on a gross basis. an entity is required to provide further disclosures on valuation techniques and inputs used to measure fair value for fair value measurements that fall in either Level II or Level III. such losses would be required to be paid by our to the limited partners in those vehicles in the event of a liquidation of the fund regardless of whether any carried interest had previously been distributed. 62 KKR 2010 ANNUAL REPORT . previously distributed carry to the extent that. carry co­investment vehicles and 8 North America Investor L.” that. Investment Companies. or does not have all the attributes of an investment company but is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the AICPA Audit and Accounting Guide. on an after­tax basis. for fair value measurements using significant unobservable inputs (Level III). Carry distributions arising subsequent to the Transactions are allocated generally to carry pool participants and KKR in accordance with the terms of the instruments governing the KKR Group Partnerships.6 million. because KFN has the power to direct the activities that most significantly impact these entities’ economic performance and KFN has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. See Note 11. In these vehicles. issuances and settlements and transfers in and transfers out of Level III. In addition. may give rise to a contingent obligation that may require the general partners to contribute capital to the fund. including presentation on the consolidated statements of financial condition of assets and liabilities of consolidated VIEs which meet the separate presentation criteria and disclosure of assets and liabilities recognized in the consolidated statements of financial condition and the maximum exposure to loss for those VIEs in which a reporting entity is determined to not be the primary beneficiary but in which it has a variable interest.

In addition. which are effective for fiscal years beginning after December 15. Interest Rate Risk Securities Market Risk Our investment funds make certain investments in portfolio companies whose securities are publicly traded. market perceptions concerning the availability of additional securities for sale. As the guidance is limited to enhanced disclosures. issuances. Because most of the capital commitments to our funds are denominated in U. 2010 would result in net gains or losses from investment activities of our funds of $844. foreign currency exchange rates and interest rates. we estimate that interest expense relating to variable rates would increase on an annual basis by $9. vehicle. 2010. such as significant management changes. a majority of our private equity funds are based on a percentage of committed or invested capital. The proportion of our management and other amounts that are based on NAV depends on the number and type of funds in existence. and settlements in the roll forward of activity in Level III fair value measurements. Market Risk Our funds hold investments that are reported at fair value. 2010 (inclusive of debt obligations of our consolidated funds). British pounds. we depend on these counterparties to make payment or otherwise perform. In addition. we estimate the impact that the consequential decrease in investment income would have on our reported income attributable to Group Holdings would be significantly less than the amount presented above. In these agreements. dollar and other currencies in which our investments are denominated (primarily euros. excluding the reconciliation of Level III activity. These debt obligations accrue interest at variable rates. Based on the investments of our funds as of December 31. management fees are often calculated based on the average NAV of the fund. the amount of fees that we may charge will be increased or decreased in direct proportion to the effect of changes in the fair value of the fund’s investments. dollars. as described under “Business — Our Segments — Private Markets” in our Annual Report on Form 10­K. The estimated impact on interest expense is solely on the debt obligations of our consolidated funds. general economic. given that a substantial majority of the change in fair value would be attributable to noncontrolling interests. the value of these investments may also fluctuate due to similar factors beyond our control as described above for portfolio companies whose securities are publicly traded. including the effect that those movements have on the management fees and carried interests that we receive. Our private equity funds make investments from time to time in currencies other than those in which their capital commitments are denominated. The market prices of securities may be volatile and are likely to fluctuate due to a number of factors beyond our control.MANAGEMENT’S DISCUSSION AND ANALYSIS about purchases. for that particular period. because a substantial majority of the gain or loss would be attributable to noncontrolling interests in our funds.S. shortfalls in operating results from levels forecasted by securities analysts. In the case of our Public Markets business. We estimate that a simultaneous parallel movement by 10% in the exchange rates between the U. Our policy is to minimize these risks by employing hedging techniques. KKR 2010 ANNUAL REPORT 63 . and we may not be able to access these financing markets. the general state of the securities markets and other material events. re­financings. Exchange Rate Risk Q UA LITATI V E A N D QUA N T I TAT I V E DI S C LO SU R ES A B OUT M A RK E T RI S K Our exposure to market risks primarily relates to our role as general partner or manager of our funds and sensitivities to movements in the fair value of their investments. We generally endeavor to minimize our risk of exposure by limiting the counterparties with which we enter into financial transactions to reputable financial institutions. Those investments expose us and our fund investors to the risk that the value of the investments will be affected by changes in exchange rates between the currency in which the capital commitments are denominated and the currency in which the investments are made. These factors include actual or anticipated fluctuations in the quarterly and annual results of such companies or of other companies in the industries in which they operate. 2010. We have an increased exposure to market risks as a result of the principal assets. adoption did not have an impact on KKR’s financial statements.S. although our private equity funds primarily hold investments in portfolio companies whose securities are not publicly traded. However. Currently. dollar and all of the major foreign currencies in which our funds’ investments were denominated as of December 31. To the extent that base management fees are calculated based on the NAV of the fund’s investments. our primary exposure to exchange rate risk relates to movements in the value of exchange rates between the U. or specialty finance company. KKR adopted the guidance.8 million. availability of financing from financial institutions may be uncertain due to market events. we estimate that the effect on its income before taxes and its net income from such a change would be significantly less than the amount presented above. The fair value of investments may fluctuate in response to changes in the value of securities.S. industry conditions. including using foreign currency options and foreign exchange contracts to reduce exposure to future changes in exchange rates when our funds have invested a meaningful amount of capital in currencies other than the currencies in which their capital commitments are denominated. However. impacting future earnings and cash flows. and changes in these rates would affect the amount of interest payments that we would have to make. Indian rupees and Australian dollars). sales. Our base management fees in our private equity funds are calculated based on the amount of capital committed or invested by a fund. Based on our debt obligations payable at December 31. social or political developments. acquisitions and dispositions. we estimate that a 10% decrease in the fair value of our funds’ investments would result in a corresponding reduction in investment income. Net changes in the fair value of investments impact the net gains from investments in our combined statements of operations.9 million in the event interest rates were to increase by 100 basis points. We have debt obligations that include revolving credit agreements and certain investment financing arrangements structured through the use of total return swaps which effectively convert third party capital contributions into our borrowings. Credit Risk We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. changes in government regulation.

Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances. assessing the accounting principles used and significant estimates made by management. and the related consolidated and combined statements of operations. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. respectively. and cash flows for each of the three years in the period ended December 31. changes in equity. in all material respects.: We have audited the accompanying consolidated and combined statements of financial condition of KKR & Co. 2010. nor were we engaged to perform. These consolidated and combined financial statements are the responsibility of the Company’s management. as of December 31.CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm TO THE B OA RD OF DIR EC TO RS A N D UN I T H OLDE RS O F KK R & CO . 2010 and 2009. evidence supporting the amounts and disclosures in the financial statements. 2010. but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. the financial statements include investments valued at $23.9 billion (62% of total assets) and $19. As discussed in Note 5 to the consolidated and combined financial statements.P. The Company is not required to have. Management’s estimates are based on the factors described in Note 2. Deloitte & Touche LLP New York. We believe that our audits provide a reasonable basis for our opinion. the financial position of KKR & Co. on a test basis. 2011 64 KKR 2010 ANNUAL REPORT . L. Our responsibility is to express an opinion on the consolidated and combined financial statements based on our audits.4 billion (64% of total assets) as of December 31.P. L. such consolidated and combined financial statements present fairly. In our opinion. An audit also includes examining. we express no such opinion.P. as well as evaluating the overall financial statement presentation. 2010 and 2009. in conformity with accounting principles generally accepted in the United States of America. an audit of its internal control over financial reporting. 2010 and 2009. New York March 7. (the “Company”) as of December 31. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). L . whose fair values have been estimated by management in the absence of readily determinable fair values. Accordingly. and the results of their operations and their cash flows for each of the three years in the period ended December 31.

324.988 223.042 $ 38.P.391.493 30.298 28.272 3.486.960 18.902 60.741 711.091 and 204.346.108 2.221.943 123.482 36.CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Consolidated and Combined Statements of Financial Condition (Amounts in Thousands.630 Debt Obligations Due to Affiliates Accounts Payable. respectively) Accumulated Other Comprehensive Income Total KKR & Co.047 886.161 4.185 87.013.388 36.530 1.111 $ 2.902.739 282.770.226 common units issued and outstanding as of December 31. L.111 KKR 2010 ANNUAL REPORT 65 .656 1. 2010 and December 31.770 136.193 1.391.P. 2009.052 $ 30.326.157 $ 1. at Fair Value Due from Affiliates Other Assets Total Assets Liabilities and Equity $ 738.849 23. 2010 2009 Assets Cash and Cash Equivalents Cash and Cash Equivalents Held at Consolidated Entities Restricted Cash and Cash Equivalents Investments. Total Equity Total Liabilities and Equity See notes to consolidated and combined financial statements.157 1. L.072.012.556 309.275.972.091 72.481 $ 30. Partners’ Capital (212.704 2.859.000.P.060. Partners’ Capital Noncontrolling Interests in Consolidated Entities Noncontrolling Interests held by KKR Holdings L.754 $ 38.963 1.221.361.115 $ 546.327. 1.449. Except Unit Data) December 31. Accrued Expenses and Other Liabilities Total Liabilities Commitments and Contingencies Equity KKR & Co.391.360 27.693 695.

013 264.471) Net Loss Attributable to KKR & Co.195.692 311.720) 75.902.226 Basic Diluted Weighted Average Common Units Outstanding Basic Diluted See notes to consolidated and combined financial statements.673 59.561) (12. $ $ (12. Net Income (Loss) Attributable to KKR & Co.055.850.369 36.P.250.099) 9.601 (125.851.090 1.048.293 226.226 204.178 $ 331.005 186.62 206.360 7.663 7.396 55.902.430 179.271 838.P.371 6.62 1.808 6. 2009 $ 235.38) (.685 October 1.824 (53.277 333.181 149.710 7.889.CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Consolidated and Combined Statements of Operations (Amounts in Thousands.544.103 418.944.682 206. 66 KKR 2010 ANNUAL REPORT . L.761) — $ (1.117 (79.455 39. Except Unit and Per Unit Data) For the Years Ended December 31.147 67.446) 6.382 (116.204.344.016 899.865.119.229 1. 2009 through December 31.998 6. Per Common Unit $ $ $ 1.776.182 30. Net Income (Loss) Attributable to KKR & Co.386 1.38) 204.471 6.244 $ $ (78.P. Administrative and Other Fund Expenses Total Expenses Investment Income (Loss) Net Gains (Losses) from Investment Activities Dividend Income Interest Income Interest Expense Total Investment Income (Loss) Income (Loss) Before Taxes Income Taxes Net Income (Loss) Less: Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities Less: Net Income (Loss) Attributable to Noncontrolling Interests held by KKR Holdings L.786 (13.P.221) (.638) 7.324 142.753.696) 849.755.831 75. L.762.031.108 7.232) (11.179.505.852. L.441 129.388 Employee Compensation and Benefits Occupancy and Related Charges General.369 1. 2010 2009 2008 Revenues Fees Expenses $ 435.239) (13.072 38.039.

CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Consolidated and Combined Statements of Changes in Equity
KKR & Co. L.P. Accumulated Other Comprehensive Income Noncontrolling Interests in Consolidated Entities Noncontrolling Interests held by KKR Holdings L.P . Total Comprehensive Income

(Amounts in Thousands, Except Unit Data)

Common Units

Partners’ Capital

Total Equity

January 1, 2008

$ 1,507,694 (1,204,471)

$

9,652

$ 28,749,814 (11,850,761)

$

— $(13,055,232) (8,425) $ (13,063,657)

$ 30,267,160 (13,055,232) (8,425) (13,063,657) (6,285) 4,045,915 (1,392,776) 19,850,357 $ 5,602,633 2,422 $ 5,605,055 5,602,633 2,422 5,605,055 1,970,543 (1,314,048) 26,111,907 (907,684) 95,280

Comprehensive Income: Net Income (Loss) Other Comprehensive Income — Currency Translation Adjustment Total Comprehensive Income Purchase of Noncontrolling Interests in Consolidated Entities by KKR Group Holdings L.P. Capital Contributions Capital Distributions
Balance at December 31, 2008

(8,407)

(18)

103,368 (255,957) 150,634 927,906

1,245

(6,285) 3,942,547 (1,136,819) 19,698,478 4,674,727

Comprehensive Income: Net Income (Loss) Other Comprehensive Income — Currency Translation Adjustment Total Comprehensive Income Capital Contributions Capital Distributions
Balance at September 30, 2009

2,417 35,499 (320,760) 793,279 (146,448) (368,909) 3,029,070 450,851 (2,630,491) (36,547) 1,090,805 (78,221) 105 (2,538)

5 1,935,044 (993,288) 25,314,966 (761,236) 464,225 (3,029,070)

3,662 (36)

Non­Contributed Assets (1996 Fund L.P.) Retained Interests Reallocation of Net Assets from KKR PEI Investments L.P. Contributions of Net Assets of KPE Reallocation of Interests to KKR Holdings L.P. Deferred Tax Effects Resulting from the Transactions
Balance at October 1, 2009

450,851 2,633,029 (36,547) 25,713,807 $ 1,249,738 353 1,250,091 1,249,738 353 1,250,091 562,373 470,395 (635,185) 27,361,481 27,361,481 7,776,471 978 7,777,449 — 702 824,193 4,995,347 (4,959,130) $36,000,042

204,902,226

1,088

21,988,885 1,444,655 3

2,633,029 (116,696) 245 $ 562,373 169 (6,760) 3,072,360 3,072,360 899,277 286 $ 7,776,471 978 $ 7,777,449

Comprehensive Income: Net Income (Loss) Other Comprehensive Income — Currency Translation Adjustment Total Comprehensive Income Equity Based Compensation Capital Contributions Capital Distributions
Balance at December 31, 2009 January 1, 2010

72 204,902,226 204,902,226 1,012,656 1,012,656 333,178 683 1,193 1,193

470,154 (628,425) 23,275,272 23,275,272 6,544,016 9

Comprehensive Income: Net Income (Loss) Other Comprehensive Income — Currency Translation Adjustment Total Comprehensive Income Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units Deferred Tax Effects Resulting from Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units Equity Based Compensation Capital Contributions Capital Distributions
Balance at December 31, 2010

7,867,865

69,940 674

59 28 4,954,676 (4,446,812) $ 30,327,161

(69,999)

212,770,091

(91,918) $ 1,324,530

$

1,963

824,193 40,671 (420,400) $ 4,346,388

See notes to consolidated and combined financial statements.

KKR

2010 ANNUAL REPORT

67

CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Consolidated and Combined Statements of Cash Flows
(Amounts in Thousands) For the Years Ended December 31,

2010

2009

2008

Cash Flows from Operating Activities

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

$ 7,776,471 824,193 (2,411,510) (5,343,580) (20,978) (416,254) (119,585) (79,616) 266,974 (5,396,703) 5,653,984 733,396 11,816 — (13,081) (1,265) (4,446,812) 4,954,676 (420,400) 40,671 — — (91,918) — 652,806 (1,225,420) (3,780) (540,177) 191,954 546,739 $ 738,693

$ 6,852,371 562,373 314,407 (7,819,412) (1,397) 690,371 (21,830) (21,826) 344,137 (2,795,658) 1,549,152 (347,312) (21,909) — (21,050) (42,959) (1,586,300) 2,405,198 (6,760) 169 (20,241) 470,263 (211,068) 35,571 503,462 (852,503) 573 738,364 348,093 198,646 $ 546,739

$(13,055,232) — (253,410) 13,198,130 2,387 (565,604) 14,080 87,338 28,724 (3,438,323) 1,535,754 (2,446,156) (4,471) (44,171) (13,104) (61,746) (1,136,819) 3,942,547 — — — — (250,358) 103,368 813,809 (1,018,389) (19,655) 2,434,503 (73,399) 272,045 $ 198,646

Non­Cash Equity Based Payments Net Realized (Gains) Losses on Investments Change in Unrealized (Gains) Losses on Investments Other Non­Cash Amounts Cash Flows Due to Changes in Operating Assets and Liabilities: Change in Cash and Cash Equivalents Held at Consolidated Entities Change in Due from/(to) Affiliates Change in Other Assets Change in Accounts Payable, Accrued Expenses and Other Liabilities Investments Purchased Cash Proceeds from Sale of Investments Net Cash Provided (Used) by Operating Activities
Cash Flows from Investing Activities

Change in Restricted Cash and Cash Equivalents Purchase of Noncontrolling Interests Purchase of Furniture, Equipment and Leasehold Improvements Net Cash Provided (Used) by Investing Activities
Cash Flows from Financing Activities

Distributions to Noncontrolling Interests in Consolidated Entities Contributions from Noncontrolling Interests in Consolidated Entities Distributions to KKR Holdings L.P. Contributions from KKR Holdings L.P. Cash Attributed to Non­Contributed Assets (1996 Fund L.P.) Contributions from KKR Private Equity Investors, L.P. Distributions to Partners Contributions from Partners Proceeds from Debt Obligations Repayment of Debt Obligations Deferred Financing Cost (Incurred) Returned Net Cash Provided (Used) by Financing Activities
Net Change in Cash and Cash Equivalents

Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year
(continued)

68

KKR

2010 ANNUAL REPORT

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)

(Amounts in Thousands) For the Years Ended December 31,

2010

2009

2008

Supplemental Disclosures of Cash Flow Information

Payments for Interest Payments for Income Taxes
Supplemental Disclosures of Non-Cash Activities

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

66,110 91,112 — 824,193 — — — — — (2,521) 42,738 (21,138) — 8,236 (5,525) 2,100 (2,443) 69,999 702 — — — — — — — — —

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

40,256 8,454 — 562,373 35,413 (19,412) 109,692 89,005 — 7,733 (968) (18,159) 19,761 — (12,286) 11,576 12,628 — —

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

70,952 4,539 625,000 — — — 5,599 — 15,939 — — — — — (35,624) — (14,032) — — — — — — — — — — —

Non­Cash Debt Financing/Purchase of Investments Non­Cash Contributions of Stock Based Compensation from KKR Holdings L.P. Non­Cash Distributions to Noncontrolling Interests in Consolidated Entities Non­Cash Contributions from KKR Private Equity Investors, L.P. Non­Cash Distributions to Controlling Equity Holders Non­Cash Distributions to KKR Holdings L.P. Restricted Stock Grant from Affiliate Proceeds Due from Unsettled Investment Sales Unsettled Purchase of Investments Change in Contingent Carried Interest Repayment Guarantee Realized Gains on Extinguishment of Debt Realized Gains on Repayment of Debt Unrealized Gains (Losses) on Foreign Exchange on Debt Obligations Conversion of Interest Payable into Debt Obligations Change in Foreign Exchange on Cash and Cash Equivalents Held at Consolidated Entities Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units Net Deferred Tax Effects Resulting from Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units including the effect of the tax receivable agreement
Reorganization Adjustments

Due From Affiliates Other Assets Accounts Payable, Accrued Expenses and Other Liabilities Noncontrolling Interests in Consolidated Entities
Deconsolidation of Consolidated Entities (1):

$ 94,538 $ 17,257 $ 53,040 $(2,564,845) $ $ $ $ $ 5,485 911,603 3,706 33,351 761,236

Cash and Cash Equivalents Held at Consolidated Entities Investments, at Fair Value Due From Affiliates Accounts Payable, Accrued Expenses and Other Liabilities Noncontrolling Interests in Consolidated Entities
See notes to consolidated and combined financial statements.

KKR

2010 ANNUAL REPORT

69

KKR’s business was conducted through multiple entities for which there was no single holding entity. Group Holdings also owns certain economic interests in Management Holdings through a wholly­owned Delaware corporate subsidiary of KKR Management Holdings Corp.P. of which KPE was the sole limited partner. (“Group Holdings”). This includes the exchange of the KPE Investment Partnership for a 30% economic interest in the KKR Group Partnerships in the Transactions. 2007 and its general partner is KKR Management LLC (the “Managing Partner”). L.P. which provides a global platform for sourcing transactions. From the date of its formation. The carrying amount of noncontrolling interests associated with the KPE Investment Partnership was adjusted to zero to reflect the change in ownership interest from that of KPE to that of KKR & Co. excluding any KPE units whose consent rights were controlled by KKR or its affiliates. together with its consolidated subsidiaries (“KKR”). Reorganization and Combination Transactions Prior to October 1. through its controlling equity interests in the KKR Group Partnerships. no new basis of accounting has been established upon completion of the Transactions and Group Holdings carried forward the carrying amounts of assets and liabilities that were contributed to the KKR Group Partnerships. L. KPE was established solely to hold limited partner interests in the KPE Investment Partnership and since its inception.P.S. exchanges involving the various noncontrolling interests were accounted for as equity transactions in accordance with ASC 810­10­45­23.P. In addition. a Cayman Islands exempted limited partnership. partners’ capital. federal income tax purposes. (“KPE”). net asset values of publicly traded closed­end funds are not necessarily correlated to the public market capitalization. Per Unit Data.0 billion of limited partner interests in the KPE Investment Partnership. KPE had no substantive operating activities other than the investing activities conducted through the KPE Investment Partnership. which was a Guernsey limited partnership that traded publicly on Euronext Amsterdam under the symbol “KPE”. Except Unit. The reorganization involved a contribution of certain equity interests in KKR’s businesses that were held by KKR’s Predecessor Owners to the KKR Group Partnerships in exchange for 100% of the interests in the KKR Group Partnerships. 70 KKR 2010 ANNUAL REPORT . KKR PEI Investments. (the “Partnership”) was formed as a Delaware limited partnership on June 25. Led by Henry Kravis and George Roberts. and $19. Since KKR retained its controlling financial interest in the KKR business. the KPE Investment Partnership and the other entities included in the consolidated and combined financial statements were under the common control of the Senior Principals both prior to and following the completion of the Transactions. and (ii) KKR Fund Holdings L. a Delaware corporation which is a domestic corporation for U. federal income tax purposes. is the holding partnership for the KKR business. Due to a variety of reasons.P. raising capital and carrying out capital markets activities. and the exchange by KKR’s other principals and individuals of their ownership interests in various entities included in the accompanying consolidated and combined financial statements before the Transactions for interests in KKR Holdings L. ORGANIZ ATION A ND BA S I S O F PRES E N TAT I ON KKR & Co. is a leading global investment firm that is involved in providing a broad range of investment management services to investors and provides capital markets services for the firm.4 million of net other liabilities. The Partnership is the parent company of KKR Group Limited. and Where Otherwise Noted) In order to facilitate the Combination Transaction (defined below) KKR completed a series of transactions (the “Reorganization Transactions”). Accordingly. including the fact that the holders of publicly traded units generally hold passive interests with little influence over the operations of a fund and its underlying investments and are not able to redeem their units at net asset value. the Combination Transaction was consented to by holders of a majority of KPE units.S.P. The net asset value per unit of KPE on the date of the Transactions was greater than the publicly traded unit value of KPE on that same date. The KPE Investment Partnership was controlled by Senior Principals through their general partner interest. L. (“KPE Investment Partnership”). acting upon the unanimous recommendation of the independent directors of KPE’s general partner. but were under common control of senior KKR principals (“Senior Principals”). and in which Senior Principals and KKR’s other principals and individuals held ownership interests (collectively. (“KKR Holdings”). pursuant to which KKR’s business was reorganized under the KKR Group Partnerships. its portfolio companies and clients. Substantially all of the economic interests in the KPE Investment Partnership were held by KPE through its limited partner interest. The contribution of ownership interests held by KKR’s principals and other individuals is reflected in the consolidated and combined financial statements as a reallocation of equity interests from KKR & Co.P. which is the non­economic general partner of KKR Group Holdings L. L. the “KKR Group Partnerships”) directly and through KKR Fund Holdings GP Limited. partners’ capital to noncontrolling interests held by KKR Holdings. a Cayman Island limited company which is a disregarded entity for U. The Combination Transaction involved the contribution of all of KPE’s assets and liabilities to the KKR Group Partnerships in exchange for a 30% interest in the KKR Group Partnerships. (“Management Holdings”) through KKR Management Holdings Corp. Because KPE. KKR conducts business through 14 offices around the world..3 million of cash and cash equivalents. Similarly. KKR sponsored the investment vehicle KKR Private Equity Investors.P. the “Transactions”). On October 1. because the Transactions did not result in a change of control. $470.P. all of KPE’s investments were made through another Guernsey limited partnership. Substantially all of the economic interests in KPE were held by third party investors through their limited partner interests.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Notes to Consolidated and Combined Financial Statements (All Dollars are in Thousands. KPE was controlled by Senior Principals through their general partner interest. Common control transactions are accounted for under Accounting Standards Code (“ASC”) 805­50. KKR & Co. the Partnership and KPE completed a transaction to combine the investment management business of KKR with the assets and liabilities of KPE (the “Combination Transaction” and together with the Reorganization Transactions. L. 1. The exchange of the KPE Investment Partnership for a 30% interest in the KKR Group Partnerships in the Transactions is reflected in the consolidated and combined financial statements as a reallocation of equity interests from noncontrolling interests to KKR & Co. L. L. in accordance with ASC 805­50 the Transactions are accounted for as transfers of interests under common control. no gain or loss was recognized in the accompanying consolidated and combined financial statements. and the Partnership is the sole limited partner of Group Holdings.P.P. is a limited partner with a 1% economic interest. 2009. The assets and liabilities contributed to the KKR Group Partnerships by KPE included $3. The Combination Transaction was negotiated on an arms­length basis with the independent directors of KPE’s general partner and unanimously approved by the board of directors of KPE’s general partner. (“Fund Holdings” and together with Management Holdings. the “Predecessor Owners”). Group Holdings holds a controlling economic interest in each of (i) KKR Management Holdings L. 2009. KKR operates as a single professional services firm and carries out its investment activities under the KKR brand name. In addition. and certain economic interests in Fund Holdings through a Delaware partnership of which Group Holdings is the general partner with a 99% economic interest and KKR Management Holdings Corp. (NYSE: KKR). The Partnership.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Upon completion of the Combination Transaction, KPE changed its name to KKR & Co. (Guernsey) L.P. (“KKR Guernsey”) and was traded publicly on Euronext Amsterdam under the symbol “KKR” until it was delisted on July 15, 2010. Immediately following the Transactions, KKR Guernsey held a 30% economic interest in the KKR Group Partnerships through Group Holdings and our principals retained a 70% economic interest in the KKR Group Partnerships through KKR Holdings.

The general partners of the 1996 Fund and their respective consolidated funds were removed from the financial statements as they were not contributed to the KKR Group Partnerships as part of the Transactions. The Retained Interests were not contributed to the KKR Group Partnerships but are reflected in the accompanying consolidated and combined financial statements as noncontrolling interests in consolidated entities due to the fact that the entities in which these noncontrolling interests are held continue to be consolidated subsequent to the Transactions. Prior to the Transactions, certain KKR principals who received carried interest distributions with respect to KKR’s private equity funds had personally guaranteed, on a several basis and subject to a cap, the contingent obligations of the general partners of certain private equity funds to repay amounts to fund limited partners pursuant to the general partners’ clawback obligations. The terms of the Transactions require that KKR principals remain individually responsible for any clawback obligations relating to carry distributions received prior to the Transactions up to a maximum of $223.6 million. See Note 2 “Summary of Significant Accounting Policies — Investment Income — Clawback Provision.” To the extent a fund is in a clawback position, KKR will record a benefit to reflect the amounts due from the KKR principals related to the clawback. By recording this benefit, the clawback obligation has been reduced to an amount that represents the obligation of the KKR Group Partnerships. In connection with the Transactions, KKR recorded a receivable of $95,280 on October 1, 2009 with a corresponding increase to equity. In addition, historically, KKR consolidated the KPE Investment Partnership in its financial statements and substantially all of the ownership interests were reflected as noncontrolling interests. These noncontrolling interests were removed as these interests were contributed to the KKR Group Partnerships in the Transactions. Subsequent to the Transactions, the KKR Group Partnerships hold 100% of the controlling and economic interests in the KPE Investment Partnership. KKR therefore continues to consolidate the KPE Investment Partnership and its economic interests are no longer reflected as noncontrolling interests in consolidated entities as of October 1, 2009, the effective date of the Transactions. Subsequent to the completion of the Transactions, KKR’s business is conducted through the KKR Group Partnerships, which own: • all of the controlling and economic interests in KKR’s fee­generating management companies and approximately 98% of the economic interests in KKR’s capital markets companies; • controlling and economic interests in the general partners of KKR’s private equity funds and other investment vehicles that are entitled to receive carry; and • all of the controlling and economic interests in the KPE Investment Partnership. With respect to KKR’s active and future funds and co­investment vehicles that provide for carried interest, KKR continues to allocate to its principals, other professionals and selected other individuals a portion of the carried interest earned. See Note 2, “Summary of Significant Accounting Policies — Profit Sharing Plans”. This allocation is made prior to the allocation of carried interest profits between KKR and KKR Holdings.

U.S. Listing

On July 15, 2010, KKR & Co. L.P. became listed on the New York Stock Exchange (“NYSE”). In connection with the NYSE listing, KKR Guernsey contributed its 30% interest held through Group Holdings to KKR & Co. L.P. in exchange for NYSE­listed common units of KKR & Co. L.P. and distributed those common units to holders of KKR Guernsey units (referred to hereafter as the “In­Kind Distribution”). Because the assets of KKR Guernsey consisted solely of its interests in Group Holdings, the In­Kind Distribution resulted in the dissolution of KKR Guernsey and the delisting of its units from Euronext Amsterdam. As of July 15, 2010, KKR & Co. L.P. both indirectly controlled the KKR Group Partnerships and indirectly held KKR Group Partnership units representing at that time a 30% economic interest in KKR’s business. The remaining 70% of the KKR Group Partnership units were held by KKR’s principals through KKR Holdings. Subsequent to the NYSE listing, KKR Holdings and our principals exchanged a portion of their interests in the KKR Group Partnerships for common units, and as of December 31, 2010, KKR & Co. L.P. owned 31.15% of the KKR Group Partnership units and our principals owned 68.85% through KKR Holdings. From time to time, the percentage ownership in the KKR Group Partnerships may continue to change as KKR Holdings and/or KKR’s principals exchange units in the KKR Group Partnerships (the “KKR Group Partnership Units”) for KKR & Co. L.P. common units.

Basis of Presentation

Prior to the Transactions, the accompanying consolidated and combined financial statements include the results of eight of KKR’s private equity funds and two of KKR’s fixed income funds and the general partners and management companies of those funds under the common control of its Senior Principals. One of the eight private equity funds included the KPE Investment Partnership. Prior to the Transactions, the following entities and interests were included in the accompanying consolidated and combined financial statements but were not, however, contributed to the KKR Group Partnerships as part of the Transactions: (i) the general partners of the 1996 Fund and their respective consolidated funds; (ii) economic interests that allocate to a former principal and such person’s designees an aggregate of 1% of the carried interest received by the general partners of KKR’s private equity funds and 1% of KKR’s other profits (losses); (iii) economic interests that allocate to certain of KKR’s former principals and their designees a portion of the carried interest received by the general partners of KKR’s private equity funds that was allocated to them with respect to private equity investments made during such former principals’ previous tenure with KKR; and (iv) economic interests that allocate to certain of KKR’s current and former principals all of the capital invested by or on behalf of the general partners of KKR’s private equity funds before t he completion of the Transactions and any returns thereon. The interests described in (ii) through (iv) are referred to as the “Retained Interests.”

Consolidation

The consolidated and combined financial statements (referred to hereafter as the “financial statements”) include the accounts of KKR’s management and capital markets companies, the general partners of certain unconsolidated co­investment vehicles and the general partners of its private equity, fixed income, and capital solution oriented funds and their respective consolidated funds (the “KKR Funds”).

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

KKR & Co. L.P. consolidates the financial results of the KKR Group Partnerships and their consolidated subsidiaries. KKR Holdings’ ownership interest in the KKR Group Partnerships is reflected as noncontrolling interests held by KKR Holdings L.P. in the accompanying consolidated and combined financial statements. References in the accompanying consolidated and combined financial statements to KKR’s “principals” are to KKR’s senior executives and operating consultants who hold interests in KKR’s business through KKR Holdings, including Senior Principals.

The KKR Funds are, for GAAP purposes, investment companies and therefore are not required to consolidate their majority owned and controlled investments in portfolio companies (“Portfolio Companies”). Rather, KKR reflects their investments in portfolio companies at fair value as described below. All intercompany transactions and balances have been eliminated.
Variable Interest Entities

2 . S U MMARY OF SIGNIF I C A N T ACCOUN T I N G POLI C I ES

Basis of Accounting

The accompanying consolidated and combined financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates

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

Consolidation
General

KKR consolidates (i) those entities in which it holds a majority voting interest or has majority ownership and control over significant operating, financial and investing decisions of the entity, including those KKR Funds in which the general partner is presumed to have control, or (ii) entities determined to be variable interest entities (“VIEs”) for which it is considered the primary beneficiary. The majority of the entities consolidated by KKR are comprised of: (i) those entities in which KKR has majority ownership and has control over significant operating, financial and investing decisions; and (ii) the consolidated KKR Funds, which are those entities in which KKR holds substantive, controlling general partner or managing member interests. With respect to the consolidated KKR Funds, KKR generally has operational discretion and control, and limited partners have no substantive rights to impact ongoing governance and operating activities of the fund. The KKR Funds are consolidated by KKR notwithstanding the fact that KKR has only a minority economic interest in those funds. KKR’s financial statements reflect the assets, liabilities, fees, expenses, investment income and cash flows of the consolidated KKR Funds on a gross basis, and the majority of the economic interests in those funds, which are held by third party investors, are attributed to noncontrolling interests in consolidated entities in the accompanying financial statements. All of the management fees and certain other amounts earned by KKR from those funds are eliminated in consolidation. However, because the eliminated amounts are earned from, and funded by, noncontrolling interests, KKR’s attributable share of the net income from those funds is increased by the amounts eliminated. Accordingly, the elimination in consolidation of such amounts has no effect on net income (loss) attributable to KKR or KKR partners’ capital.

KKR consolidates all VIEs in which it is considered the primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The consolidation rules which were revised effective January 1, 2010 require an analysis to (a) determine whether an entity in which KKR holds a variable interest is a variable interest entity and (b) whether KKR’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment. Where KKR has an interest in an entity that has qualified for the deferral of the consolidation rules as discussed in “Recently Issued Accounting Pronouncements”, the analysis is based on consolidation rules prior to January 1, 2010. These rules require an analysis to (a) determine whether an entity in which KKR holds a variable interest is a variable interest entity and (b) whether KKR’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would be expected to absorb a majority of the variability of the entity. Under both guidelines, KKR determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion at each reporting date. In evaluating whether KKR is the primary beneficiary, KKR evaluates its economic interests in the entity held either directly by KKR or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that KKR is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by KKR, affiliates of KKR or third parties) or amendments to the governing documents of the respective KKR Funds could affect an entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, KKR assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly. As of December 31, 2010 and 2009, the maximum exposure to loss for those VIEs in which KKR is determined not to be the primary beneficiary but in which it has a variable interest is as follows:
December 31,

2010

2009

Investments, at Fair Value Due from Affiliates Maximum Exposure to Loss

$ 35,867 3,225 $39,092

$ 13,753 1,473 $15,226

For those unconsolidated VIEs in which KKR is the sponsor, KKR may have an obligation as general partner to provide commitments to such funds. For the years ended December 31, 2010 and 2009, KKR did not provide any support other than its obligated amount. KKR’s investment strategies differ by investment fund; however, the fundamental risks have similar characteristics, including loss of invested capital and loss of management and incentive fees. Accordingly, disaggregation of KKR’s involvement with VIEs would not provide more useful information.

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KKR

2010 ANNUAL REPORT

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Noncontrolling Interests
Noncontrolling Interests in Consolidated Entities

Prior to the completion of the Transactions, noncontrolling interests in consolidated entities represented ownership interests in consolidated entities held by entities or persons other than our Predecessor Owners. The majority of these noncontrolling interests were held by third party investors in the KKR Funds and the limited partner interests in the KPE Investment Partnership. Subsequent to the completion of the Transactions, noncontrolling interests in consolidated entities represent the ownership interests in KKR that are held by: (i) third party investors in the KKR Funds; (ii) a former principal and such person’s designees representing an aggregate of 1% of the carried interest received by the general partners of KKR’s funds and 1% of KKR’s other profits (losses) until a future date; (iii) certain of KKR’s former principals and their designees representing a portion of the carried interest received by the general partners of KKR’s private equity funds that was allocated to them with respect to private equity investments made during such former principals’ previous tenure with KKR; (iv) certain of KKR’s current and former principals representing all of the capital invested by or on behalf of the general partners of KKR’s private equity funds before the completion of the Transactions and any returns thereon; and (v) a third party in KKR’s capital markets business (representing an aggregate of 2% of the capital markets business equity).
Noncontrolling Interests held by KKR Holdings

Investments and other financial instruments measured and reported at fair value are classified and disclosed in one of the following categories: Level I — Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include publicly listed equities, publicly listed derivatives, equity securities sold, but not yet purchased and call options. KKR does not adjust the quoted price for these investments, even in situations where KKR holds a large position and a sale could reasonably affect the quoted price. Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is generally determined through the use of models or other valuation methodologies. Investments which are included in this category include corporate credit investments, convertible debt securities indexed to publicly listed securities and certain over­the­ counter derivatives. Level III — Pricing inputs are unobservable for the asset or liability and includes situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in this category generally include private Portfolio Companies held directly through the KKR Funds and private equity co­investment vehicles. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. KKR’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and it considers factors specific to the investment. In cases where an investment measured and reported at fair value is transferred into or out of Level III of the fair value hierarchy, KKR accounts for the transfer at the end of the reporting period.

Subsequent to the completion of the Transactions, noncontrolling interests attributable to KKR Holdings include KKR’s Predecessor Owners’ economic interests in the KKR Group Partnership Units. KKR’s Predecessor Owners receive financial benefits from KKR’s business in the form of distributions received from KKR Holdings and through their direct and indirect participation in the value of KKR Group Partnership Units held by KKR Holdings. As a result, certain profit based cash amounts that were previously paid by KKR no longer are paid by KKR and are borne by KKR Holdings. Income of KKR after allocation to controlling interests in consolidated entities, with the exception of certain tax assets and liabilities that are directly allocable to KKR Management Holdings Corp., is attributed based on the percentage of the weighted average KKR Group Partnership Units held by KKR and KKR Holdings, who are the equity holders of the KKR Group Partnerships during the period. However, the contribution of certain expenses borne entirely by KKR Holdings as well as the periodic of exchange of KKR Holdings units for KKR & Co. L.P. common units results in the equity allocations shown in the statements of changes in equity to differ from the pro rata split of net assets and liabilities.

Cash and Cash Equivalents

KKR considers all highly liquid short­term investments with original maturities of 90 days or less when purchased to be cash equivalents.

Cash and Cash Equivalents Held at Consolidated Entities

Cash and cash equivalents held at consolidated entities represents cash that, although not legally restricted, is not available to fund general liquidity needs of KKR as the use of such funds is generally limited to the investment activities of the KKR Funds.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents represent amounts that are held by third parties under certain of KKR’s financing and derivative transactions.

Fair Value Measurements

Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the exit price). KKR measures and reports its investments and other financial instruments at fair value. KKR has categorized and disclosed its assets and liabilities measured and reported at fair value based on the hierarchical levels as defined within GAAP. GAAP establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type and the characteristics specific to the asset or liability. Investments and other financial instruments for which fair value can be measured from quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments, at Fair Value

KKR’s investments consist primarily of private equity and other investments. See Note 4, “Investments.”
Private Equity Investments

Private equity investments consist of investments in Portfolio Companies of consolidated KKR Funds that are, for GAAP purposes, investment companies. The KKR Funds reflect investments at their estimated fair values, with unrealized gains or losses resulting from changes in fair value reflected as a component of Net Gains (Losses) from Investment Activities in the statements of operations. Private equity investments that have readily observable market prices (such as those traded on a securities exchange) are stated at the last quoted sales price as of the reporting date.

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fees consisted of the following: For the Years Ended December 31. The liability for such securities sold short is marked to market based on the current value of the underlying security at the reporting date with changes in fair value recorded as unrealized gains or losses in Net Gains (Losses) from Investment Activities in the accompanying statements of operations. Foreign Exchange Derivatives and Hedging Activities KKR enters into derivative financial instruments primarily to manage foreign exchange risk and interest rate risk arising from certain assets and liabilities.476 60. high­ yield securities and other fixed income securities.527 119. Transaction Fees Monitoring Fees Management Fees Incentive Fees Total Fee Income Transaction Fees $ 212. Depreciation and Amortization Fixed assets consist primarily of leasehold improvements. and where those values are not available. and separately managed accounts. In connection with pursuing successful Portfolio Company investments. Not Yet Purchased 2010 2009 2008 Whether part of a hedging transaction or a transaction in its own right.234 58. recent public market and private transactions for comparable securities. Corporate Credit Investments Investment Activities in the accompanying statements of operations. the cash receipt is recorded and the deferred amounts are relieved. KKR’s derivative financial instruments contain credit risk to the extent that its bank counterparties may be unable to meet the terms of the agreements. current market conditions. and financing transactions subsequent to the acquisition of the investment. KKR considers its principals and their related entities. Derivatives Comprehensive income is defined as the change in equity of a busi­ ness enterprise during a period from transactions and other events and circumstances. For the years ended December 31. KKR receives reimbursement for certain transaction­related expenses. These fees are paid based on a fixed periodic schedule by the Portfolio Companies either in advance or in arrears and are separately negotiated for each 74 KKR 2010 ANNUAL REPORT . Fees are typically paid on or around the closing. KKR attempts to minimize this risk by limiting its counter­ parties to major financial institutions with strong credit ratings.472 $ 331. Transaction­related expenses. Investments in Publicly Traded Securities Fees consist primarily of (i) monitoring and transaction fees from providing advisory and other services. Comprehensive Income Corporate credit investments that are listed on a securities exchange are valued at their last quoted sales price as of the reporting date. and (iii) fees from capital markets activities. Investments in corporate debt. In the event that third party pricing service quotations are unavailable. a specialty finance company. at Fair Value. KKR’s investments in publicly traded securities represent equity securities. are valued at the mean of the “bid” and “asked” prices obtained from third party pricing services.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS The determination of fair value may differ materially from the values that would have resulted if a ready market had existed. These transactions may involve a market risk in excess of the amount currently reflected in KKR’s statements of financial condition. and computer hardware and software. which are classified as trading securities and carried at fair market value. 2009 and 2008. fixtures and equipment.828 174.271 $ 41. Investments denominated in currencies other than the U.640 — $ 235. Subsequent to closing. dollar are valued based on the spot rate of the respective currency at the end of the reporting period with changes related to exchange rate movements reflected as a component of Net Gains (Losses) from Investment Activities in the accompanying statements of operations. Securities Sold. furniture. The costs of success­ fully completed transactions are borne by the KKR Funds and included as a component of the investment’s cost basis. the nature of the investment. No fees or expenses are recorded for these reimbursements.S. Transaction fees are recognized upon closing of the transaction. In the accompanying financial statements. not yet purchased.785 38. These fees are based on the contractual terms of the govern­ ing agreements and are recognized in the period during which the related services are performed. are typically deferred until the transaction is consummated and are recorded in Other Assets on the date incurred. All derivatives are recognized as either assets or liabilities in the statements of financial condition and measured at fair value with changes in fair value recorded in Net Gains (Losses) from Monitoring fees are earned by KKR for services provided to Portfolio Companies and are recognized as services are rendered.181 Transaction fees are earned by KKR primarily in connection with successful private equity and debt transactions and capital markets activities. corporate credit investments are valued by KKR or KKR may engage a third party valuation firm to assist in such valuations. Fees Derivative contracts. The fair value recorded for a particular investment will generally be within the range suggested by the two approaches. represent obligations of KKR to deliver the specified security at the contracted price. securities sold. 2010. and three to seven years for other fixed assets. excluding those resulting from contributions from and distributions to owners.307 135. structured finance vehicles. unconsolidated funds and the Portfolio Companies of its funds to be affiliates. For these investments. investments are recorded at fair value each reporting period as described in the section above titled Investments.386 $ 91. Changes in the fair market value of trading securities are reported within Net Gains (Losses) from Investment Activities in the accompanying statements of operations.495 4. Depreciation and amortization are calculated using the straight­line method over the assets’ estimated economic useful lives. or securities sold short. Fixed Assets. Such amounts are recorded at cost less accumulated depreciation and amortization. Upon reimbursement from a third party.832 $435.242 64. which are reimbursed by third parties. and thereby create a liability to repurchase the security in the market at the prevailing prices. Receivables from and payables to affiliates are recorded at their current settlement amount. KKR generally uses a market approach and an income (discounted cash flow) approach when determining fair value. Monitoring Fees Due from and Due to Affiliates For purposes of classifying amounts. comprehensive income represents Net Income (Loss). which for leasehold improvements are the lesser of the lease terms or the life of the asset. including the price at which the investment was acquired. Management considers various internal and external factors when applying these approaches. including syndicated bank loans. (ii) management and incentive fees from providing investment management services to unconsoli­ dated funds. are recorded at estimated fair value with changes in fair value recorded as unrealized gains or losses in Net Gains (Losses) from Investment Activities in the accompanying statements of operations. values are obtained from dealers or market makers. including total rate of return swap contracts and credit default swap contracts. as presented in the statements of operations and net foreign currency translation adjustments.

For KKR’s private equity funds and certain unconsolidated KKR sponsored funds. For purposes of calculating the management fee. the fee is eliminated in consolidation. these investor contributions were used to satisfy a portion of the capital commitments to which KKR would otherwise have been subject as the general partner of the fund. Typically.932.25% plus (ii) equity in excess of $3 billion multiplied by 1%. There were no waived fees for the year ended December 31. equity was an amount defined in the management agreement.243 and $112. a liability to the fund’s limited partners is recorded and revenue is reduced for the amount of the carried interest recognized. 2010.7 million as a result of certain funds not yet recognizing sufficient carried interests. that KKR is entitled to certain fees. As a result of the election to waive the fees. Vested common shares that are received as a component of compensation for management services are carried as trading securities.258 for the years ended December 31.233 and $22. $158. KKR’s management agreement with KFN also provides that KFN is responsible for paying KKR quarterly incentive compensation in an amount equal to the product of (i) 25% of the dollar amount by which: (a) KFN’s net income. Certain of KKR’s private equity funds require the management company to refund up to 20% of any cash management fees earned from limited partners in the event that the funds recognize a carried interest. consisting of a base management fee and an incentive fee. KKR re­measures the restricted common shares and share options to the extent that they are unvested. because these amounts are funded by.310. Income from restricted common shares is recognized ratably over the vesting period as a component of Fees in the accompanying statement of operations. since the KKR Group Partnerships hold 100% of the controlling and economic interests of the KPE Investment Partnership. Costs incurred in monitoring these entities are classified as general. Private Equity Funds KKR’s management agreement with KFN provides. the elimination of these fees does not have an effect on the net income attributable to KKR or KKR partners’ capital. among other things. these fees would not be returned to the funds’ limited partners. 2009 and 2008. based on an annual rate of 1. before incentive compensation. The cash that would have been payable was contributed by the funds’ investors and was initially included as a component of Cash and Cash Equivalents Held at Consolidated Entities. These reimbursements amounted to $32. respectively. For periods prior to the Transactions.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Portfolio Company. Subsequently. and earned from. At such time as the fund recognizes a carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof.50% plus one­fourth of the ten year treasury rate for such quarter. KKR earned fees from the KPE Investment Partnership which were determined quarterly based on 25% of the sum of (i) equity up to and including $3 billion multiplied by KKR 2010 ANNUAL REPORT 75 . 2010. KKR earns a base management fee. KKR was not entitled to any portion of these fees until the fund had achieved positive investment results. respectively. not to exceed 20% of the management fees earned. in which case a termination fee is not payable to KKR. and are recorded at estimated fair value with changes in fair value recognized in Net Gains (Losses) from Investment Activities in the accompanying statements of operations. Once earned. engages in certain acts of willful misconduct or gross negligence. 2011 unless the agreement is terminated in accordance with its terms. 2010. However. administrative and other expenses and reimbursements of such costs are classified as monitoring fees. 2009 and 2008. 2010. Management and Incentive Fees 1. In connection with the monitoring of Portfolio Companies and certain unconsolidated funds.5 million and $44. Accordingly. respectively. exceeds (b) an amount equal to (A) the weighted average of the price per share of the common stock of KFN in its August 2004 private placement and the prices per share of the common stock of KFN in its initial public offering and any subsequent offerings by KFN multiplied by (B) the greater of (1) 2. $16. per weighted average share of KFN’s common shares for such quarter. KKR Financial Holdings LLC (“KFN”) Management fees received from consolidated KKR Funds are eliminated in consolidation.75% of adjusted equity. However. an investment period is defined as a period of up to six years.00% and (2) 0. KKR’s management agreement with KFN was renewed on January 1. becomes bankrupt or insolvent or is dissolved. noncontrolling interests. Monitoring fees amounted to $86. The refunds to the limited partners are paid. The restricted common shares and share options vest ratably over applicable vesting periods and are initially recorded as deferred revenue at their estimated fair values at the date of grant. in accordance with the respective fund agreements.976 for the years ended December 31. the KPE Investment Partnership continues to pay a fee. In the event that a fund’s carried interest is not sufficient to cover all or a portion of the amount that represents 20% of the earned management fees. In lieu of making direct cash capital contributions. 2009 and 2008.0 million for the years ended December 31. For periods prior to the Transactions. or • KKR’s subsidiary that manages KFN experiences a “change of control” or KKR materially breaches the provisions of the agreement. multiplied by (ii) the weighted average number of KFN’s common shares outstanding in such quarter. KKR had elected to waive the right to earn certain management fees that it would have been entitled to from its private equity funds. with a corresponding adjustment to deferred revenue. As of December 31. and the liabilities relieved. there are no clawbacks of incentive fees received from KFN.75% of invested capital after the expiration of the fund’s investment period with subsequent reductions over time. in advance of the management service period. KKR has also received restricted common shares and common share options from KFN as a component of compensation for management services provided to KFN. Because the ability to earn the waived fees was contingent upon the achievement of positive investment returns by the fund. None of the aforementioned events have occurred as of December 31. the amount subject to refund for which no liability has been recorded approximates $58. KKR’s allocated share of the net income from consolidated KKR Funds is increased by the amount of fees that are eliminated. The actual length of the investment period may be shorter based on the timing and deployment of committed capital. computed and payable monthly in arrears. Subsequent to the Transactions. KKR receives reimbursement for certain expenses incurred on behalf of these entities. in which case a termination fee is payable to KKR. The management agreement provides that KFN may terminate the agreement only if: • the termination is approved at least 180 days prior to the expiration date by at least two­thirds of KFN’s independent directors or by the holders of a majority of KFN’s outstanding common shares and the termination is based upon (i) a determination that KKR’s performance has been unsatisfactory and materially detrimental to KFN or (ii) a determination that the management and incentive fees payable to KKR are not fair (subject to KKR’s right to prevent a termination by reaching an agreement to reduce KKR’s management and incentive fees). the recognition of income only occurred when the contingency was satisfied. 2010 and waived fees of $25. which is an amount defined in the management agreement. gross management fees generally range from 1% to 2% of committed capital during the fund’s investment period and is generally 0. 2011 and will automatically be renewed for successive one­year terms following December 31. at such time that the underlying investments are sold and the associated carried interests are realized.

(iii) interest income. While cash bonuses paid to most employees are funded by KKR and result in customary employee compensation and benefits charges. as well as less­liquid credit products such as mezzanine debt and special situations investments. previously recognized unrealized gains or losses are reversed and a realized gain or loss is recognized. 2009 and 2008. Due to the extended durations of KKR’s private equity funds.411. this excess will be funded by KKR Holdings and reflected in compensation expense in the statement of operations.15% of collateral and subordinate collateral management fees are determined based on an annual rate of 0. 2009 and 2008.472 and $119. capital commitments or invested capital. If these investment returns decrease or turn negative in subsequent periods. Employees are also eligible to receive discretionary cash bonuses based on performance. if triggered.562 for the years ended December 31. Unrealized gains or losses result from changes in fair value of investments during the period. GAAP generally requires that the cost of services received in exchange for an award of an equity instrument be measured based on the grant­ date fair value of the award. KKR has the right to waive all or any portion of any collateral management fee. Following the completion of the Transactions. collateral. $136. recognized carried interest will be reduced and reflected as investment losses. respectively. on the date it is received.. (ii) dividends. the instruments governing KKR’s private equity funds generally include a “clawback” or. Carried interest is recognized based on the contractual formula set forth in the instruments governing the fund as if the fund was terminated at the reporting date with the then estimated fair values of the investments realized. the payment dates. Interest income earned by the consolidated KKR Funds amounted to $217. vested awards) are expensed immediately. any shortfall is deferred and payable on subsequent payment dates. Compensation paid to non­employee operating consultants to KKR’s businesses in the form of equity is recognized as general. KKR has permanently waived $103. 2010. dividends earned by the consolidated KKR Funds amounted to $1. To the extent that distributions received by these individuals exceed the amounts that they are otherwise entitled to through their vested units in KKR Holdings. and are included in Net Gains (Losses) from Investment Activities. Carried interest is generally recognized based on the contractual formula set forth in the applicable agreement governing the account. Equity based awards that require the satisfaction of future service or performance criteria are recognized over the relevant service period. Investment Income Investment income consists primarily of the net impact of: (i) realized and unrealized gains and losses on investments. For the years ended December 31. in certain instances. may be subject to a preferred return prior to any distributions of carried interest. overall profitability and other matters.373 and $74. adjusted for estimated forfeitures of awards not expected to vest. bonuses. Dividend Income Dividend income is recognized by KKR on the ex­dividend date. The carried interest. These accounts provide for management fees determined quarterly based on an annual rate generally ranging from 0. equity based compensation and profit sharing plans as described below.613. KKR did not record any employee compensation and benefits charges for payments made to Senior Principals for periods prior to the completion of the Transactions. Unlike employee equity awards. Interest income is recognized as earned. 2009 and 2008. Carried Interests Carried interests entitle the general partner of a fund to a greater allocable share of the fund’s earnings from investments relative to the capital contributed by the general partner and correspondingly reduce noncontrolling interests’ attributable share of those earnings. respectively. Such accounts may also provide for a carried interest on investment disposition proceeds in excess of the capital contributions made for such investment. or in the absence of a formal declaration.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Investment Funds Structured Finance Vehicles KKR’s management agreements for its structured finance vehicles provide for senior collateral management fees and subordinate collateral management fees. 2010. Equity based awards that do not require the satisfaction of future service or performance criteria (i. respectively. employee compensation and benefits expense has consisted of base salaries and bonuses paid to employees who were not Senior Principals. KKR generally waives the collateral management fees for the majority of its structured finance vehicles.254.197) million for the years ended December 31.5% to 1. (iv) interest expense and (v) foreign exchange gains and losses relating to mark­to­market activity on foreign exchange forward contracts. if any. Senior collateral management fees are determined based on an annual rate of 0. KKR believes Equity Based Payments Compensation paid to KKR employees in the form of equity is recognized as employee compensation and benefits expense. such as leveraged loans and high yield bonds.5%.1 million of collateral management fees. administrative and other expense. As described below. $832 million and ($1.e. 2010. a “net loss sharing” provision that.247. If an account provides for carried interest. Carried interest recognized (reversed) amounted to approximately $1. and the priority of payments are terms defined in the management agreements. KKR may cease waiving collateral management fees at its discretion. If amounts distributable on any payment date are insufficient to pay the collateral management fees according to the priority of payments. Payments made to our Senior Principals included partner distributions that were paid to our Senior Principals and accounted for as capital distributions as a result of operating as a partnership. Such rate may be based on the accounts’ average net asset value. 2010. Upon disposition of an investment.207 million. Interest Income Certain fixed income and special situations accounts referred to as “Separately Managed Accounts” invest in liquid strategies. Historically. Separately Managed Accounts that this approach results in income recognition that best reflects the periodic performance of KKR in the management of those funds. cash bonuses that are paid to certain of our most senior employees are funded by KKR Holdings with distributions that it receives on its KKR Group Partnership Units.35% of collateral. Accordingly. foreign currency options and foreign denominated debt. For the purpose of calculating the collateral management fees. Carried interests and similar distribution rights generally entitle KKR to a percentage of the profits generated by a fund as described below. the applicable agreements typically provide for clawback if it is determined that KKR received carried interest in excess of the amount it was entitled to receive for such account. may give rise to a contingent obligation that may require the general partner to return or contribute amounts to the fund for distribution to investors at the end of the life of the fund. As of December 31. the cost of services 76 KKR 2010 ANNUAL REPORT . $181. all of the Senior Principals and other employees receive a base salary that is paid by KKR and accounted for as employee compensation and benefits expense. however. Amounts earned pursuant to carried interests are included as investment income in Net Gains (Losses) from Investment Activities and are earned by the general partner of those funds to the extent that cumulative investment returns are positive. Employee Compensation and Benefits Employee compensation and benefits expense includes salaries. See Note 13 “Commitments and Contingencies”.

Equity based awards that require the satisfaction of future service or performance criteria are recognized over the relevant service period. KKR will allocate to its principals. as partnerships for U. KKR regularly monitors its position and subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more­likely­than­not.S. Translation adjustments are included as a component of accumulated other comprehensive income until realized. KKR reviews its tax positions quarterly and adjusts its tax balances as new information becomes available. These assessments can be complex and require significant judgment. operating consultants and certain senior advisors working in its businesses that are designed to appropriately align performance and compensation. Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase. these entities in some cases continue to be subject to New York City unincorporated business taxes. jurisdictions.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS received in exchange for an award of an equity instrument to service providers is measured at each vesting date. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties. Accordingly. KKR 2010 ANNUAL REPORT 77 . KKR measures the tax benefit of such positions by determining the largest amount that is greater than 50% likely of being realized upon settlement. in U. state and foreign income taxes currently payable. a portion is attributable to the goodwill inherent in our business. other professionals and operating consultants a portion of the carried interest earned in relation to these funds as part of its carry pool. Results of foreign operations are translated at the weighted average exchange rate for each reporting period. Generally.S. KKR operated as a partnership or limited liability company for U. 2010. In addition. $455. state and local corporate income taxes at the entity level and the related tax provision attributable to KKR’s share of this income is reflected in the financial statements. deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using currently enacted tax rates. or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency. jurisdictions. For the year ended December 31. entered into a tax receivable agreement with KKR Holdings pursuant to which our intermediate holding company will be required to pay to KKR Holdings or transferees of its KKR Group Partnership Units 85% of the amount of cash savings. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. if any. if any. such differences will impact the income tax provision in the period in which such determinations are made. state and local income taxes that the intermediate holding company actually realizes as a result of this increase in tax basis. If the initial assessment fails to result in the recognition of a tax benefit. No payments have been made under the tax receivable agreement for the year­ended December 31. and is not measured based on the grant­date fair value of the award unless the award is vested at the grant date. federal. Equity based awards that do not require the satisfaction of future service or performance criteria (i.9 million was charged to the statement of operations. Income taxes shown on the statements of operations prior to the Transactions are attributable to the New York City unincorporated business tax and other income taxes on certain entities located in non­U.2 million was a one­time charge recorded immediately subsequent to the Transactions. This increase in tax basis may increase depreciation and amortization for U. the KKR Group Partnerships and certain of their subsidiaries continue to operate in the U. 2010. federal income tax purposes and mainly as a corporate entity in non­U. the measured value of the award will not be finalized until the vesting date.S. as well as 85% of the amount of any such savings the intermediate holding company actually realizes as a result of increases in tax basis that arise due to payments under the tax receivable agreement. or non­U. KKR & Co. jurisdictions. For the year ended December 31.S. L. that would not otherwise have been available.P.P. related profit sharing amounts previously accrued are adjusted and reflected as a credit to current period compensation expense. For the purposes of calculating uncertain tax positions. (ii) the statute of limitations expires.S. To the extent previously recorded carried interest is adjusted to reflect decreases in the underlying funds’ valuations at period end. In connection with the Transactions. adjusted for estimated forfeitures of awards not expected to vest.S. Subsequent to the Transactions.2 million was charged to the statement of operations of which $130.S. 2009... income was not subject to U. subsidiaries of KKR and the KKR Group Partnerships are subject to federal.S. 2010. neither KKR Holdings nor its transferees will reimburse us for any payments previously made under the tax receivable agreement if such tax basis increase. 2009 and 2008.S. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. To the extent that KKR’s estimates change or the final tax outcome of these matters is different than the amounts recorded. income taxes. KKR currently allocates approximately 40% of the carry it earns from these funds and vehicles to its carry pool. Foreign currency gains or losses resulting from transactions outside of the functional currency of a consolidated entity are recorded in income as incurred and were not material during the years ended December 31. federal and state income taxes. Interest and penalties. Foreign currency denominated assets and liabilities are translated using the exchange rates prevailing at the end of each reporting period. Accordingly.’s share of the tax basis of the tangible and intangible assets of KKR Management Holdings L. These amounts are accounted for as compensatory profit­sharing arrangements in conjunction with the related carried interest income and recorded as compensation expense for KKR employees and general and administrative expense for operating consultants. Tax Receivable Agreement Income Taxes Prior to the completion of the Transactions. In addition. $167. vested awards) are expensed immediately. or the benefits of such increases. Following the Transactions. with respect to KKR’s active and future funds and co­investment vehicles that provide for carried interest. federal income tax purposes and generally as corporate entities in non­U.e. are recorded within the provision for income taxes in KKR’s statements of operations and are classified on the statements of financial condition with the related liability for unrecognized tax benefits.S. based on the fair value of the award on each reporting date and adjusted for the actual fair value of the award at each vesting date. The Company provides for federal. As a result. presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. certain of the wholly owned Certain exchanges of KKR Group Partnership Units from KKR Holdings or transferees of its KKR Group Partnership Units is expected to result in an increase in Management Holdings Corp. Uncertain Tax Positions Profit Sharing Plans KKR has implemented profit sharing arrangements for KKR employees. were successfully challenged. Foreign Currency Foreign currency denominated assets and liabilities are primarily held through the KKR Funds. the tax liability related to income earned by these entities represented obligations of the KKR principals and have not been reflected in the historical financial statements. federal income tax purposes and therefore reduce the amount of income tax that our intermediate holding company would otherwise be required to pay in the future.

With respect to the unconsolidated investment vehicles. The amendments significantly affect the overall consolidation analysis. KKR consolidates the same entities both before and after adopting these new rules. sales. and (c) the entity is not a securitization entity. See Note 11. including presentation on the consolidated statements of financial condition of assets and liabilities of consolidated VIEs which meet the separate presentation criteria and disclosure of assets and liabilities recognized in the consolidated statements of financial condition and the maximum exposure to loss for those VIEs in which a reporting entity is determined to not be the primary beneficiary but in which it has a variable interest. The revised guidance also enhances the disclosure requirements for a reporting entity’s involvement with VIEs. KKR adopted guidance issued by the Financial Accounting Standards Board (“FASB”) related to VIEs. in connection with the adoption of the new consolidation rules.. and settlements in the roll forward of activity in Level III fair value measurements.. L. by the weighted average number of common units outstanding during the period. The guidance is effective for interim and annual periods beginning after December 15. Diluted earnings per common unit include unvested equity awards that have been granted under the KKR & Co. L. with a corresponding net adjustment to equity at the time of exchange. or does not have all the attributes of an investment company but is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the AICPA Audit and Accounting Guide. KKR Index Fund Investments L. Recently Issued Accounting Pronouncements On January 1. issuances. In addition. With respect to these entities. The guidance requires continuous assessment of the reporting entity’s involvement with such VIEs. Investment Companies.P. (b) the reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity.P. Diluted earnings per common unit is calculated by dividing Net Income (Loss) attributable to KKR & Co. Disclosures relating to KKR’s involvement with VIEs are disclosed within this Note. 78 KKR 2010 ANNUAL REPORT . The guidance requires additional disclo­ sure on transfers in and out of Levels I and II fair value measurements in the fair value hierarchy and the reasons for such transfers. issuances and settlements and transfers in and transfers out of Level III. “Related Party Transactions” for financial information related to KFN. is assumed to receive upon the exchange.’s interests in the KKR Group Partnerships and would have an anti­dilutive effect on earnings per common unit as a result of certain tax benefits KKR & Co. 2010. for fair value measurements using significant unobservable inputs (Level III). L. Prior to the revision of the consolidation rules.P. except for the disclosures about purchases. asset backed financing entity or an entity that was formerly considered a qualifying special purpose entity.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS KKR will record any such changes in basis as a deferred tax asset and the liability for any corresponding payments as amounts due to affiliates. L. changing the approach taken by companies in identifying which entities are VIEs and in determining which party is the primary beneficiary. L. Accordingly. KKR adopted the guidance. In January 2010.P. The KKR Holdings units are excluded from the diluted calculation given that the exchange of these units would proportionally increase KKR & Co. L.P. 2010.P. because KFN has the power to direct the activities that most significantly impact these entities’ economic performance and KFN has both the obligation to absorb losses of these entities and the right to receive benefits from these entities that could potentially be significant to these entities. KKR will record any benefit of the reduced income tax our intermediate holding company may recognize as such benefit is recognized. 2010. sales. 2010 Equity Incentive Plan since these equity awards dilute KKR and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR Group Partnerships. by the weighted average number of common units outstanding during the period increased to include the number of additional common units that would have been outstanding if the dilutive potential common units had been issued. The reporting entity is required to perform a consolidation analysis for entities that qualify for the deferral in accordance with previously issued guidance on VIEs. The guidance provides a limited scope deferral for a reporting entity’s interest in an entity that meets all of the following conditions: (a) the entity has all the attributes of an investment company as defined under the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide. In addition. the FASB issued guidance on improving disclosures about fair value measurements. which are effective for fiscal years beginning after December 15. including the reconciliation of Level III activity. KFN. these entities have qualified for the deferral of the revised consolidation rules and the consolidation analysis was based on the previous consolidation rules. As a result. an entity is required to provide further dis­ closures on valuation techniques and inputs used to measure fair value for fair value measurements that fall in either Level II or Level III. the revised consolidation rules have not resulted in the consolidation or deconsolidation of any entities. The new guidance also requires enhanced disclosures on the fair value hierarchy to disaggregate disclosures by each class of assets and liabilities. KKR has included the required disclosures for the year ended December 31. KKR considered whether it was appropriate to consolidate five structured finance vehicle subsidiaries of KFN. 2009. In addition. Diluted earnings per common unit exclude KKR Holdings units which are exchangeable on a one­for­one basis into common units of KKR & Co. the reconciliation of beginning and ending balances shall be presented on a gross basis.P.P. Investment Companies. the primary beneficiary was determined to be KFN. Earnings Per Common Unit Basic earnings per common unit is calculated by dividing Net Income (Loss) attributable to KKR & Co. carry co­investment vehicles and 8 North America Investor L. KKR consolidated a substantial majority of its investment vehicles except for KKR Strategic Capital Overseas Fund Ltd. with separate disclosure of gross purchases.

103 $ 28.718) 6.115 (21.422.198.285) — $ 7.654) (2.698 12. 4.130) (a) See Note 4 “Investments”.661) 489. NE T GA I N S ( LO SS ES ) F ROM I N V EST M E N T AC T I V I T I ES Net Gains (Losses) from Investment Activities in the statements of operations consist primarily of the realized and unrealized gains and losses on investments (including foreign exchange gains and losses attributable to foreign denominated investments and related activities) and other financial instruments. See Note 8 “Debt Obligations.770 $27.752) 2.351.489) — 1 (2.235 respectively.023) $ 2.632.149) — 20.025) (133) (17.172) (4. The following table summarizes KKR’s total Net Gains (Losses) from Investment Activities: Year Ended December 31.819 (14.549.364 (7.172 and $5.788 (3. (c) See Note 13 “Commitments and Contingencies”.708 81.732 — $ (13. previously recognized unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period.219 (242.333. (d) See Note 8 “Debt Obligations”.306) 40. 2010 and 2009. 2009 Net Realized Gains (Losses) Net Unrealized Gains (Losses) Year Ended December 31. (b) See Note 7 “Other Assets and Accounts Payable.032) $ 253. Upon disposition of an investment.” KKR 2010 ANNUAL REPORT 79 .856) (12) (7.943 As of December 31.761 12. (e) See Statement of Cash Flows Supplemental Disclosures.406 (157.410 $(13.411. Accrued Expenses and Other Liabilities”.994) 15.166 1.998 184.234 8.412 $ 353. Investments.510 $ 5.159.421) $5. Unrealized gains or losses result from changes in the fair value of these investments and other financial instruments during a period.046 (9.548) (167. INV EST ME N TS Investments.159 (20.819.840 1.958) (4.407) $ 7.771) — 13.807.466) 19.236 (1.865) — — 176 (16. at fair value totaling $5. were pledged as direct collateral against various financing arrangements.138) (5.756 21.998 — 3.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 3.693) (12.343.034 (13. at Fair Value consist of the following: Fair Value December 31.628 $ (314.115) — 8.580 $ (173.325 — (2.604 $36. 2008 Net Realized Gains (Losses) Net Unrealized Gains (Losses) Private Equity Investments (a) Other Investments (a) Foreign Exchange Contracts (b) Foreign Exchange Options (b) Futures Contract (b) Call Options Written (b) Securities Sold Short (b) Other Derivative Liabilities (b) Contingent Carried Interest Repayment Guarantee (c) Debt Obligations (d) Foreign Exchange Losses on Cash and Cash Equivalents held at Consolidated Entities (e) Total Net Gains (Losses) from Investment Activities $2.975) (376.972.449.621) (29.495 560.146 8. 2010 2009 Private Equity Investments Other Investments $34.525) (1.632 48.022.950. 2010 Net Realized Gains (Losses) Net Unrealized Gains (Losses) Year Ended December 31.766) — 23 (6.642.

2% 7. December 31.419.069 2.070 251.5% 0.367.0% 60.0% 16.309 1.2% 0.283.0% 0. 2009.435 2.493.742 128.195 708.2% 4.113.876.908 4. 2010.0% 1.929 2.916 266. $16. $10.089 1.876 423. $31.8% 0.5% 2.513 48.706 185.063 249.0% 0.399 82.1% 18.163.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Private Equity Investments The following table presents KKR’s private equity investments at fair value. at Fair Value (Cost: December 31. at Fair Value North America Retail Healthcare Financial Services Media Technology Energy Consumer Products Education Chemicals Hotels/Leisure North America Total (Cost: December 31.7% 0. 2010.3% 2.625.100 — 158.232 16.822 6.063.5% 8.173.580 720.0% 7.270 286. $3.969 165.2% 8.364.6% 3.950.881) Australia.471.9% 8.2% 6.226.450 779.7% 4.6% 0.192.256.395 218. 2009.5% 0.210.9% 0.393 1.609. 2009. $29.523 257.0% 15.579.6% 3.532) 80 KKR 2010 ANNUAL REPORT .921 710. December 31.655 899.8% 24.232 17.6% 2.7% 0.5% 0. December 31. 2010.655 — 4.363 1.262) Europe $ 5.129 $27.052 620.137 1.457 912.6% 100.3% 1.751.638.527 6. 2009.057.0% 0.305.766 426.336 49.277 11.7% 0.340.389) Private Equity lnvestments. Total (Cost: December 31.9% 1.1% 1.942 619.856.4% 1.9% 9.939 870.431.199.309 $34.221.714 2.5% 2.0% 7.262 6.2% 3.3% 12.772 297.761.281. $15.465.6% 2.567 1.852.1% 49.726.885 2.1% 0.9% 0. The classifications of the private equity investments are based on its primary business and the domiciled location of the business. December 31. 2010 2009 2010 2009 Private Equity Investments.4% 0.9% 0.0% 7.081.3% 0.2% 0.8% 0.5% 6.631 273.310 1.059 6.957 — — 224.166 $ 4.8% 0.915 683.0% 0.0% Healthcare Manufacturing Technology Retail Telecom Media Services Consumer Products Recycling Europe Total (Cost: December 31.829 219.8% 3.5% 2.078 2. $4.996 2. Fair Value Fair Value as a Percentage of Total December 31.6% 2.567.9% 3.6% 31.647 653.2% 0.840 15.642.782 1.391 41.7% 2.965 — 248.031.691 3.143 2.329.5% 2.953.805. Asia and Other Locations Technology Consumer Products Financial Services Media Manufacturing Services Telecom Recycling Retail Transportation Energy Australia.0% 0.7% 0. Asia and Other Locations. 2010.6% 100.6% 12.768 863. $11.

386 Level I $ $ 2.998 Level I Level II Level III Total Securities Sold. 2010 Level I Level II Level III Total Private Equity Investments Other Investments Total Investments Foreign Exchange Forward Contracts Foreign Currency Options Total Assets $9.986 1.289 97.842 13. Not Yet Purchased Foreign Exchange Contracts Interest Rate Swap Call Options Total Liabilities $ 82. and (iii) HCA Inc.022.103.916 58.986.075 19.172.794 and $10. (ii) HCA Inc.888 — — 80 82. 2010.392 Total Securities Sold.510.069.006 Level II $ $ — — — Level III $ $ 91.721 76. 2009.972.535.808. respectively.961 92.110 1.377.594 $ 877.461.753 125. the aggregate amount of investments that were other than equity securities amounted to $1.121 $ $ $ $ KKR 2010 ANNUAL REPORT 81 . 2010 and 2009. $1.826 566 92.259 75.986 1.166 1.115 — 128. 2010. As of December 31. at fair value: December 31. (b) Net unrealized trading gains (losses) relating to these investments amounted to $1.985. private equity investments which represented greater than 5% of the net assets of consolidated private equity funds included: (i) Dollar General valued at $3.020. (iii) Alliance Boots valued at $1. 2010 and 2009.770 58. (ii) Alliance Boots valued at $2.530 $36.999 — — $23.149.943 13.883.468.807. 2009.432 $ 23.022.173 2.145. 5. $931.115 80 211.128. Net unrealized trading gains (losses) relating to these investments amounted to $146.820 566 90. 2009 Level I Level II Level III Total Private Equity Investments Other Investments Total Investments Foreign Currency Options Total Assets Liabilities. 2010 $ 6. 2010 and 2009.797 711.417.A valued at $1.202 23.028 as of December 31. valued at $2. respectively. 2009 $ $ 89.153 $ — — — — — $ 83.465 $1.417.999 $ 34. (iv) First Data valued at $1.164. private equity investments which represented greater than 5% of the net assets of consolidated private equity funds included: (i) Dollar General valued at $3.377.055 $ 3. and (v) Legrand S.507 and $78.883. The majority of the securities underlying KKR’s private equity investments represent equity securities.083.814.855 $ 2.476.968 $ 865 125.048.476.418.016.449.807. 2010 2009 Corporate Credit Investments (a) Equity Securities (b) Other Total Other Investments (Cost: December 31.216 6.596 9.604 36. valued at $2. December 31.830 76.849 75. FAIR VA LUE ME A S URE ME N TS OF F I N AN C I A L I N ST RU M E N TS The following tables summarize the valuation of KKR’s investments and other financial instruments measured and reported at fair value by the fair value hierarchy levels described in Note 2 “Summary of Significant Accounting Policies” as of December 31.103 (a) Represents corporate high yield securities and loans classified as trading securities. Other Investments The following table presents KKR’s other investments at fair value: Fair Value December 31.030.950.604 $1. As of December 31.429.386. at fair value: December 31.286 December 31.173 2.526.971.808 67.324.552.479 as of December 31.812 3.006 — 2.003.661.055 $ 28.103 28.552.283.633.461.642.855 — — $ 9.806 3. Assets.840 1. Not Yet Purchased Call Options Total Liabilities December 31.065 $ 2.955) $1.030 854. 2010 and 2009.459.036 $ 27. respectively.953.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS As of December 31.530 $ 3.897 $ 19.036 — $ 19.160 and $2.065 — $6.

682 $ $ 333.172.754 $ 40.4% 0. restricted cash and cash equivalents.146.207.455 The Transfers Out noted in the table above for private equity investments are attributable to certain Portfolio Companies that completed an initial public offering during the period. 2009 Basic Diluted Net Income (Loss) Attributable to KKR & Co. 2010 or 2009.039.156.731 (2. by the total weighted average number of common units outstanding during the period.597 (48.884) 3. Total realized and unrealized gains and losses recorded for Level III investments are reported in Net Gains (Losses) from Investment Activities in the accompanying statements of operations.244 $ $ (78.221) (0.901 $ 19.226 $ $ (78. Beginning of Period Transfers In Transfers Out Purchases Sales Net Realized Gains (Losses) Net Unrealized Gains (Losses) Balance. 2009 through December 31. Beginning of Period Transfers In Transfers Out Purchases Sales Net Realized Gains (Losses) Net Unrealized Gains (Losses) Balance.4% 97.378. due from / (to) affiliates.092.531.961 $ $ 162.857 — (185.968 92.0% 99.62 206.772 (39. 2010 Private Equity Investments Other Investments Total Level III Holdings The Transfers Out noted in the table above for other investments are principally attributable to certain corporate credit investments that experienced a significant level of market activity during the period and thus were valued using observable inputs.902.38) 204. L.62 206.P.723) 1. 2009.075 $ 3. Diluted earnings per common unit is calculated by dividing Net Income (Loss) attributable to KKR & Co. 2010 Basic Diluted October 1.178 1.324. 2010 Private Equity Investments Other Investments Balance.808 (484.902. Per Common Unit Total Weighted­Average Common Units Outstanding $ $ 333. basic and diluted earnings per common unit were calculated as follows: For the Year Ended December 31. L.P. accounts payable. There were no significant transfers between Level I and Level II during the years ended December 31.202 Balance.031. KKR’s debt obligations except for KKR’s Senior Notes (See Note 8) bear interest at floating rates and therefore fair value approximates carrying value.312) (24.6% 3.P. End of Period Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities (including foreign exchange gains and losses attributable to foreign­ denominated investments) related to Investments still held at Reporting Date $ 19. End of Period Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities (including foreign exchange gains and losses attributable to foreign­ denominated investments) related to Investments still held at Reporting Date $ 16.627 500.P. EARNINGS PER COM M ON UN I T Basic earnings per common unit is calculated by dividing Net Income (Loss) Attributable to KKR & Co.961 — (1.0% 0. 2010 and period from October 1.186) 1.899 3.148) 484. 2009 Private Equity Other Third­Party Fund Managers Public/Private Company Comparables and Discounted Cash Flows Total 0. L.6% 100.227.38) 204. by the weighted average number of common units outstanding during the period increased to include the number of additional common units that would have been outstanding if the dilutive potential common units had been issued. 2009 through December 31. For the Year Ended December 31.178 1.221) (0. 6 .797 $ 92.226 82 KKR 2010 ANNUAL REPORT .932 $ 711.078 The Transfers Out noted in the table above are principally attributable to the Reorganization Transactions and private equity investments in certain Portfolio Companies that had an initial public offerings during the period.361) 6. $ 3.562. 2010 and 2009 are as follows: For the Year Ended December 31.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS The following table summarizes KKR’s Level III investments and other financial instruments by valuation methodology as of December 31.0% 2. For the year ended December 31. 2010: December 31.900.324.589) 22.389. Net Income Attributable to KKR & Co. L.494) 5.526 (45.0% 97.714 38.075 183.500 (4.621) 155. accrued expenses and other liabilities approximate fair value due to their short­term maturities.620 $ 56.276 $23.014.0% The changes in private equity investments and other investments measured and reported at fair value for which KKR has used Level III inputs to determine fair value for the years ended December 31. The Transfers In noted in the table above for other investments are principally attributable to certain corporate credit investments that experienced an insignificant level of market activity during the period and thus were valued in the absence of observable inputs.791) (298. The carrying amounts of cash and cash equivalents.

094 17. Accrued Expenses and Other Liabilities. approximately $796.831 1. (a) Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign denominated private equity investments.060. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments.864 7. Not Yet Purchased (b) Unsettled Investment Trades (c) Accounts Payable and Accrued Expenses Deferred Tax Liabilities Accrued Compensation and Benefits Taxes Payable Deferred Revenue Unrealized Losses on Foreign Exchange Forward Contracts (d) Derivative Liabilities (e) Other $520.733 5. 2010. Accounts Payable.099 17.173 and was reported in Accounts Payable. 2010.530 36.616 13.173 2.826 56.P.P.2 million in these specific private equity investments of which $989. respectively.974 — 50. Such instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations. (c) Net of accumulated amortization of $9. 2009 was an unrealized loss of $125. As of December 31. other professionals and selected other individuals with respect to KKR’s active funds and co­investment vehicles that provide for carried interest.628.254 8. The fair value of these instruments as of December 31. 2010 2009 Amounts Payable to Carry Pool (a) Interest Payable Securities Sold. 2010 and 2009.0 million of financing. Such instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations.887 51.893 $886. a total of 30.807 83.753 14.170 as of December 31.964 67.894 $ 711. See Note 2 “Summary of Significant Accounting Policies — Profit Sharing Plans”. which are obligations of KKR to deliver a specified security at a contracted price at a future point in time. 2010.4 million was structured through the use of total return swaps which effectively convert third party capital contributions into borrowings of KKR. Accrued Expenses and Other Liabilities consist of the following: December 31. 2010 and 2009 was $19. 2010 2009 Interest Receivable Unrealized Gains on Foreign Exchange Forward Contracts (a) Fixed Assets.’s interests in the KKR Group Partnerships and would have an anti­dilutive effect on earnings per common unit as a result of certain tax benefits KKR & Co. 2009 and 2008. The cost basis for these instruments at December 31. Total availability under these financing arrangements amounted to $992.949 and $76.488 — 733. 2010 Equity Incentive Plan are dilutive and as such have been included in the calculation of diluted earnings per unit.986 and was reported in Other Assets. The cost basis for these instruments at December 31.704 7. Such securities are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations.0 million was funded using these financing arrangements.697 $2.788.244 $309. net (b) Intangible Asset.272 6. Of the $989. The $989.960 $ 1.664. (d) Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign denominated private equity investments.213 93.788 and $2. earnings per common unit information have not been presented for the periods ended September 30.972 — $1.P.668 31. respectively. net (c) Receivables Unsettled Investment Trades (d) Prepaid Expenses Deferred Financing Costs Deferred Tax Assets Foreign Currency Options (e) Other $ 84.799 and $17. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments.424 $223. D E BT OBL I G AT I O N S Debt obligations consist of the following: December 31. $9.185 Investment Financing Agreements Certain of KKR’s private equity fund investment vehicles have entered into financing arrangements with major financial institutions in connection with specific private equity investments with the objective of enhancing returns.9 million as of December 31.260 28.754 $ 54. L. (c) Represents amounts owed to third parties for investment purchases for which cash settlement has not occurred.986 49.422 91. These financing arrangements are not direct obligations of the general partners of KKR’s private equity funds or its management companies. KKR Holdings units have been excluded from the calculation of diluted earnings per common unit given that the exchange of these units would proportionally increase KKR & Co.115 4.535 125. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments. there were no such derivative financial instruments outstanding. Amortization expense totaled $3.787 and $5. (d) Represents amounts due from third parties for investments sold for which cash has not been received.108 $200.888 8.326. is assumed to receive upon the exchange. respectively. 2010 was an unrealized gain of $58.352 for the years ended December 31. (b) Net of accumulated depreciation and amortization of $72.573 10.211 for the years ended December 31.918 114.787 3. 2009 and December 31. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments.486. L. respectively.322 — — 17.988 497. 2010.473 8.705 and $10.954 24. As of December 31. respectively. KKR’s business was conducted through a large number of entities as to which there was no single holding entity but which were separately owned by its Predecessor Owners.000 unvested equity awards that have been granted under the KKR & Co. 2010. 2010 2009 Investment Financing Arrangements Senior Notes Revolving Credit Agreements $ 988. KKR had made $1.243 8. L.971 31.906. respectively. (e) Represents hedging instruments used to manage foreign exchange risk. Accordingly. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments.018 58. KKR 2010 ANNUAL REPORT 83 . The fair value of these instruments as of December 31. OTH ER A SS E TS A N D ACCOUN TS PAYABL E . 2009 and 2008. 2010.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS For the year ended December 31.059 3. 8 .999 as of December 31. (b) Represents securities sold short.480 1.052 (a) Represents the amount of carried interest payable to KKR’s principals.741. 2010 and 2009 was $81.055 14. 2008. $3.0 million of financing was structured through various instruments as discussed below. (e) Represents derivative financial instruments used to manage interest rate risk arising from certain assets and liabilities. ACC RU E D EXPENSES A N D OT H E R LI A B I LI T I ES Other assets consist of the following: December 31.389 and $60. There was no single capital structure upon which to calculate historical earnings per common unit information. For the year ended December 31. 2010 and 2009. Depreciation and amortization expense totaled $11.610 17. 2010. Such instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations.149 69. Prior to the Transactions. The instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations.787 10.

the date of repurchase. Transaction costs related to the issuance of the Senior Notes have been capitalized and are being amortized over the life of the Senior Notes. 2012. In addition. See Note 3 “Net Gains (Losses) from Investment Activities” for foreign currency adjustments related to these borrowings. The per annum rates of interest payable for the financings range from three­month LIBOR plus 1.P.4 million of the total return swaps mature in May 2011 with the remainder maturing in February 2015. a KKR investment vehicle entered into a five­year revolving credit agreement with a syndicate of lenders (the “Investment Credit Agreement”). LLC (the “Issuer”). 2010).0 million of commitments on the Principal Credit Agreement from one of the counterparties to the agreement. As of December 31. the KCM Credit Agreement was amended to reduce the amounts available on revolving borrowings from $700 million to $500 million. but not including. unless earlier redeemed or repurchased.1% as of December 31. commencing on March 29.584%. KKR had availability under the facility of $13. 2010.0 million. as supplemented. under the terms of these financing arrangements. the counterparty returned approximately $1. If a change of control repurchase event occurs. As of December 31.” KCM Credit Agreement Senior Notes On February 27. 2008. applicable grace period.0 million sublimit for swing­line notes and a $25.35% to three­month LIBOR plus 1. The Senior Notes are fully and unconditionally guaranteed.0 million of senior secured credit subject to availability under a borrowing base determined by the value of certain investments pledged as collateral security for obligations under the agreement. See Note 16 “Subsequent Events.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS $171.6 million outstanding.65% for periods from March 12. 2020.375% per annum. the fair value of the Senior Notes was $495. insolvency. jointly and severally.6 million sub­limit for letters of credit. The per annum rate of interest for each borrowing under the Term Facility was equal to the Bloomberg United States Dollar Interest Rate Swap Ask Rate plus 1. consolidate or sell. As of December 31. Interest is payable semiannually in arrears on March 29 and September 29 of each year.2 million of financing was structured through the use of a syndicated term and a revolving credit facility (the “Term Facility”) that matures in August 2014. In November 2010. 2013. 2010. The KCM Credit Agreement has a maturity date of February 27.375% Senior Notes (the “Senior Notes”). The Senior Notes bear interest at a rate of 6. The Corporate Credit Agreement provided for revolving borrowings of up to $1.65%. the Senior Notes are subject to repurchase by the Issuer at a repurchase price in cash equal to 101% of the aggregate principal amount of the Senior Notes repurchased plus any accrued and unpaid interest on the Senior Notes repurchased to. 2010. 84 KKR 2010 ANNUAL REPORT . as of December 31. The guarantees are unsecured and unsubordinated obligations of the guarantors. there is a letter of credit of $0. This financing arrangement is non­recourse to the Partnership beyond the specific assets pledged as collateral. the KPE Investment Partnership entered into a five­year revolving credit agreement with a syndicate of lenders (the “Principal Credit Agreement”). accruing from September 29. L.0 million sublimit for letters of credit. All or a portion of the Senior Notes may be redeemed at the Issuer’s option in whole or in part. KKR Group Finance Co. at the make­whole redemption price set forth in the Senior Notes. The facility had a term of five years that expired on February 26. 2010. Interest expense on the Senior Notes was $8. The Senior Notes are unsecured and unsubordinated obligations of the Issuer and will mature on September 29. KKR Revolving Credit Agreements Corporate Credit Agreement On February 26. which were issued at a price of 99. by KKR & Co. the Term Facility was amended and the per annum rate of interest is the greater of the 5­Year interest rate swap rate plus 1.75% (rates ranging from 1. transfer or lease assets. The Investment Credit Agreement provides for up to $28. In September 2009. which has effectively reduced KKR’s availability under the Principal Credit Agreement on a consolidated basis to $860.79%. as amended. 2010 on the borrowings outstanding was 4. Based on the level of certain assets in the investment vehicle. no borrowings were outstanding under the Principal Credit Agreement. KKR may be required to provide additional collateral plus accrued interest. 2010.75%. 2010. 2010 to June 7. no borrowings were outstanding on the Corporate Credit Agreement. 2010.6 million in financing costs. The indenture. 2012 through maturity the interest rate is equal to one year LIBOR plus 1. and from time to time. For the period June 8. Approximately $182.4 million of borrowings were outstanding. KKR entered into a credit agreement with a major financial institution (the “Corporate Credit Agreement”). The interest rate at December 31. The indenture. with a $50. On March 11. and the KKR Group Partnerships. KKR Capital Markets entered into a revolving credit agreement with a major financial institution (the “KCM Credit Agreement”). In March 2009.7% to 2. The KCM Credit Agreement. In the case of specified events of bankruptcy.1 million for the year ended December 31. 2010. 2011. 2010. prior to their stated maturity. also provides for events of default and further provides that the trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Senior Notes may declare the Senior Notes immediately due and payable upon the occurrence and during the continuance of any event of default after expiration of any In June 2007. incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge. Upon the occurrence of certain events. a wholly­owned subsidiary of KKR assumed $65. As of December 31. and indirect subsidiary of the Partnership. Principal Credit Agreement On September 29. a subsidiary of KKR Management Holdings Corp. 2010.0 billion. The Principal Credit Agreement provides for up to $925. receivership or reorganization. The borrowing base is subject to certain investment concentration limitations and the value of the investments constituting the borrowing base is subject to certain advance rates based on type of investment.1 million of senior secured credit subject to availability under a borrowing base determined by the value of certain specific assets pledged as collateral security for obligations under the agreement and a $5. Foreign currency adjustments related to these borrowings during the period are recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations.75% or 4. As a result of this amendment. subject to exceptions. As of December 31. the principal amount of the Senior Notes and any accrued and unpaid interest on the Senior Notes automatically becomes due and payable. no borrowings were outstanding under the KCM Credit Agreement. including limitations on the Issuer’s and the guarantors’ ability to. 2010. including an event based on the value of the collateral and events of default. at any time.76% to 2. provides for revolving borrowings of up to $500 million with a $500 million sublimit for letters of credit. the interest rates on borrowings outstanding under the Investment Credit Agreement ranged from 2.5 million of which $10.5 million. issued $500 million aggregate principal amount of 6. 2013. 2008.75% at the time of each borrowing under the Term Facility through March 11. relating to the Senior Notes includes covenants. as supplemented by a first supplemental indenture.

407 $ 78.162 3.366 5.524 19.S.477 7. respectively.4 — — 182. Such loss carryforwards expire between 2029 and 2030.185 to record amounts Due to KKR Holdings under the tax receivable agreement.819 81. in the accompanying Statements of Financial Position.124 (2. In addition.S. the KKR Group Partnerships and certain of their subsidiaries will continue to be treated as partnerships for U. federal income tax purposes and as corporate entities in non­U.040 $ 67.506 3.837 75.722) 1. if recognized.636) 8. 2010 2009 Deferred Tax Assets Fund Management Fees Net Operating Loss Carryforwards Employee Compensation Depreciation and Amortization KKR Holdings Unit Exchange Other Total Deferred Tax Assets Deferred Tax Liabilities $23.2 635.263 2.186 $ 10.938) 521.128 $ 24. related to interest and $0. 2010 2009 2008 The provision (benefit) for income taxes consists of the following: Year Ended December 31.279 (2. these entities in some cases continue to be subject to the New York City unincorporated business tax or non­U. 2010.041. 2010.754 Federal Income Tax State and Local Income Tax Foreign Income Tax Subtotal Total Income Taxes — 1. 2010 are as follows: 2011 2012 2013 2014 2015 Thereafter $ 171.833 8. state and local corporate income taxes.795 (1. jurisdictions.154.1) million and $0. Accordingly. 2008 as no uncertain tax positions had been identified. Federal Income Tax State and Local Income Tax Foreign Income Tax Subtotal Deferred $ 51.998 $ — (612) 6.460 and $121. In the normal course of business. KKR’s tax provision included $(0. KKR’s and the predecessor entities’ state and local tax returns for the years 2007 through 2009 are open under normal statute of limitations and therefore subject to examination.0 $1.003 258 8.853 $36.640 — — $4.781 1. The net of these adjustments was recorded as an adjustment to equity at the time of the exchanges.041 1. No such charges were recorded for the year ended December 31.360 $ 2. deferred tax assets and liabilities are offset and presented as a single amount within Other Assets or Accounts Payable. respectively. respectively.463.998 $(521.489.P. 2010 and 2009.586 — 1.4 500.065 134.081) 12.076 2.314) 75. KKR recorded a deferred tax asset associated with an increase in Management Holdings Corp. Following the Transactions. This amount was offset by an adjustment totaling $16.483 (451) 1. will be subject to federal. totaling $19.5 million and $0. The following table reconciles the Provision (Benefit) for Taxes to the U.097) 1. as applicable. KKR believes that there will not be a significant increase or decrease to the tax positions within 12 months of the reporting date.817.5 million.203 1. Year Ended December 31.786 2010 2009 The components of the deferred tax asset or liability consist of the following: As of December 31.075 $ 55.243 Unrecognized Tax Benefits. December 31 $4. L. As of December 31.915 871 — — 6. as a result of certain of these exchanges.655) (476) (336) $75.595 14.708 (4. KKR 2010 ANNUAL REPORT 85 . For the years ended December 31.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Scheduled principal payments for long­term borrowings at December 31. certain of the wholly­owned subsidiaries of KKR & Co.S. January 1 Gross increases in tax positions from prior periods Gross decreases in tax positions from prior periods Gross increases in tax positions in current period Settlement of tax positions Lapse of statute of limitations Unrecognized Tax Benefits. federal statutory tax rate: 9. KKR files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. totaling $2. KKR has gross operating loss carryforwards of $6.469 28.640 — (1. related to penalties.164 11. Investment Basis Differences Other Total Deferred Tax Liabilities For a particular tax­paying component of an entity and within a particular tax jurisdiction. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: Year Ended December 31.0 million of tax benefits that.696 1.361 7. In addition.227 — (172) $ 3.188 (9.748.’s share of the tax basis of the tangible and intangible assets of Management Holdings.695 12. Accrued and Other Liabilities. local and foreign tax regulators.973 $ — — — 4.032 $ 6.960) 36. INCOM E TA XES Prior to the Transactions.555 in certain local jurisdictions for the years ended December 31.938 5.141 (2. KKR provided for New York City unincorporated business tax for certain entities based on a statutory rate of 4%. KKR believes that there will not be a significant increase or decrease to the tax positions within 12 months of the reporting date.786 $ $ $ 2010 2009 2008 Current Income (loss) derived from foreign jurisdictions is immaterial. income taxes. would affect the effective tax rate.0 In connection with exchanges of KKR Holdings units into common units of KKR. there were no significant undistributed earnings at December 31.110 $ 80. Income Before Taxes at Statutory Rate Pass Through Income Foreign Income Taxes State and Local Income Taxes Compensation Charges borne by KKR Holdings Other Effective Tax Expense $ 2. Additionally.0 million. 2010 are $4.411. 2010 and 2009.081 6.640 Included in the balance of unrecognized tax benefits at December 31.616 $66. KKR is subject to examination by federal and certain state.145 11.360 $ 7. KKR recorded an adjustment to equity to establish net deferred tax liabilities associated with future taxable income of KKR Management Holdings Corp.S.

As of December 31.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 10. compensation expense was recorded in the statements of operations. will be determined based upon the exercise of judgment by the managing members. For units vesting on the grant date.329 KKR Holdings units have been legally allocated. taxes and discount rates management deemed appropriate for the business. and (c) the absence of communication to the principals of any information related to the number of units they were initially allocated. We believe that grants to our principals and certain operating consultants provide an additional means for allowing us to incentivize. The value of the contributed interests was estimated using an income approach based upon the present value of forecasts of ongoing cash flows for the business. 2010.5 million of estimated unrecognized compensation expense related to unvested awards. The calculation of compensation expense. Specifically. 2008. Additionally.34 billion. All of the 470.237. KKR recorded compensation expense of $527. These grants were issued as part of the Reorganization Transactions as well as to promote broad ownership of our firm among our personnel and further align their interests with those of investors. These criteria are not sufficiently specific to constitute performance conditions for accounting purposes. or 470. The fair value of KKR Holdings units granted is based on the closing price of KKR & Co. transfer restrictions. L. (b) the significant judgment that can be exercised by the managing members in determining whether the vesting conditions are ultimately achieved. L. kkr principal units — Units granted to principals give rise to periodic Except for any units that vested on the date of grant.P. motivate and retain qualified professionals that will help us continue to grow our business over the long term. and to a lesser extent the lack of public data for companies comparable to KKR as a whole. That cost is expected to be recognized over a weighted­average period of 1. Each principal will ultimately receive between zero and 100% of the units initially allocated.P. current economic conditions and long­term normalized expectations that take into consideration estimated investment returns. investment holding periods. units in both KKR Holdings and KKR & Co.P. of the outstanding KKR Group Partnership Units. if any.237. on a one­for­one basis. and allow for the ability to exchange into common units of KKR & Co. the calculation of compensation expense on unvested units assumes a forfeiture rate of up to 4% annually based upon expected turnover by employee class. Individual grants at October 1. In conjunction with the Transactions. represent ownership interests in KKR Group Partnership Units and. or lack thereof. Compensation expense is recognized for all unvested KKR Holdings units received by an individual over the vesting period. employee compensation charges in the statements of operations based on the grant­date fair value of the award. L. each KKR Holdings unit is exchangeable into a KKR Group Partnership Unit on a one­for­one basis. The units whose allocation has not been communicated are subject to performance based vesting conditions. E QU IT Y BA SED COM PE N SAT I O N Upon completion of the Transactions. 2009. which ranges from 1% to 32%. These grants may have differed from historical ownership interests. The allocation of these units has not yet been communicated to the award recipients as this was management’s decision on how to best incentivize its employees. management fees. was performed on a person by person basis. especially as it relates to carried interest. certain principals received vested units in excess of the fair value of their contributed ownership interests in our historical businesses. It is anticipated that additional service­based vesting conditions will be imposed at the time the allocation is initially communicated to the respective employees. KKR Holdings owns approximately 69%. Additionally. L. discounted for the lack of participation rights in the expected distributions on unvested units. In reaching a conclusion that the service inception date has not occurred. For the years ended December 31. There were no amounts recorded for the year ended December 31.2 years. historical experience.P. certain individuals will be subject to the terms of a non­ compete agreement that may require the forfeiture of certain vested and unvested units should the terms of the non­compete agreement be violated.’s common units) at the time of grant. Upon separation from KKR. Management deemed an income approach to be the most appropriate methodology due to the differences in the underlying business fundamentals among KKR’s various business lines. were based on past performance and anticipated future performance. 86 KKR 2010 ANNUAL REPORT . these individuals will also be subject to minimum retained ownership rules requiring them to continuously hold at least 25% of their vested interests. the fair value of the total ownership interests contributed by the principals and operating consultants as a whole amounted to approximately $4. For principals and operating consultants whose value of ownership interests contributed was greater than the value of vested units received. KKR principals and certain operating consultants received grants of KKR Holdings units which are exchangeable for KKR Group Partnership Units. units are subject to service based vesting over a five­year period.940. 2010 there was approximately $452. multiplied by the number of unvested units on the grant date. which treats each vesting portion as a separate award. The transfer restriction period will last for a minimum of (i) one year with respect to one­half of the interests vesting on any vesting date and (ii) two years with respect to the other one­half of the interests vesting on such vesting date. Holders of KKR Group Partnership Units held through KKR Holdings are not entitled to participate in distributions made on KKR Group Partnership Units until such units are vested.030 of these units has not been communicated to each respective principal. which include profitability and other similar criteria. Compensation expense on unvested units is calculated based on the fair value of a unit (determined using the latest available closing price of KKR & Co. a KKR Holdings unit is an instrument with terms and conditions similar to those of a KKR & Co. additional expense was recorded. As of December 31.0 million and $451. KKR applied the guidance of ASC 718 and concluded that these KKR Holdings units do not yet meet the criteria for recognition of compensation cost because neither the grant date nor the service inception date has occurred. L.329. These units are subject to minimum retained ownership requirements and in certain cases. but the allocation of 35.’s common units) on the grant date multiplied by the number of vested units. KKR considered (a) the fact that the vesting conditions are not sufficiently specific to constitute performance conditions for accounting purposes. Assumptions utilized in the valuation analysis reflect management’s forecast for the business. subject to vesting. KKR determined this to be the best evidence of fair value as a KKR unit is traded in an active market and has an observable market price. L. no additional expense was recorded. In conjunction with the Transactions. On the date of grant. While providing services to KKR.7 million in relation to equity based awards of KKR Group Partnership Units held through KKR Holdings to principals. Accordingly. minimum retained ownership requirements and transfer restrictions referenced above.P. 2010 and 2009.’s common units on date of grant for principal awards and on the reporting date for operating consultant awards. to the extent the fair value (calculated as described above) of any vested units received in the Transactions exceeded the fair value of such principal’s contributed interests.P. common unit. certain principals and operating consultants contributed ownership interests in our historical businesses in exchange for units in KKR Holdings. compensation expense is recognized on the date of grant based on the fair value of a unit (determined using the latest available closing price of KKR & Co. using the graded attribution method. and the achievement. To the extent the fair value of an individual’s vested units received exceeded an individual’s contributed ownership interests.

780 81.462) 12. These will be funded by KKR Holdings and will not dilute KKR’s interests in the KKR Group Partnerships. using the graded attribution method. L.399 5.574. administrative and other charges in the statements of operations. support staff. KKR recorded compensation expense of $37. Units granted to operating consultants described above give rise to periodic general.428. Accordingly.851.’s common units) on each reporting date and subsequently adjusted for the actual fair value of the award at each vesting date.950 26. As of December 31.839) (4.704.7 million and general. 2013 April 1. general.780 111. which treats each vesting portion as a separate award. 2010 Granted Vested Forfeited Balance. exchange. KKR 2010 ANNUAL REPORT 87 .4 years. 2012 April 1.94 7. 2010 are presented below: KKR Principals Weighted Average Grant Date Fair Value Operating Consultants Weighted Average Grant Date Fair Value Unvested Units Units Units Balance. Accordingly.15 8. 2010 149.6 million of estimated unrecognized expense related to unvested awards.268 2.34 9. 2008.604. payment for which is made in the form of cash and KKR’s equity.0 million in relation to equity based awards of KKR Group Partnership Units held through KKR Holdings to operating consultants.’s common units) on the grant date multiplied by the number of vested units.304) 111. administrative and other expense recognized on unvested units is calculated based on the fair value of a unit (determined using the latest available closing price of KKR & Co.S. This reflected the cumulative vesting of the units from the grant date to June 30.P.080.247.604. For the year ended December 31.000 — 12.247. This event satisfied the contingency described above and accordingly.012 26. 2010. 2010. Weighted average remaining vesting period (in years) over which unvested units are expected to vest 2.780 26. KKR recorded compensation expense of $34. 2015 October 1. to the extent the fair value (calculated as described above) of any vested units received in the Transactions exceeded the fair value of such operating consultant’s contributed interests.234. To the extent that these consultants no longer provide services to KKR.064 100. administrative and other expense related to unvested awards based on the total fair value of the unvested units on that date. there was approximately $21.202 1.711. That cost is expected to be recognized over a weighted average period of 0.09 8. 2010 through December 31. 2010 in relation to these awards.7 million of estimated unrecognized general. 2010 and 2009 KKR recorded general.458 354. and other personnel.869.481.780.440 107.000 2. the measured value of these units will not be finalized until each vesting date. December 31.06 7. 2012 October 1.600 (39. January 1. Additionally. KKR & Co.067 26. administrative and other charges are expected to be recognized over a weighted­average period of 1.757 942.824) (2. 2011 April 1. the calculation of the general.8 million in relation to the restricted equity awards including the amounts above.458 354. 2010.916 grants of restricted equity units based on KKR Group Partnership Units held by KKR Holdings were made to professionals. The vesting of these equity units occurs in installments up to five years from the date of grant and was contingent on.856 $ $ $ $ $ 8. administrative and other expense of $95.071 100. administrative and other expense assumes a forfeiture rate of up to 4% annually based upon expected turnover by class of operating consultant. administrative and other expense was recorded in the statements of operations.16 8.85 9.009 2.18 7. administrative and other expense as deemed necessary. among other things. L.234.2 2.76 18.P.298. There were no amounts recorded for the year ended December 31. they are required to forfeit any unvested equity received.362.856 928. 2010. L.9 years.0 million and general.000 (4. using the graded attribution method. In conjunction with the Transactions. there was approximately $80.1 The following table summarizes the remaining vesting tranches for principals and operating consultants: Operating Consultant Units Vesting Date Principal Units April 1. 2010. KKR’s common units becoming listed and traded on the NYSE or another U. KKR will periodically assess this forfeiture estimate as actual experience is observed and make adjustments to compensation and general.000 2.704. For units vesting on the grant date.80 Principal Awards Operating Consultant Awards restricted equity units — Upon completion of the Transactions. General.270. 2015 3. For the years ended December 31. A summary of the status of KKR’s equity based awards granted to KKR principals and operating consultants from January 1.1 million during the quarter ended June 30. certain operating consultants received vested units in excess of the fair value of their contributed ownership interests in our historical businesses.539. 2014 April 1. 2011 October 1. KKR estimated a turnover rate of up to 4% annually as of December 31.764. 2010 based on expected turnover by employee class. On July 15. expense is recognized on the date of grant based on the fair value of a unit (determined using the latest available closing price of KKR & Co. administrative and other expense of $17.064 100. administrative and other expense of $27. completed its listing on the NYSE. Future general.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS operating consultant units — Certain non­employee operating consultants provide services to KKR and certain of its portfolio companies.814 379. which treats each vesting portion as a separate award.916 $ $ $ $ $ 8. As of December 31.P. 2014 October 1.0 million and $81. 2013 October 1.

2 billion. L. KFN had consolidated assets of $8.741 $ 87. As of December 31. KFN was organized in August 2004 and completed its initial public offering on June 24. common units. L. which vest over one year from the date of grant. 2010 through December 31. distributions on KKR Group Partnership Units received by KKR Holdings.650 (4. any amounts allocated in excess of a principal’s vested equity interests are reflected as employee compensation and benefits expense.075 $ 28.846 $ 18. 2010. Side­by­side investments are investments in Portfolio Companies that are made on the same terms and conditions as those acquired by the applicable fund. and shareholders’ equity of $1. R E L AT E D PA RT Y T R A N SAC T I O N S Due from and to Affiliates consists of: December 31.862 — $ 18. Compensation charges relating to this discretionary allocation amounted to $136.067 $123.36 9. January 1. The cash invested by these individuals aggregated $66. on a discretionary basis. 88 KKR 2010 ANNUAL REPORT . 2010 8.047 $ 77.615. 2010. Discretionary Investments Certain of KKR’s investment professionals.1 million for the years ended December 31. (b) Represents amounts owed to KKR Holdings and/or its principals under the Tax Receivable Agreement.4 billion and $10.P.P. and have invested. their own capital in side­by­side investments with its private equity funds.7 million and $28. 2010 Equity Incentive Plan Under the KKR & Co. See Note 13 “Commitments and Contingencies”. such amount was reflected as a capital deficit within partners’ capital given the KKR principals held controlling and economic interests in the historical KKR.7 million and $25. KKR’s ownership interest in KFN would be less than 1% of KFN’s outstanding shares as of December 31. 2010 are presented below: Restricted Equity Units Weighted Average Grant Date Fair Value 1 1. 2009. (c) Balance. L.35 11. including its principals and other qualifying employees. in Connection with the Tax Receivable Agreement (b) Due to Unconsolidated Funds Due to KKR Holdings L. respectively.P.195) (340. (a) Represents an amount due from KKR principals for the amount of the clawback obligation that would be required to be funded by KKR principals who do not hold direct controlling and economic interests in the KKR Group Partnerships. December 31. KKR is permitted to grant to employees.09 9. respectively. These compensation charges have been recorded based on the unvested portion of quarterly earnings distributions received by KKR Holdings. restricted common units.35 9.6 billion and $1. 2010 2009 Unvested Units Units Due from Principals (a) Due from Related Entities Due from Portfolio Companies Due to KKR Holdings. 2008. subject to annual adjustment. phantom restricted common units and other awards representing KKR & Co. There were no amounts recorded for the year ended December 31. These receivables represented amounts owed by our consolidated KKR Funds to our management companies. Shares of KFN held by KKR are accounted for as trading securities (see Note 2. KFN is a publicly traded specialty finance company whose limited liability company interests are listed on the NYSE under the symbol “KFN. 2009 and 2008. the directors of the Managing Partner.” KFN is managed by KKR but is not under the common control of the Senior Principals or otherwise consolidated by KKR as control is maintained by third­party investors. except that the side­by­side investments are not subject to management fees or a carried interest. such amounts were eliminated in consolidation. operating consultants and senior advisors.P.741 discretionary compensation and discretionary allocations — Certain KKR principals who hold KKR Group Partnership Units through KKR Holdings units are expected to be allocated. L.937 $ 52. “Summary of Significant Accounting Policies — Tax Receivable Agreement”) (c) Prior to the Transactions. KKR made an in­kind distribution of certain receivables of our management companies to KKR Holdings. are permitted to invest. These discretionary amounts entitle the principal to receive amounts in excess of their vested equity interests. 2010 Granted Vested Forfeited Balance. L. 30. In periods prior to the Transactions. and other personnel from January 1. 2005.8 million.185 1.984. 2010 and 2009. Subsequent to the distribution of these receivables. 2010 and 2009.556 $ 16. As of December 31. If KKR were to exercise all of each of its outstanding vested options. non­qualified unit options.P. common units pursuant to awards under the Equity Incentive Plan dilute common unitholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR Group Partnerships. KKR Financial Holdings LLC (“KFN”) KKR & Co.300 $136.679 380. $46. Because unvested units do not have distribution participation rights.000 KKR & Co. respectively.836 $ $ $ $ $ 9. the payable that existed at December 31.319 $ 28. support staff.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS A summary of the status of KKR Holding’s restricted equity awards granted to KKR professionals.51 $ 55. (see Note 2.988 $ — — 87. Accordingly.P.P. respectively.559.5 million for the years ended December 31. The total number of common units that may be issued under the Equity Incentive Plan is equivalent to 15% of the number of fully diluted common units outstanding. 2009 at the KKR Funds is reflected in Due to Affiliates.3 billion. 2010 Equity Incentive Plan (the “Equity Incentive Plan”). In periods prior to the Transactions. unit appreciation rights. These investments are not included in the accompanying financial statements. The issuance of KKR & Co. 2010 and December 31. common units have been granted under the Equity Incentive Plan.298) 3. This amount was paid to KKR Holdings in January 2010. 2010 and 2009. the amounts owed by the KKR Funds are payable to KKR Holdings and as such are no longer payable to a consolidated entity. deferred restricted common units. “Summary of Significant Accounting Policies — Management and Incentive fees”) and represented less than 1% of KFN’s outstanding shares as of December 31. L.

(ii) the exclusion of expenses of consolidated funds. (v) the exclusion of non­cash equity charges and other non­cash compensation charges borne by KKR Holdings. KKR’s capital markets services include arranging debt and equity financing for transactions. an SEC registered investment adviser.4 million for the years ended December 31. 2010. GAAP amounts on a consolidated basis as a result of: (i) the inclusion of management fees earned from consolidated funds that were eliminated in consolidation. (iii) the exclusion of charges relating to the amortization of intangible assets. structuring new investment products and providing capital markets services. ENI 12 . Certain of the Senior Principals are partners in a real­estate based partnership that maintains an ownership interest in KKR’s Menlo Park location. where applicable. KKR changed the format of its segment financial information in order to: (i) properly reflect the economic arrangements resulting from the Transactions. 2009 and 2008. (ii) the exclusion of investment income relating to noncontrolling interests.S. KKR incurred $5. L. $5. In connection with the Transactions. which is reduced for carry pool allocations and management fee refunds. (vi) the exclusion of certain reimbursable expenses and (vii) the exclusion of certain non­recurring items. personnel and maintenance costs associated with their operation. KKR’s reportable segments are presented prior to giving effect to the allocation of income (loss) between KKR and KKR Holdings and as such represents KKR’s business in total. These investment funds and co­investment vehicles are managed by Kohlberg Kravis Roberts & Co. KKR has adjusted its segment financial information for year ended December 31. (iv) the exclusion of charges relating to carry pool allocations. The components of FRE on a segment basis differ from the equivalent U. 2008 to reflect these changes.7 million and $2. vehicles and accounts are managed by KKR Asset Management LLC (which we refer to as “KAM”). Payments made to this partnership were $6. FRE Facilities FRE is comprised of segment operating revenues. ENI differs from net income (loss) on a GAAP basis as a result of: (i) the exclusion of the items referred to in FRE above. and (iii) the exclusion of income taxes..9 million and $7. and (ii) provide more detail regarding fees and investment income. $6. plus (ii) segment investment income. and less liquid credit products such as mezzanine debt and special situations investments. respectively. Public Markets Through the Public Markets segment.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Aircraft and Other Services Certain of the Senior Principals own aircraft that KKR uses for business purposes in the ordinary course of its operations. either through controlling ownership of a company or strategic minority positions. 2010. structured finance vehicles and separately managed accounts that invest capital in liquid credit strategies. KKR manages and sponsors a group of private equity funds and co­investment vehicles that invest capital for long­term appreciation.P.4 million. Key Performance Measures Fee Related Earnings (“FRE”) and Economic Net Income (“ENI”) are key performance measures used by management. These funds. 2009 and 2008. placing and underwriting securities offerings. KKR 2010 ANNUAL REPORT 89 . KKR also manages investments in infrastructure and natural resources. which are differentiated primarily by their investment focuses and strategies.2 million. None of these changes impacted economic net income. Private Markets Through the Private Markets segment.9 million for the use of these aircraft for the years ended December 31. less segment operating expenses. SEGM E N T RE PO RT I N G KKR operates through three reportable business segments. an SEC registered investment adviser. consist of the following: ENI is a measure of profitability for KKR’s reportable segments and is comprised of: (i) FRE. These Senior Principals paid for the purchase of these aircraft with their personal funds and bear all operating. These measures are used by management in making resource deployment and operating decisions as well as assessing the overall performance of each of KKR’s business segments. respectively. such as leveraged loans and high yield bonds. Capital Markets and Principal Activities The Capital Markets and Principal Activities segment combines the assets acquired in the Combination Transaction with the global capital markets business. These segments. less (iii) certain economic interests in KKR’s segments held by third parties. The hourly rates that KKR pays for the use of these aircraft are based on current market rates for chartering private aircraft of the same type. a number of investment funds. KKR manages a specialty finance company.

072 $4.872) (143.334 39.144.266 105.369 526.388.277 $ 31.102 $5. (3) Certain of KKR’s investment funds require that KKR refund up to 20% of any cash management fees earned from limited partners in the event that the funds recognize a carried interest. not to exceed 20% of management fees earned.070 (455.561 36.596 159.793 $ 6.346.202 $ 4.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS The following table presents the financial data for KKR’s reportable segments as of and for the year ended December 31.070 (453. (c)The investment income (loss) adjustment primarily represents (i) the inclusion of investment income of $6.000 718 3. At such time as the fund recognizes a carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof.446.872.825.409 $ 2.534 206.053 1.657 $ 57.629 $ 6. (ii) allocations to the carry pool of $455.218.663 $ 9.457 $5.274.375 13.416 734.781 102.643) 603.148) $ 1. and (iii) a gross up of reimbursable expenses of $32.719 primarily associated with the inclusion of operating expenses upon consolidation of the KKR Funds and (v) other adjustments of $13.832 95.277 $ 38.043 upon consolidation of the KKR Funds.179.357 344.059 38.715 56.286 38.539. (ii) allocations to the carry pool of $455.401. The following table reconciles KKR’s total reportable segments to the financial statements as of and for the year ended December 31.707.118 86.416 $ 435.139.752 1.336) 6.053 1.000. (2) With respect to KKR’s active and future investment funds and co­investment vehicles that provide for carried interest.000 (52.446) 604.202 4. (e) Substantially all of the total partners’ capital adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests.409 $ — $ 6.295.872) (143. 2010 Fees Management and incentive fees: Management fees Incentive fees Management and incentive fees Monitoring and transaction fees: Monitoring fees Transaction fees Fee Credits (1) Net monitoring and transaction fees Total fees Expenses Employee compensation and benefits Occupancy and Related Charges Other Operating Expense Total expenses Fee related earnings Investment income (loss) Gross carried interest Less: Allocation to KKR carry pool (2) Less: Management fee refunds (3) Net carried interest Other investment income (loss) Total investment income (loss) Income (loss) before noncontrolling interests in income of consolidated entities Income (loss) attributable to noncontrolling interests (4) Economic net income (loss) (5) Total Assets Total Partners’ Capital $ 396.451 $ 7. Fee Credits exclude fees that are not attributable to a fund’s interest in a portfolio company and generally amount to 80% of monitoring and transaction fees allocable to the fund after related expenses are recovered.138 $ 66.446) 607.957 5. KKR will allocate to its principals.207.932 96.212 318.700 $30.016 $ 899.391.725.310.831 $ 6.082 $ 453.910 2.899) 242.544.872.430 45.219.718 60.401.672 29.563) 130. 90 KKR 2010 ANNUAL REPORT .322 1.227 — 396.553 $ 947.607 $ 899.202.825.376 26.163 416.825.228 $ 5. and (iii) management fee refunds of $143.534 $ 416. (iii) a gross up of reimbursable expenses of $32. (iv) operating expenses of $20.353.386 $ 1.000 (2. (4) Represents economic interests that will (i) allocate to a former principal an aggregate of 1% of profits and losses of KKR’s management companies until a future date and (ii) allocate to a third party investor approximately of 2% of the equity in KKR’s capital markets business.193.752 (1. recognized carried interest will be reduced and consequently the amount of the management fee refund would be reduced resulting in income being recognized during the period.863 945 8.227 86.128 1.000) — 3.395 148.932 220.626 $ (299. (d) Substantially all of the total assets adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests upon consolidation of the KKR Funds.033 $ 1.457 $5.880 $2. 2010: Private Markets Public Markets Capital Markets and Principal Activities Total Reportable Segments As of and for the Year Ended December 31.698 (1) KKR’s agreements with the limited partners of certain of its investment funds require KKR to share with such limited partners a portion of any monitoring and transaction fees received from portfolio companies and allocable to their funds (“Fee Credits”).357.725.144.383 (64.042 (a)The fees adjustment primarily represents (i) the elimination of management fees of ($388.891 — 19.851. other professionals and selected other individuals who work in these operations a portion of the carried interest earned in relation to these funds as part of its carry pool.715 170.135 3. In periods where investment returns subsequently decrease or turn negative. carried interest is reduced.266 — 105.157 $36.910 attributable to noncontrolling interests upon consolidation of the KKR Funds. (ii) fee credits of $57.880 2.832 492. 2010: Total Reportable Segments As of and for the Year Ended December 31.762.184 79.155 $ 844.109 785.271 $ — — — — 105.675 537 $ 60.392 839 $ 784.219.626 — — — — 1.989.108 $ 7.298. 2010 Adjustments Consolidated Fees (a) Expenses (b) Investment income (loss) (c) Income (loss) before taxes Income (loss) attributable to noncontrolling interests Income (loss) attributable to KKR Holdings Total assets (d) Total Partners’ Capital (e) $ 734.230 $ 55.313 182. (b)The expenses adjustment primarily represents (i) the inclusion of non­cash equity based charges which amounted to $824.266 16.501).212 $1.283 1.753.310.117 (12.

961 4.332 581 $ 367.152.193) (899.241 826.342 38.113.884 Economic net income (loss) attributable to KKR Holdings L. (4) Represents economic interests that will allocate to a third party investor approximately of 2% of the equity in KKR’s capital markets business.951 377.178 As of and for the Year Ended December 31.171 646. 2009: Capital Markets and Principal Activities 2.158 240.604 181.785) (824.679 is allocated to KKR Holdings.826. 2010 Economic net income (loss) Income taxes Amortization of intangibles Non­cash equity based payments Allocation to KKR Holdings Net income attributable to KKR & Co.720) 745.084.654 $ 360.015 $ 4.128 $ $277. KKR 2010 ANNUAL REPORT 91 .011.062 $ 50.129 9.129 34.042 557.091 826.766 $ 109.433 158.486.013 157.207 158.249 147.476 18.279 $ 1.P.030 1.472 55.264 $62.207 — 415. other professionals and selected other individuals who work in these operations a portion of the carried interest earned in relation to these funds as part of its carry pool.226 — — — — 55. (3) Certain of KKR’s investment funds require that KKR refund up to 20% of any cash management fees earned from limited partners in the event that the funds recognize a carried interest.610 317.243 57. and the remaining 30% or $154. recognized carried interest will be reduced and consequently the amount of the management fee refund would be reduced resulting in income being recognized during the period.900) 176.971) (22.093 $ 1.624 $ $101. The following table presents the financial data for KKR’s reportable segments as of and for the year ended December 31.975 $5.125.298 — — — — 349.660.900) 142. In periods where investment returns subsequently decrease or turn negative.487.260) (5. (2) With respect to KKR’s active and future investment funds and co­investment vehicles that provide for carried interest.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS The reconciliation of economic net income (loss) to net income (loss) attributable to KKR as reported in the statements of operations consists of the following: Year Ended December 31.699 (73.793 (75.668 $ 4.255.243 91.576 is allocated to Group Holdings. At such time as the fund recognizes a carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof.502 128.139.801 34.P.502 472.277) $ 333.581 $ — — — — 34.483 18.528 874.754 4.226 24.P.554 — — — — (5.828 (73.193 (57.653 $ 465.679 $ 1.260) 5. KKR will allocate to its principals. not to exceed 20% of management fees earned.408 $ 49. Total Assets Total Partners’ Capital (1) KKR’s agreements with the limited partners of certain of its investment funds require KKR to share with such limited partners a portion of any monitoring and transaction fees received from portfolio companies and allocable to their funds (“Fee Credits”).129 — 34.971) (22.679 368.132 $3. (5) Represents nine months of historical economic net income (loss) totaling $971. L.193 (57. which is 100% allocable to Group Holdings and three months of economic net income (loss) totaling $515.306 269.114.086 2.985 $4.720) 745.(5) Economic net income (loss) attributable to KKR Group Holdings L.747 1. 2009 Private Markets Public Markets Total Reportable Segments Fees Management and incentive fees: Management fees Incentive fees Management and incentive fees Monitoring and transaction fees: Monitoring fees Transaction fees Fee Credits (1) Net monitoring and transaction fees Total fees Expenses Employee compensation and benefits Occupancy and Related Charges Other Operating Expense Total expenses Fee related earnings Investment income (loss) Gross carried interest Less: allocation to KKR carry pool (2) Less: management fee refunds (3) Net carried interest Other investment income (loss) Total investment income (loss) Income (loss) before noncontrolling interests in income of consolidated entities Income (loss) attributable to noncontrolling interests (4) Economic net income (loss) (5) Allocation of Economic net income (loss) $ 415.679 349. Fee Credits exclude fees that are not attributable to a fund’s interest in a portfolio company and generally amount to 80% of monitoring and transaction fees allocable to the fund after related expenses are recovered.360) (7. of which 70% or $360.751 $ 257.121 497 $ 1.455 783 5.238 15.726 $ $362.898 $$1.218.672 10.449 1.294 15 $ 5.747 134.947 1.103 44.399. carried interest is reduced.472 470.

535.208. KKR’s Private Markets other operating expenses excluded $34.466).557 attributable to noncontrolling interests upon consolidation of the KKR Funds. administrative and other expenses.846 associated with the Transactions included in consolidated expenses and excluded from segment reporting.487.333) $ 818.382 $ (116.998) (3.971 and (iii) other adjustments of $28. each of its business segments and is non­recurring in nature.218. (c) The investment income (loss) adjustment primarily represents (i) the inclusion of investment income of $6.654 (36. this charge is included in general.481 (a) The fees adjustment primarily represents (i) the elimination of management fees of $(405.233 and (v) other operating expenses of $31. or allocating resources to.540) (562. (d) Substantially all of the total assets adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests upon consolidation of the KKR Funds.448.306 $ 1.136.8 million incurred in connection with the Transactions.808 $ 6.622 $ 6.788) (34.889.604 $ 377.846) (115.486. In the statements of operations.118.685 (a) During the year ended December 31.271 $ 1.696) $ 30. 2009 Adjustments Consolidated Fees (a) Expenses (b) Investment income (loss) (c) Income (loss) before taxes Income (loss) attributable to noncontrolling interests Income (loss) attributable to KKR Holdings Total assets (d) Total Partners’ Capital (e) $ 646. L.511.401.753. KKR has excluded this charge from its segment financial information as such amount will be not be considered when assessing the performance of.443 $23. The reconciliation of economic net income (loss) to net income (loss) attributable to KKR as reported in the statements of operations consists of the following: Year Ended December 31. (ii) allocations to the carry pool of $173. (ii) fee credits of $73.441 primarily associated with the inclusion of operating expenses upon consolidation of the KKR Funds. (b) The expenses adjustment primarily represents (i) the inclusion of non­cash equity based payments which amounted to $562. and (iii) a gross up of reimbursable expenses of $16.369 $ 6.404 $ 6.373) (120) 116.831.289 $ (116.597 $ 331.119.111 $27.P.221.900 upon consolidation of the KKR Funds. 2009: Total Reportable Segments As of and for the Year Ended December 31. (ii) allocations to the carry pool of $57.449 $ 1.668 $ 4. (e) Substantially all of the total partners’ capital adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests upon consolidation of the KKR Funds.710 $ 7.152.195.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS The following table reconciles KKR’s total reportable segments to the consolidated financial statements as of and for the year ended December 31. (iv) gross up of reimbursable expense of $16.373.884 $ (315. 2009.747 $ 1.696 $ 849. 2009 Economic net income (loss) Income taxes Amortization of intangibles Costs relating to the Transactions (a) Adjustments to carry: Allocations to carry pool recorded in connection with the Transactions Non­cash equity based payments Allocations to former principals Allocation to KKR Holdings Net income attributable to KKR & Co.696) $ 25.084. 1.361. (iii) operating expenses of $34. 92 KKR 2010 ANNUAL REPORT .233.359 $ 5.093 $ — $5.

521) — $(1.665 185.384 $ (1.263 6.576 194.394 97.233.077.156) in consolidated expenses.601 162.558 $ 154. (2) With respect to KKR’s active and future investment funds and co­investment vehicles that provide for carried interest.477) attributable to noncontrolling interests upon consolidation of the KKR Funds.736 97.027 347.766 32.383. (ii) fee credits of $12.864 30.896 156.030 $ 19.233.576 $ (1.495) (1.441. 2008: Capital Markets and Principal Activities As of and for the Year Ended December 31.204 27.558 $ 154.115) $(1. 2008 Adjustments Consolidated Fees (a) Expenses (b) Investment income (loss) (c) Income (loss) before taxes Income (loss) attributable to noncontrolling interests Income (loss) attributable to KKR Holdings Total assets (d) Total Partners’ Capital (e) $ 581.090 — — — — (4.867 $ — — — — 18.342 — — — — 59. carried interest is reduced.566 2. In periods where investment returns subsequently decrease or turn negative.761) $ — $ 22.159.698) 125.189. (3) Certain of KKR’s investment funds require that KKR refund up to 20% of any cash management fees earned from limited partners in the event that the funds recognize a carried interest.197.156 29.482.002.387) 8.865 581. not to exceed 20% of management fees earned.521) $ 285.857.620) (223.205 $26.914 5.307 (12.850.093 12. and (iii) other adjustments of $(40. 2008 Private Markets Public Markets Total Reportable Segments Fees Management and incentive fees: Management fees Incentive fees Management and incentive fees Monitoring and transactions fees: Monitoring fees Transaction fees Fee Credits (1) Net monitoring and transaction fees Total fees Expenses Employee compensation and benefits Occupancy and Related Charges Other Operating Expenses Total Expenses Fee related earnings Investment income (loss) Gross carried interest Less: allocation to KKR carry pool (2) Less: management fee refunds (3) Net carried interest Other investment income (loss) Total investment income (loss) Income (loss) before noncontrolling interests in income of consolidated entities Income (loss) attributable to noncontrolling interests (4) Economic net income (loss) Total Assets Total Partners’ Capital $ 396.472 $ 19.389.053) (1.145) $ — $22.090 $ (346. The following table reconciles KKR’s total reportable segments to the financial statements as of and for the year ended December 31.129) (4. (c) The investment income (loss) adjustment primarily represents (i) the inclusion of investment income of $(11.620) (230.394 — 396.384 $ — $ 363. (ii) a gross up of reimbursable expenses in the consolidated financial results of $22.186 387.195.976 and (iv) other net adjustments of $15.048.698) 107.736 — 455.974 (1) KKR’s agreements with the limited partners of certain of its investment funds require KKR to share with such limited partners a portion of any monitoring and transaction fees received from portfolio companies and allocable to their funds (“Fee Credits”).094 727 5.156).601 $ 387.181 $ 418.696.976 and (iii) the inclusion of $15.148 $ 10.256 23.267 $ 235.812 $ (11.211 18.433.249 $ 59.256 $ 45. KKR 2010 ANNUAL REPORT 93 .383.654 504. At such time as the fund recognizes a carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof.025 (1.992 of other operating expenses primarily relating to the consolidation of the KKR Funds.159.297 $ 455.342 — 59. (d) Substantially all of the total assets adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests upon consolidation of the KKR Funds.342 20.687 10.115) (1.474) $ 363.129) 1.211 7.124) $(11.356) $ (11.850.421 $36.526 194.154 $ 97.090) $ 6.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS The following table presents the financial data for KKR’s reportable segments as of and for the year ended December 31.865.189.152 (1.168 (37) $ 1. (ii) allocations to the carry pool of $(8. other professionals and selected other individuals who work in these operations a portion of the carried interest earned in relation to these funds as part of its carry pool. (b) The expenses adjustment consists of (i) the reflection of allocations to the carry pool of $(8.048 135.388 $(12.197.156 29.256 41.357 (a) The fees adjustment primarily represents (i) the elimination of management fees of $(397. (iii) a gross up of reimbursable expenses of $22.611 (1.842 $52. (4) Represents economic interests that will (i) allocate to a former principal an aggregate of 1% of profits and losses of KKR’s management companies until a future date and (ii) allocate to a third party investor approximately of 2% of the equity in KKR’s capital markets business. (e) Substantially all of the total partners’ capital adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests.387) 8.611 (1. Fee Credits exclude fees that are not attributable to a fund’s interest in a portfolio company and generally amount to 80% of monitoring and transaction fees allocable to the fund after related expenses are recovered.446) $ (11.066 26. KKR will allocate to its principals.673) (1.211 — 18.687 43.698 upon consolidation of the KKR Funds.239) $(13.576 — — — — 10.134 4. recognized carried interest will be reduced and consequently the amount of the management fee refund would be reduced resulting in income being recognized during the period. 2008: Total Reportable Segments As of and for the Year Ended December 31.859.491).096).090) 6.420) $ 30.096 (12.

KKR has recorded a receivable of $55. materially restrict KKR’s investment or financing strategies.7 million related to one portfolio company revolving credit facility as of December 31.6 million is due from noncontrolling interest holders. to fund 20% of the net losses on investments.5 million of which $55.471) Prior to the Transactions. the clawback obligation would have been $61. In periods prior to the Transactions. there would have been no net losing sharing obligation. KKR’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against KKR that have not yet occurred. District Court for the Northern District of Alabama. KKR and certain of its current and former personnel were named as defendants in an action brought in the Circuit Court of Jefferson County.007 Indemnifications In the normal course of business. in 1995. 2010. Had the investments in such funds been liquidated at their December 31.7 million. 2010. KKR Holdings and KKR principals (as carry pool participants) in accordance with the terms of the instruments governing the KKR Group Partnerships.P. As of December 31. such losses would be required to be paid by KKR to the limited partners in those vehicles in the event of a liquidation of the fund regardless of whether any carried interest had previously been distributed. the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled. In addition. certain KKR principals who received carried interest distributions with respect to the private equity funds had personally guaranteed. In April 2000. the amount of carried interest KKR principals have received. (“Bruno’s”). Inc.0 million. Based on the fair market values as of December 31. that is subject to this clawback provision was $697. KKR Capital Markets had an unfunded commitment of $14. the contingent repayment obligation would have been approximately $1.” that. if triggered. may give rise to a contingent obligation that may require the general partners to return amounts to the fund for distribution to the limited partners at the end of the life of the fund. upon the liquidation of a fund. KKR had unfunded commitments to its private equity and other investment vehicles of $923. At December 31. which may result in regulatory proceedings against it. Alabama. Investment Commitments As of December 31. rent concessions or leasehold improvement incentives associated with any of these property leases. In connection with the “net loss sharing provisions. the action was consolidated with a similar action brought against the underwriters of the August 1995 subordinated notes offering.022 25.160 $223. 2010. which is pending before 94 KKR 2010 ANNUAL REPORT . The instruments governing certain of KKR’s private equity funds may also include a “net loss sharing provision. the general partner is required to return. KKR’s business is also subject to extensive regulation. COMM ITM ENTS A ND CON T I N G E N C I ES Debt Covenants Borrowings of KKR contain various customary debt covenants. In addition to base rentals. 2010.908 25.9 million within Due from Affiliates for the amount of the clawback obligation given that would be required to be funded by KKR principals who do not hold direct controlling economic interests in the KKR Group Partnerships. KKR will indemnify its principals for any personal guarantees that they have provided with respect to such amounts. Litigation Contingent Repayment Guarantees The instruments governing KKR’s private equity funds generally include a “clawback” provision that. the contingent obligations of the general partners of the private equity funds to repay amounts to fund limited partners pursuant to the general partners’ clawback obligations. 2008 Economic net income (loss) Income taxes Amortization of intangibles Net income attributable to KKR & Co. Bankruptcy Court for the Northern District of Alabama.211) $(1.474) (6. required on the operating leases are as follows: 2011 2012 2013 2014 2015 2016 and Thereafter Total minimum payments required $ 30. lawsuits and claims incidental to the conduct of KKR’s business. There are no material rent holidays. 2010. the action was transferred to the U. 13. Under a “clawback” provision.786) (2.468 20.0 million as of December 31. the approximate aggregate minimum future lease payments. in management’s opinion. on a several basis and subject to a cap. based on experience. (1. As of December 31. KKR is involved in various legal proceedings. In these vehicles. KKR is in compliance with all of its debt covenants as of December 31. KKR expects the risk of material loss to be remote. net of sublease income. such amount was reflected as a capital deficit within partners’ capital given the KKR principals held controlling economic interests in the historical KKR. The terms of the Transactions require that KKR principals remain responsible for any clawback obligations relating to carry distributions received prior to the Transactions up to a maximum of $223. 2010. if triggered.113 96. 2010. may give rise to a contingent obligation that may require the general partners to contribute capital to the fund.094. Carry distributions arising subsequent to the Transactions will be allocated to KKR.204. the complaint in this action was amended to further allege that KKR and others violated state law by fraudulently misrepresenting the financial condition of Bruno’s in an August 1995 subordinated notes offering relating to the acquisition and in Bruno’s subsequent periodic financial disclosures.S. These covenants do not.336 25. If the vehicles were liquidated at zero value.9 million is recorded in Due from Affiliates and $5. KKR and its subsidiaries enter into contracts that contain a variety of representations and warranties and provide general indemnifications. certain lease agreements are subject to escalation provisions and rent expense is recognized on a straight­line basis over the term of the lease agreement.” certain of KKR’s private equity vehicles allocate a greater share of their investment losses to KKR relative to the amounts contributed by KKR to those vehicles. alleging breach of fiduciary duty and conspiracy in connection with the acquisition of Bruno’s.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS The reconciliation of economic net income (loss) to net income (loss) attributable to KKR as reported in the statements of operations consists of the following: Year Ended December 31. one of KKR’s former portfolio companies. assuming that all applicable private equity funds were liquidated at no value. In August 2009.6 million. In August 1999. From time to time. In January 2001. or the Alabama State Court. The action was removed to the U. However. due to the diminished performance of later investments. contingent rent. previously distributed carry to the extent that. L. Non-cancelable Operating Leases KKR’s non­cancelable operating leases consist primarily of leases of office space around the globe. on an after­tax basis. 2010 fair values.S.195. 2010.

one of its portfolio companies. No. rescission of the merger agreement. the court granted a motion filed by KKR and certain other defendants to dismiss all claims alleged by a putative damages sub­class in connection with the acquisition of PanAmSat Corp. KKR is cooperating with the SEC’s inquiry. 2010. and oral argument is scheduled to be held before the Supreme Court of Delaware on March 23. On January 13. the Alabama Supreme Court ordered the parties to brief KKR’s petition and the petition filed by another defendant seeking an immediate appeal of certain rulings made by the Alabama State Court. and KFN’s former chief financial officer (the “KFN Individual Defendants. Specifically. 2011. The second phase of discovery permitted by the court is ongoing. The amended complaint asserts claims for: (i) breach of fiduciary duty against the Del Monte directors. In September 2009. including additional allegations concerning purchases of PRIMEDIA’s preferred stock in 2002. KKR is still evaluating these Delaware and California actions and expects to defend them vigorously. (ii) aiding and abetting the directors’ breaches of fiduciary duty against the Sponsors. and divide up an alleged market for private equity services for leveraged buyouts. in an unspecified amount to be proven at trial. There has been limited activity in these California cases to date. Inc. and (iv) tortuous interference with contract against Barclays arising from the aforementioned confidentiality agreement between the Sponsors and Del Monte. On October 7. together with KFN. KKR and certain of its current and former personnel were named as defendants in now­consolidated shareholder derivative actions in the Court of Chancery of the State of Delaware relating to PRIMEDIA Inc. On June 16. restrict the supply of private equity financing. In December 2007. the Vice Chancellor of the Court of Chancery of the State of Delaware entered an order dismissing all claims asserted against the defendants. 2010. is a defendant in purported shareholder class actions arising out of the proposed acquisition of Del Monte Foods Company (“Del Monte”) by Blue Acquisition Group. among other things. which served as a financial advisor to Del Monte in connection with the proposed acquisition. (“PRIMEDIA”). along with 16 other private equity firms and investment banks. the plaintiffs filed under seal a fourth amended complaint that includes new factual allegations concerning the additional eight transactions and the original nine transactions. These actions claim that the board of directors of PRIMEDIA breached its fiduciary duty of loyalty in connection with the redemption of certain shares of preferred stock in 2004 and 2005. The various complaints filed in the Delaware Chancery Court were consolidated on December 31. In August 2008. In 2005. 2011. for losses they allegedly suffered in connection with their purchase of the subordinated notes.. that the Del Monte directors breached their fiduciary duties to Del Monte stockholders by agreeing to sell Del Monte at an unfair price and through an unfair process and by filing an allegedly materially misleading and incomplete proxy statement. (“Barclays”). among other things. 2011. 2010. KKR and the other named defendants moved to dismiss the action. and Barclays Capital. 2011. the Alabama State Court granted in part and denied in part the motion to dismiss. the court granted a second stage of discovery as to eight additional transactions but denied a second stage of discovery as to any transactions beyond the additional eight specified transactions. “KFN Defendants”). KKR believes that this action is without merit and intends to defend it vigorously. The complaints all seek injunctive relief. the lead plaintiff filed an amended complaint. The first stage of discovery concluded on or about April 15. were named in a putative class action complaint filed by the Charter Township of Clinton Police and Fire Retirement System in the United States District Court for the Southern District of New York (the “Charter Litigation”). were named as defendants in a purported consolidated amended class action complaint. 2010. The plaintiffs are seeking compensatory and punitive damages. the Acquisition Entities. 6027­VCL. As suggested by the Alabama State Court. KKR has filed a petition seeking an immediate appeal of certain rulings made by the Alabama State Court when denying the motion to dismiss. On August 18. and the adequacy of KFN’s loss reserves for its real estate­ related assets (the “alleged Section 11 KKR 2010 ANNUAL REPORT 95 . In August 2008. the Delaware Chancery Court issued a ruling which. under the caption In re Del Monte Foods Company Shareholders Litigation. The ruling enjoined defendants from proceeding with the Del Monte stockholder vote. along with two other private equity firms (collectively the “Sponsors”). Briefing on the appeal has been completed. 2010. In February 2008. Similar shareholder actions are pending against the Del Monte directors. Briefing on both petitions has been completed. The fourth amended complaint also includes eight purported sub­classes of plaintiffs seeking unspecified monetary damages and/or restitution with respect to eight of the original nine challenged transactions and new separate claims against two of the original nine challenged transactions. filed a motion to dismiss the actions. KKR believes that this action is without merit and intends to defend it vigorously. plaintiffs filed an amended complaint. The plaintiffs further allege that KKR benefited from these redemptions of preferred stock at the expense of PRIMEDIA and that KKR usurped a corporate opportunity of PRIMEDIA in 2002 by purchasing shares of its preferred stock at a discount on the open market while causing PRIMEDIA to refrain from doing the same. following a review of plaintiffs’ claims. KKR believes that this action is without merit and intends to defend it vigorously. found on the preliminary record before the court that the plaintiff had demonstrated a reasonable likelihood of success on the merits of its aiding and abetting claim against the Sponsors. The amended complaint seeks injunctive relief on behalf of all persons who sold securities to any of the defendants in leveraged buyout transactions and specifically challenges nine transactions. On February 14. On March 4. The complaints also generally allege that the Sponsors. On February 18. the special litigation committee formed by the board of directors of PRIMEDIA. the members of KFN’s board of directors and certain of its former executive officers. The amended complaint alleges that KFN’s April 2007 registration statement and prospectus and the financial statements incorporated therein contained material omissions in violation of Section 11 of the Securities Act of 1933.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS the Alabama State Court. Plaintiffs seek unspecified damages on behalf of PRIMEDIA and an award of attorneys’ fees and costs. an amended complaint was filed in the Delaware action. including KKR. KKR received a request from the SEC for information regarding issues relating to the Del Monte transaction. KFN’s ability to finance its real estate­ related assets. 2011. Inc. In March 2009.” and. The complaints generally allege. Sponsors and/or the Acquisition Entities in California Superior Court and the United States District Court for the Northern District of California. 2010. the plaintiffs filed a notice of appeal with the Supreme Court of Delaware. In April 2010. The suit alleges that from mid­2003 defendants have violated antitrust laws by allegedly conspiring to rig bids. KKR. On July 15. for twenty days and preliminarily enjoined certain deal protection provisions of the merger agreement pending the stockholder vote. KFN. the Acquisition Entities and Del Monte aided and abetted the directors’ breaches of fiduciary duties. fix the prices for target companies at artificially low levels. (iii) breach of contract against the Sponsors arising from a confidentiality agreement between the Sponsors and Del Monte. In June and July 2010. which deleted as defendants the members of KFN’s board of directors and named as individual defendants only KFN’s former chief executive officer. damages and attorneys’ fees. KKR. and separate claims for relief related to the PanAmSat transaction. 2011. were named as defendants in a purported class action complaint filed in the United States District Court for the District of Massachusetts by shareholders in certain public companies acquired by private equity firms since 2003. In March 2010. regarding the risks and potential losses associated with KFN’s real estate­related assets. and both petitions are under consideration. the court granted plaintiffs’ motion to proceed to a second stage of discovery in part and denied it in part. along with 15 other private equity firms and investment banks. including certain of KKR’s current and former personnel. and Blue Merger Sub Inc. as amended (the “Securities Act”). entities controlled by private equity funds affiliated with the Sponsors (the “Acquisition Entities”). KKR. KFN’s former chief operating officer. previously scheduled for February 15.

Such lawsuits may involve claims that adversely affect the value of certain investments owned by KKR’s funds. KKR received a request from the SEC for information regarding its investors and clients that are sovereign wealth funds and certain services provided by KKR. KKR has an entity based in London which is subject to the capital requirements of the U. In April 2009. County of San Francisco (the “California Derivative Action”). and an order directing KFN to reform its corporate governance and internal procedures to prevent a recurrence of the alleged misconduct. pursuant to Section 15 of the Securities Act.4 million of illiquid portfolio investments of the Master Fund at 95% of their current fair market value. Financial Services Authority (“FSA”). KKR’s subsidiary KKR Asset Management LLC (formerly known as Kohlberg Kravis Roberts & Co. 2011. 2011. the court dismissed the Charter Litigation with prejudice and that judgment is final.S. 96 KKR 2010 ANNUAL REPORT . In January 2011. management has not concluded whether the final resolution of any of these matters will have a material adverse effect upon the financial statements. in the Superior Court of California. R E G U L AT E D E N T I T I ES KKR has a registered broker­dealer which is subject to the minimum net capital requirements of the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). the court granted the defendants’ motion and dismissed the case with prejudice. if the performance of the Master Fund is lower than certain benchmarks defined in the agreements. Principal Protected Product for Private Equity Investments The fund agreements for a private equity vehicle referred to as KKR’s principal protected product for private equity investments contain pro­ visions that require the fund underlying the principal protected product for private equity investments (the “Master Fund”) to liquidate certain of its portfolio investments in order to satisfy liquidity requirements of the fund agreements. By order dated June 18. Kostecka. in the ordinary course of business KKR is subject to regulatory examinations or investigations and also is and can be both the defendant and the plaintiff in numerous actions with respect to acquisitions. costs and expenses incurred by the lead plaintiff in the action. KKR’s obligation has been reduced to $4. management is unable to estimate a range of potential loss. By order dated January 8. and equitable or injunctive relief. Plaintiffs’ time to take an appeal has run. and another entity based in Mumbai which is subject to capital requirements of the Reserve Bank of India (“RBI”). waste of corporate assets. Haley. breaches of the duty of full disclosure. In November 2010. because such losses are either not probable or reasonably estimable (or both) at the present time. In December 2009. The amended complaint further alleges that. The complaint seeks judgment in favor of KFN for unspecified damages allegedly sustained as a result of the Haley Individual Defendants’ alleged misconduct. In August 2008. restitution.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS violation”). In March 2009.K. Additionally. The plaintiff in the California Derivative Action subsequently agreed to withdraw his complaint and. rescission or a rescissory measure of damages. the KFN Defendants filed a motion to dismiss the amended complaint for failure to state a claim under the Securities Act. As of December 31.1 million. KFN was named as a nominal defendant. of certain notes that had been issued to KFN by collateral pools of structured credit products. KKR received requests for certain documents and other information from the Antitrust Division of the U. insolvency and other types of proceedings. In November 2010. The regulatory capital requirements referred to above may restrict the Partnership’s ability to withdraw capital from its entities. 2009. 2011. (Fixed Income) LLC) received a request from the SEC for information in connection with its examination of certain investment advisers in order to review trading procedures and valuation practices in the collateral pools of structured credit products. the Court approved the parties’ stipulation to stay the proceedings in the New York Derivative Action until the Charter Litigation is dismissed on the pleadings or KFN files an answer to the Charter Litigation. which is now completed. In September 2006 and March 2009. a stipulated order dismissing the California Derivative Action was entered on February 14. and unjust enrichment in connection with the conduct at issue in the Charter Litigation. KKR has an obligation to purchase up to $18.6 million may be restricted as to the payment of cash dividends and advances to the Partnership. KKR is fully cooperating with the DOJ’s investigation. The complaint in the New York Derivative Action asserts claims against the Haley Individual Defendants for breaches of fiduciary duty. costs and disbursements incurred by plaintiff in the action. the court dismissed the Charter Litigation with prejudice and that judgment is final. abuse of control. including the filing of the April 2007 registration statement with alleged material misstatements and omissions. 2010. a purported shareholder. the members of KFN’s board of directors and its executive officers (the “Kostecka Individual Defendants”) were named in a shareholder derivative action brought by Raymond W. No loss contingency has been recorded in any period presented in the financial statements. costs and disbursements incurred by plaintiff in the action. Effective January 1. bankruptcy. the court approved the parties’ stipulation to stay the proceedings in the California Derivative Action until the Charter Litigation is dismissed on the pleadings or KFN files an answer to the Charter Litigation. related to these matters. the members of KFN’s board of directors and certain of its executive officers (the “Haley Individual Defendants”) were named in a shareholder derivative action brought by Paul B. equitable and/or injunctive relief. In an instance where the Master Fund is not in compliance with the defined liquidity requirements and has no remaining liquid portfolio investments. if any. the KFN Individual Defendants have legal responsibility for the alleged Section 11 violation. in the United States District Court for the Southern District of New York (the “New York Derivative Action”). including the filing of the April 2007 Registration Statement with alleged material misstatements and omissions. Consequently. KKR cooperated with the SEC’s examination. The amended complaint seeks judgment in favor of the lead plaintiff and the putative class for unspecified damages allegedly sustained as a result of the KFN Defendants’ alleged misconduct. the fund does not have a liquidity shortfall and therefore no obligation exists. In November 2010. gross mismanagement. The SEC also requested information regarding the surrender by KFN for cancellation. All of these broker dealer entities have continuously operated in excess of their respective regulatory capital requirements. and the judgment is now final. The plaintiff in the New York Derivative Action subsequently agreed to withdraw his complaint. 2009. Department of Justice (“DOJ”) in connection with the DOJ’s investigation of private equity firms to determine whether they have engaged in conduct prohibited by United States antitrust laws. The complaint in the California Derivative Action asserts claims against the Kostecka Individual Defendants for breaches of fiduciary duty. a purported shareholder. 1 4. 2010. KFN was named as a nominal defendant. At this time. a declaration that the Haley Individual Defendants are liable to KFN under Section 11 of the Securities Act. and a stipulated order dismissing the New York Derivative Action was entered on February 4. The complaint seeks judgment in favor of KFN for unspecified damages allegedly sustained as a result of the Kostecka Individual Defendants’ alleged misconduct. Moreover. At December 31. and for contribution in connection with the conduct at issue in the Charter Litigation. without consideration. approximately $116. KKR is cooperating with the SEC’s investigation. another entity based in Hong Kong which is subject to the capital requirements of the Hong Kong Securities and Futures Ordinance. Such matters are subject to many uncertainties and their ultimate outcomes are not predictable with assurance. and an order directing KFN to reform its corporate governance and internal procedures to prevent a recurrence of the alleged misconduct.

L.86 209.902.345) (781.261. SUB SEQUE N T E V E N TS A distribution of $0.P.393.04 0. Q UART E RLY F I N A N C I A L DATA ( UN AU D I T E D ) Three Months Ended.123. L. Per Common Unit $ 39.987.586 1.610 2.373 52. KKR Holdings will receive its pro rata share of the distribution from the KKR Group Partnerships.0 billion to $700.902.29 per KKR & Co.902.902.696) (78.033) 1.383.902.863 154.57 204.P.413.226 204. 2010 June 30.160 676.867 1. 2010 September 30. and the Issuer of the Senior Notes became guarantors of the Corporate Credit Agreement. which reduced the availability for borrowings under the facility from $1.130 292.981) — (54.070 104.370 159 2.171. 2010 Statement of Operations Data: Fees Less: Total Expenses Total Investment Income (Loss) Income (Loss) Before Taxes Income Taxes Net Income (Loss) Less: Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities Less: Net Income (Loss) Attributable to Noncontrolling Interests Attributable to KKR Holdings Net Income (Loss) Attributable to KKR & Co. common unit was declared on February 23. 2009 September 30.221) (0. 2011.738 1.724.816 143.902.226 $ 146.86 0.226 $ 96.902. Net Income (Loss) Attributable to KKR & Co.708 1.031 463.193 1.211 1.678 16.P. the KKR Group Partnerships became co­borrowers of the facility.907 0.452 2.P.437 29. together with certain general partners of KKR’s private equity funds.362 3. L. 2016. and KKR & Co.280.836 0.385 — 365.931 31.241 113.663 $ 129.263 1.586.226 $ 87.178.249.583) $ 51.959 881.406.267 418. unitholders of record as of the close of business on March 7.051 14.323 — 616.659 13.686 3.989.0 million and extended the maturity.902 3.04 204.128.697 411.38) (0.758 (715. 2011 and will be paid on March 21.226 204.986 3.564) (727.261.415 1.835 4.207 1.856 0. Per Common Unit $ 106.283 850.P. On March 1.P.018 449.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS 15. L.219 $ $ $ $ $ $ $ $ $ $ $ $ Basic Diluted Weighted Average Common Units Outstanding Basic Diluted Three Months Ended.15 0. 2010 December 31.370. L.226 204.856 838.689 2. March 31. 2011.482 97.308 2.226 $ $ $ $ $ $ Basic Diluted Weighted Average Common Units Outstanding Basic Diluted 16.115 4.633 1. KKR 2010 ANNUAL REPORT 97 .826 $ 110.38) 204. the terms of the Corporate Credit Agreement were amended. L. 2009 June 30.527 1. so that the facility now expires on March 1.443 31.465.895.307.531 (782. 2011 to KKR & Co.763.P. 2009 December 31.101 4.293. March 31. In addition.193.57 0.070 430. Net Income (Loss) Attributable to KKR & Co.507.226 204.579 0.902.15 204.597 4.413 180.219 209.936 2. L.722 2.444.186 8.354.655 (116. 2009 Statement of Operations Data: Fees Less: Total Expenses Total Investment Income (Loss) Income (Loss) Before Taxes Income Taxes Net Income (Loss) Less: Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities Less: Net Income (Loss) Attributable to Noncontrolling Interests Attributable to KKR Holdings Net Income (Loss) Attributable to KKR & Co.224.

902.007.237. 2010 GAAP Common Units Outstanding — Basic Unvested Common Units (1) GAAP Common Units Outstanding — Diluted KKR Holdings Units (2) Adjusted Units 204. L.194 683. for KKR common units.226 — 204.007.226 — 204.105.194 683.194 683. 98 KKR 2010 ANNUAL REPORT .007.226 478.902.091 30.226 — 204. upon exchange of units in KKR Holdings L. 2009 March 31.902.226 — 204. 2010 September 30.902.000 212. The issuance of common units of KKR & Co. L.226 478. pursuant to awards under its equity incentive plan dilutes KKR common unitholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR business.420 204.037.770.105.420 204.007.420 (1) Represents equity awards granted under the KKR & Co.226 478. 2010 June 30.800.226 478.P.329 683.420 212.420 204.P.902.902.APPENDIX Appendix 1 RECONC I LIATION OF GA A P COMMON UN I TS O UTSTA N D I N G TO A DJ UST E D U N I TS As of December 31. L. (2) Common units that may be issued by KKR & Co.105.194 683.902.P. 2010 Equity Incentive Plan.105. 2010 December 31.902.P.091 470.

KKR 2010 ANNUAL REPORT 99 .

com transfer agent American Stock Transfer & Trust Company. Central Hong Kong + 852 3602­7300 *As of December 31.P. UAE + 971 4 401 9879 seoul KKR Korea Limited Liability Corporation c/o The Executive Conference Center Room #3. 2010 100 KKR 2010 ANNUAL REPORT .O.c.C. d. Suite 800 Washington. we respond cohesively. and country by country. Suite 4200 New York. Sydney NSW 2000 Australia + 61 2 8298 5500 dubai KKR MENA Limited Level 12. Ltd Stirling Square 7 Carlton Gardens London SW1Y 5AD + 44 20 7839 9800 paris Kohlberg Kravis Roberts & Co. UAE + 971 4 401 9879 hong kong KKR Asia Limited 25/F. L. 9 West 57th Street Suite 4200 New York. CA 94025 + 1 (650) 233­6560 san francisco KKR Asset Management LLC 555 California Street 50th Floor San Francisco. NY 11219 + 1 (800) 937­5449 copyright information © 2011 KKR & Co. L.O. Korea + 82 2 22301490 ­ 93 KK R C A P I TA L M A R KE TS BRO K E R . Box 121208 Dubai. India Europe london Kohlberg Kravis Roberts & Co. L. Lower Parel (West) Mumbai 400 013. Gate Building DIFC. L. number of employees* 698 investor relations Kohlberg Kravis Roberts & Co. TX 77002 + 1 (713) 343­5142 washington. Box 121208 Dubai.P. NY 10019 United States + 1 (877) 610­4910 Outside US: + 1 (212) 230­9410 Email: Investor­Relations@kkr. NY 10019 + 1 (212) 230­9433 Europe london KKR Capital Markets Limited Stirling Square 7 Carlton Gardens London. P. 101 Constitution Avenue N. NY 10019 + 1 (212) 750­8300 menlo park Kohlberg Kravis Roberts & Co. Marunouchi Chiyoda­ku Tokyo 100­0005 + 81 3­6268­6000 beijing KKR Investment Consultancy (Beijing) Company Limited 15/F Beijing Yintai Office Tower C No. D. 600 Travis Street Suite 7200 Houston. Gateway Building. Kohlberg Kravis Roberts & Co.P. SW1Y 5AD + 44 20 7839 9800 Asia tokyo KKR Capital Markets Japan Limited 6F. SAS 24 rue Jean Goujon 75008 Paris + 33 1 53 53 96 00 Australia Middle East Asia sydney KKR Australia Pty Limited Level 42. 20001 + 1 (202) 742­4430 tokyo KKR Japan Limited 6F. nyse symbol KKR LO C AT I O N S USA new york Kohlberg Kravis Roberts & Co. Jung­gu Seoul 100­856. Marunouchi Chiyoda­ku Tokyo 100­0005 + 81 3­6268­6666 hong kong KKR Capital Markets Asia Limited 25/F AIG Tower 1 Connaught Road. LLC 6201 15th Avenue Brooklyn. 9 West 57th Street. Tokyo Ginko Kyokai Building 1­3­1. Lower Parel (West) Mumbai 400 013.P. CA 94104 + 1 (415) 315­3620 houston Kohlberg Kravis Roberts & Co. as one company.P. Piramal Tower Peninsula Corporate Park Ganpatrao Kadam Marg. 2800 Sand Hill Road Suite 200 Menlo Park. L. Gate Building DIFC. 1 Macquarie Place. All rights reserved. Tokyo Ginko Kyokai Building 1­3­1. Piramal Tower Peninsula Corporate Park Ganpatrao Kadam Marg. 6th Floor The Shilla Hotel 202 Jangchung­dong 2­ga. With 14 offices in 9 countries. China + 86 10 6563­7001 mumbai KKR India Advisors Private Limited 2nd Floor. Central + 852 3602­7508 chennai KKR India Financial Services Private Limited 2nd Floor. fulfilling our responsibilities to stakeholders city by city.2 Jianguomenwai Street Chaoyang District Beijing 100022.W. P.D E A L E R A DD R ESSES USA new york KKR Capital Markets LLC 9 West 57th Street Suite 4160 New York. AIA Central 1 Connaught Road.UNITHOLDER INFORMATION We’re a partnership with a global reach. India 91 22 4355­1300 dubai KKR MENA Limited Level 12.

P. In this report.” “believe. The information and opinions set forth herein have been prepared by KKR & Co. and the financial results of these strategies are subject to significant volatility. references to “KKR.” “anticipate” or the negative version of these words or other comparable words. Forward­looking statements are subject to various risks and uncertainties.” “we.” “plan. L. our operations and financial performance. References to “KKR Capstone” or “Capstone” are to all or any of Capstone Consulting LLC. Design: VSA Partners. 18). These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings.” “will. whether as a result of new information.P.” “estimate. future developments or otherwise.” “us. Additional information. and its consolidated subsidiaries. socially beneficial and economically viable management of the world’s forests. L..sec. 30.’s complete Annual Report on Form 10­K and other documents we have filed or furnished with the U.” “should.” “continue. KKR Capstone is not a subsidiary or other affiliate of KKR.. “KKR”). The financial section of this report is printed on Starbrite FSC­certified paper. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in our Annual Report on Form 10­K. can be found in KKR’s Annual Report on Form 10­K filed with the SEC and its other filings with the SEC. This material is solely for informational purposes and shall not constitute an offer to purchase or sell. any securities. each of which is owned and controlled by their senior management and not by KKR.” “may.P. In addition.” “our” and “our partnership” refer to KKR & Co.” “seek. You can identify these forward­looking statements by the use of words such as “outlook. there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. 35) The cover and narrative section of this report are printed on Mohawk Options FSC®­certified paper.S. or the solicitation of an offer to purchase or sell. KKR’s business strategies have a long­term focus. Securities and Exchange Commission can be accessed via the SEC’s website at www. Accordingly. among other things.” “approximately. The paper is certified by Green Seal and by SmartWood for FSC standards that promote environmentally appropriate. KKR Capstone Asia Limited and their affiliates. a NYSE­listed partnership (together with its consolidated subsidiar­ ies. Printing: Classic­Color Photography: Len Irish (p. Inc. 34. Mohawk Fine Papers purchases enough Green­e certified renewable energy certificates (RECs) to match 100% of the electricity used in their operations.P. Jill Henderlight (pp. cautionary note regarding forward-looking statements This report contains forward­looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. KKR Capstone uses the “KKR” name under license from KKR.” “predict. which reflect our current views with respect to.annual report on form 10-k Copies of KKR & Co.” “expect. including a description of risks that may be important to a decision to purchase or sell any common units of KKR & Co. L.” “intend. Capstone Europe Limited. .” “potential. We do not undertake any obligation to publicly update or review any forward­looking statement. L.gov.

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