Balance Sheet Overview

July 17, 2017 | Author: Ravi Chaurasia | Category: Market Liquidity, Private Equity, Investing, Balance Sheet, Mergers And Acquisitions
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Balance Sheet and Corporate Development Robert Lewin James Rudy July 17, 2012

CONFIDENTIAL AND PROPRIETARY For One-on-One Use by Investment Professionals Only

Why Do We Have Such a Large Balance Sheet? • KKR inherited a sizable balance sheet by virtue of its merger with KKR Private Equity Investors (KPE) in October 2009, the transaction by which we became publicly-traded – KPE was a $5bn permanent capital vehicle we raised in 2006 on the Euronext Amsterdam that was invested almost exclusively in KKR private equity funds and individual deals

• Our balance sheet is significantly larger than those of our peers and provides us with a number of competitive advantages – Ability to make sizable GP commitments to funds that we are raising, particularly 1st time funds (Infrastructure, Mezzanine, Special Situations) – Seed capital for new strategies that we are incubating (hedge funds, real estate, royalties/PUDs) – Funding source for broker-dealer underwriting activities (KCM, NBFC India) – Anchor co-investments to support large private equity transactions (Samson) – Flexibility to invest in new businesses (Prisma) – Fundraising / Alignment of interests with LPs (we are our own largest investor)


Balance Sheet Snapshot • KKR currently has a $6.1 billion balance sheet ($8.67/unit) • Balance sheet is essentially unlevered – $350mm net cash position – A/A- rated by Fitch/S&P

• Investment portfolio is heavily weighted to private equity due to legacy KPE investments, but has diversified since the combination – Just over 80% private equity today vs. 97% at the time of the combination

Segment Balance Sheet (March 31, 2012) Cash and Short-Term Investments Investments Unrealized Carry Other Assets Total Assets 6.375% Notes due 2020 Other Liabilties/Noncontrolling Interests Partners' Capital Book Value/Adjusted Unit

$856 5,023 600 297 $6,775 $500 198 $6,077 $8.67

B/S Investments 8% 8% 1%


52% ■ PE Funds ■ Energy/Infra

■ PE Co-Invest ■ KAM

■ Other

Current Liquidity Profile • The B/S has ~$1.8bn of liquidity and outstanding commitments of $2.3bn (expected to be drawn over 5 years) – We have over $4bn of funded PE investments (~50% public stocks)

Sources of Liquidity




Uses of Liquidity $250 $100

Corporate Revolver


Minimum Cash Balance Other Items


Liquid Seed Capital $1,650



KCM Capital Usage Unfunded Commitments

Determining What Makes a Good Balance Sheet Investment • Strategic vs. Opportunistic Investments – Strategic investments are those that generate fees and/or carry income for the firm. That’s where our focus remains – Given current liquidity and significant opportunities to deploy strategic capital, opportunistic investments have a high hurdle rate

• How does the Balance Sheet measure return on equity for new investments? – Risk adjusted by asset class – Tax-affecting returns – Place a premium on investments that meet following criteria: 1) ‘40 Act compliant 2) Generating a current yield 3) Investment is liquid 4) Diversification

• Developed capital framework for all new commitments that seeks to capture above considerations from a returns perspective 4

Current Mandate of Balance Sheet 1) Maintain liquidity to fund existing KPE/GP commitments 2) GP commitments to new funds 3) Seed capital for new strategies 4) Support KCM in its capital commitments (both Underwrites and Holds) 5) Flexibility to provide bridge / hold capital for large transactions sourced by our investment teams 6) Create optionality to pursue inorganic growth opportunities

Long-Term Vision for Balance Sheet • Leverage balance sheet to generate 20+% after-tax ROE over long-term • Further diversification across asset classes – Will reduce volatility of balance sheet earnings (largest component of ENI)

• Continue to drive a higher component of our investments into liquid securities – Will allow us to be more nimble in taking advantage of market opportunities

• Generate a much larger percentage of our return in current yield – Benefits include rating agency considerations, servicing of debt and providing optionality around public company distribution policy

• Comfortably ‘40 Act compliant


Corporate Development • The Corporate Development function at KKR was created in 2011 in order to centralize our efforts focused on M&A, strategic projects and corporate development initiatives • The Corporate Development team works in close coordination with each of KKR's business units as we continue to look for opportunities to leverage our people, platform and capital in order to accelerate growth • Over the past year, we have looked at a number of opportunities across nearly all of the different business units within the firm • Last month, the firm announced its first ever acquisition of Prisma Capital Partners, an $8 billion hedge fund of funds platform • Acquisitions and lift-out/bolt-on transactions will continue to be an important part of our growth strategy going forward as we seek to scale many of our newer businesses and enter new asset classes 7

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