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

B KKR 2010 ANNUAL REPORT Partnership POWERS MOVES CONNECTS PAYS ENERGIZES FLAVORS GROWS CARES NOURISHES COMFORTS FERMENTS BUILDS SECURES AND GUIDES everything we do. INVESTMENT EXPANDED DEVELOPMENT FROM 1 WELL TO 75 NEW WELLS

PARTNERSHIP

POWERSEast Resources mansfield, pennsylvania

2 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 3 New technology has transformed the world’s energy supply by enhancing successful and safe exploration for natural gas from shale rock formations. Recognizing this revolutionary change, our energy team identified East Resources, Inc., a leading oil and gas company with a stable portfolio of produc­ ing assets and more than 650,000 net acres of highly contiguous, operated acreage in some of the most attractive areas of the Marcellus Shale in Pennsylvania. East’s regional concentration and entrepreneurial approach provided operational and cost advantages that made it an attractive invest­ ment. In June 2009, KKR invested $330 million in East through a convertible security, which enabled the company to expand development — drilling 75 horizontal wells, compared to only one horizontal well prior to KKR’s investment. This expanded development demonstrated the value of East’s asset position. In late 2010, Royal Dutch Shell Plc acquired East for $4.7 billion, a $1.2 billion gain for KKR and our investors.

2 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 3 BMG Rights Management berlin, germany

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

4 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 5 Avago san jose, california

Avago Technologies is a leading global designer, developer and supplier of analog semiconductors. The company’s products can be found in a wide range of devices including smartphones, data networks, computer peripherals and supercom­ puters. With a 50-year history of innovation, Avago holds more than 5,000 U.S. and foreign patents and patent applications and employs more than 3,500 employees globally. Throughout its history, Avago has been a leader in innovation and engineering expertise. However, as a captive subsidiary (first of HP and later Agilent), it was not managed to its full potential. KKR and our partner Silver Lake saw an opportu­ nity for Avago to thrive as an independent company and in 2005 led the carve-out from Agilent. In the nine months that followed the carve- out, we and KKR Capstone partnered with Avago’s management to create a stand-alone company that was significantly more effective and efficient than the historical model. We strengthened the company by hiring new CEO Hock Tan, an experienced semiconductor executive, as well as other key executives and by divesting several non-core businesses. Over the course of the next four years, the new management team improved the business by re-focusing the product portfolio and redeploying R&D spending in core areas such as wireless, fiber optics and networking. From 2007 to 2010, Avago achieved annual growth of 11.1 percent and increased profitability by 25.8 percent annually. In August of 2009, Avago was listed on the NASDAQ stock exchange in an IPO supported by KKR Capital Markets. The focus on long-term performance has benefited the public owners of the stock as Avago has outperformed market indices, including the SOX (Semiconductor Index), NASDAQ and the S&P 500 since the IPO.

4 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 5 PARTNERSHIP

PAYSWorldPay london, england

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

6 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 7 Café Coffee Day, owned by Coffee Day Resorts, is one of India’s strongest consumer and retail brands. With more than 1,000 cafes in 150 cities across India, Café Coffee Day has more than four times the stores of its nearest competitor. This unmatched scale has enabled the company to develop a fully integrated supply chain with stand­ ardized product offerings across the country. Coffee Day’s promoter, VG Siddhartha, required capital to take advantage of extraordinary growth opportunities in Coffee Day as well as other businesses. Working in collaboration with manage­ ment, KKR developed and invested through an $80 million structured equity solution. Proceeds from KKR’s investment are supporting Café Coffee Day’s continued growth and business expansion, including recently opened cafes in Vienna and Prague.

200 MORE STORES ADDED SINCE KKR INVESTMENT

Café Coffee Day bangalore, india

6 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 7 Over the past 35 years, KKR has a long track record of partnering with family businesses to assist them in accelerating value creation. Founded in 1931, WILD is a leading manufacturer of natural flavor and ingredient solutions for the food and beverage industry. With healthy products, market-leading innovation and strong customer relationships, WILD is well positioned for global growth. In July 2010, after nearly 80 years of running WILD as a successful family business, Dr. Hans-Peter Wild entered a partnership with KKR as a minority investor in the company. In addition to providing the Wild family with capital, the KKR team has worked with Dr. 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. For example, our team is working with management on global purchasing, supply chain and lean manufacturing. Through our global network, we are partnering with WILD’s management to grow the business in emerging markets through both acquisition and new market development. We have also worked closely with Dr. Wild to recruit additional management talent to support the company’s global growth initiatives.

PARTNERSHIP FLAVORS WILD Flavors GmbH zug, switzerland

8 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 9 Dollar General is the largest small-box discount retailer by revenue in the United States. The 72-year-old company offers a wide variety of everyday merchandise and unique items at low prices in convenient locations. In 2007, KKR purchased Dollar General for $7.6 billion. Since then, Dollar General’s partnership with KKR has been a story of growth. Working together with Dollar General CEO Rick Dreiling and a highly experienced management team, we focused on improving store standards and product sourcing, redesigning core merchandising pro­ cesses, expanding the private label business and reducing out-of-stocks. Through operating initiatives and renewed focus on retailing discipline, the company expanded its stores, grew sales and improved margins. From 2007 to the end of its 2010 fiscal year, Dollar General grew revenue by 37 percent while increasing adjusted EBITDA by 126 percent. During this same period, approximately 15,000 positions were created, and the company avoided 160,000 metric tons of greenhouse gas emis­sions through participation in KKR’s Green Portfolio Program. In November 2009, the company went public in the largest retail IPO in 14 years, with KKR Capital Markets serving as one of the lead bookrunners. With revenues of $13 billion for the fiscal year 2010, Dollar General is now one- and-a-half times larger than its nearest direct-retail competitor. STORE GROWTH FROM 8,194 TO 9,372

PARTNERSHIP

GROWSDollar General goodlettsville, tennessee

8 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 9 PARTNERSHIP CARES Harden Healthcare austin, texas

40,000 U.S. SENIORS SERVED BY HARDEN HEALTHCARE IN 2010

Harden Healthcare provides home healthcare, hospice, assisted living and skilled nursing services. Along with its subsidiaries, Harden served nearly 40,000 seniors across the United States in 2010. In late 2009, Harden found that the significant debt it had incurred to fund a previous acquisition was inhibiting its ability to grow. KKR stepped in as a partner to recapitalize the company with $235 million of new funding. KKR Asset Management provided approximately $140 million of this financing, while KKR Capital Markets arranged the placement and syndication of the balance, including a $35 million revolving credit line. Shortly after the transaction closed in March of 2010, Harden acquired Voyager Hospice Care, expanding its presence in the hospice market and extending its geographic reach to four new states. To support this transaction, KKR invested an addi­ tional $50 million and KKR Capital Markets raised an additional $40 million of senior secured debt. 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.

10 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 11 Founded in 2005, Ma Anshan Modern Farming raises dairy cows and sells raw milk to dairy companies that produce branded consumer products. The company currently has 14 farms across China, and it is planning continued growth to strengthen its industry-leading position at the forefront of a shift toward large-scale dairy farms in China. Recognizing a growing concern and interest in food safety and quality in China, KKR invested $150 million in Ma Anshan in the beginning of 2009. 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 to improve farms’ milk quality, productivity and profitability. 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. On corn silage purchasing, for example, the team worked with the company’s purchasing managers across all 14 farms to implement an end-to-end procurement process that could meet the increasing demand for high- quality feeds. Through KKR’s global network, Ma Anshan was able to work with world-class dairy farm experts to develop and introduce best prac­ tices in farm design, construction and operations. These processes accelerated the herd’s growth and led to healthier, more productive cows, and high- quality milk that nourishes and protects the public. In November 2010, Ma Anshan Modern Farming successfully completed its initial public PRODUCES offering, raising $448 million. The company is 1.8 MILLION now the largest publicly listed dairy farm in China. TONS OF MILK PER YEAR

PARTNERSHIP NOURISHES Ma Anshan Modern Farming ma anshan city, china

10 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 11 Pets at Home handforth, united kingdom

12 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 13 22 MILLION PETS IN THE UK

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

12 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 13 Oriental Brewery seoul, south korea

Founded in 1933, Oriental Brewery is South Korea’s second largest beer producer. With a market share greater than 40%, Oriental Brewery sells more than 800 million cases of beer annually in South Korea. In 2009, KKR and Affinity Equity Partners purchased Oriental Brewery for $1.8 billion from Anheuser Busch-InBev. Since the acquisition, we have worked side-by-side with Oriental Brewery management to strengthen brand marketing, expand production capacity, upgrade IT infrastructure, reduce energy use and improve procurement processes. During 2010, the company’s first full year under new ownership, Oriental Brewery grew volume by 4.4% and gained 1.8% of market share in South Korea. Oriental Brewery also became the first company in Asia to participate in KKR’s Green Portfolio Program, significantly reducing green­ house gas emissions in its pro­duction facilities.

14 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 15 PARTNERSHIP

Colonial Pipeline alpharetta, georgia BUILDSNEARLY 5,600 MILES OF PIPELINE UNDER OPERATION

With a network of nearly 5,600 miles of pipeline under operation, Colonial Pipeline is the largest refined petroleum products pipeline in North America. Colonial has a history of stable earnings and cash flow growth, a strong commitment to environmental and workplace safety, and enjoys access to attractive sources of supply and end- market connectivity. In October 2010, KKR joined ConocoPhillips, IFM (US), Koch Capital and Shell as one of the five shareholders of Colonial, acquiring Chevron’s 23.4% stake for $1.1 billion. The investment was jointly funded by KKR and a separately managed account for our limited partner, National Pension Service of Korea, the fourth largest public pension fund in the world. KKR’s 20-plus year history of invest­ing in the energy and infrastructure space and expertise in global public affairs greatly aided the successful closure of the deal, and such expertise and experience remain assets to the company today.

14 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 15 Leading fiduciaries around the world — including large public and corporate pension plans, sovereign wealth, financial institutions, insurance companies, university and other endowments and foundations — have for decades invested with KKR as limited partners. The returns on our investments improve the retirement security and well being of current and future generations of beneficiaries, including teachers, firefighters, police officers, state and municipal employees and many others, expand access to education, help fund important activities and help meet the needs of our state and municipal budgets.

16 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 17 WE ARE OUR OWN LARGEST INVESTOR: $6 BILLION OF COMMITTED AND INVESTED CAPITAL

PARTNERSHIP

SECURESOur Investment Partners 

16 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 17 LETTER TO UNITHOLDERS

72% Dear 2010 UNIT PRICE INCREASE Fellow Unitholders

their benchmark indices, and the price of our publicly traded units increased by 72%, creating nearly $4 billion of market value. 2010 was a pivotal year for our firm. In July, we delisted from the Euronext Amsterdam exchange, where we had traded since our October 2009 combination with KKR Private Equity Investors (KPE), and began trading on the New York Stock Exchange. In August, we received investment grade ratings of A and A- from Fitch and S&P, respectively. In September, we com­

GEORGE R. ROBERTS HENRY R. KRAVIS pleted a highly successful inaugural $500 million public bond offering. And during the course of the year, we raised over $5 billion of new capital, After four decades as investors, we continue to find more than $4 billion of which was for our five new it remarkable how quickly the world and market investment strategies: infrastructure, natural sentiment can change. resources, special situations, China growth equity, Two years ago, just about every measure and mezzanine. These strategies build on the of value and health in global markets was in core competencies of our firm and facilitate KKR’s freefall. Today, however, it appears that markets diversification into areas where we can create have started to recover, and while world scale and earn attractive returns for our partners. economies have not fully rebounded, we have Amid these new beginnings, we want to seemingly turned a corner. thank you for your partnership. We are grateful While market stability remains uncertain in for the support you have shown us in our first many parts of the world, 2010 proved to be a year full year as a public company. We have been of significant value creation for the investors energized by your eagerness and patience in across all of our businesses and for you, our unit­ understanding our business. As a company whose holders. Our private equity funds increased in public listing came without the benefit of a value by 33%, our credit strategies outperformed traditional IPO process, investor education is a

18 KKR 2010 ANNUAL REPORT researching companies and building industry relationships that did not lead to investable opportunities. The result was that a lot of intel­ lectual capital and effort went unused. We missed out on many attractive opportunities for all of our partners, from management teams to investors, because our private equity capital was not sufficiently flexible to act on all of our good ideas. To mitigate this trend, we organically built new businesses such that today, we are able to convert more of the ideas and relationships gen­ erated by our “sourcing engine” into investments. As we move forward, our vision for KKR is to convert all of our ideas and relationships into opportunities for our partners. This means enhancing our offerings and evolving our approach based on changes in the economy and capital “ markets, the needs of our partners over time, and Today, we are able to convert investable trends in the markets in which we operate. Of course, the success of these endeavors more of the ideas and relationships will ultimately be judged by the returns we can generated by our ‘sourcing engine’ deliver to our partners. into investments. Financial Highlights Our business is comprised of three segments: Private Markets, Public Markets, and Capital “ Markets and Principal Activities. The first and largest of these is Private Markets, which had $46 billion of assets under management as of December 31, 2010. Private Markets includes our global private equity and our energy and infra­ critical area of focus for us. People often see KKR’s structure businesses. name and assume private equity is our sole Our second segment, Public Markets, business — after all, for 35 years, we’ve made a had $15 billion of assets under management as name for ourselves in that business. It is a of December 31, 2010. This segment houses franchise which remains and always will remain our credit investing businesses, which focus on core to our company, and we continue to evolve below-investment-grade strategies. It began and enhance our global private equity capabil­ investing in 2004 with a focus on liquid ities. Today, however, we provide much more than investments in leveraged loans and high yield private equity to our partners, whether manage­ bonds, and has since expanded to include ment teams, limited partners, or unitholders, and dedicated mezzanine and special situations we believe that our broader capa­bilities enrich strategies. In early 2011, we hired a team of each of these partnerships. public equity investors who are building a long/ Notably, our annual report is focused on short equity capability within this segment. the power of partnership. Our longevity in the Our third segment, Capital Markets and investment business has convinced us that our Principal Activities, has two main components: most important assets are our partnerships — the KKR Capital Markets business, which we with companies and management teams around began in 2007, as well as the firm’s balance sheet. the world to whom we provide advice, capital, Our Capital Markets team brings opportunities and solutions; with our limited partners and originated throughout KKR to our investors, others who commit capital alongside our own as enabling us to speak for more capital, retain more we make investments; and with the men and economics from our content, and develop direct women we’ve been able to attract to KKR whose relationships with providers of capital. Our expertise drives the value we create. These balance sheet provides us with $5.7 billion in partnerships are the lifeblood of our business; permanent capital to invest behind KKR’s protecting and enhancing them over the long future growth. term is our highest priority. Each of these segments performed Historically, because of the very low hit- extraordinarily well in 2010, taking advantage of rate nature of the only business we were in — a rebound in capital markets to generate out­ private equity — we spent a great deal of time sized results.

KKR 2010 ANNUAL REPORT 19 Private Markets Our Private Markets segment saw strong results for the year. Thanks to increasing transaction activity and value creation, our economic net income increased 19%, from $661 million in 2009 to $785 million in 2010. The key driver of this improvement was carried interest generated by appreciation in our private equity funds. Collec­ tively, our funds were up 33% for the year — more than double the S&P 500’s return of 15%. Our private equity funds’ performance was driven by strong operational accomplishments in our portfolio companies as well as improved equity markets. In aggregate, the companies in our portfolio increased revenue and EBITDA for the year by 7% and 15%, respectively, while aggregate leverage decreased 14%, from 5.5x to 4.8x. We attribute much of this improvement to the work of our world-class portfolio company management teams as well as the great work of KKR Capstone’s operational experts. With the focus of our investment and capital markets teams, we also made great progress on the capital structures of our portfolio companies by extending, retiring, or eliminating over $46 billion % of debt in 2009 and 2010. Through April 2011, vs. 15% for we have extended a further $23 billion, such that 2010 INCREASE the S&P 500 nearly 85% of our portfolio companies’ debt now IN VALUE OF PRIVATE matures in or after 2014, and two-thirds matures EQUITY FUNDS 33 in or after 2015. Our 2006 Fund, focused on private equity investments primarily in North America, increased in value by 29% during the year and was marked at 1.2x cost on a gross basis. year. The more solid post-recession outlook in The predecessor­ to the 2006 Fund, our Millennium parts of Europe laid a strong foundation for deal Fund, saw a similar increase in value of 27% activity in 2010, giving us the confidence to deploy during the year and was marked at 2.0x cost on over $2 billion in equity capital. a gross basis. Importantly, active strategic Our inaugural Asian private equity fund had buyers and the more open public equity markets a remarkable 2010, increasing in value by 51% to enabled us to return approximately $3 billion of reach 1.4x cost on a gross basis. Every investment capital to the limited partners in our North in the Asian Fund is marked at or above cost. American funds during 2010, a trend which has It also began the process of returning capital to continued in 2011. On the new investment side limited partners with the 2010 initial public of the equation, we sourced a number of exciting offering of Ma Anshan Modern Farming. From an North American opportunities in 2010, deploying investing perspective, we continue to find or committing to deploy approximately $1.5 billion compelling growth opportunities in Asia — in equity capital. especially in China and India. We invested over Despite European macroeconomic $900 million in equity capital during the year, headwinds this year, our three European private including three new transactions in China, two equity funds saw consistent growth during 2010. in India, and our first traditional buyout in Japan. Our mature funds, the European Fund and We also invested additional capital in three European Fund II, appreciated by 48% and 39% existing investments to pursue attractive growth during the year and were marked at 2.8x and opportunities. 0.9x cost on a gross basis, respectively. The Our approach to private equity investing in European Fund III, which we are still investing, developing Asian markets is somewhat different appreciated by 2% and was marked at cost. Our than the buyout-focused approach we take in portfolio has benefitted from strong operating more mature economies. We tend to partner with performance and the Western European local entrepreneurs to build their companies economic recovery, especially in Germany. We into world-leading businesses, so equity checks returned over $650 million of capital to the in Asia are often smaller. To continue to capitalize limited partners in our European funds during the upon those relationships, we raised a $1 billion

20 KKR 2010 ANNUAL REPORT in 2010 and also invested $1.1 billion through an infrastructure-related separately managed account. In energy more broadly, we have the ability to invest behind many of the industry trends we are seeing today. One example is our natural resources strategy, 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 risk-adjusted and current cash returns for our investors. We raised approximately $250 million of capital dedicated to our natural resources strategy in 2010 and invested approximately $70 million. On the other side of this coin, the development­ of uncon­ ventional basins has created an enormous capital need, providing attractive opportunities to invest in less mature shale plays with a risk/return profile more akin to private equity.

Public Markets Our Public Markets segment also had a successful 2010. Fee related earnings were up to $57 million in 2010 from $12 million in 2009, and economic net income grew by $54 million to $60 million. This segment includes our liquid credit, mezzanine, and special situations investing platforms. In liquid credit, we have four primary strat­ egies: investing in bank loans, high yield bonds, a combination of bank loans and high yield bonds, and “opportunistic credit,” which is flexible across a range of sub-investment-grade credit investments. We continued to outperform bench­ marks in each of these strategies during 2010, demonstrating top-quartile performance. We characterize our mezzanine and special 2010 NEW $ 5.4 billion situations businesses as alternative credit CAPITAL RAISED strategies due to their private equity-like structure, with longer investment horizons and capital lock- ups. Across these platforms, we got off to a strong start in 2010 by raising approximately $1.3 billion. Our mezzanine transactions have China Growth Fund in 2010 in partnership with thus far focused primarily on Europe (where the both existing and new KKR investors to make high-yield markets remain less efficient) and smaller investments in that country. This new on the mid-market segment in the U.S. (coverage pool of capital gives us flexibility to participate of which Wall Street all but eliminated during the in more of the exciting transactions we are resource-strapped recession years). In special sourcing in China. situations, we have flexibility to invest in companies Our Private Markets segment today is that do not have access to traditional funding predominantly comprised of our private equity sources. We invested or committed to invest investing business, but it is also home to our approximately $1.2 billion across our mezzanine energy and infrastructure investing businesses. and special situations businesses during 2010. We are excited about the scalability and growth In keeping with our goal of better utilizing potential for this effort. all of the intellectual capital we have at KKR, In infrastructure, we focus on investing in we announced this year that we intend to launch long-lived assets that provide critical functions a long/short public equities investing business services. We take the same approach to value within our Public Markets segment. The thorough creation through active ownership that we do in bottoms-up industry group approach we employ private equity. We held a first close of approx­ in each of our investing platforms provides us imately $500 million on our infrastructure fund with distinctive viewpoints on global industries.

KKR 2010 ANNUAL REPORT 21 Historically, we could express those opinions through investments in both liquid and illiquid markets on the credit side. But on the equity side, we had only long-biased, long-duration, and illiquid Private Markets capital to put behind our ideas. With the recent creation of KKR Equity Strategies, we have added the capability of public equity market investing.

Capital Markets and Principal Activities Finally, our Capital Markets and Principal Activities segment had an equally strong year. Our Capital Markets business continues to scale, with fee related earnings of $79 million in 2010, or growth of $60 million over 2009. This was driven by increased transaction activity that benefited from stronger markets and our team continuing to gain traction across our global activities. Principal Activities — our balance sheet — saw appreciation in the year commen­ surate with the performance of our overall private equity portfolio, resulting in investment income of $1.2 billion for the year. As of December 31, our book value per unit was $8.38, an increase of 38% from the end of 2009. 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 ramp-up in fund realizations, we paid out 60 cents per unit in distributions derived from 2010 results. Looking Ahead 38% What we find most exciting about our progress 2010 INCREASE IN and performance in 2010 is the momentum it BOOK VALUE PER UNIT provides going into 2011. 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. To achieve this, we’ll assess adding investment classes failed to achieve the returns needed to strategies and businesses that can help us better match their growth in liabilities. And in today’s leverage the core competencies of our firm and low interest-rate and volatile equity market environ­­ bring greater depth to our investment insights. ment, this trend appears likely to continue. Many Our biggest focus, however, will be on building pension funds, sovereign entities, and other large the new business lines we have already launched. pools of capital are thus increasing their alter­ We plan to scale these businesses through active native allocations both to account for the current fundraising and top-tier track records. environment and to make up for lost returns. Importantly, we are also committing balance We have also found that investors’ allo­ sheet capital to all of our new strategies. We cations were spread among too many managers. believe strongly in demonstrating our confidence Initially this strategy was intended to diversify in new businesses in the same way our investors exposure, but the result was the burden of do — through a financial commitment. With monitoring an exorbitant number of funds and a permanent balance sheet capital, we expect to lack of relation­ship depth. From our dialogue continue building alignment with our partners by with limited partners, we expect a consolidation investing behind every new business we create of manager relationships, facilitating true in the future. partnership and alignment between investor We believe secular trends will provide and manager. tailwinds as KKR continues to expand. Many large To drive our ability to help our investors, institutional investors are assessing where the we created our Client & Partner Group, financial crisis left their investment portfolios, and which has the responsibility of building deeper finding that over the last decade, traditional asset relationships with our existing investors and

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

KKR 2010 ANNUAL REPORT 23 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, enabling our portfolio companies to focus on the relent­ less pursuit of mutually agreed-upon objectives. In addition, because of the breadth of our private equity portfolio, we have the ability to share best practices in a way that impacts multiple companies, industries and geographies. 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. While we are committed to considering ESG issues in our investment processes, the challenges are not insignificant. We invest in large, complex organizations around the world, and we and our portfolio companies are regularly faced with making trade-offs, some of them controversial. We are not flawless and we may make choices that do not satisfy everyone, 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. Because we invest in diverse companies in multiple industries around the world, the outcome of the process will tend to be different from year to year and investment to investment. However, the process through which we address and continuously improve on these issues is critical to ensuring ongoing value creation. We are at the beginning of a journey, but we also understand that considering ESG issues in the private equity investment process is essential to creating sustainable value. For these reasons, we have completed our first-ever responsible investor report, excerpts of which are included in this annual report. Addi­ tional details about our performance and goals for the future can be found in the online version of this report, which is available on KKR’s website. We look forward to your feedback on all of our efforts. Though the direction of our firm has never been clearer, the hurdles before us are formidable. 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 thank you sincerely for your partnership and look forward to growing together.

HENRY R. KRAVIS GEORGE R. ROBERTS Co-Founder, Co-Founder, Co-Chairman and Co-CEO Co-Chairman and Co-CEO

24 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 25 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

24 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 25 Cross-asset class capabilities built on a solid foundation of organic AUM growth and strong relationships DOLLARS IN BILLIONS AUM BY INVESTOR TYPE $61.0 3% CORPORATE

14.8 PENSION

$52.2 25% SOVEREIGN WEALTH FUNDS/ OTHER GOVERNMENT 13.4 ENTITIES $47.2 $44.9 10.8 46.2 13.1

$37.0 38.8 5.1 36.5 37% U.S. PUBLIC PENSION 31.9 31.8

$23.4

3.7 1% ENDOWMENT FOUNDATION 8% 19.7 FUND OF FUNDS $15.1

0.8 6% FAMILY OFFICE/HNW 14.4

PUBLIC MARKETS AUM PRIVATE MARKETS AUM 20% FINANCIAL Assets under management INSTITUTION/ (AUM) are presented pro forma INSURANCE for the combination with KPE and therefore exclude the net asset value (NAV) of KPE and its former commitments to KKR’s investment funds. 04 05 06 07 08 09 10

26 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 27 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

26 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 27 Driving Growth… Private Markets: Aggregate Private Equity Portfolio Company 2010 Performance

REVENUE +7% to $204b EBITDA +15% to $38b

Driving Returns… 19.9% Public Markets: Liquid Credit Strategy Inception-to-Date Annualized Returns 12.2% 11.1% 11.0% 9.4% Gross 8.2% References to gross returns do

7.1% Benchmark not take into consideration the payment of applicable fees 5.2% and expenses. Consequently, net returns would be lower. See our Annual Report on Form 10-K for important information regarding each benchmark. SECURED HIGH-YIELD BANK LOANS OPPORTUNISTIC CREDIT MODEL CARVE-OUT & HIGH YIELD CREDIT INCEPTION 9/2004 INCEPTION 9/2004 INCEPTION 7/2008 INCEPTION 5/2008

Building Businesses… Capital Markets: Fee Related Earnings Performance DOLLARS IN MILLIONS

$79.1 75% 2010 MARGIN

$18.7 55% 2009

$5.3 29% 2008

28 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 29 Building Value Book Value per Unit IN DOLLARS

$8.38

$7.63 $7.37

$6.93

$6.08 38% Y-O-Y GROWTH

BOOK VALUE/ ADJUSTED UNIT

Adjusted units represent the fully diluted unit count using the if-converted method. Adjusted units are not presented in accordance with accounting principles generally accepted in the United States of 0.77 ACCRUED America (“GAAP”). See Appendix I CARRY/ 0.23

0.56 ADJUSTED (p. 98) for a reconciliation of such 0.53 UNIT

mea­sures to financial results 0.38 prepared in accordance with GAAP. DEC MAR JUN SEP DEC 09 10 10 10 10

28 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 29 BUSINESS OVERVIEW Over the course of 35 years, KKR has established itself as a leading global investment firm.

Private Markets

KKR Public Markets

Capital Markets and Principal Activities

Throughout our history, we have consistently been a leader in the private equity industry, having completed more than 185 private equity investments with a total transaction value in excess of $435 billion. In recent years, we have grown our firm not only by expanding our geographical presence, but by building complementary businesses in areas such as fixed income, capital markets, infrastructure, and natural resources. These newer efforts build on our core competencies and industry expertise, allowing us to leverage the intellectual capital and synergies in our businesses to capitalize on a broader range of the opportunities we source.

30 KKR 2010 ANNUAL REPORT Private Markets to different market conditions to capitalize on Private Equity investment opportunities that may arise at We are a world leader in private equity, having every level of the capital structure and across raised 16 funds with approximately $60.4 billion market cycles. of capital commitments through December 31, KKR Asset Management LLC manages 2010. We invest in industry-leading franchises specialty finance company KKR Financial which attract world-class management teams. Holdings LLC (NYSE: KFN), whose majority- Our investment approach leverages our capital owned subsidiar­ies finance and invest in base, sourcing advantage, global network and financial assets, including below investment industry knowledge. It also leverages our sizeable grade corporate debt, marketable equity team of operating consultants who work exclu­ securities and private equity. Additionally, KFN sively with our portfolio companies, as well as has and may make additional investments in our senior advisors, many of whom are former other asset classes including natural resources chief executive officers and leaders of the busi­ and real estate. ness community. As of December 31, 2010, this segment had From our inception in 1976 through $14.8 billion of AUM, comprised of $1.4 billion December 31, 2010, our investment funds with at of assets managed in KFN, $7.9 billion of assets least 36 months of investment activity generated managed in structured finance vehicles and a cumulative gross IRR of 25.8%, compared to the $5.5 billion of assets managed in other types of 11.6% gross IRR achieved by the S&P 500 Index investment vehicles and separately managed over the same period, despite the cyclical and accounts. sometimes­ challenging environments in which we have operated. Capital Markets and Principal Activities Capital Markets Infrastructure Our capital markets business supports our firm, We manage investments in infrastructure assets our portfolio companies and our clients in order to capitalize on the growing demand by providing tailored capital markets advice and for global infrastructure investment. We believe developing and implementing both traditional that the global infrastructure market provides and nontraditional capital solutions for an opportunity for the firm’s combination of private investments and companies seeking financing. investment, operational improvement, and Our capital markets services include arranging stakeholder engagement skills. This strategy seeks debt and equity financing for transactions, to achieve returns through the acquisition and placing and underwriting securities offerings, operational improvement of assets important to structuring new investment products and the functioning of the economy and also to provide providing capital markets services. To allow us current income to investors. to carry out these activities, we are registered or authorized to carry out certain broker-dealer Natural Resources activities in various countries in North America, We manage direct investments in natural resources Europe and Asia. assets, such as oil and natural gas properties. This strategy seeks to generate returns through the Principal Activities production of the underlying natural resources Principal Activities refers to other principal while providing investors with exposure to com­ activities at our firm, which include investments modity prices. As of December 31, 2010, we in our private equity funds as well as had received $250 million of commitments to co-investments in certain portfolio companies this strategy. of those funds. Together, these investments provide us with a significant source of capital to Public Markets further grow and expand our business, Through our Public Markets segment, we manage increase our participation in our existing port­ a specialty finance company, a number of folio of businesses and further align our investment funds, structured finance vehicles and interests with those of our investors and other separately managed accounts that invest capital stakeholders. We believe that the market in liquid credit strategies, such as leveraged loans experience and skills of professionals in our and high yield bonds, and less liquid credit capital markets business and the investment products such as mezzanine debt and special expertise of professionals in our Private Markets situations investments. These funds, vehicles and and Public Markets segments will allow us to accounts are managed by KKR Asset continue to grow and diversify this asset base Management LLC. We intend to continue to grow over time. this business by leveraging our global investment platform, experienced investment professionals and the ability to adapt our investment strategies

KKR 2010 ANNUAL REPORT 31 ENVIRONMENTAL, SOCIAL AND GOVERNANCE OVERVIEW

“ Responsible investment is critical to building better companies and creating long-term value for us and all of our partners. “

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

32 KKR 2010 ANNUAL REPORT A Greener Portfolio Responsible Sourcing In 2008, KKR and the Environmental Defense In today’s global economy, it can be increasingly Fund launched the Green Portfolio Program, challenging for companies to ensure that their which today helps drive innovation and business — and their customers’ — expectations for sustain­­ improvements at 16 companies globally. ability performance are met by their suppliers in These companies have already produced distant geographies. Suppliers’ failure to achieve significant results on many fronts. In 2010, eight these expectations can result in unacceptable Green Portfolio Program companies avoided an human impacts and operational risks. estimated $160 million in costs by collectively: Recognizing that we have a unique oppor­ tunity to partner with our portfolio companies on this issue, in 2010, we launched our Responsible Sourcing Initiative to work with our portfolio avoiding producing reducing companies to develop effective tools to address this shared challenge. To enhance this effort, million paper use by 345,000 1.2 we partnered with Business for Social metric tons of fewer tons tons 8,500 Responsibility, a leading nonprofit organization greenhouse gas of waste, and that works with a network of more than emissions 250 global organizations to develop sustainable business strategies and solutions and has particular expertise in facilitating supply chain sustainability programs. Visit http://green.kkr.com Transparency and Engagement for more information We participate in thoughtful constructive dialogue with the many individuals, investors, organiza­ tions and community groups affecting and affected by our business decisions. By doing so, we Launched the Responsible Engaging Employees can better ensure that our approach is sound and Sourcing Initiative, with Building better, stronger companies creates jobs informed by a broad range of insights and Business for Social and opportunities for workers and economic experiences. Responsibility, to provide growth for the communities in which those com­ As part of this, we have completed our first- resources to portfolio companies on supply chain panies­ operate. The companies in which we are ever sustainability report, which is excerpted sustainability invested today employ hundreds of thousands of here. We look forward to your feedback on this people around the world. We are very pleased inaugural effort. Organized training and that in 2010, notwithstanding a very volatile and best practice summits for portfolio company challenging environment, our private equity human resource officers, portfolio grew and many of our portfolio companies general counsels, chief added new jobs. purchasing officers and One critical component of achieving others that included sustainable growth is effective, collaborative rela­ ESG issues tionships between company management and Created “ESG Round employees. Therefore, we carefully assess the Tables” to engage with and relationship between workers and management, learn from our limited including, where relevant, organized labor and partners and portfolio com­ work councils, before we make new private equity panies on critical ESG investments. We encourage and support our issues portfolio companies on maintaining constructive Created our inaugural sus­ dialogue throughout our investment period. In tainability report and addition, we strive to work with management to integrated key portions in identify opportunities to improve employee our annual review engagement and productivity where possible. We see an opportunity to expand our efforts on employee engagement and to share best practices across the portfolio. Therefore, in 2011, we will continue to develop opportunities to partner with company management teams on employee engagement, with a particular focus on issues and shared solutions related to health and wellness.

KKR 2010 ANNUAL REPORT 33 VALUES The bedrock of KKR’s culture is a unique spirit of partnership and a shared sense of ownership across all of our businesses. Our founders established the firm in 1976 based on these beliefs, as well as their own unique partnership and lifelong friendship. The same core values are ingrained in the organization today. Not only are they well understood throughout the firm, they are also fundamental to how we recruit, evaluate and reward people.

Values

34 KKR 2010 ANNUAL REPORT Teamwork is at the heart of how we operate. People do business with people they like and trust. We pride ourselves on our one-firm approach, As a Relationship-Driven firm, we are deeply working proactively and collaboratively across committed to building and sustaining long-term businesses and geographies to achieve the best partnerships — internally and externally — possible results. We continually look for ways grounded in trust and transparency. We know it to help one another, no matter the issue or where takes years to build a strong partnership, while the opportunity resides. In keeping with this one can be ruined in just a few minutes. We work approach, every person at KKR is an owner of our hard to understand and align the interests of all firm and shares in our success. We subscribe to stake­holders, and we treat others as we would the ethos that we can achieve much more like to be treated — with fairness, compassion and collectively than any of us could individually. respect. We believe that “arrogance kills” and has no place at KKR. We conduct ourselves with Integrity in everything we do. Our reputations — as individuals and as a We readily accept Accountability for our actions, firm — are paramount. Our word is our bond — we inactions and decisions, both individually and as a say what we mean and we do what we say we firm. We also embrace the implied responsibilities will do. As a learning organization, we are self- of our one-firm approach: the obligation to speak critical — acknowledging our mistakes and trying up and say what we think and to respect and always to learn from them. listen to those who do the same. We also have the fortitude to say “no,” even at the eleventh hour. We deliver on our commitments — to our stake­ holders, our partners and one another.

We constantly strive to be Innovative — questioning accepted wisdom, creating new ideas and new approaches, and never resting on our laurels. We are self-starters with a “can-do” approach and a willingness to take prudent risks. We work passionately to retain the entrepreneurial spirit that created our firm and to fight against politics and bureaucracy.

In our pursuit of Excellence, we aspire to be the best at what we do and lead by example. We set high standards — each of us as individuals and the firm as whole — and consistently try to exceed them. We attract self-motivated, highly capable, results-oriented people and invest heavily in their development. We strive for diversity, recognizing that people with different backgrounds, experi­ Success ences, and perspectives make us a stronger and more effective organization. Our focus on impact and results creates a vibrant and meritocratic environment, directly linking individual performance with the firm’s success.

These deeply rooted, core values make KKR a very special place to work, and also drive a culture committed to exceptional performance and results for our investors and other stakeholders.

KKR 2010 ANNUAL REPORT 35 KKR LEADERSHIP

Board of Directors Executive Officers

HENRY R. KRAVIS GEORGE R. ROBERTS HENRY R. KRAVIS GEORGE R. ROBERTS Co-Chairman and Co-Chairman and Co-Chairman and Co-Chairman and Co-Chief Executive Co-Chief Executive Co-Chief Executive Co-Chief Executive Officer Officer Officer Officer

JOSEPH A. GRUNDFEST DIETER RAMPL TODD A. FISHER WILLIAM J. JANETSCHEK Independent Director Independent Director Chief Administrative Chief Financial Officer Officer PATRICIA F. RUSSO THOMAS M. SCHOEWE Independent Director Independent Director DAVID J. SORKIN General Counsel ROBERT W. SCULLY Independent Director

36 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 37 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

36 KKR 2010 ANNUAL REPORT KKR 2010 ANNUAL REPORT 37 MANAGEMENT’S DISCUSSION AND ANALYSIS

As a global investment firm, we earn management, monitoring, Management’s Discussion transaction and incentive fees for providing investment management, monitoring and other services to our funds, vehicles, managed accounts, specialty finance company and portfolio companies, and we generate and Analysis of Financial transaction‑specific income from capital markets transactions. We earn additional investment income from investing our own capital Condition and Results alongside that of our investors and from the carried interest we receive from our funds and certain of our other investment vehicles. A carried interest entitles the sponsor of a fund to a specified of Operations percentage of investment gains that are generated on third‑party capital that is invested. The following discussion and analysis is an excerpt from our Annual Report on Form 10-K filed with the Securities and Exchange Commission We seek to consistently generate attractive investment returns by (“SEC”) on March 7, 2011. The following discussion and analysis is employing world‑class people, following a patient and disciplined presented only with respect to the year ended December 31, 2010, and investment approach and driving growth and value creation in the it has not been updated. For current information, please refer to our assets we manage. Our investment teams have deep industry other reports filed with the SEC subsequent to March 7, 2011. knowledge and are supported by a substantial and diversified capital base, an integrated global investment platform, the expertise of operating The following discussion and analysis should be read in conjunction consultants and senior advisors and a worldwide network of business with the consolidated and combined financial statements of relationships that provide a significant source of investment opportunities, KKR & Co. L.P., together with its consolidated subsidiaries, and the specialized knowledge during due diligence and substantial resources related notes included elsewhere in this report. The historical for creating and realizing value for stakeholders. We believe that these consolidated and combined financial data discussed below reflects aspects of our business will help us continue to expand and grow our the historical results and financial position of KKR for the year business and deliver strong investment performance in a variety of ended December 31, 2010. In addition, this discussion and analysis economic and financial conditions. contains forward looking statements and involves numerous risks and uncertainties, including those described under “Cautionary Note Regarding Forward Looking Statements” in this report and “Risk Factors” in our Annual Report on Form 10-K and our other reports BUSINESS SEGMENTS filed with the SEC. Actual results may differ materially from those Private Markets contained in any forward looking statements. Through our Private Markets segment, we manage and sponsor a group of private equity funds and co-investment vehicles that invest capital for long-term appreciation, either through controlling ownership of OVERVIEW a company or strategic minority positions. These investment funds and Led by Henry Kravis and George Roberts, we are a leading global co-investment vehicles are managed by Kohlberg Kravis Roberts& Co. L.P., investment firm with $61.0 billion in AUM as of December 31, 2010 and a registered investment adviser. We also manage investments in a 34-year history of leadership, innovation and investment excellence. infrastructure and in natural resources. When our founders started our firm in 1976, they established the principles that guide our business approach today, including a patient Public Markets and disciplined investment process; the alignment of our interests with Through our Public Markets segment, we manage a specialty finance those of our investors, portfolio companies and other stakeholders; company, a number of investment funds, structured finance vehicles and a focus on attracting world class talent. and separately managed accounts that invest capital in liquid credit Our business offers a broad range of investment management strategies, such as leveraged loans and high yield bonds, and less services to our investors and provides capital markets services to our liquid credit products such as mezzanine debt and special situations firm, our portfolio companies and our clients. Throughout our history, investments. These funds, vehicles and accounts are managed by we have consistently been a leader in the private equity industry, KKR Asset Management LLC (which we refer to as “KAM”), an SEC having completed more than 185 private equity investments with a registered investment adviser. We intend to continue to grow this total transaction value in excess of $435 billion. In recent years, we business by leveraging our global investment platform, experienced have grown our firm by expanding our geographical presence and investment professionals and the ability to adapt our investment building businesses in new areas, such as fixed income, capital markets, strategies to different market conditions to capitalize on investment infrastructure and natural resources. Our new efforts build on our opportunities that may arise at every level of the capital structure core principles and industry expertise, allowing us to leverage the and across market cycles. intellectual capital and synergies in our businesses, and to capitalize on a broader range of the opportunities we source. Additionally, we Capital Markets and Principal Activities have increased our focus on servicing our existing investors and have Our Capital Markets and Principal Activities segment combines the invested meaningfully in developing relationships with new investors. assets we acquired in the Combination Transaction with our global capital markets business. Our capital markets business supports our We conduct our business through 14 offices on four continents, providing firm, our portfolio companies and our clients by providing tailored us with a pre-eminent global platform for sourcing transactions, capital markets advice and developing and implementing both raising capital and carrying out capital markets activities. We have grown traditional and non-traditional capital solutions for investments and our AUM significantly, from $15.1 billion as of December 31, 2004 to companies seeking financing. Our capital markets services include $61.0 billion as of December 31, 2010, representing a compounded arranging debt and equity financing for transactions, placing and annual growth rate of 26.1%. Our growth has been driven by value underwriting securities offerings, structuring new investment products that we have created through our operationally focused investment and providing capital markets services. To allow us to carry out these approach, the expansion of our existing businesses, our entry into activities, we are registered or authorized to carry out certain broker‑ new lines of business, innovation in the products that we offer dealer activities in various countries in North America, Europe and Asia. investors, an increased focus on providing tailored solutions to our clients and the integration of capital markets distribution activities.

38 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

The assets that we acquired in the Combination Transaction(1), which holding period) can be significant to our ability to realize investment include investments in our private equity funds and co-investments in gains from these portfolio companies when economic conditions improve. certain portfolio companies of such funds, provide us with a significant Our Public Markets segment manages a number of funds and other source of capital to further grow and expand our business, increase accounts that invest capital in a variety of credit products, including our participation in our existing portfolio of businesses and further leveraged loans, high yield bonds and mezzanine debt. As a result, align our interests with those of our investors and other stakeholders. conditions in global credit markets have a direct impact on both the We believe that the market experience and skills of professionals in our performance of these investments as well as the ability to make capital markets business and the investment expertise of professionals additional investments on favorable terms in the future. in our Private Markets and Public Markets segments will allow us to continue to grow and diversify this asset base over time. In addition, 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 BUSINESS ENVIRONMENT facilities, with the size of fees generally correlated to overall transaction sizes. As a result, the conditions in global equity and credit markets As a global investment firm, we are affected by financial and economic impacts both the frequency and size of fees generated by this segment. conditions in the United States, Europe, Asia and elsewhere in the world. Global equity markets have a substantial effect on our financial Finally, conditions in commodity markets may impact the performance condition and results of operations, as equity prices significantly impact of our portfolio companies in a variety of ways, including through direct the valuation of our portfolio companies and, therefore, the investment or indirect impact on the cost of the inputs used in their operations income that we recognize. For our private equity investments that are as well as the pricing and profitability of the products or services that publicly listed and thus have readily observable market prices, global they sell. equity markets have a direct impact on valuation. For other private equity investments, these markets have an indirect impact on valuation as we typically utilize a market multiples valuation approach as one of REORGANIZATION AND COMBINATION TRANSACTIONS the methodologies to ascertain fair value. In addition, the receptivity of Prior to October 1, 2009, KKR’s business was conducted through equity markets to initial public offerings, or IPOs, as well as subsequent multiple entities for which there was no single holding entity, but were equity offerings by companies already public, impacts our ability to under common control of senior KKR principals (“Senior Principals”), realize investment gains. During 2010, we completed IPOs of three and in which Senior Principals and KKR’s other principals and individuals portfolio companies: NXP Semiconductors N.V. (Nasdaq: NXPI), China held ownership interests (collectively, the “Predecessor Owners”). Modern Dairy Holdings Ltd. (HKG: 1117), and TDC (OMX: TDC). In order to facilitate the Combination Transaction, KKR completed the Global equity markets carried positive momentum from the third Reorganization Transactions, pursuant to which KKR’s business was quarter of 2010 through the end of the year. Against a stronger, yet reorganized under two partnerships, KKR Management Holdings L.P. still mixed economic backdrop, equity prices rallied as robust corporate and KKR Fund Holdings L.P., which are collectively referred to as the earnings and improving investor sentiment outweighed concerns “KKR Group Partnerships.” The reorganization involved a contribution over lingering weak economic indicators such as unemployment and of certain equity interests in KKR’s businesses that were held by KKR’s housing prices. Predecessor Owners to the KKR Group Partnerships in exchange for The S&P 500 gained 10.8% in the fourth quarter and finished 2010 100% of the interests in the KKR Group Partnerships. up 15.1% for the full year. Global equity markets were similarly strong, On October 1, 2009, KKR & Co. L.P. and KKR Private Equity Investors, L.P. with the MSCI World Index up 9.1% and 12.3% for the fourth quarter (“KPE”), completed the Combination Transaction to combine the and full year 2010, respectively. The below investment grade credit investment management business of KKR with the assets and liabilities markets also performed well, with the S&P/LSTA Leveraged Loan index of KPE. The Combination Transaction involved the contribution of all increasing 3.2% and 10.1% for the fourth quarter and full year 2010, of KPE’s assets and liabilities to the KKR Group Partnerships in respectively, and the BofA Merrill Lynch High Yield Master II Index exchange for a 30% interest in the KKR Group Partnerships. Upon increasing 3.1% and 15.2% over the same periods. completion of the Combination Transaction, KPE changed its name to Conditions in global credit markets also have a substantial effect on KKR & Co. (Guernsey) L.P. (“KKR Guernsey”) and was traded publicly our financial condition and results of operations. We rely on the ability on Euronext Amsterdam under the symbol “KKR” until the NYSE listing on of our funds to obtain committed debt financing on favorable terms in July 15, 2010. We refer to the Reorganization Transaction and order to complete new private equity transactions. Similarly, our Combination Transaction together as the “Transactions.” portfolio companies regularly require access to the global credit markets Immediately following the Transactions, KKR Guernsey held a 30% in order to obtain financing for their operations and to refinance or economic interest in the KKR Group Partnerships through KKR Group extend the maturities of their outstanding indebtedness. To the extent Holdings L.P. (“Group Holdings”) and our principals retained a that conditions in the credit markets render such financing difficult to 70% economic interest in the KKR Group Partnerships through KKR obtain or more expensive, this may negatively impact the operating Holdings L.P. (“KKR Holdings”). performance of those portfolio companies and, therefore, our investment returns on our funds. In addition, during economic downturns or periods of slow economic growth, the inability to refinance or extend the U.S. LISTING maturities of portfolio company debt (and thereby extend our investment 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 (1) On October 1, 2009, we completed the acquisition of all of the assets and liabilities of contributed its 30% interest held through Group Holdings to KKR & Co. L.P. KKR Guernsey and, in connection with such acquisition, completed a series of transactions pursuant to which the business of KKR was reorganized into a holding company in exchange for NYSE-listed common units of KKR & Co. L.P. and structure. We refer to the acquisition of the assets and liabilities of KKR Guernsey as the “Combination Transaction,” to our reorganization into a holding company structure distributed those common units to holders of KKR Guernsey units as the “Reorganization Transactions” and to the Combination Transaction and the (referred to hereafter as the “In-Kind Distribution”). Because the Reorganization Transactions collectively as the “Transactions.” Our financial information for periods prior to the Transactions is, for accounting purposes, based on a group of assets of KKR Guernsey consisted solely of its interests in Group certain combined and consolidated entities under common control of our senior principals Holdings, the In-Kind Distribution resulted in the dissolution of KKR and under the common ownership of our principals and certain other individuals who have been involved in our business, and our financial information for periods subsequent to the Guernsey and the delisting of its units from Euronext Amsterdam. Transactions is, for accounting purposes, based on a group consisting of KKR & Co. L.P. and its consolidated subsidiaries.

KKR 2010 ANNUAL REPORT 39 MANAGEMENT’S DISCUSSION AND ANALYSIS

As of July 15, 2010, KKR & Co. L.P. both indirectly controlled the KKR KEY FINANCIAL MEASURES Group Partnerships and indirectly held KKR Group Partnership units representing at that time a 30% economic interest in KKR’s business. Fees The remaining 70% of the KKR Group Partnership units were held by Fees consist primarily of (i) monitoring and transaction fees from KKR’s principals through KKR Holdings. Subsequent to the NYSE providing advisory and other services to our portfolio companies, listing, KKR Holdings and our principals exchanged a portion of their (ii) management and incentive fees from providing investment interests in the KKR Group Partnerships for common units, and as of management services to unconsolidated funds, a specialty finance December 31, 2010, KKR & Co. L.P. owned 31.15% of the KKR Group company, structured finance vehicles, and separately managed accounts, Partnership units and our principals owned 68.85% through KKR and (iii) fees from capital markets activities. These fees are based Holdings. From time to time, the percentage ownership in the KKR Group on the contractual terms of the governing agreements. A substantial Partnerships may continue to change as KKR Holdings and/or KKR’s portion of monitoring and transaction fees earned in connection with principals exchange KKR Group Partnership Units for KKR & Co. L.P. managing portfolio companies are shared with fund investors. common units. Fees reported in our consolidated and combined financial statements do not include the management fees that we earn from consolidated funds, because those fees are eliminated in consolidation. However, BASIS OF FINANCIAL PRESENTATION because those management fees are earned from, and funded by, third‑ The consolidated and combined financial statements include the accounts party investors who hold noncontrolling interests in the consolidated of our management and capital markets companies, the general partners funds, net income attributable to KKR is increased by the amount of of certain unconsolidated co-investment vehicles and the general the management fees that are eliminated in consolidation. Accordingly, partners of our private equity and fixed income funds and their while the consolidation of funds impacts the amount of fees that are respective consolidated funds, where applicable. As of December 31, recognized in our financial statements, it does not affect the ultimate 2010, our private markets segment included eight consolidated amount of net income attributable to KKR or KKR’s partners’ capital. investment funds and ten unconsolidated co-investment vehicles. Our public markets segment included five consolidated investment funds Expenses and six unconsolidated vehicles comprised of three investment funds, Employee Compensation and Benefits Expense two separately managed accounts and one specialty finance company. Employee compensation and benefits expense includes salaries, In accordance with accounting principles generally accepted in the bonuses, equity based compensation and profit sharing plans as United States of America (“GAAP”), a substantial number of our funds described below. are consolidated notwithstanding the fact that we hold only a minority Prior to October 1, 2009, our employee compensation and benefits economic interest in those funds. The majority of our consolidated expense has consisted of base salaries and bonuses paid to employees funds consist of those funds in which we hold a general partner or who were not our Senior Principals. Payments made to our Senior managing member interest that gives us substantive controlling rights Principals included partner distributions that were paid to our Senior over such funds. With respect to our consolidated funds, we generally Principals and accounted for as capital distributions rather than have operational discretion and control over the funds and investors employee compensation and benefits expense. Accordingly, we did not do not hold any substantive rights that would enable them to impact record any employee compensation and benefits charges for payments the funds’ ongoing governance and operating activities. made to our Senior Principals for periods prior to the completion of When a fund is consolidated, we reflect the assets, liabilities, fees, the Transactions. expenses, investment income and cash flows of the consolidated fund Following the completion of the Transactions, all of our Senior on a gross basis. The majority of the economic interests in the Principals and other personnel receive a base salary that is paid by us consolidated fund, which are held by third party investors, are and accounted for as employee compensation and benefits expense. reflected as noncontrolling interests. While the consolidation of a Our employees are also eligible to receive discretionary cash bonuses consolidated fund does not have an effect on the amounts of net based on performance, our overall profitability and other matters. income attributable to KKR or KKR’s partners’ capital that KKR reports, While cash bonuses paid to most employees are funded by us and the consolidation does significantly impact the financial statement result in customary employee compensation and benefits charges, presentation. This is due to the fact that the assets, liabilities, fees, cash bonuses that are paid to certain of our most senior personnel expenses and investment income of the consolidated funds are are funded by KKR Holdings with distributions that it receives on its reflected on a gross basis while the allocable share of those amounts KKR Group Partnership Units. Any distributions received by KKR that are attributable to noncontrolling interests are reflected as single Holdings in excess of amounts that principals are otherwise entitled line items. The single line items in which the assets, liabilities, fees, to through their vested interests in KKR Holdings are reflected in expenses and investment income attributable to noncontrolling compensation expense in the statement of operations. KKR Holdings interests are recorded are presented as noncontrolling interests in has also funded all of the equity and equity based awards that have consolidated entities on the statements of financial condition and net been granted to our employees to the date of the filing of our Annual income attributable to noncontrolling interests in consolidated entities Report on Form 10-K. on the statements of operations. In connection with and subsequent to the Transactions, our principals Historically, the noncontrolling interests attributable to the ownership and other employees received equity and equity based awards in KKR of KPE’s investment partnership, KKR PEI Investments, L.P., by KPE Holdings. The awards were granted in connection with the Transactions were included in our financial statements. These noncontrolling interests and were issued in exchange for interests that our Predecessor Owners were removed from the financial statements on October 1, 2009, contributed to our holding companies as part of the Transactions as because these interests were contributed to KKR in the Transactions. well as to promote broad ownership of our firm among our personnel Subsequent to the Transactions, KKR holds 100% of the economic and and further align their interests with those of our investors. We believe controlling interests in KPE’s investment partnership. Therefore, we that grants to our principals and other employees, which include continue to consolidate KPE’s investment partnership and its economic vested and unvested interests in the KKR Group Partnerships, provide interests are no longer reflected as noncontrolling interests as of the an additional means for allowing us to incentivize, motivate and retain date of the Transactions. qualified professionals that will help us continue to grow our business over the long-term.

40 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

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

KKR 2010 ANNUAL REPORT 41 MANAGEMENT’S DISCUSSION AND ANALYSIS and liabilities and their respective tax basis using currently enacted tax Assets Under Management (“AUM”) rates. The effect on deferred assets and liabilities of a change in tax AUM represents the assets from which KKR is entitled to receive fees rates is recognized in income in the period when the change is enacted. or carried interest and general partner capital. The AUM reported prior Deferred tax assets are reduced by a valuation allowance when it is to the date of consummation of the Transactions reflected the NAV of more likely than not that some portion or all the deferred tax assets KPE and its commitments to our investment funds. Subsequent to the will not be realized. Transactions, the NAV of KPE and its commitments to our investment Tax laws are complex and subject to different interpretations by the funds are excluded from our calculation of AUM. KKR calculates the taxpayer and respective governmental taxing authorities. Significant amount of AUM as of any date as the sum of: (i) the fair value of the judgment is required in determining tax expense and in evaluating investments of KKR’s investment funds plus uncalled capital commitments tax positions including evaluating uncertainties. We review our tax from these funds; (ii) the fair value of investments in KKR’s co-investment positions quarterly and adjust our tax balances as new information vehicles; (iii) the net asset value of certain of KKR’s fixed income becomes available. products; and (iv) the value of outstanding structured finance vehicles. You should note that KKR’s calculation of AUM may differ from the Net Income (Loss) Attributable to Noncontrolling Interests calculations of other investment managers and, as a result, its Net income (loss) attributable to noncontrolling interests represents measurements of AUM may not be comparable to similar measures the ownership interests that third parties hold in entities that are presented by other investment managers. KKR’s definition of AUM is consolidated in the financial statements. The allocable share of income not based on any definition of AUM that is set forth in the agreements and expense attributable to those interests is accounted for as net governing the investment funds, vehicles or accounts that it manages. income (loss) attributable to noncontrolling interests. Historically, the amount of net income (loss) attributable to noncontrolling interests Fee Paying Assets Under Management (“FPAUM”) has been substantial and has resulted in significant charges and credits FPAUM represents only those assets under management from which in the statements of operations. For periods prior to the Transactions, KKR receives fees. FPAUM reported prior to the Transactions reflected noncontrolling interests consisted primarily of: the NAV of KPE. Subsequent to the Transactions, the NAV of KPE is excluded from our calculation of FPAUM, because these assets are now • noncontrolling interests that third party investors held in owned by us and are no longer managed on behalf of a third‑party consolidated funds; investor. FPAUM is the sum of all of the individual fee bases that are • noncontrolling interests attributable to the ownership of KPE’s used to calculate KKR’s fees and differs from AUM in the following investment partnership by KPE’s unitholders; respects: (i) assets from which KKR does not receive a fee are excluded (i.e., assets with respect to which it receives only carried • a noncontrolling interest that allocated to a third party an aggregate of interest); and (ii) certain assets, primarily in its private equity funds, approximately 2% of the equity in our capital markets business; and are reflected based on capital commitments and invested capital as • noncontrolling interests that allocated 35% of the net income (loss) opposed to fair value because fees are not impacted by changes in generated by the manager of our Public Markets segment to certain the fair value of underlying investments. You should note that KKR’s of its principals on an annual basis through May 30, 2008. calculation of FPAUM may differ from the calculations of other On May 30, 2008, we acquired all outstanding noncontrolling interests of investment managers and, as a result, its measurements of FPAUM KKR Asset Management LLC, the manager of our Public Markets segment, may not be comparable to similar measures presented by other and now own 100% of this business. In connection with the Transactions, investment managers. KKR’s definition of FPAUM is not based on any we acquired all outstanding noncontrolling interests in KPE’s investment definition of FPAUM that is set forth in the agreements governing the partnership, which is a wholly owned subsidiary of KKR. investment funds, vehicles or accounts that it manages. For periods subsequent to the completion of the Transactions, Segment Results noncontrolling interests include: We present the results of our reportable business segments in • noncontrolling interests that third party investors hold in accordance with FASB Accounting Standards Codification Section 280, consolidated funds; Segment Reporting. This guidance is based on a management approach, which requires segment presentation based on internal organization • a noncontrolling interest that allocates to a third party and the internal financial reporting used by management to make approximately of approximately 2% of the equity in our capital operating decisions, assess performance and allocate resources. All markets business; inter segment transactions are eliminated in the segment presentation. • noncontrolling interests that allocate to a former principal and Our management makes operating decisions, assesses performance and such person’s designees an aggregate of 1% of the carried interest allocates resources based on financial and operating data and measures received by general partners of our funds and 1% of our other that are presented without giving effect to the consolidation of any of profits until a future date; the funds that we manage. In addition, there are other components of • noncontrolling interests that allocate to certain of our former our reportable segment results that differ from the equivalent GAAP principals and their designees a portion of the carried interest results on a consolidated basis. These differences are described below. received by the general partners of the private equity funds with We believe such adjustments are meaningful because management respect to private equity investments made during such former makes operating decisions and assesses the performance of our principals’ tenure with us; business based on financial and operating metrics and data that are • noncontrolling interests that allocate to certain of our current and presented without the consolidation of any funds. former principals all of the capital invested by or on behalf of the general partners of the private equity funds before the completion Segment Operating and Performance Measures of the Transactions and any returns thereon; and Fee Related Earnings Fee related earnings (“FRE”) is comprised of segment operating • noncontrolling interests representing the KKR Group Partnership Units revenues, less segment operating expenses. The components of FRE that KKR Holdings holds in the KKR Group Partnerships, which interests on a segment basis differ from the equivalent GAAP amounts on a were allocated on October 1, 2010 to KKR Holdings representing combined basis as a result of: (i) the inclusion of management fees 70% of the equity in the KKR Group Partnerships at that time. earned from consolidated funds that were eliminated in consolidation;

42 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

(ii) the exclusion of expenses of consolidated funds; (iii) the exclusion Certain of our investment funds require that we refund up to 20% of of charges relating to the amortization of intangible assets; (iv) the any cash management fees earned from limited partners in the event exclusion of charges relating to carry pool allocations; (v) the exclusion that the funds recognize a carried interest. At such time as the fund of non-cash equity charges and other non-cash compensation charges recognizes a carried interest in an amount sufficient to cover 20% of borne by KKR Holdings; (vi) the exclusion of certain reimbursable the management fees earned or a portion thereof, carried interest is expenses and (vii) the exclusion of certain non-recurring items. reduced, not to exceed 20% of management fees earned. Investment Income (Loss) Other investment income (loss) is comprised of realized and unrealized Investment income is composed of net carried interest and other gains (losses) and dividends on capital invested by the general partners investment income (loss). Carried interests entitle the general partner of our funds and by us, as well as interest income and interest expense. of our private equity funds to a greater allocable share of the fund’s earnings from investments relative to the capital contributed by the Economic Net Income Economic net income (“ENI”) is a measure of profitability for KKR’s general partner and correspondingly reduces third party investors’ reportable segments and is comprised of: (i) FRE; plus (ii) segment share of those earnings. Carried interests are earned on realized and investment income, which is reduced for carry pool allocations and unrealized gains (losses) on fund investments as well as dividends management fee refunds; less (iii) certain economic interests in KKR’s received by our funds. Amounts earned pursuant to carried interests segments held by third parties. ENI differs from net income on a are included in investment income to the extent that cumulative U.S. GAAP basis as a result of: (i) the exclusion of the items referred investment returns in a given fund are positive. If these investment to in FRE above; (ii) the exclusion of investment income relating to returns decrease or turn negative in subsequent periods, recognized noncontrolling interests; and (iii) the exclusion of income taxes. carried interests will be reduced and reflected as investment losses. Gross carried interest is reduced for carry pool allocations and refunds Committed Dollars Invested of management fees payable upon the recognition of carried interest. Committed dollars invested is the aggregate amount of capital Allocations to our carry pool represent approximately 40% of carried commitments that have been invested by our investment funds and interest earned in funds and vehicles eligible to receive carry distributions carry‑yielding co-investment vehicles during a given period. Such to be allocated to our principals plus any allocation of carried interest amounts include: (i) capital invested by fund investors and co-investors to our other personnel as part of our profit sharing plan. No carry with respect to which we are entitled to a carried interest and (ii) capital pool allocations are recorded in funds and vehicles that are in either a invested by us. clawback position or a net loss sharing position and therefore carry Uncalled Commitments pool allocations may not always equal 40% of gross carried interest. Uncalled commitments represents unfunded capital commitments that Prior to October 1, 2009, allocations to our carry pool consisted only KKR’s investment funds and carry paying co-investment vehicles have of allocations to our employee profit sharing program. received from partners to contribute capital to fund future investments.

CONSOLIDATED AND COMBINED RESULTS OF OPERATIONS The following is a discussion of our consolidated and combined results of operations for the years ended December 31, 2010, 2009 and 2008. You should read this discussion in conjunction with the consolidated and combined financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected the results of operations of our three business segments in these periods, see “— Segment Analysis.” The following tables set forth information regarding our results of operations for the years ended December 31, 2010, 2009 and 2008.

($ in thousands) Years Ended December 31, 2010 2009 2008 Revenues Fees $ 435,386 $ 331,271 $ 235,181 Expenses Employee Compensation and Benefits 1,344,455 838,072 149,182 Occupancy and Related Charges 39,692 38,013 30,430 General, Administrative and Other 311,147 264,396 179,673 Fund Expenses 67,369 55,229 59,103 Total Expenses 1,762,663 1,195,710 418,388 Investment Income (Loss) Net Gains (Losses) from Investment Activities 7,755,090 7,505,005 (12,944,720) Dividend Income 1,250,293 186,324 75,441 Interest Income 226,824 142,117 129,601 Interest Expense (53,099) (79,638) (125,561) Total Investment Income (Loss) 9,179,108 7,753,808 (12,865,239) Income (Loss) Before Taxes 7,851,831 6,889,369 (13,048,446) Income Taxes 75,360 36,998 6,786 Net Income (loss) 7,776,471 6,852,371 (13,055,232) Less: Net Income (loss) Attributable to Noncontrolling Interests in Consolidated Entities 6,544,016 6,119,382 (11,850,761) Less: Net Income (Loss) Attributable to Noncontrolling Interests in KKR Holdings L.P. 899,277 (116,696) — Net Income (Loss) Attributable to KKR & Co. L.P. $ 333,178 $ 849,685 $ (1,204,471)

KKR 2010 ANNUAL REPORT 43 MANAGEMENT’S DISCUSSION AND ANALYSIS

Year ended December 31, 2010 compared to year ended The majority of our net gains (losses) from investment activities December 31, 2009 relate to our private equity portfolio. The following is a summary of Fees the components of net gains (losses) from investment activities for Fees were $435.4 million for the year ended December 31, 2010, an Private Equity Investments which illustrates the significant variances increase of $104.1 million, or 31.4%, from the year ended December 31, from the prior period. See “— Segment Analysis — Private Markets 2009. The increase was primarily due to an increase in fees relating Segment” for further information regarding significant gains and to underwriting, syndication, and other capital markets services of losses in our private equity portfolio. $71.2 million driven by an increase in the number of capital markets transactions during the period. In addition, there was a $57.4 million ($ in thousands) Year Ended December 31, 2010 2009 increase in gross transaction fees received from transaction fee- Realized Gains $ 2,474,584 $ 299,721 generating investments, reflecting an increase in the number of transaction Unrealized Losses from Sales of fee-generating investments during the period. Incentive fees from KFN Investments and Realization of Gains (a) (2,484,878) (482,299) increased $34.4 million as a result of KFN’s financial performance Realized Losses (122,876) (473,269) exceeding certain required benchmarks for each of the four quarters Unrealized Gains from Sales of during the year ended December 31, 2010. KFN only earned an Investments and Realization incentive fee in one quarter during the year ended December 31, 2009. of Losses (b) 157,874 479,617 Partially offsetting these increases was a decrease in monitoring fees Unrealized Gains from Changes in of $55.2 million, primarily due to $72.2 million in fees received during Fair Value 10,010,038 9,696,213 the year ended December 31, 2009 relating to the termination of Unrealized Losses from Changes in monitoring agreements in connection with the IPOs of two portfolio Fair Value (2,523,402) (2,144,036) companies, Dollar General Corporation and Avago Technologies Limited and partially offset by a $16.1 million increase in reimbursable expenses. Net Gains (Losses) from Investment These types of termination payments may occur in the future; Activities — Private Equity Investments $ 7,511,340 $ 7,375,947 however, they are infrequent in nature and are generally correlated (a) Amounts represent the reversal of previously recognized unrealized gains in with initial public offering activity in our private equity portfolio. connection with realization events where such gains become realized. (b) Amounts represent the reversal of previously recognized unrealized losses in connection with realization events where such losses become realized. Expenses Expenses were $1.8 billion for the year ended December 31, 2010, an increase of $0.6 billion, or 47.4%, from the year ended December 31, Dividend Income 2009. The increase was primarily due to an increase in non-cash Dividend income was $1.3 billion for the year ended December 31, 2010, equity based charges of $261.8 million associated with the issuance of an increase of $1.1 billion compared to dividend income of $186.3 million interests in KKR Holdings to our principals, other employees and for the year ended December 31, 2009. During the year ended operating consultants as well as increases in the allocations to our December 31, 2010, we received $1.2 billion of dividends from two carry pool of $278.7 million. The increase in allocations to our carry portfolio companies and an aggregate of $42.6 million of comparatively pool was due to (i) a higher level of gross carried interest recognized smaller dividends from other investments. During the year ended in 2010 and (ii) the allocation of a portion of carried interest to our December 31, 2009, we received $179.2 million of dividends from two carry pool for the full year in 2010 versus only one quarter in 2009. portfolio companies and an aggregate of $7.1 million of comparatively Allocations to the carry pool were not made prior to the Transactions smaller dividends from other investments. on October 1, 2009. For the year ended December 31, 2010, these Interest Income items resulted in charges recorded in employee compensation and Interest income was $226.8 million for the year ended December 31, benefits relating to principals and other personnel amounting to 2010, an increase of $84.7 million, compared to interest income of $1.1 billion, and charges recorded in general, administrative, and other $142.1 million for the year ended December 31, 2009. The increase expense relating to operating consultants amounting to $143.7 million. primarily reflects an increase in the level of fixed income instruments In addition, other employee compensation and benefits expense, in our fixed income vehicles and our private equity portfolio. comprised primarily of salaries and incentive compensation, increased $29.7 million as a result of the hiring of additional personnel and the Interest Expense continued expansion of our businesses, and transaction related expenses Interest expense was $53.1 million for the year ended December 31, increased $10.1 million as a result of a higher level of unconsummated 2010, a decrease of $26.5 million, compared to interest expense of transactions during the period. Offsetting these increases was a $79.6 million for the year ended December 31, 2009. The decrease decrease related to non-recurring charges of $34.8 million associated was primarily due to lower average outstanding borrowings resulting with the closing of the Transactions in the prior period. from the repayment of borrowings under our revolving credit agree­ ments, partially offset by the issuance of senior notes during 2010. Net Gains (Losses) from Investment Activities Net gains from investment activities were $7.8 billion for the year ended Income (Loss) Before Taxes December 31, 2010, an increase of $0.3 billion, or 3.3%, from the year Due to the factors described above, income before taxes was $7.9 billion ended December 31, 2009. The following is a summary of net gains for the year ended December 31, 2010, an increase of $1.0 billion, or (losses) from investment activities: 14.0%, from the year ended December 31, 2009.

($ in thousands) Year Ended December 31, 2010 2009 Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities Private Equity Investments $ 7,511,340 $ 7,375,947 Net income attributable to noncontrolling interests in consolidated Other Net Gains (Losses) from entities was $6.5 billion for the year ended December 31, 2010, an Investment Activities 129,058 243,750 increase of $0.4 billion, or 6.9%, from the year ended December 31, Net Gains (Losses) from Investment 2009. The increase was primarily driven by the overall increase in Activities $7,755,090 $7,505,005 the components of net gains (losses) from investment activities described above.

44 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Income (Loss) Attributable to Noncontrolling Interests in in occupancy costs of $7.6 million primarily reflecting the opening of KKR Holdings L.P. new offices subsequent to December 31, 2008 as well as an increase Net income attributable to noncontrolling interests in KKR Holdings in existing office space, (iii) a decrease in transaction related expenses was $0.9 billion for the year ended December 31, 2010, an increase of attributable to unconsummated transactions during the period of $1.0 billion compared to loss attributable to noncontrolling interests in $14.0 million, from $28.2 million to $14.2 million for the years ended KKR Holdings of $0.1 billion for the year ended December 31, 2009. December 31, 2008 and 2009, respectively, and (iv) decreases in other The increase is primarily due to the change in net gains (losses) from operating expenses of $25.0 million reflecting expense reductions investment activities described above. across the majority of our businesses.

Year ended December 31, 2009 compared to year ended Net Gains (Losses) from Investment Activities December 31, 2008 Net gains from investment activities were $7.5 billion for the year ended December 31, 2009, an increase of $20.4 billion compared to net Fees losses from investment activities of $12.9 billion for the year ended Fees were $331.3 million for the year ended December 31, 2009, an December 31, 2008. The increase in net gains (losses) from investment increase of $96.1 million, or 40.9%, from the year ended December 31, activities from the prior period was primarily attributable to net 2008. The increase was primarily due to a $50.5 million increase in unrealized gains of $7.8 billion resulting primarily from increases in transaction fees, from $41.3 million to $91.8 million for the years ended the market value of our investment portfolio during 2009 compared to December 31, 2008 and 2009, respectively reflecting an increase in net unrealized losses of $13.2 billion during 2008. This change in net transaction-fee generating private equity investments during the period. unrealized gains and losses resulted in a net favorable variance in During the year ended December 31, 2009, we completed twelve unrealized investment activity from the prior period of $21.0 billion. transaction-fee generating transactions with a combined transaction Offsetting the increase in unrealized gains (losses) was realization value of $5.1 billion compared to four transaction-fee generating activity that represented a net loss for 2009 of $0.3 billion compared transactions with a combined transaction value of $4.5 billion in 2008. with a net gain of $0.3 billion for 2008, which resulted in a net unfavorable Transaction fees are negotiated separately for each completed variance in realization activity from the prior period of $0.6 billion. transaction based on the services that we provide and will also vary The majority of our net gains (losses) from investment activities are depending on the nature of the investment being made. Monitoring fees related to our private equity investments. The following is a summary increased $39.2 million reflecting the net impact of (i) an increase of of the components of net gains (losses) from investment activities: $72.2 million relating to fees received for the termination of monitoring fee contracts in connection with public equity offerings of two of our ($ in thousands) Year Ended December 31, 2009 2008 portfolio companies, (ii) a decrease relating to the receipt in the prior Realized Gains $ 393,310 $ 446,856 period of a non-recurring $15.0 million advisory fee from one of our portfolio companies in connection with equity raised by that company, Unrealized Losses from Sales of (iii) a $6.8 million net decrease in reimbursable expenses and (iv) a Investments and Realization of (a) net decrease of $11.2 million in fees received from certain portfolio Gains (498,839) (345,477) companies due primarily to a decline in the number of portfolio Realized Losses (707,717) (193,446) companies paying a fee and to a lesser extent lower average fees Unrealized Gains from Sales of received. During the year ended December 31, 2009, excluding one Investments and Realization of time fees received from the termination of monitoring fee contracts, Losses (b) 683,696 101,402 we had 30 portfolio companies that were paying an average fee of Unrealized Gains from Changes $2.9 million compared with 33 portfolio companies that were paying in Fair Value 9,831,344 2,681,711 an average fee of $3.0 million during the year ended December 31, Unrealized Losses from Changes 2008. In addition, during 2009 fees were increased by a third quarter in Fair Value (2,196,789) (15,635,766) incentive fee of $4.5 million earned from KKR Financial Holdings LLC Net Gains (Losses) from (NYSE: KFN), or KFN, as a result of KFN’s financial performance Investment Activities $ 7,505,005 $ (12,944,720) exceeding certain required benchmarks. No such fee was earned in the prior period. (a) Amounts represent the reversal of previously recognized unrealized gains in connection with realization events where such gains become realized. (b) Amounts represent the reversal of previously recognized unrealized losses in Expenses connection with realization events where such losses become realized. Expenses were $1,195.7 million for the year ended December 31, 2009, an increase of $777.3 million, as compared to expenses of $418.4 million for the year ended December 31, 2008. The increase was primarily Dividend Income due to non-cash charges associated with the issuance of interests in Dividend income was $186.3 million for the year ended December 31, KKR Holdings to our principals and operating consultants. For the year 2009, an increase of $110.9 million compared to dividend income of ended December 31, 2009, non-cash employee compensation and $75.4 million for the year ended December 31, 2008. Our dividends benefits relating to principals amounted to $644.5 million, and non-cash are generally earned in connection with sales of significant operations charges recorded in general and administrative expenses relating to undertaken by our portfolio companies resulting in available cash that operating consultants amounted to $85.0 million. In addition, other is distributed to our private equity funds. During the year ended employee compensation and benefits expenses increased $44.4 million December 31, 2009, we received $179.2 million of dividends from two due to (i) a $26.9 million increase in profit sharing costs in connection portfolio companies and an aggregate of $7.1 million of comparatively with an increase in the value of our private equity portfolio, (ii) an smaller dividends from other investments. During the year ended $11.7 million increase in salaries and other benefits reflecting the hiring December 31, 2008, we received $74.2 million of dividends from two of additional personnel in connection with the expansion of our business, portfolio companies and an aggregate of $1.2 million of comparatively and (iii) a $5.8 million increase in incentive compensation in connection smaller dividends from other investments. with higher bonuses in 2009 reflecting improved overall financial Interest Income performance of our management companies when compared to the Interest income was $142.1 million for the year ended December 31, prior period. The remainder of the net increase in expenses is the result 2009, an increase of $12.5 million, or 9.7%, from the year ended of the net impact of the following: (i) a $34.8 million non-recurring December 31, 2008. The increase primarily reflects an increase of charge associated with the closing of the Transactions, (ii) an increase $38.1 million at one of our fixed income vehicles resulting from a

KKR 2010 ANNUAL REPORT 45 MANAGEMENT’S DISCUSSION AND ANALYSIS higher average level of debt investments during the period. Offsetting Income (Loss) Before Taxes this increase was (i) a decrease of $19.9 million at the KPE Investment Due to the factors described above, income before taxes was $6.9 billion Partnership due to a decrease in interest income‑yielding investments, for the year ended December 31, 2009, an increase of $19.9 billion (ii) a $2.0 million decrease as a result of the exclusion of the general compared to loss before taxes of $13.0 billion for the year ended partners of the 1996 Fund in the fourth quarter of 2009, which interests December 31, 2008. were not contributed to the KKR Group Partnerships in connection with Net Income (Loss) Attributable to Noncontrolling Interests in the Transactions, and (iii) a $3.7 million decrease at our management Consolidated Entities companies and private equity funds resulting from lower average cash Net income attributable to noncontrolling interests in consolidated balances. entities was $6.1 billion for the year ended December 31, 2009, an increase of $18.0 billion compared to net loss attributable to noncontrolling Interest Expense interests in consolidated entities of $11.9 billion for the year ended Interest expense was $79.6 million for the year ended December 31, 2009 December 31, 2008. The increase was primarily driven by the overall a decrease of $45.9 million, or 36.6%, from the year ended December 31, changes in the components of net gains (losses) from investment 2008. Average outstanding borrowings remained unchanged from the activities described above. year ended December 31, 2008, however the weighted average interest rate was lower during the year ended December 31, 2009 as compared to the prior year period.

SEGMENT ANALYSIS The following is a discussion of the results of our three reportable business segments for the years ended December 31, 2010, 2009 and 2008. 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.

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, 2010, 2009 and 2008.

($ in thousands) Years Ended December 31, 2010 2009 2008 Fees Management and Incentive Fees: Management Fees $ 396,227 $ 415,207 $ 396,394 Incentive Fees — — — Total Management and Incentive Fees 396,227 415,207 396,394 Net Monitoring and Transaction Fees: Monitoring Fees 86,932 158,243 97,256 Transaction Fees 96,000 57,699 23,096 Total Fee Credits (52,563) (73,900) (12,698) Net Transaction and Monitoring Fees 130,369 142,042 107,654 Total Fees 526,596 557,249 504,048 Expenses Employee Compensation and Benefits 159,561 147,801 135,204 Occupancy and Related Charges 36,395 34,747 27,665 Other Operating Expenses 148,357 134,610 185,027 Total Expenses 344,313 317,158 347,896 Fee Related Earnings 182,283 240,091 156,152 Investment Income (Loss) Gross Carried interest 1,202,070 826,193 (1,197,387) Less: Allocation to KKR carry pool (453,872) (57,971) 8,156 Less: Management fee refunds (143,446) (22,720) 29,611 Net carried interest 604,752 745,502 (1,159,620) Other investment income (loss) (1,643) 128,528 (230,053) Total Investment Income (Loss) 603,109 874,030 (1,389,673) Income (Loss) before Income (Loss) Attributable to Noncontrolling Interests 785,392 1,114,121 (1,233,521) Income (Loss) Attributable to Noncontrolling Interests 839 497 — Economic Net Income $ 784,553 $ 1,113,624 $ (1,233,521) Assets under management (period end) $46,223,900 $38,842,900 $35,283,700 Fee paying assets under management (period end) $ 38,186,700 $36,484,400 $39,244,700 Committed Dollars Invested $ 4,555,700 $ 2,107,700 $ 3,168,800 Uncalled Commitments (period end) $ 12,625,900 $ 13,728,100 $ 14,930,142

46 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

Year ended December 31, 2010 compared to year ended ($ in thousands) Year Ended December 31, 2010 2009 December 31, 2009 Net Realized Gains (Losses) $ 420,574 $ (44,136) Fees Net Unrealized Gains (Losses) 593,971 835,028 Fees were $526.6 million for the year ended December 31, 2010, a Dividends and Interest 187,525 35,301 decrease of $30.7 million, or 5.5%, from the year ended December 31, Gross carried interest 1,202,070 826,193 2009. The decrease was primarily due to a $71.3 million decrease in gross monitoring fees. This decrease was primarily due to the Less: Allocation to KKR carry pool (453,872) (57,971) absence in 2010 of $72.2 million in fees received during the year Less: Management fee refunds (143,446) (22,720) ended December 31, 2009 relating to the termination of monitoring Net carried interest $ 604,752 $ 745,502 agreements in connection with the IPOs of two portfolio companies, Dollar General Corporation and Avago Technologies Limited. These Net realized gains (losses) for the year ended December 31, 2010 types of termination payments may occur in the future; however, they consists primarily of the sales of East Resources Inc. and Eastman are infrequent in nature and are generally correlated with initial public Kodak Company, and partial sales of Dollar General Corporation, offering activity in our private equity portfolio. In addition, management Legrand Holdings S.A. and Avago Technologies Limited. Net realized fees decreased $19.0 million resulting primarily from the net impact of gains (losses) for the year ended December 31, 2009 consists primarily the following: (i) a $28.2 million decrease in management fees as fees of the write-off of our investment in Masonite International, Inc., offset which were previously earned from KPE have been eliminated as a result by realized gains on initial public offerings of Avago Technologies of the Transactions on October 1, 2009; (ii) a decrease of $10.9 million Limited and Dollar General Corporation. The following table presents primarily relating to fee paying capital that was transferred from a fee net unrealized gains (losses) of carried interest by fund for the years paying private equity fund (European Fund III) to a non-fee paying ended December 31, 2010 and 2009. private equity fund (E2 Investors) subsequent to September 30, 2009; (iii) a $5.4 million net decrease due primarily to a reduction in fee paying ($ in thousands) Year Ended December 31, 2010 2009 capital at our private equity funds in connection with realization activity 2006 Fund $216,594 $ 203,762 offset by new fee paying capital raised; and (iv) an increase of $25.5 million Asian Fund 170,526 22,422 associated with a reduction in waived management fees during 2010. Millennium Fund 73,098 380,054 The net decrease in fees was partially offset by (i) an increase in gross European Fund 70,091 123,834 transaction fees of $38.3 million primarily reflecting an increase in the number of transaction fee-generating investments during the period Co-Investment Vehicles 40,926 57,183 and (ii) a $21.3 million decrease in credits earned by limited partners European Fund III 21,768 — under fee sharing arrangements in our private equity funds due primarily E2 Investors 968 — to the decline in gross transaction and monitoring fees. 1996 Fund (a) — 47,773 (a) Expenses Total $ 593,971 $835,028 Expenses were $344.3 million for the year ended December 31, 2010, an (a) The above table excludes any funds for which there were no unrealized gains (losses) increase of $27.2 million, or 8.6%, from the year ended December 31, of carried interest during either of the periods presented. In addition, subsequent to the Transactions, the 1996 Fund was no longer included in our results and therefore 2009. The increase was primarily due to an increase in other operating no unrealized gains (losses) of carried interest attributable to the 1996 Fund are included for the year ended December 31, 2010 or the three months ended expenses of $13.7 million primarily reflecting an increase in transaction December 31, 2009. related expenses of $10.1 million attributable to unconsummated transactions during the period. In addition, employee compensation and For the year ended December 31, 2010, approximately 33% of net benefits expense increased $11.8 million reflecting the hiring of additional unrealized gains from changes in value were attributable to increased personnel and the continued expansion of our business. share prices of various publicly held investments, the most significant Fee Related Earnings of which were Dollar General Corporation (NYSE: DG) and Legrand Fee related earnings in our Private Markets segment were Holdings S.A. (ENXTPA: LR). Our private portfolio contributed the $182.3 million for the year ended December 31, 2010, a decrease of remainder of the net unrealized gains from changes in value, the most $57.8 million, or 24.1%, from the year ended December 31, 2009. The significant of which were HCA Inc. (healthcare sector), Alliance decrease was due to the decline in fees and increase in expenses Boots GmbH (healthcare sector) and U.S. Foodservice (retail sector). described above. The increased valuations, in the aggregate, generally related to both improvements in market comparables and individual company Investment Income performance. Investment income was $603.1 million for the year ended December 31, 2010, a decrease of $270.9 million, or 31.0%, compared to investment For the year ended December 31, 2009, approximately 40% of income of $874.0 million for the year ended December 31, 2009. The unrealized gains were attributable to increased share prices of various decrease was primarily driven by certain adjustments related to the publicly held investments, the most significant of which were Legrand Combination Transaction that were applicable for the full year of 2010 Holdings S.A. (ENXTPA: LR), Avago Technologies Limited (NYSE: AVGO), versus only one quarter in 2009, including (i) the exclusion of carried Sealy Corporation (NYSE: ZZ) and Rockwood Holdings, Inc. (NYSE: ROC). interest from the 1996 Fund, (ii) the exclusion of carried interest Our private portfolio contributed the remainder of the unrealized gains, allocated to certain of our former principals, (iii) the allocation of a the most significant of which were HCA Inc. (healthcare sector), portion of carried interest to the carry pool, and (iv) the exclusion of KKR Debt Investors S.a.r.l. (financial services sector), and Alliance investment gains and losses on capital invested by or on behalf of the Boots GmbH (healthcare sector). In addition, there was a significant general partners of our private equity funds. For the year ended unrealized gain due to the reversal of a previously recognized December 31, 2010, investment income (loss) included (i) net carried unrealized loss in connection with the write-off of our investment in interest of $604.8 million and (ii) other investment income (loss) of Masonite International Inc. (manufacturing sector) when the loss $(1.6) million, which was comprised primarily of losses from unfavorable became realized. The increased valuations, in the aggregate, generally changes in foreign exchange rates. The following table presents the related to both improvements in market comparables and individual components of net carried interest for the years ended December 31, company performance. 2010 and 2009.

KKR 2010 ANNUAL REPORT 47 MANAGEMENT’S DISCUSSION AND ANALYSIS

Dividend and interest income for the year ended December 31, 2010 Fee Paying Assets Under Management consists primarily of dividends earned from HCA Inc. (healthcare sector) The following table reflects the changes in our Private Markets FPAUM and Visant Inc. (media sector). Dividend and interest income for the from December 31, 2009 to December 2010: year ended December 31, 2009 consists primarily of dividends earned from Dollar General Corporation and Legrand Holdings S.A. The amount ($ in thousands) of carried interest earned during the year ended December 31, 2010 for December 31, 2009 FPAUM $36,484,400 those funds and vehicles eligible to receive carried interest amounted New Capital Raised 2,971,600 to $1.1 billion, of which the carry pool was allocated approximately 40% Distributions (650,300) and the remaining portion was allocated to KKR and KKR Holdings based Foreign Exchange (658,800) on their respective ownership percentages. Management fee refunds Change in Value amounted to $143.4 million for the year ended December 31, 2010, an 39,800 increase of $120.7 million from the year ended December 31, 2009 December 31, 2010 FPAUM $ 38,186,700 primarily reflecting the 2006 Fund becoming carry‑earning in 2010. FPAUM in our Private Markets segment was $38.2 billion at December 31, Economic Net Income (Loss) 2010, an increase of $1.7 billion, or 4.7%, compared to $36.5 billion at Economic net income in our Private Markets segment was $784.6 million December 31, 2009. The increase was primarily attributable to new fee for the year ended December 31, 2010, a decrease of $329.1 million paying capital raised during 2010, including $0.9 billion for our China compared to economic net income of $1.1 billion for the year ended Growth Fund and $1.1 billion for an infrastructure separately managed December 31, 2009. The decrease in investment income described account. The increase was partially offset by distributions of $0.7 billion above was the main contributor to the period over period decline in and a $0.7 billion decrease related to foreign exchange adjustments economic net income. on foreign denominated commitments and invested capital.

Assets Under Management Committed Dollars Invested The following table reflects the changes in our Private Markets AUM Committed dollars invested were $4.6 billion for the year ended from December 31, 2009 to December 31, 2010: December 31, 2010, an increase of $2.4 billion from the year ended December 31, 2009. ($ in thousands) December 31, 2009 AUM $38,842,900 Uncalled Commitments New Capital Raised 3,025,500 As of December 31, 2010 our Private Markets segment had $12.6 billion of remaining uncalled capital commitments that could be called for Distributions (4,085,200) investment in new transactions. Foreign Exchange (274,800) Change in Value 8,715,500 Year ended December 31, 2009 compared to year ended December 31, 2010 AUM $46,223,900 December 31, 2008 Fees AUM in our Private Markets segment was $46.2 billion at December 31, Fees in our Private Markets segment were $557.2 million for the year 2010, an increase of $7.4 billion, or 19.0%, compared to $38.8 billion ended December 31, 2009, an increase of $53.2 million, or 10.6%, at December 31, 2009. The increase was primarily attributable to from the year ended December 31, 2008. The increase was primarily $8.7 billion of net unrealized gains resulting from changes in the market due to a $34.4 million increase in net transaction and monitoring fees. values of our private equity portfolio companies, as well as $3.0 billion Transaction fees are negotiated separately for each completed of new capital raised. The net unrealized investment gains in our transaction based on the services that we provide and will also vary private equity funds were driven primarily by net unrealized gains of depending on the nature of the investment being made. The increase $3.2 billion, $1.4 billion, $1.3 billion, $0.9 billion, and $0.8 billion in in net transaction and monitoring fees was primarily the result of our 2006 Fund, Millennium Fund, European Fund II, Asian Fund and (i) an increase in gross transaction fees of $34.6 million reflecting an European Fund, respectively. Approximately 40% of the net change in increase in transaction-fee generating private equity investments value for the year ended December 31, 2010 was attributable to changes during the period (we completed twelve transaction-fee generating in share prices of various publicly listed investments, notably increases transactions with a combined transaction value of $5.1 billion in 2009 in Dollar General Corporation (NYSE: DG), Legrand Holdings S.A. compared to four transaction-fee generating transactions in 2008 (ENXTPA: LR) and NXP Semiconductors NV (NASDAQ: NXPI), which with a combined transaction value of $4.5 billion); (ii) an increase in was taken public during the third quarter of 2010. Our private portfolio gross monitoring fees of $61.0 million reflecting the net impact of an contributed the remainder of the change in value, with the largest increase of $72.2 million relating to fees received for the termination contributor being unrealized gains relating to HCA Inc. (healthcare of monitoring fee contracts in connection with public equity offerings sector). These unrealized gains were partially offset by significant of two of our portfolio companies and a net $11.2 million decrease in unrealized losses related to Energy Future Holdings Corp. (energy fees received from certain portfolio companies due primarily to a sector) and U.N Ro‑Ro (transportation sector). The increased valuations, decline in the number of portfolio companies paying a monitoring fee in the aggregate, generally related to both improvements in market and a lower average fee received; and (iii) an increase in credits comparables and individual company performance. Partially offsetting earned by limited partners under fee sharing arrangements in our these increases were distributions from our funds totaling $4.1 billion, private equity funds of $61.2 million due to the increase in transaction which was comprised of $3.3 billion of realized gains and $0.8 billion and monitoring fees. During the year ended December 31, 2009, of return of original cost. excluding one time fees received from the termination of monitoring fee contracts, we had 30 portfolio companies that were paying an average monitoring fee of $2.9 million, compared with 33 portfolio companies that were paying an average fee of $3.0 million during the year ended December 31, 2008. In addition there was an $18.8 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.

48 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

Expenses The following table presents net unrealized gains (losses) of carried Expenses were $317.2 million for the year ended December 31, 2009, interest by fund for the years ended December 31, 2009 and 2008. a decrease of $30.7 million, or 8.8%, from the year ended December 31, 2008. The decrease was primarily due to the net impact of the following: ($ in thousands) Year Ended December 31, 2009 2008 (i) a decrease in transaction related expenses of $14.0 million Millennium Fund $380,054 $ (512,564) attributable to unconsummated transactions during the period, from 2006 Fund 203,762 (305,449) $28.2 million to $14.2 million for the years ended December 31, 2008 European Fund 123,834 (268,885) and 2009, respectively; (ii) decreases in operating expenses of Co-Investment Vehicles 57,183 3,244 $36.4 million (excluding the non-recurring charge described below) (a) primarily as a result of a reduction in professional and other service 1996 Fund 47,773 (145,088) provider fees due to our efforts to actively manage our expense base in Asian Fund 22,422 — a deteriorating economic environment; (iii) an increase in occupancy European Fund II — (50,616) costs of $7.1 million reflecting the opening of new offices subsequent Total (a) $835,028 $(1,279,358) to December 31, 2008 as well as an increase in existing office space; (a) The above table excludes any funds for which there were no unrealized gains and (iv) an increase in employee compensation and benefits expense (losses) of carried interest during either of the periods presented. For the years of $12.6 million resulting from an increase in salaries reflecting the ended December 31, 2009 and 2008, these excluded funds were the European Fund III and KKR E2 Investors (Annex Fund). In addition, subsequent to the Transactions, hiring of additional personnel in connection with the expansion of our the 1996 Fund was no longer included in our results. As such, net unrealized gains (losses) of carried interest attributable to the 1996 Fund are only included through business as well as an increase in incentive compensation in connection September 30, 2009. with higher bonuses in 2009 reflecting improved overall financial performance of our private markets management company when For the year ended December 31, 2009, approximately 40% of compared to the prior period. Our Private Markets expenses exclude a unrealized gains were attributable to increased share prices of various $34.8 million charge incurred in connection with the Transactions. publicly held investments, the most significant of which were Legrand Management has excluded this charge from our segment financial Holdings S.A. (ENXTPA: LR), Avago Technologies Limited (NYSE: AVGO), information as such amount will be not be considered when assessing Sealy Corporation (NYSE: ZZ) and Rockwood Holdings, Inc. (NYSE: ROC). the performance of or allocating resources to, each of our business Our private portfolio contributed the remainder of the unrealized gains, segments, and is non-recurring in nature. On a consolidated basis, the most significant of which were HCA Inc. (healthcare sector), this charge is included in general, administrative and other expenses. KKR Debt Investors S.á r.l (financial services sector), and Alliance Fee Related Earnings Boots GmbH (healthcare sector). In addition, there was a significant Due primarily to the increase in fees described above, fee related unrealized gain due to the reversal of a previously recognized unrealized earnings in our Private Markets segment were $240.1 million for the loss in connection with the write-off of our investment in Masonite year ended December 31, 2009, an increase of $83.9 million, or 53.7%, International Inc. (manufacturing sector) when the loss became from the year ended December 31, 2008. realized. The increased valuations, in the aggregate, generally related to both improvements in market comparables and individual company Investment Income (Loss) performance. Investment income was $874.0 million for the year ended December 31, 2009, an increase of $2.3 billion compared to investment losses of For the year ended December 31, 2008, approximately 40% of unrealized $1.4 billion for the year ended December 31, 2008. For the year ended losses were attributable to decreased share prices of various publicly December 31, 2009, investment income (loss) was comprised of held investments, the most significant of which were Legrand (i) net carried interest of $745.5 million and (ii) other investment Holdings S.A. (ENXTPA: LR), Rockwood Holdings, Inc. (NYSE: ROC) income (loss) of $128.5 million, which includes net gains from investment and Sealy Corporation (NYSE: ZZ). Our private portfolio contributed activities of $106.4 million, dividends of $23.7 million and net interest the remainder of the unrealized losses, the most significant of which expense of $1.6 million. The following table presents the components of were Capmark Financial Group Inc. (financial services sector), net carried interest for the years ended December 31, 2009 and 2008. PagesJaunes Groupe S.A. (media sector), Alliance Boots GmbH (healthcare sector), and ProSieben SAT.1 Media AG (media sector). ($ in thousands) Year Ended December 31, 2009 2008 The decreased valuations, in the aggregate, generally related to Net Realized Gains (Losses) $ (44,136) $ 67,709 deterioration in market comparables and to a certain extent individual company performance. Net Unrealized Gains (Losses) 835,028 (1,279,358) Dividends and Interest 35,301 14,262 Dividend income for the year ended December 31, 2009 consists Gross carried interest 826,193 (1,197,387) primarily of dividends earned from Dollar General Corporation and Legrand Holdings S.A. Dividend income for the year ended December 31, Less: Allocation to KKR carry pool (57,971) 8,156 2008 consists primarily of dividends earned from Legrand Holdings S.A. Less: Management fee refunds (22,720) 29,611 The amount of carried interest earned during the fourth quarter of Net carried interest $745,502 $ (1,159,620) fiscal year 2009 for those funds and vehicles eligible to receive carried interest amounted to $92.3 million of which the carry pool was allocated Net realized gains (losses) for the year ended December 31, 2009 40% and the remaining portion was allocated to KKR Group Holdings consists primarily of the write-off of our investment in Masonite and KKR Holdings based on their respective ownership percentages. International, Inc., offset by realized gains in connection with the initial The increase in other investment income of $358.6 million from the public offerings of Avago Technologies Limited and Dollar General year ended December 31, 2008 is primarily due to an increase in net Corporation. Net realized gains (losses) for the year ended December 31, unrealized gains from increases in the market value of capital invested 2008 consists primarily of the partial sale of Rockwood Holdings, Inc. by or on behalf of the general partners of our private equity funds. and the sale of Demag Holdings S.á r.l.

KKR 2010 ANNUAL REPORT 49 MANAGEMENT’S DISCUSSION AND ANALYSIS

Economic Net Income (Loss) Fee Paying Assets Under Management Economic net income in our Private Markets segment was $1.1 billion The following table reflects the changes in our Private Markets fee for the year ended December 31, 2009, an increase of $2.3 billion paying assets under management from December 31, 2008 to compared to economic net loss of $1.2 billion for the year ended December 31, 2009: December 31, 2008. The increased investment income described above was the main contributor to the period over period increase in ($ in thousands) economic net income. December 31, 2008 FPAUM $39,244,800 Exclusion of KPE (a) (3,175,900) Assets Under Management The following table reflects the changes in our Private Markets assets New Capital Raised 609,000 under management from December 31, 2008 to December 31, 2009: European Fund III/E2 Investors (571,600) Distributions (325,058) ($ in thousands) Change in Value 703,158 December 31, 2008 AUM $35,283,700 December 31, 2009 FPAUM $36,484,400 Exclusion of KPE (a) (3,514,400) (a) The FPAUM reported prior to the Transactions reflected the NAV of KPE. Subsequent New Capital Raised 683,300 to the Transactions, the NAV of KPE is excluded from our calculation of fee paying assets under management, because these assets are now owned by us and are no Distributions (808,600) longer managed on behalf of a third party investor. Change in Value 7,198,900 December 31, 2009 AUM $38,842,900 FPAUM in our Private Markets segment was $36.5 billion at December 31, 2009, a $2.7 billion decrease, or 6.9%, compared to (a) The AUM reported prior to the Transactions reflected the NAV of KPE and its commitments to our funds. Subsequent to the Transactions, the NAV of KPE and its $39.2 billion at December 31, 2008. The decrease was primarily commitments to our funds are excluded from our calculation of assets under attributable to a $3.2 billion reduction representing the exclusion of management, because these assets are now owned by us and no longer managed on behalf of a third party investor. the NAV of KPE and its commitments to our investment funds. In addition, the decrease was attributable to distributions of $0.3 billion AUM in our Private Markets segment was $38.8 billion at December 31, primarily representing the reduction of capital associated with 2009, an increase of $3.5 billion, or 9.9%, compared to $35.3 billion at realization activity and $0.6 billion related to capital that was December 31, 2008. The increase was primarily attributable to $7.2 billion transferred from a fee paying private equity fund (European Fund of net unrealized gains resulting from changes in the market values of III) to a non-fee paying private equity fund (E2 Investors). These our portfolio companies, as well as $0.7 billion in new capital raised in decreases were partially offset by new capital raised of $0.6 billion our European III Fund, E2 Investors and separately managed accounts. in our European III Fund and separately managed accounts and The net unrealized investment gains were driven by net unrealized gains $0.7 billion of foreign exchange adjustments on foreign denominated of $2.7 billion, $1.7 billion, $0.8 billion, $0.8 billion and $0.4 billion in committed and invested capital. For additional discussion of our our 2006 Fund, Millennium Fund, European Fund II, European Fund private equity funds and other Private Markets investment vehicles, and Asian Fund, respectively, with all other funds also recording net please see “Business” in our Annual Report on Form 10-K. realized gains during the period. Over 50% of the change in value for Committed Dollars Invested the year ended December 31, 2009 was attributable to increased share Committed dollars invested were $2.1 billion for the year ended prices of various publicly held investments, notably Dollar General December 31, 2009, a decrease of $1.1 billion, or 33.5%, from the year Corporation (NYSE: DG), which we took public in the fourth quarter of ended December 31, 2008. The decrease was due primarily to a 2009, Avago Technologies Limited (NYSE: AVGO), which went public decrease in both the size and transaction volume of private equity in the third quarter of 2009, and Legrand Holdings S.A. (ENXTPA: LR). investments closed during 2009 as compared with 2008. Our private portfolio contributed the remainder of the change in value, with the largest contributors being unrealized gains relating to HCA Inc. Uncalled Commitments (healthcare sector) and Alliance Boots GmbH (healthcare sector). As of December 31, 2009, our Private Markets segment had $13.7 billion These unrealized gains were partially offset by a significant unrealized of remaining uncalled capital commitments that could be called for loss relating to Energy Future Holdings Corp. (energy sector). The investments in new transactions. increased valuations, in the aggregate, generally related to both improvements in market comparables and individual company perfor­ mance, coupled with an overall improvement in global markets. This increase was partially offset by distributions from our funds totaling $0.8 billion comprised of $0.5 billion of realized gains and $0.3 billion of return of original cost. In addition, the change in AUM included a $3.5 billion reduction representing the exclusion of the NAV of KPE and its commitments to our investment funds.

50 KKR 2010 ANNUAL REPORT 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, 2009 and 2008.

($ in thousands) Years Ended December 31, 2010 2009 2008 Fees Management and Incentive Fees: Management Fees $ 57,059 $ 50,754 $ 59,342 Incentive Fees 38,832 4,472 — Total Management and Incentive Fees 95,891 55,226 59,342 Net Transaction Fees: Transaction Fees 19,117 — — Total Fee Credits (12,336) — — Net Transaction Fees 6,781 — — Total Fees 102,672 55,226 59,342 Expenses Employee Compensation and Benefits 29,910 24,086 20,566 Occupancy and Related Charges 2,375 2,483 2,134 Other Operating Expenses 13,430 18,103 4,066 Total Expenses 45,715 44,672 26,766 Fee Related Earnings 56,957 10,554 32,576 Investment Income (Loss) Gross Carried interest 5,000 — — Less: Allocation to KKR carry pool (2,000) — — Net carried interest 3,000 — — Other investment income (Loss) 718 (5,260) 10,687 Total Investment Income (Loss) 3,718 (5,260) 10,687 Income (Loss) before Income (Loss) Attributable to Noncontrolling Interests 60,675 5,294 43,263 Income (Loss) Attributable to Noncontrolling Interests 537 15 6,421 Economic Net Income $ 60,138 $ 5,279 $ 36,842 Assets under management (period end) $14,773,600 $13,361,300 $13,167,000 Fee paying assets under management (period end) $ 7,824,400 $6,295,400 $ 4,167,000 Committed Dollars Invested $ 697,600 $ — $ — Uncalled Commitments (period end) $ 1,448,800 $ 816,327 $ —

Year ended December 31, 2010 compared to year ended Expenses December 31, 2009 Expenses in our Public Markets segment were $45.7 million for the Fees year ended December 31, 2010, an increase of $1.0 million, or 2.3%, Our Public Markets segment earned fees of $102.7 million for the year from $44.7 million for the year ended December 31, 2009. The increase ended December 31, 2010, an increase of $47.5 million, or 85.9%, from was primarily due to an increase in employee compensation and the year ended December 31, 2009. The increase is primarily the result benefits expense of $5.8 million reflecting the hiring of additional of an increase in incentive fee income from KFN of $34.3 million, from personnel and the continued growth of this segment. Partially offsetting $4.5 million for the year ended December 31, 2009 to $38.8 million for the increase in employee compensation and benefits was a decrease in the year ended December 31, 2010. The increase in incentive fee income other operating expenses of $4.6 million which was primarily attributable is a result of KFN’s financial performance exceeding the required to an $11.7 million decrease in waived expense reimbursements. We benchmark. The increase in fees is also attributable to increased fee waived $13.0 million of expense reimbursements during 2009 from KFN paying assets under management associated with new capital raised and the Strategic Capital Funds, versus only $1.3 million in 2010, as (see “Fee Paying Assets Under Management” table below) and noted above. This decrease in other operating expenses was partially $6.8 million of net transaction fees earned during the year ended offset by increased general and administrative expenses resulting from December 31, 2010. No transaction fees were earned during the year the expansion of our business. ending December 31, 2009. These increases in fees were partially offset Fee Related Earnings by an $11.7 million decrease in management fees from structured finance Fee related earnings in our Public Markets segment were $57.0 million vehicles. In 2009, we elected to temporarily receive management fees for the year ended December 31, 2010, an increase of $46.4 million from from structured finance vehicles in lieu of being reimbursed $13.0 million $10.6 million for the year ended December 31, 2009. The increase in fee of expenses by KFN and the Strategic Capital Funds. We ceased electing related earnings is primarily due to the increase in fees described above. to receive management fees in lieu of the expense reimbursement in the first quarter of 2010 and, as a result, received only $1.3 million of such fees in 2010.

KKR 2010 ANNUAL REPORT 51 MANAGEMENT’S DISCUSSION AND ANALYSIS

Investment Income (Loss) Committed Dollars Invested Our Public Markets segment had investment income of $3.7 million Committed dollars invested were $0.7 billion for the year ended for the year ended December 31, 2010, an increase of $9.0 million December 31, 2010. There were no committed dollars invested to from investment losses of $5.3 million for the year ended December 31, any of our public markets investment vehicles for the year ended 2009. The increase was primarily driven by net carried interest from December 31, 2009. certain special situations separately managed accounts earned in the year ended December 31, 2010. Uncalled Commitments As of December 31, 2010 our Public Markets segment had $1.4 billion Economic Net Income of uncalled capital commitments that could be called for investments Economic net income in our Public Markets segment was $60.1 million in new transactions. for the year ended December 31, 2010, an increase of $54.8 million from economic net income of $5.3 million for the year ended December 31, Year ended December 31, 2009 compared to year ended 2009. The increase in fee related earnings described above was the main December 31, 2008 contributors to the period over period increase in economic net income. Fees Our Public Markets segment earned fees of $55.2 million for the year Assets Under Management The following table reflects the changes in our Public Markets AUM ended December 31, 2009, a decrease of $4.1 million, or 6.9%, from the from December 31, 2009 to December 31, 2010: year ended December 31, 2008. The decrease is primarily the result of a $15.2 million decrease in management fees received from the

($ in thousands) Strategic Capital Funds. The reduction in management fees from the Strategic Capital Funds was partially due to a lower average net asset December 31, 2009 AUM $ 13,361,300 value during the year ended December 31, 2009 which resulted in a New Capital Raised 1,970,100 reduction of fees of $7.5 million. Additionally, effective December 1, Distributions (1,281,700) 2008, the fees for all investor classes of the Strategic Capital Funds Foreign Exchange — were reduced, which resulted in a further reduction of fees of $7.7 million. Change in Value 723,900 Management fees were reduced for all investor classes within the December 31, 2010 AUM $14,773,600 Strategic Capital Funds in conjunction with the mandatory redemption and restructuring of the funds, which was effective December 1, 2008. AUM in our Public Markets segment totaled $14.8 billion at December 31, In addition to the reduced fees from the Strategic Capital Funds, there 2010, an increase of $1.4 billion, or 10.6%, from $13.4 billion at was a $10.2 million decrease in fees received from KFN due primarily December 31, 2009. The increase was driven by $2.0 billion of new to a lower average equity value during the year ended December 31, capital raised across our various Public Markets strategies, as well as 2009, offset by an incentive fee received in 2009. KFN’s equity value a $0.7 billion increase in the net asset value of KFN and certain other increased during the year ended December 31, 2009, however, because fixed income vehicles. These increases were partially offset by $1.3 billion KFN’s equity value had declined significantly in the fourth quarter of of redemptions in our liquid credit separately managed accounts. 2008, the average equity value for the year ended December 31, 2009 was lower than the average equity value for the year ended December 31, Fee Paying Assets Under Management 2008. Separately, the incentive fee at KFN is calculated on a quarterly The following table reflects the changes in our Public Markets FPAUM basis and is earned solely based on KFN’s financial performance in a from December 31, 2009 to December 31, 2010: given quarter. As a result, the incentive fee can be earned in one quarter of a given year even if KFN experiences negative financial performance ($ in thousands) for other quarters during that same year. For additional discussion of December 31, 2009 FPAUM $6,295,400 the KFN incentive fee, please see “Summary of Significant Accounting New Capital Raised 1,893,000 Policies.” Distributions (1,281,700) These decreases were offset by a $7.3 million increase in management Foreign Exchange — fees resulting from an increase in capital managed on behalf of third Change in Value 917,700 party investors and an increase in management fees from structured December 31, 2010 FPAUM $ 7,824,400 finance vehicles totaling $14.0 million. Beginning in 2009 we elected to temporarily receive management fees from structured finance FPAUM in our Public Markets segment totaled $7.8 billion at vehicles in lieu of being reimbursed $13.0 million of expenses by KFN December 31, 2010, an increase of $1.5 billion, or 24.3%, from $6.3 billion and the Strategic Capital Funds, thereby providing incremental cash at December 31, 2009. The increase was driven by $1.9 billion of new flow, which otherwise would have been unavailable, to the investors capital raised across our various Public Markets strategies, as well as in these entities. The election to receive management fees in lieu of a $0.9 billion increase in the net asset value of KFN and certain other expense reimbursements had an insignificant cash flow impact on us. fixed income vehicles. These increases were partially offset by $1.3 billion Expenses of redemptions in our liquid credit separately managed accounts. Expenses in our Public Markets segment were $44.7 million for the year ended December 31, 2009, an increase of $17.9 million, or 66.9% from the year ended December 31, 2008. The increase was primarily attributable to our waiving of $13.0 million of expense reimbursements during 2009 from KFN and the Strategic Capital Funds, as noted above. Additionally, employee compensation and benefits expense increased by $3.5 million, which was primarily due to increased headcount.

52 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

Investment Income (Loss) Fee Paying Assets Under Management Our Public Markets segment had an investment loss of $5.3 million for The following table reflects the changes in our Public Markets fee the year ended December 31, 2009, a decrease of $15.9 million from the paying assets under management from December 31, 2008 to year ended December 31, 2008. This decrease was primarily driven by December 31, 2009: an increase in non-cash stock based compensation expense associated with equity grants received from KFN. Our stock based commitments ($ in thousands) to employees are tied to the stock price of KFN, and a rising stock December 31, 2008 FPAUM $ 4,167,000 price of KFN increases our liability to employees. The stock price of Exclusion of KPE (a) (62,600) KFN appreciated in 2009 from a price of $1.58 at December 31, 2008 New Capital Raised 1,400,000 to a price of $5.80 at December 31, 2009. Distributions — Fee Related Earnings Investor Redemptions (634,700) Due primarily to the increase in expenses described above, fee related Change in Value 1,425,700 earnings in our Public Markets segment were $10.6 million for the year December 31, 2009 FPAUM $6,295,400 ended December 31, 2009, a decrease of $22.0 million compared to fee related earnings of $32.6 million for the year ended December 31, 2008. (a) The FPAUM reported prior to the Transactions reflected the NAV of KPE. Subsequent to the Transactions, the NAV of KPE is excluded from our calculation of fee paying assets under management, because those items are now owned by us and are no Economic Net Income longer managed on behalf of a third party investor. Economic net income in our Public Markets segment was $5.3 million for the year ended December 31, 2009, a decrease of $31.6 million FPAUM in our Public Market segment was $6.3 billion at December 31, compared to economic net income of $36.8 million for the year ended 2009, an increase of $2.1 billion, or 50.0%, compared to $4.2 billion at December 31, 2008. The decrease in fee related earnings described December 31, 2008. This increase was driven primarily by $1.4 billion above was the main contributor to the period over period decrease in of net unrealized gains resulting from improvements in the overall economic net income. credit markets. Our portfolios for KFN (including its majority owned subsidiaries), the Strategic Capital Funds, and our separately managed Assets Under Management The following table reflects the changes in our Public Markets assets accounts primarily consisted of corporate debt, including leveraged under management from December 31, 2008 to December 31, 2009: loans and high yield bonds, with both asset classes experiencing material price appreciation in the fiscal year ended December 31, 2009. ($ in thousands) In addition to the unrealized appreciation on the portfolios noted December 31, 2008 AUM $ 13,167,000 above, we raised $1.4 billion in new capital for our separately managed Exclusion of KPE (a) (62,600) accounts. Offsetting the increases to our FPAUM were redemptions of New Capital Raised 1,416,300 $0.6 billion from our Strategic Capital Funds. For additional discussion of our investment funds, structured finance vehicles, and separately Distributions (2,000,000) managed accounts, please see “Business” in our Annual Report on Investor Redemptions (634,700) Form 10-K. Change in Value 1,475,300 December 31, 2009 AUM $ 13,361,300 Uncalled Commitments As of December 31, 2009, our Public Markets segment had $816.3 million (a) The AUM reported prior to the Transactions reflected the NAV of KPE and its of remaining uncalled capital commitments that could be called for commitments to our funds. Subsequent to the Transactions, the NAV of KPE and its commitments to our funds are excluded from our calculation of assets under investments in new transactions. management, because those items are now owned by us and no longer managed on behalf of a third party investor.

AUM in our Public Markets segment was $13.4 billion at December 31, 2009, an increase of $0.2 billion, or 1.5%, compared to $13.2 billion at December 31, 2008. The increase was driven by $1.5 billion of net unrealized gains resulting from improvement in the overall credit markets. Our portfolios for KFN (including its majority owned subsidiaries), the Strategic Capital Funds, and our separately managed accounts primarily consisted of corporate debt, including leveraged loans and high yield bonds, with both asset classes experiencing material price appreciation in the fiscal year ended December 31, 2009. In addition to the unrealized appreciation on the portfolios noted above, we raised $1.4 billion in new capital for our separately managed accounts. Offsetting these increases was the restructuring and distribution of one of our structured finance vehicles, which decreased our AUM by $2.0 billion. 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. Further offsetting the increases to our AUM were redemptions of $0.6 billion from our Strategic Capital Funds.

KKR 2010 ANNUAL REPORT 53 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, 2010, 2009 and 2008. 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. As a result, we have reclassified the results of our capital markets business since inception into this segment.

($ in thousands) Year Ended December 31, 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 105,266 34,129 18,211 Total Fee Credits — — Net Transaction and Monitoring Fees 105,266 34,129 18,211 Total Fees 105,266 34,129 18,211 Expenses Employee Compensation and Benefits 16,863 9,455 7,094 Occupancy and Related Charges 945 783 727 Other Operating Expenses 8,376 5,238 5,093 Total Expenses 26,184 15,476 12,914 Fee Related Earnings 79,082 18,653 5,297 Investment Income (Loss) Gross Carried interest — — — Less: Allocation to KKR carry pool — — — Net carried interest — — — Other investment income (loss) 1,219,053 349,679 (4,129) Total Investment Income (loss) 1,219,053 349,679 (4,129) Income (Loss) before Income (Loss) Attributable to Noncontrolling Interests 1,298,135 368,332 1,168 Income (Loss) Attributable to Noncontrolling Interests 3,033 581 (37) Economic Net Income $1,295,102 $ 367,751 $ 1,205

Year ended December 31, 2010 compared to year ended Fee Related Earnings December 31, 2009 Due primarily to the increase in fees described above, fee related Fees earnings in our Capital Markets and Principal Activities segment were Fees in our Capital Markets and Principal Activities segment were $79.1 million for the year ended December 31, 2010, an increase of $105.3 million for the year ended December 31, 2010, an increase of $60.4 million, as compared to fee related earnings of $18.7 million $71.2 million, from $34.1 million for the year ended December 31, 2009. during the year ended December 31, 2009. We completed 45 capital markets transactions in 2010, as compared to Investment Income (Loss) 11 transactions in 2009. While each of the capital markets transactions The following table presents the components of other investment that we undertake in this segment is separately negotiated, our fee rates income (loss) for the years ended December 31, 2010 and 2009. are generally higher with respect to underwriting the offerings of equity securities than with respect to the issuance of debt securities, ($ in thousands) Year Ended December 31, 2010 2009 and the amount of fees that we collect for like transactions generally Net Realized Gains (Losses) $ 26,241 $ 24,516 correlates with overall transaction sizes. Our capital markets business Net Unrealized Gains (Losses) 966,869 333,578 is dependent on the overall capital markets environment, which is influenced by equity prices, credit spreads and volatility. Dividend Income 226,616 598 Interest Income 25,746 5,104 Expenses Interest Expense (26,419) (14,117) Expenses were $26.2 million for the year ended December 31, 2010, an Other Investment Income (Loss) $1,219,053 $349,679 increase of $10.7 million, or 69.2%, from the year ended December 31, 2009. The increase was primarily due to a $7.4 million increase in employee compensation and benefits expense relating primarily to The first nine months of 2009 did not include the results of the net increased headcount in connection with the expansion of our business assets acquired from KPE since the Transactions were completed on as well as to an increase in incentive compensation resulting from the October 1, 2009. Accordingly, the 2009 amounts reflect investment improved overall financial performance of our capital markets business. income for the fourth quarter of 2009 and the remainder of 2009 activity primarily relates to interest expense at our capital markets business.

54 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

In 2010, the net unrealized gains were comprised of $821.8 million of net Investment Income (Loss) unrealized gains from private equity investments, the most significant The following table presents the components of other investment of which were Dollar General Corporation (NYSE: DG) and NXP income (loss) for the years ended December 31, 2009 and 2008. Semiconductors NV (NASDAQ: NXPI), which went public in the third quarter of 2010, as well as $145.1 million of net unrealized gains from ($ in thousands) Year Ended December 31, 2009 2008 non‑private equity investments (total net unrealized gains included Net Realized Gains (Losses) $ 24,516 $ (21) reversals of previously recorded unrealized losses of $216.7 million Net Unrealized Gains (Losses) 333,578 — related to the sale of investments during the year). Net realized gains Dividend Income 598 — were comprised of $150.3 million of realized gains from the sale of Interest Income 5,104 489 certain private equity investments, the most significant of which was Interest Expense (14,117) (4,597) the partial sale of Dollar General Corporation, and $124.1 million of realized losses from the sale of non‑private equity investments, which Other Investment Income (Loss) $349,679 $ (4,129) related primarily to the write‑off of our investment in Aero Technical Support & Services S.a.r.l. (industrial sector). Dividend income of The first nine months of 2009 did not include the results of the net $226.6 million in 2010 primarily consisted of dividends earned from assets acquired from KPE since the Transactions were completed on HCA Inc. (healthcare sector). October 1, 2009. Accordingly, the 2009 amounts reflect investment income for the fourth quarter of 2009 and the remainder of 2009 In 2009, net unrealized gains were comprised of $293.8 million of net activity primarily relates to interest expense at our capital markets unrealized gains from private equity investments, the most significant of business. The 2008 amounts primarily reflect interest expense from which were Dollar General Corporation (NYSE: DG), which went public our capital markets business. in the fourth quarter of 2009, NXP Semiconductors N.V. and HCA Inc., as well as $39.8 million of net unrealized gains from non-private equity In 2009, net unrealized gains were comprised of $293.8 million of net investments. unrealized gains from private equity investments, the most significant of which were Dollar General Corporation (NYSE: DG), which went Economic Net Income (Loss) public in the fourth quarter of 2009, NXP Semiconductors N.V. and Economic net income in our Capital Markets and Principal Activities HCA Inc. (healthcare sector), as well as $39.8 million of net unrealized segment was $1.3 billion for the year ended December 31, 2010, an gains from non‑private equity investments. increase of $927.4 million, as compared to economic net income of $367.8 million for the year ended December 31, 2009. The increase in Economic Net Income (Loss) investment income described above was the main contributor to the Economic net income in our Capital Markets and Principal Activities growth in economic net income. segment was $367.8 million for the year ended December 31, 2009 as compared to $1.2 million for the year ended December 31, 2008. Year ended December 31, 2009 compared to year ended The increase in investment income as described above was the main December 31, 2008 contributor to the increase in economic net income. Fees Fees in our Capital Markets and Principal Activities segment were $34.1 million for the year ended December 31, 2009, an increase of $15.9 million, or 87.4%, from the year ended December 31, 2008. The increase was due to an increase in the number of capital markets transactions during the period. We completed 11 capital markets transactions in 2009, as compared to 9 transactions in 2008. These transactions generated $34.1 million of underwriting, syndication and other capital markets services fees in 2009, compared to $18.2 million in 2008. While each of the capital markets transactions that we undertake in this segment is separately negotiated, our fee rates are generally higher with respect to underwriting the offerings of equity securities than with respect to the issuance of debt securities, and the amount of fees that we collect for like transactions generally correlates with overall transaction sizes.

Expenses Expenses were $15.5 million for the year ended December 31, 2009, an increase of $2.6 million, or 19.8%, from the year ended December 31, 2008. 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, to a lesser extent, an increase in headcount.

Fee Related Earnings Due primarily to the increases in fees as mentioned above, fee related earnings in our Capital Markets and Principal Activities segment were $18.7 million for the year ended December 31, 2009, an increase of $13.4 million, as compared to fee related earnings of $5.3 during the year ended December 31, 2008.

KKR 2010 ANNUAL REPORT 55 MANAGEMENT’S DISCUSSION AND ANALYSIS

Segment Partners’ Capital The following table presents our segment statement of financial condition as of December 31, 2010:

Capital Markets Private Public and Principal Total Markets Markets Activities Reportable Segment Segment Segment Segments Cash and cash equivalents $ 229,729 $ 10,007 $ 516,544 $ 756,280 Investments — — 4,831,798 4,831,798 Unrealized carry 523,002 3,001 — 526,003 Other assets 194,424 53,222 39,730 287,376 Total assets $ 947,155 $66,230 $5,388,072 $ 6,401,457 Debt obligations $ — $ — $ 500,000 $ 500,000 Other liabilities 104,248 10,193 45,837 160,278 Total liabilities 104,248 10,193 545,837 660,278 Noncontrolling interests (1,750) 766 16,537 15,553 Partners’ capital $ 844,657 $ 55,271 $4,825,698 $ 5,725,626

Total Reportable Segments Partners’ Capital $ 5,725,626 Plus: Equity impact of Management Holdings Corp. and other (52,745) Less: Noncontrolling Interests held by KKR Holdings L.P. 4,346,388 Total KKR & Co. L.P. Partners’ Capital $ 1,326,493

LIQUIDITY Revolving Credit Agreements We have managed our historical liquidity and capital requirements by As of December 31, 2010, no borrowings were outstanding on any of focusing on our cash flows before the consolidation of our funds and the revolving credit agreements described below. We may, however, the effect of normal changes in short term assets and liabilities, which utilize these facilities prospectively in the normal course of our we anticipate will be settled for cash within one year. Our primary operations. cash flow activities on an unconsolidated basis involve: (i) generating • On February 26, 2008, Kohlberg Kravis Roberts & Co. L.P. entered cash flow from operations; (ii) generating income from investment into a credit agreement with a major financial institution (the activities; (iii) funding capital commitments that we have made to our “Corporate Credit Agreement”). The Corporate Credit Agreement funds; (iv) funding our growth initiatives; (v) distributing cash flow to provided for revolving borrowings of up to $1.0 billion, with a our owners; and (vi) borrowings, interest payments and repayments $50.0 million sublimit for swing-line notes and a $25.0 million under credit agreements, the Senior Notes and other borrowing sublimit for letters of credit. The facility had a term of five years that arrangements. As of December 31, 2010, we had an available cash expired on February 26, 2013. During 2010, amounts outstanding balance of approximately $0.8 billion. under the Corporate Credit Agreement ranged from zero to $98.0 million. On March 1, 2011, the terms of the Corporate Credit Sources of Cash Agreement were amended, which reduced availability for borrowings Our principal sources of cash consist of cash and cash equivalents under the facility from $1.0 billion to $700 million and extended the consists of amounts received from: (i) our operating activities, maturity, so that the facility now expires on March 1, 2016. In addition, including the fees earned from our funds, managed accounts, portfolio the KKR Group Partnerships became co‑borrowers of the facility, companies, capital markets transactions and other investment products; and KKR & Co. L.P. and the Issuer (as defined below) of the Senior (ii) realizations on carried interest from our investment funds; Notes became guarantors of the Corporate Credit Agreement, (iii) realizations from principal investments; and (iv) borrowings under together with certain general partners of our private equity funds. our credit facilities and other borrowing arrangements described below. • On February 27, 2008, KKR Capital Markets entered into a revolving In addition, a significant amount of cash and cash equivalents was credit agreement with a major financial institution (the “KCM Credit contributed to the KKR Group Partnerships as part of the Transactions. Agreement”). The KCM Credit Agreement, as amended, provides Carried interest is distributed to the general partner of a vehicle with for revolving borrowings of up to $500 million with a $500 million a clawback or net loss sharing provision only after all of the following sublimit for letters of credit. The KCM Credit Agreement has a are met: (i) a realization event has occurred (e.g., sale of a portfolio maturity date of February 27, 2013. In March 2009, the KCM Credit company, dividend, etc.); (ii) the vehicle has achieved positive overall Agreement was amended to reduce the amounts available on investment returns since its inception; and (iii) all of the cost has been revolving borrowings from $700 million to $500 million. As a result returned to investors with respect to investments with a fair value of this amendment, the counterparty returned approximately below remaining cost. $1.6 million in financing costs. Borrowings under this facility may We have access to funding under various credit facilities and other only be used for our capital markets business. During 2010, there borrowing arrangements that we have entered into with major financial were no amounts outstanding under the KCM Credit Agreement. institutions or which we receive from the capital markets. The following • In June 2007, the KPE Investment Partnership entered into a five- is a summary of the principal terms of these facilities and other year revolving credit agreement with a syndicate of lenders (the borrowing arrangements: “Principal Credit Agreement”). The Principal Credit Agreement provides for up to $925.0 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. The borrowing base is subject to certain investment concentration limitations and the value of the investments

56 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

constituting the borrowing base is subject to certain advance rates Uncalled based on type of investment. In September 2009, a wholly owned ($ in thousands) Commitments subsidiary of KKR assumed $65.0 million of commitments on the Private Markets Principal Credit Agreement from one of the counterparties to the 2006 Fund $ 362,684 agreement, which has effectively reduced KKR’s availability under the European Fund III 300,540 Principal Credit Agreement on a consolidated basis to $860.0 million. Asian Fund 117,396 During 2010, amounts outstanding under the Principal Credit Infrastructure Fund 50,000 Agreement ranged from zero to $810.0 million. E2 Investors (Annex Fund) 30,833 Senior Notes China Growth Fund 8,506 • On September 29, 2010, KKR Group Finance Co. LLC (the “Issuer”), Natural Resources I 5,413 a subsidiary of KKR Management Holdings Corp. and an indirect Other Private Markets Commitments 1,264 subsidiary of KKR & Co. L.P., issued $500 million aggregate principal Total Private Markets Commitments 876,636 amount of 6.375% Senior Notes (the “Senior Notes”), which were issued at a price of 99.584%. The Senior Notes are unsecured Public Markets and unsubordinated obligations of the Issuer and will mature on Mezzanine Fund 34,100 September 29, 2020, unless earlier redeemed or repurchased. Capital Solutions Vehicles 13,000 The Senior Notes are fully and unconditionally guaranteed, jointly Total Public Markets Commitments 47,100 and severally, by KKR & Co. L.P. and the KKR Group Partnerships. Total Uncalled Commitments $ 923,736 The guarantees are unsecured and unsubordinated obligations of the guarantors. The Senior Notes bear interest at a rate of 6.375% Historically, we have funded commitments with cash from operations per annum, accruing from September 29, 2010. that otherwise would be distributed to our principals. We expect to fund From time to time, we may borrow amounts to satisfy general short- future commitments with available cash, proceeds from realizations term needs of our business by opening short-term lines of credit with of principal assets and other sources of liquidity available to us. established financial institutions. These amounts are generally repaid We and our intermediate holding company, a taxable corporation for within 30 days, at which time such short-term lines of credit would U.S. federal, state and local income tax purposes, may be required to close. There were no such borrowings as of December 31, 2010. acquire KKR Group Partnership Units from time to time pursuant to our exchange agreement with KKR Holdings. KKR Management Holdings L.P. Liquidity Needs made an election under Section 754 of the Internal Revenue Code that We expect that our primary liquidity needs will consist of cash required will remain in effect for each taxable year in which an exchange of to: (i) continue to grow our business, including funding our capital KKR Group Partnership Units for common units occurs, which may commitments made to existing and future funds and any net capital result in an increase in our intermediate holding company’s share of requirements of our capital markets companies; (ii) service debt the tax basis of the assets of the KKR Group Partnerships at the time obligations, as well as any contingent liabilities that may give rise to of an exchange of KKR Group Partnership Units. Certain of these future cash payments; (iii) fund cash operating expenses; (iv) pay exchanges are expected to result in an increase in our intermediate amounts that may become due under our tax receivable agreement holding company’s share of the tax basis of the tangible and intangible with KKR Holdings; and (v) make cash distributions in accordance with assets of the KKR Group Partnerships, primarily attributable to a portion our distribution policy. We may also require cash to fund contingent of the goodwill inherent in our business that would not otherwise have obligations including those under clawback and net-loss sharing been available. This increase in tax basis may increase depreciation arrangements. See “— Liquidity — Contractual Obligations, Commitments and amortization deductions for tax purposes and therefore reduce and Contingencies on an Unconsolidated Basis.” We believe that the the amount of income tax our intermediate holding company would sources of liquidity described above will be sufficient to fund our otherwise be required to pay in the future. This increase in tax basis working capital requirements for the next 12 months. may also decrease gain (or increase loss) on future dispositions The agreements governing our active investment funds generally of certain capital assets to the extent tax basis is allocated to those require the general partners of the funds to make minimum capital capital assets. commitments to the funds, which usually range from 2% to 4% of a We have entered into a tax receivable agreement with KKR Holdings fund’s total capital commitments at final closing. In addition, as a result requiring our intermediate holding company to pay to KKR Holdings of the Transactions, we are responsible for the uncalled commitments or transferees of its KKR Group Partnership Units 85% of the amount once attributable to KPE’s investment partnership as a partner in our of cash savings, if any, in U.S. federal, state and local income tax private equity funds. The following table presents our uncalled that the intermediate holding company actually realizes as a result of commitments to our active investment funds as of December 31, 2010: this increase in tax basis, 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. 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. This payment obligation is an obligation of our intermediate holding company and not of either KKR Group Partnership. As such, 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. As the payments reflect actual tax savings received by KKR entities, 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. No cash payments were made in 2010 under the tax receivable agreement.

KKR 2010 ANNUAL REPORT 57 MANAGEMENT’S DISCUSSION AND ANALYSIS

We expect our intermediate holding company to benefit from the certain tax liabilities, as calculated by KKR. When KKR & Co. L.P. remaining 15% of cash savings, if any, in income tax that it realizes. receives distributions from the KKR Group Partnerships, KKR Holdings In the event that other of our current or future subsidiaries become receives its pro rata share of such distributions from the KKR Group taxable as corporations and acquire KKR Group Partnership Units in Partnerships. For the purposes of KKR’s distribution policy, our the future, or if we become taxable as a corporation for U.S. federal distributions are expected to consist of an amount consisting of (i) FRE, income tax purposes, we expect that each will become subject to a (ii) carry distributions received from KKR’s investment funds which tax receivable agreement with substantially similar terms. have not been allocated as part of our carry pool, and (iii) certain tax We intend to make quarterly cash distributions in amounts that in the distributions, if any. This amount is expected to be reduced by aggregate are expected to constitute substantially all of the cash (i) corporate and applicable local taxes if any, (ii) noncontrolling interests, earnings of our investment management business each year in and (iii) amounts determined by KKR to be necessary or appropriate excess of amounts determined by KKR to be necessary or appropriate for the conduct of our business and other matters as discussed above. to provide for the conduct of our business, to make appropriate The declaration and payment of any distributions are subject to the investments in our business and our investment funds and to comply discretion of the board of directors of the general partner of KKR & Co. L.P. with applicable law and any of our debt instruments or other agreements. and the terms of its limited partnership agreement. There can be no KKR does not intend to distribute gains on principal investments, assurance that distributions will be made as intended or at all or that other than certain additional distributions that KKR may determine to such distributions will be sufficient to pay any particular KKR & Co. L.P. make. These additional distributions, if any, are intended to cover unitholder’s actual U.S. or non-U.S. tax liability.

Contractual Obligations, Commitments and Contingencies on an Unconsolidated Basis In the ordinary course of business, we enter into contractual arrangements that may require future cash payments. The following table sets forth information relating to anticipated future cash payments as of December 31, 2010 on an unconsolidated basis.

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) $ 923.7 $ — $ — $ — $ 923.7 Debt payment obligations (2) — — — 500.0 500.0 Interest obligations on debt (3) 40.3 66.6 66.6 151.4 324.9 Lease obligations 30.9 50.3 45.6 96.2 223.0 Total $ 994.9 $ 116.9 $ 112.2 $ 747.6 $ 1,971.6

(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. Because capital contributions are due on demand, the above commitments have been presented as falling due within one year. However, given the size of such commitments and the rates at which our investment funds make investments, we expect that the capital commitments presented above will be called over a period of several years. See “—Liquidity — Liquidity Needs.” (2) Represents Senior Notes which are presented gross of unamortized discount. (3) These interest obligations on debt represent estimated interest to be paid over the maturity of the related debt obligation, which has been calculated assuming no prepayments are made and the related debt is held until its final maturity date. Future interest rates have been calculated using rates in effect as of December 31, 2010, including both variable and fixed rates provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness.

In the normal course of business, we also enter into contractual The instruments governing certain of our private equity funds may arrangements that contain a variety of representations and warranties also include a “net loss sharing provision,” that, if triggered, may give and that include general indemnification obligations. Our maximum rise to a contingent obligation that may require the general partners exposure under such arrangements is unknown due to the fact that the to contribute capital to the fund, to fund 20% of the net losses on exposure would relate to claims that may be made against us in the investments attributed to the limited partners of such fund. In connection future. Accordingly, no amounts have been included in our consolidated with the “net loss sharing provisions,” certain of our private equity and combined financial statements as of December 31, 2010 relating vehicles allocate a greater share of their investment losses to us to indemnification obligations. relative to the amounts contributed by us to those vehicles. In these The partnership documents governing our private equity funds vehicles, such losses would be required to be paid by us to the limited generally include a “clawback” provision that, if triggered, may give partners in those vehicles in the event of a liquidation of the fund rise to a contingent obligation that may require the general partner to regardless of whether any carried interest had been previously return amounts to the fund for distribution to investors at the end of distributed. Based on the fair market values as of December 31, 2010, the life of the fund. The terms of the Transactions require that our there would have been no net loss sharing obligation. If the vehicles principals remain responsible for any clawback obligation relating to were liquidated at zero value, the net loss sharing obligation would carry distributions received prior to the Transactions up to a maximum have been approximately $1,094.0 million as of December 31, 2010. of $223.6 million. Carry distributions arising subsequent to the Unlike the “clawback” provisions, the KKR Group Partnerships will be Transactions may give rise to clawback obligations that will be allocated responsible for amounts due under net loss sharing arrangements and generally to carry pool participants and the KKR Group Partnerships in will indemnify our principals for personal guarantees that they have accordance with the terms of the instruments governing the KKR Group provided with respect to such amounts. Partnerships. As of December 31, 2010, assuming that all applicable private equity funds were liquidated at no value, the amount of carried interest distributed that would be subject to this clawback provision would be $697.0 million, of which $473.4 million would be borne by KKR and $223.6 million would be borne by our principals. Had the investments in such funds been liquidated at their December 31, 2010 fair values, the clawback obligation would have been $61.5 million, of which $55.9 million is recorded in due from affiliates and $5.6 million is due from noncontrolling interest holders.

58 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS

Contractual Obligations, Commitments and Contingencies on a Consolidated Basis In the ordinary course of business, we and our consolidated funds enter into contractual arrangements that may require future cash payments. The following table sets forth information relating to anticipated future cash payments as of December 31, 2010. 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.

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) $14,074.7 $ — $ — $ — $14,074.7 Debt payment obligations (2) 171.4 — 817.6 500.0 1,489.0 Interest obligations on debt (3) 55.1 102.2 192.2 151.4 500.9 Lease obligations 30.9 50.3 45.6 96.2 223.0 Total $ 14,332.1 $ 152.5 $ 1,055.4 $ 747.6 $16,287.6

(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. Because capital contributions are due on demand, the above commitments have been presented as falling due within one year. However, given the size of such commitments and the rates at which our investment funds make investments, we expect that the capital commitments presented above will be called over a period of several years. See “—Liquidity — Liquidity Needs.” (2) Certain of our consolidated fund investment vehicles have entered into financing arrangements in connection with specific investments with the objective of enhancing returns. Such financing arrangements include $796.4 million of financing provided through total return swaps and $192.6 million of financing provided through a term loan and revolving credit facilities. 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. The amount for Senior Notes offering is presented gross of unamortized discount. (3) These interest obligations on debt represent estimated interest to be paid over the maturity of the related debt obligation, which has been calculated assuming no prepayments are made and the related debt is held until its final maturity date. Future interest rates have been calculated using rates in effect as of December 31, 2010, including both variable and fixed rates provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness.

Off Balance Sheet Arrangements Net Cash Provided by (Used in) Financing Activities Other than contractual commitments and other legal contingencies Our net cash provided by (used in) financing activities was $(0.5) billion, incurred in the normal course of our business, we do not have any $0.7 billion and $2.4 billion during the years ended December 31, off-balance sheet financings or liabilities. 2010, 2009 and 2008, respectively. Our financing activities primarily included: (i) contributions net of distributions, made to noncontrolling Consolidated Statement of Cash Flows interests, of $0.1 billion, $0.8 billion and $2.8 billion during the years The accompanying consolidated and combined statements of cash flows ended December 31, 2010, 2009 and 2008, respectively; (ii) repayment include the cash flows of our consolidated funds despite the fact that of debt obligations net of proceeds received of $0.6 billion, $0.3 billion we have only a minority economic interest in those funds. The assets and $0.2 billion during the years ended December 31, 2010, 2009 and of consolidated funds, on a gross basis, are substantially larger than 2008, respectively; and (iii) distributions net of contributions to our the assets of our business and, accordingly, have a substantial effect equity holders of $0.1 billion, $0.2 billion and $0.1 billion during the years on the cash flows reflected in our combined statements of cash flows. ended December 31, 2010, 2009 and 2008, respectively. The primary cash flow activities of our consolidated funds involve: (i) raising capital from fund investors; (ii) using the capital of fund investors to make investments; (iii) financing certain investments CRITICAL ACCOUNTING POLICIES with indebtedness; (iv) generating cash flows through the realization The preparation of our consolidated and combined financial statements of investments; and (v) distributing cash flows from the realization of in accordance with GAAP requires our management to make estimates investments to fund investors. Because our consolidated funds are and judgments that affect the reported amounts of assets and liabilities, treated as investment companies for accounting purposes, these cash disclosure of contingent assets and liabilities, and reported amounts flow amounts are included in our cash flows from operations. of fees, expenses and investment income. Our management bases Net Cash Provided by (Used in) Operating Activities these estimates and judgments on available information, historical Our net cash provided by (used in) operating activities was $0.7 billion, experience and other assumptions that we believe are reasonable $(0.3) billion and $(2.4) billion during the years December 31, 2010, under the circumstances. However, these estimates, judgments and 2009 and 2008, respectively. These amounts primarily included: assumptions are often subjective and may be impacted negatively (i) proceeds from sales of investments net of purchases of investments based on changing circumstances or changes in our analyses. If actual by our funds of $0.3 billion, $(1.2) billion, and $(1.9) billion during the amounts are ultimately different from those estimated, judged or years ended December 31, 2010, 2009 an 2008, respectively; (ii) net assumed, revisions are included in the consolidated and combined realized gains (losses) on investments of $2.4 billion, $(0.3) billion and financial statements in the period in which the actual amounts become $0.3 billion during the years ended December 31, 2010, 2009 and 2008, known. We believe the following critical accounting policies could respectively; and (iii) change in unrealized gains on investments of potentially produce materially different results if we were to change $5.3 billion, $7.8 billion and $(13.2) billion during the years ended underlying estimates, judgments or assumptions. Please see the December 31, 2010, 2009 and 2008, respectively. These amounts are notes to the consolidated and combined financial statements included reflected as operating activities in accordance with investment company elsewhere in this report for further detail regarding our critical accounting. accounting policies. Net Cash Provided by (Used in) Investing Activities Principles of Consolidation Our net cash provided by (used in) investing activities was $(1.3) million, Our policy is to consolidate (i) those entities in which we hold a $(43.0) million and $(61.7) million during the years ended December 31, majority voting interest or have majority ownership and control over 2010, 2009 and 2008, respectively. Our investing activities included significant operating, financial and investing decisions of the entity the purchases of furniture, equipment and leasehold improvements of including those KKR funds in which the general partner is presumed to $13.1 million, $21.1 million and $13.1 million, as well as a (decrease) have control or (ii) entities determined to be variable interest entities increase in restricted cash and cash equivalents that primarily funds (“VIEs”) for which we are considered the primary beneficiary. collateral requirements of $(11.8) million, $21.9 million and $4.5 million during the years ended December 31, 2010, 2009 and 2008, respectively.

KKR 2010 ANNUAL REPORT 59 MANAGEMENT’S DISCUSSION AND ANALYSIS

The majority of the entities consolidated by us are comprised of: Level II — Pricing inputs are other than quoted prices in active markets, (i) those entities in which we have majority ownership and have which are either directly or indirectly observable as of the reporting control over significant operating, financial and investing decisions date, and fair value is determined through the use of models or other and (ii) the consolidated KKR funds, which are those entities in which valuation methodologies. In certain cases, debt and equity securities we hold substantive, controlling general partner or managing member are valued on the basis of prices from an orderly transaction between interests. With respect to the consolidated KKR funds, we generally market participants provided by reputable dealers or pricing services. have operational discretion and control, and limited partners have no In determining the value of a particular investment, pricing services substantive rights to impact ongoing governance and operating may use certain information with respect to transactions in such activities of the fund. investments, quotations from dealers, pricing matrices, market The consolidated KKR funds do not consolidate their majority owned transactions in comparable investments and various relationships and controlled investments in portfolio companies. Rather, those between investments. Investments which are generally included in this investments are accounted for as investments and carried at fair value category include corporate bonds and loans, convertible debt indexed as described below. to publicly listed securities and certain over-the-counter derivatives. We classified 8.5% of total investments measured and reported at fair The KKR funds are consolidated notwithstanding the fact that we have value as Level II at December 31, 2010. only a minority economic interest in those funds. The consolidated and combined financial statements reflect the assets, liabilities, revenues, Level III — Pricing inputs are unobservable for the investment and include expenses, investment income and cash flows of the consolidated KKR situations where there is little, if any, market activity for the investment. funds on a gross basis, and the majority of the economic interests in The inputs into the determination of fair value require significant those funds, which are held by third party investors, are attributed to management judgment or estimation. Investments that are included in noncontrolling interests in the accompanying consolidated and combined this category generally include private portfolio companies held through financial statements. Substantially all of the management fees and our private equity funds. We classified 65.5% of total investments certain other amounts earned by us from those funds are eliminated in measured and reported at fair value as Level III at December 31, 2010. consolidation. However, because the eliminated amounts are earned The valuation of our Level III investments at December 31, 2010 from, and funded by, noncontrolling interests, our attributable share of represents management’s best estimate of the amounts that we would the net income from those funds is increased by the amounts eliminated. anticipate realizing on the sale of these investments at such date. Accordingly, the elimination in consolidation of such amounts has no In certain cases, the inputs used to measure fair value may fall into effect on net income (loss) attributable to KKR or KKR’s partners’ capital. different levels of the fair value hierarchy. In such cases, an investment’s Noncontrolling interests represent the ownership interests held by level within the fair value hierarchy is based on the lowest level of input entities or persons other than KKR. that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in Fair Value of Investments its entirety requires judgment, and we consider factors specific to the Our consolidated funds are treated as investment companies under investment. investment company accounting guidance for the purposes of GAAP When determining fair values of investments, we use the last reported and, as a result, reflect their investments on the consolidated and market price as of the statement of financial condition date for combined statement of financial condition at fair value, with unrealized investments that have readily observable market prices. If no sales gains or losses resulting from changes in fair value reflected as a occurred on such day, we use the “bid” price at the close of business on component of investment income in the consolidated and combined that date and, if sold short, the “asked” price at the close of business statements of operations. We have retained the specialized accounting on that date day. Forward contracts are valued based on market rates of the consolidated funds. or prices obtained from recognized financial data service providers. We measure and report our investments in accordance with fair value The majority of our private equity investments are valued utilizing accounting guidance, which establishes a hierarchical disclosure frame­ unobservable pricing inputs. Management’s determination of fair value work that prioritizes and ranks the level of market price observability is based upon the best information available for a given circumstance used in measuring investments at fair value. Market price observability and may incorporate assumptions that are management’s best estimates is affected by a number of factors, including the type of investment after consideration of a variety of internal and external factors. We and the characteristics specific to the investment. Investments with generally employ two valuation methodologies when determining the readily available actively quoted prices or for which fair value can be fair value of a private equity investment. The first methodology is measured from actively quoted prices generally will have a higher typically a market multiples approach that considers a specified financial degree of market price observability and a lesser degree of judgment measure (such as EBITDA) and recent public market and private used in measuring fair value. transactions and other available measures for valuing comparable Investments measured and reported at fair value are classified and companies. Other factors such as the applicability of a control premium disclosed in one of the following categories: or illiquidity discount, the presence of significant unconsolidated assets and liabilities and any favorable or unfavorable tax attributes Level I — Quoted prices are available in active markets for identical are also considered in arriving at a market multiples valuation. The investments as of the reporting date. The type of investments included second methodology utilized is typically a discounted cash flow in Level I include publicly listed equities and publicly listed derivatives. approach. In this approach, we incorporate significant assumptions and In addition, securities sold, but not yet purchased and call options judgments in determining the most likely buyer, or market participant are included in Level I. We do not adjust the quoted price for these for a hypothetical sale, which might include an initial public offering, investments, even in situations where we hold a large position and a private equity investor, strategic buyer or a transaction consummated sale could reasonably affect the quoted price. We classified 26.0% of through a combination of any of the above. Estimates of assumed total investments measured and reported at fair value as Level I at growth rates, terminal values, discount rates, capital structure and December 31, 2010. other factors are employed in this approach. The ultimate fair value recorded for a particular investment will generally be within the range suggested by the two methodologies, adjusted for issues related to achieving liquidity including size, registration process, corporate governance structure, timing, an initial public offering discount and

60 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS other factors, if applicable. As discussed above, we utilize several Revenue Recognition unobservable pricing inputs and assumptions in determining the fair Fees consist primarily of (i) monitoring and transaction fees that we value of our private equity investments. These unobservable pricing receive from our portfolio companies and capital markets activities inputs and assumptions may differ by investment and in the application and (ii) management and incentive fees that we receive directly from of our valuation methodologies. Our reported fair value estimates our unconsolidated funds. These fees are based upon the contractual could vary materially if we had chosen to incorporate different terms of the management and other agreements that we enter into with unobservable pricing inputs and other assumptions. the applicable funds, portfolio companies and third parties. We recognize Approximately 26.0%, or $9.5 billion, and 22.6%, or $6.6 billion, of the fees in the period during which the related services are performed and value of our investments were valued using quoted market prices, which the amounts have been contractually earned in accordance with the have not been adjusted, as of December 31, 2010 and December 31, relevant management or other agreements. Incentive fees are accrued 2009, respectively. either annually or quarterly after all contingencies have been removed. Approximately 74.0%, or $27.0 billion, and 77.4%, or $22.4 billion, of KKR’s private equity funds require the management company to refund the value of our investments were valued in the absence of readily up to 20% of any cash management fees earned from limited partners observable market prices as of December 31, 2010 and December 31, in the event that the funds recognize a carried interest. At such time as 2009, respectively. The majority of these investments were valued the fund recognizes a carried interest in an amount sufficient to cover using internal models with significant unobservable market parameters 20% of the management fees earned or a portion thereof, a liability to and our determinations of the fair values of these investments may the fund’s limited partners is recorded and revenue is reduced for the differ materially from the values that would have resulted if readily amount of the carried interest recognized, not to exceed 20% of the observable market prices had existed. Additional external factors may management fees earned. As of December 31, 2010, the amount subject cause those values, and the values of investments for which readily to refund for which no liability has been recorded approximates observable market prices exist, to increase or decrease over time, $58.7 million as a result of certain funds not yet recognizing sufficient which may create volatility in our earnings and the amounts of assets carried interests. The refunds to the limited partners are paid, and the and partners’ capital that we report from time to time. liabilities relieved, at such time that the underlying investments are sold and the associated carried interests are realized. In the event that Our calculations of the fair values of private company investments a fund’s carried interest is not sufficient to cover all or a portion of the were reviewed by an independent valuation firm, who provided third amount that represents 20% of the earned management fees, these fees party valuation assistance to us, which consisted of certain limited would not be returned to the funds’ limited partners, in accordance procedures that we identified and requested it to perform. Upon with the respective fund agreements. completion of such limited procedures, they concluded that the fair value, as determined by us, of those investments subjected to their Recognition of Investment Income limited procedures was reasonable. The limited procedures did not Investment income consists primarily of the unrealized and realized involve an audit, review, compilation or any other form of examination gains (losses) on investments (including the impacts of foreign currency or attestation under generally accepted auditing standards. The general on non-dollar denominated investments), dividend and interest income partners of our funds are responsible for determining the fair value received from investments and interest expense incurred in connection of investments in good faith, and the limited procedures performed by with investment activities. Unrealized gains or losses result from an independent valuation firm are supplementary to the inquiries changes in the fair value of our funds’ investments during a period as and procedures that the general partner of each fund is required to well as the reversal of unrealized gains or losses in connection with undertake to determine the fair value of the investments. realization events. Upon disposition of an investment, previously Changes in the fair value of the investments of our consolidated private recognized unrealized gains or losses are reversed and a corresponding equity funds may impact the net gains (losses) from investment activities realized gain or loss is recognized in the current period. While this of our private equity funds as described under “— Key Financial reversal generally does not significantly impact the net amounts of gains Measures — Investment Income (Loss) — Net Gains (Losses) from (losses) that we recognize from investment activities, it affects the Investment Activities.” Based on the investments of our private equity manner in which we classify our gains and losses for reporting purposes. funds as of December 31, 2010, we estimate that an immediate 10% Due to the consolidation of the majority of our funds, the share of our decrease in the fair value of the funds’ investments generally would funds’ investment income that is allocable to our carried interests and result in a 10% immediate change in net gains (losses) from the funds’ capital investments is not shown in the consolidated and combined investment activities (including carried interest when applicable), financial statements. Instead, the investment income that KKR retains regardless of whether the investment was valued using observable in its net income, after allocating amounts to noncontrolling interests, market prices or management estimates with significant unobservable represents the portion of its investment income that is allocable to pricing inputs. However, we estimate the impact that the consequential us. Because the substantial majority of our funds are consolidated decrease in investment income would have on net income attributable and because we hold only a minority economic interest in our funds’ to KKR would be significantly less than the amount described above, investments, our share of the investment income generated by our given that a majority of the change in fair value would be attributable funds’ investment activities is significantly less than the total amount to noncontrolling interests. of investment income presented in its consolidated and combined As of December 31, 2010, private equity investments which represented financial statements. greater than 5% of the net assets of consolidated private equity funds We recognize investment income with respect to our carried interests included: (i) Dollar General valued at $3.4 billion; (ii) Alliance Boots in investments of our private equity funds and co-investment vehicles, valued at $2.5 billion; and (iii) HCA Inc. valued at $2.4 billion. the capital invested by or on behalf of the general partners of our The majority of the value of the investments in our consolidated fixed private equity funds and the noncontrolling interests that third‑party income funds were valued using observable market parameters, which fund investors hold in our consolidated funds. may include quoted market prices, as of December 31, 2010 and December 31, 2009. Quoted market prices, when used, are not adjusted.

KKR 2010 ANNUAL REPORT 61 MANAGEMENT’S DISCUSSION AND ANALYSIS

Recognition of Carried Interests in Statement of Operations Recent Accounting Pronouncements Carried interests entitle the general partner of a fund to a greater On January 1, 2010, KKR adopted guidance issued by the Financial allocable share of the fund’s earnings from investments relative to the Accounting Standards Board (“FASB”) related to VIEs. The amendments capital contributed by the general partner and correspondingly reduce significantly affect the overall consolidation analysis, changing the noncontrolling interests’ attributable share of those earnings. Amounts approach taken by companies in identifying which entities are VIEs and earned pursuant to carried interests in the KKR funds are included as in determining which party is the primary beneficiary. The guidance investment income in Net Gains (Losses) from Investment Activities requires continuous assessment of the reporting entity’s involvement and are earned by the general partner of those funds to the extent that with such VIEs. The guidance provides a limited scope deferral for a cumulative investment returns are positive. If these investment returns reporting entity’s interest in an entity that meets all of the following decrease or turn negative in subsequent periods, recognized carried conditions: (a) the entity has all the attributes of an investment company interest will be reduced and reflected as investment losses. Carried as defined under AICPA Audit and Accounting Guide, Investment interest is recognized based on the contractual formula set forth in the Companies, or does not have all the attributes of an investment instruments governing the fund as if the fund was terminated at the company but is an entity for which it is acceptable based on industry reporting date with the then estimated fair values of the investments practice to apply measurement principles that are consistent with the realized. Due to the extended durations of our private equity funds, AICPA Audit and Accounting Guide, Investment Companies, (b) the management believes that this approach results in income recognition reporting entity does not have explicit or implicit obligations to fund that best reflects our periodic performance in the management of any losses of the entity that could potentially be significant to the those funds. entity, and (c) the entity is not a securitization entity, asset backed The instruments governing our private equity funds generally include financing entity or an entity that was formerly considered a qualifying a “clawback” or, in certain instances, a “net loss sharing” provision special purpose entity. The reporting entity is required to perform a that, if triggered, may give rise to a contingent obligation that may consolidation analysis for entities that qualify for the deferral in require the general partner to return or contribute amounts to the fund accordance with previously issued guidance on VIEs. Prior to the for distribution to investors at the end of the life of the fund. revision of the consolidation rules, KKR consolidated a substantial majority of its investment vehicles except for KKR Strategic Capital Clawback Provision Overseas Fund Ltd., KFN, KKR Index Fund Investments L.P., carry Under a “clawback” provision, upon the liquidation of a private equity co-investment vehicles and 8 North America Investor L.P. With respect fund, the general partner is required to return, on an after-tax basis, to the unconsolidated investment vehicles, these entities have qualified previously distributed carry to the extent that, due to the diminished for the deferral of the revised consolidation rules and the consolidation performance of later investments, the aggregate amount of carry analysis was based on the previous consolidation rules. In addition, in distributions received by the general partner during the term of the fund connection with the adoption of the new consolidation rules, KKR exceed the amount to which the general partner was ultimately entitled. considered whether it was appropriate to consolidate five structured finance vehicle subsidiaries of KFN. With respect to these entities, the Prior to the Transactions, certain KKR principals who received carried primary beneficiary was determined to be KFN, because KFN has interest distributions with respect to the private equity funds had the power to direct the activities that most significantly impact these personally guaranteed, on a several basis and subject to a cap, the entities’ economic performance and KFN has both the obligation to contingent obligations of the general partners of the private equity absorb losses of these entities and the right to receive benefits from funds to repay amounts to fund limited partners pursuant to the general these entities that could potentially be significant to these entities. See partners’ clawback obligations. The terms of the Transactions require Note 11, “Related Party Transactions” for financial information related that KKR principals remain responsible for clawback obligations to KFN. Accordingly, the revised consolidation rules have not resulted relating to carry distributions received prior to the Transactions up to in the consolidation or deconsolidation of any entities. As a result, KKR a maximum of $223.6 million. consolidates the same entities both before and after adopting these Carry distributions arising subsequent to the Transactions are allocated new rules. generally to carry pool participants and KKR in accordance with the The revised guidance also enhances the disclosure requirements for a terms of the instruments governing the KKR Group Partnerships. reporting entity’s involvement with VIEs, including presentation on the consolidated statements of financial condition of assets and liabilities Net Loss Sharing Provision of consolidated VIEs which meet the separate presentation criteria The instruments governing certain of our private equity funds may and disclosure of assets and liabilities recognized in the consolidated also include a “net loss sharing provision,” that, if triggered, may give statements of financial condition and the maximum exposure to loss rise to a contingent obligation that may require the general partners for those VIEs in which a reporting entity is determined to not be the to contribute capital to the fund, to fund 20% of the net losses on primary beneficiary but in which it has a variable interest. Disclosures investments. In connection with the “net loss sharing provisions,” relating to KKR’s involvement with VIEs are disclosed within this Note. certain of our private equity funds allocate a greater share of their investment losses to us relative to the amounts contributed by us to In January 2010, the FASB issued guidance on improving disclosures those vehicles. In these vehicles, such losses would be required to be about fair value measurements. The guidance requires additional paid by our to the limited partners in those vehicles in the event of a disclosure on transfers in and out of Levels I and II fair value liquidation of the fund regardless of whether any carried interest had measurements in the fair value hierarchy and the reasons for such previously been distributed. Unlike the “clawback” provisions, we will transfers. In addition, for fair value measurements using significant be responsible for amounts due under net loss sharing arrangements unobservable inputs (Level III), the reconciliation of beginning and ending and will indemnify our principals for personal guarantees that they balances shall be presented on a gross basis, with separate disclosure have provided with respect to such amounts. of gross purchases, sales, issuances and settlements and transfers in and transfers out of Level III. The new guidance also requires enhanced disclosures on the fair value hierarchy to disaggregate disclosures by each class of assets and liabilities. In addition, 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. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures

62 KKR 2010 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS about purchases, sales, issuances, and settlements in the roll forward Exchange Rate Risk of activity in Level III fair value measurements, which are effective Our private equity funds make investments from time to time in for fiscal years beginning after December 15, 2010. KKR adopted the currencies other than those in which their capital commitments are guidance, excluding the reconciliation of Level III activity. As the guidance denominated. Those investments expose us and our fund investors to is limited to enhanced disclosures, adoption did not have an impact the risk that the value of the investments will be affected by changes in on KKR’s financial statements. exchange rates between the currency in which the capital commitments are denominated and the currency in which the investments are made. Our policy is to minimize these risks by employing hedging techniques, QUALITATIVE AND QUANTITATIVE DISCLOSURES including using foreign currency options and foreign exchange contracts ABOUT MARKET RISK to reduce exposure to future changes in exchange rates when our Our exposure to market risks primarily relates to our role as general funds have invested a meaningful amount of capital in currencies partner or manager of our funds and sensitivities to movements in the other than the currencies in which their capital commitments are fair value of their investments, including the effect that those movements denominated. have on the management fees and carried interests that we receive. Because most of the capital commitments to our funds are We have an increased exposure to market risks as a result of the denominated in U.S. dollars, our primary exposure to exchange rate principal assets. The fair value of investments may fluctuate in response risk relates to movements in the value of exchange rates between to changes in the value of securities, foreign currency exchange rates the U.S. dollar and other currencies in which our investments are and interest rates. denominated (primarily euros, British pounds, Indian rupees and Australian dollars). We estimate that a simultaneous parallel Market Risk movement by 10% in the exchange rates between the U.S. dollar and Our funds hold investments that are reported at fair value. Net changes all of the major foreign currencies in which our funds’ investments in the fair value of investments impact the net gains from investments were denominated as of December 31, 2010 would result in net gains in our combined statements of operations. Based on the investments of or losses from investment activities of our funds of $844.8 million. our funds as of December 31, 2010, we estimate that a 10% decrease in However, we estimate that the effect on its income before taxes and the fair value of our funds’ investments would result in a corresponding its net income from such a change would be significantly less than the reduction in investment income. However, we estimate the impact that amount presented above, because a substantial majority of the gain or the consequential decrease in investment income would have on our loss would be attributable to noncontrolling interests in our funds. reported income attributable to Group Holdings would be significantly less than the amount presented above, given that a substantial majority Credit Risk of the change in fair value would be attributable to noncontrolling We are party to agreements providing for various financial services interests. and transactions that contain an element of risk in the event that the Our base management fees in our private equity funds are calculated counterparties are unable to meet the terms of such agreements. In based on the amount of capital committed or invested by a fund, these agreements, we depend on these counterparties to make as described under “Business — Our Segments — Private Markets” in payment or otherwise perform. We generally endeavor to minimize our Annual Report on Form 10-K. In the case of our Public Markets our risk of exposure by limiting the counterparties with which we business, management fees are often calculated based on the average enter into financial transactions to reputable financial institutions. In NAV of the fund, vehicle, or specialty finance company, for that addition, availability of financing from financial institutions may be particular period. To the extent that base management fees are uncertain due to market events, and we may not be able to access calculated based on the NAV of the fund’s investments, the amount these financing markets. 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 Interest Rate Risk investments. The proportion of our management and other amounts We have debt obligations that include revolving credit agreements that are based on NAV depends on the number and type of funds in and certain investment financing arrangements structured through the existence. Currently, a majority of our private equity funds are based use of total return swaps which effectively convert third party capital on a percentage of committed or invested capital. contributions into our borrowings. These debt obligations accrue interest at variable rates, and changes in these rates would affect the Securities Market Risk amount of interest payments that we would have to make, impacting Our investment funds make certain investments in portfolio companies future earnings and cash flows. Based on our debt obligations whose securities are publicly traded. The market prices of securities payable at December 31, 2010 (inclusive of debt obligations of our may be volatile and are likely to fluctuate due to a number of factors consolidated funds), we estimate that interest expense relating to beyond our control. These factors include actual or anticipated variable rates would increase on an annual basis by $9.9 million in fluctuations in the quarterly and annual results of such companies or the event interest rates were to increase by 100 basis points. The of other companies in the industries in which they operate, market estimated impact on interest expense is solely on the debt obligations perceptions concerning the availability of additional securities for sale, of our consolidated funds. general economic, social or political developments, industry conditions, changes in government regulation, shortfalls in operating results from levels forecasted by securities analysts, the general state of the securities markets and other material events, such as significant management changes, re-financings, acquisitions and dispositions. In addition, although our private equity funds primarily hold investments in portfolio companies whose securities are not publicly traded, 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.

KKR 2010 ANNUAL REPORT 63 CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm

TO THE BOARD OF DIRECTORS AND UNITHOLDERS OF KKR & CO. L.P.: We have audited the accompanying consolidated and combined statements of financial condition of KKR & Co. L.P. (the “Company”) as of December 31, 2010 and 2009, and the related consolidated and combined statements of operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2010. These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated and combined financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of KKR & Co. L.P. as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 5 to the consolidated and combined financial statements, the financial statements include investments valued at $23.9 billion (62% of total assets) and $19.4 billion (64% of total assets) as of December 31, 2010 and 2009, respectively, whose fair values have been estimated by management in the absence of readily determinable fair values. Management’s estimates are based on the factors described in Note 2.

Deloitte & Touche LLP New York, New York March 7, 2011

64 KKR 2010 ANNUAL REPORT CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Consolidated and Combined Statements of Financial Condition

(Amounts in Thousands, Except Unit Data) December 31, 2010 2009 Assets Cash and Cash Equivalents $ 738,693 $ 546,739 Cash and Cash Equivalents Held at Consolidated Entities 695,902 282,091 Restricted Cash and Cash Equivalents 60,482 72,298 Investments, at Fair Value 36,449,770 28,972,943 Due from Affiliates 136,556 123,988 Other Assets 309,754 223,052 Total Assets $ 38,391,157 $ 30,221,111 Liabilities and Equity Debt Obligations $ 1,486,960 $ 2,060,185 Due to Affiliates 18,047 87,741 Accounts Payable, Accrued Expenses and Other Liabilities 886,108 711,704 Total Liabilities 2,391,115 2,859,630 Commitments and Contingencies Equity KKR & Co. L.P. Partners’ Capital (212,770,091 and 204,902,226 common units issued and outstanding as of December 31, 2010 and December 31, 2009, respectively) 1,324,530 1,012,656 Accumulated Other Comprehensive Income 1,963 1,193 Total KKR & Co. L.P. Partners’ Capital 1,326,493 1,013,849 Noncontrolling Interests in Consolidated Entities 30,327,161 23,275,272 Noncontrolling Interests held by KKR Holdings L.P. 4,346,388 3,072,360 Total Equity 36,000,042 27,361,481 Total Liabilities and Equity $ 38,391,157 $ 30,221,111

See notes to consolidated and combined financial statements.

KKR 2010 ANNUAL REPORT 65 CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Consolidated and Combined Statements of Operations

(Amounts in Thousands, Except Unit and Per Unit Data) For the Years Ended December 31, 2010 2009 2008 Revenues Fees $ 435,386 $ 331,271 $ 235,181 Expenses Employee Compensation and Benefits 1,344,455 838,072 149,182 Occupancy and Related Charges 39,692 38,013 30,430 General, Administrative and Other 311,147 264,396 179,673 Fund Expenses 67,369 55,229 59,103 Total Expenses 1,762,663 1,195,710 418,388 Investment Income (Loss) Net Gains (Losses) from Investment Activities 7,755,090 7,505,005 (12,944,720) Dividend Income 1,250,293 186,324 75,441 Interest Income 226,824 142,117 129,601 Interest Expense (53,099) (79,638) (125,561) Total Investment Income (Loss) 9,179,108 7,753,808 (12,865,239) Income (Loss) Before Taxes 7,851,831 6,889,369 (13,048,446) Income Taxes 75,360 36,998 6,786 Net Income (Loss) 7,776,471 6,852,371 (13,055,232) Less: Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities 6,544,016 6,119,382 (11,850,761) Less: Net Income (Loss) Attributable to Noncontrolling Interests held by KKR Holdings L.P. 899,277 (116,696) — Net Income (Loss) Attributable to KKR & Co. L.P. $ 333,178 $ 849,685 $ (1,204,471)

October 1, 2009 through December 31, 2009 Net Loss Attributable to KKR & Co. L.P. $ (78,221) Net Income (Loss) Attributable to KKR & Co. L.P. Per Common Unit Basic $ 1.62 $ (.38) Diluted $ 1.62 $ (.38) Weighted Average Common Units Outstanding Basic 206,031,682 204,902,226 Diluted 206,039,244 204,902,226

See notes to consolidated and combined financial statements.

66 KKR 2010 ANNUAL REPORT CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Consolidated and Combined Statements of Changes in Equity

KKR & Co. L.P. Accumulated Noncontrolling Other Interests in Noncontrolling Total Partners’ Comprehensive Consolidated Interests held by Comprehensive (Amounts in Thousands, Except Unit Data) Common Units Capital Income Entities KKR Holdings L.P. Income Total Equity January 1, 2008 — $ 1,507,694 $ 9,652 $ 28,749,814 $ — $ 30,267,160 Comprehensive Income: Net Income (Loss) (1,204,471) (11,850,761) $(13,055,232) (13,055,232) Other Comprehensive Income — Currency Translation Adjustment (8,407) (18) (8,425) (8,425) Total Comprehensive Income $(13,063,657) (13,063,657) Purchase of Noncontrolling Interests in Consolidated Entities by KKR Group Holdings L.P. (6,285) (6,285) Capital Contributions 103,368 3,942,547 4,045,915 Capital Distributions (255,957) (1,136,819) (1,392,776) Balance at December 31, 2008 — 150,634 1,245 19,698,478 — 19,850,357 Comprehensive Income: Net Income (Loss) 927,906 4,674,727 $ 5,602,633 5,602,633 Other Comprehensive Income — Currency Translation Adjustment 2,417 5 2,422 2,422 Total Comprehensive Income $ 5,605,055 5,605,055 Capital Contributions 35,499 1,935,044 1,970,543 Capital Distributions (320,760) (993,288) (1,314,048) Balance at September 30, 2009 — 793,279 3,662 25,314,966 — 26,111,907 Non-Contributed Assets (1996 Fund L.P.) (146,448) (761,236) (907,684) Retained Interests (368,909) (36) 464,225 95,280 Reallocation of Net Assets from KKR PEI Investments L.P. 3,029,070 (3,029,070) Contributions of Net Assets of KPE 450,851 450,851 Reallocation of Interests to KKR Holdings L.P. (2,630,491) (2,538) 2,633,029 Deferred Tax Effects Resulting from the Transactions (36,547) (36,547) Balance at October 1, 2009 204,902,226 1,090,805 1,088 21,988,885 2,633,029 25,713,807 Comprehensive Income: Net Income (Loss) (78,221) 1,444,655 (116,696) $ 1,249,738 1,249,738 Other Comprehensive Income — Currency Translation Adjustment 105 3 245 353 353 Total Comprehensive Income $ 1,250,091 1,250,091 Equity Based Compensation 562,373 562,373 Capital Contributions 72 470,154 169 470,395 Capital Distributions (628,425) (6,760) (635,185) Balance at December 31, 2009 204,902,226 1,012,656 1,193 23,275,272 3,072,360 27,361,481 January 1, 2010 204,902,226 1,012,656 1,193 23,275,272 3,072,360 27,361,481 Comprehensive Income: Net Income (Loss) 333,178 6,544,016 899,277 $ 7,776,471 7,776,471 Other Comprehensive Income — Currency Translation Adjustment 683 9 286 978 978 Total Comprehensive Income $ 7,777,449 7,777,449 Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units 7,867,865 69,940 59 (69,999) — Deferred Tax Effects Resulting from Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units 674 28 702 Equity Based Compensation 824,193 824,193 Capital Contributions 4,954,676 40,671 4,995,347 Capital Distributions (91,918) (4,446,812) (420,400) (4,959,130) Balance at December 31, 2010 212,770,091 $ 1,324,530 $ 1,963 $ 30,327,161 $ 4,346,388 $36,000,042

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) $ 7,776,471 $ 6,852,371 $(13,055,232) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Non-Cash Equity Based Payments 824,193 562,373 — Net Realized (Gains) Losses on Investments (2,411,510) 314,407 (253,410) Change in Unrealized (Gains) Losses on Investments (5,343,580) (7,819,412) 13,198,130 Other Non-Cash Amounts (20,978) (1,397) 2,387 Cash Flows Due to Changes in Operating Assets and Liabilities: Change in Cash and Cash Equivalents Held at Consolidated Entities (416,254) 690,371 (565,604) Change in Due from/(to) Affiliates (119,585) (21,830) 14,080 Change in Other Assets (79,616) (21,826) 87,338 Change in Accounts Payable, Accrued Expenses and Other Liabilities 266,974 344,137 28,724 Investments Purchased (5,396,703) (2,795,658) (3,438,323) Cash Proceeds from Sale of Investments 5,653,984 1,549,152 1,535,754 Net Cash Provided (Used) by Operating Activities 733,396 (347,312) (2,446,156) Cash Flows from Investing Activities Change in Restricted Cash and Cash Equivalents 11,816 (21,909) (4,471) Purchase of Noncontrolling Interests — — (44,171) Purchase of Furniture, Equipment and Leasehold Improvements (13,081) (21,050) (13,104) Net Cash Provided (Used) by Investing Activities (1,265) (42,959) (61,746) Cash Flows from Financing Activities Distributions to Noncontrolling Interests in Consolidated Entities (4,446,812) (1,586,300) (1,136,819) Contributions from Noncontrolling Interests in Consolidated Entities 4,954,676 2,405,198 3,942,547 Distributions to KKR Holdings L.P. (420,400) (6,760) — Contributions from KKR Holdings L.P. 40,671 169 — Cash Attributed to Non-Contributed Assets (1996 Fund L.P.) — (20,241) — Contributions from KKR Private Equity Investors, L.P. — 470,263 — Distributions to Partners (91,918) (211,068) (250,358) Contributions from Partners — 35,571 103,368 Proceeds from Debt Obligations 652,806 503,462 813,809 Repayment of Debt Obligations (1,225,420) (852,503) (1,018,389) Deferred Financing Cost (Incurred) Returned (3,780) 573 (19,655) Net Cash Provided (Used) by Financing Activities (540,177) 738,364 2,434,503 Net Change in Cash and Cash Equivalents 191,954 348,093 (73,399) Cash and Cash Equivalents, Beginning of Year 546,739 198,646 272,045 Cash and Cash Equivalents, End of Year $ 738,693 $ 546,739 $ 198,646

(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 $ 66,110 $ 40,256 $ 70,952 Payments for Income Taxes $ 91,112 $ 8,454 $ 4,539 Supplemental Disclosures of Non-Cash Activities Non-Cash Debt Financing/Purchase of Investments $ — $ — $ 625,000 Non-Cash Contributions of Stock Based Compensation from KKR Holdings L.P. $ 824,193 $ 562,373 $ — Non-Cash Distributions to Noncontrolling Interests in Consolidated Entities $ — $ 35,413 $ — Non-Cash Contributions from KKR Private Equity Investors, L.P. $ — $ (19,412) $ — Non-Cash Distributions to Controlling Equity Holders $ — $ 109,692 $ 5,599 Non-Cash Distributions to KKR Holdings L.P. $ — $ 89,005 $ — Restricted Stock Grant from Affiliate $ — $ — $ 15,939 Proceeds Due from Unsettled Investment Sales $ (2,521) $ 7,733 $ — Unsettled Purchase of Investments $ 42,738 $ (968) $ — Change in Contingent Carried Interest Repayment Guarantee $ (21,138) $ (18,159) $ — Realized Gains on Extinguishment of Debt $ — $ 19,761 $ — Realized Gains on Repayment of Debt $ 8,236 $ — $ — Unrealized Gains (Losses) on Foreign Exchange on Debt Obligations $ (5,525) $ (12,286) $ (35,624) Conversion of Interest Payable into Debt Obligations $ 2,100 $ 11,576 $ — Change in Foreign Exchange on Cash and Cash Equivalents Held at Consolidated Entities $ (2,443) $ 12,628 $ (14,032) Exchange of KKR Holdings L.P. Units to KKR & Co. L.P. Common Units $ 69,999 $ — $ — 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 $ 702 $ — $ — Reorganization Adjustments Due From Affiliates $ — $ 94,538 $ — Other Assets $ — $ 17,257 $ — Accounts Payable, Accrued Expenses and Other Liabilities $ — $ 53,040 $ — Noncontrolling Interests in Consolidated Entities $ — $(2,564,845) $ — Deconsolidation of Consolidated Entities (1): Cash and Cash Equivalents Held at Consolidated Entities $ — $ 5,485 $ — Investments, at Fair Value $ — $ 911,603 $ — Due From Affiliates $ — $ 3,706 $ — Accounts Payable, Accrued Expenses and Other Liabilities $ — $ 33,351 $ — Noncontrolling Interests in Consolidated Entities $ — $ 761,236 $ —

See notes to consolidated and combined financial statements.

KKR 2010 ANNUAL REPORT 69 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

In order to facilitate the Combination Transaction (defined below) KKR Notes to Consolidated completed a series of transactions (the “Reorganization Transactions”), pursuant to which KKR’s business was reorganized under the KKR Group Partnerships. The reorganization involved a contribution of and Combined Financial certain equity interests in KKR’s businesses that were held by KKR’s Predecessor Owners to the KKR Group Partnerships in exchange for Statements 100% of the interests in the KKR Group Partnerships. (All Dollars are in Thousands, Except Unit, Per Unit Data, and Where Otherwise Noted) On October 1, 2009, 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, the “Transactions”). The Combination 1. ORGANIZATION AND BASIS OF PRESENTATION Transaction involved the contribution of all of KPE’s assets and KKR & Co. L.P. (NYSE: KKR), together with its consolidated subsidiaries liabilities to the KKR Group Partnerships in exchange for a 30% interest (“KKR”), is a leading global investment firm that is involved in providing in the KKR Group Partnerships. The assets and liabilities contributed a broad range of investment management services to investors and to the KKR Group Partnerships by KPE included $3.0 billion of limited provides capital markets services for the firm, its portfolio companies partner interests in the KPE Investment Partnership, $470.3 million and clients. Led by Henry Kravis and George Roberts, KKR conducts of cash and cash equivalents, and $19.4 million of net other liabilities. business through 14 offices around the world, which provides a global The net asset value per unit of KPE on the date of the Transactions platform for sourcing transactions, raising capital and carrying out was greater than the publicly traded unit value of KPE on that same capital markets activities. KKR operates as a single professional date. Due to a variety of reasons, including the fact that the holders services firm and carries out its investment activities under the KKR of publicly traded units generally hold passive interests with little brand name. influence over the operations of a fund and its underlying investments KKR & Co. L.P. (the “Partnership”) was formed as a Delaware limited and are not able to redeem their units at net asset value, net asset values partnership on June 25, 2007 and its general partner is KKR Management of publicly traded closed-end funds are not necessarily correlated to LLC (the “Managing Partner”). The Partnership is the parent company the public market capitalization. The Combination Transaction was of KKR Group Limited, which is the non-economic general partner of negotiated on an arms-length basis with the independent directors KKR Group Holdings L.P. (“Group Holdings”), and the Partnership is of KPE’s general partner and unanimously approved by the board of the sole limited partner of Group Holdings. Group Holdings holds a directors of KPE’s general partner, acting upon the unanimous controlling economic interest in each of (i) KKR Management Holdings L.P. recommendation of the independent directors of KPE’s general partner. (“Management Holdings”) through KKR Management Holdings Corp., a In addition, the Combination Transaction was consented to by holders Delaware corporation which is a domestic corporation for U.S. federal of a majority of KPE units, excluding any KPE units whose consent income tax purposes, and (ii) KKR Fund Holdings L.P. (“Fund Holdings” rights were controlled by KKR or its affiliates. and together with Management Holdings, the “KKR Group Partnerships”) Common control transactions are accounted for under Accounting directly and through KKR Fund Holdings GP Limited, a Cayman Island Standards Code (“ASC”) 805-50. Because KPE, the KPE Investment limited company which is a disregarded entity for U.S. federal income Partnership and the other entities included in the consolidated and tax purposes. Group Holdings also owns certain economic interests in combined financial statements were under the common control of the Management Holdings through a wholly‑owned Delaware corporate Senior Principals both prior to and following the completion of the subsidiary of KKR Management Holdings Corp. and certain economic Transactions, in accordance with ASC 805-50 the Transactions are interests in Fund Holdings through a Delaware partnership of which accounted for as transfers of interests under common control. Group Holdings is the general partner with a 99% economic interest Accordingly, no new basis of accounting has been established upon and KKR Management Holdings Corp. is a limited partner with a 1% completion of the Transactions and Group Holdings carried forward economic interest. The Partnership, through its controlling equity the carrying amounts of assets and liabilities that were contributed to interests in the KKR Group Partnerships, is the holding partnership for the KKR Group Partnerships. the KKR business. Similarly, because the Transactions did not result in a change of control, exchanges involving the various noncontrolling interests were accounted Reorganization and Combination Transactions for as equity transactions in accordance with ASC 810-10-45-23. The Prior to October 1, 2009, KKR’s business was conducted through carrying amount of noncontrolling interests associated with the KPE multiple entities for which there was no single holding entity, but were Investment Partnership was adjusted to zero to reflect the change in under common control of senior KKR principals (“Senior Principals”), ownership interest from that of KPE to that of KKR & Co. L.P. Since and in which Senior Principals and KKR’s other principals and individuals KKR retained its controlling financial interest in the KKR business, no held ownership interests (collectively, the “Predecessor Owners”). gain or loss was recognized in the accompanying consolidated and In addition, KKR sponsored the investment vehicle KKR Private Equity combined financial statements. This includes the exchange of the KPE Investors, L.P. (“KPE”), which was a Guernsey limited partnership that Investment Partnership for a 30% economic interest in the KKR Group traded publicly on Euronext Amsterdam under the symbol “KPE”. KPE Partnerships in the Transactions, and the exchange by KKR’s other was controlled by Senior Principals through their general partner interest. principals and individuals of their ownership interests in various entities Substantially all of the economic interests in KPE were held by third included in the accompanying consolidated and combined financial party investors through their limited partner interests. From the date statements before the Transactions for interests in KKR Holdings L.P. of its formation, all of KPE’s investments were made through another (“KKR Holdings”), a Cayman Islands exempted limited partnership. Guernsey limited partnership, KKR PEI Investments, L.P. (“KPE Investment The exchange of the KPE Investment Partnership for a 30% interest Partnership”), of which KPE was the sole limited partner. The KPE in the KKR Group Partnerships in the Transactions is reflected in the Investment Partnership was controlled by Senior Principals through consolidated and combined financial statements as a reallocation of their general partner interest. Substantially all of the economic interests equity interests from noncontrolling interests to KKR & Co. L.P. in the KPE Investment Partnership were held by KPE through its partners’ capital. The contribution of ownership interests held by limited partner interest. KPE was established solely to hold limited KKR’s principals and other individuals is reflected in the consolidated partner interests in the KPE Investment Partnership and since its and combined financial statements as a reallocation of equity interests inception, KPE had no substantive operating activities other than the from KKR & Co. L.P. partners’ capital to noncontrolling interests held investing activities conducted through the KPE Investment Partnership. by KKR Holdings.

70 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Upon completion of the Combination Transaction, KPE changed its The general partners of the 1996 Fund and their respective consolidated name to KKR & Co. (Guernsey) L.P. (“KKR Guernsey”) and was traded funds were removed from the financial statements as they were not publicly on Euronext Amsterdam under the symbol “KKR” until it was contributed to the KKR Group Partnerships as part of the Transactions. delisted on July 15, 2010. Immediately following the Transactions, KKR The Retained Interests were not contributed to the KKR Group Guernsey held a 30% economic interest in the KKR Group Partnerships Partnerships but are reflected in the accompanying consolidated and through Group Holdings and our principals retained a 70% economic combined financial statements as noncontrolling interests in interest in the KKR Group Partnerships through KKR Holdings. consolidated entities due to the fact that the entities in which these noncontrolling interests are held continue to be consolidated U.S. Listing subsequent to the Transactions. On July 15, 2010, KKR & Co. L.P. became listed on the New York Stock Exchange (“NYSE”). In connection with the NYSE listing, KKR Prior to the Transactions, certain KKR principals who received carried Guernsey contributed its 30% interest held through Group Holdings interest distributions with respect to KKR’s private equity funds had to KKR & Co. L.P. in exchange for NYSE-listed common units of personally guaranteed, on a several basis and subject to a cap, the KKR & Co. L.P. and distributed those common units to holders of KKR contingent obligations of the general partners of certain private equity Guernsey units (referred to hereafter as the “In-Kind Distribution”). funds to repay amounts to fund limited partners pursuant to the general Because the assets of KKR Guernsey consisted solely of its interests in partners’ clawback obligations. The terms of the Transactions require Group Holdings, the In-Kind Distribution resulted in the dissolution of that KKR principals remain individually responsible for any clawback KKR Guernsey and the delisting of its units from Euronext Amsterdam. obligations relating to carry distributions received prior to the As of July 15, 2010, KKR & Co. L.P. both indirectly controlled the KKR Transactions up to a maximum of $223.6 million. See Note 2 “Summary Group Partnerships and indirectly held KKR Group Partnership units of Significant Accounting Policies — Investment Income — Clawback representing at that time a 30% economic interest in KKR’s business. Provision.” The remaining 70% of the KKR Group Partnership units were held by To the extent a fund is in a clawback position, KKR will record a benefit KKR’s principals through KKR Holdings. Subsequent to the NYSE to reflect the amounts due from the KKR principals related to the listing, KKR Holdings and our principals exchanged a portion of their clawback. By recording this benefit, the clawback obligation has been interests in the KKR Group Partnerships for common units, and as of reduced to an amount that represents the obligation of the KKR Group December 31, 2010, KKR & Co. L.P. owned 31.15% of the KKR Group Partnerships. In connection with the Transactions, KKR recorded a Partnership units and our principals owned 68.85% through KKR receivable of $95,280 on October 1, 2009 with a corresponding increase Holdings. From time to time, the percentage ownership in the KKR Group to equity. Partnerships may continue to change as KKR Holdings and/or KKR’s principals exchange units in the KKR Group Partnerships (the “KKR In addition, historically, KKR consolidated the KPE Investment Group Partnership Units”) for KKR & Co. L.P. common units. Partnership in its financial statements and substantially all of the ownership interests were reflected as noncontrolling interests. Basis of Presentation These noncontrolling interests were removed as these interests were Prior to the Transactions, the accompanying consolidated and combined contributed to the KKR Group Partnerships in the Transactions. financial statements include the results of eight of KKR’s private equity Subsequent to the Transactions, the KKR Group Partnerships hold funds and two of KKR’s fixed income funds and the general partners 100% of the controlling and economic interests in the KPE Investment and management companies of those funds under the common control Partnership. KKR therefore continues to consolidate the KPE Investment of its Senior Principals. One of the eight private equity funds included Partnership and its economic interests are no longer reflected as the KPE Investment Partnership. noncontrolling interests in consolidated entities as of October 1, 2009, the effective date of the Transactions. Prior to the Transactions, the following entities and interests were included in the accompanying consolidated and combined financial Subsequent to the completion of the Transactions, KKR’s business is statements but were not, however, contributed to the KKR Group conducted through the KKR Group Partnerships, which own: Partnerships as part of the Transactions: • all of the controlling and economic interests in KKR’s fee-generating (i) the general partners of the 1996 Fund and their respective management companies and approximately 98% of the economic consolidated funds; interests in KKR’s capital markets companies; (ii) economic interests that allocate to a former principal and such • controlling and economic interests in the general partners of KKR’s person’s designees an aggregate of 1% of the carried interest private equity funds and other investment vehicles that are entitled received by the general partners of KKR’s private equity funds to receive carry; and and 1% of KKR’s other profits (losses); • all of the controlling and economic interests in the KPE Investment (iii) economic interests that allocate to certain of KKR’s former Partnership. principals and their designees a portion of the carried interest With respect to KKR’s active and future funds and co-investment received by the general partners of KKR’s private equity funds vehicles that provide for carried interest, KKR continues to allocate to that was allocated to them with respect to private equity its principals, other professionals and selected other individuals a investments made during such former principals’ previous portion of the carried interest earned. See Note 2, “Summary of tenure with KKR; and Significant Accounting Policies — Profit Sharing Plans”. This allocation (iv) economic interests that allocate to certain of KKR’s current is made prior to the allocation of carried interest profits between KKR and former principals all of the capital invested by or on behalf and KKR Holdings. of the general partners of KKR’s private equity funds before t he completion of the Transactions and any returns thereon. Consolidation The consolidated and combined financial statements (referred to The interests described in (ii) through (iv) are referred to as the hereafter as the “financial statements”) include the accounts of KKR’s “Retained Interests.” management and capital markets companies, the general partners of certain unconsolidated co-investment vehicles and the general partners of its private equity, fixed income, and capital solution oriented funds and their respective consolidated funds (the “KKR Funds”).

KKR 2010 ANNUAL REPORT 71 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

KKR & Co. L.P. consolidates the financial results of the KKR Group The KKR Funds are, for GAAP purposes, investment companies and Partnerships and their consolidated subsidiaries. KKR Holdings’ therefore are not required to consolidate their majority owned and ownership interest in the KKR Group Partnerships is reflected as controlled investments in portfolio companies (“Portfolio Companies”). noncontrolling interests held by KKR Holdings L.P. in the accompanying Rather, KKR reflects their investments in portfolio companies at fair consolidated and combined financial statements. value as described below. References in the accompanying consolidated and combined financial All intercompany transactions and balances have been eliminated. statements to KKR’s “principals” are to KKR’s senior executives and operating consultants who hold interests in KKR’s business through Variable Interest Entities KKR Holdings, including Senior Principals. 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 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES entity that most significantly impact the entity’s business and (b) the Basis of Accounting obligation to absorb losses of the entity or the right to receive benefits The accompanying consolidated and combined financial statements from the entity that could potentially be significant to the variable are prepared in accordance with accounting principles generally interest entity. The consolidation rules which were revised effective accepted in the United States of America (“GAAP”). 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 Use of Estimates (b) whether KKR’s involvement, through holding interests directly or The preparation of the financial statements in conformity with GAAP indirectly in the entity or contractually through other variable interests requires management to make estimates and assumptions that (e.g., management and performance related fees), would give it a affect the reported amounts of assets and liabilities, the disclosure of controlling financial interest. Performance of that analysis requires the contingent assets and liabilities at the date of the financial statements exercise of judgment. Where KKR has an interest in an entity that has and the reported amounts of fees, expenses and investment income qualified for the deferral of the consolidation rules as discussed in during the reporting periods. Such estimates include but are not limited “Recently Issued Accounting Pronouncements”, the analysis is based to the valuation of investments and financial instruments. Actual on consolidation rules prior to January 1, 2010. These rules require an results could differ from those estimates and such differences could analysis to (a) determine whether an entity in which KKR holds a be material to the financial statements. variable interest is a variable interest entity and (b) whether KKR’s involvement, through holding interests directly or indirectly in the entity Consolidation or contractually through other variable interests (e.g., management and performance related fees), would be expected to absorb a General majority of the variability of the entity. Under both guidelines, KKR KKR consolidates (i) those entities in which it holds a majority voting determines whether it is the primary beneficiary of a VIE at the time it interest or has majority ownership and control over significant becomes involved with a variable interest entity and reconsiders that operating, financial and investing decisions of the entity, including conclusion at each reporting date. In evaluating whether KKR is the those KKR Funds in which the general partner is presumed to have primary beneficiary, KKR evaluates its economic interests in the entity control, or (ii) entities determined to be variable interest entities held either directly by KKR or indirectly through related parties. The (“VIEs”) for which it is considered the primary beneficiary. consolidation analysis can generally be performed qualitatively; The majority of the entities consolidated by KKR are comprised of: however, if it is not readily apparent that KKR is not the primary (i) those entities in which KKR has majority ownership and has control beneficiary, a quantitative analysis may also be performed. Investments over significant operating, financial and investing decisions; and and redemptions (either by KKR, affiliates of KKR or third parties) or (ii) the consolidated KKR Funds, which are those entities in which KKR amendments to the governing documents of the respective KKR Funds holds substantive, controlling general partner or managing member could affect an entity’s status as a VIE or the determination of the interests. With respect to the consolidated KKR Funds, KKR generally primary beneficiary. At each reporting date, KKR assesses whether it is has operational discretion and control, and limited partners have no the primary beneficiary and will consolidate or deconsolidate accordingly. substantive rights to impact ongoing governance and operating As of December 31, 2010 and 2009, the maximum exposure to loss for activities of the fund. those VIEs in which KKR is determined not to be the primary beneficiary The KKR Funds are consolidated by KKR notwithstanding the fact that but in which it has a variable interest is as follows: KKR has only a minority economic interest in those funds. KKR’s financial statements reflect the assets, liabilities, fees, expenses, December 31, 2010 2009 investment income and cash flows of the consolidated KKR Funds on Investments, at Fair Value $35,867 $ 13,753 a gross basis, and the majority of the economic interests in those Due from Affiliates 3,225 1,473 funds, which are held by third party investors, are attributed to Maximum Exposure to Loss $39,092 $15,226 noncontrolling interests in consolidated entities in the accompanying financial statements. All of the management fees and certain other For those unconsolidated VIEs in which KKR is the sponsor, KKR may amounts earned by KKR from those funds are eliminated in consolidation. have an obligation as general partner to provide commitments to such However, because the eliminated amounts are earned from, and funds. For the years ended December 31, 2010 and 2009, KKR did not funded by, noncontrolling interests, KKR’s attributable share of the net provide any support other than its obligated amount. income from those funds is increased by the amounts eliminated. Accordingly, the elimination in consolidation of such amounts has no KKR’s investment strategies differ by investment fund; however, the effect on net income (loss) attributable to KKR or KKR partners’ capital. 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.

72 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Noncontrolling Interests Investments and other financial instruments measured and reported Noncontrolling Interests in Consolidated Entities at fair value are classified and disclosed in one of the following Prior to the completion of the Transactions, noncontrolling interests in categories: consolidated entities represented ownership interests in consolidated Level I — Quoted prices are available in active markets for identical entities held by entities or persons other than our Predecessor Owners. investments as of the reporting date. The type of investments included The majority of these noncontrolling interests were held by third party in Level I include publicly listed equities, publicly listed derivatives, investors in the KKR Funds and the limited partner interests in the equity securities sold, but not yet purchased and call options. KKR does KPE Investment Partnership. not adjust the quoted price for these investments, even in situations Subsequent to the completion of the Transactions, noncontrolling where KKR holds a large position and a sale could reasonably affect interests in consolidated entities represent the ownership interests in the quoted price. KKR that are held by: Level II — Pricing inputs are other than quoted prices in active markets, (i) third party investors in the KKR Funds; which are either directly or indirectly observable as of the reporting date, and fair value is generally determined through the use of models (ii) a former principal and such person’s designees representing or other valuation methodologies. Investments which are included in an aggregate of 1% of the carried interest received by the this category include corporate credit investments, convertible debt general partners of KKR’s funds and 1% of KKR’s other profits securities indexed to publicly listed securities and certain over-the- (losses) until a future date; counter derivatives. (iii) certain of KKR’s former principals and their designees Level III — Pricing inputs are unobservable for the asset or liability and representing a portion of the carried interest received by the includes situations where there is little, if any, market activity for the general partners of KKR’s private equity funds that was allocated investment. The inputs into the determination of fair value require to them with respect to private equity investments made during significant management judgment or estimation. Investments that are such former principals’ previous tenure with KKR; included in this category generally include private Portfolio Companies (iv) certain of KKR’s current and former principals representing held directly through the KKR Funds and private equity co-investment all of the capital invested by or on behalf of the general vehicles. partners of KKR’s private equity funds before the completion In certain cases, the inputs used to measure fair value may fall into of the Transactions and any returns thereon; and different levels of the fair value hierarchy. In such cases, an investment’s (v) a third party in KKR’s capital markets business (representing level within the fair value hierarchy is based on the lowest level of input an aggregate of 2% of the capital markets business equity). that is significant to the fair value measurement. KKR’s assessment of the significance of a particular input to the fair value measurement in Noncontrolling Interests held by KKR Holdings its entirety requires judgment, and it considers factors specific to the Subsequent to the completion of the Transactions, noncontrolling investment. interests attributable to KKR Holdings include KKR’s Predecessor Owners’ economic interests in the KKR Group Partnership Units. KKR’s In cases where an investment measured and reported at fair value is Predecessor Owners receive financial benefits from KKR’s business transferred into or out of Level III of the fair value hierarchy, KKR in the form of distributions received from KKR Holdings and through accounts for the transfer at the end of the reporting period. their direct and indirect participation in the value of KKR Group Partnership Units held by KKR Holdings. As a result, certain profit Cash and Cash Equivalents based cash amounts that were previously paid by KKR no longer are KKR considers all highly liquid short-term investments with original paid by KKR and are borne by KKR Holdings. maturities of 90 days or less when purchased to be cash equivalents.

Income of KKR after allocation to controlling interests in consolidated Cash and Cash Equivalents Held at Consolidated Entities entities, with the exception of certain tax assets and liabilities that are Cash and cash equivalents held at consolidated entities represents directly allocable to KKR Management Holdings Corp., is attributed based cash that, although not legally restricted, is not available to fund on the percentage of the weighted average KKR Group Partnership general liquidity needs of KKR as the use of such funds is generally Units held by KKR and KKR Holdings, who are the equity holders of the limited to the investment activities of the KKR Funds. KKR Group Partnerships during the period. However, the contribution of certain expenses borne entirely by KKR Holdings as well as the Restricted Cash and Cash Equivalents periodic of exchange of KKR Holdings units for KKR & Co. L.P. common Restricted cash and cash equivalents represent amounts that are units results in the equity allocations shown in the statements of changes held by third parties under certain of KKR’s financing and derivative in equity to differ from the pro rata split of net assets and liabilities. transactions.

Fair Value Measurements Investments, at Fair Value Fair value is the amount that would be received to sell an asset or paid to KKR’s investments consist primarily of private equity and other transfer a liability, in an orderly transaction between market participants investments. See Note 4, “Investments.” at the measurement date (i.e., the exit price). KKR measures and reports its investments and other financial instruments at fair value. Private Equity Investments KKR has categorized and disclosed its assets and liabilities measured Private equity investments consist of investments in Portfolio and reported at fair value based on the hierarchical levels as defined Companies of consolidated KKR Funds that are, for GAAP purposes, within GAAP. GAAP establishes a hierarchal disclosure framework that investment companies. The KKR Funds reflect investments at their prioritizes and ranks the level of market price observability used in estimated fair values, with unrealized gains or losses resulting from measuring assets and liabilities at fair value. Market price observability changes in fair value reflected as a component of Net Gains (Losses) is affected by a number of factors, including the type and the from Investment Activities in the statements of operations. characteristics specific to the asset or liability. Investments and other Private equity investments that have readily observable market prices financial instruments for which fair value can be measured from quoted (such as those traded on a securities exchange) are stated at the last prices in active markets generally will have a higher degree of market quoted sales price as of the reporting date. price observability and a lesser degree of judgment used in measuring fair value.

KKR 2010 ANNUAL REPORT 73 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

The determination of fair value may differ materially from the values Investment Activities in the accompanying statements of operations. that would have resulted if a ready market had existed. For these KKR’s derivative financial instruments contain credit risk to the extent investments, KKR generally uses a market approach and an income that its bank counterparties may be unable to meet the terms of the (discounted cash flow) approach when determining fair value. agreements. KKR attempts to minimize this risk by limiting its counter­ Management considers various internal and external factors when parties to major financial institutions with strong credit ratings. applying these approaches, including the price at which the investment was acquired, the nature of the investment, current market conditions, Fixed Assets, Depreciation and Amortization recent public market and private transactions for comparable Fixed assets consist primarily of leasehold improvements, furniture, securities, and financing transactions subsequent to the acquisition fixtures and equipment, and computer hardware and software. Such of the investment. The fair value recorded for a particular investment amounts are recorded at cost less accumulated depreciation and will generally be within the range suggested by the two approaches. amortization. Depreciation and amortization are calculated using the Investments denominated in currencies other than the U.S. dollar straight-line method over the assets’ estimated economic useful lives, are valued based on the spot rate of the respective currency at the which for leasehold improvements are the lesser of the lease terms or end of the reporting period with changes related to exchange rate the life of the asset, and three to seven years for other fixed assets. movements reflected as a component of Net Gains (Losses) from Investment Activities in the accompanying statements of operations. Comprehensive Income Comprehensive income is defined as the change in equity of a busi­ Corporate Credit Investments ness enterprise during a period from transactions and other events Corporate credit investments that are listed on a securities exchange and circumstances, excluding those resulting from contributions from are valued at their last quoted sales price as of the reporting date. and distributions to owners. In the accompanying financial statements, Investments in corporate debt, including syndicated bank loans, high- comprehensive income represents Net Income (Loss), as presented yield securities and other fixed income securities, are valued at the in the statements of operations and net foreign currency translation mean of the “bid” and “asked” prices obtained from third party pricing adjustments. services. In the event that third party pricing service quotations are unavailable, values are obtained from dealers or market makers, and Fees where those values are not available, corporate credit investments are Fees consist primarily of (i) monitoring and transaction fees from valued by KKR or KKR may engage a third party valuation firm to assist providing advisory and other services, (ii) management and incentive in such valuations. fees from providing investment management services to unconsoli­ dated funds, a specialty finance company, structured finance vehicles, Derivatives and separately managed accounts, and (iii) fees from capital markets Derivative contracts, including total rate of return swap contracts and activities. These fees are based on the contractual terms of the govern­ credit default swap contracts, are recorded at estimated fair value ing agreements and are recognized in the period during which the with changes in fair value recorded as unrealized gains or losses in related services are performed. Net Gains (Losses) from Investment Activities in the accompanying statements of operations. For the years ended December 31, 2010, 2009 and 2008, fees consisted of the following: Investments in Publicly Traded Securities KKR’s investments in publicly traded securities represent equity For the Years Ended December 31, 2010 2009 2008 securities, which are classified as trading securities and carried at fair Transaction Fees $ 212,527 $ 91,828 $ 41,307 market value. Changes in the fair market value of trading securities Monitoring Fees 119,242 174,476 135,234 are reported within Net Gains (Losses) from Investment Activities in Management Fees 64,785 60,495 58,640 the accompanying statements of operations. Incentive Fees 38,832 4,472 — Securities Sold, Not Yet Purchased Total Fee Income $435,386 $331,271 $ 235,181 Whether part of a hedging transaction or a transaction in its own right, securities sold, not yet purchased, or securities sold short, represent Transaction Fees obligations of KKR to deliver the specified security at the contracted Transaction fees are earned by KKR primarily in connection with price, and thereby create a liability to repurchase the security in the successful private equity and debt transactions and capital markets market at the prevailing prices. The liability for such securities sold activities. Transaction fees are recognized upon closing of the short is marked to market based on the current value of the transaction. Fees are typically paid on or around the closing. underlying security at the reporting date with changes in fair value recorded as unrealized gains or losses in Net Gains (Losses) from In connection with pursuing successful Portfolio Company investments, Investment Activities in the accompanying statements of operations. KKR receives reimbursement for certain transaction‑related expenses. These transactions may involve a market risk in excess of the amount Transaction‑related expenses, which are reimbursed by third parties, currently reflected in KKR’s statements of financial condition. are typically deferred until the transaction is consummated and are recorded in Other Assets on the date incurred. The costs of success­ Due from and Due to Affiliates fully completed transactions are borne by the KKR Funds and included For purposes of classifying amounts, KKR considers its principals and as a component of the investment’s cost basis. Subsequent to closing, their related entities, unconsolidated funds and the Portfolio Companies investments are recorded at fair value each reporting period as of its funds to be affiliates. Receivables from and payables to affiliates described in the section above titled Investments, at Fair Value. Upon are recorded at their current settlement amount. reimbursement from a third party, the cash receipt is recorded and the deferred amounts are relieved. No fees or expenses are recorded for Foreign Exchange Derivatives and Hedging Activities these reimbursements. KKR enters into derivative financial instruments primarily to manage Monitoring Fees foreign exchange risk and interest rate risk arising from certain Monitoring fees are earned by KKR for services provided to Portfolio assets and liabilities. All derivatives are recognized as either assets or Companies and are recognized as services are rendered. These fees are liabilities in the statements of financial condition and measured at fair paid based on a fixed periodic schedule by the Portfolio Companies value with changes in fair value recorded in Net Gains (Losses) from either in advance or in arrears and are separately negotiated for each

74 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Portfolio Company. Monitoring fees amounted to $86,932, $158,243 1.25% plus (ii) equity in excess of $3 billion multiplied by 1%. For and $112,258 for the years ended December 31, 2010, 2009 and 2008, purposes of calculating the management fee, equity was an amount respectively. defined in the management agreement. Subsequent to the Transactions, In connection with the monitoring of Portfolio Companies and certain the KPE Investment Partnership continues to pay a fee. However, since unconsolidated funds, KKR receives reimbursement for certain expenses the KKR Group Partnerships hold 100% of the controlling and economic incurred on behalf of these entities. Costs incurred in monitoring these interests of the KPE Investment Partnership, the fee is eliminated in entities are classified as general, administrative and other expenses consolidation. and reimbursements of such costs are classified as monitoring fees. These reimbursements amounted to $32,310, $16,233 and $22,976 for KKR Financial Holdings LLC (“KFN”) the years ended December 31, 2010, 2009 and 2008, respectively. KKR’s management agreement with KFN provides, among other things, that KKR is entitled to certain fees, consisting of a base management Management and Incentive Fees fee and an incentive fee. KKR earns a base management fee, computed Management fees received from consolidated KKR Funds are eliminated and payable monthly in arrears, based on an annual rate of 1.75% in consolidation. However, because these amounts are funded by, of adjusted equity, which is an amount defined in the management and earned from, noncontrolling interests, KKR’s allocated share of the agreement. net income from consolidated KKR Funds is increased by the amount KKR has also received restricted common shares and common share of fees that are eliminated. Accordingly, the elimination of these fees options from KFN as a component of compensation for management does not have an effect on the net income attributable to KKR or KKR services provided to KFN. The restricted common shares and share partners’ capital. options vest ratably over applicable vesting periods and are initially Private Equity Funds recorded as deferred revenue at their estimated fair values at the date For KKR’s private equity funds and certain unconsolidated KKR of grant. Subsequently, KKR re-measures the restricted common sponsored funds, gross management fees generally range from 1% to shares and share options to the extent that they are unvested, with a 2% of committed capital during the fund’s investment period and is corresponding adjustment to deferred revenue. Income from restricted generally 0.75% of invested capital after the expiration of the fund’s common shares is recognized ratably over the vesting period as a investment period with subsequent reductions over time. Typically, an component of Fees in the accompanying statement of operations. Vested investment period is defined as a period of up to six years. The actual common shares that are received as a component of compensation length of the investment period may be shorter based on the timing for management services are carried as trading securities, and are and deployment of committed capital. recorded at estimated fair value with changes in fair value recognized in Net Gains (Losses) from Investment Activities in the accompanying For periods prior to the Transactions, in advance of the management statements of operations. service period, KKR had elected to waive the right to earn certain management fees that it would have been entitled to from its private KKR’s management agreement with KFN also provides that KFN is equity funds. The cash that would have been payable was contributed responsible for paying KKR quarterly incentive compensation in an by the funds’ investors and was initially included as a component of amount equal to the product of (i) 25% of the dollar amount by which: Cash and Cash Equivalents Held at Consolidated Entities. In lieu of (a) KFN’s net income, before incentive compensation, per weighted making direct cash capital contributions, these investor contributions average share of KFN’s common shares for such quarter, exceeds were used to satisfy a portion of the capital commitments to which (b) an amount equal to (A) the weighted average of the price per share KKR would otherwise have been subject as the general partner of the of the common stock of KFN in its August 2004 private placement and fund. As a result of the election to waive the fees, KKR was not entitled the prices per share of the common stock of KFN in its initial public to any portion of these fees until the fund had achieved positive offering and any subsequent offerings by KFN multiplied by (B) the investment results. Because the ability to earn the waived fees was greater of (1) 2.00% and (2) 0.50% plus one-fourth of the ten year contingent upon the achievement of positive investment returns by the treasury rate for such quarter, multiplied by (ii) the weighted average fund, the recognition of income only occurred when the contingency was number of KFN’s common shares outstanding in such quarter. Once satisfied. There were no waived fees for the year ended December 31, earned, there are no clawbacks of incentive fees received from KFN. 2010 and waived fees of $25.5 million and $44.0 million for the years KKR’s management agreement with KFN was renewed on January 1, ended December 31, 2009 and 2008, respectively. 2011 and will automatically be renewed for successive one-year terms following December 31, 2011 unless the agreement is terminated in Certain of KKR’s private equity funds require the management company accordance with its terms. The management agreement provides that to refund up to 20% of any cash management fees earned from limited KFN may terminate the agreement only if: partners in the event that the funds recognize a carried interest. At such time as the fund recognizes a carried interest in an amount sufficient • the termination is approved at least 180 days prior to the expiration to cover 20% of the management fees earned or a portion thereof, a date by at least two-thirds of KFN’s independent directors or by the liability to the fund’s limited partners is recorded and revenue is reduced holders of a majority of KFN’s outstanding common shares and the for the amount of the carried interest recognized, not to exceed 20% termination is based upon (i) a determination that KKR’s performance of the management fees earned. As of December 31, 2010, the amount has been unsatisfactory and materially detrimental to KFN or (ii) a subject to refund for which no liability has been recorded approximates determination that the management and incentive fees payable to $58.7 million as a result of certain funds not yet recognizing sufficient KKR are not fair (subject to KKR’s right to prevent a termination by carried interests. The refunds to the limited partners are paid, and the reaching an agreement to reduce KKR’s management and incentive liabilities relieved, at such time that the underlying investments are fees), in which case a termination fee is payable to KKR; or sold and the associated carried interests are realized. In the event that • KKR’s subsidiary that manages KFN experiences a “change of control” a fund’s carried interest is not sufficient to cover all or a portion of the or KKR materially breaches the provisions of the agreement, engages amount that represents 20% of the earned management fees, these fees in certain acts of willful misconduct or gross negligence, becomes would not be returned to the funds’ limited partners, in accordance bankrupt or insolvent or is dissolved, in which case a termination with the respective fund agreements. fee is not payable to KKR. For periods prior to the Transactions, KKR earned fees from the KPE None of the aforementioned events have occurred as of December 31, Investment Partnership which were determined quarterly based on 2010. 25% of the sum of (i) equity up to and including $3 billion multiplied by

KKR 2010 ANNUAL REPORT 75 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Investment Funds that this approach results in income recognition that best reflects the Structured Finance Vehicles periodic performance of KKR in the management of those funds. KKR’s management agreements for its structured finance vehicles Carried interest recognized (reversed) amounted to approximately provide for senior collateral management fees and subordinate $1,207 million, $832 million and ($1,197) million for the years ended collateral management fees. Senior collateral management fees are December 31, 2010, 2009 and 2008, respectively. determined based on an annual rate of 0.15% of collateral and As described below, the instruments governing KKR’s private equity subordinate collateral management fees are determined based on an funds generally include a “clawback” or, in certain instances, a “net annual rate of 0.35% of collateral. If amounts distributable on any loss sharing” provision that, if triggered, may give rise to a contingent payment date are insufficient to pay the collateral management fees obligation that may require the general partner to return or contribute according to the priority of payments, any shortfall is deferred and amounts to the fund for distribution to investors at the end of the life payable on subsequent payment dates. KKR has the right to waive all of the fund. See Note 13 “Commitments and Contingencies”. or any portion of any collateral management fee. As of December 31, 2010, KKR has permanently waived $103.1 million of collateral Dividend Income management fees. KKR generally waives the collateral management Dividend income is recognized by KKR on the ex-dividend date, or in fees for the majority of its structured finance vehicles; however, KKR the absence of a formal declaration, on the date it is received. For the may cease waiving collateral management fees at its discretion. For years ended December 31, 2010, 2009 and 2008, dividends earned the purpose of calculating the collateral management fees, collateral, by the consolidated KKR Funds amounted to $1,247,254, $181,373 and the payment dates, and the priority of payments are terms defined in $74,613, respectively. the management agreements. Interest Income Separately Managed Accounts Interest income is recognized as earned. Interest income earned by Certain fixed income and special situations accounts referred to as the consolidated KKR Funds amounted to $217,411, $136,472 and “Separately Managed Accounts” invest in liquid strategies, such as $119,562 for the years ended December 31, 2010, 2009 and 2008, leveraged loans and high yield bonds, as well as less-liquid credit respectively. products such as mezzanine debt and special situations investments. These accounts provide for management fees determined quarterly Employee Compensation and Benefits based on an annual rate generally ranging from 0.5% to 1.5%. Such Employee compensation and benefits expense includes salaries, rate may be based on the accounts’ average net asset value, capital bonuses, equity based compensation and profit sharing plans as commitments or invested capital. Such accounts may also provide for described below. a carried interest on investment disposition proceeds in excess of the Historically, employee compensation and benefits expense has consisted capital contributions made for such investment. The carried interest, of base salaries and bonuses paid to employees who were not Senior if any, may be subject to a preferred return prior to any distributions of Principals. Payments made to our Senior Principals included partner carried interest. Carried interest is generally recognized based on the distributions that were paid to our Senior Principals and accounted contractual formula set forth in the applicable agreement governing for as capital distributions as a result of operating as a partnership. the account. If an account provides for carried interest, the applicable Accordingly, KKR did not record any employee compensation and agreements typically provide for clawback if it is determined that KKR benefits charges for payments made to Senior Principals for periods received carried interest in excess of the amount it was entitled to prior to the completion of the Transactions. receive for such account. Following the completion of the Transactions, all of the Senior Investment Income Principals and other employees receive a base salary that is paid by KKR Investment income consists primarily of the net impact of: (i) realized and accounted for as employee compensation and benefits expense. and unrealized gains and losses on investments, (ii) dividends, Employees are also eligible to receive discretionary cash bonuses (iii) interest income, (iv) interest expense and (v) foreign exchange based on performance, overall profitability and other matters. While gains and losses relating to mark-to-market activity on foreign exchange cash bonuses paid to most employees are funded by KKR and result forward contracts, foreign currency options and foreign denominated in customary employee compensation and benefits charges, cash debt. Carried interests and similar distribution rights generally entitle bonuses that are paid to certain of our most senior employees are KKR to a percentage of the profits generated by a fund as described funded by KKR Holdings with distributions that it receives on its KKR below. Unrealized gains or losses result from changes in fair value of Group Partnership Units. To the extent that distributions received by investments during the period, and are included in Net Gains (Losses) these individuals exceed the amounts that they are otherwise entitled from Investment Activities. Upon disposition of an investment, to through their vested units in KKR Holdings, this excess will be previously recognized unrealized gains or losses are reversed and a funded by KKR Holdings and reflected in compensation expense in realized gain or loss is recognized. the statement of operations.

Carried Interests Equity Based Payments Carried interests entitle the general partner of a fund to a greater Compensation paid to KKR employees in the form of equity is allocable share of the fund’s earnings from investments relative to the recognized as employee compensation and benefits expense. GAAP capital contributed by the general partner and correspondingly reduce generally requires that the cost of services received in exchange for noncontrolling interests’ attributable share of those earnings. Amounts an award of an equity instrument be measured based on the grant- earned pursuant to carried interests are included as investment income date fair value of the award. Equity based awards that do not require in Net Gains (Losses) from Investment Activities and are earned by the satisfaction of future service or performance criteria (i.e., vested the general partner of those funds to the extent that cumulative awards) are expensed immediately. Equity based awards that require investment returns are positive. If these investment returns decrease the satisfaction of future service or performance criteria are recognized or turn negative in subsequent periods, recognized carried interest over the relevant service period, adjusted for estimated forfeitures of will be reduced and reflected as investment losses. Carried interest is awards not expected to vest. recognized based on the contractual formula set forth in the instruments Compensation paid to non-employee operating consultants to KKR’s governing the fund as if the fund was terminated at the reporting date businesses in the form of equity is recognized as general, administrative with the then estimated fair values of the investments realized. Due to and other expense. Unlike employee equity awards, the cost of services the extended durations of KKR’s private equity funds, KKR believes

76 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS received in exchange for an award of an equity instrument to service subsidiaries of KKR and the KKR Group Partnerships are subject to providers is measured at each vesting date, and is not measured federal, state and local corporate income taxes at the entity level and based on the grant-date fair value of the award unless the award is the related tax provision attributable to KKR’s share of this income is vested at the grant date. Equity based awards that do not require the reflected in the financial statements. satisfaction of future service or performance criteria (i.e., vested The Company provides for federal, state and foreign income taxes awards) are expensed immediately. Equity based awards that require currently payable. In addition, deferred tax assets and liabilities are the satisfaction of future service or performance criteria are recognized recognized for the expected future tax consequences of differences over the relevant service period, adjusted for estimated forfeitures of between the carrying amounts of assets and liabilities and their awards not expected to vest, based on the fair value of the award on respective tax bases using currently enacted tax rates. The effect on each reporting date and adjusted for the actual fair value of the award deferred assets and liabilities of a change in tax rates is recognized in at each vesting date. Accordingly, the measured value of the award income in the period when the change is enacted. Deferred tax assets will not be finalized until the vesting date. 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. Profit Sharing Plans KKR has implemented profit sharing arrangements for KKR employees, Tax laws are complex and subject to different interpretations by the operating consultants and certain senior advisors working in its taxpayer and respective governmental taxing authorities. Significant businesses that are designed to appropriately align performance and judgment is required in determining tax expense and in evaluating compensation. tax positions including evaluating uncertainties. KKR reviews its tax positions quarterly and adjusts its tax balances as new information Subsequent to the Transactions, with respect to KKR’s active and future becomes available. funds and co-investment vehicles that provide for carried interest, KKR will allocate to its principals, other professionals and operating Uncertain Tax Positions consultants a portion of the carried interest earned in relation to these For the purposes of calculating uncertain tax positions, KKR measures funds as part of its carry pool. KKR currently allocates approximately the tax benefit of such positions by determining the largest amount that 40% of the carry it earns from these funds and vehicles to its carry pool. is greater than 50% likely of being realized upon settlement, presuming These amounts are accounted for as compensatory profit‑sharing that the tax position is examined by the appropriate taxing authority arrangements in conjunction with the related carried interest income that has full knowledge of all relevant information. These assessments and recorded as compensation expense for KKR employees and general can be complex and require significant judgment. To the extent that and administrative expense for operating consultants. For the year KKR’s estimates change or the final tax outcome of these matters is ended December 31, 2010, $455.9 million was charged to the statement different than the amounts recorded, such differences will impact the of operations. For the year ended December 31, 2009, $167.2 million was income tax provision in the period in which such determinations are charged to the statement of operations of which $130.2 million was a made. If the initial assessment fails to result in the recognition of a tax one-time charge recorded immediately subsequent to the Transactions. benefit, KKR regularly monitors its position and subsequently recognizes To the extent previously recorded carried interest is adjusted to reflect the tax benefit if (i) there are changes in tax law or analogous case decreases in the underlying funds’ valuations at period end, related law that sufficiently raise the likelihood of prevailing on the technical profit sharing amounts previously accrued are adjusted and reflected merits of the position to more-likely-than-not, (ii) the statute of limitations as a credit to current period compensation expense. expires, or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency. Interest and penalties, Foreign Currency if any, are recorded within the provision for income taxes in KKR’s Foreign currency denominated assets and liabilities are primarily held statements of operations and are classified on the statements of through the KKR Funds. Foreign currency denominated assets and financial condition with the related liability for unrecognized tax benefits. liabilities are translated using the exchange rates prevailing at the end Tax Receivable Agreement of each reporting period. Results of foreign operations are translated Certain exchanges of KKR Group Partnership Units from KKR Holdings at the weighted average exchange rate for each reporting period. or transferees of its KKR Group Partnership Units is expected to result Translation adjustments are included as a component of accumulated in an increase in Management Holdings Corp.’s share of the tax basis other comprehensive income until realized. Foreign currency gains or of the tangible and intangible assets of KKR Management Holdings L.P., losses resulting from transactions outside of the functional currency of a portion is attributable to the goodwill inherent in our business, that a consolidated entity are recorded in income as incurred and were not would not otherwise have been available. This increase in tax basis material during the years ended December 31, 2010, 2009 and 2008. may increase depreciation and amortization for U.S. federal income tax purposes and therefore reduce the amount of income tax that our Income Taxes intermediate holding company would otherwise be required to pay in Prior to the completion of the Transactions, KKR operated as a the future. In connection with the Transactions, KKR & Co. L.P. entered partnership or limited liability company for U.S. federal income tax into a tax receivable agreement with KKR Holdings pursuant to which purposes and mainly as a corporate entity in non-U.S. jurisdictions. our intermediate holding company will be required to pay to KKR As a result, income was not subject to U.S. federal and state income Holdings or transferees of its KKR Group Partnership Units 85% of taxes. Generally, the tax liability related to income earned by these the amount of cash savings, if any, in U.S. federal, state and local entities represented obligations of the KKR principals and have not income taxes that the intermediate holding company actually realizes been reflected in the historical financial statements. Income taxes as a result of this increase in tax basis, as well as 85% of the amount shown on the statements of operations prior to the Transactions are of any such savings the intermediate holding company actually realizes attributable to the New York City unincorporated business tax and as a result of increases in tax basis that arise due to payments under other income taxes on certain entities located in non-U.S. jurisdictions. the tax receivable agreement. Although we are not aware of any issue Following the Transactions, the KKR Group Partnerships and certain of that would cause the IRS to challenge a tax basis increase, neither their subsidiaries continue to operate in the U.S. as partnerships for KKR Holdings nor its transferees will reimburse us for any payments U.S. federal income tax purposes and generally as corporate entities previously made under the tax receivable agreement if such tax basis in non-U.S. jurisdictions. Accordingly, these entities in some cases increase, or the benefits of such increases, were successfully continue to be subject to New York City unincorporated business taxes, challenged. No payments have been made under the tax receivable or non-U.S. income taxes. In addition, certain of the wholly owned agreement for the year‑ended December 31, 2010.

KKR 2010 ANNUAL REPORT 77 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

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

78 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

3. NET GAINS (LOSSES) FROM INVESTMENT ACTIVITIES 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. Unrealized gains or losses result from changes in the fair value of these investments and other financial instruments during a period. Upon disposition of an investment, previously recognized unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period. The following table summarizes KKR’s total Net Gains (Losses) from Investment Activities:

Year Ended December 31, 2010 Year Ended December 31, 2009 Year Ended December 31, 2008 Net Realized Net Unrealized Net Realized Net Unrealized Net Realized Net Unrealized Gains (Losses) Gains (Losses) Gains (Losses) Gains (Losses) Gains (Losses) Gains (Losses) Private Equity Investments (a) $2,351,708 $ 5,159,632 $ (173,548) $ 7,549,495 $ 353,406 $(13,333,975) Other Investments (a) 81,046 48,998 (167,718) 560,219 (157,306) (376,661) Foreign Exchange Contracts (b) (9,865) 184,159 6,146 (242,621) 40,234 489,756 Foreign Exchange Options (b) — (20,489) 8,788 (29,766) 8,998 21,325 Futures Contract (b) — — (3,856) — — — Call Options Written (b) 176 1 (12) 23 3,698 (2,025) Securities Sold Short (b) (16,654) (2,752) (7,958) (6,994) 12,364 (133) Other Derivative Liabilities (b) (2,115) 2,115 (4,172) 15,034 (7,771) (17,149) Contingent Carried Interest Repayment Guarantee (c) — (21,138) (4,466) (13,693) — — Debt Obligations (d) 8,236 (5,525) 19,761 (12,285) 13,819 20,732 Foreign Exchange Losses on Cash and Cash Equivalents held at Consolidated Entities (e) (1,023) (1,421) 12,628 — (14,032) — Total Net Gains (Losses) from Investment Activities $ 2,411,510 $5,343,580 $ (314,407) $ 7,819,412 $ 253,410 $ (13,198,130)

(a) See Note 4 “Investments”. (b) See Note 7 “Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities”. (c) See Note 13 “Commitments and Contingencies”. (d) See Note 8 “Debt Obligations”. (e) See Statement of Cash Flows Supplemental Disclosures.

4. INVESTMENTS Investments, at Fair Value consist of the following:

Fair Value December 31, 2010 2009 Private Equity Investments $34,642,166 $27,950,840 Other Investments 1,807,604 1,022,103 $36,449,770 $ 28,972,943

As of December 31, 2010 and 2009, Investments, at fair value totaling $5,422,172 and $5,632,235 respectively, were pledged as direct collateral against various financing arrangements. See Note 8 “Debt Obligations.”

KKR 2010 ANNUAL REPORT 79 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

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

Fair Value as a Fair Value Percentage of Total December 31, 2010 2009 2010 2009 Private Equity Investments, at Fair Value North America Retail $ 5,419,908 $ 4,567,691 15.6% 16.3% Healthcare 4,163,435 3,609,996 12.0% 12.9% Financial Services 2,625,310 2,579,309 7.6% 9.2% Media 1,210,655 1,256,363 3.5% 4.5% Technology 899,939 1,876,567 2.6% 6.7% Energy 870,450 1,305,580 2.5% 4.7% Consumer Products 779,921 720,915 2.3% 2.6% Education 710,766 683,070 2.1% 2.4% Chemicals 426,527 251,059 1.2% 0.9% Hotels/Leisure 6,232 6,232 0.1% 0.0% North America Total (Cost: December 31, 2010, $15,173,057; December 31, 2009, $16,340,262) 17,113,143 16,856,782 49.5% 60.2% Europe Healthcare 2,761,078 1,953,069 8.0% 7.0% Manufacturing 2,493,885 2,199,457 7.2% 7.9% Technology 2,281,137 912,829 6.6% 3.3% Retail 1,221,768 219,089 3.5% 0.8% Telecom 863,195 1,031,706 2.5% 3.7% Media 708,916 185,957 2.0% 0.7% Services 266,063 — 0.8% 0.0% Consumer Products 249,395 — 0.7% 0.0% Recycling 218,277 224,822 0.6% 0.8% Europe Total (Cost: December 31, 2010, $11,471,364; December 31, 2009, $10,081,881) 11,063,714 6,726,929 31.9% 24.2% Australia, Asia and Other Locations Technology 2,852,393 2,431,647 8.2% 8.6% Consumer Products 1,192,052 653,631 3.4% 2.3% Financial Services 620,942 273,876 1.9% 1.0% Media 619,772 423,742 1.8% 1.5% Manufacturing 297,270 128,965 0.9% 0.5% Services 286,523 — 0.8% 0.0% Telecom 257,969 248,513 0.7% 0.9% Recycling 165,399 48,100 0.5% 0.2% Retail 82,336 — 0.2% 0.0% Transportation 49,391 158,655 0.1% 0.6% Energy 41,262 — 0.1% 0.0% Australia, Asia and Other Locations, Total (Cost: December 31, 2010, $4,638,805; December 31, 2009, $3,329,389) 6,465,309 4,367,129 18.6% 15.6% Private Equity lnvestments, at Fair Value (Cost: December 31, 2010, $31,283,226; December 31, 2009, $29,751,532) $34,642,166 $27,950,840 100.0% 100.0%

80 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

As of December 31, 2010, private equity investments which represented Other Investments greater than 5% of the net assets of consolidated private equity funds The following table presents KKR’s other investments at fair value: included: (i) Dollar General valued at $3,377,971; (ii) Alliance Boots valued at $2,468,283; and (iii) HCA Inc. valued at $2,429,808. Fair Value As of December 31, 2009, private equity investments which represented December 31, 2010 2009 greater than 5% of the net assets of consolidated private equity funds Corporate Credit Investments (a) $1,633,289 $ 877,830 included: (i) Dollar General valued at $3,048,526; (ii) HCA Inc. valued Equity Securities (b) 97,721 76,808 at $2,128,535; (iii) Alliance Boots valued at $1,953,069; (iv) First Data Other 76,594 67,465 valued at $1,476,459; and (v) Legrand S.A valued at $1,418,145. Total Other Investments The majority of the securities underlying KKR’s private equity (Cost: December 31, 2010, $1,661,377, investments represent equity securities. As of December 31, 2010 and December 31, 2009, $931,955) $1,807,604 $1,022,103 2009, the aggregate amount of investments that were other than (a) Represents corporate high yield securities and loans classified as trading securities. equity securities amounted to $1,986,160 and $2,814,030, respectively. Net unrealized trading gains (losses) relating to these investments amounted to $146,507 and $78,479 as of December 31, 2010 and 2009, respectively. (b) Net unrealized trading gains (losses) relating to these investments amounted to $1,794 and $10,028 as of December 31, 2010 and 2009, respectively.

5. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS 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, 2010 and 2009. Assets, at fair value:

December 31, 2010 Level I Level II Level III Total Private Equity Investments $9,386,259 $ 2,083,110 $ 23,172,797 $34,642,166 Other Investments 75,596 1,020,806 711,202 1,807,604 Total Investments 9,461,855 3,103,916 23,883,999 36,449,770 Foreign Exchange Forward Contracts — 58,986 — 58,986 Foreign Currency Options — 1,530 — 1,530 Total Assets $ 9,461,855 $3,164,432 $23,883,999 $36,510,286

December 31, 2009 Level I Level II Level III Total Private Equity Investments $ 6,476,849 $ 2,149,030 $ 19,324,961 $ 27,950,840 Other Investments 75,216 854,812 92,075 1,022,103 Total Investments 6,552,065 3,003,842 19,417,036 28,972,943 Foreign Currency Options — 13,055 — 13,055 Total Assets $6,552,065 $ 3,016,897 $ 19,417,036 $ 28,985,998

Liabilities, at fair value:

December 31, 2010 Level I Level II Level III Total Securities Sold, Not Yet Purchased $ 89,820 $ 2,006 $ — $ 91,826 Call Options 566 — — 566 Total Liabilities $ 90,386 $ 2,006 $ — $ 92,392

December 31, 2009 Level I Level II Level III Total Securities Sold, Not Yet Purchased $ 82,888 $ 865 $ — $ 83,753 Foreign Exchange Contracts — 125,173 — 125,173 Interest Rate Swap — 2,115 — 2,115 Call Options 80 — — 80 Total Liabilities $ 82,968 $ 128,153 $ — $ 211,121

KKR 2010 ANNUAL REPORT 81 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

The following table summarizes KKR’s Level III investments and other The Transfers Out noted in the table above for other investments are financial instruments by valuation methodology as of December 31, 2010: principally attributable to certain corporate credit investments that experienced a significant level of market activity during the period and Private Equity Other Total Level III thus were valued using observable inputs. December 31, 2010 Investments Investments Holdings Third‑Party Fund Managers 0.0% 0.4% 0.4% For the Year Ended December 31, 2009 Private Equity Other Public/Private Company Balance, Beginning of Period $ 16,156,627 $ 162,857 Comparables and Discounted Transfers In 500,500 — Cash Flows 97.0% 2.6% 99.6% Transfers Out (4,227,723) (185,589) Total 97.0% 3.0% 100.0% Purchases 1,531,808 22,772 The changes in private equity investments and other investments Sales (484,791) (39,312) measured and reported at fair value for which KKR has used Level III Net Realized Gains (Losses) (298,361) (24,621) inputs to determine fair value for the years ended December 31, 2010 Net Unrealized Gains (Losses) 6,146,901 155,968 and 2009 are as follows: Balance, End of Period $ 19,324,961 $ 92,075 Changes in Net Unrealized Gains Private Equity Other For the Year Ended December 31, 2010 Investments Investments (Losses) Included in Net Gains (Losses) Balance, Beginning of Period $ 19,324,961 $ 92,075 from Investment Activities (including foreign exchange gains and losses Transfers In — 183,526 attributable to foreign‑ denominated Transfers Out (1,900,884) (45,148) investments) related to Investments Purchases 3,378,731 484,597 still held at Reporting Date $ 3,389,620 $ 56,078 Sales (2,207,186) (48,494) Net Realized Gains (Losses) 1,014,899 5,714 The Transfers Out noted in the table above are principally attributable Net Unrealized Gains (Losses) 3,562,276 38,932 to the Reorganization Transactions and private equity investments in Balance, End of Period $23,172,797 $ 711,202 certain Portfolio Companies that had an initial public offerings during Changes in Net Unrealized Gains (Losses) the period. Included in Net Gains (Losses) from Total realized and unrealized gains and losses recorded for Level III Investment Activities (including foreign investments are reported in Net Gains (Losses) from Investment exchange gains and losses attributable to Activities in the accompanying statements of operations. There were foreign‑ denominated investments) no significant transfers between Level I and Level II during the years related to Investments still held at ended December 31, 2010 or 2009. Reporting Date $ 3,092,754 $ 40,455 The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents, due from / (to) affiliates, accounts payable, The Transfers Out noted in the table above for private equity accrued expenses and other liabilities approximate fair value due to investments are attributable to certain Portfolio Companies that their short-term maturities. KKR’s debt obligations except for KKR’s completed an initial public offering during the period. Senior Notes (See Note 8) bear interest at floating rates and therefore The Transfers In noted in the table above for other investments are fair value approximates carrying value. 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.

6. EARNINGS PER COMMON UNIT Basic earnings per common unit is calculated by dividing Net Income (Loss) Attributable to KKR & Co. L.P. by the total weighted average number of common units outstanding during the period. Diluted earnings per common unit is calculated by dividing Net Income (Loss) attributable to KKR & Co. L.P. by the weighted average number of common units outstanding during the period increased to include the number of additional common units that would have been outstanding if the dilutive potential common units had been issued. For the year ended December 31, 2010 and period from October 1, 2009 through December 31, 2009, basic and diluted earnings per common unit were calculated as follows:

October 1, 2009 through For the Year Ended December 31, 2010 December 31, 2009

Basic Diluted Basic Diluted Net Income (Loss) Attributable to KKR & Co. L.P. $ 333,178 $ 333,178 $ (78,221) $ (78,221) Net Income Attributable to KKR & Co. L.P. Per Common Unit $ 1.62 $ 1.62 $ (0.38) $ (0.38) Total Weighted‑Average Common Units Outstanding 206,031,682 206,039,244 204,902,226 204,902,226

82 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

For the year ended December 31, 2010, KKR Holdings units have been Accounts Payable, Accrued Expenses and Other Liabilities consist of excluded from the calculation of diluted earnings per common unit the following: given that the exchange of these units would proportionally increase KKR & Co. L.P.’s interests in the KKR Group Partnerships and would have December 31, 2010 2009 an anti-dilutive effect on earnings per common unit as a result of certain Amounts Payable to Carry Pool (a) $520,213 $200,918 tax benefits KKR & Co. L.P. is assumed to receive upon the exchange. Interest Payable 93,422 114,807 For the year ended December 31, 2010, a total of 30,000 unvested Securities Sold, Not Yet Purchased (b) 91,826 83,753 equity awards that have been granted under the KKR & Co. L.P. 2010 Unsettled Investment Trades (c) 56,887 14,149 Equity Incentive Plan are dilutive and as such have been included in Accounts Payable and Accrued Expenses 51,668 69,964 the calculation of diluted earnings per unit. Deferred Tax Liabilities 31,610 67,243 Prior to the Transactions, KKR’s business was conducted through a Accrued Compensation and Benefits 17,480 8,094 large number of entities as to which there was no single holding entity Taxes Payable 1,787 17,059 but which were separately owned by its Predecessor Owners. There was Deferred Revenue 3,322 3,535 no single capital structure upon which to calculate historical earnings Unrealized Losses on Foreign Exchange per common unit information. Accordingly, earnings per common unit Forward Contracts (d) — 125,173 information have not been presented for the periods ended September 30, (e) 2009 and December 31, 2008. Derivative Liabilities — 2,115 Other 17,893 4,894 $886,108 $ 711,704

7. OTHER ASSETS AND ACCOUNTS PAYABLE, ACCRUED (a) Represents the amount of carried interest payable to KKR’s principals, other EXPENSES AND OTHER LIABILITIES professionals and selected other individuals with respect to KKR’s active funds and co-investment vehicles that provide for carried interest. See Note 2 “Summary of Other assets consist of the following: Significant Accounting Policies — Profit Sharing Plans”. (b) Represents securities sold short, which are obligations of KKR to deliver a specified December 31, 2010 2009 security at a contracted price at a future point in time. Such securities are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Interest Receivable $ 84,018 $ 54,974 Activities in the accompanying statements of operations. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these Unrealized Gains on Foreign Exchange instruments. The cost basis for these instruments at December 31, 2010 and 2009 Forward Contracts (a) 58,986 — was $81,949 and $76,628, respectively. (c) Represents amounts owed to third parties for investment purchases for which cash Fixed Assets, net (b) 49,260 50,971 settlement has not occurred. (c) (d) Represents derivative financial instruments used to manage foreign exchange risk Intangible Asset, net 28,099 31,888 arising from certain foreign denominated private equity investments. Such instruments Receivables 17,787 8,864 are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations. The fair value Unsettled Investment Trades (d) 10,254 7,733 of these instruments as of December 31, 2010 was an unrealized gain of $58,986 and was reported in Other Assets. See Note 3 “Net Gains (Losses) from Investment Prepaid Expenses 8,473 5,573 Activities” for the net changes in fair value associated with these instruments. Deferred Financing Costs 8,272 10,954 (e) Represents derivative financial instruments used to manage interest rate risk arising from certain assets and liabilities. Such instruments are measured at fair value with Deferred Tax Assets 6,831 24,616 changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations. As of December 31, 2010, there were no such Foreign Currency Options (e) 1,530 13,055 derivative financial instruments outstanding. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments. Other 36,244 14,424 $309,754 $223,052

(a) Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign denominated private equity investments. Such instruments 8. DEBT OBLIGATIONS are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying statements of operations. The fair value Debt obligations consist of the following: of these instruments as of December 31, 2009 was an unrealized loss of $125,173 and was reported in Accounts Payable, Accrued Expenses and Other Liabilities. See Note 3 “Net Gains (Losses) from Investment Activities” for the net changes in fair value December 31, 2010 2009 associated with these instruments. (b) Net of accumulated depreciation and amortization of $72,389 and $60,170 as of Investment Financing Arrangements $ 988,988 $1,326,488 December 31, 2010 and 2009, respectively. Depreciation and amortization expense Senior Notes 497,972 — totaled $11,664, $9,799 and $17,352 for the years ended December 31, 2010, 2009 and 2008, respectively. Revolving Credit Agreements — 733,697 (c) Net of accumulated amortization of $9,787 and $5,999 as of December 31, 2010 and 2009, respectively. Amortization expense totaled $3,788, $3,788 and $2,211 for the $1,486,960 $2,060,185 years ended December 31, 2010, 2009 and 2008, respectively. (d) Represents amounts due from third parties for investments sold for which cash has not been received. Investment Financing Agreements (e) Represents hedging instruments used to manage foreign exchange risk. The instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) Certain of KKR’s private equity fund investment vehicles have entered from Investment Activities in the accompanying statements of operations. See Note 3 into financing arrangements with major financial institutions in “Net Gains (Losses) from Investment Activities” for the net changes in fair value associated with these instruments. The cost basis for these instruments at December 31, connection with specific private equity investments with the objective 2010 and 2009 was $19,705 and $10,741, respectively. of enhancing returns. These financing arrangements are not direct obligations of the general partners of KKR’s private equity funds or its management companies. As of December 31, 2010, KKR had made $1,906.2 million in these specific private equity investments of which $989.0 million was funded using these financing arrangements. Total availability under these financing arrangements amounted to $992.9million as of December 31, 2010. The $989.0 million of financing was structured through various instruments as discussed below. Of the $989.0 million of financing, approximately $796.4 million was structured through the use of total return swaps which effectively convert third party capital contributions into borrowings of KKR.

KKR 2010 ANNUAL REPORT 83 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

$171.4 million of the total return swaps mature in May 2011 with the applicable grace period. In the case of specified events of bankruptcy, remainder maturing in February 2015. Upon the occurrence of certain insolvency, receivership or reorganization, the principal amount of events, including an event based on the value of the collateral and the Senior Notes and any accrued and unpaid interest on the Senior events of default, KKR may be required to provide additional collateral Notes automatically becomes due and payable. All or a portion of the plus accrued interest, under the terms of these financing arrangements. Senior Notes may be redeemed at the Issuer’s option in whole or in The per annum rates of interest payable for the financings range from part, at any time, and from time to time, prior to their stated maturity, three‑month LIBOR plus 1.35% to three‑month LIBOR plus 1.75% (rates at the make-whole redemption price set forth in the Senior Notes. ranging from 1.7% to 2.1% as of December 31, 2010). If a change of control repurchase event occurs, the Senior Notes are Approximately $182.2 million of financing was structured through the subject to repurchase by the Issuer at a repurchase price in cash use of a syndicated term and a revolving credit facility (the “Term equal to 101% of the aggregate principal amount of the Senior Notes Facility”) that matures in August 2014. The per annum rate of interest repurchased plus any accrued and unpaid interest on the Senior Notes for each borrowing under the Term Facility was equal to the Bloomberg repurchased to, but not including, the date of repurchase. United States Dollar Interest Rate Swap Ask Rate plus 1.75% at the time of each borrowing under the Term Facility through March 11, KKR Revolving Credit Agreements 2010. On March 11, 2010, the Term Facility was amended and the per Corporate Credit Agreement annum rate of interest is the greater of the 5-Year interest rate swap On February 26, 2008, KKR entered into a credit agreement with a rate plus 1.75% or 4.65% for periods from March 12, 2010 to June 7, major financial institution (the “Corporate Credit Agreement”). The 2012. For the period June 8, 2012 through maturity the interest rate is Corporate Credit Agreement provided for revolving borrowings of up equal to one year LIBOR plus 1.75%. The interest rate at December 31, to $1.0 billion, with a $50.0 million sublimit for swing-line notes and a 2010 on the borrowings outstanding was 4.65%. $25.0 million sublimit for letters of credit. The facility had a term of five years that expired on February 26, 2013. As of December 31, 2010, In November 2010, a KKR investment vehicle entered into a five-year no borrowings were outstanding on the Corporate Credit Agreement. revolving credit agreement with a syndicate of lenders (the “Investment See Note 16 “Subsequent Events.” Credit Agreement”). The Investment Credit Agreement provides for up to $28.1 million of senior secured credit subject to availability under a KCM Credit Agreement borrowing base determined by the value of certain specific assets On February 27, 2008, KKR Capital Markets entered into a revolving pledged as collateral security for obligations under the agreement and credit agreement with a major financial institution (the “KCM Credit a $5.6 million sub-limit for letters of credit. Based on the level of certain Agreement”). The KCM Credit Agreement, as amended, provides for assets in the investment vehicle, as of December 31, 2010, KKR had revolving borrowings of up to $500 million with a $500 million sublimit availability under the facility of $13.5 million of which $10.4 million of for letters of credit. The KCM Credit Agreement has a maturity date of borrowings were outstanding. In addition, there is a letter of credit of February 27, 2013. In March 2009, the KCM Credit Agreement was $0.6 million outstanding. As of December 31, 2010, the interest rates on amended to reduce the amounts available on revolving borrowings borrowings outstanding under the Investment Credit Agreement ranged from $700 million to $500 million. As a result of this amendment, the from 2.76% to 2.79%. This financing arrangement is non‑recourse to counterparty returned approximately $1.6 million in financing costs. the Partnership beyond the specific assets pledged as collateral. As of December 31, 2010, no borrowings were outstanding under the KCM Credit Agreement. Senior Notes On September 29, 2010, KKR Group Finance Co. LLC (the “Issuer”), a Principal Credit Agreement subsidiary of KKR Management Holdings Corp. and indirect subsidiary In June 2007, the KPE Investment Partnership entered into a five-year of the Partnership, issued $500 million aggregate principal amount of revolving credit agreement with a syndicate of lenders (the “Principal 6.375% Senior Notes (the “Senior Notes”), which were issued at a Credit Agreement”). The Principal Credit Agreement provides for up to price of 99.584%. The Senior Notes are unsecured and unsubordinated $925.0 million of senior secured credit subject to availability under a obligations of the Issuer and will mature on September 29, 2020, borrowing base determined by the value of certain investments pledged unless earlier redeemed or repurchased. The Senior Notes are fully as collateral security for obligations under the agreement. The borrowing and unconditionally guaranteed, jointly and severally, by KKR & Co. L.P. base is subject to certain investment concentration limitations and the and the KKR Group Partnerships. The guarantees are unsecured and value of the investments constituting the borrowing base is subject to unsubordinated obligations of the guarantors. certain advance rates based on type of investment. In September 2009, a wholly‑owned subsidiary of KKR assumed $65.0 million of commitments The Senior Notes bear interest at a rate of 6.375% per annum, accruing on the Principal Credit Agreement from one of the counterparties to the from September 29, 2010. Interest is payable semiannually in arrears agreement, which has effectively reduced KKR’s availability under the on March 29 and September 29 of each year, commencing on March 29, Principal Credit Agreement on a consolidated basis to $860.0 million. 2011. Interest expense on the Senior Notes was $8.1 million for the year ended December 31, 2010. Transaction costs related to the issuance of As of December 31, 2010, no borrowings were outstanding under the the Senior Notes have been capitalized and are being amortized over Principal Credit Agreement. Foreign currency adjustments related to the life of the Senior Notes. As of December 31, 2010, the fair value of these borrowings during the period are recorded in Net Gains (Losses) the Senior Notes was $495.5 million. from Investment Activities in the accompanying statements of operations. See Note 3 “Net Gains (Losses) from Investment Activities” for foreign The indenture, as supplemented by a first supplemental indenture, currency adjustments related to these borrowings. relating to the Senior Notes includes covenants, including limitations on the Issuer’s and the guarantors’ ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The indenture, as supplemented, also provides for events 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

84 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Scheduled principal payments for long-term borrowings at December 31, In connection with exchanges of KKR Holdings units into common 2010 are as follows: units of KKR, KKR recorded an adjustment to equity to establish net deferred tax liabilities associated with future taxable income of KKR 2011 $ 171.4 Management Holdings Corp. totaling $2,154. Additionally, as a result 2012 — of certain of these exchanges, KKR recorded a deferred tax asset 2013 — associated with an increase in Management Holdings Corp.’s share of 2014 182.2 the tax basis of the tangible and intangible assets of Management Holdings, totaling $19,041. This amount was offset by an adjustment 2015 635.4 totaling $16,185 to record amounts Due to KKR Holdings under the tax Thereafter 500.0 receivable agreement. The net of these adjustments was recorded as $1,489.0 an adjustment to equity at the time of the exchanges. The following table reconciles the Provision (Benefit) for Taxes to the U.S. federal statutory tax rate: 9. INCOME TAXES Year Ended December 31, 2010 2009 2008 Prior to the Transactions, KKR provided for New York City unincorporated Income Before Taxes at business tax for certain entities based on a statutory rate of 4%. Statutory Rate $ 2,748,141 $ 2,411,279 $(521,938) Following the Transactions, the KKR Group Partnerships and certain of their subsidiaries will continue to be treated as partnerships for Pass Through Income (2,817,081) (2,463,097) 521,938 U.S. federal income tax purposes and as corporate entities in non-U.S. Foreign Income Taxes 12,361 1,833 5,915 jurisdictions. Accordingly, these entities in some cases continue to be State and Local Income subject to the New York City unincorporated business tax or non-U.S. Taxes 7,065 8,819 871 income taxes. In addition, certain of the wholly‑owned subsidiaries Compensation Charges of KKR & Co. L.P. will be subject to federal, state and local corporate borne by KKR Holdings 134,188 81,124 — income taxes. Other (9,314) (2,960) — The provision (benefit) for income taxes consists of the following: Effective Tax Expense $ 75,360 $ 36,998 $ 6,786

Year Ended December 31, 2010 2009 2008 Income (loss) derived from foreign jurisdictions is immaterial. In addition, Current there were no significant undistributed earnings at December 31, 2010. Federal Income Tax $ 51,164 $ 7,595 $ — KKR has gross operating loss carryforwards of $6,460 and $121,555 State and Local Income Tax 11,695 14,081 (612) in certain local jurisdictions for the years ended December 31, 2010 Foreign Income Tax 12,837 6,469 6,366 and 2009, respectively. Such loss carryforwards expire between 2029 Subtotal 75,696 28,145 5,754 and 2030. Deferred The following is a tabular reconciliation of the total amounts of Federal Income Tax 1,795 11,781 — unrecognized tax benefits: State and Local Income Tax (1,655) 1,708 1,483 Foreign Income Tax (476) (4,636) (451) Year Ended December 31, 2010 2009 Subtotal (336) 8,853 1,032 Unrecognized Tax Benefits, January 1 $4,640 $ — Total Income Taxes $75,360 $36,998 $6,786 Gross increases in tax positions from prior periods — — The components of the deferred tax asset or liability consist of the Gross decreases in tax positions from prior following: periods (1,722) — Gross increases in tax positions in current period 1,227 4,640 As of December 31, 2010 2009 Settlement of tax positions — — Deferred Tax Assets Lapse of statute of limitations (172) — Fund Management Fees $23,003 $ 10,162 Unrecognized Tax Benefits, December 31 $ 3,973 $4,640 Net Operating Loss Carryforwards 258 3,477 Employee Compensation 8,506 7,263 Included in the balance of unrecognized tax benefits at December 31, Depreciation and Amortization 3,524 2,586 2010 are $4.0 million of tax benefits that, if recognized, would affect the KKR Holdings Unit Exchange 19,041 — effective tax rate. KKR believes that there will not be a significant increase or decrease to the tax positions within 12 months of the reporting date. Other 1,075 1,128 Total Deferred Tax Assets $ 55,407 $ 24,616 For the years ended December 31, 2010 and 2009, KKR’s tax provision included $(0.1) million and $0.5 million, respectively, related to interest Deferred Tax Liabilities and $0.5 million and $0.0 million, respectively, related to penalties. No Investment Basis Differences $ 78,076 $66,203 such charges were recorded for the year ended December 31, 2008 as Other 2,110 1,040 no uncertain tax positions had been identified. KKR believes that there Total Deferred Tax Liabilities $ 80,186 $ 67,243 will not be a significant increase or decrease to the tax positions within 12 months of the reporting date. For a particular tax-paying component of an entity and within a particular KKR files its tax returns as prescribed by the tax laws of the jurisdictions tax jurisdiction, deferred tax assets and liabilities are offset and in which it operates. In the normal course of business, KKR is subject to presented as a single amount within Other Assets or Accounts Payable, examination by federal and certain state, local and foreign tax regulators. Accrued and Other Liabilities, as applicable, in the accompanying As of December 31, 2010, KKR’s and the predecessor entities’ state Statements of Financial Position. and local tax returns for the years 2007 through 2009 are open under normal statute of limitations and therefore subject to examination.

KKR 2010 ANNUAL REPORT 85 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

10. EQUITY BASED COMPENSATION minimum retained ownership requirements and transfer restrictions Upon completion of the Transactions, KKR principals and certain referenced above, each KKR Holdings unit is exchangeable into a KKR operating consultants received grants of KKR Holdings units which Group Partnership Unit on a one-for-one basis. are exchangeable for KKR Group Partnership Units. These grants In conjunction with the Transactions, certain principals and operating were issued as part of the Reorganization Transactions as well as to consultants contributed ownership interests in our historical businesses promote broad ownership of our firm among our personnel and in exchange for units in KKR Holdings. On the date of grant, the fair further align their interests with those of investors. We believe that value of the total ownership interests contributed by the principals grants to our principals and certain operating consultants provide an and operating consultants as a whole amounted to approximately additional means for allowing us to incentivize, motivate and retain $4.34 billion. The value of the contributed interests was estimated qualified professionals that will help us continue to grow our business using an income approach based upon the present value of forecasts over the long term. These units are subject to minimum retained of ongoing cash flows for the business. Management deemed an ownership requirements and in certain cases, transfer restrictions, and income approach to be the most appropriate methodology due to the allow for the ability to exchange into common units of KKR & Co. L.P. differences in the underlying business fundamentals among KKR’s on a one-for-one basis. As of December 31, 2010, KKR Holdings owns various business lines, especially as it relates to carried interest, and approximately 69%, or 470,237,329, of the outstanding KKR Group to a lesser extent the lack of public data for companies comparable to Partnership Units. KKR as a whole. Assumptions utilized in the valuation analysis reflect Except for any units that vested on the date of grant, units are subject to management’s forecast for the business, historical experience, current service based vesting over a five-year period. The transfer restriction economic conditions and long-term normalized expectations that take period will last for a minimum of (i) one year with respect to one-half into consideration estimated investment returns, investment holding of the interests vesting on any vesting date and (ii) two years with periods, management fees, taxes and discount rates management respect to the other one-half of the interests vesting on such vesting deemed appropriate for the business. date. While providing services to KKR, these individuals will also be The calculation of compensation expense, if any, was performed on subject to minimum retained ownership rules requiring them to a person by person basis. Individual grants at October 1, 2009, were continuously hold at least 25% of their vested interests. Upon separation based on past performance and anticipated future performance. from KKR, certain individuals will be subject to the terms of a non- These grants may have differed from historical ownership interests. compete agreement that may require the forfeiture of certain vested To the extent the fair value of an individual’s vested units received and unvested units should the terms of the non-compete agreement exceeded an individual’s contributed ownership interests, additional be violated. Holders of KKR Group Partnership Units held through expense was recorded. For principals and operating consultants KKR Holdings are not entitled to participate in distributions made on whose value of ownership interests contributed was greater than the KKR Group Partnership Units until such units are vested. value of vested units received, no additional expense was recorded. All of the 470,237,329 KKR Holdings units have been legally allocated, but Compensation expense is recognized for all unvested KKR Holdings the allocation of 35,940,030 of these units has not been communicated units received by an individual over the vesting period. to each respective principal. The units whose allocation has not been kkr principal units — Units granted to principals give rise to periodic communicated are subject to performance based vesting conditions, employee compensation charges in the statements of operations which include profitability and other similar criteria. These criteria based on the grant-date fair value of the award. For units vesting on are not sufficiently specific to constitute performance conditions for the grant date, compensation expense is recognized on the date of accounting purposes, and the achievement, or lack thereof, will be grant based on the fair value of a unit (determined using the latest determined based upon the exercise of judgment by the managing available closing price of KKR & Co. L.P.’s common units) on the grant members. Each principal will ultimately receive between zero and 100% date multiplied by the number of vested units. In conjunction with the of the units initially allocated. The allocation of these units has not yet Transactions, certain principals received vested units in excess of been communicated to the award recipients as this was management’s the fair value of their contributed ownership interests in our historical decision on how to best incentivize its employees. It is anticipated that businesses. Accordingly, to the extent the fair value (calculated as additional service‑based vesting conditions will be imposed at the time described above) of any vested units received in the Transactions the allocation is initially communicated to the respective employees. exceeded the fair value of such principal’s contributed interests, KKR applied the guidance of ASC 718 and concluded that these KKR compensation expense was recorded in the statements of operations. Holdings units do not yet meet the criteria for recognition of compensation cost because neither the grant date nor the service inception date has Compensation expense on unvested units is calculated based on the occurred. In reaching a conclusion that the service inception date has fair value of a unit (determined using the latest available closing price not occurred, KKR considered (a) the fact that the vesting conditions of KKR & Co. L.P.’s common units) at the time of grant, discounted for are not sufficiently specific to constitute performance conditions for the lack of participation rights in the expected distributions on unvested accounting purposes, (b) the significant judgment that can be exercised units, which ranges from 1% to 32%, multiplied by the number of by the managing members in determining whether the vesting unvested units on the grant date. Additionally, the calculation of conditions are ultimately achieved, and (c) the absence of communication compensation expense on unvested units assumes a forfeiture rate of to the principals of any information related to the number of units they up to 4% annually based upon expected turnover by employee class. were initially allocated. For the years ended December 31, 2010 and 2009, KKR recorded compensation expense of $527.0 million and $451.7 million in relation The fair value of KKR Holdings units granted is based on the closing to equity based awards of KKR Group Partnership Units held through price of KKR & Co. L.P.’s common units on date of grant for principal KKR Holdings to principals. There were no amounts recorded for the awards and on the reporting date for operating consultant awards. year ended December 31, 2008. As of December 31, 2010 there was KKR determined this to be the best evidence of fair value as a KKR approximately $452.5 million of estimated unrecognized compensation unit is traded in an active market and has an observable market price. expense related to unvested awards. That cost is expected to be Additionally, a KKR Holdings unit is an instrument with terms and recognized over a weighted‑average period of 1.2 years, using the conditions similar to those of a KKR & Co. L.P. common unit. Specifically, graded attribution method, which treats each vesting portion as a units in both KKR Holdings and KKR & Co. L.P. represent ownership separate award. interests in KKR Group Partnership Units and, subject to vesting,

86 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

operating consultant units — Certain non-employee operating of the award at each vesting date. Accordingly, the measured value of consultants provide services to KKR and certain of its portfolio these units will not be finalized until each vesting date. Additionally, the companies, payment for which is made in the form of cash and KKR’s calculation of the general, administrative and other expense assumes equity. To the extent that these consultants no longer provide services a forfeiture rate of up to 4% annually based upon expected turnover by to KKR, they are required to forfeit any unvested equity received. Units class of operating consultant. For the years ended December 31, 2010 granted to operating consultants described above give rise to periodic and 2009 KKR recorded general, administrative and other expense of general, administrative and other charges in the statements of operations. $95.0 million and $81.0 million in relation to equity based awards of For units vesting on the grant date, expense is recognized on the date KKR Group Partnership Units held through KKR Holdings to operating of grant based on the fair value of a unit (determined using the latest consultants. There were no amounts recorded for the year ended available closing price of KKR & Co. L.P.’s common units) on the grant December 31, 2008. As of December 31, 2010, there was approximately date multiplied by the number of vested units. In conjunction with the $80.7 million of estimated unrecognized general, administrative and Transactions, certain operating consultants received vested units in other expense related to unvested awards based on the total fair value excess of the fair value of their contributed ownership interests in our of the unvested units on that date. Future general, administrative and historical businesses. Accordingly, to the extent the fair value other charges are expected to be recognized over a weighted‑average (calculated as described above) of any vested units received in the period of 1.4 years, using the graded attribution method, which treats Transactions exceeded the fair value of such operating consultant’s each vesting portion as a separate award. contributed interests, general, administrative and other expense was KKR estimated a turnover rate of up to 4% annually as of December 31, recorded in the statements of operations. 2010 based on expected turnover by employee class. KKR will periodically General, administrative and other expense recognized on unvested assess this forfeiture estimate as actual experience is observed and units is calculated based on the fair value of a unit (determined using make adjustments to compensation and general, administrative and the latest available closing price of KKR & Co. L.P.’s common units) on other expense as deemed necessary. each reporting date and subsequently adjusted for the actual fair value

A summary of the status of KKR’s equity based awards granted to KKR principals and operating consultants from January 1, 2010 through December 31, 2010 are presented below:

KKR Principals Operating Consultants Weighted Weighted Average Average Grant Date Grant Date Unvested Units Units Fair Value Units Fair Value Balance, January 1, 2010 149,574,399 $ 8.09 18,298,202 $ 8.15 Granted 5,539,600 $ 8.85 1,270,000 $ 8.34 Vested (39,080,839) $ 9.16 (4,851,824) $ 9.18 Forfeited (4,428,304) $ 8.06 (2,481,462) $ 7.94 Balance, December 31, 2010 111,604,856 $ 7.76 12,234,916 $ 7.80

Operating restricted equity units — Upon completion of the Transactions, Principal Consultant Awards Awards grants of restricted equity units based on KKR Group Partnership Weighted average remaining vesting period Units held by KKR Holdings were made to professionals, support staff, (in years) over which unvested units are and other personnel. These will be funded by KKR Holdings and will expected to vest 2.2 2.1 not dilute KKR’s interests in the KKR Group Partnerships. The vesting of these equity units occurs in installments up to five years from the date of grant and was contingent on, among other things, KKR’s The following table summarizes the remaining vesting tranches for common units becoming listed and traded on the NYSE or another principals and operating consultants: U.S. exchange. On July 15, 2010, KKR & Co. L.P. completed its listing

Operating on the NYSE. This event satisfied the contingency described above Consultant and accordingly, KKR recorded compensation expense of $34.0 million Vesting Date Principal Units Units and general, administrative and other expense of $17.1 million during April 1, 2011 3,764,067 928,268 the quarter ended June 30, 2010 in relation to these awards. This October 1, 2011 26,869,757 2,780,440 reflected the cumulative vesting of the units from the grant date to April 1, 2012 942,012 107,009 June 30, 2010. For the year ended December 31, 2010, KKR recorded October 1, 2012 26,362,814 2,711,071 compensation expense of $37.7 million and general, administrative and April 1, 2013 379,950 100,000 other expense of $27.8 million in relation to the restricted equity October 1, 2013 26,247,458 2,704,064 awards including the amounts above. April 1, 2014 354,780 100,000 As of December 31, 2010, there was approximately $21.6 million of October 1, 2014 26,247,458 2,704,064 estimated unrecognized expense related to unvested awards. That cost April 1, 2015 354,780 100,000 is expected to be recognized over a weighted average period of 0.9years, using the graded attribution method, which treats each vesting portion October 1, 2015 81,780 — as a separate award. 111,604,856 12,234,916

KKR 2010 ANNUAL REPORT 87 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

A summary of the status of KKR Holding’s restricted equity awards 11. RELATED PARTY TRANSACTIONS granted to KKR professionals, support staff, and other personnel from Due from and to Affiliates consists of: January 1, 2010 through December 31, 2010 are presented below: December 31, 2010 2009 Restricted Equity Units Due from Principals (a) $ 55,937 $ 77,075 Weighted Average Due from Related Entities $ 52,319 $ 28,846 Grant Date Unvested Units Units Fair Value Due from Portfolio Companies $ 28,300 $ 18,067 Balance, January 1, 2010 8,559,679 $ 9.35 $136,556 $123,988 Granted 380,650 $ 11.09 Due to KKR Holdings, L.P. in Connection (b) Vested (4,615,195) $ 9.36 with the Tax Receivable Agreement $ 16,185 $ — Forfeited (340,298) $ 9.35 Due to Unconsolidated Funds 1,862 — (c) Balance, December 31, 2010 3,984,836 $ 9.51 Due to KKR Holdings L.P. — 87,741 $ 18,047 $ 87,741

discretionary compensation and discretionary allocations — (a) Represents an amount due from KKR principals for the amount of the clawback Certain KKR principals who hold KKR Group Partnership Units through 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. In periods KKR Holdings units are expected to be allocated, on a discretionary prior to the Transactions, such amount was reflected as a capital deficit within partners’ capital given the KKR principals held controlling and economic interests basis, distributions on KKR Group Partnership Units received by KKR in the historical KKR. See Note 13 “Commitments and Contingencies”. Holdings. These discretionary amounts entitle the principal to receive (b) Represents amounts owed to KKR Holdings and/or its principals under the Tax amounts in excess of their vested equity interests. Because unvested Receivable Agreement. (see Note 2, “Summary of Significant Accounting Policies — Tax Receivable Agreement”) units do not have distribution participation rights, any amounts allocated (c) Prior to the Transactions, KKR made an in-kind distribution of certain receivables of in excess of a principal’s vested equity interests are reflected as our management companies to KKR Holdings. These receivables represented amounts owed by our consolidated KKR Funds to our management companies. Subsequent to employee compensation and benefits expense. These compensation the distribution of these receivables, the amounts owed by the KKR Funds are payable charges have been recorded based on the unvested portion of quarterly to KKR Holdings and as such are no longer payable to a consolidated entity. Accordingly, the payable that existed at December 31, 2009 at the KKR Funds is reflected in Due earnings distributions received by KKR Holdings. Compensation charges to Affiliates. In periods prior to the Transactions, such amounts were eliminated in relating to this discretionary allocation amounted to $136.7 million consolidation. This amount was paid to KKR Holdings in January 2010. and $28.5 million for the years ended December 31, 2010 and 2009, respectively. There were no amounts recorded for the year ended KKR Financial Holdings LLC (“KFN”) December 31, 2008. KFN is a publicly traded specialty finance company whose limited liability company interests are listed on the NYSE under the symbol KKR & Co. L.P. 2010 Equity Incentive Plan “KFN.” KFN is managed by KKR but is not under the common control of Under the KKR & Co. L.P. 2010 Equity Incentive Plan (the “Equity the Senior Principals or otherwise consolidated by KKR as control is Incentive Plan”), KKR is permitted to grant to employees, the directors maintained by third‑party investors. KFN was organized in August 2004 of the Managing Partner, operating consultants and senior advisors, and completed its initial public offering on June 24, 2005. As of non-qualified unit options, unit appreciation rights, restricted common December 31, 2010 and 2009, KFN had consolidated assets of units, deferred restricted common units, phantom restricted common $8.4 billion and $10.3 billion, respectively, and shareholders’ equity of units and other awards representing KKR & Co. L.P. common units. $1.6 billion and $1.2 billion, respectively. Shares of KFN held by KKR The issuance of KKR & Co. L.P. common units pursuant to awards under are accounted for as trading securities (see Note 2, “Summary of the Equity Incentive Plan dilute common unitholders and KKR Holdings Significant Accounting Policies — Management and Incentive fees”) pro rata in accordance with their respective percentage interests in and represented less than 1% of KFN’s outstanding shares as of the KKR Group Partnerships. The total number of common units that December 31, 2010 and December 31, 2009. If KKR were to exercise may be issued under the Equity Incentive Plan is equivalent to 15% of all of each of its outstanding vested options, KKR’s ownership interest the number of fully diluted common units outstanding, subject to annual in KFN would be less than 1% of KFN’s outstanding shares as of adjustment. As of December 31, 2010, 30,000 KKR & Co. L.P. common December 31, 2010 and 2009. units have been granted under the Equity Incentive Plan, which vest over one year from the date of grant. Discretionary Investments Certain of KKR’s investment professionals, including its principals and other qualifying employees, are permitted to invest, and have invested, their own capital in side-by-side investments with its private equity funds. Side-by-side investments are investments in Portfolio Companies that are made on the same terms and conditions as those acquired by the applicable fund, except that the side-by-side investments are not subject to management fees or a carried interest. The cash invested by these individuals aggregated $66.8 million, $46.7 million and $25.1 million for the years ended December 31, 2010, 2009 and 2008, respectively. These investments are not included in the accompanying financial statements.

88 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Aircraft and Other Services FRE Certain of the Senior Principals own aircraft that KKR uses for business FRE is comprised of segment operating revenues, less segment purposes in the ordinary course of its operations. These Senior Principals operating expenses. The components of FRE on a segment basis differ paid for the purchase of these aircraft with their personal funds and from the equivalent U.S. GAAP amounts on a consolidated basis as a bear all operating, personnel and maintenance costs associated with result of: (i) the inclusion of management fees earned from consolidated their operation. The hourly rates that KKR pays for the use of these funds that were eliminated in consolidation; (ii) the exclusion of expenses aircraft are based on current market rates for chartering private aircraft of consolidated funds; (iii) the exclusion of charges relating to the of the same type. KKR incurred $5.2 million, $6.9 million and $7.9 million amortization of intangible assets; (iv) the exclusion of charges relating for the use of these aircraft for the years ended December 31, 2010, to carry pool allocations; (v) the exclusion of non-cash equity charges 2009 and 2008, respectively. and other non-cash compensation charges borne by KKR Holdings; (vi) the exclusion of certain reimbursable expenses and (vii) the exclusion Facilities of certain non-recurring items. Certain of the Senior Principals are partners in a real-estate based partnership that maintains an ownership interest in KKR’s Menlo Park ENI location. Payments made to this partnership were $6.4 million, ENI is a measure of profitability for KKR’s reportable segments and is $5.7 million and $2.4 million for the years ended December 31, 2010, comprised of: (i) FRE; plus (ii) segment investment income, which is 2009 and 2008, respectively. reduced for carry pool allocations and management fee refunds; less (iii) certain economic interests in KKR’s segments held by third parties. ENI differs from net income (loss) on a GAAP basis as a result of: 12. SEGMENT REPORTING (i) the exclusion of the items referred to in FRE above; (ii) the exclusion KKR operates through three reportable business segments. These of investment income relating to noncontrolling interests; and (iii) the segments, which are differentiated primarily by their investment exclusion of income taxes. focuses and strategies, consist of the following: KKR’s reportable segments are presented prior to giving effect to the allocation of income (loss) between KKR and KKR Holdings and as such Private Markets represents KKR’s business in total. In connection with the Transactions, Through the Private Markets segment, KKR manages and sponsors a KKR changed the format of its segment financial information in order group of private equity funds and co-investment vehicles that invest to: (i) properly reflect the economic arrangements resulting from the capital for long-term appreciation, either through controlling ownership Transactions, and (ii) provide more detail regarding fees and investment of a company or strategic minority positions. These investment funds and income. KKR has adjusted its segment financial information for year co-investment vehicles are managed by Kohlberg Kravis Roberts& Co. L.P., ended December 31, 2008 to reflect these changes, where applicable. an SEC registered investment adviser. KKR also manages investments None of these changes impacted economic net income. in infrastructure and natural resources.

Public Markets Through the Public Markets segment, KKR manages a specialty finance company, a number of investment funds, structured finance vehicles and separately managed accounts that invest capital in liquid credit strategies, such as leveraged loans and high yield bonds, and less liquid credit products such as mezzanine debt and special situations investments. These funds, vehicles and accounts are managed by KKR Asset Management LLC (which we refer to as “KAM”), an SEC registered investment adviser.

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. KKR’s capital markets services include arranging debt and equity financing for transactions, placing and underwriting securities offerings, structuring new investment products and providing capital markets services.

Key Performance Measures Fee Related Earnings (“FRE”) and Economic Net Income (“ENI”) are key performance measures used by management. 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.

KKR 2010 ANNUAL REPORT 89 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, 2010:

Capital Markets Total Private Public and Principal Reportable As of and for the Year Ended December 31, 2010 Markets Markets Activities Segments Fees Management and incentive fees: Management fees $ 396,227 $ 57,059 $ — $ 453,286 Incentive fees — 38,832 — 38,832 Management and incentive fees 396,227 95,891 — 492,118 Monitoring and transaction fees: Monitoring fees 86,932 — — 86,932 Transaction fees 96,000 19,117 105,266 220,383 Fee Credits (1) (52,563) (12,336) — (64,899) Net monitoring and transaction fees 130,369 6,781 105,266 242,416 Total fees 526,596 102,672 105,266 734,534 Expenses Employee compensation and benefits 159,561 29,910 16,863 206,334 Occupancy and Related Charges 36,395 2,375 945 39,715 Other Operating Expense 148,357 13,430 8,376 170,163 Total expenses 344,313 45,715 26,184 416,212 Fee related earnings 182,283 56,957 79,082 318,322 Investment income (loss) Gross carried interest 1,202,070 5,000 — 1,207,070 Less: Allocation to KKR carry pool (2) (453,872) (2,000) — (455,872) Less: Management fee refunds (3) (143,446) — — (143,446) Net carried interest 604,752 3,000 — 607,752 Other investment income (loss) (1,643) 718 1,219,053 1,218,128 Total investment income (loss) 603,109 3,718 1,219,053 1,825,880 Income (loss) before noncontrolling interests in income of consolidated entities 785,392 60,675 1,298,135 2,144,202 Income (loss) attributable to noncontrolling interests (4) 839 537 3,033 4,409 Economic net income (loss) (5) $ 784,553 $ 60,138 $ 1,295,102 $ 2,139,793 Total Assets $ 947,155 $ 66,230 $5,388,072 $6,401,457 Total Partners’ Capital $ 844,657 $ 55,271 $4,825,698 $5,725,626

(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”). 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. (2) With respect to KKR’s active and future investment funds and co-investment vehicles that provide for carried interest, KKR will allocate to its principals, 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. (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. 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, carried interest is reduced, not to exceed 20% of management fees earned. In periods where investment returns subsequently decrease or turn negative, 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. (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.

The following table reconciles KKR’s total reportable segments to the financial statements as of and for the year ended December 31, 2010:

Total Reportable As of and for the Year Ended December 31, 2010 Segments Adjustments Consolidated Fees (a) $ 734,534 $ (299,148) $ 435,386 Expenses (b) $ 416,212 $ 1,346,451 $ 1,762,663 Investment income (loss) (c) $1,825,880 $ 7,353,228 $ 9,179,108 Income (loss) before taxes $2,144,202 $ 5,707,629 $ 7,851,831 Income (loss) attributable to noncontrolling interests $ 4,409 $ 6,539,607 $ 6,544,016 Income (loss) attributable to KKR Holdings $ — $ 899,277 $ 899,277 Total assets (d) $6,401,457 $31,989,700 $ 38,391,157 Total Partners’ Capital (e) $5,725,626 $30,274,416 $36,000,042

(a)The fees adjustment primarily represents (i) the elimination of management fees of ($388,501), (ii) fee credits of $57,043 upon consolidation of the KKR Funds, and (iii) a gross up of reimbursable expenses of $32,310. (b)The expenses adjustment primarily represents (i) the inclusion of non-cash equity based charges which amounted to $824,193, (ii) allocations to the carry pool of $455,872, (iii) a gross up of reimbursable expenses of $32,310, (iv) operating expenses of $20,719 primarily associated with the inclusion of operating expenses upon consolidation of the KKR Funds and (v) other adjustments of $13,357. (c)The investment income (loss) adjustment primarily represents (i) the inclusion of investment income of $6,753,910 attributable to noncontrolling interests upon consolidation of the KKR Funds, (ii) allocations to the carry pool of $455,872, and (iii) management fee refunds of $143,446. (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. (e) Substantially all of the total partners’ capital adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests.

90 KKR 2010 ANNUAL REPORT 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, 2010 Economic net income (loss) 2,139,793 Income taxes (75,360) Amortization of intangibles (7,785) Non-cash equity based payments (824,193) Allocation to KKR Holdings (899,277) Net income attributable to KKR & Co. L.P. $ 333,178

The following table presents the financial data for KKR’s reportable segments as of and for the year ended December 31. 2009:

Capital Markets and Total Private Public Principal Reportable As of and for the Year Ended December 31, 2009 Markets Markets Activities Segments Fees Management and incentive fees: Management fees $ 415,207 $50,754 $ — $ 465,961 Incentive fees — 4,472 — 4,472 Management and incentive fees 415,207 55,226 — 470,433 Monitoring and transaction fees: Monitoring fees 158,243 — — 158,243 Transaction fees 57,699 — 34,129 91,828 Fee Credits (1) (73,900) — — (73,900) Net monitoring and transaction fees 142,042 — 34,129 176,171 Total fees 557,249 55,226 34,129 646,604 Expenses Employee compensation and benefits 147,801 24,086 9,455 181,342 Occupancy and Related Charges 34,747 2,483 783 38,013 Other Operating Expense 134,610 18,103 5,238 157,951 Total expenses 317,158 44,672 15,476 377,306 Fee related earnings 240,091 10,554 18,653 269,298 Investment income (loss) Gross carried interest 826,193 — — 826,193 Less: allocation to KKR carry pool (2) (57,971) — — (57,971) Less: management fee refunds (3) (22,720) — — (22,720) Net carried interest 745,502 — — 745,502 Other investment income (loss) 128,528 (5,260) 349,679 472,947 Total investment income (loss) 874,030 (5,260) 349,679 1,218,449 Income (loss) before noncontrolling interests in income of consolidated entities 1,114,121 5,294 368,332 1,487,747 Income (loss) attributable to noncontrolling interests (4) 497 15 581 1,093 Economic net income (loss) (5) $ 1,113,624 $ 5,279 $ 367,751 $ 1,486,654 Allocation of Economic net income (loss) Economic net income (loss) attributable to KKR Holdings L.P.(5) $ $101,898 $ 1,015 $ 257,766 $ 360,679 Economic net income (loss) attributable to KKR Group Holdings L.P. $$1,011,726 $ 4,264 $ 109,985 $ 1,125,975 Total Assets $ $362,128 $62,408 $4,660,132 $5,084,668 Total Partners’ Capital $ $277,062 $ 49,581 $3,826,241 $ 4,152,884

(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”). 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. (2) With respect to KKR’s active and future investment funds and co-investment vehicles that provide for carried interest, KKR will allocate to its principals, 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. (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. 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, carried interest is reduced, not to exceed 20% of management fees earned. In periods where investment returns subsequently decrease or turn negative, 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. (4) Represents economic interests that will allocate to a third party investor approximately of 2% of the equity in KKR’s capital markets business. (5) Represents nine months of historical economic net income (loss) totaling $971,399, which is 100% allocable to Group Holdings and three months of economic net income (loss) totaling $515,255, of which 70% or $360,679 is allocated to KKR Holdings, and the remaining 30% or $154,576 is allocated to Group Holdings.

KKR 2010 ANNUAL REPORT 91 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, 2009:

Total Reportable As of and for the Year Ended December 31, 2009 Segments Adjustments Consolidated Fees (a) $ 646,604 $ (315,333) $ 331,271 Expenses (b) $ 377,306 $ 818,404 $ 1,195,710 Investment income (loss) (c) $ 1,218,449 $ 6,535,359 $ 7,753,808 Income (loss) before taxes $ 1,487,747 $ 5,401,622 $ 6,889,369 Income (loss) attributable to noncontrolling interests $ 1,093 $ 6,118,289 $ 6,119,382 Income (loss) attributable to KKR Holdings $ — $ (116,696) $ (116,696) Total assets (d) $5,084,668 $ 25,136,443 $ 30,221,111 Total Partners’ Capital (e) $ 4,152,884 $23,208,597 $27,361,481

(a) The fees adjustment primarily represents (i) the elimination of management fees of $(405,466), (ii) fee credits of $73,900 upon consolidation of the KKR Funds, and (iii) a gross up of reimbursable expenses of $16,233. (b) The expenses adjustment primarily represents (i) the inclusion of non-cash equity based payments which amounted to $562,373, (ii) allocations to the carry pool of $173,511, (iii) operating expenses of $34,846 associated with the Transactions included in consolidated expenses and excluded from segment reporting, (iv) gross up of reimbursable expense of $16,233 and (v) other operating expenses of $31,441 primarily associated with the inclusion of operating expenses upon consolidation of the KKR Funds. (c) The investment income (loss) adjustment primarily represents (i) the inclusion of investment income of $6,448,557 attributable to noncontrolling interests upon consolidation of the KKR Funds, (ii) allocations to the carry pool of $57,971 and (iii) other adjustments of $28,831. (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. (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.

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, 2009 Economic net income (loss) 1,486,654 Income taxes (36,998) Amortization of intangibles (3,788) Costs relating to the Transactions (a) (34,846) Adjustments to carry: Allocations to carry pool recorded in connection with the Transactions (115,540) Non-cash equity based payments (562,373) Allocations to former principals (120) Allocation to KKR Holdings 116,696 Net income attributable to KKR & Co. L.P. $ 849,685

(a) During the year ended December 31, 2009, KKR’s Private Markets other operating expenses excluded $34.8 million incurred in connection with the Transactions. KKR has excluded this charge from its segment financial information as such amount will be not be considered when assessing the performance of, or allocating resources to, each of its business segments and is non-recurring in nature. In the statements of operations, this charge is included in general, administrative and other expenses.

92 KKR 2010 ANNUAL REPORT 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, 2008:

Capital Markets and Total Private Public Principal Reportable As of and for the Year Ended December 31, 2008 Markets Markets Activities Segments Fees Management and incentive fees: Management fees $ 396,394 $ 59,342 $ — $ 455,736 Incentive fees — — — — Management and incentive fees 396,394 59,342 — 455,736 Monitoring and transactions fees: Monitoring fees 97,256 — — 97,256 Transaction fees 23,096 — 18,211 41,307 Fee Credits (1) (12,698) — — (12,698) Net monitoring and transaction fees 107,654 — 18,211 125,865 Total fees 504,048 59,342 18,211 581,601 Expenses Employee compensation and benefits 135,204 20,566 7,094 162,864 Occupancy and Related Charges 27,665 2,134 727 30,526 Other Operating Expenses 185,027 4,066 5,093 194,186 Total Expenses 347,896 26,766 12,914 387,576 Fee related earnings 156,152 32,576 5,297 194,025 Investment income (loss) Gross carried interest (1,197,387) — — (1,197,387) Less: allocation to KKR carry pool (2) 8,156 — — 8,156 Less: management fee refunds (3) 29,611 — — 29,611 Net carried interest (1,159,620) — — (1,159,620) Other investment income (loss) (230,053) 10,687 (4,129) (223,495) Total investment income (loss) (1,389,673) 10,687 (4,129) (1,383,115) Income (loss) before noncontrolling interests in income of consolidated entities (1,233,521) 43,263 1,168 (1,189,090) Income (loss) attributable to noncontrolling interests (4) — 6,421 (37) 6,384 Economic net income (loss) $(1,233,521) $36,842 $ 1,205 $(1,195,474) Total Assets $ 285,154 $52,256 $26,148 $ 363,558 Total Partners’ Capital $ 97,249 $45,867 $ 10,974 $ 154,090

(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”). 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. (2) With respect to KKR’s active and future investment funds and co-investment vehicles that provide for carried interest, KKR will allocate to its principals, 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. (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. 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, carried interest is reduced, not to exceed 20% of management fees earned. In periods where investment returns subsequently decrease or turn negative, 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. (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.

The following table reconciles KKR’s total reportable segments to the financial statements as of and for the year ended December 31, 2008:

Total Reportable As of and for the Year Ended December 31, 2008 Segments Adjustments Consolidated Fees (a) $ 581,601 $ (346,420) $ 235,181 Expenses (b) $ 387,576 $ 30,812 $ 418,388 Investment income (loss) (c) $ (1,383,115) $ (11,482,124) $(12,865,239) Income (loss) before taxes $(1,189,090) $(11,859,356) $(13,048,446) Income (loss) attributable to noncontrolling interests $ 6,384 $ (11,857,145) $ (11,850,761) Income (loss) attributable to KKR Holdings $ — $ — $ — Total assets (d) $ 363,558 $22,077,472 $ 22,441,030 Total Partners’ Capital (e) $ 154,090 $ 19,696,267 $ 19,850,357

(a) The fees adjustment primarily represents (i) the elimination of management fees of $(397,096), (ii) fee credits of $12,698 upon consolidation of the KKR Funds, (iii) a gross up of reimbursable expenses of $22,976 and (iv) other net adjustments of $15,002. (b) The expenses adjustment consists of (i) the reflection of allocations to the carry pool of $(8,156) in consolidated expenses, (ii) a gross up of reimbursable expenses in the consolidated financial results of $22,976 and (iii) the inclusion of $15,992 of other operating expenses primarily relating to the consolidation of the KKR Funds. (c) The investment income (loss) adjustment primarily represents (i) the inclusion of investment income of $(11,433,477) attributable to noncontrolling interests upon consolidation of the KKR Funds, (ii) allocations to the carry pool of $(8,156), and (iii) other adjustments of $(40,491). (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. (e) Substantially all of the total partners’ capital adjustment represents the inclusion of private equity and other investments that are attributable to noncontrolling interests.

KKR 2010 ANNUAL REPORT 93 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

The reconciliation of economic net income (loss) to net income (loss) Prior to the Transactions, certain KKR principals who received carried attributable to KKR as reported in the statements of operations interest distributions with respect to the private equity funds had consists of the following: personally guaranteed, on a several basis and subject to a cap, the contingent obligations of the general partners of the private equity funds Year Ended December 31, 2008 to repay amounts to fund limited partners pursuant to the general Economic net income (loss) (1,195,474) partners’ clawback obligations. Income taxes (6,786) The terms of the Transactions require that KKR principals remain Amortization of intangibles (2,211) responsible for any clawback obligations relating to carry distributions Net income attributable to KKR & Co. L.P. $(1,204,471) received prior to the Transactions up to a maximum of $223.6 million. At December 31, 2010, KKR has recorded a receivable of $55.9 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 13. COMMITMENTS AND CONTINGENCIES direct controlling economic interests in the KKR Group Partnerships. In periods prior to the Transactions, such amount was reflected as a Debt Covenants capital deficit within partners’ capital given the KKR principals held Borrowings of KKR contain various customary debt covenants. These controlling economic interests in the historical KKR. covenants do not, in management’s opinion, materially restrict KKR’s investment or financing strategies. KKR is in compliance with all of its Carry distributions arising subsequent to the Transactions will be debt covenants as of December 31, 2010. allocated to KKR, KKR Holdings and KKR principals (as carry pool participants) in accordance with the terms of the instruments Investment Commitments governing the KKR Group Partnerships. KKR will indemnify its As of December 31, 2010, KKR had unfunded commitments to its principals for any personal guarantees that they have provided with private equity and other investment vehicles of $923.7 million. In addition, respect to such amounts. KKR Capital Markets had an unfunded commitment of $14.7 million The instruments governing certain of KKR’s private equity funds may related to one portfolio company revolving credit facility as of also include a “net loss sharing provision,” that, if triggered, may give December 31, 2010. rise to a contingent obligation that may require the general partners to contribute capital to the fund, to fund 20% of the net losses on investments. Non-cancelable Operating Leases In connection with the “net loss sharing provisions,” certain of KKR’s KKR’s non-cancelable operating leases consist primarily of leases of private equity vehicles allocate a greater share of their investment office space around the globe. There are no material rent holidays, losses to KKR relative to the amounts contributed by KKR to those contingent rent, rent concessions or leasehold improvement incentives vehicles. In these vehicles, such losses would be required to be paid associated with any of these property leases. In addition to base rentals, by KKR to the limited partners in those vehicles in the event of a certain lease agreements are subject to escalation provisions and rent liquidation of the fund regardless of whether any carried interest had expense is recognized on a straight-line basis over the term of the lease previously been distributed. Based on the fair market values as of agreement. December 31, 2010, there would have been no net losing sharing As of December 31, 2010, the approximate aggregate minimum future obligation. If the vehicles were liquidated at zero value, the contingent lease payments, net of sublease income, required on the operating repayment obligation would have been approximately $1,094.0 million leases are as follows: as of December 31, 2010.

2011 $ 30,908 Indemnifications 2012 25,022 In the normal course of business, KKR and its subsidiaries enter into contracts that contain a variety of representations and warranties and 2013 25,336 provide general indemnifications. KKR’s maximum exposure under 2014 25,468 these arrangements is unknown as this would involve future claims 2015 20,113 that may be made against KKR that have not yet occurred. However, 2016 and Thereafter 96,160 based on experience, KKR expects the risk of material loss to be remote. Total minimum payments required $223,007 Litigation From time to time, KKR is involved in various legal proceedings, lawsuits Contingent Repayment Guarantees and claims incidental to the conduct of KKR’s business. KKR’s business The instruments governing KKR’s private equity funds generally include is also subject to extensive regulation, which may result in regulatory a “clawback” provision that, if triggered, may give rise to a contingent proceedings against it. obligation that may require the general partners to return amounts to In August 1999, KKR and certain of its current and former personnel the fund for distribution to the limited partners at the end of the life of were named as defendants in an action brought in the Circuit Court of the fund. Under a “clawback” provision, upon the liquidation of a fund, Jefferson County, Alabama, or the Alabama State Court, alleging breach the general partner is required to return, on an after-tax basis, previously of fiduciary duty and conspiracy in connection with the acquisition distributed carry to the extent that, due to the diminished performance of Bruno’s, Inc. (“Bruno’s”), one of KKR’s former portfolio companies, of later investments, the aggregate amount of carry distributions in 1995. The action was removed to the U.S. Bankruptcy Court for the received by the general partner during the term of the fund exceed the Northern District of Alabama. In April 2000, the complaint in this amount to which the general partner was ultimately entitled. As of action was amended to further allege that KKR and others violated December 31, 2010, the amount of carried interest KKR principals have state law by fraudulently misrepresenting the financial condition of received, that is subject to this clawback provision was $697.0 million, Bruno’s in an August 1995 subordinated notes offering relating to the assuming that all applicable private equity funds were liquidated at no acquisition and in Bruno’s subsequent periodic financial disclosures. value. Had the investments in such funds been liquidated at their In January 2001, the action was transferred to the U.S. District Court December 31, 2010 fair values, the clawback obligation would have for the Northern District of Alabama. In August 2009, the action was been $61.5 million of which $55.9 million is recorded in Due from consolidated with a similar action brought against the underwriters of Affiliates and $5.6 million is due from noncontrolling interest holders. the August 1995 subordinated notes offering, which is pending before

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

KKR 2010 ANNUAL REPORT 95 NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS violation”). The amended complaint further alleges that, pursuant to engaged in conduct prohibited by United States antitrust laws. KKR is Section 15 of the Securities Act, the KFN Individual Defendants have fully cooperating with the DOJ’s investigation. legal responsibility for the alleged Section 11 violation. The amended In December 2009, KKR’s subsidiary KKR Asset Management LLC complaint seeks judgment in favor of the lead plaintiff and the putative (formerly known as Kohlberg Kravis Roberts & Co. (Fixed Income) LLC) class for unspecified damages allegedly sustained as a result of the received a request from the SEC for information in connection with its KFN Defendants’ alleged misconduct, costs and expenses incurred by examination of certain investment advisers in order to review trading the lead plaintiff in the action, rescission or a rescissory measure of procedures and valuation practices in the collateral pools of structured damages, and equitable or injunctive relief. In April 2009, the KFN credit products. The SEC also requested information regarding the Defendants filed a motion to dismiss the amended complaint for failure surrender by KFN for cancellation, without consideration, of certain to state a claim under the Securities Act. In November 2010, the court notes that had been issued to KFN by collateral pools of structured granted the defendants’ motion and dismissed the case with prejudice. credit products. KKR cooperated with the SEC’s examination, which is Plaintiffs’ time to take an appeal has run, and the judgment is now final. now completed. In August 2008, the members of KFN’s board of directors and its In January 2011, KKR received a request from the SEC for information executive officers (the “Kostecka Individual Defendants”) were named regarding its investors and clients that are sovereign wealth funds and in a shareholder derivative action brought by Raymond W. Kostecka, a certain services provided by KKR. KKR is cooperating with the SEC’s purported shareholder, in the Superior Court of California, County of investigation. San Francisco (the “California Derivative Action”). KFN was named as a nominal defendant. The complaint in the California Derivative Action Moreover, in the ordinary course of business KKR is subject to asserts claims against the Kostecka Individual Defendants for breaches regulatory examinations or investigations and also is and can be both of fiduciary duty, abuse of control, gross mismanagement, waste of the defendant and the plaintiff in numerous actions with respect to corporate assets, and unjust enrichment in connection with the conduct acquisitions, bankruptcy, insolvency and other types of proceedings. at issue in the Charter Litigation, including the filing of the April 2007 Such lawsuits may involve claims that adversely affect the value of Registration Statement with alleged material misstatements and certain investments owned by KKR’s funds. omissions. The complaint seeks judgment in favor of KFN for unspecified No loss contingency has been recorded in any period presented in the damages allegedly sustained as a result of the Kostecka Individual financial statements, because such losses are either not probable or Defendants’ alleged misconduct, costs and disbursements incurred by reasonably estimable (or both) at the present time. Such matters are plaintiff in the action, equitable and/or injunctive relief, restitution, and subject to many uncertainties and their ultimate outcomes are not an order directing KFN to reform its corporate governance and internal predictable with assurance. Consequently, management is unable to procedures to prevent a recurrence of the alleged misconduct. By order estimate a range of potential loss, if any, related to these matters. At dated January 8, 2009, the court approved the parties’ stipulation to stay this time, management has not concluded whether the final resolution the proceedings in the California Derivative Action until the Charter of any of these matters will have a material adverse effect upon the Litigation is dismissed on the pleadings or KFN files an answer to the financial statements. Charter Litigation. In November 2010, the court dismissed the Charter Litigation with prejudice and that judgment is final. The plaintiff in Principal Protected Product for Private Equity Investments the California Derivative Action subsequently agreed to withdraw his The fund agreements for a private equity vehicle referred to as KKR’s complaint and, a stipulated order dismissing the California Derivative principal protected product for private equity investments contain pro­ Action was entered on February 14, 2011. visions that require the fund underlying the principal protected product In March 2009, the members of KFN’s board of directors and certain of for private equity investments (the “Master Fund”) to liquidate certain its executive officers (the “Haley Individual Defendants”) were named in of its portfolio investments in order to satisfy liquidity requirements of a shareholder derivative action brought by Paul B. Haley, a purported the fund agreements, if the performance of the Master Fund is lower shareholder, in the United States District Court for the Southern District than certain benchmarks defined in the agreements. In an instance of New York (the “New York Derivative Action”). KFN was named as a where the Master Fund is not in compliance with the defined liquidity nominal defendant. The complaint in the New York Derivative Action requirements and has no remaining liquid portfolio investments, KKR asserts claims against the Haley Individual Defendants for breaches of has an obligation to purchase up to $18.4 million of illiquid portfolio fiduciary duty, breaches of the duty of full disclosure, and for contribution investments of the Master Fund at 95% of their current fair market in connection with the conduct at issue in the Charter Litigation, including value. Effective January 1, 2011, KKR’s obligation has been reduced to the filing of the April 2007 registration statement with alleged material $4.1 million. As of December 31, 2010, the fund does not have a liquidity misstatements and omissions. The complaint seeks judgment in favor shortfall and therefore no obligation exists. of KFN for unspecified damages allegedly sustained as a result of the Haley Individual Defendants’ alleged misconduct, a declaration that the Haley Individual Defendants are liable to KFN under Section 11 of the 14. REGULATED ENTITIES Securities Act, costs and disbursements incurred by plaintiff in the action, KKR has a registered broker‑dealer which is subject to the minimum and an order directing KFN to reform its corporate governance and net capital requirements of the Securities and Exchange Commission internal procedures to prevent a recurrence of the alleged misconduct. (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). By order dated June 18, 2009, the Court approved the parties’ stipulation Additionally, KKR has an entity based in London which is subject to the to stay the proceedings in the New York Derivative Action until the capital requirements of the U.K. Financial Services Authority (“FSA”), Charter Litigation is dismissed on the pleadings or KFN files an answer another entity based in Hong Kong which is subject to the capital to the Charter Litigation. In November 2010, the court dismissed the requirements of the Hong Kong Securities and Futures Ordinance, and Charter Litigation with prejudice and that judgment is final. The plaintiff another entity based in Mumbai which is subject to capital requirements in the New York Derivative Action subsequently agreed to withdraw his of the Reserve Bank of India (“RBI”). All of these broker dealer entities complaint, and a stipulated order dismissing the New York Derivative have continuously operated in excess of their respective regulatory Action was entered on February 4, 2011. capital requirements. In September 2006 and March 2009, KKR received requests for certain The regulatory capital requirements referred to above may restrict the documents and other information from the Antitrust Division of the Partnership’s ability to withdraw capital from its entities. At December 31, U.S. Department of Justice (“DOJ”) in connection with the DOJ’s 2010, approximately $116.6 million may be restricted as to the payment investigation of private equity firms to determine whether they have of cash dividends and advances to the Partnership.

96 KKR 2010 ANNUAL REPORT NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

Three Months Ended, March 31, 2010 June 30, 2010 September 30, 2010 December 31, 2010 Statement of Operations Data: Fees $ 106,031 $ 87,070 $ 96,018 $ 146,267 Less: Total Expenses 463,308 430,586 449,867 418,902 Total Investment Income (Loss) 2,763,936 1,224,959 1,724,527 3,465,686 Income (Loss) Before Taxes 2,406,659 881,443 1,370,678 3,193,051 Income Taxes 13,452 31,283 16,263 14,362 Net Income (Loss) 2,393,207 850,160 1,354,415 3,178,689 Less: Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities 1,987,130 676,816 1,293,373 2,586,697 Less: Net Income (Loss) Attributable to Noncontrolling Interests Attributable to KKR Holdings 292,241 143,437 52,186 411,413 Net Income (Loss) Attributable to KKR & Co. L.P. $ 113,836 $ 29,907 $ 8,856 $ 180,579 Net Income (Loss) Attributable to KKR & Co. L.P. Per Common Unit Basic $ 0.57 $ 0.15 $ 0.04 $ 0.86 Diluted $ 0.57 $ 0.15 $ 0.04 $ 0.86 Weighted Average Common Units Outstanding Basic 204,902,226 204,902,226 204,902,226 209,383,219 Diluted 204,902,226 204,902,226 204,902,226 209,413,219

Three Months Ended, March 31, 2009 June 30, 2009 September 30, 2009 December 31, 2009 Statement of Operations Data: Fees $ 39,070 $ 51,482 $ 110,863 $ 129,856 Less: Total Expenses 104,758 97,722 154,597 838,633 Total Investment Income (Loss) (715,345) 2,307,610 4,171,835 1,989,708 Income (Loss) Before Taxes (781,033) 2,261,370 4,128,101 1,280,931 Income Taxes 1,531 159 4,115 31,193 Net Income (Loss) (782,564) 2,261,211 4,123,986 1,249,738 Less: Net Income (Loss) Attributable to Noncontrolling Interests in Consolidated Entities (727,981) 1,895,385 3,507,323 1,444,655 Less: Net Income (Loss) Attributable to Noncontrolling Interests Attributable to KKR Holdings — — — (116,696) Net Income (Loss) Attributable to KKR & Co. L.P. $ (54,583) $ 365,826 $ 616,663 $ (78,221) Net Income (Loss) Attributable to KKR & Co. L.P. Per Common Unit Basic $ (0.38) Diluted $ (0.38) Weighted Average Common Units Outstanding Basic 204,902,226 Diluted 204,902,226

16. SUBSEQUENT EVENTS A distribution of $0.29 per KKR & Co. L.P. common unit was declared on February 23, 2011 and will be paid on March 21, 2011 to KKR & Co. L.P. unitholders of record as of the close of business on March 7, 2011. KKR Holdings will receive its pro rata share of the distribution from the KKR Group Partnerships. On March 1, 2011, the terms of the Corporate Credit Agreement were amended, which reduced the availability for borrowings under the facility from $1.0 billion to $700.0 million and extended the maturity, so that the facility now expires on March 1, 2016. In addition, the KKR Group Partnerships became co‑borrowers of the facility, and KKR & Co. L.P. and the Issuer of the Senior Notes became guarantors of the Corporate Credit Agreement, together with certain general partners of KKR’s private equity funds.

KKR 2010 ANNUAL REPORT 97 APPENDIX

Appendix 1

RECONCILIATION OF GAAP COMMON UNITS OUTSTANDING TO ADJUSTED UNITS

As of December 31, 2009 March 31, 2010 June 30, 2010 September 30, 2010 December 31, 2010 GAAP Common Units Outstanding — Basic 204,902,226 204,902,226 204,902,226 204,902,226 212,770,091 Unvested Common Units (1) — — — — 30,000 GAAP Common Units Outstanding — Diluted 204,902,226 204,902,226 204,902,226 204,902,226 212,800,091 KKR Holdings Units (2) 478,105,194 478,105,194 478,105,194 478,105,194 470,237,329 Adjusted Units 683,007,420 683,007,420 683,007,420 683,007,420 683,037,420

(1) Represents equity awards granted under the KKR & Co. L.P. 2010 Equity Incentive Plan. The issuance of common units of KKR & Co. L.P. 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. (2) Common units that may be issued by KKR & Co. L.P. upon exchange of units in KKR Holdings L.P. for KKR common units.

98 KKR 2010 ANNUAL REPORT

KKR 2010 ANNUAL REPORT 99

UNITHOLDER INFORMATION

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

*As of December 31, 2010

100 KKR 2010 ANNUAL REPORT

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

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