NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(All Amounts in Thousands, Except Share and Per Share Data, and Except Where Noted)
1. ORGANIZATION
KKR & Co. Inc. (NYSE: KKR), through its subsidiaries (collectively, "KKR"), is a leading global investment firm that manages multiple alternative asset classes including private equity, credit and real assets, with strategic partners that manage hedge funds. KKR aims to generate attractive investment returns for its fund investors by following a patient and disciplined investment approach, employing world-class people, and driving growth and value creation with KKR's portfolio companies. KKR invests its own capital alongside the capital it manages for fund investors and provides financing solutions and investment opportunities through its capital markets business.
KKR & Co. Inc. is the parent company of KKR Group Holdings Corp., which is the general partner of KKR Group Partnership L.P. ("KKR Group Partnership"). KKR & Co. Inc. both indirectly controls KKR Group Partnership and indirectly holds Class A partner interests in KKR Group Partnership ("KKR Group Partnership Units") representing economic interests in KKR's business. The remaining KKR Group Partnership Units are held by KKR Holdings L.P. ("KKR Holdings"), which is not a subsidiary of KKR & Co. Inc. As of June 30, 2020, KKR & Co. Inc. held approximately 66.2% of the KKR Group Partnership Units and KKR Holdings held approximately 33.8% of the KKR Group Partnership Units. The percentage ownership in KKR Group Partnership will continue to change as KKR Holdings exchanges its KKR Group Partnership Units for shares of common stock of KKR & Co. Inc. or when KKR & Co. Inc. otherwise issues or repurchases shares of common stock of KKR & Co. Inc. KKR Group Partnership also has outstanding limited partner interests that provide for a carry pool and preferred units with economic terms that mirror the Series A and Series B preferred stock issued by KKR & Co. Inc.
On May 8, 2020 (the "Effective Date"), KKR & Co. Inc. amended and restated its Certificate of Incorporation to, among other changes, rename its Class A common stock as common stock and reclassify its Class B common stock and Class C common stock into Series I preferred stock and Series II preferred stock, respectively. Common stock, Series I preferred stock and Series II preferred stock have the same rights and powers that Class A common stock, Class B common stock and Class C common stock had, respectively, prior to the Effective Date. References to "common stock" for periods prior to the Effective Date mean Class A common stock of KKR & Co. Inc. and references to "Series I preferred stock" and "Series II preferred stock" for periods prior to the Effective Date mean Class B common stock and Class C common stock of KKR & Co. Inc., respectively. See Note 15 "Equity."
Reorganization and Acquisition of KKR Capstone
On January 1, 2020, KKR completed an internal reorganization (the "Reorganization"), in which (i) KKR Management Holdings L.P. ("Management Holdings") and KKR International Holdings L.P. ("International Holdings") were combined with KKR Fund Holdings L.P. ("Fund Holdings"), which changed its name to KKR Group Partnership L.P. and became the sole intermediate holding company for KKR's business, (ii) the issuers of each series of KKR’s outstanding senior notes were contributed to KKR Group Partnership and the guarantees by International Holdings and Management Holdings under the senior notes were automatically and unconditionally released and discharged pursuant to the terms of the indentures governing such senior notes, with KKR Group Partnership remaining as a guarantor, and (iii) the ownership interests of certain operating subsidiaries of KKR Group Partnership were reorganized. References to "KKR Group Partnerships" for periods prior to the Reorganization mean Fund Holdings, Management Holdings and International Holdings, collectively, and references to "KKR Group Partnership" for periods following the Reorganization mean KKR Group Partnership L.P. References to a "KKR Group Partnership Unit" mean (i) one Class A partner interest in each of Fund Holdings, Management Holdings and International Holdings, collectively, for periods prior to the Reorganization and (ii) one Class A partner interest in KKR Group Partnership for periods following the Reorganization.
Contemporaneously with the Reorganization, KKR acquired KKR Capstone Americas LLC and its affiliates ("KKR Capstone") on January 1, 2020. KKR Capstone was consolidated prior to January 1, 2020 and consequently, this transaction was accounted for as an equity transaction. This transaction resulted in an increase to the KKR Group Partnership equity. Accordingly, both KKR's equity and noncontrolling interests held by KKR Holdings increased for their proportionate share of the KKR Capstone equity based on their ownership in KKR Group Partnership on January 1, 2020.
Notes to Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements of KKR & Co. Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements (referred to hereafter as the "financial statements"), including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) such that the financial statements are presented fairly and that estimates made in preparing the financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements included in KKR's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the "SEC") on February 18, 2020, and the financial statements should be read in conjunction with the audited financial statements included therein. Additionally, in the accompanying financial statements, the condensed consolidated statements of financial condition are referred to hereafter as the "consolidated statements of financial condition"; the condensed consolidated statements of operations are referred to hereafter as the "consolidated statements of operations"; the condensed consolidated statements of comprehensive income (loss) are referred to hereafter as the "consolidated statements of comprehensive income (loss)"; the condensed consolidated statements of changes in equity are referred to hereafter as the "consolidated statements of changes in equity"; and the condensed consolidated statements of cash flows are referred to hereafter as the "consolidated statements of cash flows."
KKR consolidates the financial results of KKR Group Partnership and its consolidated entities, which include the accounts of KKR's investment management and capital markets companies, the general partners of certain unconsolidated investment funds, general partners of consolidated investment funds and their respective consolidated investment funds and certain other entities including CFEs. References in the accompanying financial statements to "principals" are to KKR's senior employees who hold interests in KKR's business through KKR Holdings.
All intercompany transactions and balances have been eliminated.
COVID-19 and Global Economic and Market Conditions
The outbreak of a novel strain of coronavirus ("COVID-19") continues to impact the United States and other countries throughout the world. In March 2020, the World Health Organization declared COVID-19 to be a pandemic and the United States declared a national emergency due to the outbreak. In connection with these declarations, various governments around the world have instituted measures to slow the transmissions of COVID-19, which substantially restrict individual and business activities. These measures have included, for example, closures of non-essential businesses, limitations of crowd size, stay-at-home orders, quarantines, heightened border controls and limitations on travel. Governments in the United States and around the world have responded with fiscal and monetary stimuli that aim to provide emergency assistance to individuals and businesses negatively impacted by COVID-19. The outbreak of COVID-19 and the actions taken in response have had far reaching impact on the U.S. and global economies, contributing to significant volatility in the financial markets, resulting in increased volatility in equity prices (including our common stock) and lower interest rates, and causing furloughs and layoffs in the labor market. While COVID-19 cases have declined in some parts of the United States, many states in the Southern, Midwestern and Western regions saw sharp increases in infection rates as they began to allow businesses to reopen. COVID-19 cases have also continued to surge in certain countries outside the United States, and certain countries that were initially successful at containing the virus have experienced renewed outbreaks in recent months.
Given the ongoing nature of the outbreak, at this time we cannot reasonably predict the magnitude of the ultimate impact that COVID-19 will have on KKR’s business, financial performance and operating results. We believe COVID-19's adverse impact on KKR’s business, financial performance and operating results will be significantly driven by a number of factors that we are unable to predict or control, including, for example: the severity and duration of the pandemic; the pandemic's impact on the U.S. and global economies; the timing, scope and effectiveness of additional governmental responses to the pandemic; the timing and speed of economic recovery, including the availability of a treatment or vaccination for COVID-19; and the negative impact on our fund investors, vendors and other business partners that may indirectly adversely affect KKR.
Notes to Financial Statements (Continued)
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and investment income (loss) during the reporting periods. Such estimates include but are not limited to (i) the determination of the income tax provision and (ii) the valuation of investments and financial instruments. Actual results could differ from those estimates, and such differences could be material to the financial statements.
Principles of Consolidation
The types of entities KKR assesses for consolidation include (i) subsidiaries, including management companies, broker-dealers and general partners of investment funds that KKR manages, (ii) entities that have all the attributes of an investment company, like investment funds, (iii) CFEs and (iv) other entities. Each of these entities is assessed for consolidation on a case by case basis depending on the specific facts and circumstances surrounding that entity.
Pursuant to its consolidation policy, KKR first considers whether an entity is considered a VIE and therefore whether to apply the consolidation guidance under the VIE model. Entities that do not qualify as VIEs are assessed for consolidation as voting interest entities ("VOEs") under the voting interest model.
KKR's funds are, for GAAP purposes, investment companies and therefore are not required to consolidate their investments in portfolio companies even if majority-owned and controlled. Rather, the consolidated funds and vehicles reflect their investments at fair value as described below in "Fair Value Measurements."
An entity in which KKR holds a variable interest is a VIE if any one of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk (as a group) lack either the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity's activities that have a significant effect on the success of the legal entity or the obligation to absorb the expected losses or right to receive the expected residual returns, or (c) the voting rights of some investors are disproportionate to their obligation to absorb the expected losses of the legal entity, their rights to receive the expected residual returns of the legal entity, or both and substantially all of the legal entity's activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. Limited partnerships and other similar entities where unaffiliated limited partners have not been granted (i) substantive participatory rights or (ii) substantive rights to either dissolve the partnership or remove the general partner ("kick-out rights") are VIEs under condition (b) above. KKR's investment funds that are not CFEs (i) are generally limited partnerships, (ii) generally provide KKR with operational discretion and control, and (iii) generally have fund investors with no substantive rights to impact ongoing governance and operating activities of the fund, including the ability to remove the general partner, and, as such, the limited partners do not hold kick-out rights. Accordingly, most of KKR's investment funds are categorized as VIEs.
KKR consolidates all VIEs in which it is the primary beneficiary. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in a VIE. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The consolidation guidance requires an analysis to determine (i) whether an entity in which KKR holds a variable interest is a VIE and (ii) whether KKR's involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (for example, management and performance related fees), would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment. Fees earned by KKR that are customary and commensurate with the level of effort required to provide those services, and where KKR does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, would not be considered variable interests. KKR factors in all economic interests including interests held through related parties, to determine if it holds a variable interest. KKR determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion when facts and circumstances change.
For entities that are determined not to be VIEs, these entities are generally considered VOEs and are evaluated under the voting interest model. KKR consolidates VOEs it controls through a majority voting interest or through other means.
The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE depends on the facts and circumstances surrounding each entity and therefore certain of KKR's investment funds may qualify as VIEs whereas others may qualify as VOEs.
Notes to Financial Statements (Continued)
With respect to CLOs (which are generally VIEs), in its role as collateral manager, KKR generally has the power to direct the activities of the CLO that most significantly impact the economic performance of the entity. In some, but not all cases, KKR, through its residual interest in the CLO may have variable interests that represent an obligation to absorb losses of, or a right to receive benefits from, the CLO that could potentially be significant to the CLO. In cases where KKR has both the power to direct the activities of the CLO that most significantly impact the CLO's economic performance and the obligation to absorb losses of the CLO or the right to receive benefits from the CLO that could potentially be significant to the CLO, KKR is deemed to be the primary beneficiary and consolidates the CLO.
With respect to CMBS vehicles (which are generally VIEs), KKR holds unrated and non-investment grade rated securities issued by the CMBS, which are the most subordinate tranche of the CMBS vehicle. The economic performance of the CMBS is most significantly impacted by the performance of the underlying assets. Thus, the activities that most significantly impact the CMBS economic performance are the activities that most significantly impact the performance of the underlying assets. The special servicer has the ability to manage the CMBS assets that are delinquent or in default to improve the economic performance of the CMBS. KKR generally has the right to unilaterally appoint and remove the special servicer for the CMBS and as such is considered the controlling class of the CMBS vehicle. These rights give KKR the ability to direct the activities that most significantly impact the economic performance of the CMBS. Additionally, as the holder of the most subordinate tranche, KKR is in a first loss position and has the right to receive benefits, including the actual residual returns of the CMBS, if any. In these cases, KKR is deemed to be the primary beneficiary and consolidates the CMBS vehicle.
Investments
Investments consist primarily of private equity, credit, investments of consolidated CFEs, real assets, equity method and other investments. Investments denominated in currencies other than the entity's functional currency are valued based on the spot rate of the respective currency at the end of the reporting period with changes related to exchange rate movements reflected in the consolidated statements of operations. Security and loan transactions are recorded on a trade date basis. Further disclosure on investments is presented in Note 4 "Investments."
The following describes the types of securities held within each investment class.
Private Equity - Consists primarily of equity investments in operating businesses, including growth equity investments.
Credit - Consists primarily of investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans), originated, distressed and opportunistic credit, real estate mortgage loans, and interests in unconsolidated CLOs.
Investments of Consolidated CFEs - Consists primarily of (i) investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans) held directly by the consolidated CLOs and (ii) investments in originated, fixed-rate real estate mortgage loans held directly by the consolidated CMBS vehicles.
Real Assets - Consists primarily of investments in (i) energy related assets, principally oil and natural gas properties, (ii) infrastructure assets, and (iii) real estate, principally residential and commercial real estate assets and businesses.
Equity Method - Other - Consists primarily of (i) certain direct interests in operating companies in which KKR is deemed to exert significant influence under GAAP and (ii) certain interests in partnerships and joint ventures that hold private equity and real assets investments.
Equity Method - Capital Allocation-Based Income - Consists primarily of (i) the capital interest KKR holds as the general partner in certain investment funds, which are not consolidated and (ii) the carried interest component of the general partner interest, which are accounted for as a single unit of account.
Other - Consists primarily of investments in common stock, preferred stock, warrants and options of companies that are not private equity, real assets, credit or investments of consolidated CFEs.
Notes to Financial Statements (Continued)
Investments held by Consolidated Investment Funds
The consolidated investment funds are, for GAAP purposes, investment companies and reflect their investments and other financial instruments, including portfolio companies that are majority-owned and controlled by KKR's investment funds, at fair value. KKR has retained this specialized accounting for the consolidated investment funds in consolidation. Accordingly, the unrealized gains and losses resulting from changes in fair value of the investments and other financial instruments held by the consolidated investment funds are reflected as a component of Net Gains (Losses) from Investment Activities in the consolidated statements of operations.
Certain energy investments are made through consolidated investment funds, including investments in working and royalty interests in oil and natural gas properties as well as investments in operating companies that operate in the energy industry. Since these investments are held through consolidated investment funds, such investments are reflected at fair value as of the end of the reporting period.
Investments in operating companies that are held through KKR's consolidated investment funds are generally classified within private equity investments and investments in working and royalty interests in oil and natural gas properties are generally classified as real asset investments.
Energy Investments held by KKR
KKR directly holds certain working and royalty interests in oil and natural gas properties that are not held through investment funds. Oil and natural gas activities are accounted for under the successful efforts method of accounting and such working interests are consolidated based on the proportion of the working interests held by KKR. Accordingly, KKR reflects its proportionate share of these interests on a gross basis and changes in the value of these interests are not reflected as unrealized gains and losses in the consolidated statements of operations.
Under the successful efforts method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs and costs of certain nonproducing leasehold costs are charged to expense as incurred.
Expenditures for repairs and maintenance, including workovers, are charged to expense as incurred.
The capitalized costs of producing oil and natural gas properties are depleted on a field-by-field basis using the units-of production method based on the ratio of current production to estimated total net proved oil, natural gas and natural gas liquid reserves. Proved developed reserves are used in computing depletion rates for drilling and development costs and total proved reserves are used for depletion rates of leasehold costs.
Estimated dismantlement and abandonment costs for oil and natural gas properties, net of salvage value, are capitalized at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves.
Whenever events or changes in circumstances indicate that the carrying amounts of oil and natural gas properties may not be recoverable, KKR evaluates oil and natural gas properties and related equipment and facilities for impairment on a field-by-field basis. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. Any impairment in value is recognized when incurred and is recorded in General, Administrative, and Other expense in the consolidated statements of operations.
Notes to Financial Statements (Continued)
Fair Value Option
For certain investments and other financial instruments, KKR has elected the fair value option. Such election is irrevocable and is applied on a financial instrument by financial instrument basis at initial recognition. KKR has elected the fair value option for certain private equity, real assets, credit, investments of consolidated CFEs, equity method - other and other financial instruments not held through a consolidated investment fund. Accounting for these investments at fair value is consistent with how KKR accounts for its investments held through consolidated investment funds. Changes in the fair value of such instruments are recognized in Net Gains (Losses) from Investment Activities in the consolidated statements of operations. Interest income on interest bearing credit securities on which the fair value option has been elected is based on stated coupon rates adjusted for the accretion of purchase discounts and the amortization of purchase premiums. This interest income is recorded within Interest Income in the consolidated statements of operations.
Equity Method
For certain investments in entities over which KKR exercises significant influence but which do not meet the requirements for consolidation and for which KKR has not elected the fair value option, KKR uses the equity method of accounting. The carrying value of equity method investments, for which KKR has not elected the fair value option, is determined based on the amounts invested by KKR, adjusted for the equity in earnings or losses of the investee allocated based on KKR's respective ownership percentage, less distributions.
For equity method investments for which KKR has not elected the fair value option, KKR records its proportionate share of the investee's earnings or losses based on the most recently available financial information of the investee, which in certain cases may lag the date of KKR's financial statements by no more than three calendar months. As of June 30, 2020, equity method investees for which KKR reports financial results on a lag include Marshall Wace LLP ("Marshall Wace").
KKR evaluates its equity method investments for which KKR has not elected the fair value option for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
The carrying value of investments classified as Equity Method - Capital Allocation-Based Income approximates fair value, because the underlying investments of the unconsolidated investment funds are reported at fair value.
Financial Instruments held by Consolidated CFEs
KKR measures both the financial assets and financial liabilities of the consolidated CFEs in its financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities which results in KKR's consolidated net income (loss) reflecting KKR's own economic interests in the consolidated CFEs including (i) changes in the fair value of the beneficial interests retained by KKR and (ii) beneficial interests that represent compensation for services rendered.
For the consolidated CLOs, KKR has determined that the fair value of the financial assets of the consolidated CLOs is more observable than the fair value of the financial liabilities of the consolidated CLOs. As a result, the financial assets of the consolidated CLOs are being measured at fair value and the financial liabilities are being measured in consolidation as: (1) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets that are incidental to the operations of the CLOs less (2) the sum of the fair value of any beneficial interests retained by KKR (other than those that represent compensation for services) and KKR's carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interests retained by KKR).
For the consolidated CMBS vehicles, KKR has determined that the fair value of the financial liabilities of the consolidated CMBS vehicles is more observable than the fair value of the financial assets of the consolidated CMBS vehicles. As a result, the financial liabilities of the consolidated CMBS vehicles are being measured at fair value and the financial assets are being measured in consolidation as: (1) the sum of the fair value of the financial liabilities (other than the beneficial interests retained by KKR), the fair value of the beneficial interests retained by KKR and the carrying value of any nonfinancial liabilities that are incidental to the operations of the CMBS vehicles less (2) the carrying value of any nonfinancial assets that are incidental to the operations of the CMBS vehicles. The resulting amount is allocated to the individual financial assets.
Notes to Financial Statements (Continued)
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Except for certain of KKR's equity method investments (see "Equity Method" above) and debt obligations (as described in Note 10 "Debt Obligations"), KKR's investments and other financial instruments are recorded at fair value or at amounts whose carrying values approximate fair value. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve varying levels of management estimation and judgment, the degree of which is dependent on a variety of factors.
GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments and financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:
Level I - Pricing inputs are unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date. The types of financial instruments included in this category are publicly-listed equities and securities sold short.
Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the measurement date, and fair value is determined through the use of models or other valuation methodologies. The types of financial instruments included in this category are credit investments, investments and debt obligations of consolidated CLO entities, convertible debt securities indexed to publicly-listed securities, less liquid and restricted equity securities and certain over-the-counter derivatives such as foreign currency option and forward contracts.
Level III - Pricing inputs are unobservable for the financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. The types of financial instruments generally included in this category are private portfolio companies, real assets investments, credit investments, equity method investments for which the fair value option was elected and investments and debt obligations of consolidated CMBS entities.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. KKR's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.
A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of instrument, whether the instrument has recently been issued, whether the instrument is traded on an active exchange or in the secondary market, and current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by KKR in determining fair value is greatest for instruments categorized in Level III. The variability and availability of the observable inputs affected by the factors described above may cause transfers between Levels I, II, and III, which KKR recognizes at the beginning of the reporting period.
Investments and other financial instruments that have readily observable market prices (such as those traded on a securities exchange) are stated at the last quoted sales price as of the reporting date. KKR does not adjust the quoted price for these investments, even in situations where KKR holds a large position and a sale could reasonably affect the quoted price.
Notes to Financial Statements (Continued)
Management's determination of fair value is based upon the methodologies and processes described below and may incorporate assumptions that are management's best estimates after consideration of a variety of internal and external factors.
Level II Valuation Methodologies
Credit Investments: These financial instruments generally have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that KKR and others are willing to pay for an instrument. Ask prices represent the lowest price that KKR and others are willing to accept for an instrument. For financial instruments whose inputs are based on bid-ask prices obtained from third party pricing services, fair value may not always be a predetermined point in the bid-ask range. KKR's policy is generally to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets KKR's best estimate of fair value.
Investments and Debt Obligations of Consolidated CLO Vehicles: Investments of consolidated CLO vehicles are reported within Investments of Consolidated CFEs and are valued using the same valuation methodology as described above for credit investments. Under ASU 2014-13, KKR measures CLO debt obligations on the basis of the fair value of the financial assets of the CLO.
Securities Indexed to Publicly-Listed Securities: These securities are typically valued using standard convertible security pricing models. The key inputs into these models that require some amount of judgment are the credit spreads utilized and the volatility assumed. To the extent the company being valued has other outstanding debt securities that are publicly-traded, the implied credit spread on the company's other outstanding debt securities would be utilized in the valuation. To the extent the company being valued does not have other outstanding debt securities that are publicly-traded, the credit spread will be estimated based on the implied credit spreads observed in comparable publicly-traded debt securities. In certain cases, an additional spread will be added to reflect an illiquidity discount due to the fact that the security being valued is not publicly-traded. The volatility assumption is based upon the historically observed volatility of the underlying equity security into which the convertible debt security is convertible and/or the volatility implied by the prices of options on the underlying equity security.
Equity Securities: The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction or leverage that collateralized the equity securities.
Derivatives: The valuation incorporates observable inputs comprising yield curves, foreign currency rates and credit spreads.
Level III Valuation Methodologies
Private Equity Investments: KKR generally employs two valuation methodologies when determining the fair value of a private equity investment. The first methodology is typically a market comparables analysis that considers key financial inputs and recent public and private transactions and other available measures. The second methodology utilized is typically a discounted cash flow analysis, which incorporates significant assumptions and judgments. Estimates of key inputs used in this methodology include the weighted average cost of capital for the investment and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. In certain cases the results of the discounted cash flow approach can be significantly impacted by these estimates. Other inputs are also used in both methodologies. In addition, when a definitive agreement has been executed to sell an investment, KKR generally considers a significant determinant of fair value to be the consideration to be received by KKR pursuant to the executed definitive agreement.
Upon completion of the valuations conducted using these methodologies, a weighting is ascribed to each method, and an illiquidity discount is typically applied where appropriate. The ultimate fair value recorded for a particular investment will generally be within a range suggested by the two methodologies, except that the value may be higher or lower than such range in the case of investments being sold pursuant to an executed definitive agreement.
When determining the weighting ascribed to each valuation methodology, KKR considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis, the expected hold period and manner of realization for the investment, and in the case of investments being sold pursuant to an executed definitive agreement, an estimated probability of such sale being completed. These factors can result in different weightings among investments in the portfolio and in certain instances may result in up to a 100% weighting to a single methodology.
When an illiquidity discount is to be applied, KKR seeks to take a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments. KKR then evaluates such private equity investments to
Notes to Financial Statements (Continued)
determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include (i) whether KKR is unable to freely sell the portfolio company or conduct an initial public offering of the portfolio company due to the consent rights of a third party or similar factors, (ii) whether the portfolio company is undergoing significant restructuring activity or similar factors, and (iii) characteristics about the portfolio company regarding its size and/or whether the portfolio company is experiencing, or expected to experience, a significant decline in earnings. These factors generally make it less likely that a portfolio company would be sold or publicly offered in the near term at a price indicated by using just a market multiples and/or discounted cash flow analysis, and these factors tend to reduce the number of opportunities to sell an investment and/or increase the time horizon over which an investment may be monetized. Depending on the applicability of these factors, KKR determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time KKR holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by KKR in its valuations.
In the case of growth equity investments, enterprise values may be determined using the market comparables analysis and discounted cash flow analysis described above. A scenario analysis may also be conducted to subject the estimated enterprise values to a downside, base and upside case, which involves significant assumptions and judgments. A milestone analysis may also be conducted to assess the current level of progress towards value drivers that we have determined to be important, which involves significant assumptions and judgments. The enterprise value in each case may then be allocated across the investment's capital structure to reflect the terms of the security and subjected to probability weightings. In certain cases, the values of growth equity investments may be based on recent or expected financings.
Real Asset Investments: Real asset investments in infrastructure, energy and real estate are valued using one or a combination of the discounted cash flow analysis, market comparables analysis and direct income capitalization, which in each case incorporates significant assumptions and judgments.
Infrastructure investments are generally valued using the discounted cash flow analysis. Key inputs used in this methodology can include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as exit EBITDA multiples.
Energy investments are generally valued using a discounted cash flow approach, and where applicable, a market approach using comparable companies and transactions. Key inputs used in our valuations include (i) the weighted average cost of capital, (ii) future commodity prices, as quoted on indices, and long-term commodity price forecasts, and (iii) the asset’s future operating performance.
Real estate investments are generally valued using a combination of direct income capitalization and discounted cash flow analysis. Certain real estate investments are valued by KKR based on ranges of valuations determined by an independent valuation firm. Key inputs used in such methodologies that require estimates include an unlevered discount rate and current capitalization rate. The valuations of real assets investments also use other inputs.
Credit Investments: Credit investments are valued using values obtained from dealers or market makers, and where these values are not available, credit investments are generally valued by KKR based on ranges of valuations determined by an independent valuation firm. Valuation models are based on discounted cash flow analyses, for which the key inputs are determined based on market comparables, which incorporate similar instruments from similar issuers.
Real Estate Mortgage Loans: Real estate mortgage loans are illiquid, structured investments that are specific to the property and its operating performance. KKR engages an independent valuation firm to estimate the fair value of each loan. KKR reviews the quarterly loan valuation estimates provided by the independent valuation firm. These loans are generally valued using a discounted cash flow model using discount rates derived from observable market data applied to the capital structure of the respective sponsor and estimated property value. In the event that KKR's estimate of fair value differs from the fair value estimate provided by the independent valuation firm, KKR ultimately relies solely upon the valuation prepared by the investment personnel of KKR.
Other Investments: With respect to other investments including equity method investments for which the fair value election has been made, KKR generally employs the same valuation methodologies as described above for private equity and real assets investments when valuing these other investments.
Notes to Financial Statements (Continued)
Investments and Debt Obligations of Consolidated CMBS Vehicles: Under ASU 2014-13, KKR measures CMBS investments, which are reported within Investments of Consolidated CFEs on the basis of the fair value of the financial liabilities of the CMBS. Debt obligations of consolidated CMBS vehicles are valued based on discounted cash flow analyses. The key input is the expected yield of each CMBS security using both observable and unobservable factors, which may include recently offered or completed trades and published yields of similar securities, security-specific characteristics (e.g. securities ratings issued by nationally recognized statistical rating organizations, credit support by other subordinate securities issued by the CMBS and coupon type) and other characteristics.
Key unobservable inputs that have a significant impact on KKR's Level III investment valuations as described above are included in Note 5 "Fair Value Measurements." KKR utilizes several unobservable pricing inputs and assumptions in determining the fair value of its Level III investments. These unobservable pricing inputs and assumptions may differ by investment and in the application of KKR's valuation methodologies. KKR's reported fair value estimates could vary materially if KKR had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if KKR only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies.
There is inherent uncertainty involved in the valuation of Level III investments and there is no assurance that, upon liquidation, KKR will realize the values reflected in our valuations. Our valuations may differ significantly from the values that would have been used had an active market for the investments existed, and it is reasonably possible that the difference could be material. Furthermore, the recent market volatility caused by COVID-19 and the uncertainty surrounding its full impact have amplified the possibility that our future valuations may materially change from those reflected as of June 30, 2020.
Revenues
For the three and six months ended June 30, 2020 and 2019, respectively, revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Management Fees
|
$
|
219,736
|
|
|
$
|
206,097
|
|
|
$
|
442,425
|
|
|
$
|
394,505
|
|
Fee Credits
|
(60,872
|
)
|
|
(91,862
|
)
|
|
(96,259
|
)
|
|
(195,339
|
)
|
Transaction Fees
|
161,458
|
|
|
304,889
|
|
|
260,454
|
|
|
493,092
|
|
Monitoring Fees
|
26,902
|
|
|
26,424
|
|
|
58,051
|
|
|
52,075
|
|
Incentive Fees
|
—
|
|
|
—
|
|
|
668
|
|
|
—
|
|
Expense Reimbursements
|
28,002
|
|
|
42,741
|
|
|
56,226
|
|
|
86,801
|
|
Oil and Gas Revenue
|
1,052
|
|
|
12,275
|
|
|
14,367
|
|
|
25,450
|
|
Consulting Fees
|
17,195
|
|
|
18,877
|
|
|
38,113
|
|
|
35,405
|
|
Total Fees and Other
|
393,473
|
|
|
519,441
|
|
|
774,045
|
|
|
891,989
|
|
|
|
|
|
|
|
|
|
Carried Interest
|
759,331
|
|
|
551,443
|
|
|
(451,594
|
)
|
|
1,245,826
|
|
General Partner Capital Interest
|
179,190
|
|
|
108,980
|
|
|
8,038
|
|
|
229,529
|
|
Total Capital Allocation-Based Income (Loss)
|
938,521
|
|
|
660,423
|
|
|
(443,556
|
)
|
|
1,475,355
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
$
|
1,331,994
|
|
|
$
|
1,179,864
|
|
|
$
|
330,489
|
|
|
$
|
2,367,344
|
|
Fees and Other
Fees and Other, as detailed above, are accounted for as contracts with customers. Under ASC 606, Revenue from Contracts with Customers ("ASC 606"), KKR is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) KKR satisfies its performance obligation. In determining the transaction price, KKR has included variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.
Notes to Financial Statements (Continued)
The following table summarizes KKR's revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
Revenue Type
|
Customer
|
Performance Obligation
|
Performance Obligation Satisfied Over Time or
Point In Time (1)
|
Variable or
Fixed Consideration
|
Payment Terms
|
Subject to Return Once Recognized
|
Classification of Uncollected Amounts (2)
|
Management Fees
|
Investment funds, CLOs and other vehicles
|
Investment management services
|
Over time as services are rendered
|
Variable consideration since varies based on fluctuations in the basis of the management fee over time
|
Typically quarterly or annually in arrears
|
No
|
Due from Affiliates
|
Transaction Fees
|
Portfolio companies and third party companies
|
Advisory services and debt and equity arranging and underwriting
|
Point in time when the transaction (e.g. underwriting) is completed
|
Fixed consideration
|
Typically paid on or shortly after transaction closes
|
No
|
Due from Affiliates (portfolio companies)
Other Assets (third parties)
|
Monitoring Fees
|
|
|
|
|
|
|
|
Recurring Fees
|
Portfolio companies
|
Monitoring services
|
Over time as services are rendered
|
Variable consideration since varies based on fluctuations in the basis of the recurring fee
|
Typically quarterly in arrears
|
No
|
Due from Affiliates
|
Termination Fees
|
Portfolio companies
|
Monitoring services
|
Point in time when the termination is completed
|
Fixed consideration
|
Typically paid on or shortly after termination occurs
|
No
|
Due from Affiliates
|
Incentive Fees
|
Investment funds and other vehicles
|
Investment management services that result in achievement of minimum investment return levels
|
Point in time at the end of the performance measurement period (quarterly or annually) if investment performance is achieved
|
Variable consideration since contingent upon the investment fund and other vehicles achieving more than stipulated investment return hurdles
|
Typically paid shortly after the end of the performance measurement period
|
No
|
Due from Affiliates
|
Expense Reimbursements
|
Investment funds and portfolio companies
|
Investment management and monitoring services
|
Point in time when the related expense is incurred
|
Fixed consideration
|
Typically shortly after expense is incurred
|
No
|
Due from Affiliates
|
Oil and Gas Revenues
|
Oil and gas wholesalers
|
Delivery of oil liquids and gas
|
Point in time when delivery has occurred and title has transferred
|
Fixed consideration
|
Typically shortly after delivery
|
No
|
Other Assets
|
Consulting Fees
|
Portfolio companies and other companies
|
Consulting and other services
|
Over time as services are rendered
|
Fixed consideration
|
Typically quarterly in arrears
|
No
|
Due from Affiliates
|
|
|
(1)
|
For performance obligations satisfied at a point in time, there were no significant judgments made in evaluating when a customer obtains control of the promised service.
|
|
|
(2)
|
For amounts classified in Other Assets, see Note 8 "Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities." For amounts classified in Due from Affiliates, see Note 13 "Related Party Transactions."
|
Management Fees
KKR provides investment management services to investment funds, CLOs, and other vehicles in exchange for a management fee. Management fees are determined quarterly based on an annual rate and are generally based upon a percentage of the capital committed or capital invested during the investment period. Thereafter, management fees are generally based on a percentage of remaining invested capital, net asset value, gross assets or as otherwise defined in the respective contractual agreements. Since some of the factors that cause the fees to fluctuate are outside of KKR's control, management fees are considered to be constrained and are therefore not included in the transaction price. Additionally, after the contract is established there are no significant judgments made when determining the transaction price.
Management fees earned from KKR's consolidated investment funds, CLOs, and other vehicles are eliminated in consolidation. However, because these amounts are funded by, and earned from, noncontrolling interests, KKR's allocated share of the net income from the consolidated investment funds, CLOs, and other vehicles is increased by the amount of fees that are
Notes to Financial Statements (Continued)
eliminated. Accordingly, the elimination of these fees does not impact the net income (loss) attributable to KKR or KKR stockholders' equity.
Fee Credits
Under the terms of the management agreements with certain of its investment funds, KKR is required to share with such funds an agreed upon percentage of certain fees, including monitoring and transaction fees earned from portfolio companies ("Fee Credits"). Investment funds earn Fee Credits only with respect to monitoring and transaction fees that are allocable to the fund's investment in the portfolio company and not, for example, any fees allocable to capital invested through co-investment vehicles. Fee Credits are calculated after deducting certain costs incurred in connection with pursuing potential investments that do not result in completed transactions ("broken-deal expenses") and generally amount to 80% for older funds, or 100% for newer funds, of allocable monitoring and transaction fees after broken-deal expenses are recovered, although the actual percentage may vary from fund to fund. Fee Credits are recognized and owed to investment funds concurrently with the recognition of monitoring fees, transaction fees and broken-deal expenses. Since Fee Credits are payable to investment funds, amounts owed are generally applied as a reduction of the management fee that is otherwise billed to the investment fund. Fee credits are recorded as a reduction of revenues in the consolidated statement of operations. Fee Credits owed to investment funds are recorded in Due to Affiliates on the consolidated statements of financial condition. See Note 13 "Related Party Transactions."
Transaction Fees
KKR (i) arranges debt and equity financing, places and underwrites securities offerings, and provides other types of capital markets services for companies seeking financing in its Capital Markets business line and (ii) provides advisory services in connection with successful Private Markets and Public Markets business line portfolio company investment transactions, in each case, in exchange for a transaction fee. Transaction fees are separately negotiated for each transaction and are generally based on (i) for Capital Markets business line transactions, a percentage of the overall transaction size and (ii) for Private Markets and Public Markets business line transactions, a percentage of either total enterprise value of an investment or a percentage of the aggregate price paid for an investment. After the contract is established, there are no significant judgments made when determining the transaction price.
Monitoring Fees
KKR provides services in connection with monitoring portfolio companies in exchange for a fee. Recurring monitoring fees are separately negotiated for each portfolio company. In addition, certain monitoring fee arrangements may provide for a termination payment following an initial public offering or change of control as defined in the contractual terms of the related agreement. These termination payments are recognized in the period when the related transaction closes. After the contract is established, there are no significant judgments made when determining the transaction price.
Incentive Fees
KKR provides investment management services to certain investment funds, CLOs and other vehicles in exchange for a management fee as discussed above and, in some cases an incentive fee when KKR is not entitled to a carried interest. Incentive fee rates generally range from 5% to 20% of investment gains. Incentive fees are considered a form of variable consideration as these fees are subject to reversal, and therefore the recognition of such fees is deferred until the end of each fund's measurement period when the performance-based incentive fees become fixed and determinable. Incentive fees are generally paid within 90 days of the end of the investment vehicles' measurement period. After the contract is established, there are no significant judgments made when determining the transaction price.
Incentive fees earned from KKR's consolidated investment funds, CLOs, and other vehicles are eliminated in consolidation. However, because these amounts are funded by, and earned from, noncontrolling interests, KKR's allocated share of the net income from the consolidated investment funds, CLOs, and other vehicles is increased by the amount of fees that are eliminated. Accordingly, the elimination of these fees does not impact the net income (loss) attributable to KKR or KKR stockholders' equity.
Notes to Financial Statements (Continued)
Expense Reimbursements
Providing investment management services to investment funds and monitoring KKR’s portfolio companies require KKR to arrange for services on behalf of them. In those situations where KKR is acting as an agent on behalf of its investment funds or portfolio companies, it presents the cost of services on a net basis as a reduction of Revenues. In all other situations, KKR is primarily responsible for fulfilling the services and is therefore acting as a principal for those arrangements for accounting purposes. As a result, the expense and related reimbursement associated with those services is presented on a gross basis. Costs incurred are classified within Expenses and reimbursements of such costs are classified as Expense Reimbursements within Revenues on the consolidated statements of operations. After the contract is established, there are no significant judgments made when determining the transaction price.
Oil and Gas Revenue
KKR directly holds certain working and royalty interests in oil and natural gas properties that are not held through investment funds. Oil and gas revenue is recognized when the performance obligation is satisfied, which occurs at the point in time when control of the product transfers to the customer. Performance obligations are typically satisfied through the monthly delivery of production. Revenue is recognized based on KKR's proportionate share of production from non-operated properties as marketed by the operator. After the contract is established, there are no significant judgments made when determining the transaction price.
Consulting Fees
KKR provides consulting and other services to portfolio companies and other companies in exchange for a consulting fee. Consulting fees are separately negotiated with each portfolio company for which services are provided. After the contract is established, there are no significant judgments made when determining the transaction price.
Capital Allocation-Based Income (Loss)
Capital allocation-based income (loss) is earned from those arrangements where KKR has a general partner capital interest and is entitled to a disproportionate allocation of investment income (referred to hereafter as "carried interest"). KKR accounts for its general partner interests in capital allocation-based arrangements as financial instruments under ASC 323, Investments - Equity Method and Joint Ventures ("ASC 323") since the general partner has significant governance rights in the investment funds in which it invests, which demonstrates significant influence. In accordance with ASC 323, KKR records equity method income based on the proportionate share of the income of the investment fund, including carried interest, assuming the investment fund was liquidated as of each reporting date pursuant to each investment fund's governing agreements. Accordingly, these general partner interests are accounted for outside of the scope of ASC 606. Other arrangements surrounding contractual incentive fees through an advisory contract are separate and distinct and accounted for in accordance with ASC 606. In these incentive fee arrangements, accounted for in accordance with ASC 606, KKR’s economics in the entity do not involve an allocation of capital. See "Incentive Fees" above.
Carried interest is allocated to the general partner based on cumulative fund performance to date, and where applicable, subject to a preferred return to the funds' limited partners. At the end of each reporting period, KKR calculates the carried interest that would be due to KKR for each investment fund, pursuant to the fund agreements, as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as carried interest to reflect either (a) positive performance resulting in an increase in the carried interest allocated to the general partner or (b) negative performance that would cause the amount due to KKR to be less than the amount previously recognized, resulting in a negative adjustment to carried interest allocated to the general partner. In each case, it is necessary to calculate the carried interest on cumulative results compared to the carried interest recorded to date and to make the required positive or negative adjustments. KKR ceases to record negative carried interest allocations once previously recognized carried interest allocations for an investment fund have been fully reversed. KKR is not obligated to make payments for guaranteed returns or hurdles and, therefore, cannot have negative carried interest over the life of an investment fund. Accrued but unpaid carried interest as of the reporting date is reflected in Investments in the consolidated statements of financial condition.
Notes to Financial Statements (Continued)
Compensation and Benefits
Compensation and Benefits expense includes (i) cash compensation consisting of salaries, bonuses, and benefits, (ii) equity based compensation consisting of charges associated with the vesting of equity-based awards (see Note 12 "Equity Based Compensation") and (iii) carry pool allocations.
All KKR employees receive a base salary that is paid by KKR or its consolidated entities, and is accounted for as Compensation and Benefits expense in the consolidated statements of operations. These employees are also eligible to receive discretionary cash bonuses based on performance, overall profitability and other matters. While cash bonuses paid to most employees are borne by KKR and certain consolidated entities and result in customary compensation and benefits expense, certain cash bonuses that are paid to certain of KKR's principals can be borne by KKR Holdings. These bonuses are funded with distributions that KKR Holdings receives on KKR Group Partnership Units held by KKR Holdings but are not then passed on to holders of unvested units of KKR Holdings. Because KKR principals are not entitled to receive distributions on units that are unvested, any amounts allocated to principals in excess of a principal's vested equity interests are reflected as employee compensation and benefits expense. These compensation charges, if any, are currently recorded based on the amount of cash expected to be paid by KKR Holdings.
Carry Pool Allocation
With respect to KKR's funds that provide for carried interest, KKR allocates to its employees a portion of the carried interest earned in relation to these funds as part of its carry pool. KKR allocates 40% or 43%, depending on the fund's vintage, of the carry it earns from these funds and vehicles to its carry pool. These amounts are accounted for as compensatory profit‑sharing arrangements in Accounts Payable, Accrued Expenses and Other Liabilities within the accompanying consolidated statements of financial condition in conjunction with the related carried interest income and recorded as compensation expense. Upon a reversal of carried interest income, the related carry pool allocation, if any, is also reversed. Accordingly, such compensation expense is subject to both positive and negative adjustments.
Profit Sharing Plan
KKR provides certain profit sharing programs for KKR employees. In particular, KKR provides a 401(k) plan for eligible employees in the United States. For certain professionals who are participants in the 401(k) plan, KKR may, in its discretion, contribute an amount after the end of the plan year.
General, Administrative and Other
General, administrative and other expense consists primarily of professional fees paid to legal advisors, accountants, advisors and consultants, insurance costs, travel and related expenses, communications and information services, depreciation and amortization charges, expenses (including impairment charges) incurred by oil and gas entities that are consolidated, broken-deal expenses, placement fees and other general operating expenses. A portion of these general administrative and other expenses, in particular broken-deal expenses, are borne by fund investors.
Investment Income
Investment income consists primarily of the net impact of:
|
|
(i)
|
Realized and unrealized gains and losses on investments, securities sold short, derivatives and debt obligations of consolidated CFEs which are recorded in Net Gains (Losses) from Investment Activities. Upon disposition of an investment, previously recognized unrealized gains or losses are reversed and a realized gain or loss is recognized.
|
|
|
(ii)
|
Foreign exchange gains and losses relating to mark‑to‑market activity on foreign exchange forward contracts, foreign currency options and foreign denominated debt which are recorded in Net Gains (Losses) from Investment Activities.
|
|
|
(iii)
|
Dividends, which are recognized on the ex‑dividend date, or, in the absence of a formal declaration of a record date, on the date it is received.
|
|
|
(iv)
|
Interest income, which is recognized as earned.
|
|
|
(v)
|
Interest expense, which is recognized as incurred.
|
Notes to Financial Statements (Continued)
Income Taxes
KKR & Co. Inc. is a corporation for U.S. federal income tax purposes and thus is subject to U.S. federal, state and local corporate income taxes at the entity level on KKR’s share of net taxable income. In addition, KKR Group Partnership and certain of its subsidiaries operate in the United States as partnerships for U.S. federal income tax purposes and as corporate entities in certain non-U.S. jurisdictions. These entities, in some cases, are subject to U.S. state or local income taxes or non-U.S. income taxes.
Deferred Income Taxes
Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period when the change is enacted.
Deferred tax assets, which are recorded in Other Assets within the statement of financial condition, are reduced by a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. When evaluating the realizability of the deferred tax assets, all evidence, both positive and negative, is considered. Items considered when evaluating the need for a valuation allowance include the ability to carry back losses, future reversals of existing temporary differences, tax planning strategies, and expectations of future earnings.
For a particular tax‑paying component of an entity and within a particular tax jurisdiction, deferred tax assets and liabilities are offset and presented as a single amount within Other Assets or Accounts Payable, Accrued and Other Liabilities, as applicable, in the accompanying statements of financial condition.
Uncertain Tax Positions
KKR analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, KKR determines that uncertainties in tax positions exist, a reserve is established. The reserve for uncertain tax positions is recorded in Accounts Payable, Accrued and Other Liabilities in the accompanying statements of financial condition. KKR recognizes accrued interest and penalties related to uncertain tax positions within the provision for income taxes in the consolidated statements of operations.
KKR records uncertain tax positions on the basis of a two‑step process: (a) determination is made whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (b) those tax positions that meet the more‑likely‑than‑not threshold are recognized as the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Cash and Cash Equivalents
KKR considers all highly liquid short‑term investments with original maturities of 90 days or less when purchased to be cash equivalents.
Cash and Cash Equivalents Held at Consolidated Entities
Cash and cash equivalents held at consolidated entities represents cash that, although not legally restricted, is not available to fund general liquidity needs of KKR as the use of such funds is generally limited to the investment activities of KKR's investment funds and CFEs.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents primarily represent amounts that are held by third parties under certain of KKR's financing and derivative transactions. The duration of this restricted cash generally matches the duration of the related financing or derivative transaction.
Notes to Financial Statements (Continued)
Due from and Due to Affiliates
KKR considers its principals and their related entities, unconsolidated investment funds and the portfolio companies of its funds to be affiliates for accounting purposes. Receivables from and payables to affiliates are recorded at their current settlement amount.
Fixed Assets, Depreciation and Amortization
Fixed assets consist primarily of corporate real estate, leasehold improvements, furniture and computer hardware. Such amounts are recorded at cost less accumulated depreciation and amortization and are included in Other Assets within the accompanying consolidated statements of financial condition. Depreciation and amortization are calculated using the straight‑line method over the assets' estimated economic useful lives, which for leasehold improvements are the lesser of the lease terms or the life of the asset, and three to seven years for other fixed assets.
Freestanding Derivatives
Freestanding derivatives are instruments that KKR and certain of its consolidated funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include forward, swap and option contracts related to foreign currencies and interest rates to manage foreign exchange risk and interest rate risk arising from certain assets and liabilities. All derivatives are recognized in Other Assets or Accounts Payable, Accrued Expenses and Other Liabilities and are presented on a gross basis in the consolidated statements of financial condition and measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying consolidated statements of operations. KKR's derivative financial instruments contain credit risk to the extent that its counterparties may be unable to meet the terms of the agreements. KKR attempts to reduce this risk by limiting its counterparties to major financial institutions with strong credit ratings.
Goodwill
Goodwill represents the excess of acquisition cost over the fair value of net tangible and intangible assets acquired in connection with an acquisition. Goodwill is assessed for impairment annually in the third quarter of each fiscal year or more frequently if circumstances indicate impairment may have occurred. Goodwill is recorded in Other Assets in the accompanying consolidated statements of financial condition.
Securities Sold Short
Whether part of a hedging transaction or a transaction in its own right, securities sold short represent obligations of KKR to deliver the specified security at the contracted price at a future point in time, and thereby create a liability to repurchase the security in the market at the prevailing prices. The liability for such securities sold short, which is recorded in Accounts Payable, Accrued Expenses and Other Liabilities in the statement of financial condition, is marked to market based on the current fair value of the underlying security at the reporting date with changes in fair value recorded as unrealized gains or losses in Net Gains (Losses) from Investment Activities in the accompanying consolidated statements of operations. These transactions may involve market risk in excess of the amount currently reflected in the accompanying consolidated statements of financial condition.
Comprehensive Income (Loss)
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from contributions from and distributions to owners. In the accompanying consolidated financial statements, comprehensive income is comprised of (i) Net Income (Loss), as presented in the consolidated statements of operations and (ii) net foreign currency translation.
Notes to Financial Statements (Continued)
Foreign Currency
Consolidated entities which have a functional currency that differs from KKR's reporting currency are primarily KKR's investment management and capital markets companies located outside the United States and certain CFEs. Foreign currency denominated assets and liabilities are translated using the exchange rates prevailing at the end of each reporting period. Results of foreign operations are translated at the weighted average exchange rate for each reporting period. Translation adjustments are included as a component of accumulated other comprehensive income (loss) until realized. Foreign currency income or expenses resulting from transactions outside of the functional currency of a consolidated entity are recorded as incurred in general, administrative and other expense in the consolidated statements of operations.
Leases
At contract inception, KKR determines if an arrangement contains a lease by evaluating whether (i) the identified asset has been deployed in the contract explicitly or implicitly and (ii) KKR obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. Additionally, at contract inception KKR will evaluate whether the lease is an operating or finance lease. Right-of-use (“ROU”) assets represent KKR’s right to use an underlying asset for the lease term and lease liabilities represent KKR’s obligation to make lease payments arising from the lease.
ROU assets and the associated lease liabilities are recognized at the commencement date based on the present value of the future minimum lease payments over the lease term. The discount rate implicit in the lease is generally not readily determinable. Consequently, KKR uses its incremental borrowing rate based on the information available including, but not limited to, collateral assumptions, the term of the lease, and the economic environment in which the lease is denominated at the commencement date in determining the present value of the future lease payments. The ROU assets are recognized as the initial measurement of the lease liabilities plus any initial direct costs and any prepaid lease payments less lease incentives received, if any. The lease terms may include options to extend or terminate the lease which are accounted for when it is reasonably certain that KKR will exercise that option. Certain leases that include lease and non-lease components are accounted for as one single lease component. In addition to contractual rent payments, occupancy lease agreements generally include additional payments for certain costs incurred by the landlord, such as building expenses and utilities. To the extent these are fixed or determinable, they are included as part of the lease payments used to measure the Operating Lease Liability.
Operating lease expense is recognized on a straight-line basis over the lease term and is recorded within Occupancy and Related Charges in the accompanying consolidated statements of operations. The ROU assets are included in Other Assets and the lease liabilities are included in Accounts Payable, Accrued Expenses and Other Liabilities in the accompanying consolidated statements of financial condition. See Note 8 "Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities."
Notes to Financial Statements (Continued)
Recently Issued Accounting Pronouncements
Adopted in 2020
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which has subsequently been amended by ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, and ASU No. 2019-11. The amended guidance requires a company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Prior to ASU 2016-13, GAAP required an "incurred loss" methodology that delayed recognition until it was probable a loss had been incurred. Under ASU 2016-13, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected and the income statement will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period.
This guidance has been adopted as of January 1, 2020. Financial instruments measured at fair value are not within the scope of this guidance. Consequently, the adoption of ASU 2016-13 did not result in a cumulative-effect adjustment in retained earnings and did not have a material impact to KKR.
Goodwill
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance simplifies the accounting for goodwill impairments by eliminating the second step from the goodwill impairment test. The ASU requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit's carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. The ASU also (i) clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and (ii) clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance has been adopted as of January 1, 2020 and this guidance will impact KKR's accounting for any future goodwill impairments.
Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issued ASU No. 2018-15, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement ("CCA") that is a service contract. The ASU aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This guidance has been adopted as of January 1, 2020, on a prospective basis, and the impact to KKR was not material.
Effective on January 1, 2021 and Thereafter
Simplifying the Accounting for Income Taxes
On December 18, 2019, the FASB issued ASU No. 2019-12, which modifies ASC 740 to simplify the accounting for income taxes. The ASU, among other changes, (i) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and (ii) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The guidance is effective for fiscal periods beginning after December 15, 2020. KKR is currently evaluating the impact of this guidance on the financial statements.
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
On March 12, 2020, the FASB issued ASU No. 2020-04, which provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The temporary optional expedients and exceptions can be elected through December 31, 2022. For the quarter ended June 30, 2020, KKR has not elected to apply the temporary optional expedients and exceptions and will be reevaluating the application each quarter.
Notes to Financial Statements (Continued)
3. NET GAINS (LOSSES) FROM INVESTMENT ACTIVITIES
Net Gains (Losses) from Investment Activities in the consolidated statements of operations consist primarily of the realized and unrealized gains and losses on investments (including foreign exchange gains and losses attributable to foreign denominated investments and related activities) and other financial instruments, including those for which the fair value option has been elected. Unrealized gains or losses result from changes in the fair value of these investments and other financial instruments during a period. Upon disposition of an investment or financial instrument, previously recognized unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period.
The following table summarizes total Net Gains (Losses) from Investment Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2019
|
|
Net Realized Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
|
Net Realized Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
Private Equity (1)
|
$
|
60,793
|
|
|
$
|
1,086,731
|
|
|
$
|
1,147,524
|
|
|
$
|
24,498
|
|
|
$
|
938,390
|
|
|
$
|
962,888
|
|
Credit (1)
|
(7,763
|
)
|
|
97,220
|
|
|
89,457
|
|
|
(54,074
|
)
|
|
29,923
|
|
|
(24,151
|
)
|
Investments of Consolidated CFEs (1)
|
(52,950
|
)
|
|
1,261,963
|
|
|
1,209,013
|
|
|
(3,141
|
)
|
|
63,921
|
|
|
60,780
|
|
Real Assets (1)
|
4,704
|
|
|
319,787
|
|
|
324,491
|
|
|
17,097
|
|
|
(19,585
|
)
|
|
(2,488
|
)
|
Equity Method - Other (1)
|
(149,684
|
)
|
|
398,831
|
|
|
249,147
|
|
|
47,217
|
|
|
85,439
|
|
|
132,656
|
|
Other Investments (1)
|
(242,083
|
)
|
|
265,660
|
|
|
23,577
|
|
|
(9,969
|
)
|
|
(32,651
|
)
|
|
(42,620
|
)
|
Foreign Exchange Forward Contracts
and Options (2)
|
35,907
|
|
|
(231,459
|
)
|
|
(195,552
|
)
|
|
19,607
|
|
|
(1,777
|
)
|
|
17,830
|
|
Securities Sold Short (2)
|
11,386
|
|
|
(69,963
|
)
|
|
(58,577
|
)
|
|
30,126
|
|
|
15,956
|
|
|
46,082
|
|
Other Derivatives (2)
|
1,036
|
|
|
(45,333
|
)
|
|
(44,297
|
)
|
|
—
|
|
|
(9,202
|
)
|
|
(9,202
|
)
|
Debt Obligations and Other (3)
|
8,090
|
|
|
(1,272,004
|
)
|
|
(1,263,914
|
)
|
|
2,816
|
|
|
(106,606
|
)
|
|
(103,790
|
)
|
Net Gains (Losses) From Investment Activities
|
$
|
(330,564
|
)
|
|
$
|
1,811,433
|
|
|
$
|
1,480,869
|
|
|
$
|
74,177
|
|
|
$
|
963,808
|
|
|
$
|
1,037,985
|
|
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2019
|
|
Net Realized Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
|
Net Realized Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
Private Equity (1)
|
$
|
60,793
|
|
|
$
|
(195,673
|
)
|
|
$
|
(134,880
|
)
|
|
$
|
93,066
|
|
|
$
|
1,858,015
|
|
|
$
|
1,951,081
|
|
Credit (1)
|
(48,460
|
)
|
|
(808,387
|
)
|
|
(856,847
|
)
|
|
(71,950
|
)
|
|
38,592
|
|
|
(33,358
|
)
|
Investments of Consolidated CFEs (1)
|
(93,802
|
)
|
|
(850,578
|
)
|
|
(944,380
|
)
|
|
(13,671
|
)
|
|
297,278
|
|
|
283,607
|
|
Real Assets (1)
|
58,067
|
|
|
(531,228
|
)
|
|
(473,161
|
)
|
|
46,644
|
|
|
69,996
|
|
|
116,640
|
|
Equity Method - Other (1)
|
(145,279
|
)
|
|
(46,192
|
)
|
|
(191,471
|
)
|
|
67,350
|
|
|
242,345
|
|
|
309,695
|
|
Other Investments (1)
|
(253,536
|
)
|
|
(402,059
|
)
|
|
(655,595
|
)
|
|
(8,519
|
)
|
|
(63,012
|
)
|
|
(71,531
|
)
|
Foreign Exchange Forward Contracts and Options (2)
|
119,146
|
|
|
99,592
|
|
|
218,738
|
|
|
45,061
|
|
|
53,012
|
|
|
98,073
|
|
Securities Sold Short (2)
|
26,041
|
|
|
(48,440
|
)
|
|
(22,399
|
)
|
|
44,552
|
|
|
(64,816
|
)
|
|
(20,264
|
)
|
Other Derivatives (2)
|
810
|
|
|
(44,522
|
)
|
|
(43,712
|
)
|
|
1,465
|
|
|
(22,607
|
)
|
|
(21,142
|
)
|
Debt Obligations and Other (3)
|
9,031
|
|
|
631,041
|
|
|
640,072
|
|
|
(40
|
)
|
|
(370,898
|
)
|
|
(370,938
|
)
|
Net Gains (Losses) From Investment Activities
|
$
|
(267,189
|
)
|
|
$
|
(2,196,446
|
)
|
|
$
|
(2,463,635
|
)
|
|
$
|
203,958
|
|
|
$
|
2,037,905
|
|
|
$
|
2,241,863
|
|
|
|
(1)
|
See Note 4 "Investments."
|
|
|
(2)
|
See Note 8 "Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities."
|
|
|
(3)
|
See Note 10 "Debt Obligations."
|
Notes to Financial Statements (Continued)
4. INVESTMENTS
Investments consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Private Equity
|
$
|
13,573,075
|
|
|
$
|
12,923,600
|
|
Credit
|
10,769,988
|
|
|
10,538,139
|
|
Investments of Consolidated CFEs
|
15,583,230
|
|
|
14,948,237
|
|
Real Assets
|
3,316,996
|
|
|
3,567,944
|
|
Equity Method - Other
|
4,748,986
|
|
|
4,846,949
|
|
Equity Method - Capital Allocation-Based Income
|
4,069,308
|
|
|
5,329,368
|
|
Other Investments
|
2,363,570
|
|
|
2,782,031
|
|
Total Investments
|
$
|
54,425,153
|
|
|
$
|
54,936,268
|
|
As of June 30, 2020 and December 31, 2019, there were no investments which represented greater than 5% of total investments. The majority of the securities underlying private equity investments represent equity securities.
KKR evaluates its equity method investments for which KKR has not elected the fair value option for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. During the second quarter of 2020, KKR recognized an $88.3 million impairment charge in Net Gains (Losses) from Investment Activities to reduce the carrying value of one of its equity method investments that is accounted for under the equity method of accounting to its fair value. KKR determined that the growth expectations of the investment had declined significantly and the estimated fair value of the investment had declined meaningfully. Therefore, KKR performed a valuation to determine whether the fair value of the investment had declined below its carrying value using a discounted cash flow analysis, a Level III fair value methodology. Based on the discounted cash flow analysis, KKR concluded that the fair value of its investment had declined below is carrying value and that the decline was other-than temporary.
Notes to Financial Statements (Continued)
5. FAIR VALUE MEASUREMENTS
The following tables summarize the valuation of assets and liabilities measured and reported at fair value by the fair value hierarchy. Investments classified as Equity Method - Other, for which the fair value option has not been elected, and Equity Method - Capital Allocation-Based Income have been excluded from the tables below.
Assets, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Private Equity
|
$
|
1,265,714
|
|
|
$
|
1,497,248
|
|
|
$
|
10,810,113
|
|
|
$
|
13,573,075
|
|
Credit
|
—
|
|
|
2,048,510
|
|
|
8,721,478
|
|
|
10,769,988
|
|
Investments of Consolidated CFEs
|
—
|
|
|
15,583,230
|
|
|
—
|
|
|
15,583,230
|
|
Real Assets
|
—
|
|
|
93,456
|
|
|
3,223,540
|
|
|
3,316,996
|
|
Equity Method - Other
|
221,457
|
|
|
51,560
|
|
|
1,622,885
|
|
|
1,895,902
|
|
Other Investments
|
579,938
|
|
|
88,835
|
|
|
1,694,797
|
|
|
2,363,570
|
|
Total Investments
|
2,067,109
|
|
|
19,362,839
|
|
|
26,072,813
|
|
|
47,502,761
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts and Options
|
—
|
|
|
347,369
|
|
|
—
|
|
|
347,369
|
|
Other Derivatives
|
45,722
|
|
|
1,769
|
|
|
26,078
|
|
(1)
|
73,569
|
|
Total Assets
|
$
|
2,112,831
|
|
|
$
|
19,711,977
|
|
|
$
|
26,098,891
|
|
|
$
|
47,923,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Private Equity
|
$
|
1,393,654
|
|
|
$
|
1,658,264
|
|
|
$
|
9,871,682
|
|
|
$
|
12,923,600
|
|
Credit
|
—
|
|
|
1,320,380
|
|
|
9,217,759
|
|
|
10,538,139
|
|
Investments of Consolidated CFEs
|
—
|
|
|
14,948,237
|
|
|
—
|
|
|
14,948,237
|
|
Real Assets
|
—
|
|
|
—
|
|
|
3,567,944
|
|
|
3,567,944
|
|
Equity Method - Other
|
228,999
|
|
|
49,511
|
|
|
1,656,045
|
|
|
1,934,555
|
|
Other Investments
|
431,084
|
|
|
196,192
|
|
|
2,154,755
|
|
|
2,782,031
|
|
Total Investments
|
2,053,737
|
|
|
18,172,584
|
|
|
26,468,185
|
|
|
46,694,506
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts and Options
|
—
|
|
|
188,572
|
|
|
—
|
|
|
188,572
|
|
Other Derivatives
|
—
|
|
|
1,333
|
|
|
21,806
|
|
(1)
|
23,139
|
|
Total Assets
|
$
|
2,053,737
|
|
|
$
|
18,362,489
|
|
|
$
|
26,489,991
|
|
|
$
|
46,906,217
|
|
|
|
(1)
|
Includes derivative assets that were valued using a third-party valuation firm. The approach used to estimate the fair value of these derivative assets was generally the discounted cash flow method, which includes consideration of the current portfolio, projected portfolio construction, projected portfolio realizations, portfolio volatility (based on the volatility, correlation, and size of each underlying asset class), and the discounting of future cash flows to the reporting date.
|
Notes to Financial Statements (Continued)
Liabilities, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Securities Sold Short
|
$
|
479,015
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
479,015
|
|
Foreign Exchange Contracts and Options
|
—
|
|
|
81,250
|
|
|
—
|
|
|
81,250
|
|
Unfunded Revolver Commitments
|
—
|
|
|
—
|
|
|
70,148
|
|
(1)
|
70,148
|
|
Other Derivatives
|
41,365
|
|
|
60,296
|
|
|
—
|
|
|
101,661
|
|
Debt Obligations of Consolidated CFEs
|
—
|
|
|
15,293,024
|
|
|
—
|
|
|
15,293,024
|
|
Total Liabilities
|
$
|
520,380
|
|
|
$
|
15,434,570
|
|
|
$
|
70,148
|
|
|
$
|
16,025,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Securities Sold Short
|
$
|
251,223
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
251,223
|
|
Foreign Exchange Contracts and Options
|
—
|
|
|
39,364
|
|
|
—
|
|
|
39,364
|
|
Unfunded Revolver Commitments
|
—
|
|
|
—
|
|
|
75,842
|
|
(1)
|
75,842
|
|
Other Derivatives
|
—
|
|
|
34,174
|
|
|
—
|
|
|
34,174
|
|
Debt Obligations of Consolidated CFEs
|
—
|
|
|
14,658,137
|
|
|
—
|
|
|
14,658,137
|
|
Total Liabilities
|
$
|
251,223
|
|
|
$
|
14,731,675
|
|
|
$
|
75,842
|
|
|
$
|
15,058,740
|
|
|
|
(1)
|
These unfunded revolver commitments are classified as Level III within the fair value hierarchy and valued using the same valuation methodologies as KKR's Level III credit investments.
|
Notes to Financial Statements (Continued)
The following tables summarize changes in investments and debt obligations measured and reported at fair value for which Level III inputs have been used to determine fair value for the three and six months ended June 30, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
Level III Investments
|
|
|
|
Private
Equity
|
|
Credit
|
|
Real Assets
|
|
Equity Method - Other
|
|
Other Investments
|
|
Total
|
|
|
Balance, Beg. of Period
|
$
|
9,349,448
|
|
|
$
|
9,004,965
|
|
|
$
|
2,727,991
|
|
|
$
|
1,352,346
|
|
|
$
|
1,677,617
|
|
|
$
|
24,112,367
|
|
|
|
Transfers In / (Out) Due to Changes in Consolidation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Transfers In
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Transfers Out
|
—
|
|
|
—
|
|
|
(113,770
|
)
|
|
—
|
|
|
—
|
|
|
(113,770
|
)
|
|
|
Asset Purchases
|
570,713
|
|
|
292,405
|
|
|
339,612
|
|
|
79,970
|
|
|
94,769
|
|
|
1,377,469
|
|
|
|
Sales / Paydowns
|
(33,608
|
)
|
|
(470,124
|
)
|
|
(48,486
|
)
|
|
(68
|
)
|
|
(24,631
|
)
|
|
(576,917
|
)
|
|
|
Settlements
|
—
|
|
|
7,313
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,313
|
|
|
|
Net Realized Gains (Losses)
|
(6,322
|
)
|
|
(14,342
|
)
|
|
4,085
|
|
|
(56,579
|
)
|
|
(247,792
|
)
|
|
(320,950
|
)
|
|
|
Net Unrealized Gains (Losses)
|
929,882
|
|
|
(101,197
|
)
|
|
314,108
|
|
|
247,216
|
|
|
194,834
|
|
|
1,584,843
|
|
|
|
Change in Other
Comprehensive Income
|
—
|
|
|
2,458
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,458
|
|
|
|
Balance, End of Period
|
$
|
10,810,113
|
|
|
$
|
8,721,478
|
|
|
$
|
3,223,540
|
|
|
$
|
1,622,885
|
|
|
$
|
1,694,797
|
|
|
$
|
26,072,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities related to Level III Assets and Liabilities still held as of the Reporting Date
|
$
|
921,625
|
|
|
$
|
(109,991
|
)
|
|
$
|
316,362
|
|
|
$
|
190,825
|
|
|
$
|
(47,093
|
)
|
|
$
|
1,271,728
|
|
|
|
|
Notes to Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
Level III Investments
|
|
Level III
Debt Obligations
|
|
Private
Equity
|
|
Credit
|
|
Investments of
Consolidated
CFEs
|
|
Real Assets
|
|
Equity Method - Other
|
|
Other Investments
|
|
Total
|
|
Debt
Obligations of
Consolidated
CFEs
|
Balance, Beg. of Period
|
$
|
6,831,546
|
|
|
$
|
6,530,479
|
|
|
$
|
2,083,735
|
|
|
$
|
3,213,813
|
|
|
$
|
1,650,179
|
|
|
$
|
2,063,950
|
|
|
$
|
22,373,702
|
|
|
$
|
1,914,571
|
|
Transfers In / (Out) Due to Changes in Consolidation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers In
|
7,956
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,520
|
|
|
—
|
|
|
34,476
|
|
|
—
|
|
Transfers Out
|
(435,694
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(435,694
|
)
|
|
—
|
|
Asset Purchases / Debt Issuances
|
918,908
|
|
|
1,843,769
|
|
|
—
|
|
|
106,984
|
|
|
46,607
|
|
|
394,905
|
|
|
3,311,173
|
|
|
—
|
|
Sales / Paydowns
|
(149,516
|
)
|
|
(535,789
|
)
|
|
(24,039
|
)
|
|
(72,254
|
)
|
|
(104,379
|
)
|
|
(133,217
|
)
|
|
(1,019,194
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
16,526
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,526
|
|
|
(24,039
|
)
|
Net Realized Gains (Losses)
|
14,663
|
|
|
(18,575
|
)
|
|
—
|
|
|
17,097
|
|
|
(948
|
)
|
|
(817
|
)
|
|
11,420
|
|
|
—
|
|
Net Unrealized Gains (Losses)
|
210,029
|
|
|
15,097
|
|
|
28,961
|
|
|
(19,585
|
)
|
|
51,343
|
|
|
(29,487
|
)
|
|
256,358
|
|
|
31,771
|
|
Change in Other
Comprehensive Income
|
—
|
|
|
(6,645
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,645
|
)
|
|
—
|
|
Balance, End of Period
|
$
|
7,397,892
|
|
|
$
|
7,844,862
|
|
|
$
|
2,088,657
|
|
|
$
|
3,246,055
|
|
|
$
|
1,669,322
|
|
|
$
|
2,295,334
|
|
|
$
|
24,542,122
|
|
|
$
|
1,922,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities related to Level III Assets and Liabilities still held as of the Reporting Date
|
$
|
209,924
|
|
|
$
|
13,738
|
|
|
$
|
28,961
|
|
|
$
|
(13,442
|
)
|
|
$
|
51,343
|
|
|
$
|
(29,487
|
)
|
|
$
|
261,037
|
|
|
$
|
31,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
Level III Investments
|
|
|
|
Private
Equity
|
|
Credit
|
|
Real Assets
|
|
Equity Method - Other
|
|
Other Investments
|
|
Total
|
|
|
Balance, Beg. of Period
|
$
|
9,871,682
|
|
|
$
|
9,217,759
|
|
|
$
|
3,567,944
|
|
|
$
|
1,656,045
|
|
|
$
|
2,154,755
|
|
|
$
|
26,468,185
|
|
|
|
Transfers In / (Out) Due to Changes in Consolidation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Transfers In
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Transfers Out
|
—
|
|
|
—
|
|
|
(113,770
|
)
|
|
—
|
|
|
—
|
|
|
(113,770
|
)
|
|
|
Asset Purchases
|
684,812
|
|
|
1,519,543
|
|
|
508,252
|
|
|
82,068
|
|
|
181,993
|
|
|
2,976,668
|
|
|
|
Sales / Paydowns
|
(33,608
|
)
|
|
(1,090,769
|
)
|
|
(259,427
|
)
|
|
(68
|
)
|
|
(51,413
|
)
|
|
(1,435,285
|
)
|
|
|
Settlements
|
—
|
|
|
(32,160
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(32,160
|
)
|
|
|
Net Realized Gains (Losses)
|
(6,322
|
)
|
|
(34,792
|
)
|
|
57,448
|
|
|
(56,579
|
)
|
|
(256,849
|
)
|
|
(297,094
|
)
|
|
|
Net Unrealized Gains (Losses)
|
293,549
|
|
|
(838,530
|
)
|
|
(536,907
|
)
|
|
(58,581
|
)
|
|
(333,689
|
)
|
|
(1,474,158
|
)
|
|
|
Change in Other
Comprehensive Income
|
—
|
|
|
(19,573
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,573
|
)
|
|
|
Balance, End of Period
|
$
|
10,810,113
|
|
|
$
|
8,721,478
|
|
|
$
|
3,223,540
|
|
|
$
|
1,622,885
|
|
|
$
|
1,694,797
|
|
|
$
|
26,072,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities related to Level III Assets and Liabilities still held as of the Reporting Date
|
$
|
285,292
|
|
|
$
|
(860,828
|
)
|
|
$
|
(528,543
|
)
|
|
$
|
(114,972
|
)
|
|
$
|
(575,616
|
)
|
|
$
|
(1,794,667
|
)
|
|
|
|
Notes to Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
Level III Investments
|
|
Level III
Debt Obligations
|
|
Private
Equity
|
|
Credit
|
|
Investments of
Consolidated
CFEs
|
|
Real Assets
|
|
Equity Method - Other
|
|
Other Investments
|
|
Total
|
|
Debt
Obligations of
Consolidated
CFEs
|
Balance, Beg. of Period
|
$
|
6,128,583
|
|
|
$
|
6,764,730
|
|
|
$
|
2,082,545
|
|
|
$
|
3,157,954
|
|
|
$
|
1,503,022
|
|
|
$
|
2,116,586
|
|
|
$
|
21,753,420
|
|
|
$
|
1,876,783
|
|
Transfers In / (Out) Due to Changes in Consolidation
|
—
|
|
|
(1,598
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(42,864
|
)
|
|
(44,462
|
)
|
|
—
|
|
Transfers In
|
7,956
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,520
|
|
|
—
|
|
|
34,476
|
|
|
—
|
|
Transfers Out
|
(491,723
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(491,723
|
)
|
|
—
|
|
Asset Purchases / Debt Issuances
|
1,328,529
|
|
|
2,655,726
|
|
|
—
|
|
|
174,286
|
|
|
184,516
|
|
|
490,040
|
|
|
4,833,097
|
|
|
—
|
|
Sales / Paydowns
|
(249,119
|
)
|
|
(1,563,852
|
)
|
|
(62,334
|
)
|
|
(202,825
|
)
|
|
(145,505
|
)
|
|
(160,650
|
)
|
|
(2,384,285
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
37,341
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,341
|
|
|
(26,770
|
)
|
Net Realized Gains (Losses)
|
83,231
|
|
|
(33,773
|
)
|
|
—
|
|
|
46,644
|
|
|
10,678
|
|
|
1,304
|
|
|
108,084
|
|
|
—
|
|
Net Unrealized Gains (Losses)
|
590,435
|
|
|
(9,709
|
)
|
|
68,446
|
|
|
69,996
|
|
|
90,091
|
|
|
(109,082
|
)
|
|
700,177
|
|
|
72,290
|
|
Change in Other
Comprehensive Income
|
—
|
|
|
(4,003
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,003
|
)
|
|
—
|
|
Balance, End of Period
|
$
|
7,397,892
|
|
|
$
|
7,844,862
|
|
|
$
|
2,088,657
|
|
|
$
|
3,246,055
|
|
|
$
|
1,669,322
|
|
|
$
|
2,295,334
|
|
|
$
|
24,542,122
|
|
|
$
|
1,922,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities related to Level III Assets and Liabilities still held as of the Reporting Date
|
$
|
652,596
|
|
|
$
|
(17,159
|
)
|
|
$
|
68,446
|
|
|
$
|
77,835
|
|
|
$
|
100,483
|
|
|
$
|
(108,834
|
)
|
|
$
|
773,367
|
|
|
$
|
72,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Financial Statements (Continued)
Total realized and unrealized gains and losses recorded for Level III assets and liabilities are reported in Net Gains (Losses) from Investment Activities in the accompanying consolidated statements of operations.
The following table presents additional information about valuation methodologies and significant unobservable inputs used for investments that are measured and reported at fair value and categorized within Level III as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value June 30, 2020
|
|
Valuation
Methodologies
|
|
Unobservable Input(s) (1)
|
|
Weighted
Average (2)
|
|
Range
|
|
Impact to
Valuation
from an
Increase in
Input (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity
|
$
|
10,810,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity
|
$
|
8,322,563
|
|
|
Inputs to market comparables, discounted cash flow and transaction price
|
|
Illiquidity Discount
|
|
6.9%
|
|
5.0% - 15.0%
|
|
Decrease
|
|
|
|
|
|
Weight Ascribed to Market Comparables
|
|
29.6%
|
|
0.0% - 100.0%
|
|
(4)
|
|
|
|
|
|
Weight Ascribed to Discounted Cash Flow
|
|
68.7%
|
|
0.0% - 100.0%
|
|
(5)
|
|
|
|
|
|
Weight Ascribed to Transaction Price
|
|
1.7%
|
|
0.0% - 100.0%
|
|
(6)
|
|
|
|
|
Market comparables
|
|
Enterprise Value/LTM EBITDA Multiple
|
|
14.5x
|
|
8.2x - 21.7x
|
|
Increase
|
|
|
|
|
Enterprise Value/Forward EBITDA Multiple
|
|
15.5x
|
|
7.4x - 25.2x
|
|
Increase
|
|
|
|
|
Discounted cash flow
|
|
Weighted Average Cost of Capital
|
|
9.8%
|
|
6.6% - 16.0%
|
|
Decrease
|
|
|
|
|
|
Enterprise Value/LTM EBITDA Exit Multiple
|
|
12.7x
|
|
6.0x - 16.0x
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Equity
|
$
|
2,487,550
|
|
|
Inputs to market comparables, discounted cash flow and milestones
|
|
Illiquidity Discount
|
|
12.0%
|
|
10.0% - 40.0%
|
|
Decrease
|
|
|
|
|
Weight Ascribed to Market Comparables
|
|
40.7%
|
|
0.0% - 100.0%
|
|
(4)
|
|
|
|
|
Weight Ascribed to Discounted Cash Flow
|
|
5.9%
|
|
0.0% - 50.0%
|
|
(5)
|
|
|
|
|
Weight Ascribed to Milestones
|
|
53.4%
|
|
0.0% - 100.0%
|
|
(6)
|
|
|
|
Scenario Weighting
|
|
Base
|
|
61.6%
|
|
25.0% - 70.0%
|
|
Increase
|
|
|
|
|
Downside
|
|
14.2%
|
|
5.0% - 75.0%
|
|
Decrease
|
|
|
|
|
Upside
|
|
24.2%
|
|
0.0% - 45.0%
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
$
|
8,721,478
|
|
|
Yield Analysis
|
|
Yield
|
|
8.8%
|
|
4.7% - 32.5%
|
|
Decrease
|
|
|
|
|
Net Leverage
|
|
5.7x
|
|
0.4x - 16.9x
|
|
Decrease
|
|
|
|
|
EBITDA Multiple
|
|
10.2x
|
|
1.0x - 27.5x
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Assets
|
$
|
3,223,540
|
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
$
|
1,372,053
|
|
|
Discounted cash flow
|
|
Weighted Average Cost of Capital
|
|
11.8%
|
|
9.1% - 15.5%
|
|
Decrease
|
|
|
|
|
|
Average Price Per BOE (8)
|
|
$35.65
|
|
$25.69 - $41.40
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
$
|
1,663,020
|
|
|
Inputs to direct income capitalization and discounted cash flow
|
|
Weight Ascribed to Direct Income Capitalization
|
|
23.7%
|
|
0.0% - 100.0%
|
|
(7)
|
|
|
|
|
|
Weight Ascribed to Discounted Cash Flow
|
|
76.3%
|
|
0.0% - 100.0%
|
|
(5)
|
|
|
|
|
Direct income capitalization
|
|
Current Capitalization Rate
|
|
6.0%
|
|
4.3% - 9.0%
|
|
Decrease
|
|
|
|
|
Discounted cash flow
|
|
Unlevered Discount Rate
|
|
7.4%
|
|
4.9% - 18.0%
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Method - Other
|
$
|
1,622,885
|
|
|
Inputs to market comparables, discounted cash flow and transaction price
|
|
Illiquidity Discount
|
|
10.0%
|
|
5.0% - 15.0%
|
|
Decrease
|
|
|
|
Weight Ascribed to Market Comparables
|
|
47.6%
|
|
0.0% - 100.0%
|
|
(4)
|
|
|
|
|
|
Weight Ascribed to Discounted Cash Flow
|
|
45.2%
|
|
0.0% - 100.0%
|
|
(5)
|
|
|
|
|
|
Weight Ascribed to Transaction Price
|
|
7.2%
|
|
0.0% - 100.0%
|
|
(6)
|
|
|
|
|
Market comparables
|
|
Enterprise Value/LTM EBITDA Multiple
|
|
11.9x
|
|
8.2x - 28.1x
|
|
Increase
|
|
|
|
|
Enterprise Value/Forward EBITDA Multiple
|
|
14.1x
|
|
7.4x - 25.5x
|
|
Increase
|
|
|
|
|
Discounted cash flow
|
|
Weighted Average Cost of Capital
|
|
9.0%
|
|
4.5% - 15.3%
|
|
Decrease
|
|
|
|
|
|
Enterprise Value/LTM EBITDA Exit Multiple
|
|
11.0x
|
|
6.0x - 18.0x
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value June 30, 2020
|
|
Valuation
Methodologies
|
|
Unobservable Input(s) (1)
|
|
Weighted
Average (2)
|
|
Range
|
|
Impact to
Valuation
from an
Increase in
Input (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
$
|
1,694,797
|
|
(10)
|
Inputs to market comparables, discounted cash flow and transaction price
|
|
Illiquidity Discount
|
|
8.6%
|
|
0.0% - 20.0%
|
|
Decrease
|
|
|
|
Weight Ascribed to Market Comparables
|
|
32.0%
|
|
0.0% - 100.0%
|
|
(4)
|
|
|
|
|
Weight Ascribed to Discounted Cash Flow
|
|
41.1%
|
|
0.0% - 100.0%
|
|
(5)
|
|
|
|
|
Weight Ascribed to Transaction Price
|
|
26.9%
|
|
0.0% - 100.0%
|
|
(6)
|
|
|
|
Market comparables
|
|
Enterprise Value/LTM EBITDA Multiple
|
|
11.8x
|
|
1.3x - 27.5x
|
|
Increase
|
|
|
|
|
Enterprise Value/Forward EBITDA Multiple
|
|
13.2x
|
|
1.3x - 23.0x
|
|
Increase
|
|
|
|
Discounted cash flow
|
|
Weighted Average Cost of Capital
|
|
15.1%
|
|
8.3% - 20.9%
|
|
Decrease
|
|
|
|
|
Enterprise Value/LTM EBITDA Exit Multiple
|
|
9.1x
|
|
6.7x - 11.0x
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In determining certain of these inputs, management evaluates a variety of factors including economic conditions, industry and market developments, market valuations of comparable companies and company specific developments including exit strategies and realization opportunities. Management has determined that market participants would take these inputs into account when valuing the investments and debt obligations. LTM means last twelve months and EBITDA means earnings before interest, taxes, depreciation and amortization.
|
|
|
(2)
|
Inputs were weighted based on the fair value of the investments included in the range.
|
|
|
(3)
|
Unless otherwise noted, this column represents the directional change in the fair value of the Level III investments that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant increases and decreases in these inputs in isolation could result in significantly higher or lower fair value measurements.
|
|
|
(4)
|
The directional change from an increase in the weight ascribed to the market comparables approach would increase the fair value of the Level III investments if the market comparables approach results in a higher valuation than the discounted cash flow approach and transaction price. The opposite would be true if the market comparables approach results in a lower valuation than the discounted cash flow approach and transaction price.
|
|
|
(5)
|
The directional change from an increase in the weight ascribed to the discounted cash flow approach would increase the fair value of the Level III investments if the discounted cash flow approach results in a higher valuation than the market comparables approach, transaction price and direct income capitalization approach. The opposite would be true if the discounted cash flow approach results in a lower valuation than the market comparables approach, transaction price and direct income capitalization approach.
|
|
|
(6)
|
The directional change from an increase in the weight ascribed to the transaction price or milestones would increase the fair value of the Level III investments if the transaction price or milestones results in a higher valuation than the market comparables and discounted cash flow approach. The opposite would be true if the transaction price or milestones results in a lower valuation than the market comparables approach and discounted cash flow approach.
|
|
|
(7)
|
The directional change from an increase in the weight ascribed to the direct income capitalization approach would increase the fair value of the Level III investments if the direct income capitalization approach results in a higher valuation than the discounted cash flow approach. The opposite would be true if the direct income capitalization approach results in a lower valuation than the discounted cash flow approach.
|
|
|
(8)
|
The total energy fair value amount includes multiple investments (in multiple locations throughout North America) that are held in multiple investment funds and produce varying quantities of oil, condensate, natural gas liquids, and natural gas. Commodity price may be measured using a common volumetric equivalent where one barrel of oil equivalent ("BOE"), is determined using the ratio of six thousand cubic feet of natural gas to one barrel of oil, condensate or natural gas liquids. The price per BOE is provided to show the aggregate of all price inputs for the various investments over a common volumetric equivalent although the valuations for specific investments may use price inputs specific to the asset for purposes of our valuations. The discounted cash flows include forecasted production of liquids (oil, condensate, and natural gas liquids) and natural gas with a forecasted revenue ratio of approximately 89% liquids and 11% natural gas.
|
|
|
(9)
|
Includes one Infrastructure investment for $188.5 million that was valued using a market comparables and discounted cash flow analysis; weights ascribed were 25% and 75%, respectively. The significant inputs used in the market comparables approach included the Forward EBITDA multiple 10.9x. The significant inputs used in the discounted cash flow approach included the weighted average cost of capital 8.7% and the enterprise value/LTM EBITDA exit multiple 10.0x.
|
|
|
(10)
|
Consists primarily of investments in common stock, preferred stock, warrants and options of companies that are not private equity, real assets, credit, equity method - other or investments of consolidated CFEs.
|
In the table above, certain private equity investments may be valued at cost for a period of time after an acquisition as the best indicator of fair value. In addition, certain valuations of private equity investments may be entirely or partially derived by reference to observable valuation measures for a pending or consummated transaction.
The various unobservable inputs used to determine the Level III valuations may have similar or diverging impacts on valuation. Significant increases and decreases in these inputs in isolation and interrelationships between those inputs could result in significantly higher or lower fair value measurements as noted in the table above.
Notes to Financial Statements (Continued)
6. FAIR VALUE OPTION
The following table summarizes the financial instruments for which the fair value option has been elected:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
Private Equity
|
$
|
—
|
|
|
$
|
—
|
|
Credit
|
6,598,589
|
|
|
6,451,765
|
|
Investments of Consolidated CFEs
|
15,583,230
|
|
|
14,948,237
|
|
Real Assets
|
198,217
|
|
|
222,488
|
|
Equity Method - Other
|
1,895,902
|
|
|
1,934,555
|
|
Other Investments
|
226,407
|
|
|
395,637
|
|
Total
|
$
|
24,502,345
|
|
|
$
|
23,952,682
|
|
|
|
|
|
Liabilities
|
|
|
|
Debt Obligations of Consolidated CFEs
|
$
|
15,293,024
|
|
|
$
|
14,658,137
|
|
Total
|
$
|
15,293,024
|
|
|
$
|
14,658,137
|
|
Notes to Financial Statements (Continued)
The following table presents the net realized and unrealized gains (losses) on financial instruments for which the fair value option was elected:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2019
|
|
|
Net Realized Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
|
Net Realized
Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Credit
|
|
(23,128
|
)
|
|
99,911
|
|
|
76,783
|
|
|
(43,387
|
)
|
|
(16,443
|
)
|
|
(59,830
|
)
|
Investments of Consolidated CFEs
|
|
(52,950
|
)
|
|
1,261,963
|
|
|
1,209,013
|
|
|
(3,141
|
)
|
|
63,921
|
|
|
60,780
|
|
Real Assets
|
|
153
|
|
|
21,793
|
|
|
21,946
|
|
|
1,079
|
|
|
14,934
|
|
|
16,013
|
|
Equity Method - Other
|
|
(56,592
|
)
|
|
339,145
|
|
|
282,553
|
|
|
(948
|
)
|
|
20,873
|
|
|
19,925
|
|
Other Investments
|
|
(54,356
|
)
|
|
50,948
|
|
|
(3,408
|
)
|
|
(820
|
)
|
|
7,232
|
|
|
6,412
|
|
Total
|
|
$
|
(186,873
|
)
|
|
$
|
1,773,760
|
|
|
$
|
1,586,887
|
|
|
$
|
(47,217
|
)
|
|
$
|
90,517
|
|
|
$
|
43,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations of Consolidated CFEs
|
|
$
|
—
|
|
|
$
|
(1,249,559
|
)
|
|
$
|
(1,249,559
|
)
|
|
$
|
—
|
|
|
$
|
(73,678
|
)
|
|
$
|
(73,678
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
(1,249,559
|
)
|
|
$
|
(1,249,559
|
)
|
|
$
|
—
|
|
|
$
|
(73,678
|
)
|
|
$
|
(73,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2019
|
|
|
Net Realized
Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
|
Net Realized
Gains (Losses)
|
|
Net Unrealized Gains (Losses)
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
194
|
|
|
$
|
194
|
|
Credit
|
|
(48,983
|
)
|
|
(88,497
|
)
|
|
(137,480
|
)
|
|
(66,540
|
)
|
|
4,499
|
|
|
(62,041
|
)
|
Investments of Consolidated CFEs
|
|
(93,802
|
)
|
|
(850,578
|
)
|
|
(944,380
|
)
|
|
(13,671
|
)
|
|
297,278
|
|
|
283,607
|
|
Real Assets
|
|
153
|
|
|
(24,305
|
)
|
|
(24,152
|
)
|
|
1,782
|
|
|
17,370
|
|
|
19,152
|
|
Equity Method - Other
|
|
(56,592
|
)
|
|
(73,073
|
)
|
|
(129,665
|
)
|
|
10,678
|
|
|
37,957
|
|
|
48,635
|
|
Other Investments
|
|
(60,290
|
)
|
|
44,831
|
|
|
(15,459
|
)
|
|
974
|
|
|
11,219
|
|
|
12,193
|
|
Total
|
|
$
|
(259,514
|
)
|
|
$
|
(991,622
|
)
|
|
$
|
(1,251,136
|
)
|
|
$
|
(66,777
|
)
|
|
$
|
368,517
|
|
|
$
|
301,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations of Consolidated CFEs
|
|
$
|
—
|
|
|
$
|
654,933
|
|
|
$
|
654,933
|
|
|
$
|
—
|
|
|
$
|
(325,959
|
)
|
|
$
|
(325,959
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
654,933
|
|
|
$
|
654,933
|
|
|
$
|
—
|
|
|
$
|
(325,959
|
)
|
|
$
|
(325,959
|
)
|
Notes to Financial Statements (Continued)
7. NET INCOME (LOSS) ATTRIBUTABLE TO KKR & CO. INC. PER SHARE OF COMMON STOCK
For the three and six months ended June 30, 2020 and 2019, basic and diluted Net Income (Loss) attributable to KKR & Co. Inc. per share of common stock were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net Income (Loss) Attributable to KKR & Co. Inc.
Common Stockholders
|
$
|
698,628
|
|
|
$
|
514,393
|
|
|
$
|
(590,237
|
)
|
|
$
|
1,215,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share of Common Stock
|
|
|
|
|
|
|
|
Weighted Average Shares of Common Stock Outstanding - Basic
|
558,774,162
|
|
|
544,528,863
|
|
|
558,961,992
|
|
|
539,240,051
|
|
Net Income (Loss) Attributable to KKR & Co. Inc.
Per Share of Common Stock - Basic
|
$
|
1.25
|
|
|
$
|
0.94
|
|
|
$
|
(1.06
|
)
|
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income (Loss) Per Share of Common Stock
|
|
|
|
|
|
|
|
Weighted Average Shares of Common Stock Outstanding - Basic
|
558,774,162
|
|
|
544,528,863
|
|
|
558,961,992
|
|
|
539,240,051
|
|
Weighted Average Unvested Shares of Common Stock
|
6,836,976
|
|
|
10,114,947
|
|
|
—
|
|
|
13,134,457
|
|
Weighted Average Shares of Common Stock Outstanding - Diluted
|
565,611,138
|
|
|
554,643,810
|
|
|
558,961,992
|
|
|
552,374,508
|
|
Net Income (Loss) Attributable to KKR & Co. Inc.
Per Share of Common Stock - Diluted
|
$
|
1.24
|
|
|
$
|
0.93
|
|
|
$
|
(1.06
|
)
|
|
$
|
2.20
|
|
Weighted Average Shares of Common Stock Outstanding - Diluted primarily includes unvested equity awards that have been granted under the Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan (the "2010 Equity Incentive Plan") and the KKR & Co. Inc. 2019 Equity Incentive Plan (the "2019 Equity Incentive Plan" and, together with the 2010 Equity Incentive Plan, the "Equity Incentive Plans"). Vesting of these equity interests dilute KKR & Co. Inc. and KKR Holdings pro rata in accordance with their respective ownership interests in KKR Group Partnership.
For the six months ended June 30, 2020, unvested shares of common stock are excluded from the calculation of Diluted Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock because inclusion of such unvested shares of common stock would be anti-dilutive having the effect of decreasing the loss per share of common stock.
For the three and six months ended June 30, 2020 and 2019, KKR Holdings units have been excluded from the calculation of Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock - Diluted since the exchange of these units would not dilute KKR's respective ownership interests in the KKR Group Partnership.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Weighted Average KKR Holdings Units
|
286,290,915
|
|
|
297,794,189
|
|
|
287,306,484
|
|
|
298,323,364
|
|
Additionally, for the three and six months ended June 30, 2020 and 2019, 5.0 million shares of KKR common stock subject to a market price-based vesting condition were excluded from the calculation of Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Common Stock - Diluted since the vesting conditions have not been satisfied. See Note 12 "Equity Based Compensation."
Notes to Financial Statements (Continued)
8. OTHER ASSETS AND ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Other Assets consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Unsettled Investment Sales (1)
|
$
|
311,580
|
|
|
$
|
86,033
|
|
Receivables
|
50,331
|
|
|
26,893
|
|
Due from Broker (2)
|
338,015
|
|
|
65,154
|
|
Oil & Gas Assets, net (3)
|
206,551
|
|
|
215,243
|
|
Deferred Tax Assets, net
|
428,144
|
|
|
158,574
|
|
Interest Receivable
|
167,384
|
|
|
156,026
|
|
Fixed Assets, net (4)
|
693,700
|
|
|
633,025
|
|
Foreign Exchange Contracts and Options (5)
|
347,369
|
|
|
188,572
|
|
Goodwill (6)
|
83,500
|
|
|
83,500
|
|
Derivative Assets
|
73,569
|
|
|
23,139
|
|
Prepaid Taxes
|
72,088
|
|
|
84,462
|
|
Prepaid Expenses
|
18,687
|
|
|
14,596
|
|
Operating Lease Right of Use Assets (7)
|
99,124
|
|
|
121,101
|
|
Deferred Financing Costs
|
17,064
|
|
|
12,374
|
|
Other
|
109,391
|
|
|
139,544
|
|
Total
|
$
|
3,016,497
|
|
|
$
|
2,008,236
|
|
|
|
(1)
|
Represents amounts due from third parties for investments sold for which cash settlement has not occurred.
|
|
|
(2)
|
Represents amounts held at clearing brokers resulting from securities transactions.
|
|
|
(3)
|
Includes proved and unproved oil and natural gas properties under the successful efforts method of accounting, which is net of impairment write-downs, accumulated depreciation, depletion and amortization. Depreciation, depletion and amortization of $5.5 million and $6.2 million for the three months ended June 30, 2020 and 2019, respectively, and $12.4 million and $20.0 million for the six months ended June 30, 2020 and 2019, respectively, are included in General, Administrative and Other in the accompanying consolidated statements of operations.
|
|
|
(4)
|
Net of accumulated depreciation and amortization of $141.9 million and $132.7 million as of June 30, 2020 and December 31, 2019, respectively. Depreciation and amortization expense of $4.8 million and $4.3 million for the three months ended June 30, 2020 and 2019, respectively, and $9.6 million and $8.7 million for the six months ended June 30, 2020 and 2019, respectively, are included in General, Administrative and Other in the accompanying consolidated statements of operations.
|
|
|
(5)
|
Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign currency denominated investments. Such instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying consolidated statements of operations. See Note 3 "Net Gains (Losses) from Investment Activities" for the net changes in fair value associated with these instruments.
|
|
|
(6)
|
As of June 30, 2020, the carrying value of goodwill is recorded and assessed for impairment at the reporting unit.
|
|
|
(7)
|
KKR’s non-cancelable operating leases consist of leases for office space in North America, Europe, Asia and Australia. KKR is the lessee under the terms of the operating leases. The operating lease cost was $13.0 million and $12.0 million for the three months ended June 30, 2020 and 2019, respectively, and $25.8 million and $23.8 million for the six months ended June 30, 2020 and 2019, respectively.
|
Notes to Financial Statements (Continued)
Accounts Payable, Accrued Expenses and Other Liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Amounts Payable to Carry Pool (1)
|
$
|
974,567
|
|
|
$
|
1,448,879
|
|
Unsettled Investment Purchases (2)
|
1,166,589
|
|
|
481,337
|
|
Securities Sold Short (3)
|
479,015
|
|
|
251,223
|
|
Derivative Liabilities
|
101,661
|
|
|
34,174
|
|
Accrued Compensation and Benefits
|
318,325
|
|
|
131,719
|
|
Interest Payable
|
171,196
|
|
|
234,165
|
|
Foreign Exchange Contracts and Options (4)
|
81,250
|
|
|
39,364
|
|
Accounts Payable and Accrued Expenses
|
119,756
|
|
|
118,454
|
|
Taxes Payable
|
69,534
|
|
|
32,682
|
|
Uncertain Tax Positions
|
67,521
|
|
|
65,716
|
|
Unfunded Revolver Commitments
|
70,148
|
|
|
75,842
|
|
Operating Lease Liabilities (5)
|
101,180
|
|
|
125,086
|
|
Other Liabilities
|
56,305
|
|
|
58,922
|
|
Total
|
$
|
3,777,047
|
|
|
$
|
3,097,563
|
|
|
|
(1)
|
Represents the amount of carried interest payable to current and former KKR employees with respect to KKR's active funds and co-investment vehicles that provide for carried interest.
|
|
|
(2)
|
Represents amounts owed to third parties for investment purchases for which cash settlement has not occurred.
|
|
|
(3)
|
Represents the obligations of KKR to deliver a specified security 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 Activities in the accompanying consolidated statements of operations. See Note 3 "Net Gains (Losses) from Investment Activities" for the net changes in fair value associated with these instruments.
|
|
|
(4)
|
Represents derivative financial instruments used to manage foreign exchange risk arising from certain foreign currency denominated investments. Such instruments are measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying consolidated statements of operations. See Note 3 "Net Gains (Losses) from Investment Activities" for the net changes in fair value associated with these instruments.
|
|
|
(5)
|
KKR’s operating leases have remaining lease terms that range from approximately one year to 13 years, some of which include options to extend the leases for up to three years. The weighted average remaining lease terms were 4.66 years and 4.46 years as of June 30, 2020 and December 31, 2019, respectively. The weighted average discount rates were 2.51% and 2.53% as of June 30, 2020 and December 31, 2019, respectively.
|
Notes to Financial Statements (Continued)
9. VARIABLE INTEREST ENTITIES
Consolidated VIEs
KKR consolidates certain VIEs in which it is determined that KKR is the primary beneficiary as described in Note 2 "Summary of Significant Accounting Policies." The consolidated VIEs are predominately CFEs and certain investment funds sponsored by KKR.
The primary purpose of these VIEs is to provide strategy specific investment opportunities to earn investment gains, current income or both in exchange for management and performance based fees or carried interest. KKR's investment strategies differ for these VIEs; however, the fundamental risks have similar characteristics, including loss of invested capital and loss of management and performance based fees or carried interest. KKR does not provide performance guarantees and has no other financial obligation to provide funding to these consolidated VIEs, beyond amounts previously committed, if any.
Unconsolidated VIEs
KKR holds variable interests in certain VIEs which are not consolidated as it has been determined that KKR is not the primary beneficiary. VIEs that are not consolidated predominantly include certain investment funds sponsored by KKR.
KKR's investment strategies differ by investment fund; however, the fundamental risks have similar characteristics, including loss of invested capital and loss of management and performance based fees or carried interest. KKR's maximum exposure to loss as a result of its investments in the unconsolidated investment funds is the carrying value of such investments, including KKR's capital interest and any unrealized carried interest. Accordingly, disaggregation of KKR's involvement by type of unconsolidated investment fund would not provide more useful information. For these unconsolidated investment funds in which KKR is the sponsor, KKR may have an obligation as general partner to provide commitments to such investment funds. As of June 30, 2020, KKR's commitments to these unconsolidated investment funds were $3.1 billion. KKR has not provided any financial support other than its obligated amount as of June 30, 2020.
As of June 30, 2020 and December 31, 2019, the maximum exposure to loss, before allocations to the carry pool and noncontrolling interests, if any, for those VIEs in which KKR is determined not to be the primary beneficiary but in which it has a variable interest is as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Investments
|
$
|
4,069,308
|
|
|
$
|
5,329,368
|
|
Due from (to) Affiliates, net
|
683,126
|
|
|
439,374
|
|
Maximum Exposure to Loss
|
$
|
4,752,434
|
|
|
$
|
5,768,742
|
|
Notes to Financial Statements (Continued)
10. DEBT OBLIGATIONS
KKR enters into credit agreements and issues debt for its general operating and investment purposes.
KKR consolidates and reports debt obligations of KKR Financial Holdings LLC ("KFN"), which are non-recourse to KKR beyond the assets of KFN.
Certain of KKR's consolidated investment funds borrow to meet financing needs of their operating and investing activities. Fund financing facilities have been established for the benefit of certain investment funds. When an investment fund borrows from the facility in which it participates, the proceeds from the borrowings are limited for their intended use by the borrowing investment fund. KKR's obligations with respect to these financing arrangements are generally limited to KKR's pro rata equity interest in such investment funds.
In certain other cases, KKR has majority-owned consolidated investment vehicles that make investments and purchase other assets with borrowings that are collateralized only by the investments and assets they own.
In addition, consolidated CFE vehicles issue debt securities to third-party investors which are collateralized by assets held by the CFE vehicle. Debt securities issued by CFEs are supported solely by the assets held at the CFEs and are not collateralized by assets of any other KKR entity. CFEs also may have warehouse facilities with banks to provide liquidity to the CFE. The CFE's debt obligations are non-recourse to KKR beyond the assets of the CFE.
KKR's borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
|
Financing Available
|
|
Borrowing Outstanding
|
|
Fair Value
|
|
Financing Available
|
|
Borrowing Outstanding
|
|
Fair Value
|
|
Revolving Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Credit Agreement
|
$
|
1,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
KCM Credit Agreement
|
450,722
|
|
|
—
|
|
|
—
|
|
|
444,904
|
|
|
—
|
|
|
—
|
|
|
KCM 364-Day Revolving Credit Agreement
|
750,000
|
|
|
—
|
|
|
—
|
|
|
750,000
|
|
|
—
|
|
|
—
|
|
|
Notes Issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
KKR Issued 0.509% Notes Due 2023 (1)
|
—
|
|
|
231,931
|
|
|
231,505
|
|
(13)
|
—
|
|
|
228,280
|
|
|
228,026
|
|
(13)
|
KKR Issued 0.764% Notes Due 2025 (2)
|
—
|
|
|
46,012
|
|
|
46,454
|
|
(13)
|
—
|
|
|
45,255
|
|
|
45,856
|
|
(13)
|
KKR Issued 1.625% Notes Due 2029 (3)
|
—
|
|
|
722,654
|
|
|
737,122
|
|
(14)
|
—
|
|
|
718,478
|
|
|
758,903
|
|
(14)
|
KKR Issued 3.750% Notes Due 2029 (4)
|
—
|
|
|
741,737
|
|
|
860,108
|
|
(13)
|
—
|
|
|
493,962
|
|
|
533,505
|
|
(13)
|
KKR Issued 1.595% Notes Due 2038 (5)
|
—
|
|
|
94,798
|
|
|
100,032
|
|
(13)
|
—
|
|
|
93,325
|
|
|
98,524
|
|
(13)
|
KKR Issued 5.500% Notes Due 2043 (6)
|
—
|
|
|
492,344
|
|
|
620,605
|
|
(13)
|
—
|
|
|
492,175
|
|
|
613,415
|
|
(13)
|
KKR Issued 5.125% Notes Due 2044 (7)
|
—
|
|
|
991,288
|
|
|
1,206,240
|
|
(13)
|
—
|
|
|
991,106
|
|
|
1,186,670
|
|
(13)
|
KKR Issued 3.625% Notes Due 2050 (8)
|
—
|
|
|
491,988
|
|
|
496,440
|
|
(13)
|
—
|
|
|
—
|
|
|
—
|
|
|
KFN Issued 5.500% Notes Due 2032 (9)
|
—
|
|
|
494,296
|
|
|
496,499
|
|
|
—
|
|
|
494,054
|
|
|
504,807
|
|
|
KFN Issued 5.200% Notes Due 2033 (10)
|
—
|
|
|
118,472
|
|
|
115,864
|
|
|
—
|
|
|
118,411
|
|
|
117,834
|
|
|
KFN Issued 5.400% Notes Due 2033 (11)
|
—
|
|
|
68,820
|
|
|
68,844
|
|
|
—
|
|
|
68,774
|
|
|
70,059
|
|
|
KFN Issued Junior Subordinated Notes (12)
|
—
|
|
|
234,137
|
|
|
153,834
|
|
|
—
|
|
|
233,473
|
|
|
185,485
|
|
|
|
2,200,722
|
|
|
4,728,477
|
|
|
5,133,547
|
|
|
2,194,904
|
|
|
3,977,293
|
|
|
4,343,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Debt Obligations
|
5,194,091
|
|
|
23,948,422
|
|
|
23,936,222
|
|
|
3,865,495
|
|
|
23,035,991
|
|
|
23,035,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,394,813
|
|
|
$
|
28,676,899
|
|
|
$
|
29,069,769
|
|
|
$
|
6,060,399
|
|
|
$
|
27,013,284
|
|
|
$
|
27,379,075
|
|
|
|
|
(1)
|
¥25 billion (or $232.8 million) aggregate principal amount of 0.509% senior notes of KKR due 2023. Borrowing outstanding is presented net of unamortized debt issuance costs of $0.8 million and $1.0 million as of June 30, 2020 and December 31, 2019, respectively. These senior notes are denominated in Japanese Yen ("JPY").
|
|
|
(2)
|
¥5.0 billion (or $46.5 million) aggregate principal amount of 0.764% senior notes of KKR due 2025. Borrowing outstanding is presented net of unamortized debt issuance costs of $0.5 million and $0.6 million as of June 30, 2020 and December 31, 2019, respectively. These senior notes are denominated in JPY.
|
|
|
(3)
|
€650 million (or $728.0 million) aggregate principal amount of 1.625% senior notes of KKR due 2029. Borrowing outstanding is presented net of (i) unamortized note discount and (ii) unamortized debt issuance costs of $5.4 million and $6.3 million as of June 30, 2020 and December 31, 2019, respectively. These senior notes are denominated in euro.
|
Notes to Financial Statements (Continued)
|
|
(4)
|
$750 million aggregate principal amount of 3.750% senior notes of KKR due 2029. Borrowing outstanding is presented net of (i) unamortized note discount and (ii) unamortized debt issuance costs of $6.0 million and $4.7 million as of June 30, 2020 and December 31, 2019, respectively.
|
|
|
(5)
|
¥10.3 billion (or $95.8 million) aggregate principal amount of 1.595% senior notes of KKR due 2038. Borrowing outstanding is presented net of unamortized debt issuance costs of $1.1 million and $1.1 million as of June 30, 2020 and December 31, 2019, respectively. These senior notes are denominated in JPY.
|
|
|
(6)
|
$500 million aggregate principal amount of 5.500% senior notes of KKR due 2043. Borrowing outstanding is presented net of (i) unamortized note discount and (ii) unamortized debt issuance costs of $3.4 million and $3.4 million as of June 30, 2020 and December 31, 2019, respectively.
|
|
|
(7)
|
$1.0 billion aggregate principal amount of 5.125% senior notes of KKR due 2044. Borrowing outstanding is presented net of (i) unamortized note discount (net of premium) and (ii) unamortized debt issuance costs of $7.5 million and $7.7 million as of June 30, 2020 and December 31, 2019, respectively.
|
|
|
(8)
|
$500 million aggregate principal amount of 3.625% senior notes of KKR due 2050. Borrowing outstanding is presented net of (i) unamortized note discount and (ii) unamortized debt issuance costs of $5.4 million as of June 30, 2020.
|
|
|
(9)
|
KKR consolidates KFN and thus reports KFN's outstanding $500.0 million aggregate principal amount of 5.500% senior notes due 2032. Borrowing outstanding is presented net of (i) unamortized note discount and (ii) unamortized debt issuance costs of $3.9 million and $4.0 million as of June 30, 2020 and December 31, 2019, respectively. These debt obligations are classified as Level III within the fair value hierarchy and valued using the same valuation methodologies as KKR's Level III credit investments.
|
|
|
(10)
|
KKR consolidates KFN and thus reports KFN's outstanding $120.0 million aggregate principal amount of 5.200% senior notes due 2033. Borrowing outstanding is presented net of unamortized debt issuance costs of $1.5 million and $1.6 million as of June 30, 2020 and December 31, 2019, respectively. These debt obligations are classified as Level III within the fair value hierarchy and valued using the same valuation methodologies as KKR's Level III credit investments.
|
|
|
(11)
|
KKR consolidates KFN and thus reports KFN's outstanding $70.0 million aggregate principal amount of 5.400% senior notes due 2033. Borrowing outstanding is presented net of unamortized debt issuance costs of $1.2 million and $1.2 million as of June 30, 2020 and December 31, 2019, respectively. These debt obligations are classified as Level III within the fair value hierarchy and valued using the same valuation methodologies as KKR's Level III credit investments.
|
|
|
(12)
|
KKR consolidates KFN and thus reports KFN's outstanding $258.5 million aggregate principal amount of junior subordinated notes. The weighted average interest rate is 3.2% and 4.4% and the weighted average years to maturity is 16.3 years and 16.8 years as of June 30, 2020 and December 31, 2019, respectively. These debt obligations are classified as Level III within the fair value hierarchy and valued using the same valuation methodologies as KKR's Level III credit investments.
|
|
|
(13)
|
The notes are classified as Level II within the fair value hierarchy and fair value is determined by third party broker quotes.
|
|
|
(14)
|
The notes are classified as Level I within the fair value hierarchy and fair value is determined by quoted prices in active markets since the debt is publicly listed.
|
Revolving Credit Facilities
KCM Credit Agreement
On March 20, 2020, KKR Capital Markets Holdings L.P. and certain other capital market subsidiaries (collectively, the “KCM Borrowers”) of KKR & Co. Inc. entered into a third amended and restated 5-year revolving credit agreement (the “KCM Credit Agreement”) with a major financial institution, as administrative agent, and the lenders party thereto. The KCM Credit Agreement provides for revolving borrowings of up to $500 million with a $500 million sublimit for letters of credit, expires on March 20, 2025 and ranks pari passu with the existing $750 million 364-day revolving credit facility provided by them for KKR’s capital markets business. The prior second amended and restated 5-year revolving credit agreement, dated as of March 30, 2016, between the KCM Borrowers, the administrative agent, and the lenders party thereto, was terminated according to its terms on March 20, 2020 and replaced by the KCM Credit Agreement.
If a borrowing is made on the KCM Credit Agreement, the interest rate will vary depending on the type of drawdown requested. If the loan is a Eurocurrency loan, it will be based on LIBOR plus the applicable margin which ranges initially between 1.75% and 3.00%, depending on the amount and nature of the loan. If the loan is an ABR Loan, it will be based on the prime rate plus the applicable margin which ranges initially between 0.75% and 2.00% depending on the amount and nature of the loan. Borrowings under this facility may only be used for KKR’s capital markets business, and its only obligors are entities involved in KKR’s capital markets business, and its liabilities are non-recourse to other parts of KKR.
As of June 30, 2020, no amounts were outstanding under the KCM Credit Agreement; however various letters of credit were outstanding in the amount of $49.3 million, which reduce the overall borrowing capacity of the KCM Credit Agreement.
The KCM Credit Agreement contains customary representations and warranties, events of default, and affirmative and negative covenants, including a financial covenant providing for a maximum debt to equity ratio for the KCM Borrowers. The KCM Borrowers’ obligations under the KCM Credit Agreement are secured by certain assets of the KCM Borrowers, including a pledge of equity interests of certain subsidiaries of the KCM Borrowers.
Notes to Financial Statements (Continued)
KCM Short-Term Credit Agreement
On April 10, 2020, the KCM Borrowers entered into a 364-day revolving credit agreement (the "KCM Short-Term Credit Agreement”) with a major financial institution, as administrative agent, and the lenders party thereto. The KCM Short-Term Credit Agreement provides for revolving borrowings of up to $750 million, expires on April 9, 2021, and ranks pari passu with the existing KCM Credit Agreement provided by them for KKR's capital markets business. The prior 364-day revolving credit agreement, dated as of June 27, 2019, between the KCM Borrowers and a major financial institution, as administrative agent, and the lenders party thereto, was terminated according to its terms on April 10, 2020 and replaced by the KCM Revolver Agreement.
If a borrowing is made under the KCM Short-Term Credit Agreement, the interest rate will vary depending on the type of drawdown requested. If the borrowing is a Eurocurrency loan, it will be based on a LIBOR rate plus an applicable margin ranging between 1.50% and 2.75%, depending on the duration of the loan. If the borrowing is an ABR loan, it will be based on a base rate plus an applicable margin ranging between 0.50% and 1.75%, depending on the duration of the loan. Borrowings under the KCM Short-Term Credit Agreement may only be used to facilitate the settlement of debt transactions syndicated by KKR's capital markets business. Obligations under the KCM Short-Term Credit Agreement are limited to the KCM Borrowers, which are solely entities involved in KKR's capital markets business, and liabilities under the KCM Short-Term Credit Agreement are non-recourse to other parts of KKR.
The KCM Short-Term Credit Agreement contains customary representations and warranties, events of default, and affirmative and negative covenants, including a financial covenant providing for a maximum debt to equity ratio for the KCM Borrowers. The KCM Borrowers' obligations under the KCM Short-Term Credit Agreement are secured by certain assets of the KCM Borrowers, including a pledge of equity interests of certain subsidiaries of the KCM Borrowers.
Notes Issuance
KKR Issued 3.625% Senior Notes Due 2050
On February 25, 2020, KKR Group Finance Co. VII LLC, an indirect subsidiary of KKR & Co. Inc., issued $500 million aggregate principal amount of its 3.625% Senior Notes due 2050 (the "2050 Senior Notes"). The 2050 Senior Notes are guaranteed by KKR & Co. Inc. and KKR Group Partnership.
The 2050 Senior Notes bear interest at a rate of 3.625% per annum and will mature on February 25, 2050, unless earlier redeemed. Interest on the 2050 Senior Notes accrues from February 25, 2020 and is payable semi-annually in arrears on February 25 and August 25 of each year, commencing on August 25, 2020 and ending on the applicable maturity date. The 2050 Senior Notes are unsecured and unsubordinated obligations of the issuer. The 2050 Senior Notes are fully and unconditionally guaranteed, jointly and severally, by each of the guarantors. The guarantees are unsecured and unsubordinated obligations of the guarantors.
The indenture, as supplemented by the first supplemental indenture, related to the 2050 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 2050 Senior Notes may declare the 2050 Senior Notes immediately due and payable upon the occurrence and during the continuance of any event of default after expiration of any applicable grace period. In the case of specified events of bankruptcy, insolvency, receivership or reorganization, the principal amount of the 2050 Senior Notes and any accrued and unpaid interest on the 2050 Senior Notes automatically become due and payable. Prior to August 25, 2049, the issuer may redeem the 2050 Senior Notes at its option, in whole or in part, at any time and from time to time, prior to their stated maturity, at the make-whole redemption price set forth in the 2050 Senior Notes. On or after August 25, 2049, the issuer may redeem the 2050 Senior Notes at its option, in whole or in part, at any time and from time to time, at a redemption price equal to 100% of the principal amount of the 2050 Senior Notes to be redeemed, together with interest accrued and unpaid to, but excluding, the date of redemption. If a change of control repurchase event occurs, the 2050 Senior Notes are subject to repurchase by the issuer at a repurchase price in cash equal to 101% of the aggregate principal amount of the 2050 Senior Notes repurchased plus any accrued and unpaid interest on the 2050 Senior Notes repurchased to, but not including, the date of repurchase.
Notes to Financial Statements (Continued)
KKR Issued additional 3.750% Senior Notes Due 2029
On April 21, 2020, KKR Group Finance Co. VI LLC, an indirect subsidiary of KKR & Co. Inc., issued an additional $250 million aggregate principal amount of its 3.750% Senior Notes due 2029 (the "New 3.750% Senior Notes"). The New 3.750% Senior Notes are guaranteed by KKR & Co. Inc. and KKR Group Partnership. The New 3.750% Senior Notes constitute an issuance of additional notes under the indenture governing the notes. The New 3.750% Senior Notes have substantially the same terms as, and are treated as a single series with, the existing $500 million aggregate principal amount of 3.750% Senior Notes issued on July 1, 2019.
Other Debt Obligations
As of June 30, 2020, other debt obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Available
|
|
Borrowing
Outstanding
|
|
Fair Value
|
|
Weighted
Average
Interest Rate
|
|
Weighted Average Remaining Maturity in Years
|
Financing Facilities of Consolidated Funds and Other
|
$
|
5,194,091
|
|
|
$
|
8,655,398
|
|
|
$
|
8,643,198
|
|
|
2.8%
|
|
4.0
|
Debt Obligations of Consolidated CLOs
|
—
|
|
|
15,293,024
|
|
|
15,293,024
|
|
|
(1)
|
|
10.7
|
|
$
|
5,194,091
|
|
|
$
|
23,948,422
|
|
|
$
|
23,936,222
|
|
|
|
|
|
|
|
(1)
|
The senior notes of the consolidated CLOs had a weighted average interest rate of 2.4%. The subordinated notes of the consolidated CLOs do not have contractual interest rates but instead receive a pro rata amount of the net distributions from the excess cash flows of the respective CLO vehicle. Accordingly, weighted average borrowing rates for the subordinated notes are based on cash distributions during the period, if any.
|
Debt obligations of consolidated CFEs are collateralized by assets held by each respective CFE vehicle and assets of one CFE vehicle may not be used to satisfy the liabilities of another. As of June 30, 2020, the fair value of the consolidated CFE assets was $16.4 billion. This collateral consisted of Cash and Cash Equivalents Held at Consolidated Entities, Investments, and Other Assets.
Debt Covenants
Borrowings of KKR contain various debt covenants. These covenants do not, in management's opinion, materially restrict KKR's operating business or investment strategies as of June 30, 2020. KKR is in compliance with its debt covenants in all material respects as of June 30, 2020.
Notes to Financial Statements (Continued)
11. INCOME TAXES
KKR & Co. Inc. is a corporation for U.S. federal income tax purposes and thus is subject to U.S. federal, state and local corporate income taxes at the entity level on KKR’s share of net taxable income. In addition, KKR Group Partnership and certain of its subsidiaries operate in the United States as partnerships for U.S. federal income tax purposes and as corporate entities in certain non-U.S. jurisdictions. These entities, in some cases, are subject to U.S. state or local income taxes or non-U.S. income taxes.
The effective tax rates were 9.6% and 10.8% for the three months ended June 30, 2020 and 2019, respectively and 6.4% and 10.0% for the six months ended June 30, 2020 and 2019, respectively. The effective tax rate differs from the statutory rate primarily because a substantial portion of the reported net income (loss) before taxes is not attributable to KKR but rather is attributable to noncontrolling interests held in KKR’s consolidated entities by KKR Holdings or by third parties.
Future realization of deferred tax assets is dependent on KKR generating sufficient taxable income before the tax benefits are expected to expire. KKR considers projections of taxable income in evaluating its ability to utilize those deferred tax assets. In projecting its taxable income, KKR begins with historical results and incorporates assumptions concerning the amount and timing of future pretax operating income. Those assumptions require significant judgment but are consistent with the plans and estimates that KKR uses to manage its business. KKR has determined that it is more likely than not that all deferred tax assets will be realized and that a valuation allowance is not needed as of June 30, 2020.
During the three and six months ended June 30, 2020, there were no material changes to KKR’s uncertain tax positions and KKR believes there will be no significant increase or decrease to the uncertain tax positions within 12 months of the reporting date.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act, among other things, includes certain income tax provisions for individuals and corporations; however, it did not have a material impact on KKR's financial statements for the current period.
Notes to Financial Statements (Continued)
12. EQUITY BASED COMPENSATION
The following table summarizes the expense associated with equity-based compensation for the three and six months ended June 30, 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Equity Incentive Plans
|
$
|
39,933
|
|
|
$
|
48,611
|
|
|
$
|
90,936
|
|
|
$
|
103,496
|
|
KKR Holdings Principal Awards
|
21,023
|
|
|
22,803
|
|
|
41,599
|
|
|
46,469
|
|
Total (1)
|
$
|
60,956
|
|
|
$
|
71,414
|
|
|
$
|
132,535
|
|
|
$
|
149,965
|
|
|
|
(1)
|
Includes approximately $0.1 million and $0.4 million of equity based compensation for the three and six months ended June 30, 2020, respectively, and $0.7 million and $0.5 million of equity based compensation for the three and six months ended June 30, 2019, respectively, related to employees of equity method investees. Such amounts are included in Net Gains (Losses) from Investment Activities in the consolidated statements of operations.
|
Equity Incentive Plans
Under the 2019 Equity Incentive Plan, KKR is permitted to grant equity awards representing ownership interests in KKR & Co. Inc. common stock. The total number of shares of common stock that may be issued under the 2019 Equity Incentive Plan is equivalent to 15% of the aggregate number of the shares of common stock and KKR Group Partnership Units (excluding KKR Group Partnership Units held by KKR & Co. Inc. or its wholly-owned subsidiaries), subject to annual adjustment. Vested awards under the Equity Incentive Plans dilute KKR & Co. Inc. common stockholders and KKR Holdings pro rata in accordance with their respective percentage interests in KKR Group Partnership.
Equity awards have been granted under the Equity Incentive Plans and are generally subject to service-based vesting, typically over a three to five year period from the date of grant. In certain cases, these awards are subject to transfer restrictions and/or minimum retained ownership requirements. The transfer restriction period, if applicable, lasts for (i) one year with respect to one-half of the interests vesting on any vesting date and (ii) two years with respect to the other one-half of the interests vesting on such vesting date. While providing services to KKR, if applicable, certain of these awards are also subject to minimum retained ownership rules requiring the award recipient to continuously hold shares of common stock equivalents equal to at least 15% of their cumulatively vested awards that have the minimum retained ownership requirement.
Expense associated with the vesting of these awards is based on the closing price of the KKR & Co. Inc. common stock on the date of grant, discounted for the lack of participation rights in the expected dividends on unvested shares.
The following table presents information regarding the discount for the lack of participation rights in the expected dividends by grant date:
|
|
|
|
|
|
Date of Grant
|
|
Discount
per share (1)
|
January 1, 2016 to December 31, 2016
|
|
$
|
0.64
|
|
January 1, 2017 to December 31, 2017
|
|
$
|
0.68
|
|
January 1, 2018 to June 30, 2018
|
|
$
|
0.68
|
|
July 1, 2018 to December 31, 2019
|
|
$
|
0.50
|
|
January 1, 2020 to Present
|
|
$
|
0.54
|
|
|
|
(1)
|
Represents the annual discount for the lack of participation rights on expected dividends. The total discount on any given tranche of unvested shares is calculated as the discount per share multiplied by the number of years in the applicable vesting period.
|
Expense is recognized on a straight line basis over the life of the award and assumes a forfeiture rate of up to 7% annually based upon expected turnover by class of recipient.
Notes to Financial Statements (Continued)
Market Condition Awards
On November 2, 2017, KKR's Co-Presidents and Co-Chief Operating Officers were each granted equity awards representing 2.5 million shares of KKR common stock subject to a market price-based vesting condition ("Market Condition Awards"). These awards were granted under the 2010 Equity Incentive Plan. All of such awards will vest upon the market price of KKR common stock reaching and maintaining a closing market price of $40 per share for 10 consecutive trading days on or prior to December 31, 2022, subject to the employee's continued service to the time of such vesting. If the $40 price target is not achieved by the close of business on December 31, 2022, the unvested Market Condition Awards will be automatically canceled and forfeited. These Market Condition Awards are subject to additional transfer restrictions and minimum retained ownership requirements after vesting. Due to the existence of the market condition, the vesting period for the Market Condition Awards is not explicit, and as such, compensation expense will be recognized over the period derived from the valuation technique used to estimate the grant-date fair value of the award (the "Derived Vesting Period"). The fair value of the Market Condition Awards at the date of grant was $4.02 per share based on a Monte-Carlo simulation valuation model due to the existence of the market condition described above.
Below is a summary of the significant assumptions used to estimate the grant date fair value of the Market Condition Awards:
|
|
|
|
|
Closing KKR share price as of valuation date
|
|
$19.90
|
Risk Free Rate
|
|
2.02
|
%
|
Volatility
|
|
25.00
|
%
|
Dividend Yield
|
|
3.42
|
%
|
Expected Cost of Equity
|
|
11.02
|
%
|
In addition, the grant date fair value assumes that holders of the Market Condition Awards will not participate in dividends until such awards have met their vesting requirements. Compensation expense is recognized over the Derived Vesting Period, which was estimated to be 3 years from the date of grant, on a straight-line basis. As of June 30, 2020, there was approximately $2.3 million of estimated unrecognized compensation expense related to unvested Market Condition Awards and such awards did not meet their market-price based vesting condition.
As of June 30, 2020, there was approximately $207.4 million of total estimated unrecognized expense related to unvested awards, including Market Condition Awards. That cost is expected to be recognized as follows:
|
|
|
|
|
|
Year
|
|
Unrecognized Expense
(in millions)
|
Remainder of 2020
|
|
$
|
71.6
|
|
2021
|
|
86.0
|
|
2022
|
|
38.9
|
|
2023
|
|
8.9
|
|
2024
|
|
1.7
|
|
2025
|
|
0.3
|
|
Total
|
|
$
|
207.4
|
|
A summary of the status of unvested awards granted under the Equity Incentive Plans, excluding Market Condition Awards as described above, from January 1, 2020 through June 30, 2020 is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
Balance, January 1, 2020
|
22,697,645
|
|
|
$
|
18.46
|
|
Granted
|
268,653
|
|
|
23.07
|
|
Vested
|
(6,687,215
|
)
|
|
15.57
|
|
Forfeitures
|
(572,343
|
)
|
|
18.41
|
|
Balance, June 30, 2020
|
15,706,740
|
|
|
$
|
19.78
|
|
The weighted average remaining vesting period over which unvested awards are expected to vest is 1.1 years.
Notes to Financial Statements (Continued)
A summary of the remaining vesting tranches of awards granted under the Equity Incentive Plans is presented below:
|
|
|
|
|
Vesting Date
|
|
Shares
|
October 1, 2020
|
|
4,105,856
|
|
April 1, 2021
|
|
4,654,041
|
|
October 1, 2021
|
|
2,623,588
|
|
April 1, 2022
|
|
1,637,614
|
|
October 1, 2022
|
|
1,363,448
|
|
April 1, 2023
|
|
841,257
|
|
October 1, 2023
|
|
163,707
|
|
April 1, 2024
|
|
185,385
|
|
October 1, 2024
|
|
5,133
|
|
April 1, 2025
|
|
126,711
|
|
|
|
15,706,740
|
|
KKR Holdings Awards
KKR Holdings units are exchangeable for KKR Group Partnership Units and allow for their exchange into common stock of KKR & Co. Inc. on a one-for-one basis. As of June 30, 2020 and 2019, KKR Holdings owned approximately 33.8% or 285,978,495 units and 35.2% or 296,961,596 units, respectively, of outstanding KKR Group Partnership Units. Awards for KKR Holdings units that have been granted are generally subject to service based vesting, typically over a three to five year period from the date of grant. They are also generally subject to transfer restrictions which last for (i) one year with respect to one-half of the interests vesting on any vesting date and (ii) two years with respect to the other one-half of the interests vesting on such vesting date. While providing services to KKR, the recipients are also subject to minimum retained ownership rules requiring them to continuously hold 25% of their vested interests. Upon separation from KKR, award recipients are subject to the terms of a confidentiality and restrictive covenants agreement that would require the forfeiture of certain vested and unvested units should the terms of the agreement be violated. Holders of KKR Holdings units are not entitled to participate in distributions made on KKR Group Partnership Units underlying their KKR Holdings units until such units are vested. All of the KKR Holdings units (except for less than 1.2% of the outstanding KKR Holdings units) have been granted as of June 30, 2020, and certain Holdings units remain subject to vesting.
The fair value of awards granted out of KKR Holdings is generally based on the closing price of KKR & Co. Inc. common stock on the date of grant discounted for the lack of participation rights in the expected distributions on unvested units. KKR determined this to be the best evidence of fair value as KKR & Co. Inc. common stock is traded in an active market and has an observable market price. Additionally, a KKR Holdings unit is an instrument with terms and conditions similar to those of KKR & Co. Inc. common stock. Specifically, units in KKR Holdings and shares of KKR & Co. Inc. represent ownership interests in KKR Group Partnership Units and, subject to any vesting, minimum retained ownership requirements and transfer restrictions, each KKR Holdings unit is exchangeable into a KKR Group Partnership Unit and then into a share of KKR & Co. Inc. common stock on a one-for-one basis.
In February 2016, approximately 28.9 million KKR Holdings units were granted that were originally subject to market condition and service-based vesting that were subsequently modified in November 2016 to eliminate the market condition vesting and instead require only service-based vesting in equal annual installments over a five year period. At the date of modification, total future compensation expense amounted to $320.9 million, net of estimated forfeitures, to be recognized over the remaining vesting period of the modified awards.
The awards described above were granted from outstanding but previously unallocated units of KKR Holdings, and consequently these grants did not increase the number of KKR Holdings units outstanding or outstanding KKR & Co. Inc. common stock on a fully-diluted basis. If and when vested, these awards will not dilute KKR's respective ownership interests in KKR Group Partnership.
KKR Holdings awards give rise to equity-based compensation in the consolidated statements of operations based on the grant-date fair value of the award discounted for the lack of participation rights in the expected distributions on unvested units. This discount is consistent with that noted above for shares issued under the Equity Incentive Plans.
Notes to Financial Statements (Continued)
Expense is recognized on a straight line basis over the life of the award and assumes a forfeiture rate of up to 7% annually based on expected turnover by class of recipient.
As of June 30, 2020, there was approximately $108.6 million of estimated unrecognized expense related to unvested KKR Holdings awards. That cost is expected to be recognized as follows:
|
|
|
|
|
|
Year
|
|
Unrecognized Expense
(in millions)
|
Remainder of 2020
|
|
$
|
37.7
|
|
2021
|
|
45.2
|
|
2022
|
|
25.7
|
|
Total
|
|
$
|
108.6
|
|
A summary of the status of unvested awards granted under the KKR Holdings Plan from January 1, 2020 through June 30, 2020 is presented below:
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted
Average Grant
Date Fair Value
|
Balance, January 1, 2020
|
16,569,479
|
|
|
$
|
14.43
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(3,029,479
|
)
|
|
11.86
|
|
Forfeitures
|
(360,000
|
)
|
|
11.19
|
|
Balance, June 30, 2020
|
13,180,000
|
|
|
$
|
15.12
|
|
The weighted average remaining vesting period over which unvested awards are expected to vest is 1.2 years.
A summary of the remaining vesting tranches of awards granted under the KKR Holdings Plan is presented below:
|
|
|
|
|
Vesting Date
|
|
Units
|
October 1, 2020
|
|
2,940,000
|
|
May 1, 2021
|
|
2,905,000
|
|
October 1, 2021
|
|
3,425,000
|
|
October 1, 2022
|
|
3,910,000
|
|
|
|
13,180,000
|
|
Notes to Financial Statements (Continued)
13. RELATED PARTY TRANSACTIONS
Due from Affiliates consists of:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Amounts due from portfolio companies
|
$
|
129,820
|
|
|
$
|
120,391
|
|
Amounts due from unconsolidated investment funds
|
799,615
|
|
|
594,184
|
|
Amounts due from related entities
|
668
|
|
|
2,824
|
|
Due from Affiliates
|
$
|
930,103
|
|
|
$
|
717,399
|
|
Due to Affiliates consists of:
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Amounts due to KKR Holdings - tax receivable agreement
|
$
|
145,285
|
|
|
$
|
131,288
|
|
Amounts due to unconsolidated investment funds
|
116,489
|
|
|
154,810
|
|
Due to Affiliates
|
$
|
261,774
|
|
|
$
|
286,098
|
|
14. SEGMENT REPORTING
KKR operates through one operating and reportable segment. This single reportable segment reflects how the chief operating decision makers allocate resources and assess performance under KKR's "one-firm approach," which includes operating collaboratively across business lines, with predominantly a single expense pool.
15. EQUITY
Stockholders' Equity
Common Stock
Our common stock is entitled to vote as provided by our certificate of incorporation, Delaware law and the rules of the NYSE. Subject to preferences that apply to shares of Series A Preferred Stock and Series B Preferred Stock and any other shares of preferred stock outstanding at the time on which dividends are payable, the holders of our common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to declare dividends and then only at the times and in the amounts that our board of directors may determine. Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions.
Series I and Series II Preferred Stock
Except for any distribution required by Delaware law to be made upon a dissolution event, the holders of Series I preferred stock and Series II preferred stock do not have any economic rights to receive dividends. Series I preferred stock is entitled to vote on any matter that is submitted to vote of the stockholders. For matters on which our common stock is entitled to vote, so long as the ratio at which KKR Group Partnership Units are exchangeable for shares of common stock remains on a one-for-one basis, Series II preferred stock will vote together with common stock as a single class and on an equivalent basis, except Series II preferred stock will vote separately as a class on any amendment to the certificate of incorporation that changes certain terms, rights or preferences of Series II preferred stock. Upon a dissolution event, each holder of Series I preferred stock will be entitled to a payment equal to $0.01 per share of Series I preferred stock and each holder of Series II preferred stock will be entitled to a payment equal to $0.000000001 per share of Series II Preferred Stock.
Notes to Financial Statements (Continued)
Series A and Series B Preferred Stock
The board of directors is authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers (including voting powers), preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in each case without further vote or action by the stockholders (except as may be required by the terms of any preferred stock then outstanding).
KKR & Co. Inc. has outstanding 13,800,000 shares of Series A Preferred Stock and 6,200,000 shares of Series B Preferred Stock. Series A Preferred Stock and Series B Preferred Stock trade on the NYSE under the symbols "KKR PR A" and "KKR PR B", respectively, and were originally issued on March 17, 2016 and June 20, 2016, respectively. The terms of the preferred stock are set forth in our certificate of incorporation.
If declared, dividends on the Series A Preferred Stock and Series B Preferred Stock are payable quarterly on March 15, June 15, September 15 and December 15 of each year, at a rate per annum equal to 6.75%, in the case of Series A Preferred Stock, and 6.50%, in the case of Series B Preferred Stock. Dividends on the Series A Preferred Stock and Series B Preferred Stock are discretionary and non-cumulative. Holders of the Series A Preferred Stock and Series B Preferred Stock will only receive dividends on such shares when, as and if declared by the board of directors. KKR has no obligation to declare or pay any dividends for any dividend period, whether or not dividends on any series of preferred stock are declared or paid for any other dividend period.
Unless dividends have been declared and paid (or declared and set apart for payment) on Series A Preferred Stock and Series B Preferred Stock for a quarterly distribution period, KKR & Co. Inc. may not declare or pay dividends on, or repurchase, any of its shares that are junior to Series A Preferred Stock and Series B Preferred Stock, including common stock, during such dividend period. A dividend period begins on a dividend payment date and extends to, but excludes, the next dividend payment date.
If KKR & Co. Inc. dissolves, then the holders of the Series A Preferred Stock and Series B Preferred Stock are entitled to receive payment of a $25.00 liquidation preference per share, plus declared and unpaid dividends, if any, to the extent that KKR has sufficient gross income (excluding any gross income attributable to the sale or exchange of capital assets) such that holders of such preferred stock have capital account balances equal to such liquidation preference, plus declared and unpaid dividends, if any.
The Series A Preferred Stock and Series B Preferred Stock do not have a maturity date. However, Series A Preferred Stock may be redeemed at KKR & Co. Inc.’s option, in whole or in part, at any time on or after June 15, 2021, at a price of $25.00 per share, plus declared and unpaid dividends, if any. Series B Preferred Stock may be redeemed at KKR & Co. Inc.’s option, in whole or in part, at any time on or after September 15, 2021, at a price of $25.00 per share, plus declared and unpaid dividends, if any. Holders of Series A Preferred Stock and Series B Preferred Stock have no right to require the redemption of such stock.
If a certain change of control event with a ratings downgrade occurs prior to June 15, 2021, in the case of Series A Preferred Stock, and September 15, 2021, in the case of Series B Preferred Stock, then Series A Preferred Stock or Series B Preferred Stock, as applicable, may be redeemed at KKR & Co. Inc.’s option, in whole but not in part, upon at least 30 days' notice, within 60 days of the occurrence of such change of control event, at a price of $25.25 per share, plus declared and unpaid dividends, if any. If such a change of control event occurs (whether before, on or after June 15, 2021, in the case of the Series A Preferred Stock, or September 15, 2021, in the case of the Series B Preferred Stock) and we do not give such notice, the dividend rate per annum on the applicable series of preferred stock will increase by 5.00%, beginning on the 31st day following such change of control event.
Series A Preferred Stock and Series B Preferred Stock are not convertible into common stock of KKR & Co. Inc. and have no voting rights, except that holders of Series A Preferred Stock and Series B Preferred Stock have certain voting rights in limited circumstances relating to the election of directors following the failure to declare and pay dividends, certain amendments to the terms of the preferred stock, and the creation of preferred stock that are senior to the Series A Preferred Stock and Series B Preferred Stock.
In connection with the issuance of the Series A Preferred Stock and Series B Preferred Stock, KKR Group Partnership issued for the benefit of KKR & Co. Inc. corresponding series of preferred units with economic terms that mirror those of the Series A Preferred Stock and Series B Preferred Stock, as applicable.
Notes to Financial Statements (Continued)
Share Repurchase Program
KKR has increased the total available amount under its repurchase program to $500 million, which may be used for the repurchase of shares of common stock of KKR & Co. Inc. and retirement of equity awards granted pursuant to the Equity Incentive Plans. Under this repurchase program, shares of common stock of KKR & Co. Inc. may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing, manner, price and amount of any repurchases will be determined by KKR in its discretion and will depend on a variety of factors, including legal requirements, price and economic and market conditions. In addition to the repurchases of common stock, the repurchase program will be used for the retirement (by cash settlement or the payment of tax withholding amounts upon net settlement) of equity awards granted pursuant to our Equity Incentive Plans representing the right to receive common stock. KKR expects that the program, which has no expiration date, will be in effect until the maximum approved dollar amount has been used. The program does not require KKR to repurchase or retire any specific number of shares of common stock or equity awards, respectively, and the program may be suspended, extended, modified or discontinued at any time.
The following table presents KKR & Co. Inc. common stock that has been repurchased or equity awards retired under the repurchase program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Shares of common stock repurchased
|
—
|
|
|
—
|
|
|
10,209,673
|
|
|
1,370,289
|
|
Equity Awards for common stock retired
|
1,728,914
|
|
|
2,273,112
|
|
|
1,728,914
|
|
|
2,273,112
|
|
Noncontrolling Interests
Noncontrolling interests represent (i) noncontrolling interests in consolidated entities and (ii) noncontrolling interests held by KKR Holdings.
Noncontrolling Interests in Consolidated Entities
Noncontrolling interests in consolidated entities represent the non-redeemable ownership interests in KKR that are held primarily by:
|
|
(i)
|
third party fund investors in KKR's consolidated funds and certain other entities;
|
|
|
(ii)
|
third parties entitled to up to 1% of the carried interest received by certain general partners of KKR's funds that have made investments on or prior to December 31, 2015;
|
|
|
(iii)
|
certain former principals and their designees representing a portion of the carried interest received by the general partners of KKR's private equity funds that was allocated to them with respect to private equity investments made during such former principals' tenure with KKR prior to October 1, 2009;
|
|
|
(iv)
|
certain principals and former principals representing all of the capital invested by or on behalf of the general partners of KKR's private equity funds prior to October 1, 2009 and any returns thereon; and
|
|
|
(v)
|
third parties in KKR's capital markets business line.
|
Notes to Financial Statements (Continued)
Noncontrolling Interests held by KKR Holdings
Noncontrolling interests held by KKR Holdings include economic interests held by principals indirectly in KKR Group Partnership Units. Such principals receive financial benefits from KKR's business in the form of distributions received from KKR Holdings and through their direct and indirect participation in the value of KKR Group Partnership Units held by KKR Holdings. These financial benefits are not paid by KKR & Co. Inc. and are borne by KKR Holdings.
The following tables present the calculation of total noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
Noncontrolling Interests in Consolidated Entities
|
|
Noncontrolling Interests Held by KKR Holdings
|
|
Total Noncontrolling Interests
|
Balance at the beginning of the period
|
$
|
12,478,917
|
|
|
$
|
4,785,151
|
|
|
$
|
17,264,068
|
|
Net income (loss) attributable to noncontrolling interests (1)
|
781,786
|
|
|
462,410
|
|
|
1,244,196
|
|
Other comprehensive income (loss), net of tax (2)
|
(572
|
)
|
|
640
|
|
|
68
|
|
Exchange of KKR Holdings Units to Common Stock (3)
|
—
|
|
|
(8,860
|
)
|
|
(8,860
|
)
|
Equity-based and other non-cash compensation
|
—
|
|
|
21,098
|
|
|
21,098
|
|
Capital contributions
|
1,189,312
|
|
|
25
|
|
|
1,189,337
|
|
Capital distributions
|
(231,493
|
)
|
|
(38,620
|
)
|
|
(270,113
|
)
|
Balance at the end of the period
|
$
|
14,217,950
|
|
|
$
|
5,221,844
|
|
|
$
|
19,439,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
Noncontrolling Interests in Consolidated Entities
|
|
Noncontrolling Interests Held by KKR Holdings
|
|
Total Noncontrolling Interests
|
Balance at the beginning of the period
|
$
|
13,966,250
|
|
|
$
|
5,728,634
|
|
|
$
|
19,694,884
|
|
Net income (loss) attributable to noncontrolling interests (1)
|
(1,313,449
|
)
|
|
(389,784
|
)
|
|
(1,703,233
|
)
|
Other comprehensive income (loss), net of tax (2)
|
(7,174
|
)
|
|
(6,872
|
)
|
|
(14,046
|
)
|
Exchange of KKR Holdings Units to Common Stock(3)
|
—
|
|
|
(80,754
|
)
|
|
(80,754
|
)
|
Equity-based and other non-cash compensation
|
—
|
|
|
41,794
|
|
|
41,794
|
|
Capital contributions
|
2,310,255
|
|
|
48
|
|
|
2,310,303
|
|
Capital distributions
|
(716,102
|
)
|
|
(78,667
|
)
|
|
(794,769
|
)
|
Transfer of interests under common control (4)
|
(21,830
|
)
|
|
7,445
|
|
|
(14,385
|
)
|
Balance at the end of the period
|
$
|
14,217,950
|
|
|
$
|
5,221,844
|
|
|
$
|
19,439,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
Noncontrolling Interests in Consolidated Entities
|
|
Noncontrolling Interests Held by KKR Holdings
|
|
Total Noncontrolling Interests
|
Balance at the beginning of the period
|
|
$
|
11,806,428
|
|
|
$
|
5,079,042
|
|
|
$
|
16,885,470
|
|
Net income (loss) attributable to noncontrolling interests (1)
|
|
477,768
|
|
|
361,228
|
|
|
838,996
|
|
Other comprehensive income (loss), net of tax (2)
|
|
(1,600
|
)
|
|
(285
|
)
|
|
(1,885
|
)
|
Exchange of KKR Holdings Units to Common Stock (3)
|
|
—
|
|
|
(29,683
|
)
|
|
(29,683
|
)
|
Equity-based and other non-cash compensation
|
|
—
|
|
|
22,803
|
|
|
22,803
|
|
Capital contributions
|
|
1,454,520
|
|
|
1,573
|
|
|
1,456,093
|
|
Capital distributions
|
|
(686,223
|
)
|
|
(78,986
|
)
|
|
(765,209
|
)
|
Balance at the end of the period
|
|
$
|
13,050,893
|
|
|
$
|
5,355,692
|
|
|
$
|
18,406,585
|
|
Notes to Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
Noncontrolling Interests in Consolidated Entities
|
|
Noncontrolling Interests Held by KKR Holdings
|
|
Total Noncontrolling Interests
|
Balance at the beginning of the period
|
|
$
|
10,984,910
|
|
|
$
|
4,625,448
|
|
|
$
|
15,610,358
|
|
Net income (loss) attributable to noncontrolling interests (1)
|
|
914,127
|
|
|
842,596
|
|
|
1,756,723
|
|
Other comprehensive income (loss), net of tax (2)
|
|
911
|
|
|
(164
|
)
|
|
747
|
|
Exchange of KKR Holdings Units to Common Stock (3)
|
|
—
|
|
|
(36,777
|
)
|
|
(36,777
|
)
|
Equity-based and other non-cash compensation
|
|
—
|
|
|
45,921
|
|
|
45,921
|
|
Capital contributions
|
|
2,649,312
|
|
|
1,596
|
|
|
2,650,908
|
|
Capital distributions
|
|
(1,498,367
|
)
|
|
(122,928
|
)
|
|
(1,621,295
|
)
|
Balance at the end of the period
|
|
$
|
13,050,893
|
|
|
$
|
5,355,692
|
|
|
$
|
18,406,585
|
|
|
|
(1)
|
Refer to the table below for calculation of net income (loss) attributable to noncontrolling interests held by KKR Holdings.
|
|
|
(2)
|
With respect to noncontrolling interests held by KKR Holdings, calculated on a pro rata basis based on the weighted average KKR Group Partnership Units held by KKR Holdings during the reporting period.
|
|
|
(3)
|
Calculated based on the proportion of KKR Holdings units exchanged for KKR & Co. Inc. common stock. The exchange agreement with KKR Holdings provides for the exchange of KKR Group Partnership Units held by KKR Holdings for KKR & Co. Inc. common stock.
|
|
|
(4)
|
KKR acquired KKR Capstone on January 1, 2020. KKR Capstone was consolidated prior to January 1, 2020 and consequently, this transaction was accounted for as an equity transaction. This transaction resulted in an increase to the KKR Group Partnership equity. Accordingly, both KKR's equity and noncontrolling interests held by KKR Holdings increased for their proportionate share of the KKR Capstone equity based on their ownership in KKR Group Partnership on January 1, 2020.
|
Net income (loss) attributable to each of KKR & Co. Inc. common stockholders and KKR Holdings, with the exception of certain tax assets and liabilities that are directly allocable to KKR & Co. Inc., is attributed based on the percentage of the weighted average KKR Group Partnership Units directly or indirectly held by KKR & Co. Inc. and KKR Holdings, each of which directly or indirectly hold the equity of the KKR Group Partnership. However, primarily because of the (i) contribution of certain expenses borne entirely by KKR Holdings, (ii) the periodic exchange of KKR Holdings units for KKR & Co. Inc. common stock pursuant to the exchange agreement and (iii) the contribution of certain expenses borne entirely by KKR associated with the Equity Incentive Plans, equity allocations shown in the consolidated statement of changes in equity differ from their respective pro rata ownership interests in KKR's net assets.
The following table presents net income (loss) attributable to noncontrolling interests held by KKR Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net income (loss)
|
$
|
1,951,165
|
|
|
$
|
1,361,730
|
|
|
$
|
(2,276,788
|
)
|
|
$
|
2,988,776
|
|
(-) Net income (loss) attributable to Noncontrolling Interests
in consolidated entities
|
781,786
|
|
|
477,768
|
|
|
(1,313,449
|
)
|
|
914,127
|
|
(-) Preferred Stock Dividends
|
8,341
|
|
|
8,341
|
|
|
16,682
|
|
|
16,682
|
|
(+) Income tax expense (benefit) attributable to KKR & Co. Inc.
|
203,974
|
|
|
146,323
|
|
|
(159,862
|
)
|
|
305,285
|
|
Net income (loss) attributable to KKR & Co. Inc.
Common Stockholders and KKR Holdings
|
$
|
1,365,012
|
|
|
$
|
1,021,944
|
|
|
$
|
(1,139,883
|
)
|
|
$
|
2,363,252
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Noncontrolling Interests
held by KKR Holdings
|
$
|
462,410
|
|
|
$
|
361,228
|
|
|
$
|
(389,784
|
)
|
|
$
|
842,596
|
|
Notes to Financial Statements (Continued)
16. COMMITMENTS AND CONTINGENCIES
Funding Commitments
As of June 30, 2020, KKR had unfunded commitments consisting of $6,155.0 million to its active investment vehicles. In addition to the uncalled commitments to KKR's investment funds, KKR has entered into contractual commitments with respect to (i) the purchase of investments and other assets in its Principal Activities business line and (ii) underwriting transactions, debt financing, and syndications in KKR's Capital Markets business line. As of June 30, 2020, these commitments amounted to $200.0 million and $461.3 million, respectively.
Whether these amounts are actually funded, in whole or in part, depends on the contractual terms of such commitments, including the satisfaction or waiver of any conditions to closing or funding. KKR's capital markets business has an arrangement with third parties, which reduce its risk when underwriting certain debt transactions, and thus our unfunded commitments as of June 30, 2020 have been reduced to reflect the amount to be funded by such third parties. In the case of purchases of investments or assets in KKR's Principal Activities business line, the amount to be funded includes amounts that are intended to be syndicated to third parties, and the actual amounts to be funded may be less than shown.
Non-cancelable Operating Leases
KKR's non-cancelable operating leases consist of leases of office space around the world. There are no material rent holidays, contingent rent, rent concessions or leasehold improvement incentives associated with any of these property leases. In addition to base rentals, certain lease agreements are subject to escalation provisions and rent expense is recognized on a straight‑line basis over the term of the lease agreement.
Contingent Repayment Guarantees
The partnership documents governing KKR's carry-paying investment funds and vehicles generally include a "clawback" provision that, if triggered, may give rise to a contingent obligation requiring the general partner to return amounts to the fund for distribution to the fund investors at the end of the life of the fund. Under a clawback obligation, upon the liquidation of a fund, the general partner is required to return, typically on an after-tax basis, previously distributed carry to the extent that, due to the diminished performance of later investments, the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled, including the effects of any performance thresholds. As of June 30, 2020, approximately $100.0 million of carried interest was subject to this clawback obligation, assuming that all applicable carry-paying funds and their alternative investment vehicles were liquidated at their June 30, 2020 fair values. Of this amount, approximately $40.0 million is the obligation of certain current and former KKR employees, and approximately $60.0 million is the obligation of KKR. If the investments in all of our funds were to be liquidated at zero value, the clawback obligation would be approximately $2.5 billion. Of this amount, approximately $1.0 billion would be the obligation of certain current and former KKR employees, and approximately $1.5 billion would be the obligation of KKR. Carried interest is recognized in the consolidated statements of operations based on the contractual conditions set forth in the agreements governing the fund as if the fund were terminated and liquidated at the reporting date and the fund's investments were realized at the then estimated fair values. Amounts earned pursuant to carried interest are earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment amounts earned decrease or turn negative in subsequent periods, recognized carried interest will be reversed and to the extent that the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled, a clawback obligation would be recorded. For funds that are consolidated, this clawback obligation, if any, is reflected as an increase in noncontrolling interests in the consolidated statements of financial condition. For funds that are not consolidated, this clawback obligation, if any, is reflected as a reduction of KKR's investment balance as this is where carried interest is initially recorded.
Indemnifications and Other Guarantees
KKR may incur contingent liabilities for claims that may be made against it in the future. KKR enters into contracts that contain a variety of representations, warranties and covenants, including indemnifications. For example, KKR, certain of KKR's investment funds and KFN have provided certain indemnities relating to environmental and other matters and have provided non-recourse carve-out guarantees for fraud, willful misconduct and other customary wrongful acts, each in connection with the financing of KKR's corporate real estate and certain real estate investments and for certain investment vehicles that KKR manages.
Notes to Financial Statements (Continued)
KKR provides credit support to certain of its subsidiaries' obligations in connection with a limited number of investment vehicles that KKR manages. For example, KKR has guaranteed the obligations of a general partner to post collateral on behalf of its investment vehicle in connection with such vehicle's derivative transactions. KKR has also (i) provided credit support regarding repayment and funding obligations to third-party lenders to certain of its employees, excluding its executive officers, in connection with their personal investments in KKR investment funds and in an investment vehicle that includes third party investors and invests in KKR funds and side-by-side alongside KKR funds and (ii) provided credit support to a hedge fund partnership. KKR is not a guarantor for any borrowings, credit facilities or debt securities of its Indian debt financing company.
Additionally, KKR has agreed to be liable for certain investment losses and/or for providing liquidity in the events specified in the governing documents of other investment vehicles. KKR may also become liable for certain fees payable to sellers of businesses or assets if a transaction does not close, subject to certain conditions, if any, specified in the acquisition agreements for such businesses or assets.
KKR's maximum exposure under these arrangements is currently unknown and KKR's liabilities for these matters would require a claim to be made against KKR in the future.
In May 2020, KKR entered into an agreement with a financial institution pursuant to which KKR provided a $100.0 million contingent guarantee for a revolving credit facility for an investment fund it manages within its Public Markets business line. The outstanding balance is secured by the investments of the fund. KKR has not funded any amounts under the contingent guarantee to date and believes the likelihood of any funding under this contingent guarantee to be remote.
Litigation
From time to time, KKR is involved in various legal proceedings, lawsuits and claims incidental to the conduct of KKR's business. KKR's business is also subject to extensive regulation, which may result in regulatory proceedings against it.
In December 2017, KKR & Co. L.P. and its Co-Chief Executive Officers were named as defendants in a lawsuit pending in Kentucky state court alleging, among other things, the violation of fiduciary and other duties in connection with certain separately managed accounts that Prisma Capital Partners LP, a former subsidiary of KKR, manages for the Kentucky Retirement Systems. Also named as defendants in the lawsuit are certain current and former trustees and officers of the Kentucky Retirement Systems, Prisma Capital Partners LP, and various other service providers to the Kentucky Retirement Systems and their related persons. KKR and other defendants’ motions to dismiss were denied by the trial court in November 2018, but in April 2019 the Kentucky Court of Appeals vacated the trial court's opinion and order denying the motions to dismiss the case for lack of standing. The decision of the Court of Appeals has been appealed by plaintiffs to the Supreme Court of Kentucky. On July 9, 2020, the Supreme Court of Kentucky reversed the trial court's order and remanded the case to the trial court with direction to dismiss the complaint for lack of constitutional standing. On July 20, 2020, the Office of the Attorney General, on behalf of the Commonwealth of Kentucky, filed a motion to intervene as a plaintiff in the lawsuit and filed a new lawsuit in the same Kentucky trial court making essentially the same allegations against the defendants, including KKR and Messrs. Kravis and Roberts. On July 29, 2020, certain private plaintiffs in the original lawsuit filed a motion to amend their original complaint and to add new plaintiffs. On July 30, 2020, KKR and other defendants filed objections to the Attorney General’s motion to intervene. On August 5, 2020, the trial court ordered the new lawsuit filed by the Attorney General to be consolidated with the original lawsuit.
KKR currently is and expects to continue to become, from time to time, subject to examinations, inquiries and investigations by various U.S. and non-U.S. governmental and regulatory agencies, including but not limited to the SEC, Department of Justice, state attorney generals, Financial Industry Regulatory Authority, or FINRA, and the U.K. Financial Conduct Authority. Such examinations, inquiries and investigations may result in the commencement of civil, criminal or administrative proceedings or fines against KKR or its personnel.
Moreover, in the ordinary course of business, KKR is and can be both the defendant and the plaintiff in numerous lawsuits with respect to acquisitions, bankruptcy, insolvency and other types of proceedings. Such lawsuits may involve claims that adversely affect the value of certain investments owned by KKR's funds.
KKR establishes an accrued liability for legal proceedings only when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. No loss contingency is recorded for matters where such losses are either not probable or reasonably estimable (or both) at the time of determination. Such matters may be subject to many uncertainties, including among others: (i) the proceedings may be in early stages; (ii) damages sought may be unspecified, unsupportable, unexplained or uncertain; (iii) discovery may not have been started or is incomplete; (iv) there may be uncertainty as to the outcome of pending appeals or motions; (v) there may be
Notes to Financial Statements (Continued)
significant factual issues to be resolved or (vi) there may be novel legal issues or unsettled legal theories to be presented or a large number of parties. Consequently, management is unable to estimate a range of potential loss, if any, related to these matters. In addition, loss contingencies may be, in part or in whole, subject to insurance or other payments such as contributions and/or indemnity, which may reduce any ultimate loss.
It is not possible to predict the ultimate outcome of all pending legal proceedings, and some of the matters discussed above seek or may seek potentially large and/or indeterminate amounts. As of such date, based on information known by management, management has not concluded that the final resolutions of the matters above will have a material effect upon the financial statements. However, given the potentially large and/or indeterminate amounts sought or may be sought in certain of these matters and the inherent unpredictability of investigations and litigations, it is possible that an adverse outcome in certain matters could, from time to time, have a material effect on KKR's financial results in any particular period.
17. SUBSEQUENT EVENTS
Common Stock Dividend
A dividend of $0.135 per share of common stock of KKR & Co. Inc. was announced on August 4, 2020, and will be paid on September 1, 2020 to common stockholders of record as of the close of business on August 17, 2020. KKR Holdings will receive its pro rata share of the distribution from KKR Group Partnership.
Preferred Stock Dividend
A dividend of $0.421875 per share of Series A Preferred Stock has been declared as announced on August 4, 2020 and set aside for payment on September 15, 2020 to holders of record of Series A Preferred Stock as of the close of business on September 1, 2020.
A dividend of $0.406250 per share of Series B Preferred Stock has been declared as announced on August 4, 2020 and set aside for payment on September 15, 2020 to holders of record of Series B Preferred Stock as of the close of business on September 1, 2020.
Acquisition of Global Atlantic Financial Group
On July 8, 2020, KKR and Global Atlantic Financial Group Limited (“Global Atlantic”) announced a strategic transaction whereby KKR agreed to acquire Global Atlantic, a leading retirement and life insurance company. The transaction, which is expected to close in early 2021, is subject to required regulatory approvals and certain other customary closing conditions.