UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
 
 
 
 
 
 
Form 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2018  
 
Or

o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Transition period from           to           .  
Commission File Number 001-34820
 
KKR & CO. INC.
(Exact name of Registrant as specified in its charter)  
Delaware
 
26-0426107
(State or other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)

  9 West 57 th Street, Suite 4200
New York, New York 10019
Telephone: (212) 750-8300
(Address, zip code, and telephone number, including
area code, of registrant’s principal executive office.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý  No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ý  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
Accelerated filer  o
Non-accelerated filer  o  
Smaller reporting company  o
Emerging growth company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  ý

As of November 1, 2018, there were 529,181,096 shares of Class A common stock of the registrant outstanding.
 



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KKR & CO. INC.
 
FORM 10-Q
 
For the Quarter Ended September 30, 2018
 
INDEX
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as "outlook," "believe," "expect," "potential," "continue," "may," "should," "seek," "approximately," "predict," "intend," "will," "plan," "estimate," "anticipate," the negative version of these words, other comparable words or other statements that do not relate strictly to historical or factual matters. Without limiting the foregoing, statements regarding the declaration and payment of dividends on common or preferred stock of KKR, the timing, manner and volume of repurchases of common stock pursuant to a repurchase program, and the expected synergies and benefits from acquisitions, reorganizations or strategic partnerships, may constitute forward-looking statements. Forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements or cause the anticipated benefits and synergies from transactions to not be realized. We believe these factors include those described under the section entitled "Risk Factors" in this report, in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. These factors should be read in conjunction with the other cautionary statements that are included in this report and in our other filings with the U.S. Securities and Exchange Commission (the "SEC"). We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

 
 
 


On July 1, 2018, we completed our conversion (the "Conversion") from a Delaware limited partnership named KKR & Co. L.P. into a Delaware corporation named KKR & Co. Inc.

In this report, references to "KKR," "we," "us" and "our" refer to (i) KKR & Co. Inc. and its subsidiaries following the Conversion and (ii) KKR & Co. L.P. and its subsidiaries prior to the Conversion, in each case, except where the context requires otherwise. KKR & Co. L.P. became listed on the New York Stock Exchange ("NYSE") on July 15, 2010. KKR Management Holdings L.P., KKR Fund Holdings L.P. and KKR International Holdings L.P. are together referred to in this report as the "KKR Group Partnerships." Each KKR Group Partnership has an identical number of partner interests and, when held together, one Class A partner interest in each of the KKR Group Partnerships together represents one "KKR Group Partnership Unit." In connection with KKR's 6.75% Series A Preferred Stock ("Series A Preferred Stock") and 6.50% Series B Preferred Stock ("Series B Preferred Stock"), the KKR Group Partnerships have outstanding preferred units with economic terms designed to mirror those of the Series A Preferred Stock and Series B Preferred Stock, respectively. References to our Class A common stock, Series A Preferred Stock or Series B Preferred Stock for periods prior to the Conversion mean the common units, Series A preferred units and Series B preferred units of KKR & Co. L.P., respectively.

References to the "Class B Stockholder" are to KKR Management LLC, the holder of the sole share of our Class B common stock, and unless otherwise indicated, references to equity interests in KKR's business, or to percentage interests in KKR's business, reflect the aggregate equity interests in the KKR Group Partnerships and are net of amounts that have been allocated to our principals and other employees and non-employee operating consultants in respect of the carried interest from KKR's business as part of our "carry pool" and certain minority interests. References to "principals" are to our senior employees and non-employee operating consultants who hold interests in KKR's business through KKR Holdings L.P. ("KKR Holdings") and references to our "senior principals" are to our senior employees who hold interests in the Class B Stockholder entitling them to vote for the election of its directors.

References to "non-employee operating consultants" include employees of KKR Capstone, who are not employees of KKR. KKR Capstone refers to a group of entities that are owned and controlled by their senior management. KKR Capstone is not a subsidiary or affiliate of KKR. KKR Capstone operates under several consulting agreements with KKR and uses the "KKR" name under license from KKR.

In this report, the term "GAAP" refers to accounting principles generally accepted in the United States of America.

We disclose certain financial measures in this report that are calculated and presented using methodologies other than in accordance with GAAP. We believe that providing these performance measures on a supplemental basis to our GAAP results is helpful to stockholders in assessing the overall performance of KKR's businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with GAAP, if available. We caution readers

3

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that these non-GAAP financial measures may differ from the calculations of other investment managers, and as a result, may not be comparable to similar measures presented by other investment managers. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included within Note 14 "Segment Reporting" to our condensed consolidated financial statements and under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Segment and Other Operating and Performance Measures" and "—Segment Balance Sheet."

This report uses the terms assets under management ("AUM"), fee paying assets under management ("FPAUM"), after-tax distributable earnings, fee related earnings ("FRE"), capital invested, syndicated capital and book value. You should note that our calculations of these financial measures and other financial measures may differ from the calculations of other investment managers and, as a result, our financial measures may not be comparable to similar measures presented by other investment managers. These and other financial measures are defined in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Segment and Other Operating and Performance Measures" and "—Segment Balance Sheet."

References to our "funds" or our "vehicles" refer to investment funds, vehicles and accounts advised, sponsored or managed by one or more subsidiaries of KKR, including collateralized loan obligations ("CLOs") and commercial real estate mortgage-backed securities ("CMBS") vehicles, unless the context requires otherwise. They do not include investment funds, vehicles or accounts of any hedge fund manager with which we have formed a strategic partnership where we have acquired a non-controlling interest.

Unless otherwise indicated, references in this report to our fully exchanged and diluted Class A common stock outstanding, or to our Class A common stock outstanding on a fully exchanged and diluted basis, reflect (i) actual Class A common stock outstanding, (ii) Class A common stock into which KKR Group Partnership Units not held by us are exchangeable pursuant to the terms of the exchange agreement described in this report, (iii) Class A common stock issuable in respect of exchangeable equity securities issued in connection with the acquisition of Avoca Capital ("Avoca"), all of which have been exchanged as of September 30, 2018, and (iv) Class A common stock issuable pursuant to any equity awards actually granted from the Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan (our "Equity Incentive Plan"). Our fully exchanged and diluted Class A common stock outstanding does not include (i) Class A common stock available for issuance pursuant to our Equity Incentive Plan for which equity awards have not yet been granted and (ii) Class A common stock that we have the option to issue in connection with our acquisition of additional interests in Marshall Wace LLP (together with its affiliates, "Marshall Wace"). 



4

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KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Amounts in Thousands, Except Share Data)
 
 
September 30,
2018
 
December 31,
2017
Assets
 

 
 

Cash and Cash Equivalents
$
2,264,875

 
$
1,876,687

Cash and Cash Equivalents Held at Consolidated Entities
963,777

 
1,802,372

Restricted Cash and Cash Equivalents
65,949

 
56,302

Investments
44,119,593

 
39,013,934

Due from Affiliates
682,007

 
554,349

Other Assets
2,247,747

 
2,531,075

Total Assets
$
50,343,948

 
$
45,834,719

 
 
 
 
Liabilities and Equity
 

 
 

Debt Obligations
$
20,266,172

 
$
21,193,859

Due to Affiliates
252,547

 
323,810

Accounts Payable, Accrued Expenses and Other Liabilities
3,685,318

 
3,654,250

Total Liabilities
24,204,037

 
25,171,919

 
 
 
 
Commitments and Contingencies

 


 
 
 
 
Redeemable Noncontrolling Interests
1,070,575

 
610,540

 
 
 
 
Stockholders' Equity (1)
 

 
 

KKR & Co. L.P. Capital - Common Unitholders (486,174,736 common units issued and outstanding as of December 31, 2017)

 
6,722,863

Preferred Units (20,000,000 units issued and outstanding as of December 31, 2017)

 
482,554

Preferred Stock (20,000,000 shares issued and outstanding as of September 30, 2018)
482,554

 

Class A Common Stock (525,593,409 shares issued and outstanding as of September 30, 2018)
5,256

 

Class B Common Stock (1 share issued and outstanding as of September 30, 2018)

 

Class C Common Stock (303,106,993 shares issued and outstanding as of September 30, 2018)
3,031

 

Additional Paid-In Capital
8,005,338

 

Retained Earnings
551,036

 

Accumulated Other Comprehensive Income (Loss)
(40,448
)
 
(19,481
)
Total KKR & Co. Inc. Stockholders' Equity
9,006,767

 
7,185,936

Noncontrolling Interests
16,062,569

 
12,866,324

Total Equity
25,069,336

 
20,052,260

Total Liabilities and Equity
$
50,343,948

 
$
45,834,719

(1)
See Note 1 "Organization."

See notes to condensed consolidated financial statements.


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KKR & CO. INC.
  CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Continued)
  (Amounts in Thousands)
 
The following presents the portion of the consolidated balances presented in the condensed consolidated statements of financial condition attributable to consolidated variable interest entities ("VIEs") as of September 30, 2018 and December 31, 2017 . KKR's consolidated VIEs consist primarily of certain collateralized financing entities ("CFEs") holding collateralized loan obligations ("CLOs") commercial real estate mortgage-backed securities ("CMBS") and certain investment funds. With respect to consolidated VIEs, the following assets may only be used to settle obligations of these consolidated VIEs and the following liabilities are only the obligations of these consolidated VIEs. The noteholders, limited partners and other creditors of these VIEs have no recourse to KKR's general assets. Additionally, KKR has no right to the benefits from, nor does KKR bear the risks associated with, the assets held by these VIEs beyond KKR's beneficial interest therein and any income generated from the VIEs. There are neither explicit arrangements nor does KKR hold implicit variable interests that would require KKR to provide any material ongoing financial support to the consolidated VIEs, beyond amounts previously committed, if any.
 
September 30, 2018
 
Consolidated CFEs
 
Consolidated KKR Funds and Other Entities
 
Total
Assets
 
 
 

 
 
Cash and Cash Equivalents Held at Consolidated Entities
$
437,299

 
$
329,466

 
$
766,765

Restricted Cash and Cash Equivalents

 
43,486

 
43,486

Investments
13,293,505

 
14,924,306

 
28,217,811

Due from Affiliates

 
5,939

 
5,939

Other Assets
136,909

 
176,865

 
313,774

Total Assets
$
13,867,713

 
$
15,480,062

 
$
29,347,775

 
 
 
 

 
 
Liabilities
 
 
 

 
 
Debt Obligations
$
12,645,610

 
$
720,720

 
$
13,366,330

Accounts Payable, Accrued Expenses and Other Liabilities
601,853

 
173,778

 
775,631

Total Liabilities
$
13,247,463

 
$
894,498

 
$
14,141,961

 

 
December 31, 2017
 
Consolidated CFEs
 
Consolidated KKR Funds and Other Entities
 
Total
Assets
 
 
 

 
 
Cash and Cash Equivalents Held at Consolidated Entities
$
1,467,829

 
$
231,423

 
$
1,699,252

Restricted Cash and Cash Equivalents

 
21,255

 
21,255

Investments
15,573,203

 
9,408,967

 
24,982,170

Due from Affiliates

 
23,562

 
23,562

Other Assets
176,572

 
168,003

 
344,575

Total Assets
$
17,217,604

 
$
9,853,210

 
$
27,070,814

 
 
 
 

 
 
Liabilities
 
 
 

 
 
Debt Obligations
$
15,586,216

 
$
770,350

 
$
16,356,566

Accounts Payable, Accrued Expenses and Other Liabilities
923,494

 
243,660

 
1,167,154

Total Liabilities
$
16,509,710

 
$
1,014,010

 
$
17,523,720


See notes to condensed consolidated financial statements.

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KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in Thousands, Except Share Data) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018

2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Fees and Other
$
491,503

 
$
355,418

 
$
1,299,743

 
$
1,116,382

Capital Allocation-Based Income
638,163

 
394,234

 
1,274,149

 
1,416,825

Total Revenues
1,129,666

 
749,652

 
2,573,892

 
2,533,207

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Compensation and Benefits
560,434

 
368,513

 
1,331,070

 
1,234,317

Occupancy and Related Charges
15,250

 
15,267

 
44,787

 
44,150

General, Administrative and Other
164,406

 
146,467

 
475,884

 
421,522

Total Expenses
740,090

 
530,247

 
1,851,741

 
1,699,989

 
 
 
 
 
 
 
 
Investment Income (Loss)
 
 
 
 
 
 
 
Net Gains (Losses) from Investment Activities
666,731

 
52,004

 
2,256,118

 
893,065

Dividend Income
38,245

 
20,774

 
137,653

 
100,144

Interest Income
339,393

 
317,134

 
989,354

 
893,832

Interest Expense
(211,081
)
 
(211,959
)
 
(634,521
)
 
(597,403
)
Total Investment Income (Loss)
833,288

 
177,953

 
2,748,604

 
1,289,638

 
 
 
 
 
 
 
 
Income (Loss) Before Taxes
1,222,864

 
397,358

 
3,470,755

 
2,122,856

 
 
 
 
 
 
 
 
Income Tax Expense (Benefit)
(129,405
)
 
18,420

 
(50,804
)
 
77,500

 
 
 
 
 
 
 
 
Net Income (Loss)
1,352,269

 
378,938

 
3,521,559

 
2,045,356

Net Income (Loss) Attributable to Redeemable Noncontrolling Interests
12,236

 
20,876

 
19,894

 
64,196

Net Income (Loss) Attributable to Noncontrolling Interests
691,494

 
196,158

 
1,985,961

 
1,137,585

Net Income (Loss) Attributable to KKR & Co. Inc.
648,539

 
161,904

 
1,515,704

 
843,575

 
 
 
 
 
 
 
 
Series A Preferred Stock Dividends
5,822

 
5,822

 
17,466

 
17,466

Series B Preferred Stock Dividends
2,519

 
2,519

 
7,557

 
7,557

 
 
 
 
 
 
 
 
Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders
$
640,198

 
$
153,563

 
$
1,490,681

 
$
818,552

 
 
 
 
 
 
 
 
Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Class A Common Stock
 
 
 
 
 
 
 
Basic
$
1.22

 
$
0.33

 
$
2.94

 
$
1.76

Diluted
$
1.17

 
$
0.30

 
$
2.83

 
$
1.63

Weighted Average Shares of Class A Common Stock Outstanding
 
 
 
 
 
 
 
Basic
525,240,214

 
471,758,886

 
507,981,387

 
463,941,084

Diluted
545,672,953

 
506,873,177

 
528,466,390

 
501,615,635

See notes to condensed consolidated financial statements.

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KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Amounts in Thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net Income (Loss)
$
1,352,269

 
$
378,938

 
$
3,521,559

 
$
2,045,356

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
(34,075
)
 
10,001

 
(57,988
)
 
47,097

 
 
 
 
 
 
 
 
Comprehensive Income (Loss)
1,318,194

 
388,939

 
3,463,571

 
2,092,453

 
 
 
 
 
 
 
 
Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interests
12,236

 
20,876

 
19,894

 
64,196

Less: Comprehensive Income (Loss) Attributable to Noncontrolling Interests
667,043

 
199,904

 
1,946,834

 
1,161,651

 
 
 
 
 
 
 
 
Comprehensive Income (Loss) Attributable to
KKR & Co. Inc.
$
638,915

 
$
168,159

 
$
1,496,843

 
$
866,606

 
See notes to condensed consolidated financial statements.

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KKR & CO. INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
  (Amounts in Thousands, Except Share Data)

The statements below for the nine months ended September 30, 2017 and the six months ended June 30, 2018 represent KKR & Co. Inc. as a partnership prior to the Conversion:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
KKR & Co. L.P.
 
 
 
 
 
 
 
Common
Units
Capital -
Common
Unitholders
Accumulated
Other
Comprehensive
Income (Loss)
Total
Capital -
Common
Units
Capital -
Series A
Preferred
Units
Capital -
Series B
Preferred
Units
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance at January 1, 2017
452,380,335

$
5,506,375

$
(49,096
)
$
5,457,279

$
332,988

$
149,566

 
$
10,545,902

 
$
16,485,735

 
$
632,348

Net Income (Loss)
 

818,552

 

818,552

17,466

7,557

 
1,137,585

 
1,981,160

 
64,196

Other Comprehensive Income (Loss)- Foreign Currency Translation (Net of Tax)
 

 

23,031

23,031

 
 
 
24,066

 
47,097

 
 

Changes in Consolidation
 
 
 

 
 
 
(71,657
)
 
(71,657
)
 
(315,057
)
Transfer of interests under common control
(See Note 15 "Equity")
 
12,269

(1,988
)
10,281

 
 
 
(10,281
)
 

 
 
Exchange of KKR Holdings L.P. Units and Other Securities to KKR & Co. L.P. Common Units
14,524,298

198,970

(1,615
)
197,355

 
 
 
(197,355
)
 

 
 

Tax Effects Resulting from Exchange of KKR Holdings L.P. Units and Other
 

(8,093
)
498

(7,595
)
 
 
 
 

 
(7,595
)
 
 

Net Delivery of Common Units - Equity Incentive Plan
6,229,754

(37,304
)
 
(37,304
)
 
 
 
 
 
(37,304
)
 
 
Equity-Based and Other Non-Cash Compensation
 

149,840

 

149,840

 
 
 
127,864

 
277,704

 
 
Capital Contributions
 

 
 


 
 
 
2,486,848

 
2,486,848

 
189,172

Capital Distributions
 

(230,785
)
 

(230,785
)
(17,466
)
(7,557
)
 
(1,610,880
)
 
(1,866,688
)
 
(525
)
Balance at September 30, 2017
473,134,387

$
6,409,824

$
(29,170
)
$
6,380,654

$
332,988

$
149,566

 
$
12,432,092

 
$
19,295,300

 
$
570,134


 
 
 
 
 
 
 
 
 
 
 
 
 
 
KKR & Co. L.P.
 
 
 
 
 
 
 
Common
Units
Capital -
Common
Unitholders
Accumulated
Other
Comprehensive
Income (Loss)
Total
Capital -
Common
Units
Capital -
Series A
Preferred
Units
Capital -
Series B
Preferred
Units
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance at January 1, 2018
486,174,736

$
6,722,863

$
(19,481
)
$
6,703,382

$
332,988

$
149,566

 
$
12,866,324

 
$
20,052,260

 
$
610,540

Net Income (Loss)
 

850,483

 

850,483

11,644

5,038

 
1,294,467

 
2,161,632

 
7,658

Other Comprehensive Income (Loss)- Foreign Currency Translation (Net of Tax)
 

 

(9,237
)
(9,237
)
 
 
 
(14,676
)
 
(23,913
)
 
 

Changes in Consolidation
 
 
 

 
 
 
370,307

 
370,307

 
 
Exchange of KKR Holdings L.P. Units and Other Securities to KKR & Co. L.P. Common Units
32,722,098

507,470

(1,998
)
505,472

 
 
 
(505,472
)
 

 
 

Tax Effects Resulting from Exchange of KKR Holdings L.P. Units and Other
 

6,448

17

6,465

 
 
 
 

 
6,465

 
 

Net Delivery of Common Units - Equity Incentive Plan
7,652,340

(53,439
)
 
(53,439
)
 
 
 
 
 
(53,439
)
 
 
Equity-Based and Other Non-Cash Compensation
 

125,994

 

125,994

 
 
 
61,942

 
187,936

 
 
Unit Repurchases
(2,207,300
)
(52,212
)
 
(52,212
)
 
 
 
 
 
(52,212
)
 
 
Capital Contributions
 

 
 


 
 
 
2,410,722

 
2,410,722

 
349,451

Capital Distributions
 

(167,078
)
 

(167,078
)
(11,644
)
(5,038
)
 
(1,550,955
)
 
(1,734,715
)
 
(5,502
)
Balance at June 30, 2018
524,341,874

$
7,940,529

$
(30,699
)
$
7,909,830

$
332,988

$
149,566

 
$
14,932,659

 
$
23,325,043

 
$
962,147


 
 
 
 
 
 
 
 
 
 
 
 
 

See notes to condensed consolidated financial statements.


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KKR & CO. INC.
  CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (Continued)
  (Amounts in Thousands, Except Share Data)

The statement below represents KKR & Co. Inc. as a corporation subsequent to the Conversion for the three months ended September 30, 2018:
 
Three Months Ended
September 30, 2018
 
Amounts
 
Shares
KKR & Co. L.P. Partners' Capital - Common Unitholders
 
 
 
Beginning of Period
$
7,940,529

 
524,341,874

Reclassifications resulting from the Conversion
(7,940,529
)
 
(524,341,874
)
End of Period

 

Preferred Units
 
 
 
Beginning of Period
482,554

 
20,000,000

Reclassifications resulting from the Conversion
(482,554
)
 
(20,000,000
)
End of Period

 

Preferred Stock
 
 
 
Beginning of Period

 

Reclassifications resulting from the Conversion
482,554

 
20,000,000

End of Period
482,554

 
20,000,000

Class A Common Stock
 
 
 
Beginning of Period

 

Reclassifications resulting from the Conversion
5,243

 
524,341,874

Exchange of KKR Holdings Units and Class C Common Stock
25

 
2,402,569

Repurchases of Class A Common Stock
(12
)
 
(1,151,034
)
End of Period
5,256

 
525,593,409

Class B Common Stock
 
 
 
Beginning of Period

 

Issuance of Class B Common Stock resulting from the Conversion

 
1

End of Period

 
1

Class C Common Stock
 
 
 
Beginning of Period

 

Issuance of Class C Common Stock resulting from the Conversion
3,041

 
304,107,762

Exchange of Class C Common Stock to Class A Common Stock
(10
)
 
(1,000,769
)
End of Period
3,031

 
303,106,993

Additional Paid-In Capital
 
 
 
Beginning of Period

 
 
Reclassifications resulting from the Conversion
7,932,245

 
 
Exchange of KKR Holdings Units and Class C Common Stock
48,844

 
 
Tax Effects Resulting from Exchange of KKR Holdings Units and Other
(7,114
)
 
 
Repurchases of Class A Common Stock
(28,438
)
 
 
Equity-Based Compensation
59,801

 
 
End of Period
8,005,338

 
 
Retained Earnings
 
 
 
Beginning of Period

 
 
Net Income (Loss) Attributable to KKR & Co. Inc.
648,539

 
 
Preferred Stock Dividends
(8,341
)
 
 
Common Stock Dividends
(89,162
)
 
 
End of Period
551,036

 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Beginning of Period
(30,699
)
 
 
Foreign Currency Translation
(9,624
)
 
 
Exchange of KKR Holdings Units to Class A Common Stock
(145
)
 
 
Tax Effects Resulting from Exchange of KKR Holdings Units
20

 
 
End of Period
(40,448
)
 
 
Total KKR & Co. Inc. Stockholders' Equity
9,006,767

 
 
Noncontrolling Interests (See Note 15 "Equity")
16,062,569

 
 
Total Equity
$
25,069,336

 
 

See notes to condensed consolidated financial statements.

10

Table of Contents


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands)
 
 
Nine Months Ended September 30,
 
2018
 
2017
Operating Activities
 

 
 

Net Income (Loss)
$
3,521,559

 
$
2,045,356

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


 
 

Equity-Based and Other Non-Cash Compensation
263,230

 
271,226

Net Realized (Gains) Losses on Investments
(426,220
)
 
2,662

Change in Unrealized (Gains) Losses on Investments
(1,829,898
)
 
(895,727
)
Capital Allocation-Based Income
(1,274,149
)
 
(1,416,825
)
Other Non-Cash Amounts
(29,739
)
 
15,534

Cash Flows Due to Changes in Operating Assets and Liabilities:


 
 

Change in Consolidation and Other

 
(2,244
)
Change in Due from / to Affiliates
(216,665
)
 
(230,948
)
Change in Other Assets
205,210

 
(66,260
)
Change in Accounts Payable, Accrued Expenses and Other Liabilities
731,510

 
1,176,047

Investments Purchased
(26,806,751
)
 
(29,464,933
)
Proceeds from Investments
20,621,866

 
25,981,898

Net Cash Provided (Used) by Operating Activities
(5,240,047
)
 
(2,584,214
)
 
 
 
 
Investing Activities
 

 
 

Purchases of Fixed Assets
(69,954
)
 
(70,849
)
Development of Oil and Natural Gas Properties

 
(1,041
)
Proceeds from Sale of Oil and Natural Gas Properties
26,630

 

Net Cash Provided (Used) by Investing Activities
(43,324
)
 
(71,890
)
 
 
 
 
Financing Activities
 

 
 

Preferred Stock Dividends
(25,023
)
 
(25,023
)
Common Stock Dividends
(256,240
)
 
(230,785
)
Distributions to Redeemable Noncontrolling Interests
(10,189
)
 
(525
)
Contributions from Redeemable Noncontrolling Interests
450,330

 
189,172

Distributions to Noncontrolling Interests
(2,191,227
)
 
(1,610,880
)
Contributions from Noncontrolling Interests
3,537,037

 
2,482,649

Net Delivery of Class A Common Stock (Equity Incentive Plan)
(53,439
)
 
(37,304
)
Repurchases of Class A Common Stock
(80,662
)
 

Proceeds from Debt Obligations
11,429,320

 
8,848,735

Repayment of Debt Obligations
(7,893,904
)
 
(7,557,245
)
Financing Costs Paid
(36,572
)
 
(8,550
)
Net Cash Provided (Used) by Financing Activities
4,869,431

 
2,050,244

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(26,820
)
 
70,521

 
 
 
 
Net Increase/(Decrease) in Cash, Cash Equivalents and Restricted Cash
(440,760
)
 
(535,339
)
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
3,735,361

 
4,345,815

Cash, Cash Equivalents and Restricted Cash, End of Period
$
3,294,601

 
$
3,810,476

 
See notes to condensed consolidated financial statements.

11

Table of Contents


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
(Amounts in Thousands)

 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental Disclosures of Cash Flow Information
 

 
 

Payments for Interest
$
582,148

 
$
577,428

Payments for Income Taxes
$
48,891

 
$
34,633

Supplemental Disclosures of Non-Cash Investing and Financing Activities


 
 

Equity-Based and Other Non-Cash Contributions
$
273,274

 
$
277,704

Non-Cash Contributions from Noncontrolling Interests
$

 
$
4,199

Debt Obligations - Net Gains (Losses), Translation and Other
$
378,291

 
$
(460,740
)
Tax Effects Resulting from Exchange of KKR Holdings L.P. Units and delivery of Class A Common Stock
$
(629
)
 
$
(7,595
)
Gain on Sale of Oil and Natural Gas Properties
$
15,224

 
$

 


 
 
Change in Consolidation and Other


 
 
Investments
$
(3,054,090
)
 
$
(174,906
)
Due From Affiliates
$

 
$
(3,536
)
Other Assets
$
(114,770
)
 
$
(298,097
)
Debt Obligations
$
(4,049,685
)
 
$

Accounts Payable, Accrued Expenses and Other Liabilities
$
197,874

 
$
(114,573
)
Noncontrolling Interests
$
370,307

 
$
(71,657
)
Redeemable Noncontrolling Interests
$

 
$
(315,057
)
Gain on Asset Contribution
$
312,644

 
$

 
 
 
 
 
September 30,
2018
 
December 31,
2017
Reconciliation to the Condensed Consolidated Statements of Financial Condition
 
 
 
Cash and Cash Equivalents
$
2,264,875

 
$
1,876,687

Cash and Cash Equivalents Held at Consolidated Entities
963,777

 
1,802,372

Restricted Cash and Cash Equivalents
65,949

 
56,302

Cash, Cash Equivalents and Restricted Cash, End of Period
$
3,294,601

 
$
3,735,361

 
See notes to condensed consolidated financial statements.


12

Table of Contents


KKR & CO. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All Amounts in Thousands, Except Unit and Share Data, and Except Where Noted)

1. ORGANIZATION
 
KKR & Co. Inc., together with its subsidiaries ("KKR"), is a leading global investment firm that manages multiple alternative asset classes including private equity, energy, infrastructure, real estate and credit, 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.

On July 1, 2018, KKR & Co. L.P. converted from a Delaware limited partnership to a Delaware corporation named KKR & Co. Inc. (the "Conversion"). Because the Conversion became effective on July 1, 2018, the prior period amounts in the accompanying condensed consolidated financial statements as of December 31, 2017, for the nine months ended September 30, 2017 and for the six months ended June 30, 2018, reflect KKR as a limited partnership and not a corporation. In this report, references to KKR & Co. Inc. for periods prior to the Conversion mean KKR & Co. L.P., and references to KKR's Class A common stock, Series A Preferred Stock and Series B Preferred Stock for periods prior to the Conversion mean common units, Series A preferred units and Series B preferred units of KKR & Co. L.P., respectively, in each case, except where the context requires otherwise. As a result of the Conversion, the financial impact to the condensed consolidated financial statements contained herein consisted of (i) reclassifications from partnership equity accounts to equity accounts reflective of a corporation and (ii) a partial step-up in the tax basis of certain assets resulting in the recognition of a net income tax benefit. See Note 15 "Equity" for the impact of the Conversion on KKR's equity accounts and Note 11 "Income Taxes" for the impact of the Conversion on KKR's income taxes.

In connection with the Conversion, a wholly-owned subsidiary of KKR & Co. Inc., KKR Group Holdings Corp., became (i) a general partner of KKR Fund Holdings L.P. ("Fund Holdings") and KKR International Holdings L.P. ("International Holdings") and (ii) the sole stockholder of KKR Management Holdings Corp. (the general partner of KKR Management Holdings L.P. ("Management Holdings")) and KKR Fund Holdings GP Limited (the other general partner of Fund Holdings and International Holdings). In addition, certain wholly-owned subsidiaries of KKR & Co. Inc., namely KKR Group Holdings L.P. ("Group Holdings"), KKR Group Limited (the general partner of Group Holdings), KKR Subsidiary Corp. and KKR Subsidiary Partnership L.P., were either merged into another wholly-owned subsidiary of KKR & Co. Inc. or entered into a plan of dissolution. Fund Holdings, Management Holdings and International Holdings are collectively referred to as the "KKR Group Partnerships."
 
KKR & Co. Inc. both indirectly controls the KKR Group Partnerships and indirectly holds Class A partner units in each KKR Group Partnership (collectively, "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 September 30, 2018 , KKR & Co. Inc. held approximately 63.4% of the KKR Group Partnership Units and principals through KKR Holdings held approximately 36.6% of the KKR Group Partnership Units. The percentage ownership in the KKR Group Partnerships will continue to change as KKR Holdings and/or principals exchange units in the KKR Group Partnerships for shares of Class A common stock of KKR & Co. Inc. or when KKR & Co. Inc. otherwise issues or repurchases shares of Class A common stock of KKR & Co. Inc. The KKR Group Partnerships also have outstanding equity interests that provide for the carry pool and preferred units with economic terms that mirror the preferred stock issued by KKR & Co. Inc.



13

Notes to Condensed Consolidated Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated 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 December 31, 2017 condensed consolidated balance sheet data was derived from audited consolidated financial statements included in KKR’s Annual Report on Form 10-K for the year ended December 31, 2017 , which include all disclosures required by GAAP. These financial statements should be read in conjunction with the audited consolidated financial statements included in KKR’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission ("SEC").

KKR consolidates the financial results of the KKR Group Partnerships and their 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 and non-employee operating consultants who hold interests in KKR's business through KKR Holdings.
All intercompany transactions and balances have been eliminated.
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, including entities that employ non-employee operating consultants. 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

14

Notes to Condensed Consolidated Financial Statements (Continued)

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 periodically.

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.

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, real assets, credit, investments of consolidated CFEs, equity method, carried interest 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 as a component of Net Gains (Losses) from Investment Activities in the condensed 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.

15

Notes to Condensed Consolidated Financial Statements (Continued)

Credit  - Consists primarily of investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans), distressed and opportunistic debt 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 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 producing 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 estate 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.

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 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 condensed 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 producing 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 producing properties are generally classified as real asset investments.

Energy Investments held directly by KKR

Certain energy investments are made by KKR directly in working and royalty interests in oil and natural gas producing properties and not through investment funds. Oil and natural gas producing 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 the underlying statements of financial condition and statements of operations of the consolidated working interests on a gross basis and changes in the value of these working interests are not reflected as unrealized gains and losses in the condensed 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.

16

Notes to Condensed Consolidated Financial Statements (Continued)

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 condensed consolidated statements of operations.

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 condensed 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 condensed 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 September 30, 2018 , 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 Equity Method - Capital Allocation-Based Income investments approximate 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).


17

Notes to Condensed Consolidated Financial Statements (Continued)

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.

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. Except for certain of KKR's equity method investments (see "Equity Method" above in this Note 2 "Summary of Significant Accounting Policies") 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

18

Notes to Condensed Consolidated Financial Statements (Continued)

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.
 
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 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 assets and liabilities 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: The 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.

Restricted 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.

Derivatives: The valuation incorporates observable inputs comprising yield curves, foreign currency rates and credit spreads.

Level III Valuation Methodologies
 
Investments and financial instruments categorized as Level III consist primarily of the following:

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. 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

19

Notes to Condensed Consolidated Financial Statements (Continued)

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 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 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 more 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 analysis. Key inputs used in this methodology that require estimates include the weighted average cost of capital. In addition, the valuations of energy investments generally incorporate both commodity prices as quoted on indices and long-term commodity price forecasts, which may be substantially different from commodity prices on certain indices for equivalent future dates. Certain energy investments do not include an illiquidity discount. Long-term commodity price forecasts are utilized to capture the value of the investments across a range of commodity prices within the energy investment portfolio associated with future development and to reflect a range of price expectations. Real estate investments are generally valued using a combination of direct income capitalization and discounted cash flow analysis. 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.

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 investments when valuing these other investments.


20

Notes to Condensed Consolidated 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.
 
Revenues

For the three and nine months ended September 30, 2018 and 2017 , respectively, revenues consisted of the following:    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Management Fees
$
188,866

 
$
178,942

 
$
547,765

 
$
517,393

Fee Credits
(73,904
)
 
(70,641
)
 
(137,804
)
 
(207,396
)
Transaction Fees
290,404

 
181,280

 
619,278

 
581,410

Monitoring Fees
20,176

 
14,478

 
63,125

 
58,977

Incentive Fees

 
2,519

 
14,038

 
3,637

Expense Reimbursements
38,212

 
27,370

 
108,999

 
86,226

Oil and Gas Revenue
12,635

 
12,441

 
40,995

 
47,096

Consulting Fees
15,114

 
9,029

 
43,347

 
29,039

Total Fees and Other
491,503

 
355,418

 
1,299,743

 
1,116,382


 
 
 
 
 
 
 
Carried Interest
543,750

 
337,459

 
1,097,673

 
1,224,235

General Partner Capital Interest
94,413

 
56,775

 
176,476

 
192,590

Total Capital Allocation-Based Income
638,163

 
394,234

 
1,274,149

 
1,416,825

 
 
 
 
 
 
 
 
Total Revenues
$
1,129,666

 
$
749,652

 
$
2,573,892

 
$
2,533,207



Fees and Other

Fees and Other, as detailed above, are accounted for as contracts with customers. Under the guidance for contracts with customers, 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. See Note 14 “Segment Reporting” for a disaggregated presentation of revenues by business line from contracts with customers.


21

Notes to Condensed Consolidated 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 private equity funds generally range from 1% to 2% of committed capital during the fund's investment period and are generally 0.75% to 1.25% of invested capital after the expiration of the fund's investment period with subsequent reductions over time. Typically, an investment period is defined as a period of up to six years. The actual length of the investment period is often shorter due to the earlier deployment of committed capital. Management fees earned from growth

22

Notes to Condensed Consolidated Financial Statements (Continued)

equity, real assets, and core investment strategy funds generally range from 0.5% to 2.0% and are generally based on the investment fund's average net asset value, capital commitments, or invested capital.
Management fees earned from credit funds and other investment vehicles in the Public Markets business line generally range from 0.33% to 1.75% . Such rates may be based on the investment fund's average net asset value, capital commitments, or invested capital. Management fees earned from CLOs include senior collateral management fees and subordinate collateral management fees. When combined, senior collateral management fees and subordinate collateral management fees are determined based on an annual rate ranging from 0.40% to 0.50% of collateral. If amounts distributable on any payment date are insufficient to pay the collateral management fees according to the priority of payments, any shortfall is deferred and payable on subsequent payment dates. For the purpose of calculating the collateral management fees, collateral, the payment dates, and the priority of payments are terms defined in the management agreements.
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 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 related to investment transactions that were not consummated ("broken deal costs") and generally amount to 80% for older funds, or 100% for our newer funds, of allocable monitoring and transaction fees after broken deal costs 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 costs. 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 condensed 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 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) in our Capital Markets business line, a percentage of the overall transaction size and (ii) for Private Markets and Public Markets 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 (which is generally one year) when the performance-based incentive fees become fixed and

23

Notes to Condensed Consolidated Financial Statements (Continued)

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.
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 as Expenses and reimbursements of such costs are classified as Expense Reimbursements within Revenues on the condensed 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 producing 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
Certain consolidated entities that employ non-employee operating consultants provide 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 and are not shared with KKR. After the contract is established, there are no significant judgments made when determining the transaction price.
Capital Allocation-Based Income

Capital allocation-based income 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 condensed consolidated statements of financial condition.

24

Notes to Condensed Consolidated Financial Statements (Continued)

Prior to January 1, 2018, to the extent an investment fund was not consolidated, KKR accounted for carried interest within Fees and Other separately from its general partner capital interest, which was included in Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. Effective January 1, 2018, the carried interest component of the general partner interest and the capital interest KKR holds in its investment funds as the general partner are accounted for as a single unit of account and reported in capital allocation-based income within Revenues in the condensed consolidated statements of operations. This change in accounting principle has been applied on a full retrospective basis. For the three and nine months ended September 30, 2017, $337.4 million and $1,224.2 million were reclassified from Fees and Other, respectively, to Capital Allocation-Based Income in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2017, $56.8 million and $192.6 million were reclassified from Net Gains (Losses) from Investment Activities, respectively, to Capital Allocation-Based Income in the condensed consolidated statements of operations. KKR has concluded that investments made alongside its fund investors in investment funds which entitle KKR to a carried interest represent equity method investments that are not in the scope of the amended revenue recognition guidance.
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, the KKR Group Partnerships and certain of their 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.

Prior to the Conversion, KKR & Co. L.P.’s investment income and carried interest generally were not subject to U.S. corporate income taxes. Subsequent to the Conversion, all income earned by KKR & Co. Inc. is subject to U.S. corporate income taxes, which we believe will result in an overall higher income tax expense (or benefit) when compared to periods prior to the Conversion.

See Note 11 "Income Taxes" for further information on the financial statement impact of the Conversion.

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.
2017 Tax Act
The Tax Cuts and Jobs Act, which was enacted in December 2017 (the "2017 Tax Act") makes various changes to the U.S. tax code that include, but are not limited to, (1) reducing the U.S. federal corporate income tax rate to a maximum of 21% effective January 1, 2018 and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries.
See Note 11 "Income Taxes" for further information on the financial statement impact of the 2017 Tax Act.

25

Notes to Condensed Consolidated Financial Statements (Continued)

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 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.

Recently Issued Accounting Pronouncements
 
Revenue from Contracts with Customers

The FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) in May 2014 and subsequently issued several amendments to the standard. ASU 2014-09, and related amendments, provide comprehensive guidance for recognizing revenue from contracts with customers. Entities will be able to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The guidance includes a five-step framework that requires an entity to: (i) identify the contracts with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contracts and (v) recognize revenue when the entity satisfies a performance obligation. The guidance in ASU 2014-09, and the related amendments, is effective for KKR beginning on January 1, 2018, and KKR adopted this guidance on that date. KKR has concluded that its Fees and Other are within the scope of the amended revenue recognition guidance. Additionally, KKR has concluded that investments made alongside its fund investors in investment funds which entitle KKR to a carried interest represent equity method investments that are not in the scope of the amended revenue recognition guidance. KKR has implemented ASU 2014-09 and its related amendments and there were no changes to KKR's historical pattern of recognizing revenue. See the accounting policy for Revenues above.

Cash Flows

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amended guidance adds or clarifies guidance on eight cash flow matters: (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle. The guidance is effective for KKR beginning on January 1, 2018, and KKR adopted this guidance on that date. This adoption did not have a material impact on KKR's condensed consolidated statements of cash flows.


26

Notes to Condensed Consolidated Financial Statements (Continued)

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which amends the guidance to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The amended guidance requires the following: (i) restricted cash and restricted cash equivalents should be included in the cash and cash-equivalents balances in the statement of cash flows; (ii) changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows; (iii) a reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents and (iv) the nature of the restrictions must be disclosed for material restricted cash and restricted cash equivalents amounts. The guidance is effective for KKR beginning on January 1, 2018, and KKR adopted this guidance on that date. Upon adoption, (i) Restricted Cash and Cash Equivalents and (ii) Cash and Cash Equivalents Held at Consolidated Entities were (a) included in the cash and cash-equivalents balances in the condensed consolidated statements of cash flows and (b) disclosed in a reconciliation between the condensed consolidated statements of financial condition and the condensed consolidated statements of cash flows. This guidance has been applied on a full retrospective basis. For the nine months ended September 30, 2017, $365.5 million of cash provided by operating activities and $168.0 million of cash provided by investing activities were removed from net cash provided (used) by operating activities and net cash provided (used) by investing activities, respectively, and included in net increase/(decrease) in cash, cash-equivalents and restricted cash in the condensed consolidated statements of cash flows.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which has subsequently been amended by ASU 2018-11. The guidance requires the recognition of lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. The guidance retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases under previous GAAP. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not changed significantly from previous GAAP. For operating leases, a lessee is required to do the following: (a) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial condition; (b) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (c) classify all cash payments within operating activities in the statement of cash flows. The guidance is effective for fiscal periods beginning after December 15, 2018. Early application is permitted. KKR is currently evaluating the impact of this guidance on the financial statements and such guidance is not expected to have a material impact to KKR.

Equity-Based Compensation

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"), which amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for fiscal years and interim periods beginning after December 15, 2017. This guidance has been adopted as of January 1, 2018 and did not have a material impact to KKR.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"), which generally simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-07, most of the guidance on such payments to nonemployees is generally aligned with the requirements for share-based payments granted to employees. Prior to adoption of ASU 2018-07, share-based payment arrangements with employees were accounted for under ASC 718, Compensation - Stock Compensation, while nonemployee share-based payments issued for goods and services were accounted for under ASC 505-50, Equity - Equity Based Payments to Non-Employees. ASC 505-50, before the ASU’s amendments, differed significantly from ASC 718. Differences included the guidance on (1) the determination of the measurement date (which generally is the date on which the measurement of equity-classified share-based payments becomes fixed), (2) the accounting for performance conditions, (3) the ability of a nonpublic entity to use certain practical expedients for measurement and (4) the accounting for share-based payments after vesting. ASU 2018-07 eliminates most of these differences. The guidance is effective for fiscal periods beginning after December 15, 2018. KKR has elected to early adopt ASU 2018-07 during the second quarter of 2018 with adjustments reflected as of January 1, 2018. Such adoption did not have a material impact to KKR.

27

Notes to Condensed Consolidated Financial Statements (Continued)

Income Taxes

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which removed the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. This guidance has been adopted as of January 1, 2018 and did not have a material impact to KKR.

Clarifying the Definition of a Business

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). This guidance amends the definition of a business and provides a threshold which must be considered to determine whether a transaction is an asset acquisition or a business combination. ASU 2017-01 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for transactions (i.e. acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. This guidance has been adopted as of the fourth quarter of 2017.

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. The guidance is effective for fiscal periods beginning after December 15, 2019. Early adoption is allowed for entities as of January 1, 2017, for annual and any interim impairment tests occurring after January 1, 2017. KKR is currently evaluating the impact of this guidance on the financial statements.

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. The guidance is effective for fiscal periods beginning after December 15, 2019. Early adoption is permitted and this ASU can be applied on either a retrospective or prospective basis. KKR is currently evaluating the impact of this guidance on the financial statements.

Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, which changes the fair value measurement disclosure requirements. The ASU eliminates, amends and adds disclosure requirements for fair value measurements. The guidance is effective for fiscal periods beginning after December 15, 2019. KKR has elected to early adopt ASU 2018-13 in its entirety during the third quarter of 2018. Such adoption did not have a material impact to KKR.

Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"). This guidance amends the amortization period for certain purchased callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. The guidance does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted and the guidance when adopted should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. KKR is currently evaluating the impact of this guidance on the financial statements.
    

28

Notes to Condensed Consolidated Financial Statements (Continued)

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). Under ASC 740-10-45-15, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of tax expense related to continuing operations for the period in which the law was enacted, even if the assets and liabilities related to items of accumulated other comprehensive income ("OCI"). ASU 2018-02 allows entities to reclassify from accumulated OCI to retained earnings stranded tax effects related to the change in federal tax rate for all items accounted for in OCI. Entities can also elect to reclassify other stranded tax effects that relate to the 2017 Tax Act, but do not directly relate to the change in the federal tax rate. Tax effects that are stranded in OCI for other reasons may not be reclassified. In the period of adoption, entities that elect to reclassify the income tax effects of the 2017 Tax Act from accumulated OCI to retained earnings must disclose that they made such an election. Entities must also disclose a description of other income tax effects related to the 2017 Tax Act that are reclassified from accumulated OCI to retained earnings, if any. The guidance is effective for fiscal periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statement have not yet been issued or made available upon issuance, including in the period the 2017 Tax Act was enacted. An entity that adopts ASU 2018-02 in an annual or interim periods after the period of enactment is able to choose whether to apply the amendments retrospectively to each period in which the effect of the 2017 Tax Act is recognized or to apply the amendments in the period of adoption. KKR is currently evaluating the impact of this guidance on the financial statements.


29

Notes to Condensed Consolidated Financial Statements (Continued)

3. NET GAINS (LOSSES) FROM INVESTMENT ACTIVITIES
 
Net Gains (Losses) from Investment Activities in the condensed 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 tables summarize total Net Gains (Losses) from Investment Activities:
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
Net Realized
Gains (Losses)
 
Net Unrealized
Gains (Losses)
 
Total
 
Net Realized
Gains (Losses)
 
Net Unrealized
Gains (Losses)
 
Total
Private Equity (1)
$
137,486

 
$
434,651

 
$
572,137

 
$
74,483

 
$
77,299

 
$
151,782

Credit (1)
11,306

 
(260,929
)
 
(249,623
)
 
(19,470
)
 
(21,780
)
 
(41,250
)
Investments of Consolidated CFEs (1)
(1,132
)
 
70,963

 
69,831

 
(83,797
)
 
43,905

 
(39,892
)
Real Assets (1)
52,683

 
42,865

 
95,548

 
24,479

 
56,217

 
80,696

Equity Method - Other (1)
14,765

 
111,482

 
126,247

 
6,032

 
(6,167
)
 
(135
)
Other Investments (1)
(12,750
)
 
18,108

 
5,358

 
(33,508
)
 
7,054

 
(26,454
)
Foreign Exchange Forward Contracts
     and Options (2)
(26,862
)
 
47,222

 
20,360

 
(26,043
)
 
(69,046
)
 
(95,089
)
Securities Sold Short (2)
86,188

 
(9,901
)
 
76,287

 
(7,785
)
 
14,369

 
6,584

Other Derivatives (2)
(1,063
)
 
2,704

 
1,641

 
(148
)
 
(5,049
)
 
(5,197
)
Debt Obligations and Other (3)
(19,565
)
 
(31,490
)
 
(51,055
)
 
18,343

 
2,616

 
20,959

Net Gains (Losses) From Investment
     Activities
$
241,056

 
$
425,675

 
$
666,731

 
$
(47,414
)
 
$
99,418

 
$
52,004

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
Net Realized
Gains (Losses)
 
Net Unrealized
Gains (Losses)
 
Total
 
Net Realized
Gains (Losses)
 
Net Unrealized
Gains (Losses)
 
Total
Private Equity (1)
$
179,328

 
$
1,089,947

 
$
1,269,275

 
$
202,549

 
$
372,335

 
$
574,884

Credit (1)
(132,391
)
 
(289,642
)
 
(422,033
)
 
(417,864
)
 
393,055

 
(24,809
)
Investments of Consolidated CFEs (1)
(79,184
)
 
(13,954
)
 
(93,138
)
 
(88,677
)
 
71,952

 
(16,725
)
Real Assets (1)
76,033

 
248,375

 
324,408

 
(34,208
)
 
233,608

 
199,400

Equity Method - Other (1)
(139,178
)
 
465,246

 
326,068

 
22,215

 
46,200

 
68,415

Other Investments (1)
(330,850
)
 
(3,394
)
 
(334,244
)
 
(237,496
)
 
108,654

 
(128,842
)
Foreign Exchange Forward Contracts
     and Options (2)
(66,795
)
 
161,793

 
94,998

 
(7,975
)
 
(311,427
)
 
(319,402
)
Securities Sold Short (2)
614,515

 
(51,232
)
 
563,283

 
497,926

 
66,037

 
563,963

Other Derivatives (2)
2,579

 
5,740

 
8,319

 
(6,027
)
 
(10,602
)
 
(16,629
)
Debt Obligations and Other (3)
302,163

 
217,019

 
519,182

 
66,895

 
(74,085
)
 
(7,190
)
Net Gains (Losses) From Investment
     Activities
$
426,220

 
$
1,829,898

 
$
2,256,118

 
$
(2,662
)
 
$
895,727

 
$
893,065

(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."


30

Notes to Condensed Consolidated Financial Statements (Continued)

4. INVESTMENTS
 
Investments consist of the following:
 
September 30, 2018
 
December 31, 2017
Private Equity
$
7,517,830

 
$
3,301,261

Credit
8,627,571

 
7,621,320

Investments of Consolidated CFEs
13,293,505

 
15,573,203

Real Assets
3,279,482

 
2,302,061

Equity Method - Other
4,146,762

 
3,324,631

Equity Method - Capital Allocation-Based Income
4,417,855

 
4,132,171

Other Investments
2,836,588

 
2,759,287

Total Investments
$
44,119,593

 
$
39,013,934

 
As of September 30, 2018 and December 31, 2017 , there were no investments which represented greater than 5% of total investments. The majority of the securities underlying private equity investments represent equity securities.

Strategic BDC Partnership with FS Investments
 
On April 9, 2018, KKR completed the transaction to form a new strategic BDC partnership with Franklin Square Holdings, L.P. ("FS Investments") to provide investment advisory services to Corporate Capital Trust ("CCT") and Corporate Capital Trust II ("CCT II"), which are business development companies ("BDCs") that were previously advised and sub-advised, respectively, by KKR, and four BDCs that were previously advised by FS Investments. Following the closing of this transaction in April 2018, the new strategic BDC partnership, FS/KKR Advisor, LLC, began serving as the investment adviser to all six of the aforementioned BDCs .
 
In connection with this transaction, KKR contributed a combination of cash and intangible assets, which consisted of advisory contractual rights, in exchange for a  50%  equity interest in FS/KKR Advisor, LLC. Certain of the intangible assets contributed by KKR had a carrying amount of zero. As a result, the fair value of KKR’s 50% interest in FS/KKR Advisor, LLC received in this transaction exceeded the carrying amount of the assets contributed by approximately $313 million . KKR holds a noncontrolling financial interest in FS/KKR Advisor, LLC and reports its investment in FS/KKR Advisor, LLC using the equity method of accounting.
 
 
 
 
 
 
 

31

Notes to Condensed Consolidated Financial Statements (Continued)

5 . FAIR VALUE MEASUREMENTS
 
The following tables summarize the valuation of KKR's assets and liabilities by the fair value hierarchy. Investments classified as Equity Method - Other, for which the fair value option has not been elected, have been excluded from the tables below.
 
Assets, at fair value:
 
September 30, 2018
 
Level I
 
Level II
 
Level III
 
Total
Private Equity
$
1,284,468

 
$
309,134

 
$
5,924,228

 
$
7,517,830

Credit

 
2,175,830

 
6,451,741

 
8,627,571

Investments of Consolidated CFEs

 
12,197,431

 
1,096,074

 
13,293,505

Real Assets

 

 
3,279,482

 
3,279,482

Equity Method - Other
294,171

 
47,938

 
1,402,852

 
1,744,961

Other Investments
895,687

 
185,781

 
1,755,120

 
2,836,588

Total Investments
2,474,326

 
14,916,114

 
19,909,497

 
37,299,937

 
 
 
 
 
 
 
 
Foreign Exchange Contracts and Options

 
98,748

 

 
98,748

Other Derivatives

 
10,001

 
35,309

(1)  
45,310

Total Assets
$
2,474,326

 
$
15,024,863

 
$
19,944,806

 
$
37,443,995

 
December 31, 2017
 
Level I
 
Level II
 
Level III
 
Total
Private Equity
$
1,043,390

 
$
85,581

 
$
2,172,290

 
$
3,301,261

Credit

 
2,482,383

 
5,138,937

 
7,621,320

Investments of Consolidated CFEs

 
10,220,113

 
5,353,090

 
15,573,203

Real Assets
50,794

 

 
2,251,267

 
2,302,061

Equity Method - Other
60,282

 
247,748

 
1,076,709

 
1,384,739

Other Investments
864,872

 
134,404

 
1,760,011

 
2,759,287

Total Investments
2,019,338

 
13,170,229

 
17,752,304

 
32,941,871

 
 
 
 
 
 
 
 
Foreign Exchange Contracts and Options

 
96,584

 

 
96,584

Other Derivatives

 
33,125

 
51,949

(1)  
85,074

Total Assets
$
2,019,338

 
$
13,299,938

 
$
17,804,253

 
$
33,123,529


(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.

32

Notes to Condensed Consolidated Financial Statements (Continued)

Liabilities, at fair value:
 
September 30, 2018
 
Level I
 
Level II
 
Level III
 
Total
Securities Sold Short
$
513,442

 
$

 
$

 
$
513,442

Foreign Exchange Contracts and Options

 
102,018

 

 
102,018

Unfunded Revolver Commitments

 

 
45,170

(1)  
45,170

Other Derivatives

 
13,038

 
27,700

(2)  
40,738

Debt Obligations of Consolidated CFEs

 
11,562,503

 
1,083,107

 
12,645,610

Total Liabilities
$
513,442

 
$
11,677,559

 
$
1,155,977

 
$
13,346,978


 
December 31, 2017
 
Level I
 
Level II
 
Level III
 
Total
Securities Sold Short
$
692,007

 
$

 
$

 
$
692,007

Foreign Exchange Contracts and Options

 
260,948

 

 
260,948

Unfunded Revolver Commitments

 

 
17,629

(1)  
17,629

Other Derivatives

 
27,581

 
41,800

(2)  
69,381

Debt Obligations of Consolidated CFEs

 
10,347,980

 
5,238,236

 
15,586,216

Total Liabilities
$
692,007

 
$
10,636,509

 
$
5,297,665

 
$
16,626,181


(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.
(2)
Includes options issued in connection with the acquisition of the equity interest in Marshall Wace and its affiliates in November 2015 to increase KKR's ownership interest up to 39.9% in periodic increments. The options are valued using a Monte-Carlo simulation valuation methodology. Key inputs used in this methodology that require estimates include Marshall Wace's dividend yield, assets under management volatility and equity volatility. See Note 4 "Investments."


33

Notes to Condensed Consolidated Financial Statements (Continued)

The following tables summarize changes in investments and debt obligations reported at fair value for which Level III inputs have been used to determine fair value for the three and nine months ended September 30, 2018 and 2017, respectively: 
 
For the Three Months Ended September 30, 2018
 
 
 
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
$
5,072,722

 
$
6,083,708

 
$
1,104,514

 
$
3,290,020

 
$
1,253,565

 
$
1,701,823

 
$
18,506,352

 
$
1,091,346

Transfers In / (Out) Due to Changes in Consolidation

 

 

 

 

 

 

 

Transfers In

 
154,255

 

 

 

 
8,710

 
162,965

 

Transfers Out

 

 

 

 

 

 

 

Asset Purchases / Debt Issuances
448,252

 
1,049,608

 

 
171,213

 
223,230

 
138,896

 
2,031,199

 

Sales / Paydowns
(11,851
)
 
(518,495
)
 
(2,706
)
 
(277,369
)
 
(80,624
)
 
(136,801
)
 
(1,027,846
)
 

Settlements

 
15,026

 

 

 

 

 
15,026

 
(2,706
)
Net Realized Gains (Losses)
5,297

 
(3,615
)
 

 
52,753

 
15,439

 
43,686

 
113,560

 

Net Unrealized Gains (Losses)
409,808

 
(272,838
)
 
(5,734
)
 
42,865

 
(8,758
)
 
(1,194
)
 
164,149

 
(5,533
)
Change in Other Comprehensive Income

 
(55,908
)
 

 

 

 

 
(55,908
)
 

Balance, End of Period
$
5,924,228

 
$
6,451,741

 
$
1,096,074

 
$
3,279,482

 
$
1,402,852

 
$
1,755,120

 
$
19,909,497

 
$
1,083,107

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
410,054

 
$
(273,139
)
 
$
(5,734
)
 
$
69,555

 
$
(1,092
)
 
$
50,199

 
$
249,843

 
$
(5,533
)
 
 
For the Three Months Ended September 30, 2017
 
 
 
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
$
2,394,498

 
$
3,865,070

 
$
5,447,250

 
$
2,423,419

 
$
571,575

 
$
1,771,627

 
$
16,473,439

 
$
5,333,203

Transfers In / (Out) Due to Changes in Consolidation

 

 

 

 

 

 

 

Transfers In

 

 

 

 

 

 

 

Transfers Out

 
(4,187
)
 

 

 

 

 
(4,187
)
 

Asset Purchases / Debt Issuances
98,955

 
1,112,297

 

 
62,453

 
4,457

 
35,700

 
1,313,862

 

Sales / Paydowns
(56,193
)
 
(224,135
)
 
(17,022
)
 
(361,451
)
 
(28,864
)
 
(45,887
)
 
(733,552
)
 

Settlements

 
27,528

 

 

 

 

 
27,528

 
(17,022
)
Net Realized Gains (Losses)
7,182

 
(6,896
)
 

 
24,479

 
6,282

 
(29,943
)
 
1,104

 

Net Unrealized Gains (Losses)
163,682

 
(27,876
)
 
(20,112
)
 
53,100

 
2,088

 
38,514

 
209,396

 
(20,998
)
Change in Other Comprehensive Income

 
(8,927
)
 

 

 

 

 
(8,927
)
 

Balance, End of Period
$
2,608,124

 
$
4,732,874

 
$
5,410,116

 
$
2,202,000

 
$
555,538

 
$
1,770,011

 
$
17,278,663

 
$
5,295,183

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
163,682

 
$
(40,131
)
 
$
(20,112
)
 
$
68,239

 
$
5,225

 
$
38,514

 
$
215,417

 
$
(20,998
)

34

Notes to Condensed Consolidated Financial Statements (Continued)

 
For the Nine Months Ended September 30, 2018
 
 
 
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
$
2,172,290

 
$
5,138,937

 
$
5,353,090

 
$
2,251,267

 
$
1,076,709

 
$
1,760,011

 
$
17,752,304

 
$
5,238,236

Transfers In / (Out) Due to Changes in Consolidation
928,217

 

 
(4,153,641
)
 

 

 

 
(3,225,424
)
 
(4,045,957
)
Transfers In

 
154,255

 

 

 

 
8,710

 
162,965

 

Transfers Out
(52,568
)
 

 

 

 

 

 
(52,568
)
 

Asset Purchases / Debt Issuances
2,184,987

 
2,943,849

 

 
1,135,699

 
424,015

 
297,517

 
6,986,067

 

Sales / Paydowns
(142,067
)
 
(1,322,619
)
 
(28,533
)
 
(413,992
)
 
(119,733
)
 
(280,715
)
 
(2,307,659
)
 

Settlements

 
(35,474
)
 

 

 

 

 
(35,474
)
 
(17,975
)
Net Realized Gains (Losses)
41,687

 
6,550

 
13,000

 
39,116

 
(121,115
)
 
20,755

 
(7
)
 

Net Unrealized Gains (Losses)
791,682

 
(334,387
)
 
(87,842
)
 
267,392

 
142,976

 
(51,158
)
 
728,663

 
(91,197
)
Change in Other Comprehensive Income

 
(99,370
)
 

 

 

 

 
(99,370
)
 

Balance, End of Period
$
5,924,228

 
$
6,451,741

 
$
1,096,074

 
$
3,279,482

 
$
1,402,852

 
$
1,755,120

 
$
19,909,497

 
$
1,083,107

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
811,622

 
$
(326,419
)
 
$
(87,842
)
 
$
264,630

 
$
9,277

 
$
(13,633
)
 
$
657,635

 
$
(91,197
)

 
For the Nine Months Ended September 30, 2017
 
 
 
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
$
1,559,559

 
$
3,290,361

 
$
5,406,220

 
$
1,807,128

 
$
570,522

 
$
1,767,573

 
$
14,401,363

 
$
5,294,741

Transfers In / (Out) Due to Changes in Consolidation

 
(95,962
)
 

 

 

 

 
(95,962
)
 

Transfers In

 

 

 

 

 

 

 

Transfers Out

 
(4,187
)
 

 

 

 
(1,496
)
 
(5,683
)
 

Asset Purchases / Debt Issuances
923,460

 
2,056,195

 

 
667,681

 
15,589

 
259,204

 
3,922,129

 

Sales / Paydowns
(228,676
)
 
(942,459
)
 
(34,957
)
 
(469,092
)
 
(49,842
)
 
(188,623
)
 
(1,913,649
)
 

Settlements

 
46,653

 

 

 

 

 
46,653

 
(34,957
)
Net Realized Gains (Losses)
7,871

 
(109,525
)
 

 
(34,208
)
 
6,908

 
(53,384
)
 
(182,338
)
 

Net Unrealized Gains (Losses)
345,910

 
476,920

 
38,853

 
230,491

 
12,361

 
(13,263
)
 
1,091,272

 
35,399

Change in Other Comprehensive Income

 
14,878

 

 

 

 

 
14,878

 

Balance, End of Period
$
2,608,124

 
$
4,732,874

 
$
5,410,116

 
$
2,202,000

 
$
555,538

 
$
1,770,011

 
$
17,278,663

 
$
5,295,183

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
345,910

 
$
367,269

 
$
38,853

 
$
175,183

 
$
15,498

 
$
(13,263
)
 
$
929,450

 
$
35,399




35

Notes to Condensed Consolidated 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 condensed consolidated statements of operations.

The following table presents additional information about valuation methodologies and significant unobservable inputs used for investments and debt obligations that are measured at fair value and categorized within Level III as of September 30, 2018 :
 
Fair Value September 30, 2018
 
Valuation
Methodologies
 
Unobservable Input(s) (1)
 
Weighted
Average (2)
 
Range
 
Impact to
 Valuation
from an
Increase in
Input (3)
 
 
 
 
 
 
 
 
 
 
 
 
Private Equity
$
5,924,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private Equity
$
3,808,759

 
Inputs to market comparables and discounted cash flow and transaction price
 
Illiquidity Discount
 
5.6%
 
5.0% - 15.0%
 
Decrease
 
 

 
 
Weight Ascribed to Market Comparables
 
27.5%
 
0.0% - 50.0%
 
(4)
 
 

 
 
Weight Ascribed to Discounted Cash Flow
 
69.8%
 
5.0% - 100.0%
 
(5)
 
 

 
 
Weight Ascribed to Transaction Price
 
2.7%
 
0.0% - 90.0%
 
(6)
 
 

 
Market comparables
 
Enterprise Value/LTM EBITDA Multiple
 
14.7x
 
6.6x - 29.5x
 
Increase
 
 
 
 
Enterprise Value/Forward EBITDA Multiple
 
15.2x
 
5.8x - 20.2x
 
Increase
 
 

 
Discounted cash flow
 
Weighted Average Cost of Capital
 
10.4%
 
6.1% - 13.6%
 
Decrease
 
 

 
 
Enterprise Value/LTM EBITDA Exit Multiple
 
12.0x
 
5.2x - 14.0x
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 
Growth Equity
$
2,115,469

 
Inputs to market comparables, discounted cash flow and milestones
 
Illiquidity Discount
 
11.5%
 
10.0% - 20.0%
 
Decrease
 
 
 
 
Weight Ascribed to Market Comparables
 
29.1%
 
0.0% - 100.0%
 
(4)
 
 
 
 
Weight Ascribed to Discounted Cash Flow
 
10.8%
 
0.0% - 75.0%
 
(5)
 
 
 
 
Weight Ascribed to Milestones
 
60.1%
 
0.0% - 100.0%
 
(6)
 
 
 
Scenario Weighting
 
Base
 
58.4%
 
40.0% - 80.0%
 
Increase
 
 
 
 
Downside
 
17.0%
 
5.0% - 30.0%
 
Decrease
 
 
 
 
Upside
 
24.6%
 
10.0% - 45.0%
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 
Credit
$
6,451,741

 
Yield Analysis
 
Yield
 
7.0%
 
3.5% - 26.5%
 
Decrease
 
 
 
 
Net Leverage
 
1.8x
 
0.5x - 32.1x
 
Decrease
 
 
 
 
EBITDA Multiple
 
9.4x
 
0.1x - 32.3x
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 
Investments of Consolidated CFEs
$
1,096,074

(9)
 
 
 
 
 
 
 
 
 
Debt Obligations of Consolidated CFEs
$
1,083,107

 
Discounted cash flow
 
Yield
 
6.4%
 
2.4% - 16.5%
 
Decrease
 
 
 
 
 
 
 
 
 
 
 
 
Real Assets
$
3,279,482

(10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
1,878,488

 
Discounted cash flow
 
Weighted Average Cost of Capital
 
10.4%
 
9.5% - 14.2%
 
Decrease
 
 
 
 
 
Average Price Per BOE (8)
 
$47.06
 
$43.86 - $49.98
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 

36

Notes to Condensed Consolidated Financial Statements (Continued)

 
Fair Value September 30, 2018
 
Valuation
Methodologies
 
Unobservable Input(s) (1)
 
Weighted
Average (2)
 
Range
 
Impact to
 Valuation
from an
Increase in
Input (3)
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate
$
1,182,047

 
Inputs to direct income capitalization and discounted cash flow
 
Weight Ascribed to Direct Income Capitalization
 
35.9%
 
0.0% - 100.0%
 
(7)
 
 

 
 
Weight Ascribed to Discounted Cash Flow
 
64.1%
 
0.0% - 100.0%
 
(5)
 
 

 
Direct income capitalization
 
Current Capitalization Rate
 
5.7%
 
0.6% - 12.0%
 
Decrease
 
 

 
Discounted cash flow
 
Unlevered Discount Rate
 
8.6%
 
4.5% - 18.0%
 
Decrease
 
 
 
 
 
 
 
 
 
 
 
 
Equity Method - Other
$
1,402,852

 
Inputs to market comparables, discounted cash flow and transaction price
 
Illiquidity Discount
 
9.8%
 
5.0% - 15.0%
 
Decrease
 

 
 
Weight Ascribed to Market Comparables
 
46.6%
 
0.0% - 50.0%
 
(4)
 
 

 
 
Weight Ascribed to Discounted Cash Flow
 
45.6%
 
0.0% - 50.0%
 
(5)
 
 

 
 
Weight Ascribed to Transaction Price
 
7.8%
 
0.0% - 100.0%
 
(6)
 
 

 
Market comparables
 
Enterprise Value/LTM EBITDA Multiple
 
11.7x
 
6.6x - 13.0x
 
Increase
 
 
 
 
Enterprise Value/Forward EBITDA Multiple
 
10.7x
 
5.8x - 13.5x
 
Increase
 
 

 
Discounted cash flow
 
Weighted Average Cost of Capital
 
8.2%
 
5.9% - 11.4%
 
Decrease
 
 

 
 
Enterprise Value/LTM EBITDA Exit Multiple
 
10.6x
 
6.0x - 12.5x
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 
Other Investments
$
1,755,120

(11)
Inputs to market comparables, discounted cash flow and transaction price
 
Illiquidity Discount
 
10.1%
 
5.0% - 20.0%
 
Decrease
 
 
 
Weight Ascribed to Market Comparables
 
26.4%
 
0.0% - 100.0%
 
(4)
 
 
 
 
Weight Ascribed to Discounted Cash Flow
 
41.9%
 
0.0% - 100.0%
 
(5)
 
 
 
 
Weight Ascribed to Transaction Price
 
31.7%
 
0.0% - 100.0%
 
(6)
 
 
 
Market comparables
 
Enterprise Value/LTM EBITDA Multiple
 
9.9x
 
1.2x - 13.6x
 
Increase
 
 
 
 
Enterprise Value/Forward EBITDA Multiple
 
8.7x
 
0.7x - 12.0x
 
Increase
 
 
 
Discounted cash flow
 
Weighted Average Cost of Capital
 
16.1%
 
7.5% - 30.0%
 
Decrease
 
 
 
 
Enterprise Value/LTM EBITDA Exit Multiple
 
7.5x
 
6.3x - 8.5x
 
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 90% liquids and 10% natural gas.
(9)
KKR measures CMBS investments on the basis of the fair value of the financial liabilities of the CMBS vehicle. See Note 2 "Summary of Significant Accounting Policies."

37

Notes to Condensed Consolidated Financial Statements (Continued)

(10)
Includes one Infrastructure investment for $218.9 million that was valued using a discounted cash flow analysis. The significant inputs used included the weighted average cost of capital 7.1% and the enterprise value/LTM EBITDA Exit Multiple 12.0 x.
(11)
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.

6. FAIR VALUE OPTION

The following table summarizes the financial instruments for which the fair value option has been elected:
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Private Equity
$
3,012

 
$
3,744

Credit
4,958,922

 
4,381,519

Investments of Consolidated CFEs
13,293,505

 
15,573,203

Real Assets
321,644

 
343,820

Equity Method - Other
1,744,961

 
1,384,739

Other Investments
264,218

 
344,996

     Total
$
20,586,262

 
$
22,032,021

 
 
 
 
Liabilities
 
 
 
Debt Obligations of Consolidated CFEs
$
12,645,610

 
$
15,586,216

     Total
$
12,645,610

 
$
15,586,216



38

Notes to Condensed Consolidated Financial Statements (Continued)

The following table presents the net realized and net change in unrealized gains (losses) on financial instruments on which the fair value option was elected:
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
Net Realized
Gains (Losses)
 
Net Unrealized Gains (Losses)
 
Total
 
Net Realized
Gains (Losses)
 
Net Unrealized Gains (Losses)
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Private Equity
$

 
$
37

 
$
37

 
$
2,981

 
$
(6,692
)
 
$
(3,711
)
Credit
(2,772
)
 
(119,019
)
 
(121,791
)
 
6,878

 
(10,835
)
 
(3,957
)
Investments of Consolidated CFEs
(1,132
)
 
70,963

 
69,831

 
(83,797
)
 
43,905

 
(39,892
)
Real Assets
5,370

 
(5,114
)
 
256

 
12,611

 
10,498

 
23,109

Equity Method - Other
15,062

 
18,696

 
33,758

 
6,282

 
(29
)
 
6,253

Other Investments
(2,462
)
 
(7,668
)
 
(10,130
)
 
(5,457
)
 
12,348

 
6,891

     Total
$
14,066

 
$
(42,105
)
 
$
(28,039
)
 
$
(60,502
)
 
$
49,195

 
$
(11,307
)
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Debt Obligations of Consolidated CFEs
(8,460
)
 
(55,338
)
 
(63,798
)
 
13,403

 
24,483

 
37,886

     Total
$
(8,460
)
 
$
(55,338
)
 
$
(63,798
)
 
$
13,403

 
$
24,483

 
$
37,886

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
Net Realized
Gains (Losses)
 
Net Unrealized Gains (Losses)
 
Total
 
Net Realized
Gains (Losses)
 
Net Unrealized Gains (Losses)
 
Total
Assets


 


 


 
 
 
 
 
 
Private Equity
$
(4,907
)
 
$
5,390

 
$
483

 
$
3,670

 
$
33,803

 
$
37,473

Credit
(155,879
)
 
(137,806
)
 
(293,685
)
 
(401,720
)
 
74,003

 
(327,717
)
Investments of Consolidated CFEs
(79,184
)
 
(13,954
)
 
(93,138
)
 
(88,677
)
 
71,952

 
(16,725
)
Real Assets
8,774

 
4,070

 
12,844

 
12,425

 
58,108

 
70,533

Equity Method - Other
(121,514
)
 
177,385

 
55,871

 
6,908

 
(3,075
)
 
3,833

Other
(11,578
)
 
(11,294
)
 
(22,872
)
 
(27,602
)
 
25,158

 
(2,444
)
     Total
$
(364,288
)
 
$
23,791

 
$
(340,497
)
 
$
(494,996
)
 
$
259,949

 
$
(235,047
)
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Debt Obligations of Consolidated CFEs
5,172

 
144,120

 
149,292

 
53,849

 
(30,490
)
 
23,359

     Total
$
5,172

 
$
144,120

 
$
149,292

 
$
53,849

 
$
(30,490
)
 
$
23,359


39

Notes to Condensed Consolidated Financial Statements (Continued)

7. NET INCOME (LOSS) ATTRIBUTABLE TO KKR & CO. INC. PER SHARE OF CLASS A COMMON STOCK
 
For the three and nine months ended September 30, 2018 and 2017 , basic and diluted Net Income (Loss) attributable to KKR & Co. Inc. per share of Class A common stock were calculated as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders
$
640,198

 
$
153,563

 
$
1,490,681

 
$
818,552

Excess of carrying value over consideration transferred on redemption of KFN 7.375% Series A LLC Preferred Shares

 

 
3,102

 

Net Income (Loss) Available to KKR & Co. Inc. Class A Common Stockholders
$
640,198

 
$
153,563

 
$
1,493,783

 
$
818,552

 
 
 
 
 
 
 
 
Basic Net Income (Loss) Per Share of Class A Common Stock
 
 
 
 
 
 
 
Weighted Average Shares of Class A Common Stock Outstanding - Basic
525,240,214

 
471,758,886

 
507,981,387

 
463,941,084

Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Class A Common Stock - Basic
$
1.22

 
$
0.33

 
$
2.94

 
$
1.76

Diluted Net Income (Loss) Per Share of Class A Common Stock
 
 
 
 
 
 
 
Weighted Average Shares of Class A Common Stock Outstanding - Basic
525,240,214

 
471,758,886

 
507,981,387

 
463,941,084

Weighted Average Unvested Shares of Class A Common Stock and Other Exchangeable Securities
20,432,739

 
35,114,291

 
20,485,003

 
37,674,551

Weighted Average Shares of Class A Common Stock Outstanding - Diluted
545,672,953

 
506,873,177

 
528,466,390

 
501,615,635

Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Class A Common Stock - Diluted
$
1.17

 
$
0.30

 
$
2.83

 
$
1.63

 
Weighted Average Shares of Class A 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 "Equity Incentive Plan") as well as exchangeable equity securities issued in connection with the acquisition of Avoca. Vesting or exchanges of these equity interests dilute KKR & Co. Inc. and KKR Holdings pro rata in accordance with their respective ownership interests in the KKR Group Partnerships.

For the three and nine months ended September 30, 2018 and 2017 , KKR Holdings units have been excluded from the calculation of Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Class A Common Stock - Diluted since the exchange of these units would not dilute KKR's respective ownership interests in the KKR Group Partnerships.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Weighted Average KKR Holdings Units
303,531,232

 
341,214,527

 
319,080,563

 
346,716,489


Additionally, for the three and nine months ended September 30, 2018 , 5.0 million shares of KKR Class A common stock subject to a market price-based vesting condition ("Market Condition Awards") were excluded from the calculation of Net Income (Loss) Attributable to KKR & Co. Inc. Per Share of Class A Common Stock - Diluted since the vesting conditions have not been satisfied. See Note 12 "Equity Based Compensation."




40

Notes to Condensed Consolidated Financial Statements (Continued)

8. OTHER ASSETS AND ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
 
Other Assets consist of the following:
 
 
September 30, 2018
 
December 31, 2017
Unsettled Investment Sales (1)
$
114,149

 
$
134,781

Receivables
52,223

 
138,109

Due from Broker (2)
428,928

 
682,403

Oil & Gas Assets, net (3)
221,901

 
252,371

Deferred Tax Assets, net
298,336

 
131,944

Interest Receivable
227,090

 
189,785

Fixed Assets, net (4)
422,388

 
364,203

Foreign Exchange Contracts and Options (5)
98,748

 
96,584

Intangible Assets, net (6)
10,674

 
129,178

Goodwill (7)
83,500

 
83,500

Derivative Assets
45,310

 
85,074

Deposits
7,646

 
16,330

Prepaid Taxes
79,769

 
83,371

Prepaid Expenses
29,306

 
25,677

Deferred Financing Costs
6,761

 
7,534

Other
121,018

 
110,231

Total
$
2,247,747

 
$
2,531,075

(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 amounted to $4,255 and $5,466 for the three months ended September 30, 2018 and 2017, respectively, and $17,800 and $18,563 for the nine months ended September 30, 2018 and 2017, respectively.
(4)
Net of accumulated depreciation and amortization of $168,018 and $156,859 as of September 30, 2018 and December 31, 2017 , respectively. Depreciation and amortization expense of $3,649 and $3,710 for the three months ended September 30, 2018 and 2017, respectively, and $11,133 and $11,774 for the nine months ended September 30, 2018 and 2017, respectively, is included in General, Administrative and Other in the accompanying condensed 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 condensed 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)
Net of accumulated amortization of $63,188 and $61,348 as of September 30, 2018 and December 31, 2017 , respectively. Amortization expense of $681 and $2,473 for the three months ended September 30, 2018 and 2017, respectively, and $7,028 and $13,901 for the nine months ended September 30, 2018 and 2017, respectively, is included in General, Administrative and Other in the accompanying condensed consolidated statements of operations.
(7)
As of September 30, 2018 , the carrying value of goodwill is recorded and assessed for impairment at the reporting unit.

    

41

Notes to Condensed Consolidated Financial Statements (Continued)

Accounts Payable, Accrued Expenses and Other Liabilities consist of the following:
 
 
September 30, 2018
 
December 31, 2017
Amounts Payable to Carry Pool (1)
$
1,300,165

 
$
1,220,559

Unsettled Investment Purchases (2)
605,442

 
885,945

Securities Sold Short (3) 
513,442

 
692,007

Derivative Liabilities
40,738

 
69,381

Accrued Compensation and Benefits
404,797

 
35,953

Interest Payable
183,363

 
168,673

Foreign Exchange Contracts and Options (4)
102,018

 
260,948

Accounts Payable and Accrued Expenses
126,261

 
152,916

Deferred Rent
13,997

 
17,441

Taxes Payable
70,040

 
35,933

Uncertain Tax Positions Reserve
59,798

 
58,369

Other Liabilities
265,257

 
56,125

Total
$
3,685,318

 
$
3,654,250

(1)
Represents the amount of carried interest payable to principals, professionals and other individuals 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 condensed 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 condensed consolidated statements of operations. See Note 3 "Net Gains (Losses) from Investment Activities" for the net changes in fair value associated with these instruments.



42

Notes to Condensed Consolidated 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" and which are predominately CFEs and certain investment funds. The primary purpose of these VIEs is to provide strategy specific investment opportunities to earn capital gains, current income or both in exchange for management and performance based fees or carried interest. KKR's investment strategies for these VIEs differ by product; however, the fundamental risks have similar characteristics, including loss of invested capital and loss of management fees and carried interests. 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 include certain investment funds sponsored by KKR and certain CLO vehicles.
 
Investments in Unconsolidated Investment Funds
 
KKR's investment strategies differ by investment fund; however, the fundamental risks have similar characteristics, including loss of invested capital and loss of management fees and carried interests. 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, which was approximately $4.4 billion at September 30, 2018 . 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 September 30, 2018 , KKR's commitments to these unconsolidated investment funds was $1.9 billion . KKR has not provided any financial support other than its obligated amount as of September 30, 2018 .
 
Investments in Unconsolidated CLO Vehicles
 
KKR provides collateral management services for, and has made nominal investments in, certain CLO vehicles that it does not consolidate. KKR's investments in the unconsolidated CLO vehicles, if any, are carried at fair value in the condensed consolidated statements of financial condition. KKR earns management fees, including subordinated collateral management fees, for managing the collateral of the CLO vehicles. As of September 30, 2018 , combined assets under management in the pools of unconsolidated CLO vehicles were $0.5 billion . KKR's maximum exposure to loss as a result of its investments in the residual interests of unconsolidated CLO vehicles is the carrying value of such investments, which was $27.2 million as of September 30, 2018 . CLO investors in the CLO vehicles may only use the assets of the CLO to settle the debt of the related CLO, and otherwise have no recourse against KKR for any losses sustained in the CLO structures.
 
As of September 30, 2018 and December 31, 2017, 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:
 
 
September 30, 2018
 
December 31, 2017
Investments
$
4,445,006

 
$
4,417,003

Due from (to) Affiliates, net
415,916

 
176,131

Maximum Exposure to Loss
$
4,860,922

 
$
4,593,134


43

Notes to Condensed Consolidated Financial Statements (Continued)

10. DEBT OBLIGATIONS
 
KKR borrows and enters into credit agreements and issues debt for its general operating and investment purposes. In certain cases, KKR has majority-owned investment vehicles that make investments and purchase other assets with borrowings that are collateralized only by the investments and assets they own. Additionally, certain of KKR's consolidated investment funds borrow to meet financing needs of their operating and investing activities. KKR consolidates and reports KFN's debt obligations which are non-recourse to KKR beyond the assets of KFN.

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 funds.

In addition, certain 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:
 
September 30, 2018
 
December 31, 2017
 
 
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
451,723

 

 

 
487,656

 

 

 
KCM Short-Term Credit Agreement
750,000

 

 

 
750,000

 

 

 
Notes Issued:
 
 
 
 
 
 
 
 
 
 
 
 
KKR Issued 6.375% Notes Due 2020 (1)

 
498,829

 
525,950

(14)  

 
498,390

 
549,000

(14)  
KKR Issued 5.500% Notes Due 2043 (2)

 
491,751

 
515,480

(14)  

 
491,496

 
580,000

(14)  
KKR Issued 5.125% Notes Due 2044 (3)

 
990,648

 
986,610

(14)  

 
990,375

 
1,107,100

(14)  
KKR Issued 0.509% Notes Due 2023 (4)

 
218,562

 
219,365

(14)  

 

 

 
KKR Issued 0.764% Notes Due 2025 (5)

 
43,243

 
43,757

(14)  

 

 

 
KKR Issued 1.595% Notes Due 2038 (6)

 
89,398

 
88,632

(14)  

 

 

 
KFN Issued 5.500% Notes Due 2032 (7)

 
493,447

 
500,852

 

 
493,129

 
505,235

 
KFN Issued 5.200% Notes Due 2033 (8)

 
118,260

 
116,657

 

 

 

 
KFN Issued 5.400% Notes Due 2033 (9)

 
68,660

 
69,426

 

 

 

 
KFN Issued Junior Subordinated Notes (10)

 
231,807

 
212,226

 

 
236,038

 
201,828

 
Other Debt Obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Financing Facilities of Consolidated Funds and Other (11)
3,025,531

 
4,375,957

 
4,375,957

 
2,056,096

 
2,898,215

 
2,898,215

 
CLO Senior Secured Notes (12)

 
11,173,622

 
11,173,622

 

 
10,055,686

 
10,055,686

 
CLO Subordinated Notes (12)

 
388,881

 
388,881

 

 
292,294

 
292,294

 
CMBS Debt Obligations (13)

 
1,083,107

 
1,083,107

 

 
5,238,236

 
5,238,236

 
 
$
5,227,254

 
$
20,266,172

 
$
20,300,522

 
$
4,293,752

 
$
21,193,859

 
$
21,427,594

 
 
 
 
 
 
(1)
$500 million aggregate principal amount of 6.375% senior notes of KKR due 2020. Borrowing outstanding is presented net of (i) unamortized note discount and (ii) unamortized debt issuance costs of $0.8 million and $1.0 million as of September 30, 2018 and December 31, 2017 , respectively.
(2)
$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 $3.6 million and $3.7 million as of September 30, 2018 and December 31, 2017 , respectively.
(3)
$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 $8.1 million and $8.3 million as of September 30, 2018 and December 31, 2017 , respectively.
(4)
¥25 billion (or $219.9 million ) aggregate principal amount of 0.509% senior notes of KKR due 2023. Borrowing outstanding is presented net of unamortized debt issuance costs of $1.3 million as of September 30, 2018 . These senior notes are denominated in Japanese Yen ("JPY").

44

Notes to Condensed Consolidated Financial Statements (Continued)

(5)
¥5.0 billion (or $44.0 million ) aggregate principal amount of 0.764% senior notes of KKR due 2025. Borrowing outstanding is presented net of unamortized debt issuance costs of $0.7 million as of September 30, 2018 . These senior notes are denominated in JPY.
(6)
¥10.3 billion (or $90.6 million ) aggregate principal amount of 1.595% senior notes of KKR due 2038. Borrowing outstanding is presented net of unamortized debt issuance costs of $1.2 million as of September 30, 2018 . These senior notes are denominated in JPY.
(7)
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 $4.5 million and $4.7 million as of September 30, 2018 and December 31, 2017 , 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.
(8)
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 $1.7 million as of September 30, 2018 . 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.     
(9)
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 $1.3 million as of September 30, 2018 . 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 $258.5 million aggregate principal amount of junior subordinated notes. The weighted average interest rate is 4.8% and 3.8% and the weighted average years to maturity is 18.0 years and 19.0 years as of September 30, 2018 and December 31, 2017 , 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)
Amounts include (i) borrowings at consolidated investment funds relating to financing arrangements with major financial institutions, generally to enable such investment funds to make investments prior to or without receiving capital from fund limited partners and (ii) borrowings by certain majority-owned investment vehicles that are collateralized only by the investments and assets they own. The weighted average interest rate is 4.5% and 4.2% as of September 30, 2018 and December 31, 2017 , respectively. In addition, the weighted average years to maturity is 3.0 years and 3.6 years as of September 30, 2018 and December 31, 2017 , respectively.
(12)
CLO debt obligations are carried at fair value and are classified as Level II within the fair value hierarchy. See Note 5 "Fair Value Measurements."
(13)
CMBS debt obligations are carried at fair value and are classified as Level III within the fair value hierarchy. See Note 5 "Fair Value Measurements."
(14)
The notes are classified as Level II within the fair value hierarchy and fair value is determined by third party broker quotes.

Revolving Credit Facilities

KCM Credit Agreement

As of September 30, 2018 and December 31, 2017 , no amounts were outstanding under the KCM Credit Agreement, however various letters of credit were outstanding in the amount of $48.3 million and $12.3 million , respectively, which reduce the overall capacity of the KCM Credit Agreement.
KCM Short-Term Credit Agreement

On June 28, 2018, KKR Capital Markets Holdings L.P. and certain other capital market subsidiaries of KKR & Co. Inc. (collectively, the “KCM Borrowers”) entered into a 364 -day revolving credit agreement (the “KCM Revolver Agreement”) with Mizuho Bank, Ltd., as administrative agent. The KCM Revolver Agreement provides for revolving borrowings of up to $750 million , expires on June 27, 2019, and ranks pari passu with the existing $500 million credit facility provided by them for KKR's capital markets business. The prior 364 -day revolving credit agreement, dated as of June 29, 2017, between the KCM Borrowers and Mizuho Bank, Ltd., as administrative agent, expired according to its terms on June 28, 2018. Borrowings under the KCM Revolver Agreement may only be used to facilitate the settlement of debt transactions syndicated by KKR’s capital markets business. Obligations under the KCM Revolver Agreement are limited to the KCM Borrowers, which are solely entities involved in KKR’s capital markets business, and liabilities under the KCM Revolver Agreement are non-recourse to other parts of KKR.

If a borrowing is made under the KCM Revolver 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 1.25% and 2.50% , 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 0.25% and 1.50% , depending on the duration of the loan. A facility fee of 0.20% is also payable on the entire facility amount.

The KCM Revolver 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

45

Notes to Condensed Consolidated Financial Statements (Continued)

KCM Borrowers’ obligations under the KCM Revolver Agreement are secured by certain assets of the KCM Borrowers, including a pledge of equity interests of certain subsidiaries of the KCM Borrowers.

Notes Issuances

KKR Issued 0.509% Senior Notes Due 2023, 0.764% Senior Notes Due 2025, and 1.595% Senior Notes Due 2038

On March 23, 2018, KKR Group Finance Co. IV LLC ("KKR Group Finance IV"), an indirect subsidiary of KKR & Co. Inc., completed the offering of ¥40.3 billion , aggregate principal amount of its (i) ¥25.0 billion 0.509% Senior Notes due 2023 (the "2023 Notes"), (ii) ¥5.0 billion 0.764% Senior Notes due 2025 (the "2025 Notes") and (iii) ¥10.3 billion 1.595% Senior Notes due 2038 (the "2038 Notes" and, together with the 2023 Notes and the 2025 Notes, the "JPY Notes"). The JPY Notes are guaranteed by KKR & Co. Inc. and KKR Management Holdings L.P., KKR Fund Holdings L.P. and KKR International Holdings L.P., each an indirect subsidiary of KKR & Co. Inc. (collectively with KKR & Co. Inc., the "Guarantors").

The 2023 Notes bear interest at a rate of 0.509% per annum and will mature on March 23, 2023 unless earlier redeemed. The 2025 Notes bear interest at a rate of 0.764% per annum and will mature on March 21, 2025 unless earlier redeemed. The 2038 Notes bear interest at a rate of 1.595% per annum and will mature on March 23, 2038 unless earlier redeemed. Interest on the JPY Notes accrues from March 23, 2018 and is payable semiannually in arrears on March 23 and September 23 of each year, commencing on September 23, 2018 and ending on the applicable maturity date. The JPY Notes are unsecured and unsubordinated obligations of KKR Group Finance IV. The JPY 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 JPY Notes includes covenants, including limitations on KKR Group Finance IV'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 JPY Notes may declare the JPY 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 JPY Notes and any accrued and unpaid interest on the JPY Notes automatically become due and payable. KKR Group Finance IV may redeem the JPY Notes at its option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the JPY Notes to be redeemed, together with interest accrued and unpaid to, but excluding, the date fixed for redemption, at any time, in the event of certain changes affecting taxation as provided in the JPY Indenture.

KFN Issued 5.200% Notes Due 2033

On February 12, 2018, KFN issued $120.0 million aggregate principal amount of 5.200% Senior Notes due 2033 (the "KFN 2033 Senior Notes"). The KFN 2033 Senior Notes are unsecured and unsubordinated obligations of KFN, which do not provide for recourse to KKR beyond the assets of KFN. The KFN 2033 Senior Notes are not guaranteed by the Guarantors. The KFN 2033 Senior Notes will mature on February 12, 2033, unless earlier redeemed or repurchased. The KFN 2033 Senior Notes bear interest at a rate of 5.200% per annum, accruing from February 12, 2018. Interest is payable semi-annually in arrears on February 12 and August 12 of each year.
The indenture, as supplemented by a first supplemental indenture, relating to the KFN 2033 Senior Notes includes covenants, including (i) limitations on KFN's ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of certain of its subsidiaries or merge, consolidate or sell, transfer or lease assets, (ii) requirements that KFN maintain a minimum Consolidated Net Worth (as defined in the indenture) and (iii) requirements that KFN maintain a minimum Cash and Liquid Investments (as defined in the indenture). 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 KFN 2033 Senior Notes may declare the KFN 2033 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 KFN 2033 Senior Notes and any accrued and unpaid interest on the KFN 2033 Senior Notes automatically becomes due and payable.

46

Notes to Condensed Consolidated Financial Statements (Continued)

Beginning on February 12, 2023, KFN may redeem the KFN 2033 Senior Notes in whole, but not in part, at KFN's option, at a redemption price equal to  100%  of the outstanding principal amount plus accrued and unpaid interest to, but excluding, the date of redemption. At any time prior to February 12, 2023, KFN may redeem the KFN 2033 Senior Notes in whole, but not in part, at KFN's option at any time, at a "make-whole" redemption price set forth in the KFN 2033 Senior Notes. If a change of control occurs, the KFN 2033 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 KFN 2033 Senior Notes repurchased plus any accrued and unpaid interest on the KFN 2033 Senior Notes repurchased to, but not including, the date of repurchase.
KFN Issued 5.400% Notes Due 2033

On May 23, 2018, KFN issued  $70.0 million  aggregate principal amount of  5.400%  Senior Notes due 2033 (the "KFN 5.400% Senior Notes"). The KFN 5.400% Senior Notes are unsecured and unsubordinated obligations of KFN, which do not provide for recourse to KKR beyond the assets of KFN. The KFN 5.400% Senior Notes are not guaranteed by the Guarantors. The KFN 5.400% Senior Notes will mature on May 23, 2033, unless earlier redeemed or repurchased. The KFN 5.400% Senior Notes bear interest at a rate of  5.400%  per annum, accruing from May 23, 2018. Interest is payable semi-annually in arrears on May 23 and November 23 of each year.

The indenture, as supplemented by a second supplemental indenture, relating to the KFN 5.400% Senior Notes includes covenants, including (i) limitations on KFN's ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of certain of its subsidiaries or merge, consolidate or sell, transfer or lease assets, (ii) requirements that KFN maintain a minimum Consolidated Net Worth (as defined in the indenture) and (iii) requirements that KFN maintain minimum Cash and Liquid Investments (as defined in the indenture). 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 KFN 5.400% Senior Notes may declare the KFN 5.400% 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 KFN 5.400% Senior Notes and any accrued and unpaid interest on the KFN 5.400% Senior Notes automatically becomes due and payable.

Beginning on May 23, 2023, KFN may redeem the KFN 5.400% Senior Notes in whole, but not in part, at KFN's option, at a redemption price equal to  100%  of the outstanding principal amount plus accrued and unpaid interest to, but excluding, the date of redemption. At any time prior to May 23, 2023, KFN may redeem the KFN 5.400% Senior Notes in whole, but not in part, at KFN's option at any time, at a "make-whole" redemption price set forth in the KFN 5.400% Senior Notes. If a change of control occurs, the KFN 5.400% 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 KFN 5.400% Senior Notes repurchased plus any accrued and unpaid interest on the KFN 5.400% Senior Notes repurchased to, but not including, the date of repurchase.

Other Debt Obligations

Financing Facilities of Consolidated Funds and Other
Certain of KKR's consolidated investment funds have entered into financing arrangements with financial institutions, generally to provide liquidity to such investment funds. These financing arrangements are generally not direct obligations of the general partners of KKR's investment funds, beyond KKR's capital interest, or its management companies. Such borrowings have varying maturities and bear interest at floating rates. Borrowings are generally secured by the investment purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective fund. When an investment vehicle borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or KKR. Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or KKR.

Certain investments and other assets held directly by majority-owned investment vehicles have been funded with borrowings that are collateralized by the investments and assets they own. These borrowings are non-recourse to KKR beyond the investments and assets serving as collateral. Such borrowings have varying maturities and generally bear interest at fixed rates.





47

Notes to Condensed Consolidated Financial Statements (Continued)

Debt Obligations of Consolidated CFEs
 
As of September 30, 2018 , debt obligations of consolidated CFEs consisted of the following: 
    
 
Borrowing
Outstanding
 
Weighted
Average
Interest Rate
 
Weighted Average
Remaining
Maturity in Years
Senior Secured Notes of Consolidated CLOs
$
11,173,622

 
3.1
%
 
11.7
Subordinated Notes of Consolidated CLOs
388,881

 
(1)

 
12.0
Debt Obligations of Consolidated CMBS Vehicles
1,083,107

 
4.2
%
 
29.7
 
$
12,645,610

 
 

 
 
(1)
The subordinated notes 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 September 30, 2018 , the fair value of the consolidated CFE assets was $13.9 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 September 30, 2018 . KKR is in compliance with its debt covenants in all material respects as of September 30, 2018 .
 
 
 
 
 
 
 
 

48

Notes to Condensed Consolidated 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, the KKR Group Partnerships and certain of their 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.

Prior to the Conversion, KKR & Co. L.P.’s investment income and carried interest generally were not subject to U.S. corporate income taxes. Subsequent to the Conversion, all income earned by KKR & Co. Inc. is subject to U.S. corporate income taxes, which we believe will result in an overall higher income tax expense (or benefit) when compared to periods prior to the Conversion.

The Conversion resulted in KKR obtaining a partial step-up in the tax basis of certain assets that will be recovered as those assets are sold or the basis is amortized. On the date of the Conversion, we recorded an estimated net tax benefit and estimated net deferred tax asset of $257.1 million relating to this partial step-up in tax basis.  Our overall tax provision is based on, among other things, an estimate of the amount of such partial step-up in tax basis that is derived from an analysis of the basis of our unitholders in their ownership of KKR common units at December 31, 2017, as adjusted by partial information received by KKR for some trades made in KKR common units in 2018. While this information does not completely reflect the actual basis of our unitholders at June 30, 2018, our estimate is based on the most recent unitholder basis information available to us. The amount of partial step-up in tax basis cannot be finally determined until complete trading information with respect to common units of KKR & Co. L.P. for the six months ended June 30, 2018 becomes available. KKR does not currently expect such information to become available until late in the first quarter of 2019 (most likely after our Annual Report on Form 10-K is required to be filed), and the timing and the availability of this information is not within KKR’s control. Since the unitholder basis information currently available to us does not completely reflect the actual basis of our unitholders at June 30, 2018, the amount of partial step-up in tax basis as finally determined is expected to differ, possibly materially, from the current estimate, which in turn is expected to cause KKR’s income tax provision and effective tax rate under GAAP to differ, possibly to a material extent, from the current estimate described herein. If the amount of the partial step-up in tax basis as finally determined is higher than the current estimate, KKR would record a higher net tax benefit and an incrementally greater deferred tax asset, which would have the effect of decreasing the amount of taxes payable by KKR in the future. If the amount of partial step-up in tax basis as finally determined is lower than the current estimate, KKR would record a lower net tax benefit and an incrementally lower deferred tax asset, which would have the effect of increasing the amount of taxes payable by KKR in the future.

The effective tax rates were (10.6)% and 4.64% for the three months ended September 30, 2018 and 2017, respectively, and (1.50)% and 3.65% for the nine months ended September 30, 2018 and 2017, respectively. The effective tax rate differs from the statutory rate primarily due to the following: (i) 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, (ii) the tax benefit recognized as a result of the partial step-up in tax basis of certain assets as a result of the Conversion as described above and (iii) certain compensation charges attributable to KKR are not deductible for tax purposes.
 
On December 22, 2017, the 2017 Tax Act was enacted in the United States, which instituted fundamental changes to the taxation of multinational businesses. During the year ended December 31, 2017, the Company estimated that $96.4 million of deferred tax expense, recorded in connection with the remeasurement of certain deferred tax assets and liabilities at the reduced U.S. federal tax rate, and $1.5 million of expense, net of the reversal of the deferred tax liability related to unremitted foreign earnings, recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate in accordance with Staff Accounting Bulletin 118 ("SAB 118"). KKR filed its 2017 U.S. corporate income tax return in October 2018 and the actual tax impacts described above did not differ materially from the provisional amounts recorded in 2017. In accordance with SAB 118, accounting for the effects of the 2017 Tax Act is to be completed within one year of enactment and will be reflected in our financial statements as of and for the year ended December 31, 2018.

During the three and nine months ended September 30, 2018 , 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.


49

Notes to Condensed Consolidated Financial Statements (Continued)

12. EQUITY BASED COMPENSATION
 
The following table summarizes the expense associated with equity-based compensation for the three and nine months ended September 30, 2018 and 2017 , respectively.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Equity Incentive Plan Units
$
59,801

 
$
54,921

 
$
185,795

 
$
149,840

KKR Holdings Principal Awards
25,495

 
17,622

 
81,972

 
89,869

Total (1)
$
85,296

 
$
72,543

 
$
267,767

 
$
239,709

(1)
Includes $2,952 and $10,044 of equity based charges for the three and nine months ended September 30, 2018 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 Plan
 
Under the Equity Incentive Plan, KKR is permitted to grant equity awards representing ownership interests in KKR & Co. Inc. Class A common stock. Vested awards under the Equity Incentive Plan dilute KKR & Co. Inc. common stockholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR Group Partnerships.

The total number of Class A common stock that may be issued under the Equity Incentive Plan is equivalent to 15% of the number of fully diluted shares of Class A common stock outstanding, subject to annual adjustment. Equity awards have been granted under the Equity Incentive Plan 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 Class A 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. Class A 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 for shares granted subsequent to December 31, 2015.

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 Present
 
$
0.50

(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 rate 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.


50

Notes to Condensed Consolidated Financial Statements (Continued)

Market Condition Awards

On November 2, 2017, KKR's Co-Presidents and Co-Chief Operating Officers were each granted 2.5 million shares of KKR Class A common stock subject to a market price-based vesting condition ("Market Condition Awards"). These shares were granted under the Equity Incentive Plan. All of such shares will vest upon the market price of KKR Class A 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 September 30, 2018 , there was approximately $14.0 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 September 30, 2018 , there was approximately $380.7 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 2018
 
$
48.9

2019
 
167.9

2020
 
112.8

2021
 
39.2

2022
 
11.0

2023
 
0.9

Total
 
$
380.7



51

Notes to Condensed Consolidated Financial Statements (Continued)

A summary of the status of unvested awards granted under the Equity Incentive Plan, excluding Market Condition Awards as described above, from January 1, 2018 through September 30, 2018 is presented below:
 
Shares
 
Weighted
Average Grant
Date Fair Value
Balance, January 1, 2018
46,422,733

 
$
14.98

Granted
1,849,305

 
20.61

Vested
(10,242,975
)
 
13.65

Forfeitures
(2,027,024
)
 
14.12

Balance, September 30, 2018
36,002,039

 
$
15.70

 
The weighted average remaining vesting period over which unvested awards are expected to vest is 1.3 years .
 
A summary of the remaining vesting tranches of awards granted under the Equity Incentive Plan is presented below:
Vesting Date
 
Shares
October 1, 2018
 
5,753,904

April 1, 2019
 
9,206,688

October 1, 2019
 
4,471,831

April 1, 2020
 
6,455,250

October 1, 2020
 
3,453,424

April 1, 2021
 
3,337,989

October 1, 2021
 
1,976,345

April 1, 2022
 
118,158

October 1, 2022
 
1,137,278

October 1, 2023
 
91,172

 
 
36,002,039


KKR Holdings Awards

KKR Holdings units are exchangeable for KKR Group Partnership Units and allow for their exchange into Class A common stock of KKR & Co. Inc. on a one -for-one basis. As of September 30, 2018 and 2017, KKR Holdings owned approximately 36.6% or 303,106,993 units and 41.8% or 339,845,707 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 0.2% of the outstanding KKR Holdings units) have been granted as of September 30, 2018 .
    
The fair value of awards granted out of KKR Holdings is generally based on the closing price of KKR & Co. Inc. Class A 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. Class A 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. Class A 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. Class A common stock on a one -for-one basis.


52

Notes to Condensed Consolidated Financial Statements (Continued)

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. Class A common stock on a fully-diluted basis. If and when vested, these awards will not dilute KKR's respective ownership interests in the KKR Group Partnerships.
    
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 Plan.

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 September 30, 2018 , there was approximately $281.7 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 2018
 
$
25.0

2019
 
96.1

2020
 
87.9

2021
 
47.4

2022
 
25.3

Total
 
$
281.7


A summary of the status of unvested awards granted under the KKR Holdings Plan from January 1, 2018 through September 30, 2018 is presented below:
 
Units
 
Weighted
Average Grant
Date Fair Value
Balance, January 1, 2018
30,848,583

 
$
14.42

Granted
450,000

 
20.90

Vested
(4,524,590
)
 
13.37

Forfeitures
(680,000
)
 
11.99

Balance, September 30, 2018
26,093,993

 
$
14.78


The weighted average remaining vesting period over which unvested awards are expected to vest is 2.0 years.


53

Notes to Condensed Consolidated Financial Statements (Continued)

A summary of the remaining vesting tranches of awards granted under the KKR Holdings Plan is presented below:
Vesting Date
 
Units
October 1, 2018
 
1,970,000

April 1, 2019
 
229,514

May 1, 2019
 
3,680,000

October 1, 2019
 
2,455,000

April 1, 2020
 
124,479

May 1, 2020
 
3,680,000

October 1, 2020
 
2,940,000

May 1, 2021
 
3,680,000

October 1, 2021
 
3,425,000

October 1, 2022
 
3,910,000

 
 
26,093,993



13. RELATED PARTY TRANSACTIONS
 
Due from Affiliates consists of:
 
September 30, 2018
 
December 31, 2017
Amounts due from portfolio companies
$
102,183

 
$
129,594

Amounts due from unconsolidated investment funds
571,470

 
415,907

Amounts due from related entities
8,354

 
8,848

Due from Affiliates
$
682,007

 
$
554,349



Due to Affiliates consists of:
 
September 30, 2018
 
December 31, 2017
Amounts due to KKR Holdings in connection with the tax receivable agreement
$
96,993

 
$
84,034

Amounts due to unconsolidated investment funds
155,554

 
239,776

Due to Affiliates
$
252,547

 
$
323,810




54

Notes to Condensed Consolidated Financial Statements (Continued)

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. 

KKR’s segment reporting is presented prior to giving effect to the allocation of income (loss) between KKR & Co. Inc. and KKR Holdings L.P. and as such represents the business in total. In addition, KKR’s segment reporting is presented without giving effect to the consolidation of the investment funds and CFEs that KKR manages as well as other consolidated entities that are not subsidiaries of KKR & Co. Inc. The segment measures used in KKR’s segment reporting, including segment revenues, segment expenses, after-tax distributable earnings and segment assets, are used by management in making operational and resource deployment decisions as well as assessing the overall performance of KKR’s business.

After-tax Distributable Earnings

After-tax distributable earnings is a measure of KKR’s earnings on a segment basis excluding mark-to-market gains (losses). Starting with the second quarter of 2018, it is defined as the amount of realized earnings of KKR that would be available for distribution as dividends to Class A common stockholders for a given reporting period, after deducting equity-based compensation. KKR revised the definition of after-tax distributable earnings starting in the second quarter of 2018 because it currently reflects how the chief operating decision makers allocate resources and assess performance of KKR’s business. KKR believes that after-tax distributable earnings is useful to stockholders as it aligns KKR’s net realization performance with the manner in which KKR receives its revenues and determines the compensation of its employees. After-tax distributable earnings does not represent and is not used to calculate actual dividends under KKR’s dividend policy. Historically, equity-based compensation expense relating to the Equity Incentive Plan was not reflected in the calculation of after-tax distributable earnings. Under KKR’s current segment presentation, equity-based compensation expense is included in after-tax distributable earnings as a component of compensation expense in order to reflect the dilutive nature of these non-cash equity-based awards. For comparability, after-tax distributable earnings for the comparable prior periods have been calculated using this new definition.

Modification of Segment Information
In connection with a change to KKR's chief operating decision makers, KKR's management has reevaluated the manner in which it makes operational and resource deployment decisions and assesses the overall performance of KKR's business. Effective with the three months ended June 30, 2018, the items detailed below have changed with respect to the preparation of the reports used by KKR's chief operating decision makers. As a result, KKR has modified the presentation of its segment financial information effective as of and for the three months ended June 30, 2018, with retrospective application to all prior periods presented.
         The most significant changes between KKR's current segment presentation and its previous segment presentation reported prior to the three months ended June 30, 2018, are as follows:

After-tax Distributable Earnings - After-tax distributable earnings is the performance measure for KKR's profitability and is used by management in making operational and resource deployment decisions since after-tax distributable earnings aligns KKR's net realized performance with the manner in which KKR receives its revenues and determines the compensation of its employees. Previously, economic net income was a key performance measure. The key distinction between after-tax distributable earnings and economic net income is that after-tax distributable earnings reflects the earnings of KKR excluding mark-to-market gains (losses).

Single Reportable Segment - KKR operates through one operating and reportable segment as the chief operating decision makers assess performance of and allocate resources to all of its business lines on a collective basis. These performance assessments and resource allocation decisions are based both on individual and group performance and on broad considerations reflecting KKR's "one-firm approach," which includes operating collaboratively across business lines with predominantly a single expense pool. Historically, KKR operated as four reportable segments.

Elimination of Expense Allocation Process - In previous periods, certain expenses were allocated among four historical reportable segments. For the reasons discussed above, a majority of our expenses, namely compensation expense and interest expense, are not specifically allocated among our business lines. Accordingly, KKR has eliminated the expense allocation process that was used in prior periods.


55

Notes to Condensed Consolidated Financial Statements (Continued)

Inclusion of Equity Based Compensation in After-tax Distributable Earnings - Historically, equity-based compensation expense relating to the Equity Incentive Plan was not reflected in our calculation of after-tax distributable earnings. Under KKR's current segment presentation, equity-based compensation expense is included in after-tax distributable earnings as a component of compensation expense in order to reflect the dilutive nature of these non-cash equity-based awards. For comparability, after-tax distributable earnings for the comparable prior periods have been calculated using this new definition.

Interest Expense Excluded from Segment Revenues - Historically, KKR's interest expense on its debt capital was allocated entirely to the Principal Activities business line (one of the four historical reportable segments) as a reduction of investment income. As such, interest expense was included as a reduction to total segment revenues. Under KKR's current segment presentation, interest expense is not allocated among its business lines, as its debt capital supports KKR's entire business and not just the Principal Activities business line. As such, KKR's current segment presentation excludes interest expense from total segment revenues.

         In connection with these modifications, segment information as of and for the three and nine months ended September 30, 2017 has been presented in this Quarterly Report on Form 10-Q to conform to KKR's current segment presentation for comparability purposes. Consequently, this information will be different from the historical segment financial results previously reported by KKR in its reports filed with the SEC.




56

Notes to Condensed Consolidated Financial Statements (Continued)

The following tables set forth information regarding KKR's segment results.

 
 
 
 
 
 
 
As of and for the Three Months Ended
 
As of and for the Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Segment Revenues
 
 
 
 
 
 
 
 
Fees and Other, Net
 
 
 
 
 
 
 
 
Management Fees
 
$
276,595

 
$
232,954

 
$
789,630

 
$
670,807

Transaction Fees
 
289,030

 
179,167

 
609,800

 
578,667

Monitoring Fees
 
20,176

 
14,342

 
63,100

 
58,072

Fee Credits
 
(82,187
)
 
(70,747
)
 
(178,982
)
 
(211,148
)
Total Fees and Other, Net
 
503,614

 
355,716

 
1,283,548

 
1,096,398

 
 
 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
 
 
Carried Interest
 
414,609

 
419,438

 
959,253

 
890,310

Incentive Fees
 
18,001

 
4,074

 
52,059

 
8,384

Total Realized Performance Income (Loss)
 
432,610

 
423,512

 
1,011,312

 
898,694

 
 
 
 
 
 
 
 
 
Realized Investment Income (Loss)
 
 
 
 
 
 
 
 
Net Realized Gains (Losses) (1)  
 
181,026

 
76,053

 
286,381

 
162,684

Interest Income and Dividends
 
61,717

 
70,557

 
205,522

 
195,275

Total Realized Investment Income (Loss)
 
242,743

 
146,610

 
491,903

 
357,959

Total Segment Revenues
 
$
1,178,967

 
$
925,838

 
$
2,786,763

 
$
2,353,051

 
 
 
 
 
 
 
 
 
Segment Expenses
 
 
 
 
 
 
 
 
Compensation and Benefits (2)
 
469,107

 
363,247

 
1,138,149

 
933,107

Occupancy and Related Charges
 
14,571

 
14,672

 
42,819

 
42,448

Other Operating Expenses (3)
 
73,402

 
70,517

 
194,868

 
177,084

Total Segment Expenses
 
$
557,080

 
$
448,436

 
$
1,375,836

 
$
1,152,639

 
 
 
 
 
 
 
 
 
Segment Operating Earnings
 
621,887

 
477,402

 
1,410,927

 
1,200,412

 
 
 
 
 
 
 
 
 
Interest Expense
 
44,696

 
45,613

 
140,362

 
134,348

Preferred Dividends
 
8,341

 
8,341

 
25,023

 
25,023

Income (Loss) Attributable to Noncontrolling Interests
 
2,272

 
1,046

 
4,557

 
3,810

Income Taxes Paid
 
69,880

 
12,869

 
103,868

 
54,228

After-tax Distributable Earnings
 
$
496,698

 
$
409,533

 
$
1,137,117

 
$
983,003

 
 
 
 
 
 
 
 
 
Total Segment Assets
 
$
18,772,875

 
$
15,347,999

 
$
18,772,875

 
$
15,347,999


(1)
Given the extraordinary nature of the Conversion, the reported segment financial results for the nine months ended September 30, 2018 exclude approximately $729.4 million of losses on certain investments which were realized in the second quarter in advance of the Conversion.
(2)
Includes equity-based compensation of $59,801 and $54,921 for the three months ended September 30, 2018 and 2017 , respectively, and $185,795 and $149,840 for the nine months ended September 30, 2018 and 2017 , respectively.
(3)
For the nine months ended September 30, 2018, excludes approximately $11.5 million of non-recurring costs in connection with the Conversion.



57

Notes to Condensed Consolidated Financial Statements (Continued)

KKR's business lines are differentiated primarily by their business objectives, investment strategies and sources of revenue, and are summarized below.

Through KKR's Private Markets business line, KKR manages and sponsors private equity funds and co-investment vehicles, which invest capital for long-term appreciation, either through controlling ownership of a company or strategic minority positions. In addition to its traditional private equity funds, KKR sponsors investment funds that invest in growth equity and core equity investments. KKR also manages and sponsors investment funds and co-investment vehicles that invest capital in real assets, such as infrastructure, energy and real estate.
 
Through KKR's Public Markets business line, KKR operates its combined credit and hedge funds platforms. KKR's credit platform invests capital in leveraged credit strategies, including leveraged loans, high-yield bonds, opportunistic credit and revolving credit strategies, and alternative credit strategies including special situations and private credit opportunities, such as direct lending and private opportunistic credit investment strategies. KKR's hedge funds platform consists of hedge fund partnerships with third-party hedge fund managers in which KKR owns a minority stake.
 
KKR's Capital Markets business line supports the firm, portfolio companies, and third-party clients by developing and implementing both traditional and non-traditional capital solutions for investments or companies seeking financing. These services include arranging debt and equity financing, placing and underwriting securities offerings and providing other types of capital markets services.

Through KKR's Principal Activities business line, KKR manages the firm's assets and deploys capital to support and grow its business lines including making capital commitments as general partner to its funds, to seed new business strategies or investments for new funds or to bridge capital selectively for its funds' investments. The Principal Activities business line also provides the required capital to fund the various commitments of KKR's Capital Markets business line or to meet regulatory capital requirements.


58

Notes to Condensed Consolidated Financial Statements (Continued)

The following tables provide KKR's segment revenues on a disaggregated basis by business line for the three and nine months ended September 30, 2018 and 2017 :
 
 
Three Months Ended September 30, 2018
 
 
Private Markets
 
Public Markets
 
Capital Markets
 
Principal Activities
 
Total
Fees and Other, Net
 
 
 
 
 
 
 
 
 
 
Management Fees
 
$
176,071

 
$
100,524

 
$

 
$

 
$
276,595

Transaction Fees
 
93,866

 
8,666

 
186,498

 

 
289,030

Monitoring Fees
 
20,176

 

 

 

 
20,176

Fee Credits
 
(73,571
)
 
(8,616
)
 

 

 
(82,187
)
Total Fees and Other, Net
 
216,542

 
100,574

 
186,498

 

 
503,614

 
 
 
 
 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
 
 
 
 
Carried Interest
 
404,709

 
9,900

 

 

 
414,609

Incentive Fees
 

 
18,001

 

 

 
18,001

Total Realized Performance Income (Loss)
 
404,709

 
27,901

 

 

 
432,610

 
 
 
 
 
 
 
 
 
 
 
Realized Investment Income (Loss)
 
 
 
 
 
 
 
 
 
 
Net Realized Gains (Losses)
 

 

 

 
181,026

 
181,026

Interest Income and Dividends
 

 

 

 
61,717

 
61,717

Total Realized Investment Income (Loss)
 

 

 

 
242,743

 
242,743

Total
 
$
621,251

 
$
128,475

 
$
186,498

 
$
242,743

 
$
1,178,967

 
 
 
 
 
 
 
 
 
 
 


 
 
Three Months Ended September 30, 2017
 
 
Private Markets
 
Public Markets
 
Capital Markets
 
Principal Activities
 
Total
Fees and Other, Net
 
 
 
 
 
 
 
 
 
 
Management Fees
 
$
153,841

 
$
79,113

 
$

 
$

 
$
232,954

Transaction Fees
 
82,258

 
11,469

 
85,440

 

 
179,167

Monitoring Fees
 
14,342

 

 

 

 
14,342

Fee Credits
 
(59,854
)
 
(10,893
)
 

 

 
(70,747
)
Total Fees and Other, Net
 
190,587

 
79,689

 
85,440

 

 
355,716

 
 
 
 
 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
 
 
 
 
Carried Interest
 
419,438

 

 

 

 
419,438

Incentive Fees
 

 
4,074

 

 

 
4,074

Total Realized Performance Income (Loss)
 
419,438

 
4,074

 

 

 
423,512

 
 
 
 
 
 
 
 
 
 
 
Realized Investment Income (Loss)
 
 
 
 
 
 
 
 
 
 
Net Realized Gains (Losses)
 

 

 

 
76,053

 
76,053

Interest Income and Dividends
 

 

 

 
70,557

 
70,557

Total Realized Investment Income (Loss)
 

 

 

 
146,610

 
146,610

Total
 
$
610,025

 
$
83,763

 
$
85,440

 
$
146,610

 
$
925,838

 
 
 
 
 
 
 
 
 
 
 


59

Notes to Condensed Consolidated Financial Statements (Continued)

 
 
Nine Months Ended September 30, 2018
 
 
Private Markets
 
Public Markets
 
Capital Markets
 
Principal Activities
 
Total
Fees and Other, Net
 
 
 
 
 
 
 
 
 
 
Management Fees
 
$
490,556

 
$
299,074

 
$

 
$

 
$
789,630

Transaction Fees
 
189,122

 
21,897

 
398,781

 

 
609,800

Monitoring Fees
 
63,100

 

 

 

 
63,100

Fee Credits
 
(158,163
)
 
(20,819
)
 

 

 
(178,982
)
Total Fees and Other, Net
 
584,615

 
300,152

 
398,781

 

 
1,283,548

 
 
 
 
 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
 
 
 
 
Carried Interest
 
949,353

 
9,900

 

 

 
959,253

Incentive Fees
 

 
52,059

 

 

 
52,059

Total Realized Performance Income (Loss)
 
949,353

 
61,959

 

 

 
1,011,312

 
 
 
 
 
 
 
 
 
 
 
Realized Investment Income (Loss)
 
 
 
 
 
 
 
 
 
 
Net Realized Gains (Losses)
 

 

 

 
286,381

 
286,381

Interest Income and Dividends
 

 

 

 
205,522

 
205,522

Total Realized Investment Income (Loss)
 

 

 

 
491,903

 
491,903

Total
 
$
1,533,968

 
$
362,111

 
$
398,781

 
$
491,903

 
$
2,786,763

 
 
 
 
 
 
 
 
 
 
 


 
 
Nine Months Ended September 30, 2017
 
 
Private Markets
 
Public Markets
 
Capital Markets
 
Principal Activities
 
Total
Fees and Other, Net
 
 
 
 
 
 
 
 
 
 
Management Fees
 
$
419,606

 
$
251,201

 
$

 
$

 
$
670,807

Transaction Fees
 
237,392

 
41,040

 
300,235

 

 
578,667

Monitoring Fees
 
58,072

 

 

 

 
58,072

Fee Credits
 
(177,254
)
 
(33,894
)
 

 

 
(211,148
)
Total Fees and Other, Net
 
537,816

 
258,347

 
300,235

 

 
1,096,398

 
 
 
 
 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
 
 
 
 
Carried Interest
 
890,310

 

 

 

 
890,310

Incentive Fees
 

 
8,384

 

 

 
8,384

Total Realized Performance Income (Loss)
 
890,310

 
8,384

 

 

 
898,694

 
 
 
 
 
 
 
 
 
 
 
Realized Investment Income (Loss)
 
 
 
 
 
 
 
 
 
 
Net Realized Gains (Losses)
 

 

 

 
162,684

 
162,684

Interest Income and Dividends
 

 

 

 
195,275

 
195,275

Total Realized Investment Income (Loss)
 

 

 

 
357,959

 
357,959

Total
 
$
1,428,126

 
$
266,731

 
$
300,235

 
$
357,959

 
$
2,353,051

 
 
 
 
 
 
 
 
 
 
 



60

Notes to Condensed Consolidated Financial Statements (Continued)

The following tables reconcile the most directly comparable financial measures calculated and presented in accordance with GAAP to KKR's segment information: 

Revenues

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Total GAAP Revenues
 
$
1,129,666

 
$
749,652

 
$
2,573,892

 
$
2,533,207

Add: Management Fees - Consolidated Funds and Other
 
104,356

 
53,454

 
270,383

 
155,418

Deduct: Fee Credits - Consolidated Funds
 
8,283

 
106

 
41,178

 
3,752

Deduct: Capital Allocation-Based Income (GAAP)
 
638,163

 
394,234

 
1,274,149

 
1,416,825

Add: Segment Realized Carried Interest
 
414,609

 
419,438

 
959,253

 
890,310

Add: Segment Realized Investment Income (Loss)
 
242,743

 
146,610

 
491,903

 
357,959

Deduct: Revenue Earned by Other Consolidated Entities
 
27,749

 
21,470

 
84,342

 
76,135

Deduct: Expense Reimbursements
 
38,212

 
27,506

 
108,999

 
87,131

Total Segment Revenues
 
$
1,178,967

 
$
925,838

 
$
2,786,763

 
$
2,353,051


 
Expenses

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Total GAAP Expenses
 
$
740,090

 
$
530,247

 
$
1,851,741

 
$
1,699,989

Deduct: Equity-based and Other Compensation - KKR Holdings L.P.
 
25,327

 
23,807

 
87,269

 
127,864

Deduct: Segment Unrealized Performance Income Compensation
 
57,407

 
(19,826
)
 
81,376

 
157,162

Deduct: Amortization of Intangibles
 
681

 
2,473

 
7,028

 
13,901

Deduct: Reimbursable Expenses
 
43,382

 
35,098

 
125,787

 
107,335

Deduct: Operating Expenses relating to Other Consolidated Entities
 
37,845

 
43,818

 
135,268

 
121,691

Deduct: One-time Non-recurring Costs (1)
 

 

 
11,501

 

Add: Other
 
(18,368
)
 
3,559

 
(27,676
)
 
(19,397
)
Total Segment Expenses
 
$
557,080

 
$
448,436

 
$
1,375,836

 
$
1,152,639

(1)
Represents non-recurring costs in connection with the Conversion.

 

61

Notes to Condensed Consolidated Financial Statements (Continued)

Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
GAAP Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders
 
$
640,198

 
$
153,563

 
$
1,490,681

 
$
818,552

 
 
 
 
 
 
 
 
 
Add: Net Income (Loss) Attributable to Noncontrolling Interests held by KKR Holdings L.P.
 
293,659

 
115,434

 
864,520

 
637,146

Add: Equity-based and Other Compensation - KKR Holdings L.P.
 
25,537

 
23,807

 
87,479

 
127,864

Add: Amortization of Intangibles and Other, net
 
60,948

 
20,464

 
58,014

 
57,825

Add: One-time Non-recurring Costs (1)
 

 

 
11,501

 

Add: Realized Losses on Certain Investments (2)
 

 

 
729,425

 

Deduct: Unrealized Carried Interest
 
130,420

 
(59,638
)
 
182,130

 
377,707

Deduct: Net Unrealized Gains (Losses)
 
251,346

 
(50,902
)
 
1,849,077

 
461,111

Add: Unrealized Performance Income Compensation
 
57,407

 
(19,826
)
 
81,376

 
157,162

Add: Income Tax Provision
 
(129,405
)
 
18,420

 
(50,804
)
 
77,500

Deduct: Income Taxes Paid
 
69,880

 
12,869

 
103,868

 
54,228

 
 
 
 
 
 
 
 
 
After-tax Distributable Earnings
 
$
496,698

 
$
409,533

 
$
1,137,117

 
$
983,003

 
 
 
 
 
 
 
 
 
(1)
Represents non-recurring costs in connection with the Conversion.
(2)
Represents losses on certain investments which were realized in the second quarter in advance of the Conversion.

The items that reconcile KKR's reportable segment income (loss) attributable to noncontrolling interests to the corresponding consolidated amounts calculated and presented in accordance with GAAP for net income (loss) attributable to redeemable noncontrolling interests and income (loss) attributable to noncontrolling interests are primarily attributable to the impact of KKR Holdings L.P., KKR's consolidated funds and certain other entities.

Assets
 
As of September 30,
 
2018
 
2017
Total GAAP Assets
$
50,343,948

 
$
44,305,639

Deduct: Impact of Consolidation of Funds and Other Entities
30,354,674

 
27,524,641

Deduct: Carry Pool Reclassification from Liabilities
1,300,165

 
1,131,071

Add: Tax Reclassifications
83,766

 

Deduct: Impact of KKR Management Holdings Corp.

 
301,928

Total Segment Assets
$
18,772,875

 
$
15,347,999

 
 
 
 



62

Notes to Condensed Consolidated Financial Statements (Continued)

15. EQUITY

Stockholders' Equity

KKR & Co. Inc.'s common stock consists of Class A common stock, Class B common stock and Class C common stock. On July 1, 2018, as a result of the Conversion, (i) each outstanding common unit representing limited partner interests in KKR & Co. L.P. converted into one issued and outstanding, fully paid and nonassessable share of Class A common stock, (ii) each outstanding managing partner unit of KKR & Co. L.P. converted into one issued and outstanding, fully paid and nonassessable share of Class B common stock, and (iii) each outstanding special voting unit of KKR & Co. L.P. converted into one issued and outstanding, fully paid and nonassessable share of Class C common stock. KKR & Co. Inc.'s certificate of incorporation and bylaws provide stockholders with substantially the same rights and obligations that unitholders had immediately prior to the Conversion. Under the laws of the state of its incorporation, KKR & Co. Inc. is deemed to be the same entity as KKR & Co. L.P. In connection with the Conversion, each 6.75% Series A Preferred Unit and 6.50% Series B Preferred Unit of KKR & Co. L.P. was converted into one share of 6.75% Series A Preferred Stock ("Series A Preferred Stock") and 6.50% Series B Preferred Stock ("Series B Preferred Stock") of KKR & Co. Inc., respectively.

Upon Conversion, KKR's authorized capital stock consists of 5,000,000,000 shares, all with a par value of $0.01 per share, of which: (i) 3,500,000,000 are designated as Class A common stock; (ii) one is designated as Class B common stock; (iii) 499,999,999 are designated as Class C common stock; and (iv) 1,000,000,000 are designated as preferred stock, of which (a) 13,800,000 shares are designated as Series A Preferred Stock and (b) 6,200,000 shares are designated as Series B Preferred Stock.
Below is a summary of the reclassification from partnership equity accounts to equity accounts reflective of a corporation following the Conversion. See statements of changes in equity.
KKR & Co. L.P. Partners' Capital - Common Unitholders as of June 30, 2018
 
$
7,940,529

Less: Reclassifications to Class A Common Stock ($0.01 par value, 524,341,874 shares)
 
5,243

Less: Reclassifications to Class B Common Stock ($0.01 par value, 1 share)
 

Less: Reclassifications to Class C Common Stock ($0.01 par value, 304,107,762 shares)
 
3,041

Less: Reclassifications to Additional Paid-In Capital
 
7,932,245

KKR & Co. L.P. Partners' Capital - Common Unitholders as of July 1, 2018
 
$

Retained Earnings
Upon Conversion, there was no Retained Earnings as a corporation.
Accumulated Other Comprehensive Income (Loss)
There was no impact to Accumulated Other Comprehensive Income (Loss) upon Conversion.
Class A, Class B and Class C Common Stock
Class A common stock and Class C common stock are non-voting and are not entitled to vote on any matter that is generally subject to a vote of the stockholders, except as expressly provided in the certificate of incorporation and bylaws or required by Delaware law or the rules of the NYSE. Class B common stock is voting and is entitled to one vote per share on any matter that is submitted to a vote of the stockholders generally. For matters on which our Class A common stock is entitled to vote, as provided in the certificate of incorporation or bylaws or required by Delaware law or the rules of the NYSE, so long as the ratio at which KKR Group Partnership Units are exchangeable for Class A common stock remains on a one-for-one basis, Class C common stock will vote together with Class A common stock as a single class and on an equivalent basis unless required otherwise by Delaware law, except Class C common stock will vote separately as a class on any amendment to the certificate of incorporation that changes certain terms, rights or preference of Class C common stock.
The holder of Class B common stock and holders of Class C common stock do not have any economic rights to receive dividends or receive distributions upon the dissolution, liquidation or winding up of KKR. Class A common stock, Class B common stock and Class C common stock are not entitled to preemptive rights, and, except in the case of impermissible

63

Notes to Condensed Consolidated Financial Statements (Continued)

transfers of the Class B common stock, which would result in KKR’s redemption of such Class B common stock, are not subject to conversion, redemption or sinking fund provisions.
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).
As of September 30, 2018, the certificate of incorporation has designated two series of preferred stock, Series A Preferred Stock and Series B Preferred Stock, each of which is outstanding.
On March 17, 2016, KKR issued 13,800,000 shares of Series A Preferred Stock, and on June 20, 2016, KKR issued 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. The terms of the preferred stock are set forth in our certificate of incorporation.
If declared, dividends on 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 Series A Preferred Stock and Series B Preferred Stock are discretionary and non-cumulative. Holders of 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 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 Class A 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 dissolves, then the holders of 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.
Series A Preferred Stock and Series B Preferred Stock do not have a maturity date. However, Series A Preferred Stock may be redeemed at the issuer’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 the issuer’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, Series A Preferred Stock or Series B Preferred Stock, as applicable, may be redeemed at the issuer’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 Series A Preferred Stock, or September 15, 2021, in the case of 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 Series A Preferred Stock and Series B Preferred Stock.

64

Notes to Condensed Consolidated Financial Statements (Continued)

In connection with the issuance of Series A Preferred Stock and Series B Preferred Stock, the KKR Group Partnerships issued for the benefit of KKR & Co. Inc. corresponding series of preferred units with economic terms that mirror those of Series A Preferred Stock and Series B Preferred Stock, as applicable.
Share Repurchase Program

On May 3, 2018, KKR increased the available amount under its repurchase program to $500 million , which may be used for the repurchase of its shares of Class A common stock of KKR & Co. Inc. and retirement of equity awards issued pursuant to the Equity Incentive Plan (and any successor equity plan thereto). Under this repurchase program, shares of Class A 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. 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 any specific number of shares of Class A common stock of KKR & Co. Inc., and the program may be suspended, extended, modified or discontinued at any time. During the three and nine months ended September 30, 2018 , approximately 1.1 million and 3.3 million shares of Class A common stock, respectively, were repurchased pursuant to this program. There were no shares of Class A common stock repurchased pursuant to this program during the three and nine months ended September 30, 2017 .
Noncontrolling Interests
 
Noncontrolling interests represent (i) noncontrolling interests in consolidated entities and (ii) noncontrolling interests held by KKR Holdings. There was no impact to Noncontrolling Interests upon Conversion.
 
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 funds;
(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.

On January 16, 2018, KKR Financial Holdings LLC ("KFN") completed the redemption of all of its outstanding 7.375% Series A LLC Preferred Shares.
During the third quarter of 2018, all remaining holders of exchangeable equity securities representing ownership interests in a subsidiary of a KKR Group Partnership issued in connection with the acquisition of Avoca Capital ("Avoca") have exchanged such securities for shares of Class A common stock.

Noncontrolling Interests held by KKR Holdings
 
Noncontrolling interests held by KKR Holdings include economic interests held by principals in the KKR Group Partnerships. 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.


65

Notes to Condensed Consolidated Financial Statements (Continued)

The following tables present the calculation of total noncontrolling interests.
 
 
Nine Months Ended September 30,
 
 
2018
 
 
Noncontrolling Interests in Consolidated Entities
 
Noncontrolling Interests Held by KKR Holdings
 
Total Noncontrolling Interests
Balance at the beginning of the period
 
$
8,072,849

 
$
4,793,475

 
$
12,866,324

Net income (loss) attributable to noncontrolling interests (1)
 
1,121,441

 
864,520

 
1,985,961

Other comprehensive income (loss), net of tax (2)
 
(25,451
)
 
(13,676
)
 
(39,127
)
Exchange of KKR Holdings Units to Class A Common Stock and Other (3) 
 
(52,585
)
 
(501,600
)
 
(554,185
)
Equity-based and other non-cash compensation
 

 
87,479

 
87,479

Capital contributions
 
3,534,670

 
2,367

 
3,537,037

Capital distributions
 
(2,023,277
)
 
(167,950
)
 
(2,191,227
)
Changes in consolidation
 
370,307

 

 
370,307

Balance at the end of the period
 
$
10,997,954

 
$
5,064,615

 
$
16,062,569

(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 and other exchangeable securities exchanged for KKR & Co. Inc. Class A common stock during the reporting period. The exchange agreement with KKR Holdings provides for the exchange of KKR Group Partnership Units held by KKR Holdings for KKR & Co. Inc. Class A common stock.

Net income (loss) attributable to each of KKR & Co. Inc. Class A 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 holds equity of the KKR Group Partnerships. 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. Class A common stock pursuant to the exchange agreement and (iii) the contribution of certain expenses borne entirely by KKR associated with the Equity Incentive Plan, equity allocations shown in the condensed 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 September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
1,352,269

 
$
378,938

 
$
3,521,559

 
$
2,045,356

Less: Net income (loss) attributable to Redeemable Noncontrolling Interests
12,236

 
20,876

 
19,894

 
64,196

Less: Net income (loss) attributable to Noncontrolling Interests in consolidated entities
397,835

 
80,724

 
1,121,441

 
500,439

Less: Preferred Stock Dividends
8,341

 
8,341

 
25,023

 
25,023

Plus: Income tax expense (benefit) attributable to KKR & Co. Inc.
(131,912
)
 
6,063

 
(84,947
)
 
30,571

Net income (loss) attributable to KKR & Co. Inc. Class A Common Stockholders and KKR Holdings
$
801,945

 
$
275,060

 
$
2,270,254

 
$
1,486,269

 
 
 
 
 
 
 
 
Net income (loss) attributable to Noncontrolling Interests held by KKR Holdings
$
293,659

 
$
115,434

 
$
864,520

 
$
637,146



66

Notes to Condensed Consolidated Financial Statements (Continued)

Redeemable Noncontrolling Interests
 
Redeemable Noncontrolling Interests represent noncontrolling interests of certain investment funds and vehicles that are subject to periodic redemption by fund investors following the expiration of a specified period of time (typically one year), or may be withdrawn subject to a redemption fee during the period when capital may not be otherwise withdrawn. Fund investors interests subject to redemption as described above are presented as Redeemable Noncontrolling Interests in the accompanying condensed consolidated statements of financial condition and presented as Net Income (Loss) Attributable to Redeemable Noncontrolling Interests in the accompanying condensed consolidated statements of operations. There was no impact to Redeemable Noncontrolling Interests upon Conversion.
 
When redeemable amounts become legally payable to fund investors, they are classified as a liability and included in Accounts Payable, Accrued Expenses and Other Liabilities in the accompanying condensed consolidated statements of financial condition. For all consolidated investment vehicles and funds in which redemption rights have not been granted, noncontrolling interests are presented within Stockholders' Equity in the accompanying condensed consolidated statements of financial condition as noncontrolling interests.

The following table presents the rollforward of Redeemable Noncontrolling Interests:
 
 
Nine Months Ended
September 30,
 
 
2018
Balance at the beginning of the period
 
$
610,540

Net income (loss) attributable to Redeemable Noncontrolling Interests
 
19,894

Capital contributions
 
450,330

Capital distributions
 
(10,189
)
Balance at the end of the period
 
$
1,070,575


Transfer of Interests Under Common Control and Other

On March 30, 2017, KKR reorganized KKR's Indian capital markets and credit asset management businesses to create KKR India Financial Investments Pte. Ltd. ("KIFL"). This reorganization transaction was accounted for as a transfer of interests under common control, and the difference between KKR's carrying value before and after the transaction was treated as a reallocation of equity interests. No gain or loss was recognized in the condensed consolidated financial statements.

On November 24, 2017, KIFL issued equity to an unaffiliated third-party. This transaction was accounted for as a subsidiary's direct issuance of its equity to third-parties, and the difference between KKR's carrying value before and after the transaction was treated as a reallocation of equity interests. No gain or loss was recognized in the condensed consolidated financial statements.

Both transactions above resulted in an increase to KKR's equity and to noncontrolling interests held by KKR Holdings.


67

Notes to Condensed Consolidated Financial Statements (Continued)

16. COMMITMENTS AND CONTINGENCIES
 
Funding Commitments
 
As of September 30, 2018 , KKR had unfunded commitments consisting of  $5,055.9 million to its active private equity and other 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 September 30, 2018 , these commitments amounted to $28.6 million and $1,041.7 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. The unfunded commitments shown for KKR's Capital Markets business line are shown without reflecting arrangements that may reduce the actual amount of contractual commitments shown occurring after September 30, 2018 . KKR's capital markets business has an arrangement with a third party, which reduces its risk when underwriting certain debt transactions, and thus our unfunded commitments are reduced to reflect the amount to be funded by such a third party. 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.

Contingent Repayment Guarantees
 
The partnership documents governing KKR's carry-paying funds, including funds relating to private equity, infrastructure, energy, real estate, mezzanine, direct lending and special situations investments, 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 September 30, 2018 , no carried interest was subject to this clawback obligation, assuming that all applicable carry-paying funds were liquidated at their September 30, 2018 fair values. Had the investments in such funds been liquidated at zero value, the clawback obligation would have been approximately $2.0 billion . Carried interest is recognized in the condensed 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 condensed 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, certain of KKR's investment funds and KFN have provided certain indemnities relating to environmental and other matters and have provided nonrecourse carve-out guarantees for fraud, willful misconduct and other customary wrongful acts, each in connection with the financing of certain real estate investments that KKR has made and for certain investment vehicles that KKR manages. In addition, KKR has also provided 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, and KKR has also 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 has also provided credit support regarding repayment 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 to a strategic partner regarding the ownership of its business. KKR also may 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.


68

Notes to Condensed Consolidated Financial Statements (Continued)

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 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 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 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. REGULATORY CAPITAL REQUIREMENTS
 
KKR has registered broker-dealer subsidiaries which are subject to the minimum net capital requirements of the SEC and the FINRA. Additionally, KKR entities based in London and Dublin are subject to the regulatory capital requirements of the U.K. Financial Conduct Authority and the Central Bank of Ireland, respectively. In addition, KKR has an entity based in Hong Kong which is subject to the capital requirements of the Hong Kong Securities and Futures Ordinance, an entity based in Tokyo subject to the capital requirements of Financial Services Authority of Japan, and two entities based in Mumbai which are subject to capital requirements of the Reserve Bank of India and the Securities and Exchange Board of India. All of these entities have continuously operated in excess of their respective minimum regulatory capital requirements.
 The regulatory capital requirements referred to above may restrict KKR's ability to withdraw capital from its registered broker-dealer entities. At September 30, 2018 , approximately $153.3 million of cash at KKR's registered broker-dealer entities may be restricted as to the payment of cash dividends and advances to KKR.
 

69

Notes to Condensed Consolidated Financial Statements (Continued)

18. SUBSEQUENT EVENTS
 
Common Stock Dividend
 
A dividend of $0.125 per share of Class A common stock of KKR & Co. Inc. was announced on October 25, 2018 , and will be paid on November 20, 2018 to Class A common stockholders of record as of the close of business on November 5, 2018 . KKR Holdings will receive its pro rata share of the distribution from the KKR Group Partnerships.

Preferred Stock Dividend

A dividend of $0.421875 per share of Series A Preferred Stock has been declared as announced on October 25, 2018 and set aside for payment on December 17, 2018 to holders of record of Series A Preferred Stock as of the close of business on December 1, 2018 .

A dividend of $0.406250 per share of Series B Preferred Stock has been declared as announced on October 25, 2018 and set aside for payment on December 17, 2018 to holders of record of Series B Preferred Stock as of the close of business on December 1, 2018 .

Investment in Marshall Wace

Due to the exercise of one of the options agreed to between Marshall Wace and KKR, KKR expects to acquire an additional 5.0% interest in Marshall Wace in the fourth quarter of 2018. The acquisition is expected to be completed with a combination of cash and shares of Class A common stock.




70



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of KKR & Co. Inc., together with its consolidated subsidiaries, and the related notes included elsewhere in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 23,
2018 (our "Annual Report"), including the audited consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. The historical condensed consolidated financial data discussed below reflects the historical results and financial position of KKR. In addition, this discussion and analysis contains forward looking statements and involves numerous risks and uncertainties, including those described under "Cautionary Note Regarding Forward-looking Statements" and “Risk Factors" in this report, our Annual Report and other quarterly reports. Actual results may differ materially from those contained in any forward looking statements.
 
Overview
 
We are a leading global investment firm that manages multiple alternative asset classes including private equity, energy, infrastructure, real estate, and credit, and with strategic partners that manage hedge funds. We aim to generate attractive investment returns for our fund investors by following a patient and disciplined investment approach, employing world-class people, and driving growth and value creation with our portfolio companies. We invest our own capital alongside the capital we manage for fund investors and provide financing solutions and investment opportunities through our capital markets business.
Our business offers a broad range of investment management services to our fund investors and provides capital markets services to our firm, our portfolio companies, and third parties. Throughout our history, we have consistently been a leader in the private equity industry, having completed more than 335 private equity investments in portfolio companies with a total transaction value in excess of $580 billion as of September 30, 2018 . We have grown our firm by expanding our geographical presence and building businesses in areas such as leveraged credit, alternative credit, capital markets, infrastructure, energy, real estate, growth equity, and core investments. Our balance sheet has provided a significant source of capital in the growth and expansion of our business and has allowed us to further align our interests with those of our fund investors. Building on these efforts and leveraging our industry expertise and intellectual capital have allowed us to capitalize on a broader range of the opportunities we source. Additionally, we have increased our focus on meeting the needs of our existing fund investors and in developing relationships with new investors in our funds.
KKR operates according to a “one-firm” philosophy. This means we seek to work proactively and collaboratively across business lines, departments, and geographies, as appropriate, to achieve what we believe are the best results for our funds, our clients, and the firm. Through our offices throughout the world, we have a pre-eminent global integrated platform for sourcing transactions, raising capital, and carrying out capital markets activities. Our growth has been driven by value that we have created through our operationally focused investment approach, the expansion of our existing businesses, our entry into new lines of business, innovation in the products that we offer investors in our funds, an increased focus on providing tailored solutions to our clients, and the integration of capital markets distribution activities.
As a global investment firm, we earn management, monitoring, transaction and incentive fees, and carried interest for providing investment management, monitoring, and other services to our funds, vehicles, CLOs, managed accounts, and portfolio companies, and we generate transaction-specific income from capital markets transactions. We earn additional investment income from investing our own capital alongside that of our fund investors from other assets on our balance sheet and from the carried interest we receive from our funds and certain of our other investment vehicles. A carried interest entitles the sponsor of a fund to a specified percentage of investment gains that are generated on third-party capital that is invested.
Our investment teams have deep industry knowledge and are supported by a substantial and diversified capital base; an integrated global investment platform; the expertise of operating consultants, senior advisors, and other advisors; and a worldwide network of business relationships that provide a significant source of investment opportunities, specialized knowledge during due diligence, and substantial resources for creating and realizing value for stakeholders. These teams invest capital, a substantial portion of which is of a long duration and not subject to redemption. As of September 30, 2018 , approximately 78% of our fee paying assets under management are not subject to redemption for at least 8 years from inception, providing us with significant flexibility to grow investments and select exit opportunities. We believe that these aspects of our business will help us continue to expand and grow our business and deliver strong investment performance in a variety of economic and financial conditions.

71

Table of Contents


Recent Developments
Our Conversion to a Corporation
On July 1, 2018, we completed our conversion from a Delaware limited partnership named KKR & Co. L.P. into a Delaware corporation named KKR & Co. Inc. (the "Conversion"). See “Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.

Our Business Lines

Private Markets
 
Through our Private Markets business line, we manage and sponsor a group of private equity funds that invest capital for long-term appreciation, either through controlling ownership of a company or strategic minority positions. In addition to our traditional private equity funds, we sponsor investment funds that invest in growth equity and core equity investments. We also manage and sponsor investment funds that invest capital in real assets, such as infrastructure, energy, and real estate. Our Private Markets business line includes separately managed accounts that invest in multiple strategies, which may include our credit strategies as well as our private equity and real assets strategies. These funds and accounts are managed by Kohlberg Kravis Roberts & Co. L.P., an SEC-registered investment adviser. As of September 30, 2018 , Private Markets business line had $103.7 billion of AUM and FPAUM of $66.1 billion , consisting of $44.5 billion in private equity (including growth equity and core investments) and $21.6 billion in real assets (including infrastructure, energy, and real estate) and other related strategies.


72

Table of Contents


The table below presents information as of September 30, 2018 , relating to our current private equity, growth equity, core investment, and real asset funds and other investment vehicles in our Private Markets business line for which we have the ability to earn carried interest. This data does not reflect acquisitions or disposals of investments, changes in investment values, or distributions occurring after September 30, 2018 .
 
 
Investment Period (1)
Amount ($ in millions)
 
 
Start
Date
End
Date
Commitment  (2)
Uncalled
Commitments
Percentage
Committed
by General
Partner
Invested
Realized
Remaining
Cost  (3)
Remaining
Fair Value
Gross Accrued
Carried
Interest
 
 
 
 

 

 
 

 

 

 

 
Private Equity and Growth Equity Funds
 
 
 

 

 
 

 

 

 

 
Asian Fund III (4)
4/2017
4/2023
$
9,000.0

$
7,733.5

5.6%
$
1,266.5

$

$
1,266.5

$
1,525.3

$
18.8

Americas Fund XII (4)
1/2017
1/2023
13,500.0

11,607.1

6.0%
1,892.9


1,892.9

2,401.3

41.0

Health Care Strategic Growth Fund (4)
12/2016
12/2021
1,331.0

1,233.5

11.3%
97.5


97.5

160.4

3.2

Next Generation Technology Growth Fund (4)
3/2016
3/2021
658.9

244.8

22.5%
414.1


414.1

668.1

24.0

European Fund IV (4)
12/2014
12/2020
3,511.9

1,325.4

5.6%
2,276.2

461.2

1,893.0

3,185.7

224.9

Asian Fund II (4)
4/2013
4/2017
5,825.0

649.2

1.3%
6,177.0

2,515.1

4,647.3

6,709.6

417.1

North America Fund XI (4)
9/2012
1/2017
8,718.4

851.9

2.9%
9,296.8

7,431.2

6,076.8

11,488.8

1,012.0

China Growth Fund
11/2010
11/2016
1,010.0


1.0%
1,010.0

721.8

584.2

585.7

0.3

European Fund III
3/2008
3/2014
5,562.3

225.5

5.1%
5,336.8

8,969.1

1,063.8

2,009.2

190.9

Asian Fund
7/2007
4/2013
3,983.3


2.5%
3,945.9

8,409.6

239.2

292.5

11.7

2006 Fund
9/2006
9/2012
17,642.2

337.7

2.1%
17,304.5

29,376.5

3,742.8

6,028.7

432.4

European Fund II
11/2005
10/2008
5,750.8


2.1%
5,750.8

8,479.3


59.0

4.7

Millennium Fund
12/2002
12/2008
6,000.0


2.5%
6,000.0

14,123.1

0.5

14.9

3.0

Private Equity and Growth Equity Funds
 
 
82,493.8

24,208.6

 
60,769.0

80,486.9

21,918.6

35,129.2

2,384.0

 
 
 
 
 
 
 
 
 
 
 
Co-Investment Vehicles and Other (4)
Various
Various
7,165.9

2,365.8

Various
5,006.7

3,402.2

3,395.2

5,135.4

482.6

 
 
 
 
 
 
 
 
 
 
 
Total Private Equity and Growth Equity Funds
 
 
89,659.7

26,574.4

 
65,775.7

83,889.1

25,313.8

40,264.6

2,866.6

 
 
 
 

 

 
 

 

 

 

 
Real Assets
 
 
 
 
 
 
 
 
 
 
Energy Income and Growth Fund (4)
9/2013
6/2018
1,974.2

59.3

12.9%
1,958.2

531.9

1,508.0

1,788.4


Natural Resources Fund
Various
Various
887.4

2.6

Various
884.8

115.9

201.5

178.4


Global Energy Opportunities (4)
Various
Various
979.2

334.4

Various
474.2

83.0

346.1

337.7

2.6

Global Infrastructure Investors (4)
9/2011
10/2014
1,040.2

25.4

4.8%
1,046.2

1,174.6

467.3

628.1

18.9

Global Infrastructure Investors II (4)
10/2014
6/2018
3,041.4

673.1

4.1%
2,591.4

260.8

2,360.9

2,972.4

58.0

Global Infrastructure Investors III (4)
6/2018
6/2024
7,182.0

7,182.0

3.8%





Real Estate Partners Americas (4)
5/2013
5/2017
1,229.1

352.7

16.3%
1,004.3

1,061.5

402.4

419.2

24.5

Real Estate Partners Americas II (4)
5/2017
12/2020
1,921.2

1,562.3

7.8%
358.9

10.8

355.8

402.5


Real Estate Partners Europe (4)
9/2015
6/2020
712.3

425.6

9.7%
297.0

19.1

284.4

345.7


Real Estate Credit Opportunity Partners (4)
2/2017
2/2019
1,130.0

458.5

4.4%
671.5

38.8

671.5

686.9

2.8

Co-Investment Vehicles and Other
Various
Various
2,138.4

743.9

Various
1,394.5

649.3

1,391.2

1,675.8

1.3

 
 
 
 
 
 
 
 
 
 
 
Real Assets
 
 
$
22,235.4

$
11,819.8

 
$
10,681.0

$
3,945.7

$
7,989.1

$
9,435.1

$
108.1

 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
Core Investment Vehicles (4)
Various
Various
9,500.0

6,560.7

36.8%
2,939.3


2,939.3

3,462.5

14.2

Unallocated Commitments (5)
 
 
3,149.8

3,149.8

Various





 
 
 
 
 
 
 
 
 
 
 
Private Markets Total
 
 
$
124,544.9

$
48,104.7

 
$
79,396.0

$
87,834.8

$
36,242.2

$
53,162.2

$
2,988.9

 
(1)
The start date represents the date on which the general partner of the applicable fund commenced investment of the fund's capital or the date of the first closing. The end date represents the earlier of (i) the date on which the general partner of the applicable fund was or will be required by the fund's governing agreement to cease making investments on behalf of the fund, unless extended by a vote of the fund investors, and (ii) the date on which the last investment was made.
(2)
The commitment represents the aggregate capital commitments to the fund, including capital commitments by third-party fund investors and the general partner. Foreign currency commitments have been converted into U.S. dollars based on (i) the foreign exchange rate at the date of purchase for each investment and (ii) the exchange rate that prevailed on September 30, 2018 , in the case of uncalled commitments.
(3)
The remaining cost represents the initial investment of the general partner and limited partners, with the limited partners' investment reduced for any return of capital and realized gains from which the general partner did not receive a carried interest.
(4)
The "Invested" and "Realized" columns include the amounts of any realized investments that restored the unused capital commitments of the fund investors, if any.
(5)
"Unallocated Commitments" represent unallocated commitments from our strategic investor partnerships.

73

Table of Contents


The table below presents information as of September 30, 2018 , relating to the historical performance of certain of our Private Markets investment vehicles since inception, which we believe illustrates the benefits of our investment approach. This data does not reflect additional capital raised since September 30, 2018 , or acquisitions or disposals of investments, changes in investment values or distributions occurring after that date. However, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of future results.
 
Amount
 
Fair Value of Investments
 
 
 
 
 
 
Private Markets Investment Funds
Commitment
Invested
 
Realized (4)
Unrealized
 
Total Value
 
Gross
IRR (5)
Net
IRR (5)
Gross Multiple of Invested
Capital (5)
($ in millions)
Legacy Funds (1)
 

 

 
 

 

 
 

 
 

 

 

1976 Fund
$
31.4

$
31.4

 
$
537.2

$

 
$
537.2

 
39.5
 %
35.5
 %
17.1

1980 Fund
356.8

356.8

 
1,827.8


 
1,827.8

 
29.0
 %
25.8
 %
5.1

1982 Fund
327.6

327.6

 
1,290.7


 
1,290.7

 
48.1
 %
39.2
 %
3.9

1984 Fund
1,000.0

1,000.0

 
5,963.5


 
5,963.5

 
34.5
 %
28.9
 %
6.0

1986 Fund
671.8

671.8

 
9,080.7


 
9,080.7

 
34.4
 %
28.9
 %
13.5

1987 Fund
6,129.6

6,129.6

 
14,949.2


 
14,949.2

 
12.1
 %
8.9
 %
2.4

1993 Fund
1,945.7

1,945.7

 
4,143.3


 
4,143.3

 
23.6
 %
16.8
 %
2.1

1996 Fund
6,011.6

6,011.6

 
12,476.9


 
12,476.9

 
18.0
 %
13.3
 %
2.1

Subtotal - Legacy Funds
16,474.5

16,474.5

 
50,269.3


 
50,269.3

 
26.1
 %
19.9
 %
3.1

Included Funds
 

 

 
 

 

 
 

 
 

 

 

European Fund (1999) (2)
3,085.4

3,085.4

 
8,757.7


 
8,757.7

 
26.9
 %
20.2
 %
2.8

Millennium Fund (2002)
6,000.0

6,000.0

 
14,123.1

14.9

 
14,138.0

 
22.0
 %
16.1
 %
2.4

European Fund II (2005) (2)
5,750.8

5,750.8

 
8,479.3

59.0

 
8,538.3

 
6.1
 %
4.5
 %
1.5

2006 Fund (2006)
17,642.2

17,304.5

 
29,376.5

6,028.7

 
35,405.2

 
11.9
 %
9.3
 %
2.0

Asian Fund (2007)
3,983.3

3,945.9

 
8,409.6

292.5

 
8,702.1

 
19.0
 %
13.8
 %
2.2

European Fund III (2008) (2)
5,562.3

5,336.8

 
8,969.1

2,009.2

 
10,978.3

 
17.2
 %
12.0
 %
2.1

E2 Investors (Annex Fund) (2009) (2)
195.8

195.8

 
199.6


 
199.6

 
0.6
 %
0.5
 %
1.0

China Growth Fund (2010)
1,010.0

1,010.0

 
721.8

585.7

 
1,307.5

 
8.5
 %
3.6
 %
1.3

Natural Resources Fund (2010)
887.4

884.8

 
115.9

178.4

 
294.3

 
(23.5
)%
(25.6
)%
0.3

Global Infrastructure Investors (2011) (2)  
1,040.2

1,046.2

 
1,174.6

628.1

 
1,802.7

 
15.0
 %
13.0
 %
1.7

North America Fund XI (2012)
8,718.4

9,296.8

 
7,431.2

11,488.8

 
18,920.0

 
27.1
 %
21.6
 %
2.0

Asian Fund II (2013)
5,825.0

6,177.0

 
2,515.1

6,709.6

 
9,224.7

 
19.1
 %
13.9
 %
1.5

Real Estate Partners Americas (2013)
1,229.1

1,004.3

 
1,061.5

419.2

 
1,480.7

 
19.6
 %
14.5
 %
1.5

Energy Income and Growth Fund (2013)
1,974.2

1,958.2

 
531.9

1,788.4

 
2,320.3

 
8.4
 %
5.6
 %
1.2

Global Infrastructure Investors II (2014) (2)
3,041.4

2,591.4

 
260.8

2,972.4

 
3,233.2

 
15.4
 %
12.5
 %
1.2

European Fund IV (2015) (2)
3,511.9

2,276.2

 
461.2

3,185.7

 
3,646.9

 
28.0
 %
21.0
 %
1.6

Real Estate Partners Europe (2015) (2)
712.3

297.0

 
19.1

345.7

 
364.8

 
18.4
 %
11.5
 %
1.2

Next Generation Technology Growth Fund (2016)
658.9

414.1

 

668.1

 
668.1

 
55.3
 %
43.2
 %
1.6

Health Care Strategic Growth Fund
(2016) (3)
1,331.0

97.5

 

160.4

 
160.4

 



Americas Fund XII (2017) (3)
13,500.0

1,892.9

 

2,401.3

 
2,401.3

 



Real Estate Credit Opportunity Partners
(2017) (3)
1,130.0

671.5

 
38.8

686.9

 
725.7

 



Asian Fund III (2017) (3)
9,000.0

1,266.5

 

1,525.3

 
1,525.3

 



Real Estate Partners Americas II (2017) (3)
1,921.2

358.9

 
10.8

402.5

 
413.3

 



Core Investment Vehicles (2017) (3)
9,500.0

2,939.3

 

3,462.5

 
3,462.5

 



Global Infrastructure Investors III (2018) (2)(3)
7,182.0


 


 

 



Subtotal - Included Funds
114,392.8

75,801.8

 
92,657.6

46,013.3

 
138,670.9

 
15.9
 %
11.9
 %
1.9

 
 
 
 
 
 
 
 
 
 
 
 
All Funds
$
130,867.3

$
92,276.3

 
$
142,926.9

$
46,013.3

 
$
188,940.2

 
25.6
 %
18.8
 %
2.0

 
 
 
 
 
 
 
 
 
 
 
 
(1)
These funds were not contributed to KKR as part of the acquisition of the assets and liabilities of KKR & Co. (Guernsey) L.P. (formerly known as KKR Private Equity Investors, L.P.) on October 1, 2009 (the "KPE Transaction").

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(2)
The following table presents information regarding investment funds with euro-denominated commitments. Such amounts have been converted into U.S. dollars based on (i) the foreign exchange rate at the date of purchase for each investment and (ii) the exchange rate prevailing on September 30, 2018 , in the case of unfunded commitments.
Private Markets Investment Funds
Commitment (€ in millions)
 
European Fund
 
196.5

European Fund II
 
2,597.5

European Fund III
 
2,882.8

E2 Investors (Annex Fund)
 
55.5

European Fund IV
 
1,626.1

Global Infrastructure Investors
 
30.0

Global Infrastructure Investors II
 
243.8

Real Estate Partners Europe
 
276.6

Global Infrastructure Investors III
 
987.0

(3)
The gross IRR, net IRR and gross multiple of invested capital are calculated for our investment funds that made their first investment at least 24 months prior to September 30, 2018 . None of the Health Care Strategic Growth Fund, Americas Fund XII, Real Estate Credit Opportunity Partners, Asian Fund III, Real Estate Partners Americas II, our Core Investment Vehicles, or Global Infrastructure Investors III has invested for at least 24 months as of September 30, 2018 . We therefore have not calculated gross IRRs, net IRRs and gross multiples of invested capital with respect to those funds.
(4)
An investment is considered realized when it has been disposed of or has otherwise generated disposition proceeds or current income that has been distributed by the relevant fund. In periods prior to the three months ended September 30, 2015, realized proceeds excluded current income such as dividends and interest. Realizations have not been shown for those investment funds that have either made their first investment more recently than 24 months prior to September 30, 2018 or have otherwise not had any realizations.
(5)
IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period. Net IRRs are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees and organizational expenses. Gross IRRs are calculated before giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees and organizational expenses.
         The gross multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the fund. Such amounts do not give effect to the allocation of realized and unrealized carried interest or the payment of any applicable management fees or organizational expenses.

KKR's Private Markets funds may utilize third-party financing facilities to provide liquidity to such funds. The above net and gross IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund, and the use of such financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. KKR's Private Markets funds also generally provide in certain circumstances, which vary depending on the relevant fund documents, for a portion of capital returned to investors to be restored to unused commitments as recycled capital. For KKR's Private Markets funds that have a preferred return, we take into account recycled capital in the calculation of IRRs and multiples of invested capital because the calculation of the preferred return includes the effect of recycled capital. For KKR's Private Markets funds that do not have a preferred return, we do not take recycled capital into account in the calculation of IRRs and multiples of invested capital. The inclusion of recycled capital generally causes invested and realized amounts to be higher and IRRs and multiples of invested capital to be lower than had recycled capital not been included. The inclusion of recycled capital would reduce the composite net IRR of all Included Funds by 0.1% and the composite net IRR of all Legacy Funds by 0.5% and would reduce the composite multiple of invested capital of Included Funds by less than 0.1 and the composite multiple of invested capital of Legacy Funds by 0.4.

Public Markets
 
Through our Public Markets business line, we operate our combined credit and hedge funds platforms. Our credit platform invests capital in (i) leveraged credit strategies, including leveraged loans, high-yield bonds, opportunistic credit, and revolving credit strategies and (ii) alternative credit strategies, including special situations and private credit strategies, such as direct lending and private opportunistic credit (or mezzanine) investment strategies. The funds, CLOs, separately managed accounts, investment companies registered under the Investment Company Act of 1940 (the "Investment Company Act"), including BDCs, and alternative investment funds ("AIFs") in our leveraged credit and alternative credit strategies are managed by KKR Credit Advisors (US) LLC, which is an SEC-registered investment adviser, KKR Credit Advisors (Ireland) Unlimited Company, regulated by the Central Bank of Ireland, and KKR Credit Advisors (EMEA) LLP, regulated by the United Kingdom Financial Conduct Authority (the "FCA"). Our Public Markets business line also includes our hedge funds platform, which consists of strategic partnerships with third-party hedge fund managers in which KKR owns a minority stake (which we refer to as "hedge fund partnerships"). Our hedge fund partnerships offer a variety of investment strategies, including hedge fund-of-funds, equity hedge funds, credit hedge funds, and funds focused on investing in natural catastrophe and weather risks.
We intend to continue to grow the Public Markets business line by leveraging our global investment platform, experienced investment professionals, and the ability to adapt our investment strategies to different market conditions to capitalize on investment opportunities that may arise at various levels of the capital structure and across market cycles.

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As of September 30, 2018 , our Public Markets business line had $91.0 billion of AUM, comprised of $32.2 billion of assets managed in our leveraged credit strategies (which include $2.2 billion of assets managed in our opportunistic credit strategy and $1.8 billion of assets managed in our revolving credit strategy), $7.3 billion of assets managed in our special situations strategy, $22.5 billion of assets managed in our private credit strategies, $28.2 billion of assets managed through our hedge fund platform, and $0.8 billion of assets managed in other strategies. Our private credit strategies include $16.7 billion of assets managed in our direct lending strategy and $5.8 billion of assets managed in our private opportunistic credit strategy. Assets managed through our hedge fund platform represent KKR's pro rata portion of AUM of our hedge fund partnerships.
The previously announced strategic BDC partnership (the "FS Investments Transaction") with Franklin Square Holdings, L.P. ("FS Investments") closed on April 9, 2018. Our BDC platform has approximately $16.8 billion in combined assets under management. We report all of the assets under management of the BDCs in our BDC platform advised by FS/KKR Advisor, LLC.

Credit

Performance
We generally review our performance in our credit platform by investment strategy.

The following table presents information regarding the principal leveraged credit strategies managed by KKR. The returns presented below are from inception of the strategy to September 30, 2018 . However, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of any future result.

Leveraged Credit Strategies: Inception-to-Date Annualized Gross Performance vs. Benchmark by Strategy
Leveraged Credit Strategy
 
Inception Date
 
Gross
Returns
 
Net
Returns
 
Benchmark  (1)
 
Benchmark
Gross
Returns
Bank Loans Plus High Yield
 
Jul 2008
 
7.98
%
 
7.35
%
 
65% S&P/LSTA Loan Index, 35% BoAML HY Master II Index (2)
 
6.27
%
Opportunistic Credit (3)
 
May 2008
 
12.78
%
 
10.78
%
 
BoAML HY Master II Index (3)
 
6.53
%
Bank Loans
 
Apr 2011
 
5.54
%
 
4.93
%
 
S&P/LSTA Loan Index (4)
 
4.37
%
High-Yield
 
Apr 2011
 
6.77
%
 
6.19
%
 
BoAML HY Master II Index (5)
 
6.27
%
Bank Loans Conservative
 
Apr 2011
 
4.79
%
 
4.19
%
 
S&P/LSTA BB-B Loan Index (6)
 
4.34
%
European Leveraged Loans (7)
 
Sep 2009
 
5.23
%
 
4.70
%
 
CS Inst West European Leveraged Loan Index (8)
 
4.63
%
High-Yield Conservative
 
Apr 2011
 
6.04
%
 
5.47
%
 
BoAML HY BB-B Constrained (9)
 
6.09
%
European Credit Opportunities (7)
 
Sept 2007
 
5.70
%
 
4.79
%
 
S&P European Leveraged Loans (All Loans) (10)
 
4.36
%
Revolving Credit (11)
 
May 2015
 
N/A

 
N/A

 
N/A
 
N/A

 
(1)
The benchmarks referred to herein include the S&P/LSTA Leveraged Loan Index (the "S&P/LSTA Loan Index"), S&P/LSTA U.S. B/BB Ratings Loan Index (the "S&P/LSTA BB-B Loan Index"), the Bank of America Merrill Lynch High Yield Master II Index (the "BoAML HY Master II Index"), the BofA Merrill Lynch BB-B US High Yield Index (the "BoAML HY BB-B Constrained"), the Credit Suisse Institutional Western European Leveraged Loan Index (the "CS Inst West European Leveraged Loan Index"), and S&P European Leveraged Loans (All Loans). The S&P/LSTA Loan Index is a daily tradable index for the U.S. loan market that seeks to mirror the market-weighted performance of the largest institutional loans that meet certain criteria. The S&P/ LSTA BB-B Loan Index is comprised of loans in the S&P/LSTA Loan Index, whose rating is BB+, BB, BB-, B+, B or B-. The BoAML HY Master II Index is an index for high-yield corporate bonds. It is designed to measure the broad high-yield market, including lower-rated securities. The BoAML HY BB-B Constrained is a subset of the BoAML HY Master II Index including all securities rated BB1 through B3, inclusive. The CS Inst West European Leveraged Loan Index contains only institutional loan facilities priced above 90 , excluding TL and TLa facilities and loans rated CC, C or are in default. The S&P European Leveraged Loan Index reflects the market-weighted performance of institutional leveraged loan portfolios investing in European credits. While the returns of our leveraged credit strategies reflect the reinvestment of income and dividends, none of the indices presented in the chart above reflect such reinvestment, which has the effect of increasing the reported relative performance of these strategies as compared to the indices. Furthermore, these indices are not subject to management fees, incentive allocations, or expenses.
(2)
Performance is based on a blended composite of Bank Loans Plus High Yield strategy accounts. The benchmark used for purposes of comparison for the Bank Loans Plus High Yield strategy is based on 65% S&P/LSTA Loan Index and 35% BoAML HY Master II Index.
(3)
The Opportunistic Credit strategy invests in high-yield securities and corporate loans with no preset allocation. The Benchmark used for purposes of comparison for the Opportunistic Credit strategy presented herein is based on the BoAML HY Master II Index. Funds within this strategy may utilize third-party financing facilities to enhance investment returns. In cases where financing facilities are used, the amounts drawn on the facility are deducted from the assets of the fund in the calculation of net asset value, which tends to increase returns when net asset value grows over time and decrease returns when net asset value decreases over time.
(4)
Performance is based on a composite of portfolios that primarily invest in leveraged loans. The benchmark used for purposes of comparison for the Bank Loans strategy is based on the S&P/LSTA Loan Index.

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(5)
Performance is based on a composite of portfolios that primarily invest in high-yield securities. The benchmark used for purposes of comparison for the High Yield strategy is based on the BoAML HY Master II Index.
(6)
Performance is based on a composite of portfolios that primarily invest in leveraged loans rated B-/Baa3 or higher. The benchmark used for purposes of comparison for the Bank Loans Conservative strategy is based on the S&P/LSTA BB-B Loan Index.
(7)
The returns presented are calculated based on local currency.
(8)
Performance is based on a composite of portfolios that primarily invest in higher quality leveraged loans. The benchmark used for purposes of comparison for the European Leveraged Loans strategy is based on the CS Inst West European Leveraged Loan Index.
(9)
Performance is based on a composite of portfolios that primarily invest in high-yield securities rated B or higher. The benchmark used for purposes of comparison for the High-Yield Conservative strategy is based on the BoAML HY BB-B Constrained Index.
(10)
Performance is based on a composite of portfolios that primarily invest in European institutional leveraged loans. The benchmark used for purposes of comparison for the European Credit Opportunities strategy is based on the S&P European Leveraged Loans (All Loans) Index.
(11)
This strategy has not called any capital as of September 30, 2018 . As a result, the gross and net return performance measures are not meaningful and are not included above.
The following table presents information regarding our Public Markets alternative credit funds where investors are subject to capital commitments from inception to September 30, 2018 . Some of these funds have been investing for less than 24 months, and thus their performance is less meaningful and not included below. In addition, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below, and past performance is no guarantee of any future result.

Alternative Credit Strategies: Fund Performance
 
 
 
 
Amount
 
Fair Value of Investments
 
 
 
 
 
 
 
 
 
 
Public Markets 
Investment Funds
 
Inception Date
 
Commitment
 
Invested (1)
 
Realized (1)
 
Unrealized
 
Total
Value
 
Gross
IRR (2)
 
Net
IRR (2)
 
Multiple of Invested Capital (3)
 
Gross
Accrued
Carried Interest
($ in Millions)
Special Situations Fund
 
Dec 2012
 
$
2,274.3

 
$
2,244.7

 
$
1,140.7

 
$
1,657.4

 
$
2,798.1

 
6.5
%
 
4.5
%
 
1.2

 
$

Special Situations Fund II
 
Dec 2014
 
3,387.6

 
2,052.1

 
39.7

 
2,299.7

 
2,339.4

 
8.3
%
 
5.7
%
 
1.1

 

Mezzanine Partners
 
Mar 2010
 
1,022.8

 
913.9

 
1,060.1

 
314.3

 
1,374.4

 
13.5
%
 
8.8
%
 
1.5

 
69.1

Private Credit Opportunities Partners II
 
Dec 2015
 
2,245.1

 
637.3

 
13.1

 
639.2

 
652.3

 
5.0
%
 
2.1
%
 
1.0

 

Lending Partners
 
Dec 2011
 
460.2

 
405.3

 
431.4

 
77.8

 
509.2

 
6.7
%
 
5.2
%
 
1.3

 

Lending Partners II
 
Jun 2014
 
1,335.9

 
1,179.1

 
723.7

 
792.8

 
1,516.5

 
12.1
%
 
9.9
%
 
1.3

 
43.5

Lending Partners III
 
Apr 2017
 
963.8

 
195.0

 

 
236.2

 
236.2

 
N/A

 
N/A

 
N/A

 
5.8

Lending Partners Europe
 
Mar 2015
 
847.6

 
538.1

 
73.9

 
529.8

 
603.7

 
11.6
%
 
7.8
%
 
1.1

 
1.2

Other Alternative Credit Vehicles
 
Various
 
8,261.0

 
4,207.4

 
2,534.9

 
3,151.2

 
5,686.1

 
N/A

 
N/A

 
N/A

 
164.4

Unallocated Commitments (4)
 
Various
 
450.0

 

 

 

 

 
N/A

 
N/A

 
N/A

 

All Funds
 
 
 
$
21,248.3

 
$
12,372.9

 
$
6,017.5

 
$
9,698.4

 
$
15,715.9

 
 

 
 

 
 
 
$
284.0

(1)    Recycled capital is excluded from the amounts invested and realized. 
(2)    These credit funds utilize third-party financing facilities to provide liquidity to such funds, and in such an event, IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund. The use of such financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period and are calculated taking into account recycled capital. Net IRRs presented are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees. Gross IRRs are calculated before giving effect to the allocation of carried interest and the payment of any applicable management fees.
 (3)    The multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the investors. The use of financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate multiples of invested capital, which tends to increase multiples when fair value grows over time and decrease multiples when fair value decreases over time. Such amounts do not give effect to the allocation of any realized and unrealized returns on a fund's investments to the fund's general partner pursuant to a carried interest or the payment of any applicable management fees and are calculated without taking into account recycled capital.
(4)
"Unallocated Commitments" represent unallocated commitments from our strategic investor partnerships.



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Table of Contents


Public Markets AUM and Vehicle Structures
The table below presents information as of September 30, 2018 , based on the investment funds, vehicles, or accounts offered by our Public Markets business line. Our funds, vehicles, and accounts have been sorted based upon their primary investment strategies. However, the AUM and FPAUM presented for each line in the table includes certain investments from non-primary investment strategies, which are permitted by their investment mandates, for purposes of presenting the fees and other terms for such funds, vehicles, and accounts.
($ in millions)
 
AUM
 
FPAUM
 
Typical 
Management
Fee Rate
 
Incentive Fee /
Carried
Interest
 
Preferred
Return
 
Duration
of Capital
Leveraged Credit:
 
 

 
 

 
 
 
 
 
 
 
 
Leveraged Credit SMAs/Funds
 
$
16,512

 
$
15,119

 
0.10% - 1.10%
 
Various (1)
 
Various (1)
 
Subject to redemptions
CLOs
 
12,113

 
12,113

 
0.40% - 0.50%
 
Various (1)
 
Various (1)
 
10-14 Years (2)
Total Leveraged Credit
 
28,625

 
27,232

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alternative Credit: (3)
 
 
 
 
 
 
 
 
 
 
 
 
Special Situations
 
7,575

 
4,473

 
0.90% - 1.75% (4)
 
10.00 - 20.00%
 
7.00 - 12.00%
 
8-15 Years (2)
Private Credit
 
9,797

 
4,085

 
0.50% - 1.50%
 
10.00 - 20.00%
 
5.00 - 8.00%
 
8-15 Years (2)
Total Alternative Credit
 
17,372

 
8,558

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge Funds (5)
 
28,168

 
20,642

 
0.50% - 2.00%
 
Various (1)
 
Various (1)
 
Subject to redemptions
BDCs (6)
 
16,793

 
16,793

 
0.60%
 
8.00%
 
7.00%
 
Indefinite
Total
 
$
90,958

 
$
73,225

 
 
 
 
 
 
 
 
 
(1)
Certain funds and CLOs are subject to a performance fee in which the manager or general partner of the funds share up to 20% of the net profits earned by investors in excess of performance hurdles (generally tied to a benchmark or index) and are subject to a provision requiring the funds and vehicles to regain prior losses before any performance fee is earned.
(2)
Duration of capital is measured from inception. Inception dates for CLOs were between 2013 and 2018 and for separately managed accounts and funds investing in alternative credit strategies from 2009 through 2018.
(3)
Our alternative credit funds generally have investment periods of three to five years and our newer alternative credit funds generally earn fees on invested capital during the investment period.
(4)
Lower fees on uninvested capital in certain vehicles.
(5)
Hedge Funds represent KKR's pro rata portion of AUM and FPAUM of our hedge fund partnerships, which consist of minority stakes in hedge fund managers.
(6)
Consists of our BDC platform advised by FS/KKR Advisor, LLC. We report all of the assets under management of the BDCs in AUM and FPAUM.

Capital Markets
 
Our Capital Markets business line is comprised of our global capital markets business, which is integrated with KKR's other business lines, and serves our portfolio companies and third-party clients by developing and implementing both traditional and non-traditional capital solutions for investments or companies seeking financing. These services include arranging debt and equity financing, placing and underwriting securities offerings, and providing other types of capital markets services. Our capital markets business underwrites credit facilities and arranges loan syndications and participations. When we are sole arrangers of a credit facility, we may advance amounts to the borrower on behalf of other lenders, subject to repayment. When we underwrite an offering of securities on a firm commitment basis, we commit to buy and sell an issue of securities and generate revenue by purchasing the securities at a discount or for a fee. When we act in an agency capacity or best efforts basis, we generate revenue for arranging financing or placing securities with capital markets investors. We may also provide issuers with capital markets advice on security selection, access to markets, marketing considerations, securities pricing, and other aspects of capital markets transactions in exchange for a fee. Our capital markets business also plays an important role in syndicating private equity co-investment opportunities to both fund investors and other third parties, which may entitle the firm to receive management fees and/or a carried interest.
Our flagship capital markets subsidiary is KKR Capital Markets LLC, an SEC-registered broker-dealer and a member of the Financial Industry Regulation Authority ("FINRA"), which is registered or authorized to carry out certain broker-dealer activities in various countries in North America, Europe, Asia-Pacific, and the Middle East.

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Principal Activities
 
Through our Principal Activities business line, we manage the firm's own assets on our balance sheet and deploy capital to support and grow our business lines. Typically, the funds in our Private Markets and Public Markets business lines contractually require us, as general partner of the funds, to make sizable capital commitments from time to time. We believe our general partner commitments are indicative of the conviction we have in a given fund's strategy, which assists us in raising new funds from limited partners. We also use our balance sheet to acquire investments in order to help establish a track record for fundraising purposes in new strategies. We may also use our own capital to seed investments for new funds, to bridge capital selectively for our funds' investments, or finance strategic acquisitions and partnerships, although the financial results of an acquired business or hedge fund partnership may be reported in our other business lines.

Our Principal Activities business line also provides the required capital to fund the various commitments of our Capital Markets business line when underwriting or syndicating securities, or when providing term loan commitments for transactions involving our portfolio companies and for third parties. Our Principal Activities business line also holds assets that may be utilized to satisfy regulatory requirements for our Capital Markets business line and risk retention requirements for our CLOs.

We also make opportunistic investments through our Principal Activities business line, which include co-investments alongside our Private Markets and Public Markets funds as well as Principal Activities investments that do not involve our Private Markets or Public Markets funds.

We endeavor to use our balance sheet strategically and opportunistically to generate an attractive risk-adjusted return on equity in a manner that is consistent with our fiduciary duties, is in compliance with applicable laws, and is consistent with our one-firm approach.

The chart below presents the holdings of our Principal Activities business line by asset class as of September 30, 2018 .

Holdings by Asset Class (1)  
CHART-BB8B84A9E0E058F9924.JPG
(1)
This presentation includes our capital commitments to our funds. Assets and revenues of other asset managers with which KKR has formed hedge fund partnerships where KKR does not hold more than 50% ownership interest are not included in Principal Activities but are reported in the financial results of our other business lines. Private Equity includes KKR private equity funds, co-investments alongside such KKR-sponsored private equity funds, certain core equity investments, and other opportunistic investments. However, equity investments in other asset classes, such as real estate, special situations and energy appear in these other asset classes. Other Credit consists of other leveraged credit and specialty finance strategies.


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Business Environment
 
Economic and Market Conditions
Economic Conditions . As a global investment firm, we are affected by financial and economic conditions globally. Global and regional economic conditions have a substantial impact on our financial condition and results of operations, impacting the values of the investments we make, our ability to exit these investments profitably, our ability to raise capital from investors, and our ability to make new investments. Financial and economic conditions in the United States, the European Union, Japan, China, and other major economies are significant contributors to the global economy.

As of September 30, 2018, U.S. economic growth remained strong, despite showing signs of slowing down amid the imposition of tariffs on U.S.-China trades and widening U.S. trade deficit in the third quarter. Following the previous rate increases in March and June of 2018, the U.S. Federal Reserve again raised its benchmark interest rate by 25 basis points in September 2018, and forecasted another raise in 2018 and three more in 2019. In the United States, real GDP growth was 3.5%, on a seasonally adjusted annualized basis, for the quarter ended September 30, 2018, down from 4.2% for the quarter ended June 30, 2018; the U.S. unemployment rate was 3.7% as of September 30, 2018, down from 4.0% as of June 30, 2018; U.S. core consumer price index inflation was 2.2% on a year-over-year basis as of September 30, 2018, down from 2.3% on a year-over-year basis as of June 30, 2018; and the effective federal funds rate set by the U.S. Federal Reserve was 2.2% as of September 30, 2018, up from 1.9% as of June 30, 2018.
As of September 30, 2018, the European Union continued its slow and steady pace of economic growth, with concerns of instability rising in the background due to ongoing negotiations over Britain's exit from the European Union and disagreement about Italy's budget plan. In the Euro Area, real GDP growth was 0.2%, on a seasonally adjusted quarter-over-quarter basis, for the quarter ended September 30, 2018, down from 0.4% for the quarter ended June 30, 2018; the Euro Area unemployment rate is estimated to be 8.1% as of September 30, 2018, slightly down from 8.2% as of June 30, 2018; Euro Area core inflation was 0.9% on a year-over-year basis as of September 30, 2018, unchanged from June 30, 2018; and the short-term benchmark interest rate set by the European Central Bank was 0% as of September 30, 2018, flat from June 30, 2018.
As of September 30, 2018, the Bank of Japan continued its loose monetary policy and projected a continued modest expansion of Japan's economy. Chinese economic growth slowed during the third quarter of 2018, which could reflect growing tensions in its trade conflicts with the United States. In Japan, the short-term benchmark interest rate set by the Bank of Japan was 0.1% as of September 30, 2018, unchanged from June 30, 2018; and in China, reported real GDP was 1.6%, on a seasonally adjusted quarter-over-quarter basis, for the quarter ended September 30, 2018, compared to 1.8% in the quarter ended June 30, 2018.
These and other key issues could have repercussions across regional and global financial markets, which could adversely affect the valuations of our investments. Other key issues include (i) political uncertainty caused by, among other things, populist political parties and economic nationalist sentiments, (ii) regulatory changes regarding, for example, taxation, international trade, cross-border investments, immigration, and austerity programs, (iii) increased volatility as the U.S. Federal Reserve potentially raises interest rates more frequently and/or in larger increments than in previous increases, and (iv) technological advancements and innovations that may disrupt marketplaces and businesses. For a further discussion of how market conditions may affect our businesses, see "Risk Factors—Risks Related to Our Business—Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" in our Annual Report.
Equity and Credit Markets . Global equity and credit markets have a substantial effect on our financial condition and results of operations. In general, a climate of reasonable interest rates and high levels of liquidity in the debt and equity capital markets provide a positive environment for us to generate attractive investment returns, which also impacts our ability to generate incentive fees and carried interest. Periods of volatility and dislocation in the capital markets present substantial risks, but also can present us with opportunities to invest at reduced valuations that position us for future growth and investment returns. Low interest rates related to monetary stimulus and economic stagnation may negatively impact expected returns on all types of investments. Higher interest rates in conjunction with slower growth or weaker currencies in some emerging market economies have caused, and may further cause, the default risk of these countries to increase, and this could impact the operations or value of our investments that operate in these regions. Areas such as the Eurozone and Japan, which have ongoing central bank quantitative easing campaigns and comparatively low interest rates relative to the United States, could potentially experience further currency volatility and weakness relative to the U.S. dollar.


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Many of our investments are in equities, so a change in global equity prices or in market volatility directly impacts the value of our investments and our profitability as well as our ability to realize investment gains and the receptiveness of fund investors to our investment products. For the quarter ended September 30, 2018, global equity markets were positive, with the S&P 500 Index up 7.7% and the MSCI World Index up 5.1% on a total return basis including dividends. Equity market volatility as evidenced by the Chicago Board Options Exchange Market Volatility Index (the "VIX"), a measure of volatility, ended at 12.1 as of September 30, 2018, decreasing from 16.1 as of June 30, 2018. Since September 30, 2018, however, the U.S. equity market has experienced significant volatility, with the VIX rising to 24.22 on October 25, 2018 and the S&P 500 Index falling by 7.2% between September 30, 2018 and October 25, 2018. For a discussion of our valuation methods, see "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Fair Value Measurements—Level III Valuation Methodologies" in our Annual Report.
Many of our investments are also in non-investment grade credit instruments, and our funds and our portfolio companies also rely on credit financing and the ability to refinance existing debt. Consequently, any decrease in the value of credit instruments that we have invested in or any increase in the cost of credit financing reduces our returns and decreases our net income. In particular due in part to holdings of credit instruments such as CLOs on our balance sheet, the performance of the credit markets has had an amplified impact on our financial results, as we directly bear the full extent of losses from credit instruments on our balance sheet. Credit markets can also impact valuations because a discounted cash flow analysis is generally used as one of the methodologies used to ascertain the fair value of our investments that do not have readily observable market prices. In addition, with respect to our credit instruments, tightening credit spreads are generally expected to lead to an increase, and widening credit spreads are generally expected to lead to a decrease, in the value of these credit investments, if not offset by hedging or other factors. In addition, the significant widening of credit spreads is also typically expected to negatively impact equity markets, which in turn would negatively impact our portfolio and us as noted above. During the quarter ended September 30, 2018, U.S. investment grade corporate bond spreads (BofA Merrill Lynch US Corporate Index) narrowed by 17 basis points and U.S. high-yield corporate bond spreads (BofAML HY Master II Index) narrowed by 43 basis points. The non-investment grade credit indices were up during the quarter ended September 30, 2018, with the S&P/LSTA Leveraged Loan Index up 1.8% and the BofAML HY Master II Index up 2.4%. In addition, during the quarter ended September 30, 2018, 10-year government bond yields rose 20 basis points in the United States, rose 17 basis points in Germany, rose 30 basis points in the United Kingdom, rose 14 basis points in China, and rose 9 basis points in Japan. For a further discussion of how market conditions may affect our businesses, see "Risk Factors—Risks Related to Our Business—Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" and "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report.

For further discussion of the impact of global credit markets on our financial condition and results of operations, see "Risk Factors—Risks Related to the Assets We Manage—Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income," "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" and "Risk Factors—Risks Related to the Assets We Manage—Our funds and our firm through our Principal Activities segment may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" in our Annual Report. For a further discussion of our valuation methods, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Fair Value Measurements—Level III Valuation Methodologies" in our Annual Report.
Foreign Exchange Rates . Foreign exchange rates have a substantial impact on the valuations of our investments that are denominated in currencies other than the U.S. dollar. Currency volatility can also affect our businesses and investments that deal in cross-border trade. The appreciation or depreciation of the U.S. dollar is expected to contribute to a decrease or increase, respectively, in the U.S. dollar value of our non-U.S. investments to the extent unhedged. In addition, an appreciating U.S. dollar would be expected to make the exports of U.S. based companies less competitive, which may lead to a decline in their export revenues, if any, while a depreciating U.S. dollar would be expected to have the opposite effect. Moreover, when

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selecting investments for our investment funds that are denominated in U.S. dollars, an appreciating U.S. dollar may create opportunities to invest at more attractive U.S. dollar prices in certain countries outside of the United States, while a depreciating U.S. dollar would be expected to have the opposite effect. For our investments denominated in currencies other than the U.S. dollar, the depreciation in such currencies will generally contribute to the decrease in the valuation of such investments, to the extent unhedged, and adversely affect the U.S. dollar equivalent revenues of portfolio companies with substantial revenues denominated in such currencies, while the appreciation in such currencies would be expected to have the opposite effect. For the quarter ended September 30, 2018, the euro fell 0.7%, the British pound fell 1.3%, the Japanese yen fell 2.6%, and the Chinese renminbi fell 3.6%, respectively, relative to the U.S. dollar. For additional information regarding our foreign exchange rate risk, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk—Exchange Rate Risk" in our Annual Report.

Commodity Markets . Our Private Markets portfolio contains energy real asset investments, and certain of our other Private Markets and Public Markets strategies and products, including private equity, direct lending, special situations and CLOs, also have meaningful investments in the energy sector. The value of these investments is heavily influenced by the price of natural gas and oil. During the quarter ended September 30, 2018, the long-term price of WTI crude oil increased approximately 9%, while the long-term price of natural gas decreased approximately 2%. The long-term price of WTI crude oil increased from approximately $58 per barrel to $63 per barrel, and the long-term price of natural gas decreased from approximately $2.64 per mcf to $2.59 per mcf as of June 30, 2018 and September 30, 2018, respectively. When commodity prices decline or if a decline is not offset by other factors, we would expect the value of our energy real asset investments to be adversely impacted. In addition, because we hold certain energy assets, which had a fair value of $ 0.7 billion  as of September 30, 2018 on our balance sheet, these price movements would have an amplified impact on our financial results, as we would directly bear the full extent of such gains or losses. For additional information regarding our energy real assets, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Fair Value Measurements—Level III Valuation Methodologies—Real Asset Investments" and "Risk Factors—Risks Related to the Assets We Manage—Our funds and our firm through our Principal Activities segment may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" in our Annual Report.

Business Conditions
Our segment revenues consist of fees, performance income and investment income. Our ability to grow our revenues depends in part on our ability to attract new capital and investors, our successful deployment of capital including from our balance sheet and our ability to realize investments at a profit.
Our ability to attract new capital and investors. Our ability to attract new capital and investors in our funds is driven, in part, by the extent to which they continue to see the alternative asset management industry generally, and our investment products specifically, as an attractive vehicle for capital appreciation or income. Since 2010, we have expanded into strategies such as energy, infrastructure, real estate, growth equity, core, credit and, through hedge fund partnerships, hedge funds. In several of these strategies, our first time funds have begun raising successor funds, and we expect the cost of raising such successor funds to be lower. We have also reached out to new fund investors, including retail and high net worth investors. However, fundraising continues to be competitive. While our Americas Fund XII, Asian Fund III and our Real Estate Partners Americas II fund exceeded the size of their respective predecessor funds, there is no assurance that fundraises for our other flagship private equity funds or for our newer strategies and their successor funds will experience similar success. If we are unable to successfully raise comparably sized or larger funds, our AUM, FPAUM and associated fees attributable to new capital raised in future periods may be lower than in prior years. New capital organically raised in AUM for the quarters ended September 30, 2018 and 2017 were $6.1 billion and $7.7 billion, respectively. See "Risk Factors—Risks Related to Our Business—Our inability to raise additional or successor funds (or raise successor funds of a comparable size as our predecessor funds) could have a material adverse impact on our business" in our Annual Report.
Our ability to successfully deploy capital. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital available to us and participate in capital markets transactions. Greater competition, high valuations, increased overall cost of credit and other general market conditions may impact our ability to identify and execute attractive investments. Additionally, because we seek to make investments that have an ability to achieve our targeted returns while taking on a reasonable level of risk, we may experience periods of reduced investment activity. We have a long-term investment horizon and the capital deployed in any one quarter may vary significantly from the capital deployed in any other quarter or the quarterly average of capital deployed in any given year. Reduced levels of transaction activity also tends to result in reduced potential future investment gains, lower transaction fees and lower fees for our capital markets business line, which may earn fees in the syndication of equity or debt. Capital invested for the quarters ended September 30, 2018 and 2017 were

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$5.5 billion and $4.6 billion , respectively, and syndicated capital for the quarters ended September 30, 2018 and 2017 were $1.6 billion and $0.5 billion , respectively.
Our ability to realize investments. Challenging market and economic conditions may adversely affect our ability to exit and realize value from our investments and result in lower-than-expected returns. Although the equity markets are not the only means by which we exit investments, the strength and liquidity of the U.S. and relevant global equity markets generally, and the initial public offering market specifically, affect the valuation of, and our ability to successfully exit, our equity positions in our private equity portfolio companies in a timely manner. We may also realize investments through strategic sales. When financing is not available or becomes too costly, it may be more difficult to find a buyer that can successfully raise sufficient capital to purchase our investments. For the quarters ended September 30, 2018 and 2017, through exit activity in our investments, we realized carried interest of $0.4 billion and $0.4 billion , respectively.

Basis of Accounting
 
We consolidate the financial results of the KKR Group Partnerships and their consolidated entities, which include the accounts of our investment management and capital markets companies, the general partners of unconsolidated funds and vehicles, general partners of certain funds that are consolidated and their respective consolidated funds and certain other entities including certain consolidated CLOs and CMBS. We refer to CLOs and CMBS as collateralized financing entities ("CFEs").

When an entity is consolidated, we reflect the accounts of the consolidated entity, including its assets, liabilities, fees, expenses, investment income, cash flows and other amounts, on a gross basis. While the consolidation of a consolidated fund or entity does not have an effect on the amounts of Net Income Attributable to KKR or KKR's partners' capital that KKR reports, the consolidation does significantly impact the financial statement presentation under GAAP. This is due to the fact that the accounts of the consolidated entities are reflected on a gross basis while the allocable share of those amounts that are attributable to third parties are reflected as single line items. The single line items in which the accounts attributable to third parties are recorded are presented as noncontrolling interests on the consolidated statements of financial condition and net income attributable to noncontrolling interests on the consolidated statements of operations.
 
For a further discussion of our consolidation policies, see Note 2 "Summary of Significant Accounting Policies" to the condensed consolidated financial statements included elsewhere in this report.
 
Key Financial Measures Under GAAP
 
Revenues

Fees and Other
 
Fees and other consist primarily of (i) management and incentive fees from providing investment management services to unconsolidated funds, CLOs, other vehicles, and separately managed accounts; (ii) transaction fees earned in connection with successful investment transactions and from capital markets activities; (iii) monitoring fees from providing services to portfolio companies; (iv) expense reimbursements from certain investment funds and portfolio companies; (v) revenue earned by oil and gas-producing entities that are consolidated; and (vi) consulting fees earned by consolidated entities that employ non-employee operating consultants. These fees are based on the contractual terms of the governing agreements and are recognized when earned, which coincides with the period during which the related services are performed and in the case of transaction fees, upon closing of the transaction. Monitoring fees may provide for a termination payment following an initial public offering or change of control. These termination payments are recognized in the period when the related transaction closes.

Capital Allocation-Based Income

Capital allocation-based income is earned from those arrangements whereby KKR serves as general partner and includes income from KKR's capital interest as well as “carried interest” which entitles KKR to a disproportionate allocation of investment income from investment funds' limited partners.
 
For a further discussion of our revenue policies, see Note 2 "Summary of Significant Accounting Policies" to the condensed consolidated financial statements included elsewhere in this report.
 

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Expenses
 
Compensation and Benefits
 
Compensation and benefits expense includes cash compensation consisting of salaries, bonuses, and benefits, as well as equity-based compensation consisting of charges associated with the vesting of equity-based awards, carry pool allocations, and other performance-based income compensation. The amounts allocated to the carry pool and other performance-based income compensation are accounted for as compensatory profit-sharing arrangements and recorded as compensation and benefits expenses.

All employees and employees of certain consolidated entities receive a base salary that is paid by KKR or its consolidated entities, and is accounted for as compensation and benefits expense. 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, in the past cash bonuses that are paid to certain employees have been borne by KKR Holdings. These bonuses have historically been 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 employees are not entitled to receive distributions on units that are unvested, any amounts allocated to employees in excess of an employee's vested equity interests are reflected as employee compensation and benefits expense. These compensation charges are currently recorded based on the amount of cash expected to be paid by KKR Holdings. Because KKR makes only fixed quarterly dividends, the distributions made on KKR Group Partnership Units underlying any unvested KKR Holdings units are generally insufficient to fund annual cash bonus compensation to the same extent as in periods prior to the fourth quarter of 2015. In addition, substantially all remaining units in KKR Holdings have been allocated and, while subject to a 5 year vesting period, will become fully vested by 2021, thus decreasing the amount of distributions received by KKR Holdings that are available for annual cash bonus compensation. We, therefore, expect to pay all or substantially all of the cash bonus payments from KKR's cash from operations, the carry pool, and other performance-based income compensation as described below; although, from time to time, KKR Holdings may contribute to the cash bonus payments in the future. See "Risks Related to Our Business—If we cannot retain and motivate our principals and other key personnel and recruit, retain and motivate new principals and other key personnel, our business, results and financial condition could be adversely affected" in our Annual Report regarding the adequacy of such distributions to fund future discretionary cash bonuses.

KKR uses several methods, which are designed to yield comparable results, to allocate carried interest and other performance income compensation. With respect to KKR's investment funds that provide for carried interest without a preferred return, KKR allocates 40% of the carried interest received from such funds to its carry pool for employees and non-employee operating consultants. In addition, for investment funds that provide for incentive fees rather than carried interest, beginning with the quarter ended March 31, 2018, our carry pool is supplemented by allocating 43% of the incentive fees that do not constitute carried interest that are earned from such funds to performance income compensation. Prior to the quarter ended March 31, 2018, our carry pool was supplemented by 40% of incentive fees that do not constitute carried interest. Beginning with the quarter ended September 30, 2016, for investment funds that provide for carried interest with a preferred return and have accrued carried interest as of June 30, 2016, KKR also includes 40% of the management fees that would have been subject to a management fee refund as performance income compensation. Because of the different ways management fees are refunded in preferred return and non-preferred return funds that provide for carried interest, this calculation of 40% of the portion of the management fees subject to refund for funds that have a preferred return is designed to allocate to compensation an amount comparable to the amount that would have been allocated to the carry pool had the fund not had a preferred return. Beginning with the quarter ended September 30, 2017, for then-current and future carry generating funds with a preferred return and no or minimal accrued carried interest as of June 30, 2017, KKR allocates 43% of the carried interest to the carry pool instead of 40% of carried interest. For impacted funds, the incremental 3% replaces the allocation of management fee refunds that would have been calculated for those funds and is designed, based on a historical financial analysis of certain investment funds, to allocate an amount for preferred return funds that is comparable to the management fee refunds that would have been allocated as performance income compensation for those funds. The percentage of carried interest, management fee refunds, and incentive fees allocable to the carry pool or as performance income compensation is subject to change from time to time. For a discussion of how management fees are refunded for preferred return funds and non-preferred funds see "—Fair Value Measurements—Recognition of Carried Interest in the Statement of Operations."
 

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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, changes in fair value of contingent consideration, expenses incurred by oil and gas-producing entities (including impairment charges) that are consolidated, and other general and operating expenses which are not borne by fund investors and are not offset by credits attributable to fund investors' noncontrolling interests in consolidated funds. General, administrative and other expense also consists of costs incurred in connection with pursuing potential investments that do not result in completed transactions, a substantial portion of which are borne by fund investors.

Investment Income (Loss)
 
Net Gains (Losses) from Investment Activities
 
Net gains (losses) from investment activities consist of realized and unrealized gains and losses arising from our investment activities as well as income earned from equity method investments. A large portion of our net gains (losses) from investment activities are related to our private equity investments. Fluctuations in net gains (losses) from investment activities between reporting periods is driven primarily by changes in the fair value of our investment portfolio as well as the realization of investments. The fair value of, as well as the ability to recognize gains from, our private equity and other investments is significantly impacted by the global financial markets, which, in turn, affects the net gains (losses) from investment activities recognized in any given period. Upon the disposition of an investment, previously recognized unrealized gains and losses are reversed and an offsetting realized gain or loss is recognized in the current period. Since our investments are carried at fair value, fluctuations between periods could be significant due to changes to the inputs to our valuation process over time. For a further discussion of our fair value measurements and fair value of investments, see "—Critical Accounting Policies—Fair Value Measurements."

Dividend Income
 
Dividend income consists primarily of distributions that we and our consolidated investment funds receive from portfolio companies in which they invest. Dividend income is recognized primarily in connection with (i) dispositions of operations by portfolio companies, (ii) distributions of excess cash generated from operations from portfolio companies, and (iii) other significant refinancings undertaken by portfolio companies.

Interest Income
 
Interest income consists primarily of interest that is received on our credit instruments in which we and our consolidated funds and other entities invest as well as interest on our cash balances and other investments.
 
Interest Expense
 
Interest expense is incurred from debt issued by KKR, including debt issued by KFN, credit facilities entered into by KKR, debt securities issued by consolidated CFEs, and financing arrangements at our consolidated funds entered into primarily with the objective of managing cash flow. KFN's debt obligations are non-recourse to KKR beyond the assets of KFN. Debt securities issued by consolidated CFEs are supported solely by the investments held at the CFE and are not collateralized by assets of any other KKR entity. Our obligations under financing arrangements at our consolidated funds are generally limited to our pro rata equity interest in such funds. However, in some circumstances, we may provide limited guarantees of the obligations of our general partners in an amount equal to its pro rata equity interest in such funds. Our management companies bear no obligations with respect to financing arrangements at our consolidated funds. We also may provide other kinds of guarantees. See "—Liquidity."

Income Taxes

On July 1, 2018, we converted from a Delaware limited partnership to a Delaware corporation. Prior to the Conversion, KKR’s investment income and carried interest generally were not subject to U.S. corporate income taxes. Subsequent to the Conversion, all income earned by KKR is subject to U.S. corporate income taxes, resulting in an overall higher income tax expense (or benefit) in periods subsequent to the Conversion. See “Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.


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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, the KKR Group Partnerships and certain of their 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 Conversion resulted in KKR obtaining a partial step-up in the tax basis of certain assets that will be recovered as those assets are sold or the basis is amortized. On the date of the Conversion, we recorded an estimated net tax benefit and estimated net deferred tax asset of $257.1 million relating to this partial step-up in tax basis.   Note 11 "Income Taxes" to the condensed consolidated financial statements included elsewhere in this report and “Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.

We use the asset and liability method to account for income taxes in accordance with GAAP. 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 currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized.
 
The 2017 Tax Act, which was enacted on December 22, 2017, permanently reduces the U.S. federal corporate income tax rate from a maximum of 35% to a 21% rate, effective January 1, 2018. KKR has recognized the provisional tax impacts related to deemed repatriated earnings, the revaluation of deferred tax assets and deferred tax liabilities, and the related impact on the tax receivable agreement and included these amounts in its consolidated financial statements for the year ended December 31, 2017. KKR filed its 2017 U.S. corporate income tax return in October 2018 and the actual tax impacts described above did not differ materially from the provisional amounts recorded in 2017. See Note 11 "Income Taxes" to the audited financial statements included in our Annual Report for further information on the financial statement impact of the 2017 Tax Act.

Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties. We review our tax positions quarterly and adjust our tax balances as new information becomes available.
 
Net Income (Loss) Attributable to Noncontrolling Interests
 
Net income (loss) attributable to noncontrolling interests primarily represents the ownership interests that certain third parties hold in entities that are consolidated in the financial statements as well as the ownership interests in our KKR Group Partnerships that are held by KKR Holdings. The allocable share of income and expense attributable to these interests is accounted for as net income (loss) attributable to noncontrolling interests. Given the consolidation of certain of our investment funds and the significant ownership interests in our KKR Group Partnerships held by KKR Holdings, we expect a portion of net income (loss) will continue to be attributed to noncontrolling interests in our business.

For a further discussion of our noncontrolling interests policies, see Note 2 "Summary of Significant Accounting Policies" to the condensed consolidated financial statements included elsewhere in this report.


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Key Segment and Other Operating and Performance Measures
 
The key performance measures that follow are used by management in making operational and resource deployment decisions as well as assessing the overall performance of KKR's businesses. KKR's segment reporting is presented prior to giving effect to the allocation of income (loss) between KKR & Co. Inc. and KKR Holdings L.P. and as such represents the business in total. In addition, KKR's segment reporting is presented without giving effect to the consolidation of the investment funds and CFEs that KKR manages as well as other consolidated entities that are not subsidiaries of KKR & Co. Inc.

We disclose certain financial measures in this report that are calculated and presented using methodologies other than in accordance with GAAP. We believe that providing these performance measures on a supplemental basis to our GAAP results is helpful to stockholders in assessing the overall performance of KKR's businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with GAAP, if available. We caution readers that these non-GAAP financial measures may differ from the calculations of other investment managers, and as a result, may not be comparable to similar measures presented by other investment managers. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included within Note 14 "Segment Reporting" to the condensed consolidated financial statements included elsewhere in this report and under "—Segment Balance Sheet."

Adjusted Shares

Adjusted shares are used as a measure of the total common equity ownership of KKR that is held by KKR & Co. Inc. (including equity awards issued under the Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan (the "Equity Incentive Plan"), but excluding preferred stock), KKR Holdings and other holders of securities exchangeable into Class A common stock of KKR & Co. Inc. and represent the fully diluted share count of Class A common stock using the if-converted method. We believe this measure is useful to stockholders as it provides an indication of the total common equity ownership of KKR as if all outstanding KKR Holdings units, equity awards issued under the Equity Incentive Plan and other exchangeable securities had been exchanged for Class A common stock of KKR & Co. Inc. The Series A and Series B Preferred Stock are not exchangeable for Class A common stock of KKR & Co. Inc.

Adjusted Shares Eligible for Distribution

Adjusted shares eligible for distribution represents the portion of total adjusted shares that are eligible to receive a dividend. We believe this measure is useful to stockholders as it provides insight into the calculation of amounts available for distribution as dividends on a per share basis. Weighted average adjusted shares eligible for distribution is used in the calculation of after-tax distributable earnings per share.

After-tax Distributable Earnings

After-tax distributable earnings is a measure of KKR’s earnings on a segment basis excluding mark-to-market gains (losses). Starting with the second quarter of 2018, it is defined as the amount of realized earnings of KKR that would be available for distribution as dividends to Class A common stockholders for a given reporting period, after deducting equity-based compensation. KKR revised the definition of after-tax distributable earnings starting in the second quarter of 2018, because it currently reflects how the chief operating decision makers allocate resources and assess performance of KKR’s business. KKR believes that after-tax distributable earnings is useful to stockholders as it aligns KKR’s net realization performance with the manner in which KKR receives its revenues and determines the compensation of its employees. After-tax distributable earnings does not represent and is not used to calculate actual dividends under KKR’s dividend policy. Historically equity-based compensation expense relating to the Equity Incentive Plan was not reflected in our calculation of after-tax distributable earnings. Under KKR’s current segment presentation, equity-based compensation expense is included in after-tax distributable earnings as a component of compensation expense in order to reflect the dilutive nature of these non-cash equity-based awards. For comparability, after-tax distributable earnings for the comparable prior periods have been calculated using this new definition.
 
Assets Under Management ("AUM")

Assets under management represent the assets managed or advised by KKR from which KKR is entitled to receive fees or a carried interest (either currently or upon deployment of capital), general partner capital, and assets managed or advised by strategic BDC partnership and hedge fund managers in which KKR holds a minority ownership interest. We believe this measure is useful to stockholders as it provides additional insight into the capital raising activities of KKR and its hedge fund managers and the overall activity in their investment funds and other managed capital. KKR calculates the amount of AUM as

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of any date as the sum of: (i) the fair value of the investments of KKR's investment funds; (ii) uncalled capital commitments from these funds, including uncalled capital commitments from which KKR is currently not earning management fees or carried interest; (iii) the fair value of investments in KKR's co-investment vehicles; (iv) the par value of outstanding CLOs (excluding CLOs wholly-owned by KKR); (v) KKR's pro rata portion of the AUM of hedge fund managers in which KKR holds a minority ownership interest; (vi) all of AUM of the strategic BDC partnership with FS Investments; and (vii) the fair value of other assets managed by KKR. The pro rata portion of the AUM of hedge fund managers is calculated based on KKR’s percentage ownership interest in such entities multiplied by such entity’s respective AUM. KKR's definition of AUM is not based on any definition of AUM that may be set forth in the agreements governing the investment funds, vehicles or accounts that it manages or calculated pursuant to any regulatory definitions.

Book Value

Book value is a measure of the net assets of KKR’s reportable segment and is used by management primarily in assessing the unrealized value of KKR’s investments and other assets, including carried interest. We believe this measure is useful to stockholders as it provides additional insight into the assets and liabilities of KKR excluding the assets and liabilities that are allocated to noncontrolling interest holders and to the holders of the Series A and Series B Preferred Stock. As of September 30, 2018, KKR's segment balance sheet reflects KKR's tax assets and liabilities as prepared under GAAP.

Capital Invested

Capital invested is the aggregate amount of capital invested by (i) KKR’s investment funds, (ii) KKR's Principal Activities business line as a co-investment, if any, alongside KKR’s investment funds, and (iii) KKR's Principal Activities business line in connection with a syndication transaction conducted by KKR's Capital Markets business line, if any. Capital invested is used as a measure of investment activity at KKR during a given period. We believe this measure is useful to stockholders as it provides a measure of capital deployment across KKR’s business lines. Capital invested includes investments made using investment financing arrangements like credit facilities, as applicable. Capital invested excludes (i) investments in certain leveraged credit strategies, (ii) capital invested by KKR’s Principal Activities business line that is not a co-investment alongside KKR’s investment funds, and (iii) capital invested by KKR’s Principal Activities business line that is not invested in connection with a syndication transaction by KKR’s Capital Markets business line. Capital syndicated by KKR's Capital Markets business line to third parties other than KKR’s investment funds or Principal Activities business line is not included in capital invested.  See also "—Syndicated Capital."

Fee Paying AUM ("FPAUM")

Fee paying AUM ("FPAUM") represents only the AUM from which KKR receives management fees. We believe this measure is useful to stockholders as it provides additional insight into the capital base upon which KKR earns management fees. FPAUM is the sum of all of the individual fee bases that are used to calculate KKR's and its hedge fund and BDC partnership management fees and differs from AUM in the following respects: (i) assets and commitments from which KKR does not receive a management fee are excluded (e.g., assets and commitments with respect to which it receives only carried interest or is otherwise not currently receiving a management fee) and (ii) certain assets, primarily in its private equity funds, are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments.

Fee Related Earnings ("FRE")

Fee related earnings is a supplemental measure of earnings of KKR on a segment basis before performance income and investment income. KKR believes this measure may be useful to stockholders as it provides additional insight into the profitability of KKR’s fee generating management companies and capital markets businesses. Starting with the second quarter of 2018, fee related earnings is calculated as KKR’s total Fees and Other, Net, multiplied by KKR’s segment operating margin. For purposes of the fee related earnings calculation, segment operating margin is calculated as Segment Operating Earnings, before equity-based compensation, divided by total segment revenues. Historically, fee related earnings was calculated as operating earnings of KKR on a segment basis before performance income, related performance income compensation and investment income. KKR revised the definition of fee related earnings starting in the second quarter of 2018 to provide supplemental information about fees generated from KKR’s management companies and capital markets business because KKR believes it provides increased transparency on KKR’s underlying financial results to the stockholders. Fee related earnings for the comparable prior periods have been calculated using this new definition.




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Income Taxes Paid

Income taxes paid represents the implied current income tax provision that has been calculated assuming that all current taxable income is allocated to KKR & Co. Inc., which would occur following an exchange of all KKR Holdings units for Class A common stock of KKR & Co. Inc. The assumptions and methodology used to calculate the implied current income tax provision are consistent with those used in calculating the current tax provision for KKR & Co. Inc. under GAAP.

Outstanding Adjusted Shares

Outstanding adjusted shares represents the portion of total adjusted shares that would receive assets of KKR if it were to be liquidated as of a particular date. Outstanding adjusted shares is used to calculate book value per outstanding adjusted share, which we believe is useful to stockholders as it provides a measure of net assets of KKR’s reportable segment on a per share basis.

Segment Operating Earnings

Segment operating earnings represents segment earnings before interest expense, preferred dividends, income attributable to noncontrolling interests and income taxes paid. We believe segment operating earnings is useful to stockholders as it provides a supplemental measure of our operating performance without taking into account items that we do not believe relate directly to operations.

Syndicated Capital

Syndicated capital is generally the aggregate amount of capital in transactions originated by KKR and its investment funds and carry-yielding co-investment vehicles, which has been distributed to third parties in exchange for a fee. It does not include (i) capital invested in such transactions by KKR investment funds and carry-yielding co-investment vehicles, which is instead reported in capital invested, (ii) debt capital that is arranged as part of the acquisition financing of transactions originated by KKR investment funds, and (iii) debt capital that is either underwritten or arranged on a best efforts basis. Syndicated capital is used as a measure of investment activity for KKR during a given period, and we believe that this measure is useful to stockholders as it provides additional insight into levels of syndication activity in KKR's Capital Markets business line and across KKR's investment platform.

Uncalled Commitments

Uncalled commitments are used as a measure of unfunded capital commitments that KKR’s investment funds and carry-paying co-investment vehicles have received from partners to contribute capital to fund future investments. We believe this measure is useful to stockholders as it provides additional insight into the amount of capital that is available to KKR’s investment funds to make future investments. Uncalled commitments are not reduced for investments completed using fund-level investment financing arrangements.
    





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Unaudited Condensed Consolidated Results of Operations
 
The following is a discussion of our condensed consolidated results of operations for the three and nine months ended September 30, 2018 and 2017 . You should read this discussion in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected the results of operations of our reportable segment in these periods, see "—Segment Analysis."

Three months ended September 30, 2018 compared to three months ended September 30, 2017
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Change
 
($ in thousands)
Revenues
 

 
 

 
 
Fees and Other
$
491,503

 
$
355,418

 
$
136,085

Capital Allocation-Based Income
638,163

 
394,234

 
243,929

Total Revenues
1,129,666

 
749,652

 
380,014

 
 
 
 
 
 
Expenses
 
 
 
 
 
Compensation and Benefits
560,434

 
368,513

 
191,921

Occupancy and Related Charges
15,250

 
15,267

 
(17
)
General, Administrative and Other
164,406

 
146,467

 
17,939

Total Expenses
740,090

 
530,247

 
209,843

 
 
 
 
 
 
Investment Income (Loss)
 
 
 
 
 
Net Gains (Losses) from Investment Activities
666,731

 
52,004

 
614,727

Dividend Income
38,245

 
20,774

 
17,471

Interest Income
339,393

 
317,134

 
22,259

Interest Expense
(211,081
)
 
(211,959
)
 
878

Total Investment Income (Loss)
833,288

 
177,953

 
655,335

 
 
 
 
 
 
Income (Loss) Before Taxes
1,222,864

 
397,358

 
825,506

 
 
 
 
 
 
Income Tax Expense (Benefit)
(129,405
)
 
18,420

 
(147,825
)
 
 
 
 
 
 
Net Income (Loss)
1,352,269

 
378,938

 
973,331

Net Income (Loss) Attributable to Redeemable Noncontrolling Interests
12,236

 
20,876

 
(8,640
)
Net Income (Loss) Attributable to Noncontrolling Interests
691,494

 
196,158

 
495,336

Net Income (Loss) Attributable to KKR & Co. Inc.
648,539

 
161,904

 
486,635

 
 
 
 
 
 
Series A Preferred Stock Dividends
5,822

 
5,822

 

Series B Preferred Stock Dividends
2,519

 
2,519

 

 
 
 
 
 
 
Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders
$
640,198

 
$
153,563

 
$
486,635




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Revenues

For the three months ended September 30, 2018 and 2017 , revenues consisted of the following:

 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Management Fees
 
$
188,866

 
$
178,942

 
$
9,924

Fee Credits
 
(73,904
)
 
(70,641
)
 
(3,263
)
Transaction Fees
 
290,404

 
181,280

 
109,124

Monitoring Fees
 
20,176

 
14,478

 
5,698

Incentive Fees
 

 
2,519

 
(2,519
)
Expense Reimbursements
 
38,212

 
27,370

 
10,842

Oil and Gas Revenue
 
12,635

 
12,441

 
194

Consulting Fees
 
15,114

 
9,029

 
6,085

Total Fees and Other
 
491,503

 
355,418

 
136,085

 
 
 
 
 
 
 
Carried Interest
 
543,750

 
337,459

 
206,291

General Partner Capital Interest
 
94,413

 
56,775

 
37,638

Total Capital Allocation-Based Income
 
638,163

 
394,234

 
243,929

 
 
 
 
 
 
 
Total Revenues
 
$
1,129,666

 
$
749,652

 
$
380,014


Prior to January 1, 2018, to the extent an investment fund was not consolidated, KKR accounted for carried interest within Fees and Other separately from its general partner capital interest, which was included in Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. Effective January 1, 2018, the carried interest component of the general partner interest and the capital interest KKR holds in its investment funds as the general partner are accounted for as a single unit of account and reported in capital allocation-based income within Revenues in the condensed consolidated statements of operations. This change in accounting principle has been applied on a full retrospective basis. See Note 2 "Summary of Significant Accounting Policies" to the condensed consolidated financial statements included elsewhere in this report.

Total Fees and Other for the three months ended September 30, 2018 increased compared to the three months ended September 30, 2017 primarily as a result of an increase in transaction fees, expense reimbursements and management fees, partially offset by an increase in fee credits and a decrease in incentive fees.

For a more detailed discussion of the factors that affected our transaction fees, monitoring fees, and incentive fees during the period, see "—Segment Results—Segment Revenues."

The increase in management fees during the three months ended September 30, 2018 compared to the prior period was primarily due to new management fees earned from our Global Infrastructure Fund III when it entered its investment period in the second quarter of 2018. Partially offsetting this increase was a decrease in management fees related to a reduction in management fees in our BDC platform as a result of the FS Investments Transaction that closed in the second quarter of 2018. Prior to the closing of the FS Investments Transaction, KKR recorded management fees as an advisor and sub-advisor to its BDC platform. Subsequent to the closing, KKR reports its investment in FS/KKR Advisor, LLC using the equity method of accounting. Accordingly, the management fees from our BDC platform that had been reported in fees and other prior to the closing of the transaction on April 9, 2018, are reflected as part of our allocation of the net income of FS/KKR Advisor, LLC after April 9, 2018, resulting in a decrease in our reported management fees when compared to the prior period. For a more detailed discussion of the factors that affected our management fees during the period, see "—Segment Results—Segment Revenues."

The increase in carried interest and general partner capital interest during the three months ended September 30, 2018 was due primarily to a higher level of net appreciation in the value of our private equity portfolio as compared to the three months ended September 30, 2017 . For a more detailed discussion of the factors that affected our Private Markets and Public Markets

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carried interest during the period, see "—Segment Results—Segment Revenues—Private Markets Revenues—Realized Performance Income" and "—Segment Results—Segment Revenues—Public Markets Revenues—Realized Performance Income." For a more detailed discussion of the factors that affected our general partner capital interest during the period, see "—Segment Results—Segment Revenues—Principal Activities Revenues—Realized Investment Income."

Compensation and Benefits Expenses

The increase was primarily due to (i) higher overall compensation driven by a higher level of fees and (ii) a higher level of compensation primarily reflecting a higher level of appreciation in the value of our private equity portfolio during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 . Additionally, there were higher equity-based compensation charges resulting from an increase in the number of unvested shares outstanding.

General, Administrative and Other Expenses

The increase during the three months ended September 30, 2018 compared to the prior period was primarily due to (i) an increase in placement fees incurred in connection with capital raising activity during the three months ended September 30, 2018 as compared to the prior period and (ii) an increase in expenses reimbursable by investment funds. These increases were partially offset by a lower level of financing costs incurred related to debt at new consolidated CLOs during the three months ended September 30, 2018 as compared to the prior period.

Net Gains (Losses) from Investment Activities

The following is a summary of net gains (losses) from investment activities:
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
($ in thousands)
Private Equity
$
572,137

 
$
151,782

Credit
(249,623
)
 
(41,250
)
Investments of Consolidated CFEs
69,831

 
(39,892
)
Real Assets
95,548

 
80,696

Equity Method - Other
126,247

 
(135
)
Other Investments
5,358

 
(26,454
)
Debt Obligations and Other
(51,055
)
 
20,959

Other Net Gains (Losses) from Investment Activities
98,288

 
(93,702
)
Net Gains (Losses) from Investment Activities
$
666,731

 
$
52,004


Prior to January 1, 2018, to the extent an investment fund was not consolidated, KKR accounted for its general partner capital interest in Net Gains (Losses) from Investment Activities in the condensed consolidated statements of operations. Effective January 1, 2018, the general partner capital interest and the carried interest component of the general partner interest are accounted for as a single unit of account and reported within Revenues in the statements of operations. This change in accounting has been applied on a full retrospective basis. See Note 2 "Summary of Significant Accounting Policies" to the condensed consolidated financial statements included elsewhere in this report.

Net Gains (Losses) from Investment Activities for the three months ended September 30, 2018

The net gains from investment activities for the three months ended September 30, 2018 were comprised of net realized gains of $241.1 million and net unrealized gains of $425.7 million .

Realized Gains and Losses from Investment Activities

For the three months ended September 30, 2018 , net realized gains related primarily to realized gains on (i) the partial sale of our investment in First Data Corporation (NYSE: FDC) which is held as a direct co-investment by KKR, (ii) the sale of assets in our consolidated special situations funds and (iii) the sale of real estate investments held through certain consolidated entities.



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Unrealized Gains from Investment Activities

For the three months ended September 30, 2018 , unrealized gains were driven primarily by (i) mark-to-market gains in portfolio companies in our core investment strategy, the most significant of which were USI, Inc. (financial services sector), Heartland Dental LLC (health care sector) and PetVet Care Centers, LLC (health care sector), (ii) mark-to-market gains on our investment in First Data Corporation which is held as a direct co-investment by KKR, (iii) mark-to-market gains in our growth equity investments held directly by KKR and certain consolidated entities, and (iv) mark-to-market gains on investments in our energy portfolio held through certain consolidated entities.

Unrealized Losses from Investment Activities

Partially offsetting the unrealized gains above were unrealized losses relating to (i) mark-to-market losses on alternative credit assets held in our consolidated special situations funds, our investment in Preferred Sands, Inc. (energy sector) held as a direct co-investment by KKR, our investment in HDFC Bank Limited (NYSE: HDB) held as a direct investment by KKR and on investments held at our India debt financing company and (ii) the reversal of previously recognized unrealized gains relating to the partial sale of First Data Corporation, assets sold in our consolidated special situations funds and the sale of real estate investments held through certain consolidated entities.

Since September 30, 2018, the broader equity markets have experienced significant volatility, with the S&P 500 Index falling by 7.2% between September 30, 2018 and October 25, 2018. Such volatility and uncertainty could make it more difficult to consummate new investments or exit our existing investments. Further, if the broader equity market continues to experience volatility and downward pressure in the fourth quarter of 2018, valuations of our investments may be negatively impacted, which may result in a lower valuations for these investments compared to September 30, 2018.

For a discussion of other factors that affected KKR's investment income, see "—Segment Analysis."

Net Gains (Losses) from Investment Activities for the three months ended September 30, 2017

The net gains from investment activities for the three months ended  September 30, 2017  were comprised of net realized losses of $(47.4) million and net unrealized gains of $99.4 million.

Realized Gains and Losses from Investment Activities

For the three months ended  September 30, 2017 , net realized losses were comprised primarily of realized losses on (i) the sale of investments held by consolidated CLOs and (ii) losses on alternative credit assets in our consolidated special situations funds and other consolidated credit funds. Partially offsetting these realized losses were realized gains, the most significant of which were realized gains on the partial sale of PRA Health Sciences, Inc., First Data Corporation, and US Foods Holding Corp. (NYSE: USFD).

Unrealized Gains from Investment Activities

For the three months ended  September 30, 2017 , unrealized gains were driven primarily by (i) mark-to-market gains on investments held directly by KKR and in certain consolidated entities, the most significant of which were unrealized gains in The Hut Group Limited (retail sector), and (ii) the reversal of previously recognized unrealized losses relating to the sale of investments held by consolidated CLOs.

Unrealized Losses from Investment Activities

Partially offsetting the unrealized gains for the three months ended  September 30, 2017 were unrealized losses, the most significant of which were unrealized losses relating to (i) the reversal of unrealized gains on the partial sale of First Data Corporation, PRA Health Sciences, Inc., and US Foods Holding Corp. and (ii) losses on alternative credit assets held in our consolidated special situations funds and held as a direct co-investment by KKR.

For a discussion of other factors that affected KKR's investment income, see "—Segment Analysis."

Dividend Income
 
During the three months ended September 30, 2018 , the most significant dividends received included $12.8 million from our consolidated energy funds and $12.5 million from our consolidated real estate funds. During the three months ended

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September 30, 2017 , the most significant dividends received included $6.7 million from real estate, credit and other investments held directly by KKR and $4.8 million from our consolidated real estate funds. Significant dividends from portfolio companies are generally not recurring quarterly dividends, and while they may occur in the future, their size and frequency are variable. For a discussion of other factors that affected KKR's dividend income, see "—Segment Analysis—Segment Revenues—Principal Activities Revenues—Realized Investment Income."

Interest Income
 
The increase in interest income during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily due to a higher level of interest earned related to (i) the closing of six additional CLOs subsequent to the three months ended September 30, 2017 , (ii) an increase in the amount of additional capital deployed in investments held by KKR Real Estate Finance Trust Inc. ("KREF"), and (iii) an increase in the amount of investments held in our consolidated credit funds compared to the prior period. These increases were partially offset by a decrease in interest income as a result of the sale of KKR's beneficial interest in four consolidated CMBS vehicles held by KREF that resulted in the deconsolidation of such vehicles subsequent to September 30, 2017 . For a discussion of other factors that affected KKR's interest income, see "—Segment Results—Segment Revenues—Principal Activities Revenues—Realized Investment Income."

Interest Expense
 
The decrease in interest expense during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily due to (i) a decrease in interest expense incurred as a result of the sale of KKR's beneficial interest in four consolidated CMBS vehicles held by KREF that resulted in the deconsolidation of such vehicles subsequent to September 30, 2017 and (ii) a decrease in interest expense associated with certain notes issued by consolidated CLOs being called for redemption subsequent to September 30, 2017 . These decreases were largely offset by an increase in interest expense due to the impact of (i) the closing of six additional CLOs subsequent to the three months ended September 30, 2017 and (ii) increased interest on amounts under KREF's lending facilities used to finance investments in commercial loans. For a discussion of other factors that affected KKR's interest expense, see "—Segment Results—Segment Expenses—Interest Expense."
 
Income (Loss) Before Taxes
 
The increase in income (loss) before taxes during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was due primarily to a higher level of net gains from investment activities, and to a lesser extent, a higher level of capital allocation-based income, in each case as described above.

Income Taxes

For the three months ended September 30, 2018 there was a net income tax benefit of $129.4 million which was driven primarily by tax benefits recorded on the date of the Conversion. The tax benefit was partially offset by a higher level of income that is subject to corporate taxes following the Conversion. Prior to the Conversion, KKR & Co. L.P.’s investment income and carried interest generally were not subject to U.S. corporate income taxes. Subsequent to the Conversion, all income earned by KKR & Co. Inc. is subject to U.S. corporate income taxes, which we believe will result in an overall higher income tax expense (or benefit) when compared to periods prior to the Conversion. Our effective tax rate under GAAP for the three months ended September 30, 2018 was (10.6)%. For a discussion of factors that impacted KKR's tax provision, see Note 11 "Income Taxes" to the condensed consolidated financial statements included elsewhere in this report and "Risk Factors" in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.

Net Income (Loss) Attributable to Noncontrolling Interests
 
Net income (loss) attributable to noncontrolling interests for the three months ended September 30, 2018 relates primarily to net income attributable to KKR Holdings representing its ownership interests in the KKR Group Partnerships as well as third-party limited partner interests in those investment funds that we consolidate. The increase from the prior period is due primarily to a higher level of income recorded by certain consolidated fund entities that is attributable to third party limited partners as well as higher amounts attributed to KKR Holdings in connection with a higher level of income recognized for the three months ended September 30, 2018 as compared to the prior period. This increase was partially offset by a reduction in KKR Holdings' ownership percentage in the KKR Group Partnerships.


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Net Income (Loss) Attributable to KKR & Co. Inc.
 
The increase in net income (loss) attributable to KKR & Co. Inc. for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily due to a higher level of net investment gains and carried interest gains as well as an overall tax benefit in the current period as compared to the prior period, partially offset by an increase in income attributable to noncontrolling interests.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Change
 
($ in thousands)
Revenues
 

 
 

 
 
Fees and Other
$
1,299,743

 
$
1,116,382

 
$
183,361

Capital Allocation-Based Income
1,274,149

 
1,416,825

 
(142,676
)
Total Revenues
2,573,892

 
2,533,207

 
40,685

 
 
 
 
 
 
Expenses
 
 
 
 
 
Compensation and Benefits
1,331,070

 
1,234,317

 
96,753

Occupancy and Related Charges
44,787

 
44,150

 
637

General, Administrative and Other
475,884

 
421,522

 
54,362

Total Expenses
1,851,741

 
1,699,989

 
151,752

 
 
 
 
 
 
Investment Income (Loss)
 
 
 
 
 
Net Gains (Losses) from Investment Activities
2,256,118

 
893,065

 
1,363,053

Dividend Income
137,653

 
100,144

 
37,509

Interest Income
989,354

 
893,832

 
95,522

Interest Expense
(634,521
)
 
(597,403
)
 
(37,118
)
Total Investment Income (Loss)
2,748,604

 
1,289,638

 
1,458,966

 
 
 
 
 
 
Income (Loss) Before Taxes
3,470,755

 
2,122,856

 
1,347,899

 
 
 
 
 
 
Income Tax (Benefit)
(50,804
)
 
77,500

 
(128,304
)
 
 
 
 
 
 
Net Income (Loss)
3,521,559

 
2,045,356

 
1,476,203

Net Income (Loss) Attributable to Redeemable Noncontrolling Interests
19,894

 
64,196

 
(44,302
)
Net Income (Loss) Attributable to Noncontrolling Interests
1,985,961

 
1,137,585

 
848,376

Net Income (Loss) Attributable to KKR & Co. Inc.
1,515,704

 
843,575

 
672,129

 
 
 
 
 
 
Series A Preferred Stock Dividends
17,466

 
17,466

 

Series B Preferred Stock Dividends
7,557

 
7,557

 

 
 
 
 
 
 
Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders
$
1,490,681

 
$
818,552

 
$
672,129




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Revenues

For the nine months ended September 30, 2018 and 2017 , revenues consisted of the following:

 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Management Fees
 
$
547,765

 
$
517,393

 
$
30,372

Fee Credits
 
(137,804
)
 
(207,396
)
 
69,592

Transaction Fees
 
619,278

 
581,410

 
37,868

Monitoring Fees
 
63,125

 
58,977

 
4,148

Incentive Fees
 
14,038

 
3,637

 
10,401

Expense Reimbursements
 
108,999

 
86,226

 
22,773

Oil and Gas Revenue
 
40,995

 
47,096

 
(6,101
)
Consulting Fees
 
43,347

 
29,039

 
14,308

Total Fees and Other
 
1,299,743

 
1,116,382

 
183,361

 
 
 
 
 
 
 
Carried Interest
 
1,097,673

 
1,224,235

 
(126,562
)
General Partner Capital Interest
 
176,476

 
192,590

 
(16,114
)
Total Capital Allocation-Based Income
 
1,274,149

 
1,416,825

 
(142,676
)
 
 
 
 
 
 
 
Total Revenues
 
$
2,573,892

 
$
2,533,207

 
$
40,685


Total Fees and Other for the nine months ended September 30, 2018 increased compared to the nine months ended September 30, 2017 primarily as a result of an increase in transaction fees, management fees and expense reimbursements, and with respect to our Private Markets and Public Markets business lines, a decrease in fee credits. These increases were partially offset by a decrease in oil and gas revenue.

For a more detailed discussion of the factors that affected our transaction fees, monitoring fees, fee credits and incentive fees during the period, see "—Segment Results—Segment Revenues."

The increase in management fees during the nine months ended September 30, 2018 compared to the prior period was due primarily to management fees earned from our Asian Fund III and Global Infrastructure Fund III which entered their investment periods in the second quarter of 2017 and the second quarter of 2018, respectively. This increase was partially offset by a reduction in management fees from (i) Prisma Capital Partners LP ("Prisma") as a result of the transaction to combine Pacific Alternative Asset Management Company, LLC ("PAAMCO") and Prisma to create PAAMCO Prisma (the "PAAMCO Prisma transaction") that closed in the second quarter of 2017 and (ii) lower management fees paid by our Asian Fund II when it entered its post-investment period in the second quarter of 2017, in which it pays fees at a lower rate than during the investment period and based on capital invested at the time rather than total committed capital. For a more detailed discussion of the factors that affected our management fees during the period, see "—Segment Results—Segment Revenues."

The decrease in carried interest and general partner capital interest during the nine months ended September 30, 2018 compared to the prior period was due primarily to a lower level of net appreciation in the value of our private equity portfolio as compared to the nine months ended September 30, 2017 . For a more detailed discussion of the factors that affected our Private Markets and Public Markets carried interest during the period, see "—Segment Results—Segment Revenues—Private Markets Revenues—Realized Performance Income" and "—Segment Results—Segment Revenues—Public Markets Revenues—Realized Performance Income." For a more detailed discussion of the factors that affected our general partner capital interest during the period, see "—Segment Results—Segment Revenues—Principal Activities Revenues—Realized Investment Income."

Compensation and Benefits Expenses

The increase was primarily due to higher overall compensation driven by a higher level of fees during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 and higher equity-based compensation

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charges resulting from an increase in the number of unvested shares outstanding. Partially offsetting this increase was a decrease in compensation reflecting a lower level of appreciation in the value of our private equity portfolio.

General, Administrative and Other Expenses

The increase for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to (i) an increase in professional fees and travel expenses incurred, the most significant of which were costs incurred in connection with the Conversion, (ii) an increase in expenses reimbursable by investment funds, and (iii) a higher level of financing costs incurred related to debt at new consolidated CLOs as compared to the prior period. These increases were partially offset by (i) expenses of Prisma that had been reported on a gross basis prior to the closing of the PAAMCO Prisma transaction on June 1, 2017 and that are now reflected as part of our allocation of the net income of PAAMCO Prisma after June 1, 2017, resulting in a decrease in our reported General, Administrative and Other Expenses, and (ii) a decrease in placement fees incurred in connection with capital raising activity during the nine months ended September 30, 2018 as compared to the prior period.

Net Gains (Losses) from Investment Activities

The following is a summary of net gains (losses) from investment activities:
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
($ in thousands)
Private Equity
$
1,269,275

 
$
574,884

Credit
(422,033
)
 
(24,809
)
Investments of Consolidated CFEs
(93,138
)
 
(16,725
)
Real Assets
324,408

 
199,400

Equity Method - Other
326,068

 
68,415

Other Investments
(334,244
)
 
(128,842
)
Debt Obligations and Other
519,182

 
(7,190
)
Other Net Gains (Losses) from Investment Activities
666,600

 
227,932

Net Gains (Losses) from Investment Activities
$
2,256,118

 
$
893,065


Net Gains (Losses) from Investment Activities for the nine months ended September 30, 2018

The net gains from investment activities for the nine months ended September 30, 2018 were comprised of net realized gains of $426.2 million and net unrealized gains of $1,829.9 million .

Realized Gains from Investment Activities

For the nine months ended September 30, 2018 , realized gains related primarily to (i) a gain recognized on the FS Investments Transaction, (ii) the sale of assets in our consolidated special situations funds, (iii) the partial sale of our investment in First Data Corporation which is held as a direct co-investment by KKR, (iv) the sale of real estate investments held through certain consolidated entities, (v) the sale of energy investments held through certain consolidated entities and (vi) the sale of our investment in Next Issue Media LLC (technology sector) which was held directly by KKR.

Realized Losses from Investment Activities

Partially offsetting these realized gains were realized losses primarily relating to the write-off of Trinity Holdings LLC (energy sector) and certain CLOs during the nine months ended September 30, 2018 .

Unrealized Gains from Investment Activities

For the nine months ended September 30, 2018 , unrealized gains were driven primarily by (i) mark-to-market gains on our co-investments held directly by KKR, the most significant of which was First Data Corporation, (ii) mark-to-market gains in portfolio companies in our core investment strategy, the most significant of which were USI, Inc., PetVet Care Centers, LLC, and Heartland Dental LLC, (iii) the reversal of previously recognized unrealized losses related to the write-off of Trinity Holdings LLC and certain CLOs as described above, (iv) mark-to-market gains in our growth equity investments held directly

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by KKR and certain consolidated entities and (v) mark-to-market gains on investments in our energy portfolio held through certain consolidated funds.

Unrealized Losses from Investment Activities

Partially offsetting the unrealized gains above were unrealized losses relating to (i) the reversal of previously recognized unrealized gains relating to the partial sale of First Data Corporation, assets sold in our consolidated special situations funds and the sale of real estate investments held through certain consolidated entities and (ii) mark-to-market losses on our investment in Preferred Sands, Inc. held directly by KKR, investments held at our India debt financing company, and our investment in HDFC Bank Limited which is held as a direct investment by KKR.

For a discussion of other factors that affected KKR's investment income, see "—Segment Analysis."

Net Gains (Losses) from Investment Activities for the nine months ended September 30, 2017

The net gains from investment activities for the nine months ended  September 30, 2017  were comprised of net realized losses of $(2.7) million and net unrealized gains of $895.8 million.

Realized Gains and Losses from Investment Activities

For the nine months ended  September 30, 2017 , realized losses were comprised primarily of realized losses related to (i) the sale of investments in our energy portfolio held directly by KKR, (ii) alternative credit assets in our consolidated special situations funds, and (iii) the sale of investments held by our consolidated CLOs. Partially offsetting these realized losses were realized gains on sales of private equity investments held directly by KKR, including the final sale of Galenica AG (VTX: GALN) and HCA Holdings, Inc. (NYSE: HCA) and partial sales of First Data Corporation and US Foods Holding Corp. 

Unrealized Gains from Investment Activities

For the nine months ended  September 30, 2017 , unrealized gains were driven primarily by (i) mark-to-market gains in our private equity portfolio held directly by KKR, the most significant of which were unrealized gains in First Data Corporation, (ii) mark-to-market gains on investments held directly by KKR and in certain consolidated entities, the most significant of which were unrealized gains in The Hut Group Limited, (iii) mark-to-market gains on alternative credit assets in our consolidated special situations funds and KFN, and (iv) mark-market gains and the reversal of unrealized losses on the sale of investments in our consolidated energy funds and infrastructure portfolios held directly by KKR.

Unrealized Losses from Investment Activities

Partially offsetting the unrealized gains for the nine months ended  September 30, 2017 were unrealized losses, the most significant of which were unrealized losses relating to the reversal of unrealized gains on the final sales of Galenica AG and HCA Holdings, Inc. and the partial sale of US Foods Holding Corp.

For a discussion of other factors that affected KKR's investment income, see "—Segment Analysis."

Dividend Income
 
During the nine months ended September 30, 2018 , the most significant dividends received included $43.4 million from our consolidated energy funds, $34.0 million from our consolidated special situations funds, and $26.2 million from our consolidated real estate funds. During the nine months ended September 30, 2017 , the most significant dividends received included $45.5 million from our consolidated special situations funds, $18.1 million from investments across multiple strategies held directly by KKR and $16.0 million from our consolidated real estate funds. Significant dividends from portfolio companies are generally not recurring quarterly dividends, and while they may occur in the future, their size and frequency are variable. For a discussion of other factors that affected KKR's dividend income, see "—Segment Results—Segment Revenues—Principal Activities Revenues—Realized Investment Income."







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Interest Income
 
The increase in interest income during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to a higher level of interest earned related to (i) an increase in the amount of additional capital deployed in investments held by KREF, (ii) the closing of six additional CLOs subsequent to the nine months ended September 30, 2017 , (iii) an increase in the amount of investments held in our consolidated credit funds compared to the prior period, and (iv) an increase in the amount of investments held at our India debt financing company as compared to the prior period. These increases were partially offset by a decrease in interest income earned as a result of the sale of KKR's beneficial interest in four consolidated CMBS vehicles held by KREF that resulted in the deconsolidation of such vehicles subsequent to September 30, 2017 . For a discussion of other factors that affected KKR's interest income, see "—Segment Results—Segment Revenues—Principal Activities Revenues—Realized Investment Income."

Interest Expense
 
The increase in interest expense during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to the impact of (i) the closing of six additional CLOs subsequent to the nine months ended September 30, 2017 and (ii) increased interest on amounts under KREF's lending facilities used to finance investments in commercial loans. These increases were partially offset by a decrease in (i) interest expense incurred as a result of the sale of KKR's beneficial interest in four consolidated CMBS vehicles held by KREF that resulted in the deconsolidation of such vehicles subsequent to September 30, 2017 and (ii) interest expense associated with certain notes issued by consolidated CLOs being called for redemption subsequent to September 30, 2017 . For a discussion of other factors that affected KKR's interest expense, see "—Segment Analysis—Segment Expenses—Interest Expense."
 
Income (Loss) Before Taxes
 
The increase in income (loss) before taxes for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was due primarily to a higher level of net gains from investment activities, and to a lesser extent, a higher level of fees, partially offset by a lower level of capital allocation-based income, in each case as described above.

Income Taxes

For the nine months ended September 30, 2018 there was a net income tax benefit of $50.8 million which was driven primarily by tax benefits recorded on the date of the Conversion. The tax benefit was partially offset by a higher level of income that is subject to corporate taxes following the Conversion. Prior to the Conversion, KKR & Co. L.P.’s investment income and carried interest generally were not subject to U.S. corporate income taxes. Subsequent to the Conversion, all income earned by KKR & Co. Inc. is subject to U.S. corporate income taxes, which we believe will result in an overall higher income tax expense (or benefit) when compared to periods prior to the Conversion. Our effective tax rate under GAAP for the nine months ended September 30, 2018 was (1.5)%. For a discussion of factors that impacted KKR's tax provision, see Note 11 "Income Taxes" to the condensed consolidated financial statements included elsewhere in this report and "Risk Factors" in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.

Net Income (Loss) Attributable to Noncontrolling Interests
 
Net income (loss) attributable to noncontrolling interests for the nine months ended September 30, 2018 relates primarily to net income attributable to KKR Holdings representing its ownership interests in the KKR Group Partnerships as well as third-party limited partner interests in those investment funds that we consolidate. The increase from the prior period is due primarily to a higher level of income recorded by certain consolidated fund entities that is attributable to third party limited partners as well as higher amounts attributed to KKR Holdings in connection with a higher level of income recognized for the nine months ended September 30, 2018 as compared to the prior period. This increase was partially offset by a reduction in KKR Holdings' ownership percentage in the KKR Group Partnerships.
 
Net Income (Loss) Attributable to KKR & Co. Inc.
 
The increase in net income (loss) attributable to KKR & Co. Inc. for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to a higher level of net investment gains partially offset by a lower level of carried interest gains and an increase in income attributable to noncontrolling interests in the current period as compared to the prior period.



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Condensed Consolidated Statements of Financial Condition

The following table provides the condensed consolidated statements of financial condition on a GAAP basis as of September 30, 2018 and December 31, 2017 .
(Amounts in thousands, except per share amounts)
 
 
As of
 
As of
 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
Assets
 
 
 
 
Cash and Cash Equivalents
 
$
2,264,875

 
$
1,876,687

Investments
 
44,119,593

 
39,013,934

Other
 
3,959,480

 
4,944,098

Total Assets
 
50,343,948

 
45,834,719

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Debt Obligations
 
20,266,172

 
21,193,859

Other Liabilities
 
3,937,865

 
3,978,060

Total Liabilities
 
24,204,037

 
25,171,919

 
 
 
 
 
Redeemable Noncontrolling Interests
 
1,070,575

 
610,540

 
 
 
 
 
Stockholders' Equity
 
 
 
 
Preferred Stock
 
482,554

 
482,554

KKR & Co. Inc. Stockholders' Equity - Common Stockholders
 
8,524,213

 
6,703,382

Noncontrolling Interests
 
16,062,569

 
12,866,324

Total Equity
 
25,069,336

 
20,052,260

Total Liabilities and Equity
 
$
50,343,948

 
$
45,834,719

 
 
 
 
 
KKR & Co. Inc. Stockholders' Equity Per Outstanding Share of Class A Common Stock - Basic
 
$
16.22

 
$
13.79

 
 
 
 
 




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Condensed Consolidated Statements of Cash Flows
 
The accompanying condensed consolidated statements of cash flows include the cash flows of our consolidated entities which include certain consolidated investment funds and CFEs notwithstanding the fact that we may hold only a minority economic interest in those funds and CFEs.

The assets of our consolidated funds and CFEs, on a gross basis, can be substantially larger than the assets of our business and, accordingly, could have a substantial effect on the cash flows reflected in our condensed consolidated statements of cash flows. The primary cash flow activities of our consolidated funds and CFEs involve: (i) capital contributions from fund investors; (ii) using the capital of fund investors to make investments; (iii) financing certain investments with indebtedness; (iv) generating cash flows through the realization of investments; and (v) distributing cash flows from the realization of investments to fund investors. Because our consolidated funds and CFEs are treated as investment companies for accounting purposes, certain of these cash flow amounts are included in our cash flows from operations.

On January 1, 2018, KKR adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which amends the guidance to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. Upon adoption, (i) Restricted Cash and Cash Equivalents and (ii) Cash and Cash Equivalents Held at Consolidated Entities were (a) included in the cash and cash-equivalents balances in the condensed consolidated statements of cash flows and (b) disclosed in a reconciliation between the condensed consolidated statements of financial condition and the condensed consolidated statements of cash flows. This guidance has been applied on a full retrospective basis. For the nine months ended September 30, 2017, $365.5 million of cash provided by operating activities and $168.0 million of cash provided by investing activities were removed from net cash provided (used) by operating activities and net cash provided (used) by investing activities, respectively, and included in net increase/(decrease) in cash, cash-equivalents and restricted cash in the condensed consolidated statements of cash flows.

Net Cash Provided (Used) by Operating Activities
 
Our net cash provided (used) by operating activities was $(5.2) billion and $(2.6) billion during the nine months ended September 30, 2018 and 2017 , respectively. These amounts primarily included: (i) proceeds from investments net of investments purchased of $(6.2) billion and $(3.5) billion during the nine months ended September 30, 2018 and 2017 , respectively; (ii) net realized gains (losses) on investments of $426.2 million and (2.7) million during the nine months ended September 30, 2018 and 2017 , respectively; (iii) change in unrealized gains (losses) on investments of $1,829.9 million and $895.7 million during the nine months ended September 30, 2018 and 2017 respectively and (iv) capital allocation-based income of $1,274.1 million and $1,416.8 million during the nine months ended September 30, 2018 and 2017 , respectively. Investment funds are, for GAAP purposes, investment companies and reflect their investments and other financial instruments at fair value.
 
Net Cash Provided (Used) by Investing Activities
 
Our net cash provided (used) by investing activities was $(43.3) million and $(71.9) million during the nine months ended September 30, 2018 and 2017 , respectively. Our investing activities included: (i) the purchase of fixed assets of $(70.0) million and $(70.8) million during the nine months ended September 30, 2018 and 2017 , respectively; (ii) proceeds from sale of oil and natural gas properties of $26.6 million for the nine months ended September 30, 2018 and (iii) development of oil and natural gas properties of $(1.0) million for the nine months ended September 30, 2017 .
 
Net Cash Provided (Used) by Financing Activities
 
Our net cash provided (used) by financing activities was $4.9 billion and $2.1 billion during the nine months ended September 30, 2018 and 2017 , respectively. Our financing activities primarily included: (i) distributions to, net of contributions by, our noncontrolling and redeemable noncontrolling interests of $1.8 billion and $1.1 billion during the nine months ended September 30, 2018 and 2017 , respectively; (ii) proceeds received net of repayment of debt obligations of $3.5 billion and $1.3 billion during the nine months ended September 30, 2018 and 2017 , respectively; (iii) common stock dividends of $(256.2) million and $(230.8) million during the nine months ended September 30, 2018 and 2017 , respectively; (iv) net delivery of Class A common stock of $(53.4) million and $(37.3) million during the nine months ended September 30, 2018 and 2017 , respectively; (v) repurchases of Class A common stock of $(80.7) million during the nine months ended September 30, 2018 and (vi) preferred stock dividends of $(25.0) million during the nine months ended September 30, 2018 and 2017 .


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Segment Analysis
 
The following is a discussion of the results of our business on a segment basis for the three and nine months ended September 30, 2018 and 2017 . You should read this discussion in conjunction with the information included under "—Basis of Accounting—Key Segment and Other Operating and Performance Measures" and the condensed consolidated financial statements and related notes included elsewhere in this report.
In connection with a change to KKR's chief operating decision makers, KKR's management has reevaluated the manner in which it makes operational and resource deployment decisions and assesses the overall performance of KKR's business. Effective with the three months ended June 30, 2018, the items detailed below have changed with respect to the preparation of the reports used by KKR's chief operating decision makers. As a result, KKR has modified the presentation of its segment financial information effective as of and for the three months ended June 30, 2018, with retrospective application to all prior periods presented.
         The most significant changes between KKR's current segment presentation and its previous segment presentation reported prior to the three months ended June 30, 2018, are as follows:

After-tax Distributable Earnings - After-tax distributable earnings is the performance measure for KKR's profitability and is used by management in making operational and resource deployment decisions since after-tax distributable earnings aligns KKR's net realized performance with the manner in which KKR receives its revenues and determines the compensation of its employees. Previously, economic net income was a key performance measure. The key distinction between after-tax distributable earnings and economic net income is that after-tax distributable earnings reflects the earnings of KKR excluding mark-to-market gains (losses).

Single Reportable Segment - KKR operates through one operating and reportable segment as the chief operating decision makers assess performance of and allocate resources to all of its business lines on a collective basis. These performance assessments and resource allocation decisions are based both on individual and group performance and on broad considerations reflecting KKR's "one-firm approach," which includes operating collaboratively across business lines with predominantly a single expense pool. Historically, KKR operated as four reportable segments.

Elimination of Expense Allocation Process - In previous periods, certain expenses were allocated among four historical reportable segments. For the reasons discussed above, a majority of our expenses, namely compensation expense and interest expense, are not specifically allocated among our business lines. Accordingly, KKR has eliminated the expense allocation process that was used in prior periods.

Inclusion of Equity Based Compensation in After-tax Distributable Earnings - Historically, equity-based compensation expense relating to the Equity Incentive Plan was not reflected in our calculation of after-tax distributable earnings. Under KKR's current segment presentation, equity-based compensation expense is included in after-tax distributable earnings as a component of compensation expense in order to reflect the dilutive nature of these non-cash equity-based awards. For comparability, after-tax distributable earnings for the comparable prior periods have been calculated using this new definition.

Interest Expense Excluded from Segment Revenues - Historically, KKR's interest expense on its debt capital was allocated entirely to the Principal Activities business line (one of the four historical reportable segments) as a reduction of investment income. As such, interest expense was included as a reduction to total segment revenues. Under KKR's current segment presentation, interest expense is not allocated among its business lines, as its debt capital supports KKR's entire business and not just the Principal Activities business line. As such, KKR's current segment presentation excludes interest expense from total segment revenues.

         In connection with these modifications, segment information as of and for the three and nine months ended September 30, 2017 has been presented in this Quarterly Report on Form 10-Q to conform to KKR's current segment presentation for comparability purposes. Consequently, this information will be different from the historical segment financial results previously reported by KKR in its reports filed with the SEC.

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Segment Results
 
The following tables set forth information regarding KKR's segment results and certain key operating metrics as of and for the three and nine months ended September 30, 2018 and 2017 .

Three months ended September 30, 2018 compared to three months ended September 30, 2017

 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Segment Revenues
 
 
 
 
 
 
Fees and Other, Net
 
 
 
 
 
 
Management Fees
 
$
276,595

 
$
232,954

 
$
43,641

Transaction Fees
 
289,030

 
179,167

 
109,863

Monitoring Fees
 
20,176

 
14,342

 
5,834

Fee Credits
 
(82,187
)
 
(70,747
)
 
(11,440
)
Total Fees and Other, Net
 
503,614

 
355,716

 
147,898

 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
Carried Interest
 
414,609

 
419,438

 
(4,829
)
Incentive Fees
 
18,001

 
4,074

 
13,927

Total Realized Performance Income (Loss)
 
432,610

 
423,512

 
9,098

 
 
 
 
 
 
 
Realized Investment Income (Loss)
 
 
 
 
 
 
Net Realized Gains (Losses)
 
181,026

 
76,053

 
104,973

Interest Income and Dividends
 
61,717

 
70,557

 
(8,840
)
Total Realized Investment Income (Loss)
 
242,743

 
146,610

 
96,133

Total Segment Revenues
 
1,178,967

 
925,838

 
253,129

 
 
 
 
 
 
 
Segment Expenses
 
 
 
 
 
 
Compensation and Benefits (1)
 
469,107

 
363,247

 
105,860

Occupancy and Related Charges
 
14,571

 
14,672

 
(101
)
Other Operating Expenses
 
73,402

 
70,517

 
2,885

Total Segment Expenses
 
557,080

 
448,436

 
108,644

 
 
 
 
 
 
 
Segment Operating Earnings
 
621,887

 
477,402

 
144,485

 
 
 
 
 
 
 
Interest Expense
 
44,696

 
45,613

 
(917
)
Preferred Dividends
 
8,341

 
8,341

 

Income (Loss) Attributable to Noncontrolling Interests
 
2,272

 
1,046

 
1,226

Income Taxes Paid
 
69,880

 
12,869

 
57,011

After-tax Distributable Earnings
 
$
496,698

 
$
409,533

 
$
87,165

(1)
Includes equity-based compensation of $59,801 and $54,921 for the three months ended September 30, 2018 and 2017 , respectively.



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Segment Revenues

The following sections discuss revenues for each of our business lines on a disaggregated basis for the three months ended September 30, 2018 and 2017 .

Private Markets Revenues

The following table presents Fees and Other, Net, and Realized Performance Income in the Private Markets business line for the three months ended September 30, 2018 and 2017 :

 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Fees and Other, Net
 
 
 
 
 
 
Management Fees
 
$
176,071

 
$
153,841

 
$
22,230

Transaction Fees
 
93,866

 
82,258

 
11,608

Monitoring Fees
 
20,176

 
14,342

 
5,834

Fee Credits
 
(73,571
)
 
(59,854
)
 
(13,717
)
Total Fees and Other, Net
 
216,542

 
190,587

 
25,955

 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
Carried Interest
 
404,709

 
419,438

 
(14,729
)
Incentive Fees
 

 

 

Total Realized Performance Income (Loss)
 
$
404,709

 
$
419,438

 
$
(14,729
)

Fees and Other, Net
 
The increase for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 was primarily due to an increase in management fees and transaction fees, partially offset by a corresponding increase in fee credits.

The increase in management fees was primarily due to (i) management fees earned from our Global Infrastructure Fund III when it entered its investment period in the second quarter of 2018 and (ii) new capital raised in our Real Estate Partners Americas II fund after September 30, 2017. This net increase was partially offset by decreases due to (i) management fees calculated based on lower levels of invested capital as a result of realizations primarily in our European Fund III and 2006 Fund and (ii) lower management fees earned from our Real Estate Partners Americas fund when it entered its post-investment period in the second quarter of 2017, in which it pays fees based on capital invested rather than remaining commitments and capital invested during the investment period.
 
The increase in transaction fees was primarily attributable to an increase in the number of transaction fee-generating investments. During the three months ended September 30, 2018 , there were 17 transaction fee-generating investments that paid an average fee of $5.5 million compared to 14 transaction fee-generating investments that paid an average fee of $5.9 million during the three months ended September 30, 2017 . For the three months ended September 30, 2018 , approximately 57% of these transaction fees were paid by companies located in North America, 34% were paid from companies located Europe, and 9% were paid from companies in the Asia-Pacific region. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular agreements as to the amount of the fees, the complexity of the transaction, and KKR's role in the transaction. Additionally, transaction fees are generally not earned with respect to energy and real estate investments. The increase in fee credits is due primarily to a higher level of transaction fees shared with fund investors.

Recurring monitoring fees increased $5.8 million, which was primarily the result of an increase in both the size and number of portfolio companies paying monitoring fees. For the three months ended September 30, 2018 , we had 55 portfolio companies that were paying an average monitoring fee of $0.4 million compared with 50 portfolio companies that were paying an average monitoring fee of $0.3 million for the three months ended September 30, 2017 . There were no termination payments for the three months ended September 30, 2018 and 2017. These termination payments may occur in the future;

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however, they are infrequent in nature and are generally correlated with the IPO and other realization activity in our private equity portfolio, and they are expected to continue to be smaller in size and number compared to prior periods.

Realized Performance Income

The following table presents realized carried interest by investment vehicle for the three months ended September 30, 2018 and 2017 :
 
Three Months Ended September 30,
 
2018
 
2017
 
($ in thousands)
North America Fund XI
$
158,452

 
$
90,394

2006 Fund
99,304

 
295,782

European Fund III
86,117

 
4,500

Asian Fund II
29,575

 

Global Infrastructure Investors
16,653

 

Co-Investment Vehicles and Other
8,946

 
16,255

China Growth Fund
6,895

 

Real Estate Partners Americas
4,935

 
10,365

European Fund II
1,720

 
2,142

Millennium Fund
(7,888
)
 

Total Realized Carried Interest (1)
$
404,709

 
$
419,438

(1)
The above table excludes any funds for which there was no realized carried interest during either of the periods presented.
 
Realized carried interest for the three months ended September 30, 2018 consisted primarily of realized gains from the sale of Mehiläinen (health care sector) and partial sales of National Vision Holdings, Inc. (NASDAQ: EYE) and PRA Health Sciences, Inc.

Realized carried interest for the three months ended September 30, 2017, consisted primarily of realized gains from the sale of Capsugel S.A. (manufacturing sector) and partial sales of PRA Health Sciences, Inc. and US Foods Holding Corp.


 

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Public Markets Revenues

The following table presents Fees and Other, Net, and Realized Performance Income in the Public Markets business line for the three months ended September 30, 2018 and 2017:

 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Fees and Other, Net
 
 
 
 
 
 
Management Fees
 
$
100,524

 
$
79,113

 
$
21,411

Transaction Fees
 
8,666

 
11,469

 
(2,803
)
Fee Credits
 
(8,616
)
 
(10,893
)
 
2,277

Total Fees and Other, Net
 
100,574

 
79,689

 
20,885

 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
Carried Interest
 
9,900

 

 
9,900

Incentive Fees
 
18,001

 
4,074

 
13,927

Total Realized Performance Income (Loss)
 
$
27,901

 
$
4,074

 
$
23,827


Fees and Other, Net
 
The increase for the three months ended September 30, 2018 compared to the prior period was primarily due to an increase in management fees, partially offset by a decrease in transaction fees, net of fee credits. The increase in management fees was primarily due to an increase in fees earned from BDCs advised or sub-advised by KKR driven primarily by the completion of the FS Investments Transaction in the second quarter of 2018 and increased fees from our hedge fund partnerships as a result of greater overall FPAUM. As a result of the closing of the FS Investments Transaction on April 9, 2018, KKR began receiving its portion of the management and incentive fees on an additional $13.2 billion of FPAUM (relating to FS Investments' BDCs), which are reflected in our operating results beginning in the second quarter of 2018.

The decrease in transaction fees was primarily attributable to a decrease in the number and average size of transaction fee-generating investments. During the three months ended September 30, 2018 , there were 13 transaction fee-generating investments that paid an average fee of $0.7 million compared to 14 transaction fee-generating investments that paid an average fee of $0.8 million during the three months ended September 30, 2017 .

Realized Performance Income
 
The increase for the three months ended September 30, 2018 was primarily attributable to higher incentive fees received from BDCs advised or sub-advised by KKR and, to a lesser extent, realized carried interest earned in our special situations strategy.

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Capital Markets Revenues

The following table presents Transaction Fees in the Capital Markets business line for the three months ended September 30, 2018 and 2017:

 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Transaction Fees
 
$
186,498

 
$
85,440

 
$
101,058

 
 
 
 
 
 
 

Transaction fees increased due primarily to an increase in both the size and number of capital markets transactions for the three months ended September 30, 2018 , compared to the three months ended September 30, 2017 . Overall, we completed 56 capital markets transactions for the three months ended September 30, 2018 , of which 12 represented equity offerings and 44 represented debt offerings, as compared to 48 transactions for the three months ended September 30, 2017 , of which 2 represented equity offerings and 46 represented debt offerings. We earned fees in connection with underwriting, syndication and other capital markets services. While each of the capital markets transactions that we undertake in this business line is separately negotiated, our fee rates are generally higher with respect to underwriting or syndicating equity offerings than with respect to debt offerings, and the amount of fees that we collect for like transactions generally correlates with overall transaction sizes. Our capital markets fees are generated in connection with our Private Markets and Public Markets business lines as well as from third-party companies. For the three months ended September 30, 2018 , approximately 10% of our transaction fees were earned from unaffiliated third parties as compared to approximately 38% for the three months ended September 30, 2017 . Our transaction fees are comprised of fees earned from North America, Europe, and the Asia-Pacific region. For the three months ended September 30, 2018 , approximately 44% of our transaction fees were generated outside of North America as compared to approximately 21% for the three months ended September 30, 2017 . Our Capital Markets business line is dependent on the overall capital markets environment, which is influenced by equity prices, credit spreads, and volatility. Our Capital Markets business line does not generate management or monitoring fees.

Principal Activities Revenues

The following table presents Realized Investment Income in the Principal Activities business line for the three months ended September 30, 2018 and 2017:

 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Realized Investment Income (Loss)
 
 
 
 
 
 
Net Realized Gains (Losses)
 
$
181,026

 
$
76,053

 
$
104,973

Interest Income and Dividends
 
61,717

 
70,557

 
(8,840
)
Total Realized Investment Income (Loss)
 
$
242,743

 
$
146,610

 
$
96,133


Realized Investment Income
The increase is primarily due to an increased level of net realized gains, partially offset by a decrease in interest income and dividends during the three months ended September 30, 2018 , compared to the prior period.
For the three months ended September 30, 2018 , net realized gains were comprised of gains primarily from the sale of private markets investments including the partial sales of our investments in First Data Corporation, PRA Health Sciences, Inc., and National Vision Holdings, Inc. and the sale of Mehiläinen.
    For the three months ended September 30, 2017 , net realized gains were primarily comprised of gains from the sale of private markets investments including the sales or partial sales of First Data Corporation, Sentio Healthcare Properties, Inc. (real estate sector), and Capsugel S.A.
For the three months ended September 30, 2018 , interest income and dividends were comprised of (i) $39.7 million of interest income which consists primarily of interest that is received from our public markets investments including CLOs and other credit investments and to a lesser extent our India debt financing company and our cash balances (ii) $22.0 million of

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dividend income from distributions received primarily through our energy investments and real estate investments including our investment in KREF.
For the three months ended September 30, 2017 , interest income and dividends were comprised of (i) $42.6 million of interest income which consists primarily of interest that is received from our Public Markets investments including CLOs and other credit investments and to a lesser extent our capital markets business and our cash balances and (ii) $27.9 million of dividend income from distributions received primarily through our private equity investments and real estate investments including our investment in KREF.
The net decrease in interest income and dividends is due to a lower level of interest and dividend income in Alternative Credit for the three months ended September 30, 2018 compared to the prior period.
In the fourth quarter of 2018 we completed, or expect to complete sales, partial sales or secondary sales with respect to certain private equity portfolio companies and other investments as well as other realization activities such as the receipt of dividends and interest income across our broader portfolio. The most significant of these transactions are Sedgwick Claims Management Services, Inc. (financial services sector), the sale of an interest in one of our hedge fund partnerships and Cognita (education sector). These realization activities, if and when completed, are expected to result in realized performance income and realized investment income of approximately $580 million. Some of these transactions are not complete, and are subject to the satisfaction of closing conditions; there can be no assurance if or when any of these transactions will be completed.

Segment Expenses
Compensation and Benefits
 
The increase for the three months ended September 30, 2018 compared to the prior period was due primarily to higher compensation recorded in connection with higher total segment revenues and includes higher equity-based compensation charges resulting from an increase in the number of unvested shares outstanding.

Occupancy and Other Operating Expenses

The increase for the three months ended September 30, 2018 compared to the prior period is primarily due to an increase in professional fees and other administrative costs in connection with the growth of the firm.

Interest Expense

For the three months ended September 30, 2018 and 2017 interest expense relates primarily to the senior notes outstanding for KKR and KFN. The net decrease in interest expense for the three months ended September 30, 2018 compared to the prior period is due to lower interest rates at KFN, and to a lesser extent, an overall lower level of borrowings at KFN. This net decrease was partially offset by an increased level of borrowing under certain of our revolving credit facilities.
Income Taxes Paid
The increase in income taxes paid is primarily due to a higher level of income that is subject to corporate taxes following the Conversion.
After-tax Distributable Earnings
 
The increase in after-tax distributable earnings for the three months ended September 30, 2018 compared to the prior period was due primarily to higher transaction fees, realized performance income and realized investment income, partially offset by a higher level of compensation expense and income taxes paid in the current period compared to the prior period.


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Other Operating and Performance Measures

The following table presents certain key operating and performance metrics as of September 30, 2018 and June 30, 2018 :
 
 
As of
 
 
September 30, 2018
 
June 30, 2018
 
Change
 
 
($ in thousands)
Assets Under Management
 
$
194,613,800

 
$
191,265,400

 
$
3,348,400

Fee Paying Assets Under Management
 
$
139,285,700

 
$
138,841,100

 
$
444,600

Uncalled Commitments
 
$
57,880,100

 
$
57,417,400

 
$
462,700



The following table presents one of our key performance metrics for the three months ended September 30, 2018 and 2017 :
 
 
Three Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Capital Invested and Syndicated Capital
 
$
7,075,800

 
$
5,144,800

 
$
1,931,000


Assets Under Management

Private Markets

The following table reflects the changes in our Private Markets AUM from June 30, 2018 to September 30, 2018 :
 
($ in thousands)
June 30, 2018
$
102,391,900

New Capital Raised
1,425,300

Distributions and Other
(3,918,800
)
Change in Value
3,757,800

September 30, 2018
$
103,656,200


AUM for the Private Markets business line was $103.7 billion at September 30, 2018 , an increase of $1.3 billion, compared to $102.4 billion at June 30, 2018 .

The increase was primarily attributable to (i) an increase in the value of our Private Markets portfolio and (ii) to a lesser extent, new capital raised primarily in our Energy Income and Growth Fund II and Global Infrastructure Fund III. These increases were partially offset by distributions to Private Markets fund investors primarily as a result of realizations, most notably in our 2006 Fund, North America Fund XI and European Fund III.
 
The increase in the value of our Private Markets portfolio was driven primarily by net gains of $0.8 billion in each of our North America Fund XI and 2006 Fund and $0.3 billion in each of our Americas Fund XII and Asian Fund III.

For the three months ended September 30, 2018 , the value of our private equity investment portfolio increased 7.2%. This was comprised of a 7.4% increase in value of our privately held investments and a 7.0% increase in the share prices of various publicly held or publicly indexed investments.

The most significant increases in value of our privately held investments related to Sedgwick Claims Management Services, Inc., Hitachi Kokusai Electric Inc. (manufacturing sector), and Privilege Underwriters, Inc. (financial services sector). These increases in value on our privately held investments were partially offset by decreases in value relating primarily to Latitude Financial Services Limited (financial services sector), Upfield (consumer products sector) and United Group B.V. The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) in the case of Sedgwick Claims Management Services, Inc., a valuation that reflects an agreement to sell this investment, (ii) an increase in the value of market comparables, and (iii) individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to changes in foreign exchange rates.


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The most significant increases in share prices of various publicly held or publicly indexed investments were gains in First Data Corporation, gains in Focus Financial Partners Inc. (NASDAQ: FOCS) (which had an IPO in the third quarter of 2018) and National Vision Holdings, Inc. These increases were partially offset by decreases in share prices of various publicly held investments, the most significant of which were losses in BrightView Holdings, Inc. (NYSE: BV), Qingdao Haier Co., Ltd. (CH: 600690) and Bharti Infratel Limited (BSE: 534816).

Since September 30, 2018, the broader equity markets have experienced significant volatility, with the S&P 500 Index falling by 7.2% between September 30, 2018 and October 25, 2018. Such volatility and uncertainty could make it more difficult to consummate new investments or exit our existing investments. Further, if the broader equity market continues to experience volatility and downward pressure in the fourth quarter of 2018, valuations of our investments may be negatively impacted, which may result in a lower valuations for these investments compared to September 30, 2018.

For the three months ended September 30, 2017 , the value of our private equity investment portfolio increased 3.9%. This was comprised of a 2.6% increase in the share prices of various publicly held or publicly indexed investments and a 4.6% increase in value of our privately held investments. Additionally, our infrastructure investment portfolio, which is comprised predominately of private investments, increased 6.6%.

The most significant increases in share prices of various publicly held or publicly indexed investments were gains in Gardner Denver Holdings, Inc. (NYSE: GDI), China International Capital Corporation Limited (HK: 3908), and Pets At Home Group Plc (LSE: PETS). These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were losses in Laureate Education, Inc. (NASDAQ: LAUR), First Data Corporation, and Beijing Capital Grand Limited (HK: 1329). Our privately held investments contributed the remainder of the change in value, the most significant of which were gains relating to Internet Brands, Inc. (technology sector), Colonial Pipeline Company (infrastructure sector), and United Group B.V. The unrealized gains on our privately held investments were partially offset by unrealized losses relating primarily to Optiv Inc. (technology sector), Academy Ltd. (retail sector) and Sundrop Farms Holding Limited (agriculture sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) an increase in the value of market comparables and (ii) individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance or, in certain cases, an unfavorable business outlook and (ii) a decrease in the value of market comparables.

Certain investments included in our AUM are denominated in currencies other than the U.S. dollar. Those investments expose our AUM to the risk that the value of the investments will be affected by changes in exchange rates between the currency in which the investments are denominated and the currency in which the investments are made. We generally seek to minimize these risks by employing hedging techniques in connection with certain investments, including using foreign currency options and foreign exchange forward contracts to reduce exposure to changes in exchange rates when a meaningful amount of capital has been invested in currencies other than the currencies in which the investments are denominated. We do not, however, hedge our currency exposure in all currencies or for all investments. See "—Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk" and "Risk Factors—Risks Related to the Assets We Manage—We make investments in companies that are based outside of the United States, which may expose us to additional risks not typically associated with investing in companies that are based in the United States" in our Annual Report.
 
Public Markets

The following table reflects the changes in our Public Markets AUM from June 30, 2018 to September 30, 2018
 
($ in thousands)
June 30, 2018
$
88,873,500

New Capital Raised
4,679,100

Distributions
(590,700
)
Redemptions
(2,055,200
)
Change in Value
50,900

September 30, 2018
$
90,957,600


AUM in our Public Markets business line totaled $91.0 billion at September 30, 2018 , an increase of $2.1 billion compared to AUM of $88.9 billion at June 30, 2018 . The increases due to new capital raised were related to multiple strategies, most notably $2.2 billion in certain leveraged credit strategies, $1.4 billion in our private credit strategies and $1.1 billion in our hedge fund partnerships. Partially offsetting these increases were redemptions and distributions from certain investment

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vehicles across multiple strategies, including our hedge fund partnerships, certain leveraged credit strategies and our BDCs. The increase due to change in value was driven primarily by changes in our private credit strategies.

Fee-Paying Assets Under Management
 
Private Markets

The following table reflects the changes in our Private Markets FPAUM from June 30, 2018 to September 30, 2018 :
 
($ in thousands)
June 30, 2018
$
66,295,700

New Capital Raised
1,005,300

Distributions and Other
(1,269,100
)
Change in Value
28,500

September 30, 2018
$
66,060,400


FPAUM in our Private Markets business line was $66.1 billion at September 30, 2018 , a decrease of $0.2 billion, compared to $66.3 billion at June 30, 2018 .

The decrease was primarily attributable to distributions primarily relating to realizations in our 2006 Fund, Global Infrastructure Fund and European Fund III. These decreases were partially offset by new capital raised in our Global Infrastructure Fund III and Energy Income and Growth Fund II and capital invested in our core investment vehicles and Asian Fund II.

Uncalled capital commitments from Private Markets investment funds from which KKR is currently not earning management fees amounted to approximately $12.2 billion at September 30, 2018 , which includes capital commitments reserved for follow-on investments for funds that have completed their investment periods. This capital will generally begin to earn management fees upon deployment of the capital or upon the commencement of the fund's investment period. The average annual management fee rate associated with this capital is approximately 1.0% . We will not begin earning fees on this capital until it is deployed or the related investment period commences, neither of which is guaranteed.  If and when such management fees are earned, which will occur over an extended period of time, a portion of existing FPAUM may cease paying fees or pay lower fees, thus offsetting a portion of any new management fees earned.

Public Markets

The following table reflects the changes in our Public Markets FPAUM from June 30, 2018 to September 30, 2018
 
($ in thousands)
June 30, 2018
$
72,545,400

New Capital Raised
3,688,600

Distributions
(863,200
)
Redemptions
(2,055,200
)
Change in Value
(90,300
)
September 30, 2018
$
73,225,300

 
FPAUM in our Public Markets business line was $73.2 billion at September 30, 2018 , an increase of $0.7 billion compared to FPAUM of $72.5 billion at June 30, 2018 . The increases due to new capital raised were related to multiple strategies, most notably $2.3 billion in certain leveraged credit strategies, $0.8 billion in our hedge fund partnerships and $0.6 billion in our private credit strategies. Partially offsetting these increases were redemptions and distributions from certain investment vehicles across multiple strategies, most notably our hedge fund partnerships, certain leveraged credit strategies and our private credit strategies.

Uncalled capital commitments from Public Markets investment funds from which KKR is currently not earning management fees amounted to approximately $7.8 billion at September 30, 2018 . This capital will generally begin to earn management fees upon deployment of the capital or upon the commencement of the fund's investment period. The average annual management fee rate associated with this capital is approximately 0.9% . We will not begin earning fees on this capital until it is deployed or the related investment period commences, neither of which is guaranteed. If and when such management

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fees are earned, which will occur over an extended period of time, a portion of existing FPAUM may cease paying fees or pay lower fees, thus offsetting a portion of any new management fees earned.

Uncalled Commitments
 
Private Markets

As of September 30, 2018 , our Private Markets business line had $48.1 billion of remaining uncalled capital commitments that could be called for investments in new transactions as compared to $48.6 billion as of June 30, 2018 . The decrease is due primarily to capital called from fund investors to make investments during the period, partially offset by new capital raised in our Global Infrastructure Fund III and Energy and Income Growth Fund II.

Public Markets

As of September 30, 2018 , our Public Markets business line had $9.8 billion of uncalled capital commitments that could be called for investments in new transactions as compared to $8.9 billion as of June 30, 2018 . The increase is due to new capital raised primarily in our private credit strategies, partially offset by capital called from fund investors to make investments during the period.

Capital Invested and Syndicated Capital
 
Private Markets Capital Invested

For the three months ended September 30, 2018 , Private Markets had $3.9 billion of capital invested as compared to $3.0 billion for the three months ended September 30, 2017 . The increase was driven primarily by a $0.6 billion increase in capital invested in our real assets and other strategies and $0.3 billion increase in capital invested in our private equity strategies (including core investments and growth equity). Generally, the portfolio companies acquired through our private equity funds have higher transaction values and result in higher capital invested relative to transactions in our real assets funds. The number of large private equity investments made in any quarter is volatile and consequently, a significant amount of capital invested in one quarter or a few quarters may not be indicative of a similar level of capital deployment in future quarters. During the quarter ended September 30, 2018 , 88% of capital deployed in private equity, which includes core equity investments, was in transactions in North America, 11% in the Asia-Pacific region, and 1% was in Europe. As of October 25, 2018, our Private Markets business line had announced transactions that were subject to closing conditions which aggregated approximately $5.1 billion. These transactions are generally subject to the satisfaction of closing conditions prior to their completion, and there can be no assurance if or when any of these transactions will be completed.
Public Markets Capital Invested

Public Markets capital invested of $1.6 billion was relatively flat for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 . This was primarily due to a higher level of net capital deployed in our direct lending strategy, offset by a lower level of net capital deployed in our special situations strategy.

Capital Markets Syndicated Capital

For the three months ended September 30, 2018 , Capital Markets had $1.6 billion of syndicated capital as compared to $0.5 billion for the three months ended September 30, 2017 . The increase was primarily due to an increase in the number and size of syndication transactions in the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 . Overall, we completed five syndication transactions for the three months ended September 30, 2018 as compared to one syndication for the three months ended September 30, 2017 .

Reconciliations to GAAP Measures

For the reconciliations of the most directly comparable financial measures calculated and presented in accordance with GAAP to total segment revenues, total segment expenses, and after-tax distributable earnings, see Note 14 "Segment Reporting" to the condensed consolidated financial statements included elsewhere in this report.

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Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Segment Revenues
 
 
 
 
 
 
Fees and Other, Net
 
 
 
 
 
 
Management Fees
 
$
789,630

 
$
670,807

 
$
118,823

Transaction Fees
 
609,800

 
578,667

 
31,133

Monitoring Fees
 
63,100

 
58,072

 
5,028

Fee Credits
 
(178,982
)
 
(211,148
)
 
32,166

Total Fees and Other, Net
 
1,283,548

 
1,096,398

 
187,150

 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
Carried Interest
 
959,253

 
890,310

 
68,943

Incentive Fees
 
52,059

 
8,384

 
43,675

Total Realized Performance Income (Loss)
 
1,011,312

 
898,694

 
112,618

 
 
 
 
 
 
 
Realized Investment Income (Loss)
 
 
 
 
 
 
Net Realized Gains (Losses) (1)  
 
286,381

 
162,684

 
123,697

Interest Income and Dividends
 
205,522

 
195,275

 
10,247

Total Realized Investment Income (Loss)
 
491,903

 
357,959

 
133,944

Total Segment Revenues
 
2,786,763

 
2,353,051

 
433,712

 
 
 
 
 
 
 
Segment Expenses
 
 
 
 
 
 
Compensation and Benefits (2)
 
1,138,149

 
933,107

 
205,042

Occupancy and Related Charges
 
42,819

 
42,448

 
371

Other Operating Expenses (3)
 
194,868

 
177,084

 
17,784

Total Segment Expenses
 
1,375,836

 
1,152,639

 
223,197

 
 
 
 
 
 
 
Segment Operating Earnings
 
1,410,927

 
1,200,412

 
210,515

 
 
 
 
 
 
 
Interest Expense
 
140,362

 
134,348

 
6,014

Preferred Dividends
 
25,023

 
25,023

 

Income (Loss) Attributable to Noncontrolling Interests
 
4,557

 
3,810

 
747

Income Taxes Paid
 
103,868

 
54,228

 
49,640

After-tax Distributable Earnings
 
$
1,137,117

 
$
983,003

 
$
154,114

(1)
Given the extraordinary nature of the Conversion, the reported segment financial results for the nine months ended September 30, 2018 exclude approximately $729.4 million of losses on certain investments which were realized in the second quarter in advance of the Conversion.
(2)
Includes equity-based compensation of $185,795 and $149,840 for the nine months ended September 30, 2018 and September 30, 2017 , respectively.
(3)
For the nine months ended September 30, 2018, excludes approximately $11.5 million of non-recurring costs in connection with the Conversion.




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Segment Revenues

The following sections discuss revenues for each of our business lines on a disaggregated basis for the nine months ended September 30, 2018 and 2017 .

Private Markets Revenues

The following table presents Fees and Other, Net, and Realized Performance Income in the Private Markets business line for the nine months ended September 30, 2018 and 2017 :

 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Fees and Other, Net
 
 
 
 
 
 
Management Fees
 
$
490,556

 
$
419,606

 
$
70,950

Transaction Fees
 
189,122

 
237,392

 
(48,270
)
Monitoring Fees
 
63,100

 
58,072

 
5,028

Fee Credits
 
(158,163
)
 
(177,254
)
 
19,091

Total Fees and Other, Net
 
584,615

 
537,816

 
46,799

 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
Carried Interest
 
949,353

 
890,310

 
59,043

Incentive Fees
 

 

 

Total Realized Performance Income (Loss)
 
$
949,353

 
$
890,310

 
$
59,043


Fees and Other, Net
 
The increase for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to an increase in management fees, partially offset by a decrease in transaction fees, net of fee credits.

The increase in management fees was primarily due to (i) management fees earned from our Asian Fund III when it entered its investment period in the second quarter of 2017, (ii) management fees earned from our Global Infrastructure Fund III when it entered its investment period in the second quarter of 2018 and (iii) management fees earned from our Real Estate Partners Americas II fund which entered its investment period in the second quarter of 2017. This net increase was partially offset by decreases due to (i) lower management fees paid by our Asian Fund II when it entered its post-investment period in the second quarter of 2017, in which it pays fees at a lower rate than during the investment period and based on capital invested at the time rather than total committed capital, (ii) lower management fees calculated based on lower levels of invested capital as a result of realizations primarily in our European Fund III, 2006 Fund and Asian Fund and (iii) lower management fees earned from our Real Estate Partners Americas fund when it entered its post-investment period in the second quarter of 2017, in which it pays fees based on capital invested rather than remaining commitments and capital invested during the investment period.

The decrease in transaction fees was primarily attributable to a decrease in both the number and size of transaction fee-generating investments. During the nine months ended September 30, 2018 , there were 32 transaction fee-generating investments that paid an average fee of $5.9 million compared to 38 transaction fee-generating investments that paid an average fee of $6.2 million during the nine months ended September 30, 2017 . For the nine months ended September 30, 2018 , approximately 54% of these transaction fees were paid by companies located in North America, 26% were paid from companies located in the Asia-Pacific region and 20% were paid from companies in Europe. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular agreements as to the amount of the fees, the complexity of the transaction and KKR's role in the transaction. Additionally, transaction fees are generally not earned with respect to energy and real estate investments. The decrease in fee credits is due primarily to a lower level of transaction fees reimbursable to the fund investors.

The increase in monitoring fees was primarily attributable to an increase in recurring monitoring fees compared to the prior period, partially offset by lower termination payments. Recurring monitoring fees increased $13.6 million, which was primarily the result of an increase in both the size and number of portfolio companies paying monitoring fees. For the nine months ended

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September 30, 2018 , we had 63 portfolio companies that were paying an average monitoring fee of $0.9 million compared with 53 portfolio companies that were paying an average monitoring fee of $0.8 million for the nine months ended September 30, 2017 . For the nine months ended September 30, 2018 , we received termination payments of $7.5 million in connection with the IPO of BrightView Holdings, Inc. compared to $16.0 million of termination payments received in the nine months ended September 30, 2017 relating to the IPO of Gardner Denver Holdings, Inc. These termination payments may occur in the future; however, they are infrequent in nature and are generally correlated with the IPO and other realization activity in our private equity portfolio, and are expected to continue to be smaller in size and number compared to prior periods.
 
Realized Performance Income

The following table presents realized carried interest by investment vehicle for the nine months ended September 30, 2018 and 2017 :
 
Nine Months Ended September 30,
 
2018
 
2017
 
($ in thousands)
North America Fund XI
$
366,017

 
$
129,576

2006 Fund
267,461

 
511,935

European Fund III
98,110

 
83,045

Asian Fund II
67,124

 
29,351

Millennium Fund
64,613

 
28,266

Asian Fund
28,991

 
17,846

Co-Investment Vehicles and Other
17,637

 
23,088

Global Infrastructure Investors
16,653

 
14,772

China Growth Fund
11,759

 
20,130

Real Estate Partners Americas
8,830

 
12,050

European Fund II
2,158

 
20,251

Total Realized Carried Interest (1)
$
949,353

 
$
890,310

(1)
The above table excludes any funds for which there was no realized carried interest during either of the periods presented.
 
The most significant realizations contributing to our realized carried interest for the nine months ended September 30, 2018 , consisted of the partial sales of National Vision Holdings, Inc. and GoDaddy Inc. (NYSE: GDDY), and the sale of Mehiläinen.

Realized carried interest for the nine months ended September 30, 2017 , consisted primarily of realized gains from the sale of Capsugel and the partial sales of US Foods Holding Corp. and PRA Health Sciences, Inc.


 

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Public Markets Revenues

The following table presents Fees and Other, Net, and Realized Performance Income in the Public Markets business line for the nine months ended September 30, 2018 and 2017 :

 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Fees and Other, Net
 
 
 
 
 
 
Management Fees
 
$
299,074

 
$
251,201

 
$
47,873

Transaction Fees
 
21,897

 
41,040

 
(19,143
)
Fee Credits
 
(20,819
)
 
(33,894
)
 
13,075

Total Fees and Other, Net
 
300,152

 
258,347

 
41,805

 
 
 
 
 
 
 
Realized Performance Income (Loss)
 
 
 
 
 
 
Carried Interest
 
9,900

 

 
9,900

Incentive Fees
 
52,059

 
8,384

 
43,675

Total Realized Performance Income (Loss)
 
$
61,959

 
$
8,384

 
$
53,575


Fees and Other, Net
 
The increase for the nine months ended September 30, 2018 was primarily due to an increase in management fees, partially offset by a decrease in transaction fees, net of fee credits. The increase in management fees was primarily due to (i) an increase in fees earned from BDCs advised or sub-advised by KKR resulting in part from the completion of the FS Investments Transaction in the second quarter of 2018, (ii) increased fees from our hedge fund partnerships as a result of greater FPAUM, and (iii) an increase in fees in our Special Situations Fund II as a result of increased capital invested. As a result of the closing of the FS Investments Transaction on April 9, 2018, KKR began receiving its portion of the management and incentive fees on an additional $13.2 billion of FPAUM (relating to FS Investments' BDCs), which are reflected in our operating results beginning in the second quarter of 2018. This increase was partially offset by a reduction in management fees from Prisma as a result of the PAAMCO Prisma transaction that closed in the second quarter of 2017. KKR reports its investment in PAAMCO Prisma using the equity method of accounting, and on a segment basis, KKR reflects its allocation of the net income of PAAMCO Prisma as management fees and realized incentive fees.  Accordingly, the management fees and other revenues and expenses of Prisma that had been reported on a gross basis prior to the closing of the transaction on June 1, 2017 are reflected on a net basis as part of our allocation of the net income of PAAMCO Prisma after June 1, 2017 resulting in a decrease in our reported gross management fees when compared to the prior period. The decrease in transaction fees was driven primarily by an $18.5 million breakup fee received in the nine months ended September 30, 2017 in connection with a terminated transaction and included in transaction fees, compared to no such breakup fees in the nine months ended September 30, 2018. The net amount of this fee attributable to us after credits to our fund limited partners was $4.6 million.

Realized Performance Income
 
The increase for the nine months ended September 30, 2018 compared to the prior period was primarily attributable to higher incentive fees received from BDCs advised or sub-advised by KKR driven in part by the completion of the FS Investments Transaction in the second quarter of 2018, and to a lesser extent, realized carried interest earned in our special situations strategy.













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Capital Markets Revenues

The following table presents Transaction Fees in the Capital Markets business line for the nine months ended September 30, 2018 and 2017 :

 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Transaction Fees
 
$
398,781

 
$
300,235

 
$
98,546

 
 
 
 
 
 
 

Transaction fees increased due primarily to an increase in both the size and number of capital markets transactions for the nine months ended September 30, 2018 , compared to the nine months ended September 30, 2017 . Overall, we completed 154 capital markets transactions for the nine months ended September 30, 2018, of which 23 represented equity offerings and 131 represented debt offerings, as compared to 144 transactions for the nine months ended September 30, 2017 , of which 20 represented equity offerings and 124 represented debt offerings. Our capital markets fees are generated in connection with our Private Markets and Public Markets business lines as well as from third-party companies. For the nine months ended September 30, 2018 , approximately 19% of our transaction fees were earned from unaffiliated third parties as compared to approximately 28% for the nine months ended September 30, 2017 . Our transaction fees are comprised of fees earned from North America, Europe and Asia-Pacific. For the nine months ended September 30, 2018 , approximately 34% of our transaction fees were generated outside of North America as compared to approximately 36% for the nine months ended September 30, 2017 . Our Capital Markets business line is dependent on the overall capital markets environment, which is influenced by equity prices, credit spreads and volatility. Our Capital Markets business line does not generate management or monitoring fees.
 
Principal Activities Revenues

The following table presents Realized Investment Income in the Principal Activities business line for the nine months ended September 30, 2018 and 2017 :

 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Realized Investment Income (Loss)
 
 
 
 
 
 
Net Realized Gains (Losses) (1)
 
$
286,381

 
$
162,684

 
$
123,697

Interest Income and Dividends
 
205,522

 
195,275

 
10,247

Total Realized Investment Income (Loss)
 
$
491,903

 
$
357,959

 
$
133,944

(1)
Given the extraordinary nature of the Conversion, the reported segment financial results for the nine months ended September 30, 2018 exclude approximately $729.4 million of losses on certain investments which were realized in the second quarter in advance of the Conversion.

Realized Investment Income
The increase is primarily due to an increased level of net realized gains and an increase in interest income and dividends during the nine months ended September 30, 2018 , compared to the prior period.
For the nine months ended September 30, 2018 , net realized gains were comprised primarily of gains from the sale of Private Markets investments including the sales or partial sales of our investments in First Data Corporation, Next Issue Media LLC, Mehiläinen, and National Vision Holdings, Inc., as well as the sale of our alternative credit investment in Amedisys, Inc. (NASDAQ: AMED). Given the extraordinary nature of the Conversion, the reported segment financial results for the nine months ended September 30, 2018 exclude approximately $729.4 million of realized losses on certain investments, primarily credit and energy investments, which were realized in the second quarter in advance of the Conversion.
For the nine months ended September 30, 2017 , net realized gains were primarily comprised of gains from the sale of private equity investments including the sales or partial sales of HCA Holdings, Inc., Galenica AG, and First Data Corporation, partially offset by losses on the sale of Fortune Creek Partnership (energy sector) and the restructurings of Algeco Scotsman (industrial sector) and Aurora Eaglebine (energy sector). Net unrealized gains were primarily attributable to mark-to-market gains on various Private Markets investments including First Data Corporation, an oil field services investment in our special

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situations strategy, and Veresen Midstream (infrastructure sector). These increases were partially offset primarily by unrealized losses due to the reversal of unrealized gains on the sales of private equity investments mentioned above.
For the nine months ended September 30, 2018 , interest income and dividends were comprised of (i) $126.6 million of interest income which consists primarily of interest that is received from our Public Markets investments, including CLOs and other credit investments and, to a lesser extent, our India debt financing company and our cash balances and (ii) $78.9 million of dividend income from distributions received primarily through our real assets investments, including our real estate investment in KREF, as well as our credit and energy investments.
For the nine months ended September 30, 2017 , net interest and dividends were comprised of (i) $117.2 million of interest income which consists primarily of interest that is received from our Public Markets investments including CLOs and other credit investments and to a lesser extent our capital markets business and our cash balances, (ii) $78.1 million of dividend income from distributions received primarily through our private equity investments and real estate investments including our investment in KREF.
The increase in interest income and dividends is due primarily to a higher level of interest income for the nine months ended September 30, 2018 compared to the prior period due to a higher level of interest in our cash management strategies.

Segment Expenses

Compensation and Benefits
 
The increase for the nine months ended September 30, 2018 compared to the prior period was due primarily to higher compensation recorded in connection with higher total segment revenues and includes higher equity-based compensation charges resulting from an increase in the number of unvested shares outstanding.

Occupancy and Other Operating Expenses

The increase for the nine month ended September 30, 2018 compared to the prior period is primarily due to higher professional fees and other administrative costs in connection with the growth of the firm.

Interest Expense

For the nine months ended September 30, 2018 and 2017 interest expense relates primarily to the senior notes outstanding for KKR and KFN. The increase in interest expense for the nine months ended September 30, 2018 compared to the prior period is due to overall higher levels of borrowings, in particular at KFN and under certain of our revolving credit facilities.
Income Taxes Paid
The increase in income taxes paid is primarily due to a higher level of income that is subject to corporate taxes following the Conversion.
After-tax Distributable Earnings
 
The net increase in after-tax distributable earnings for the nine months ended September 30, 2018 compared to the prior period was due primarily to higher management fees, realized performance income and realized investment income, partially offset by a higher level of compensation expense in the current period compared to the prior period.


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Other Operating and Performance Measures

The following table presents certain key operating and performance metrics as of September 30, 2018 and December 31, 2017 :
 
 
As of
 
 
September 30, 2018
 
December 31, 2017
 
Change
 
 
($ in thousands)
Assets Under Management
 
$
194,613,800

 
$
168,470,600

 
$
26,143,200

Fee Paying Assets Under Management
 
$
139,285,700

 
$
117,437,500

 
$
21,848,200

Uncalled Commitments
 
$
57,880,100

 
$
56,553,100

 
$
1,327,000


The following table presents one of our key performance metrics for the nine months ended September 30, 2018 and 2017 :
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
Change
 
 
($ in thousands)
Capital Invested and Syndicated Capital
 
$
16,189,100

 
$
17,073,300

 
$
(884,200
)

Assets Under Management

Private Markets

The following table reflects the changes in our Private Markets AUM from December 31, 2017 to September 30, 2018 :
 
($ in thousands)
December 31, 2017
$
97,527,100

New Capital Raised
9,328,600

Distributions and Other
(10,321,300
)
Change in Value
7,121,800

September 30, 2018
$
103,656,200


AUM for the Private Markets business line was $103.7 billion at September 30, 2018 , an increase of $6.2 billion, compared to $97.5 billion at December 31, 2017 .

The increase was primarily attributable to (i) new capital raised primarily in our Global Infrastructure Fund III and our Energy Income and Growth Fund II and (ii) to a lesser extent, an increase in the value of our Private Markets portfolio. These increases were partially offset by distributions to Private Markets fund investors primarily as a result of realizations, most notably in our North America Fund XI, 2006 Fund and European Fund III.
 
The increase in the value of our Private Markets portfolio was driven primarily by net gains of $2.0 billion in our 2006 Fund, $1.2 billion in our North America Fund XI and $0.5 billion in each of our Americas Fund XII and European Fund III. 

For the nine months ended September 30, 2018 , the value of our private equity investment portfolio increased 13.3%. This was comprised of a 15.0% increase in value of our privately held investments and a 9.9% increase in the share prices of various publicly held or publicly indexed investments.

The most significant increases in value of our privately held investments related to increases in Sedgwick Claims Management Services, Inc., Internet Brands, Inc., and Ultimate Fighting Championship Ltd. (media sector). These increases in value on our privately held investments were partially offset by decreases in value relating primarily to Arbor Pharmaceuticals, Inc. (health care sector), Westbrick Energy Ltd. (energy sector), and Sundrop Farms Holding Limited. The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) in the case of Sedgwick Claims Management Services, Inc., a valuation that reflects an agreement to sell this investment, (ii) an increase in the value of market comparables, and (iii) individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance or, in certain cases, an unfavorable business outlook and (ii) a decrease in the value of market comparables.


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The most significant increases in share prices of various publicly held or publicly indexed investments were gains in First Data Corporation, GoDaddy Inc. and Focus Financial Partners Inc. (which had an IPO in the third quarter of 2018). These increases were partially offset by decreases in share prices of various publicly held investments, the most significant of which were losses in Gardner Denver Holdings, Inc., Bharti Infratel Limited, and Qingdao Haier Co., Ltd.

For the nine months ended September 30, 2017 , the value of our private equity investment portfolio increased 15.9%. This was comprised of a 24.9% increase in the share prices of various publicly held or publicly indexed investments and an 11.2% increase in value of our privately held investments. Additionally, our infrastructure investment portfolio, which is comprised predominately of private investments, increased 20.0%.

The most significant increases in share prices of various publicly held or publicly indexed investments were gains in Gardner Denver Holdings, Inc., First Data Corporation, and Qingdao Haier Co., Ltd. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were losses in Fujian Sunner Development Co. Ltd. (SZ: 002299), Laureate Education, Inc., and US Foods Holding Corp. Our privately held investments contributed the remainder of the change in value, the most significant of which were gains relating to Internet Brands, Inc., Weld North Holdings LLC (education sector), and Colonial Pipeline Company. The unrealized gains on our privately held investments were partially offset by unrealized losses relating primarily to Academy Ltd., Toys R Us, Inc. (retail sector), and Santanol Pty Ltd (forestry sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) an increase in the value of market comparables and (ii) individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance or, in certain cases, an unfavorable business outlook and (ii) a decrease in the value of market comparables.

Certain investments included in our AUM are denominated in currencies other than the U.S. dollar. Those investments expose our AUM to the risk that the value of the investments will be affected by changes in exchange rates between the currency in which the investments are denominated and the currency in which the investments are made. We generally seek to minimize these risks by employing hedging techniques in connection with certain investments, including using foreign currency options and foreign exchange forward contracts to reduce exposure to changes in exchange rates when a meaningful amount of capital has been invested in currencies other than the currencies in which the investments are denominated. We do not, however, hedge our currency exposure in all currencies or for all investments. See "—Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk" and "Risk Factors—Risks Related to the Assets We Manage—We make investments in companies that are based outside of the United States, which may expose us to additional risks not typically associated with investing in companies that are based in the United States" in our Annual Report.
 
Public Markets

The following table reflects the changes in our Public Markets AUM from December 31, 2017 to September 30, 2018
 
($ in thousands)
December 31, 2017
$
70,943,500

New Capital Raised
13,363,900

Acquisitions
13,189,100

Distributions
(2,745,800
)
Redemptions
(4,338,800
)
Change in Value
545,700

September 30, 2018
$
90,957,600


AUM in our Public Markets business line totaled $91.0 billion at September 30, 2018 , an increase of $20.1 billion compared to AUM of $70.9 billion at December 31, 2017 . The increases due to new capital raised were related to multiple strategies, most notably $4.9 billion in our hedge fund partnerships, $4.6 billion in certain leveraged credit strategies, $1.9 billion in our private credit strategies and $1.8 billion in CLOs. The "Acquisitions" activity represents the AUM previously managed by FS Investments in connection with the completion of the FS Investments Transaction. Change in value was driven primarily by net increases in value of our private credit strategies and our hedge fund partnerships. Partially offsetting these increases were redemptions and distributions from certain investment vehicles across multiple strategies, primarily with our hedge fund partnerships, certain leveraged credit strategies, BDCs and direct lending strategies.


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Fee-Paying Assets Under Management
 
Private Markets

The following table reflects the changes in our Private Markets FPAUM from December 31, 2017 to September 30, 2018 :
 
($ in thousands)
December 31, 2017
$
61,678,600

New Capital Raised
9,578,900

Distributions and Other
(4,362,600
)
Net Changes in Fee Base of Certain Funds
(1,040,300
)
Change in Value
205,800

September 30, 2018
$
66,060,400


FPAUM in our Private Markets business line was $66.1 billion at September 30, 2018 , an increase of $4.4 billion, compared to $61.7 billion at December 31, 2017 .

The increase was primarily attributable to new capital raised in our Global Infrastructure Fund III and capital invested in our core investment vehicles. These increases were partially offset by (i) distributions primarily relating to realizations in our 2006 Fund, North America Fund XI, and European Fund III and (ii) net changes in the fee base of our Global Infrastructure Fund II and Energy Income and Growth Fund as a result of these funds entering their post investment period, during which they earn fees based on net asset value or invested capital, respectively, rather than remaining commitments/net asset value or remaining commitments/invested capital, respectively.

Public Markets

The following table reflects the changes in our Public Markets FPAUM from December 31, 2017 to September 30, 2018
 
($ in thousands)
December 31, 2017
$
55,758,900

New Capital Raised
11,646,100

Acquisitions
13,189,100

Distributions
(3,014,000
)
Redemptions
(4,338,800
)
Change in Value
(16,000
)
September 30, 2018
$
73,225,300

 
FPAUM in our Public Markets business line was $73.2 billion at September 30, 2018 , an increase of $17.4 billion compared to FPAUM of $55.8 billion at December 31, 2017 . The "Acquisitions" activity represents the AUM previously managed by FS Investments in connection with the completion of the FS Investments Transaction. The increases due to new capital raised were related to multiple strategies, most notably $4.6 billion in certain leveraged credit strategies, $2.9 billion in our hedge fund partnerships, $2.1 billion in our private credit strategies and $1.8 billion in CLOs. Partially offsetting these increases were redemptions and distributions from certain investment vehicles across multiple strategies, primarily with our hedge fund partnerships, our private credit strategies, and certain leveraged credit strategies.

Uncalled Commitments
 
Private Markets

As of September 30, 2018 , our Private Markets business line had $48.1 billion of remaining uncalled capital commitments that could be called for investments in new transactions as compared to $47.4 billion as of December 31, 2017. The increase is due primarily to new capital raised in our Global Infrastructure Fund III, Energy and Income Growth Fund II and our core investment vehicles, partially offset by capital called from fund investors to make investments during the period.

Public Markets

As of September 30, 2018 , our Public Markets business line had $9.8 billion of uncalled capital commitments that could be called for investments in new transactions as compared to $9.1 billion as of December 31, 2017. The increase is due to new

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capital raised primarily in our direct lending strategies, partially offset by capital called from fund investors to make investments during the period.

Capital Invested and Syndicated Capital
 
Private Markets Capital Invested

For the nine months ended September 30, 2018 , Private Markets had $8.9 billion of capital invested as compared to $11.1 billion for the nine months ended September 30, 2017 . The decrease was driven primarily by a $2.6 billion decrease in capital invested in our private equity platform (including core investments and growth equity), partially offset by a $0.4 billion increase in capital invested in our real assets and other platforms. Generally, the portfolio companies acquired through our private equity funds have higher transaction values and result in higher capital invested relative to transactions in our real assets funds. The number of large private equity investments made in any quarter is volatile and consequently, a significant amount of capital invested in one quarter or a few quarters may not be indicative of a similar level of capital deployment in future quarters. During the nine months ended September 30, 2018 , 72% of capital deployed in private equity, which includes core and growth equity investments, was in transactions in North America, 26% was in the Asia-Pacific region and 2% was in Europe.
Public Markets Capital Invested
For the nine months ended September 30, 2018 , Public Markets had $5.0 billion of capital invested as compared to $3.8 billion for the nine months ended September 30, 2017 . The increase was primarily due to a higher level of net capital deployed in our direct lending and private opportunistic credit strategies.
Capital Markets Syndicated Capital

For the nine months ended September 30, 2018 , Capital Markets had $2.3 billion of syndicated capital as compared to $2.2 billion for the nine months ended September 30, 2017 . The increase was primarily due to an increase in the size and number of syndication transactions in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 . Overall, we completed 13 syndication transactions for the nine months ended September 30, 2018 as compared to ten syndications for the nine months ended September 30, 2017 .

Reconciliations to GAAP Measures

For the reconciliations of the most directly comparable financial measures calculated and presented in accordance with GAAP to total segment revenues, total segment expenses, and after-tax distributable earnings, see Note 14 "Segment Reporting" to the condensed consolidated financial statements included elsewhere in this report.

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Segment Balance Sheet
 
Our segment balance sheet is the balance sheet of KKR & Co. Inc. and its subsidiaries on a segment basis which includes, but is not limited to, our investment management companies, broker-dealer companies, general partners of our investment funds and KFN. Our segment balance sheet excludes the assets and liabilities of our investment funds and CFEs and other consolidated entities that are not subsidiaries of KKR & Co. Inc.
 
Investments
 
Investments is a term used solely for purposes of financial presentation of a portion of KKR's balance sheet and includes majority ownership of subsidiaries that operate KKR's asset management and other businesses, including the general partner interests of KKR's investment funds.

Cash and Short-Term Investments
 
Cash and short-term investments represent cash and liquid short-term investments in high-grade, short-duration cash management strategies used by KKR to generate additional yield on our excess liquidity and is used by management in evaluating KKR's liquidity position. We believe this measure is useful to stockholders as it provides additional insight into KKR's available liquidity. Cash and short-term investments differ from cash and cash equivalents on a GAAP basis as a result of the inclusion of liquid short-term investments in cash and short-term investments. The impact that these liquid short-term investments have on cash and cash equivalents on a GAAP basis is reflected in the consolidated statements of cash flows within cash flows from operating activities. Accordingly, the exclusion of these investments from cash and cash equivalents on a GAAP basis has no impact on cash provided (used) by operating activities, investing activities or financing activities.
 
    

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The following tables present information with respect to our segment balance sheet as of September 30, 2018 and December 31, 2017 :

 
 
 
As of
 
As of
 
 
 
September 30, 2018
 
December 31, 2017
 
 
 
($ in thousands, except per share amounts)
 
Cash and Short-term Investments
 
$
2,907,704

 
$
3,214,794

 
Investments
 
10,288,390

 
8,488,606

 
Unrealized Carried Interest (1)
 
1,775,603

 
1,620,401

 
Corporate Real Estate
 
161,225

 
161,225

 
Tax Assets
 
449,568

 

 
Other Assets
 
3,190,385

 
2,276,286

 
Total Assets
 
$
18,772,875

 
$
15,761,312

 
 
 
 
 
 
 
Debt Obligations - KKR (ex-KFN)
 
$
2,354,488

 
$
2,000,000

 
Debt Obligations - KFN
 
948,517

 
764,767

 
Preferred Shares - KFN
 

 
373,750

 
Tax Liabilities
 
302,473

 

 
Other Liabilities
 
821,190

 
426,699

 
Total Liabilities
 
4,426,668

 
3,565,216

 
 
 
 
 
 
 
Noncontrolling Interests
 
21,163

 
22,187

 
Preferred Stock
 
500,000

 
500,000

 
 
 
 
 
 
 
Book Value
 
$
13,825,044

 
$
11,673,909

 
 
 
 
 
 
 
Book Value Per Outstanding Adjusted Share
 
$
16.68

 
$
14.20

 
 
 
 
 
 
 
(1)   Unrealized Carried Interest
 
 
 
 
 
Private Markets Business Line
 
$
1,609,183

 
$
1,480,142

 
Public Markets Business Line
 
166,420

 
140,259

 
Total
 
$
1,775,603

 
$
1,620,401

 
 
 


 


 
 
 

 
Book Value Per Outstanding Adjusted Share

Book value per outstanding adjusted share increased 17.5% from December 31, 2017. This increase was due primarily to a broad-based increase in the value of KKR's investment portfolio, including investments held directly by KKR as well as investments held through investment funds, such as KKR's private equity funds, where KKR is entitled to earn carried interest. For the nine months ended September 30, 2018, the value of KKR's balance sheet portfolio, on a segment basis, increased 14.9% and KKR's private equity portfolio increased 13.3%. The increase in book value per outstanding adjusted share was also due to approximately $1.1 billion of after-tax distributable earnings during the nine months ended September 30, 2018. Effective as of September 30, 2018, KKR's segment balance sheet reflects KKR's tax assets and liabilities as prepared under GAAP, which increased book value by approximately $160 million as of such date. These increases were partially offset by dividends to Class A common stockholders and repurchases of Class A common stock during the nine months ended September 30, 2018. For a discussion of factors that impacted KKR's after-tax distributable earnings, see "—Segment Analysis—Segment Results."



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The following table presents the holdings of our segment balance sheet by asset class as of September 30, 2018 . To the extent investments on our segment balance sheet are realized at values below their cost in future periods, after-tax distributable earnings would be adversely affected by the amount of such loss, if any, during the period in which the realization event occurs.
 
 
As of September 30, 2018
Investments
 
Cost
 
Fair Value
 
Fair Value as a Percentage of
Total Investments
 
 
 
 
 
 
 
Private Equity Co-Investments, Core Investments and Other Equity
 
$
3,258,663

 
$
4,261,939

 
41.4
%
Private Equity Funds
 
1,131,274

 
1,656,834

 
16.1
%
Private Equity Total
 
4,389,937

 
5,918,773

 
57.5
%
 
 
 
 
 
 
 
Energy
 
680,513

 
719,448

 
7.0
%
Real Estate
 
759,909

 
784,706

 
7.6
%
Infrastructure
 
337,867

 
438,197

 
4.3
%
Real Assets Total
 
1,778,289

 
1,942,351

 
18.9
%
 
 
 
 
 
 
 
Special Situations
 
830,329

 
719,008

 
7.0
%
Direct Lending
 
119,278

 
110,890

 
1.1
%
Mezzanine
 
24,698

 
28,443

 
0.3
%
Alternative Credit Total
 
974,305

 
858,341

 
8.4
%
CLOs
 
694,962

 
661,981

 
6.4
%
Other Credit
 
376,804

 
332,878

 
3.2
%
Credit Total
 
2,046,071

 
1,853,200

 
18.0
%
 
 
 
 
 
 
 
Other
 
554,422

 
574,066

 
5.6
%
 
 
 
 
 
 
 
Total Investments
 
$
8,768,719

 
$
10,288,390

 
100.0
%
 
 
 
 
 
 
 
 
 
As of September 30, 2018
Significant Investments: (1)
 
Cost
 
Fair Value
 
Fair Value as a Percentage of
Total Investments
First Data Corporation (NYSE: FDC)
 
$
794,978

 
$
1,430,518

 
13.9
%
USI, Inc.
 
500,111

 
650,125

 
6.3
%
Heartland Dental
 
302,255

 
332,480

 
3.2
%
KKR Real Estate Finance Trust Inc. (NYSE: KREF)
 
325,000

 
327,763

 
3.2
%
PetVet Care Centers
 
243,188

 
291,826

 
2.8
%
Total Significant Investments
 
2,165,532

 
3,032,712

 
29.4
%
 
 
 
 
 
 
 
Other Investments
 
6,603,187

 
7,255,678

 
70.6
%
Total Investments
 
$
8,768,719

 
$
10,288,390

 
100.0
%
 
 
 
 
 
 
 
(1)
The significant investments include the top five investments (other than investments expected to be syndicated or transferred in connection with new fundraising) based on their fair values as of September 30, 2018 . The fair value figures include the co-investment and the limited partner and/or general partner interests held directly by KKR in the underlying investment, if applicable.
    

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The following tables provide reconciliations of KKR's GAAP Condensed Consolidated Statements of Financial Condition to our Segment Balance Sheet as of September 30, 2018 and December 31, 2017 .
As of September 30, 2018
(Amounts in thousands)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (GAAP BASIS)
 
1
 
2
 
3
 
4
 
5
 
SEGMENT BALANCE SHEET
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
2,264,875

 

 

 
642,829

 

 

 
$
2,907,704

Cash and Short-term Investments
Investments
44,119,593

 
(28,772,038
)
 
(1,300,165
)
 
(3,759,000
)
 

 

 
10,288,390

Investments
 
 
 

 

 
1,775,603

 

 

 
1,775,603

Unrealized Carried Interest
 
 
 

 

 
161,225

 

 

 
161,225

Corporate Real Estate
 
 
 

 

 

 

 
449,568

 
449,568

Tax Assets
Other Assets
3,959,480

 
(1,582,636
)
 

 
1,179,343

 

 
(365,802
)
 
3,190,385

Other Assets
Total Assets
$
50,343,948

 
(30,354,674
)
 
(1,300,165
)
 

 

 
83,766

 
$
18,772,875

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Obligations
20,266,172

 
(16,963,167
)
 

 
(948,517
)
 

 

 
2,354,488

Debt Obligations - KKR (ex-KFN)
 
 
 

 

 
948,517

 

 

 
948,517

Debt Obligations - KFN
 
 
 

 

 

 

 
302,473

 
302,473

Tax Liabilities
Other Liabilities
3,937,865

 
(1,597,803
)
 
(1,300,165
)
 

 

 
(218,707
)
 
821,190

Other Liabilities
Total Liabilities
24,204,037

 
(18,560,970
)
 
(1,300,165
)
 

 

 
83,766

 
4,426,668

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable Noncontrolling Interests
1,070,575

 
(1,070,575
)
 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
482,554

 

 

 
(482,554
)
 

 

 

 
KKR & Co. Inc. Stockholders' Equity - Common Stockholders
8,524,213

 
253,662

 

 
(17,446
)
 
5,064,615

 

 
13,825,044

Book Value
Noncontrolling Interests
16,062,569

 
(10,976,791
)
 

 

 
(5,064,615
)
 

 
21,163

Noncontrolling Interests
 
 
 

 

 
500,000

 

 

 
500,000

Preferred Stock
Total Liabilities and Equity
$
50,343,948

 
(30,354,674
)
 
(1,300,165
)
 

 

 
83,766

 
$
18,772,875

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
IMPACT OF CONSOLIDATION OF INVESTMENT VEHICLES AND OTHER ENTITIES
2
CARRY POOL RECLASSIFICATION
 
3
OTHER RECLASSIFICATIONS
 
4
NONCONTROLLING INTERESTS HELD BY KKR HOLDINGS L.P.
 
5
TAX RECLASSIFICATIONS
 





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As of December 31, 2017
(Amounts in thousands)
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (GAAP BASIS)
 
1
 
2
 
3
 
4
 
5
 
SEGMENT BALANCE SHEET
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,876,687

 

 

 
1,338,107

 

 

 
$
3,214,794

Cash and Short-term Investments
Investments
39,013,934

 
(27,684,368
)
 
(1,220,559
)
 
(1,620,401
)
 

 

 
8,488,606

Investments
 
 
 

 

 
1,620,401

 

 

 
1,620,401

Unrealized Carried Interest
Other Assets
4,944,098

 
(974,710
)
 

 
(1,499,332
)
 

 
(193,770
)
 
2,276,286

Other Assets
 
 
 

 

 
161,225

 

 

 
161,225

Corporate Real Estate
Total Assets
$
45,834,719

 
(28,659,078
)
 
(1,220,559
)
 

 

 
(193,770
)
 
$
15,761,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Obligations
21,193,859

 
(18,429,092
)
 

 
(764,767
)
 

 

 
2,000,000

Debt Obligations - KKR (ex-KFN)
 
 
 

 

 
764,767

 

 

 
764,767

Debt Obligations - KFN
 
 
 

 

 
373,750

 

 

 
373,750

Preferred Shares - KFN
Other Liabilities
3,978,060

 
(2,207,518
)
 
(1,220,559
)
 

 

 
(123,284
)
 
426,699

Other Liabilities
Total Liabilities
25,171,919

 
(20,636,610
)
 
(1,220,559
)
 
373,750

 

 
(123,284
)
 
3,565,216

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable Noncontrolling Interests
610,540

 
(610,540
)
 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
482,554

 

 

 
(482,554
)
 

 

 
 
 
KKR & Co. Inc. Stockholders' Equity - Common Stockholders
6,703,382

 
214,188

 

 
(17,446
)
 
4,844,271

 
(70,486
)
 
11,673,909

Book Value
Noncontrolling Interests
12,866,324

 
(7,626,116
)
 

 
(373,750
)
 
(4,844,271
)
 

 
22,187

Noncontrolling Interests
 
 
 

 

 
500,000

 

 

 
500,000

Preferred Stock
Total Liabilities and Equity
$
45,834,719

 
(28,659,078
)
 
(1,220,559
)
 

 

 
(193,770
)
 
$
15,761,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
IMPACT OF CONSOLIDATION OF INVESTMENT VEHICLES AND OTHER ENTITIES
 
2
CARRY POOL RECLASSIFICATION
 
3
OTHER RECLASSIFICATIONS
 
4
NONCONTROLLING INTERESTS HELD BY KKR HOLDINGS L.P. AND OTHER
 
5
EQUITY IMPACT OF KKR MANAGEMENT HOLDINGS CORP.
 


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The following tables provide reconciliations of KKR's GAAP Shares of Class A Common Stock Outstanding to Adjusted Shares Eligible for Distribution and Outstanding Adjusted Shares:
 
As of
As of
 
September 30, 2018
December 31, 2017
GAAP Shares of Class A Common Stock Outstanding
525,593,409

486,174,736

Adjustments:
 
 
Other Securities (1)

2,299,421

KKR Holdings Units (2)
303,106,993

335,971,334

Adjusted Shares Eligible for Distribution (3)
828,700,402

824,445,491

Adjustments:
 
 
Other Securities

(2,299,421
)
Outstanding Adjusted Shares
828,700,402

822,146,070

 
 
 
Unvested Shares of Class A Common Stock (4)
36,008,840

46,475,176

 




(1)
Represents vested other securities that are exchangeable into shares of Class A common stock. The issuance of shares of Class A common stock pursuant to such other securities dilutes KKR common stockholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR business.
(2)
Class A common stock that may be issued by KKR & Co. Inc. upon exchange of units in KKR Holdings for Class A common stock.
(3)
Amounts exclude unvested equity awards granted under the Equity Incentive Plan.
(4)
Represents equity awards granted under the Equity Incentive Plan. The issuance of Class A common stock of KKR & Co. Inc. pursuant to awards under the Equity Incentive Plan dilutes KKR Class A common stockholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR business. Excludes the award of 2,500,000 restricted stock units granted to each of our Co-Presidents/Co-Chief Operating Officers during 2017 that have not met their market-price based vesting condition as of September 30, 2018. See "Item 1. Condensed Consolidated Financial Statements (Unaudited)—Equity Based Compensation."


Liquidity
 
We manage our liquidity and capital requirements by focusing on our cash flows before the consolidation of our funds and CFEs and the effect of changes in short term assets and liabilities, which we anticipate will be settled for cash within one year. Our primary cash flow activities on a segment basis typically involve: (i) generating cash flow from operations; (ii) generating income from investment activities, by investing in investments that generate yield (namely interest and dividends), as well as the sale of investments and other assets; (iii) funding capital commitments that we have made to, and advancing capital to, our funds and CLOs; (iv) developing and funding new investment strategies, investment products, and other growth initiatives, including acquisitions of other investments, assets, and businesses; (v) underwriting and funding commitments in our capital markets business; (vi) distributing cash flow to our stockholders, certain holders of certain exchangeable securities, and holders of our Series A and Series B Preferred Stock; and (vii) paying borrowings, interest payments, and repayments under credit agreements, our senior notes, and other borrowing arrangements. See "—Liquidity—Liquidity Needs—Dividends."

Sources of Liquidity
 
Our primary sources of liquidity consist of amounts received from: (i) our operating activities, including the fees earned from our funds, portfolio companies, and capital markets transactions; (ii) realizations on carried interest from our investment funds; (iii) interest and dividends from investments that generate yield, including our investments in CLOs; (iv) realizations on and sales of investments and other assets, including the transfers of investments for fund formations; and (v) borrowings under our credit facilities, debt offerings, and other borrowing arrangements. In addition, we may generate cash proceeds from sales of equity securities.
 
Many of our investment funds provide carried interest. With respect to our private equity funds, carried interest is distributed to the general partner of a private equity fund with a clawback provision only after all of the following are met: (i) a realization event has occurred (e.g., sale of a portfolio company, dividend, etc.); (ii) the vehicle has achieved positive overall investment returns since its inception, in excess of performance hurdles where applicable and (iii) with respect to investments with a fair value below cost, cost has been returned to fund investors in an amount sufficient to reduce remaining cost to the investments' fair value. As of September 30, 2018 , certain of our funds had met the first and second criteria, as described above,

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but did not meet the third criteria. In these cases, carried interest accrues on the consolidated statement of operations, but will not be distributed in cash to us as the general partner of an investment fund upon a realization event. For a fund that has a fair value above cost, overall, but has one or more investments where fair value is below cost, the shortfall between cost and fair value for such investments is referred to as a "netting hole." When netting holes are present, realized gains on individual investments that would otherwise allow the general partner to receive carried interest distributions are instead used to return invested capital to our funds' limited partners in an amount equal to the netting hole. Once netting holes have been filled with either (a) return of capital equal to the netting hole for those investments where fair value is below cost or (b) increases in the fair value of those investments where fair value is below cost, then realized carried interest will be distributed to the general partner upon a realization event. A fund that is in a position to pay cash carry refers to a fund for which carried interest is expected to be paid to the general partner upon the next material realization event, which includes funds with no netting holes as well as funds with a netting hole that is sufficiently small in size such that the next material realization event would be expected to result in the payment of carried interest. Strategic investor partnerships with fund investors may require netting across the various funds in which they invest, which may reduce the carried interest we otherwise would have earned if such fund investors were to have invested in our funds without the existence of the strategic investor partnership. See "Risk Factors—Risks Related to Our Business—Strategic investor partnerships have longer investment periods and invest in multiple strategies, which may increase the possibility of a 'netting hole,' which will result in less carried interest for us, as well as clawback liabilities" in our Annual Report.
 
As of September 30, 2018 , no netting holes in excess of $50 million existed at our private equity funds. In accordance with the criteria set forth above, other funds currently have and may in the future develop netting holes, and netting holes for those and other funds may otherwise increase or decrease in the future.

We have access to funding under various credit facilities, other borrowing arrangements and other sources of liquidity that we have entered into with major financial institutions or which we receive from the capital markets. The following describes these sources of liquidity.
 
Revolving Credit Agreements, Senior Notes, KFN Debt Obligations & KFN Securities

For a discussion of KKR's debt obligations, including our revolving credit agreements, senior notes, KFN debt obligations and KFN securities, see Note 10 "Debt Obligations" to the audited financial statements included in our Annual Report. For an update of such information see Note 10 "Debt Obligations" to the condensed consolidated financial statements included elsewhere in this report which should be read in conjunction with the information filed in our Annual Report.

Preferred Stock

For a discussion of KKR's equity, including our preferred stock, see Note 15 "Equity" to the audited financial statements included in our Annual Report.

Liquidity Needs
 
We expect that our primary liquidity needs will consist of cash required to:

continue to grow our business lines, including seeding new strategies, funding our capital commitments made to existing and future funds, co-investments and any net capital requirements of our capital markets companies and otherwise supporting investment vehicles which we sponsor;
 
warehouse investments in portfolio companies or other investments for the benefit of one or more of our funds, vehicles, accounts or CLOs pending the contribution of committed capital by the investors in such vehicles, and advancing capital to them for operational or other needs;

service debt obligations including the payment of obligations upon maturity or redemption, as well as any contingent liabilities that may give rise to future cash payments;

fund cash operating expenses and contingencies, including litigation matters and, after the Conversion, additional corporate income taxes; 

pay amounts that may become due under our tax receivable agreement with KKR Holdings; 


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pay cash dividends in accordance with our dividend policy for our Class A common stock or the terms of our preferred stock;  

underwrite commitments, advance loan proceeds and fund syndication commitments within our capital markets business;

make future purchase price payments in connection with our proprietary investments, such as our hedge fund partnership with Marshall Wace, to the extent not paid by newly issued Class A common stock;

acquire other assets for our Principal Activities business line, including other businesses, investments and assets, some of which may be required to satisfy regulatory requirements for our capital markets business or risk retention requirements for CLOs (to the extent it continues to apply); and

repurchase KKR's Class A common stock pursuant to the share repurchase program or other securities issued by KKR.

KKR & Co. Inc. Share Repurchase Program

On October 27, 2015, KKR announced the authorization of a program providing for the repurchase by KKR of up to $500 million in the aggregate of its outstanding common units. On February 9, 2017, KKR announced the authorization for KKR to repurchase an incremental $250 million under this unit repurchase program. On May 3, 2018, KKR announced the increase of the available amount under its repurchase program to $500 million, which may be used for the repurchase of its Class A common stock and the retirement of equity awards issued pursuant to our Equity Incentive Plan (and any successor equity plan thereto). During the third quarter of 2018, KKR repurchased 1.1 million shares for approximately $30 million. As of September 30, 2018, approximately $729 million has been spent since October 27, 2015, representing a total of 46.0 million shares, to either repurchase shares or retire equity awards. As of September 30, 2018, approximately $420 million is available under the repurchase program.

Under the current repurchase program, KKR is authorized to repurchase its Class A common stock from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing, manner, price and amount of any Class A common stock 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. 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 any specific number of shares of Class A common stock, and the program may be suspended, extended, modified or discontinued at any time.
    
In addition to the purchases of Class A common stock above, 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 issued pursuant to our Equity Incentive Plan (and any successor equity plan thereto) representing the right to receive Class A common stock. See "Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds."






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Capital Commitments

The agreements governing our active investment funds generally require the general partners of the funds to make minimum capital commitments to such funds, which usually range from 2% to 8% of a fund's total capital commitments at final closing; however, the size of our general partner commitment to certain funds pursuing newer strategies may exceed this range. The following table presents our uncalled commitments to our active investment funds as of September 30, 2018 :
 
 
Uncalled
Commitments
Private Markets
($ in thousands)
Core Investment Vehicles
$
2,315,500

Americas Fund XII
690,800

Asian Fund III
553,900

Global Infrastructure III
333,700

Real Estate Partners Americas II
150,400

Health Care Strategic Growth
139,000

European Fund IV
71,200

Next Generation Technology Growth
55,100

Real Estate Partners Europe
40,900

Real Estate Credit Opportunity Partners
15,200

Other Private Markets Vehicles
374,700

Total Private Markets Commitments
4,740,400

 
 

Public Markets
 

Special Situations Fund II
119,600

Private Credit Opportunities Partners II
35,500

Lending Partners III
19,500

Lending Partners Europe
14,200

Other Public Markets Vehicles
126,700

Total Public Markets Commitments
315,500

 
 

Total Uncalled Commitments
$
5,055,900

 
Other Commitments

In addition to the uncalled commitments to our investment funds as shown above, KKR has entered into contractual commitments with respect to (i) the purchase of investments and other assets in our Principal Activities business line and (ii) underwriting transactions, debt financing, and syndications in our Capital Markets business line. As of September 30, 2018 , these commitments amounted to $28.6 million and $1,041.7 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. The unfunded commitments shown for our Capital Markets business line are shown without reflecting arrangements that may reduce the actual amount of contractual commitments shown occurring after September 30, 2018 . Our capital markets business has an arrangement with a third party, which reduces our risk when underwriting certain debt transactions, and thus our unfunded commitments are reduced to reflect the amount to be funded by such a third party. In the case of purchases of investments or assets in our 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.
 
Investment in Marshall Wace

On November 2, 2015, KKR entered into a hedge fund partnership with Marshall Wace and acquired a 24.9% interest in Marshall Wace through a combination of cash and common units. Subject to the exercise of a put option by Marshall Wace or a call option by KKR, at subsequent closings to occur in the third and fourth years following the initial closing described above, and subject to satisfaction or waiver of certain closing conditions, including regulatory approvals, KKR may at each such closing subscribe (or be required to subscribe) for an incremental 5% equity interest, for ultimate aggregate ownership of up to

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39.9% of Marshall Wace. The exercise of such options would require the use of cash and/or KKR Class A common stock. KKR's investment in Marshall Wace is accounted for using the equity method of accounting.

On November 30, 2017, KKR acquired an additional 5.0% interest in Marshall Wace after the exercise of one of the options agreed to between Marshall Wace and KKR. This acquisition was funded through a combination of cash and 4,727,966 common units.

Due to the exercise of one of the options agreed to between Marshall Wace and KKR, KKR expects to acquire an additional 5.0% interest in Marshall Wace in the fourth quarter of 2018. The acquisition is expected to be completed with a combination of cash and shares of Class A common stock.
Corporate Capital Trust

During 2017, CCT shareholders approved, among other things, a proposal for KKR Credit Advisors (US) LLC to become CCT's sole investment adviser subject to the listing of CCT's common stock on a national securities exchange, which occurred during the fourth quarter of 2017.  Following the listing of CCT on the NYSE, KKR Credit Advisors may purchase up to $50 million of CCT's common stock in the aggregate in open-market transactions. Through September 30, 2018 , approximately $26.4 million has been purchased.

Tax Receivable Agreement

We may be required to acquire KKR Group Partnership Units from time to time pursuant to our exchange agreement with KKR Holdings. The KKR Group Partnerships have made or are expected to make an election under Section 754 of the Code that will remain in effect for each taxable year in which an exchange of KKR Group Partnership Units for Class A common stock occurs, which may result in an increase in our tax basis of the assets of the KKR Group Partnerships at the time of an exchange of KKR Group Partnership Units. A net increase in tax basis may increase depreciation and amortization deductions for tax purposes and therefore reduce the amount of income tax we otherwise would be required to pay in the future. An increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

We have entered into a tax receivable agreement with KKR Holdings, which requires us to pay to KKR Holdings, or to current and former principals who have exchanged KKR Holdings units for KKR Class A common stock as transferees of KKR Group Partnership Units, 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of the increase in tax basis described above, as well as 85% of the amount of any such savings we realize as a result of increases in tax basis that arise due to future payments under the agreement. We expect to benefit from the remaining 15% of cash savings, if any, in income tax that we realize. A termination of the agreement or a change of control could give rise to similar payments based on tax savings that we would be deemed to realize in connection with such events.

These payment obligations are obligations of KKR and not the KKR Group Partnerships. Payments made under the tax receivable agreement are required to be made within 90 days of the filing of our tax returns, which may result in a timing difference between the tax savings and the cash payments made to the selling holders of KKR Group Partnership Units.

For the three and nine months ended September 30, 2018 and 2017, no cash payments were made under the tax receivable agreement. As of September 30, 2018 , $4.2 million of cumulative income tax savings have been realized. See "—Liquidity—Other Liquidity Needs—Contractual Obligations, Commitments and Contingencies" for a discussion of amounts payable and cumulative cash payments made under this agreement. See also “Reorganization and Amendments to Material Agreements” under “Item 5. Other Information” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which was filed with the SEC on May 8, 2018.

Regarding the impact of the Conversion, see "Part II. Item 1A. Risk Factors—We will be required to pay our principals for most of the benefits relating to our use of tax attributes we receive from prior and future exchanges of our Class A common stock for KKR Group Partnership Units and related transactions."

Dividends
A dividend of $0.125 per share of Class A common stock has been declared, which will be paid on November 20, 2018 to holders of record of Class A common stock as of the close of business on November 5, 2018 .

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A dividend of $0.421875 per share of Series A Preferred Stock has been declared and set aside for payment on December 17, 2018 to holders of record of Series A Preferred Stock as of the close of business on December 1, 2018. A dividend of $0.406250 per share of Series B Preferred Stock has been declared and set aside for payment on December 17, 2018 to holders of record of Series B Preferred Stock as of the close of business on December 1, 2018.
When KKR & Co. Inc. receives distributions from the KKR Group Partnerships (the holding companies of the KKR business), KKR Holdings receives its pro rata share of such distributions from the KKR Group Partnerships.
The declaration and payment of dividends to our Class A common stockholders will be at the sole discretion of our board of directors, and our dividend policy may be changed at any time. As a corporation, we expect our dividends to our Class A common stockholders, if declared, to be lower than the distribution amounts we declared in prior periods as a limited partnership. Our distribution policy as a limited partnership had been to pay annual aggregate distributions to holders of our common units of $0.68 per common unit, and we have announced that we anticipate that our dividend policy beginning with respect to the third quarter of 2018 will be to pay dividends to holders of our Class A common stock in an initial annual aggregate amount of $0.50 per share (or a quarterly dividend of $0.125 per share), in each case, subject to the discretion of our board of directors based on a number of factors, including KKR’s future financial performance and other considerations that the board deems relevant, and compliance with the terms of KKR & Co. Inc.'s certificate of incorporation and applicable law. For U.S. federal income tax purposes, any dividends we pay following July 1, 2018 (including dividends on our preferred stock) generally will be treated as qualified dividend income (generally taxable to U.S. individual stockholders at capital gain rates) paid by a domestic corporation to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. No income, gains, losses, deductions or credits of KKR will flow through to the stockholders for U.S. federal income tax purposes following July 1, 2018. There can be no assurance that future dividends will be made as intended or at all or that any particular dividend policy for our Class A common stock will be maintained. Furthermore, the declaration and payment of distributions by the KKR Group Partnerships and our other subsidiaries may also be subject to legal, contractual and regulatory restrictions, including restrictions contained in our debt agreements and the terms of the preferred stock of the KKR Group Partnerships.

Other Liquidity Needs
 
We may also be required to fund various underwriting, syndication and fronting commitments in our capital markets business in connection with the underwriting of loans, securities or other financial instruments, which has increased in significance in recent periods and may continue to be significant in future periods. We generally expect that these commitments will be syndicated to third parties or otherwise fulfilled or terminated, although we may in some instances elect to retain a portion of the commitments for our own investment.


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Contractual Obligations, Commitments and Contingencies
 
In the ordinary course of business, we and our consolidated funds and CFEs enter into contractual arrangements that may require future cash payments. The following table sets forth information relating to anticipated future cash payments as of September 30, 2018 excluding consolidated funds and CFEs with a reconciliation of such amounts to the anticipated future cash payments of KKR including consolidated funds and CFEs.

 
 
Payments due by Period
Types of Contractual Obligations
 
<1 Year
 
1-3 Years
 
3-5 Years
 
>5 Years
 
Total
 
 
($ in millions)
Uncalled commitments to investment funds (1)
 
$
5,055.9

 
$

 
$

 
$

 
$
5,055.9

Debt payment obligations (2)
 

 
500.0

 
219.9

 
2,583.1

 
3,303.0

Interest obligations on debt (3)
 
185.1

 
295.1

 
262.7

 
2,105.8

 
2,848.7

Underwriting commitments (4)
 
888.3

 

 

 

 
888.3

Lending commitments (5)
 
153.4

 

 

 

 
153.4

Purchase commitments (6)
 
28.6

 

 

 

 
28.6

Lease obligations
 
50.3

 
69.8

 
18.5

 
9.7

 
148.3

Corporate real estate (7)
 
292.5

 

 

 

 
292.5

Total Contractual Obligations of KKR
 
6,654.1

 
864.9

 
501.1

 
4,698.6

 
12,718.7

Plus: Uncalled commitments of consolidated funds (8)
 
9,488.4

 

 

 

 
9,488.4

Plus: Debt payment obligations of consolidated funds, CFEs and Other (9)
 
461.0

 
2,902.0

 
254.5

 
13,266.4

 
16,883.9

Plus: Interest obligations of consolidated funds, CFEs and Other (10)
 
608.1

 
1,140.6

 
852.2

 
2,413.0

 
5,013.9

Plus: Purchase commitments of consolidated funds (11)
 
369.9

 

 

 

 
369.9

Total Consolidated Contractual Obligations
 
$
17,581.5

 
$
4,907.5

 
$
1,607.8

 
$
20,378.0

 
$
44,474.8

(1)
These uncalled commitments represent amounts committed by us to fund a portion of the purchase price paid for each investment made by our investment funds which are actively investing. Because capital contributions are due on demand, the above commitments have been presented as falling due within one year. However, given the size of such commitments and the pace at which our investment funds make investments, we expect that the capital commitments presented above will be called over a period of several years. See "—Liquidity—Liquidity Needs."
(2)
Amounts include: (i)  $500 million aggregate principal amount of 6.375% Senior Notes due 2020 issued by KKR Group Finance Co. LLC, $500 million aggregate principal amount of 5.500% Senior Notes due 2043 issued by KKR Group Finance Co. II LLC and $1,000 million aggregate principal amount of 5.125% Senior Notes due 2044 issued by KKR Group Finance Co. III LLC, gross of unamortized discount; (ii) $354.5 million aggregate principal amount of 0.509% Senior Notes due 2023, 0.764% Senior Notes due 2025 and 1.595% Senior Notes due 2038 issued by KKR Group Finance Co. IV LLC (denominated in Japanese Yen); (iii) $500 million aggregate principal amount of KFN 2032 Senior Notes, gross of unamortized discount; (iv) $120 million aggregate principal amount of KFN 2033 Senior Notes; (v) $70.0 million aggregate principal amount of KFN 5.400% Senior Notes due 2033 and (vi)  $258.5 million aggregate principal amount of KFN junior subordinated notes, gross of unamortized discount. KFN's debt obligations are non-recourse to KKR beyond the assets of KFN.
(3)
These interest obligations on debt represent estimated interest to be paid over the maturity of the related debt obligation, which has been calculated assuming the debt outstanding at September 30, 2018 is not repaid until its maturity. Future interest rates are assumed to be those in effect as of September 30, 2018 , including both variable and fixed rates, as applicable, provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness.
(4)
Represents various commitments in our capital markets business in connection with the underwriting of loans, securities and other financial instruments. These commitments are shown net of amounts syndicated.
(5)
Represents obligations in our capital markets business to lend under various revolving credit facilities.
(6)
Represents commitments of KKR and KFN to fund the purchase of various investments.
(7)
Represents the purchase price due upon delivery of a new KKR office being constructed, all or a portion of which represents construction financing obtained by the developer and may be refinanced upon delivery of the completed office.
(8)
Represents uncalled commitments of our consolidated funds excluding KKR's portion of uncalled commitments as the general partner of the respective funds.
(9)
Amounts include (i) financing arrangements entered into by our consolidated funds with the objective of providing liquidity to the funds of $3.6 billion , (ii) debt securities issued by our consolidated CLOs of $11.6 billion , (iii) debt securities issued by our consolidated CMBS entities of $1.1 billion and (iv) borrowings collateralized by specific investments and other assets held directly by majority-owned investment vehicles of $0.6 billion . In April 2018, a consolidated entity of KKR sold its controlling beneficial interest in four consolidated CMBS vehicles. Debt securities issued by consolidated CLOs and CMBS entities are supported solely by the investments held at the CLO and CMBS vehicles and are not collateralized by assets of any other KKR entity. Obligations under financing arrangements entered into by our consolidated funds are generally limited to our pro rata equity interest in such funds. Our management companies bear no obligations to repay any financing arrangements at our consolidated funds.

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(10)
The interest obligations on debt of our consolidated funds, CFEs and other borrowings represent estimated interest to be paid over the maturity of the related debt obligation, which has been calculated assuming the debt outstanding at September 30, 2018 is not repaid until its maturity. Future interest rates are assumed to be those in effect as of September 30, 2018 , including both variable and fixed rates, as applicable, provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness.
(11)
Represents commitments of consolidated funds to fund the purchase of various investments.
 
The commitment table above excludes contractual amounts owed under the tax receivable agreement because the ultimate amount and timing of the amounts due are not presently known. As of September 30, 2018 , an undiscounted payable of $97.0 million has been recorded in due to affiliates in the consolidated financial statements representing management's best estimate of the amounts currently expected to be owed under the tax receivable agreement. As of September 30, 2018 , approximately $24.0 million of cumulative cash payments have been made under the tax receivable agreement. See "—Liquidity Needs—Tax Receivable Agreement" and "Part II. Item 1A. Risk Factors—We will be required to pay our principals for most of the benefits relating to our use of tax attributes we receive from prior and future exchanges of our Class A common stock for KKR Group Partnership Units and related transactions."
  
We may incur contingent liabilities for claims that may be made against us in the future. We enter into contracts that contain a variety of representations, warranties and covenants, including indemnifications. For example, certain of our investment funds and KFN have provided certain indemnities relating to environmental and other matters and have provided nonrecourse carve-out guarantees for fraud, willful misconduct and other customary wrongful acts, each in connection with the financing of certain real estate investments that we have made. KKR has also provided certain guarantees for fraud, willful misconduct, bankruptcy and other customary wrongful acts in connection with certain investment vehicles. KKR has also guaranteed certain of our employees' (other than our named executive officers) and consultants' personal loans obtained in connection with certain fund investments. We have also indemnified employees and non-employees against potential liabilities, in connection with their service as described under "Item 13. Certain Relationships and Related Transactions, and Director Independence-Indemnification of Directors, Officers and Others" in our Annual Report. In addition, we have also provided credit support to certain of our subsidiaries' obligations in connection with certain investment vehicles or partnerships that we manage. 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, and we have also agreed to be liable for certain investment losses and/or for providing liquidity in the events specified in the governing documents of certain investment vehicles. Our maximum exposure under these arrangements is currently unknown as our liabilities for these matters would require a claim to be made against us in the future.
 
The partnership documents governing our carry-paying funds, including funds and vehicles relating to private equity, mezzanine, infrastructure, energy, direct lending and special situations investments, 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 September 30, 2018 , no carried interest was subject to this clawback obligation, assuming that all applicable carry paying funds were liquidated at their September 30, 2018 fair values. Had the investments in such funds been liquidated at zero value, the clawback obligation would have been approximately $2.0 billion . Carried interest is recognized in the statement 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 our investment balance as this is where carried interest is initially recorded.

Off Balance Sheet Arrangements
 
Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.


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Critical Accounting Policies
 
The preparation of our consolidated financial statements in accordance with GAAP requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of fees, expenses and investment income. Our management bases these estimates and judgments on available information, historical experience and other assumptions that we believe are reasonable under the circumstances. However, these estimates, judgments and assumptions are often subjective and may be impacted negatively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from those estimated, judged or assumed, revisions are included in the consolidated financial statements in the period in which the actual amounts become known. We believe our critical accounting policies could potentially produce materially different results if we were to change underlying estimates, judgments or assumptions.

The following discussion details certain of our critical accounting policies. For a full discussion of all critical accounting policies, please see Note 2 "Summary of Significant Accounting Policies" to the condensed consolidated financial statements included elsewhere in this report.

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 and 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.

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.

We classified 6.6% of total investments measured and reported at fair value as Level I at September 30, 2018 .
 
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.

We classified 40.0% of total investments measured and reported at fair value as Level II at September 30, 2018 .
 
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

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investments, credit investments, equity method investments for which the fair value option was elected and investments and debt obligations of consolidated CMBS entities.

We classified 53.4% of total investments measured and reported at fair value as Level III at September 30, 2018 . The valuation of our Level III investments at September 30, 2018 represents management's best estimate of the amounts that we would anticipate realizing on the sale of these investments in an orderly transaction at such date.
 
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. Our 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 us 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 we recognize 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. We do not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably affect the quoted price.

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 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 assets and liabilities 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 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: The 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.

Restricted 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.

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Derivatives: The valuation incorporates observable inputs comprising yield curves, foreign currency rates and credit spreads.
 
Level III Valuation Methodologies
 
Financial assets and liabilities categorized as Level III consist primarily of the following:
 
Private Equity Investments:  We generally employ 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. Also, as discussed in greater detail under "—Business Environment" and "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions that are difficult to quantify or predict, but may have a significant adverse impact on the value of our investments" in this report, a change in interest rates could have a significant impact on valuations. 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, we consider, 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, the estimated probability of such a 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. Across the total Level III private equity investment portfolio, including investments in both consolidated and unconsolidated investment funds, approximately 68% of the fair value is derived from investments that are valued based exactly 50% on market comparables and 50% on a discounted cash flow analysis. Less than 2% of the fair value of this Level III private equity investment portfolio is derived from investments that are valued either based 100% on market comparables or 100% on a discounted cash flow analysis. As of September 30, 2018 , the overall weights ascribed to the market comparables methodology, the discounted cash flow methodology, and a methodology based on pending sales for this portfolio of Level III private equity investments were 40%, 46%, and 14%, respectively.
 
When an illiquidity discount is to be applied, we seek to take a uniform approach across our portfolio and generally apply a minimum 5% discount to all private equity investments. We then evaluate such private equity investments to 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 we are 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, we determine the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time we hold 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 us in our 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

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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 more 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 analysis. Key inputs used in this methodology that require estimates include the weighted average cost of capital. In addition, the valuations of energy investments generally incorporate both commodity prices as quoted on indices and long-term commodity price forecasts, which may be substantially different from, and are currently higher than, commodity prices on certain indices for equivalent future dates. Certain energy investments do not include an illiquidity discount. Long-term commodity price forecasts are utilized to capture the value of the investments across a range of commodity prices within the energy investment portfolio associated with future development and to reflect a range of price expectations. Real estate investments are generally valued using a combination of direct income capitalization and discounted cash flow analysis. Key inputs used in such methodologies that require estimates include an unlevered discount rate and current capitalization rate, and certain real estate investments do not include a minimum illiquidity discount. The valuations of real assets investments also use other inputs.

On a segment basis, our energy real asset investments in oil and gas-producing properties as of  September 30, 2018  had a fair value of approximately  $719 million . Based on this fair value, we estimate that an immediate, hypothetical 10% decline in the fair value of these energy investments from one or more adverse movements to the investments' valuation inputs would result in a decline in book value of $71.9 million. As of  September 30, 2018 , if we were to value our energy investments using only the commodity prices as quoted on indices and did not use long-term commodity price forecasts, and also held all other inputs to their valuation constant, we estimate that book value would have been approximately $86 million lower.

These hypothetical declines relate only to book value. There would be no current impact on KKR's unrealized carried interest since all of the investment funds which hold these types of energy investments have investment values that are either below their cost or not currently accruing carried interest. Additionally, there would be no impact on fees since fees earned from investment funds which hold investments in oil and gas-producing properties are based on either committed capital or capital invested.

For GAAP purposes, where KKR holds energy investments consisting of working interests in oil and gas-producing properties directly and not through an investment fund, such working interests are consolidated based on the proportion of the working interests held by us. Accordingly, we reflect the assets, liabilities, revenues, expenses, investment income and cash flows of the consolidated working interests on a gross basis and changes in the value of these energy investments are not reflected as unrealized gains and losses in the consolidated statements of operations. Accordingly, a change in fair value for these investments does not result in a decrease in net gains (losses) from investment activities, but may result in an impairment charge reflected in general, administrative and other expenses. For segment purposes, these directly held working interests are treated as investments and changes in value are reflected in our segment results as unrealized gains and losses.

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 us 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.
 
Other Investments:  With respect to other investments including equity method investments for which the fair value election has been made, we generally employ the same valuation methodologies as described above for private equity investments when valuing these other investments.
 
Investments and Debt Obligations of Consolidated CMBS Vehicles: Under ASU 2014-13, we measure CMBS investments 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.
 

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Key unobservable inputs that have a significant impact on our Level III investment valuations as described above are included in Note 5 "Fair Value Measurements" of the condensed consolidated financial statements included elsewhere in this report. We utilize several unobservable pricing inputs and assumptions in determining the fair value of our Level III investments. These unobservable pricing inputs and assumptions may differ by investment and in the application of our valuation methodologies. Our reported fair value estimates could vary materially if we had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if we only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies. For valuations determined for periods other than at year end, various inputs may be estimated prior to the end of the relevant period.
 
Level III Valuation Process
 
The valuation process involved for Level III measurements is completed on a quarterly basis and is designed to subject the valuation of Level III investments to an appropriate level of consistency, oversight, and review.

For Private Markets investments classified as Level III, investment professionals prepare preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and other factors. These preliminary valuations are reviewed by an independent valuation firm engaged by KKR to perform certain procedures in order to assess the reasonableness of KKR's valuations annually for all Level III investments in Private Markets and quarterly for investments other than certain investments, which have values less than pre-set value thresholds and which in the aggregate comprise less than 5% of the total value of KKR's Level III Private Markets investments. The valuations of certain real asset investments are determined solely by an independent valuation firm without the preparation of preliminary valuations by our investment professionals, and instead such independent valuation firm relies on valuation information available to it as a broker or valuation firm. For credit investments and debt obligations of consolidated CMBS vehicles, an independent valuation firm is generally engaged quarterly by KKR with respect to most investments classified as Level III. The valuation firm either provides a value or provides a valuation range from which KKR's investment professionals select a point in the range to determine the preliminary valuation or performs certain procedures in order to assess the reasonableness and provide positive assurance of KKR's valuations. After reflecting any input from the independent valuation firm, the valuation proposals are submitted for review and approval by KKR's valuation committees. As of September 30, 2018 , less than 3% of the total value of our Level III credit investments were not valued with the engagement of an independent valuation firm.

KKR has a global valuation committee that is responsible for coordinating and implementing the firm's valuation process to ensure consistency in the application of valuation principles across portfolio investments and between periods. The global valuation committee is assisted by the asset class-specific valuation committees that exist for private equity (including growth equity), real estate, energy and infrastructure and credit. The asset class-specific valuation committees are responsible for the review and approval of all preliminary Level III valuations in their respective asset classes on a quarterly basis. The members of these valuation committees are comprised of investment professionals, including the heads of each respective strategy, and professionals from business operations functions such as legal, compliance and finance, who are not primarily responsible for the management of the investments. For periods prior to the completion of the PAAMCO Prisma transaction, when Level III valuations were required to be performed on hedge fund investments, a valuation committee for hedge funds reviewed these valuations.

All Level III valuations are also subject to approval by the global valuation committee, which is comprised of senior employees including investment professionals and professionals from business operations functions, and includes one of KKR's Co-Presidents and Co-Chief Operating Officers and its Chief Financial Officer, General Counsel and Chief Compliance Officer. When valuations are approved by the global valuation committee after reflecting any input from it, the valuations of Level III investments, as well as the valuations of Level I and Level II investments, are presented to the audit committee of the board of directors of the general partner of KKR & Co. Inc. and are then reported to the board of directors.
 
As of September 30, 2018 , upon completion by, where applicable, an independent valuation firm of certain limited procedures requested to be performed by them on certain investments, the independent valuation firm concluded that the fair values, as determined by KKR, of those investments reviewed by them were reasonable. The limited procedures did not involve an audit, review, compilation or any other form of examination or attestation under generally accepted auditing standards and were not conducted on all Level III investments. We are responsible for determining the fair value of investments in good faith, and the limited procedures performed by an independent valuation firm are supplementary to the inquiries and procedures that we are required to undertake to determine the fair value of the commensurate investments.
 
As described above, Level II and Level III investments were valued using internal models with significant unobservable inputs and our determinations of the fair values of these investments may differ materially from the values that would have

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resulted if readily observable inputs had existed. Additional external factors may cause those values, and the values of investments for which readily observable inputs exist, to increase or decrease over time, which may create volatility in our earnings and the amounts of assets and partners' capital that we report from time to time.
 
Changes in the fair value of investments impacts the amount of carried interest that is recognized as well as the amount of investment income that is recognized for investments held directly and through our consolidated funds as described below. We estimate that an immediate 10% decrease in the fair value of investments held directly and through consolidated investment funds generally would result in a commensurate change in the amount of net gains (losses) from investment activities for investments held directly and through investment funds and a more significant impact to the amount of carried interest recognized, regardless of whether the investment was valued using observable market prices or management estimates with significant unobservable pricing inputs. With respect to consolidated investment funds, the impact that the consequential decrease in investment income would have on net income attributable to KKR would generally be significantly less than the amount described above, given that a majority of the change in fair value of our consolidated funds would be attributable to noncontrolling interests and therefore we are only impacted to the extent of our carried interest and our balance sheet investments.
 
As of September 30, 2018 , there were no investments which represented greater than 5% of total investments on a GAAP basis. On a segment basis, as of September 30, 2018 , investments which represented greater than 5% of investments consisted of First Data Corporation and USI, Inc. valued at $1,430.5 million and $650.1 million , respectively. Our investment income on a GAAP basis and our book value can be impacted by volatility in the public markets related to our holdings of publicly traded securities, including our sizable holdings of First Data Corporation. See "—Business Environment" for a discussion on the impact of global equity markets on our financial condition and "—Segment Balance Sheet" for additional information regarding our largest holdings on a segment basis.

Since September 30, 2018, the broader equity markets have experienced significant volatility, with the S&P 500 Index falling by 7.2% between September 30, 2018 and October 25, 2018. Such volatility and uncertainty could make it more difficult to consummate new investments or exit our existing investments. Further, if the broader equity market continues to experience volatility and downward pressure in the fourth quarter of 2018, valuations of our investments may be negatively impacted, which may result in a lower valuations for these investments compared to September 30, 2018.
 
Recognition of Investment Income

Investment income consists primarily of the net impact of: (i) realized and unrealized gains and losses on investments; (ii) dividends; (iii) interest income; (iv) interest expense and (v) foreign exchange gains and losses relating to mark-to-market activity on foreign exchange forward contracts, foreign currency options, foreign denominated debt and debt securities issued by consolidated CFEs. Unrealized gains or losses resulting from the aforementioned activities are included in net gains (losses) from investment activities. Upon disposition of an instrument that is marked-to-market, previously recognized unrealized gains or losses are reversed and a realized gain or loss is recognized. While this reversal generally does not significantly impact the net amounts of gains (losses) that we recognize from investment activities, it affects the manner in which we classify our gains and losses for reporting purposes.
 
Certain of our investment funds are consolidated. When a fund is consolidated, the portion of our funds' investment income that is allocable to our carried interests and capital investments is not shown in the consolidated financial statements. For funds that are consolidated, all investment income (loss), including the portion of a funds' investment income (loss) that is allocable to KKR's carried interest, is included in investment income (loss) on the consolidated statements of operations. The carried interest that KKR retains in net income (loss) attributable to KKR & Co. Inc. is reflected as an adjustment to net income (loss) attributable to noncontrolling interests. However, because certain of our funds remain consolidated and because we hold a minority economic interest in these funds' investments, our share of the investment income is less than the total amount of investment income presented in the consolidated financial statements for these consolidated funds.
 

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Recognition of Carried Interest in the Statement of Operations
 
Carried interest entitles the general partner of a fund to a greater allocable share of the fund's earnings from investments relative to the capital contributed by the general partner and correspondingly reduces noncontrolling interests' attributable share of those earnings. Carried interest is 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 returns decrease or turn negative in subsequent periods, recognized carried interest will be reversed and reflected as losses in the statement of operations. For funds that are not consolidated, amounts earned pursuant to carried interest are included in fees and other in the consolidated statements of operations. Amounts earned pursuant to carried interest at consolidated funds are eliminated from fees and other upon consolidation of the fund and are included as investment income (loss) in net gains (losses) from investment activities along with all of the other investment gains and losses at the consolidated fund.
 
Carried interest is recognized in the statement 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. Due to the extended durations of our private equity funds, we believe that this approach results in income recognition that best reflects our periodic performance in the management of those funds. 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 not consolidated, this clawback obligation, if any, is reflected as a reduction of our investment balance as this is where carried interest is initially 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.

Prior to January 1, 2016, most of our historical private equity funds that provide for carried interest do not have a preferred return. For these funds, the management company is required to refund up to 20% of any management fees earned from its limited partners in the event that the fund recognizes carried interest. At such time as the fund recognizes carried interest in an amount sufficient to cover 20% of the management fees earned or a portion thereof, a liability due to the fund's limited partners is recorded and revenue is reduced for the amount of the carried interest recognized, not to exceed 20% of the management fees earned. The refunds to the limited partners are paid, and liabilities relieved, at such time that the underlying investment is sold and the associated carried interest is realized. In the event that a fund's carried interest is not sufficient to cover all or a portion of the amount that represents 20% of the earned management fees, such management fees would be retained and not returned to the funds' limited partners.

Most of our newer investment funds that provide for carried interest, however, have a preferred return. In this case, the management company does not refund the management fees earned from the limited partners of the fund as described above. Instead, the management fee is effectively returned to the limited partners through a reduction of the realized gain on which carried interest is calculated. To calculate the carried interest, KKR calculates whether a preferred return has been achieved based on an amount that includes all of the management fees paid by the limited partners as well as the other capital contributions and expenses paid by them to date. To the extent the fund has exceeded the preferred return at the time of a realization event, and subject to any other conditions for the payment of carried interest like netting holes, carried interest is distributed to the general partner. Until the preferred return is achieved, no carried interest is recorded. Thereafter, the general partner is entitled to a catch up allocation such that the general partner's carried interest is paid in respect of all of the fund's net gains, including the net gains used to pay the preferred return, until the general partner has received the full percentage amount of carried interest that the general partner is entitled to under the terms of the fund. In general, investment funds that entitle the management company to receive an incentive fee have a preferred return and are calculated on a similar basis that takes into account management fees paid.

Recently Issued Accounting Pronouncements
  
For a full discussion of recently issued accounting pronouncements, please see Note 2 "Summary of Significant Accounting Policies" to the condensed consolidated financial statements included elsewhere in this report.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There was no material change in our market risks during the three and nine months ended September 30, 2018 . For additional information, please refer to our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 23, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that the information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and such information is accumulated and communicated to management, including the Co-Chief Executive Officers and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives.

 As of the period ended September 30, 2018 , we carried out an evaluation, under the supervision and with the participation of our management, including the Co-Chief Executive Officers and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Co-Chief Executive Officers and Chief Financial Officer have concluded that, as of the period ended September 30, 2018 , our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during the three or nine months ended September 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.
 
The section entitled "Litigation" appearing in Note 16 "Commitments and Contingencies" to our condensed consolidated financial statements included elsewhere in this report is incorporated herein by reference.

ITEM 1A.  RISK FACTORS.
 
Other than as set forth in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018 under the heading "Risk Factors," which are incorporated herein by reference, there were no material changes to the risk factors disclosed in our Annual Report.


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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Share Repurchases in the Third Quarter of 2018

As announced on October 27, 2015 and amended on February 9, 2017, KKR was authorized to repurchase up to $750 million in the aggregate of its outstanding Class A common stock. On May 3, 2018, KKR announced an increase to the available amount under its repurchase program to $500 million. Prior to this increase, there was approximately $291 million remaining under the program.

Under the current repurchase program, KKR is authorized to repurchase its Class A common stock from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing, manner, price and amount of any Class A common stock 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. 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 any specific number of shares of Class A common stock, and the program may be suspended, extended, modified or discontinued at any time.
    
In addition to the repurchases of Class A common stock described above, subsequent to May 3, 2018, 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 issued pursuant to our Equity Incentive Plan (and any successor equity plan thereto) representing the right to receive shares of Class A common stock. During the first nine months of 2018, KKR paid approximately $53 million in cash in lieu of issuing shares of Class A common stock upon the vesting of equity awards representing 2.6 million shares of Class A common stock to satisfy tax withholding and cash-settlement obligations. From October 27, 2015 through September 30, 2018, KKR has paid approximately $190 million in cash in lieu of issuing shares of Class A common stock upon the vesting of equity awards representing 11.0 million shares of Class A common stock to satisfy tax withholding and cash-settlement obligations. Since these 11.0 million shares were retired prior to May 3, 2018, such shares are not counted against the amounts remaining under the repurchase program.

The table below sets forth the information with respect to repurchases made by or on behalf of KKR & Co. Inc. or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our Class A common stock during the third quarter of 2018. 1,151,034 shares of Class A common stock were repurchased during the third quarter of 2018. From inception of the repurchase program through September 30, 2018, we have repurchased a total of approximately 35.0 million shares of Class A common stock under the program at an average price of approximately $15.40 per share.

Issuer Purchases of Class A Common Stock
(amounts in thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1
(July 1, 2018 to
July 31, 2018)
719,883

 
$
26.39

 
34,601,345

 
$
430,788

Month #2
(August 1, 2018 to
August 31, 2018)
152,196

 
$
26.28

 
34,753,541

 
$
426,788

Month #3
(September 1, 2018 to
September 30, 2018)
278,955

 
$
26.71

 
35,032,496

 
$
419,338

Total through September 30, 2018
1,151,034

 
 
 
 
 
 
 
 
 
 
 
 
 
 


 

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Unregistered Sale of Equity Securities

During the third quarter of 2018, 1,401,800 exchangeable securities issued in connection with the acquisition of Avoca were exchanged for an equal number of shares of our Class A common stock. These issuances were exempt from registration in reliance on Section 4(a)(2) of the Securities Act. As of September 30, 2018, all remaining exchangeable securities were exchanged for an equal number of shares of our Class A common stock.

Other Equity Securities

During the third quarter of 2018, 1,000,769 KKR Group Partnership Units were exchanged by KKR Holdings for an equal number of shares of our Class A common stock. This resulted in an increase in our ownership of the KKR Group Partnerships and a corresponding decrease in the ownership of the KKR Group Partnerships by KKR Holdings. In November 2018, approximately 4.0 million KKR Group Partnership Units are expected to be exchanged by KKR Holdings into an equal number of shares of our Class A common stock.

As previously disclosed, in connection with the Conversion, our executive officers had agreed not to sell or make charitable transfers of equity securities of KKR & Co. Inc. for six months following the date of announcement of the Conversion. The six month period will expire on November 3, 2018, and after that date, our executive officers are no longer restricted from selling or donating equity securities of KKR & Co. Inc., including approximately 20.0 million shares of Class A common stock that were designated for charitable donations by or on behalf of our executive officers pursuant to an exchange of KKR Holdings units for shares of Class A common stock that occurred in May 2018.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.  MINE SAFETY DISCLOSURES.
 
Not applicable.


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ITEM 5. OTHER INFORMATION.

We are providing the following supplemental information about after-tax economic net income (loss) ("ENI") on a voluntary basis for comparability purposes. ENI is an alternative measurement of the operating and investment earnings of KKR including mark-to-market gains (losses) that has been used historically. ENI is calculated as after-tax distributable earnings, plus unrealized carried interest and unrealized investment income, less unrealized performance income compensation and non-current income taxes.

The following reconciles after-tax distributable earnings and ENI to GAAP Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders for the three and nine months ended September 30, 2018 and 2017:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
($ in thousands)
After-tax Distributable Earnings
 
$
496,698

 
$
409,533

 
$
1,137,117

 
$
983,003

Add: Unrealized Carried Interest
 
130,420

 
(59,638
)
 
182,130

 
377,707

Add: Net Unrealized Gains (Losses)
 
251,346

 
(50,902
)
 
1,849,077

 
461,111

Deduct: Unrealized Performance Income Compensation
 
57,407

 
(19,826
)
 
81,376

 
157,162

Deduct: Non-current Income Taxes (1)
 
135,667

 
10,448

 
212,361

 
53,822

Add: Non-recurring Items (2)
 

 

 
(729,425
)
 

ENI
 
685,390

 
308,371

 
2,145,162

 
1,610,837

Deduct: Net Income (Loss) Attributable to Noncontrolling Interests held by
KKR Holdings L.P.
 
293,659

 
115,434

 
864,520

 
637,146

Deduct: Equity-based and Other Compensation - KKR Holdings L.P.
 
25,537

 
23,807

 
87,479

 
127,864

Deduct: Amortization of Intangibles and
Other, net
 
60,948

 
20,464

 
58,014

 
57,825

Add: Provision for Income Tax (Benefit)
 
205,547

 
23,317

 
316,229

 
108,050

Deduct: Income Tax Expense (Benefit)
 
(129,405
)
 
18,420

 
(50,804
)
 
77,500

Deduct: One-time Non-recurring Costs (3)
 

 

 
11,501

 

GAAP Net Income (Loss) Attributable to KKR & Co. Inc. Class A Common Stockholders
 
$
640,198

 
$
153,563

 
$
1,490,681

 
$
818,552

(1)
Excludes the impact of the estimated tax benefit resulting from the partial step-up in the tax basis of certain assets in connection with the Conversion.
(2)
Represents losses on certain investments which were realized in the second quarter in advance of the Conversion.
(3)
Represents non-recurring costs in connection with the Conversion.


ITEM 6. EXHIBITS.

The following is a list of all exhibits filed or furnished as part of this report:
 
Exhibit No.
 
Description of Exhibit
10.1
 
10.2
 
10.3
 
10.4
 
31.1
 
31.2
 
31.3
 

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Exhibit No.
 
Description of Exhibit
32.1
 
32.2
 
32.3
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Financial Condition as of September 30, 2018 and December 31, 2017, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and September 30, 2017, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and September 30, 2017; (iv) the Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2018 and September 30, 2017, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and September 30, 2017, and (vi) the Notes to the Condensed Consolidated Financial Statements.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


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SIGNATURES
 
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
KKR & CO. INC.
 
 
 
 
 
 
 
 
By:
/s/ William J. Janetschek
 
 
 
William J. Janetschek
 
 
 
Chief Financial Officer
 
 
 
(principal financial and accounting officer)
 
 
 
 
DATE:
November 2, 2018
 
 
 


149

Exhibit 10.2

INDEPENDENT DIRECTOR COMPENSATION PROGRAM

As of November 2018

1. Annual Retainer : $90,000.

2. Committee Fees : audit committee member—$25,000, audit committee chair— $50,000 (inclusive of the audit committee member fee), nominating and corporate governance committee member—$15,000.

3. Equity Awards : to be determined from time to time by the board of directors or a committee thereof.




Exhibit 10.3

PUBLIC COMPANY EQUITY UNIT AWARD AGREEMENT
OF
KKR & CO. INC.

(Directors)

 
CONFIDENTIAL



Table of Contents

   
Page
     
ARTICLE I GRANT OF PUBLIC COMPANY EQUITY UNITS
1
   
 
Section 1.1.     Grant of Public Company Equity Units
1
 
Section 1.2.     RSUs and Agreement Subject to Plan; Administrator
1
     
ARTICLE II VESTING AND SETTLEMENT OF RSUS
1
   
 
Section 2.1.     Vesting of RSUs
1
 
Section 2.2.     Settlement of RSUs
2
 
Section 2.3.     No Dividend Payments
3
     
ARTICLE III RESTRICTIONS ON TRANSFERS
3
   
 
Section 3.1.     Transfers of RSUs
3
     
ARTICLE IV MISCELLANEOUS
3
   
 
Section 4.1.     Governing Law
3
 
Section 4.2.     Arbitration
4
 
Section 4.3.     Remedies; Recoupment; Right to Set-Off
5
 
Section 4.4.     Amendments and Waivers
5
 
Section 4.5.     Withholding
5
 
Section 4.6.     Notices
6
 
Section 4.7.     Entire Agreement; Termination of Agreement; Survival
6
 
Section 4.8.     Severability
6
 
Section 4.9.     Binding Effect
7
 
Section 4.10.   Further Assurances
7
 
Section 4.11.   Interpretation; Defined Terms; Section 409A; Service with Designated Service Recipient; Headings
7
 
Section 4.12.   Counterparts
8
     
APPENDIX A DEFINITIONS
A-1
   
APPENDIX B RSU GRANT CERTIFICATE
B-1
   
APPENDIX C AMENDED AND RESTATED KKR & CO. INC. 2010 EQUITY INCENTIVE PLAN
C-1

i

PUBLIC COMPANY EQUITY UNIT AWARD AGREEMENT
OF
KKR & CO. INC.

This PUBLIC COMPANY EQUITY UNIT AWARD AGREEMENT (this “ Agreement ”) of KKR & CO. INC. (the “ Corporation ”) is made by and between the Corporation and the undersigned (the “ Grantee ”), who is a member of the board of directors of the Corporation (the “ Board ”).  Capitalized terms used herein and not otherwise defined herein or in the Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan, as amended from time to time (the “ Plan ”), shall be as defined in Appendix A attached hereto.

RECITALS

WHEREAS , the Board has determined it is in the best interests of the Corporation to provide the Grantee with this Agreement pursuant to and in accordance with the terms of the Plan.

NOW, THEREFORE , in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties hereto agree to the following:

ARTICLE I
GRANT OF PUBLIC COMPANY EQUITY UNITS

Section 1.1.
Grant of Public Company Equity Units

The Corporation hereby grants to the Grantee, effective as of the Grant Date specified on the RSU Grant Certificate attached hereto as Appendix B (the “ Grant Date ”), the number of “public company equity units”, which are restricted stock units set forth in the RSU Grant Certificate attached hereto, subject to the terms and conditions of this Agreement. Each restricted stock unit that is granted pursuant to this Agreement represents the right to receive delivery of one share of Class A Common Stock, subject to any adjustment pursuant to Section 9 of the Plan (each such restricted stock unit, an “ RSU ”).

Section 1.2.
RSUs and Agreement Subject to Plan; Administrator

This Agreement and the grant of RSUs provided for herein shall be subject to the provisions of the Plan, except that if there are any express differences or inconsistencies between the provisions of the Plan and this Agreement, the provisions of this Agreement shall govern. For the avoidance of doubt, the Corporation may delegate to any employee of the KKR Group its duties and powers hereunder, and any reference to the “Administrator” contained herein shall be deemed to include any such delegate.

ARTICLE II
VESTING AND SETTLEMENT OF RSUS

Section 2.1.
Vesting of RSUs


(a)
The following vesting provisions shall apply to the RSUs:

1


(i)
Subject to the Grantee’s continued service as a director of the Corporation (“Service”) through the Service Vesting Date or Service Vesting Dates, as applicable, as specified in the RSU Grant Certificate attached hereto, the RSUs shall become vested on such date or dates, as applicable, as to the percentage(s) set forth in such RSU Grant Certificate.


(ii)
If, prior to the date the RSUs are vested as provided in Section 2.1(a)(i) above or otherwise terminate pursuant to Section 2.1(b) below: (A) the Grantee dies or experiences a Disability; or (B) there occurs a Change in Control, then all unvested RSUs shall be vested as a result thereof.


(iii)
All RSUs that become vested under this Section 2.1(a) are eligible to be Settled pursuant to Section 2.2 of this Agreement.


(b)
If the Grantee’s Service terminates for any reason other than due to the Grantee’s death or Disability as provided for in Section 2.1(a) above, all then unvested RSUs shall immediately terminate and be forfeited without consideration, and no Class A Common Stock shall be delivered hereunder.

Section 2.2.
Settlement of RSUs


(a)
To the extent that (i) an RSU granted hereunder becomes vested pursuant to Section 2.1(a) above and (ii) the related Service Vesting Date has also occurred, then with respect to such percentage of RSUs set forth next to the applicable Service Vesting Date on the RSU Grant Certificate, such RSU shall be Settled as soon as administratively practicable on or following the applicable Service Vesting Date for such RSU; provided that the Administrator may determine that such Settlement may instead occur on or as soon as administratively practicable after the first day of the next permissible trading window of Class A Common Stock that opens for members of the Board and employees of the KKR Group to sell Class A Common Stock (provided that in any event such Settlement shall not be later than the time permitted under Section 409A, if applicable).  For the avoidance of doubt, the Settlement of any RSUs that become vested pursuant to Section 2.1(a)(ii) above shall not be accelerated, such that, with respect to any such RSUs, only that percentage of such RSUs that would otherwise have become vested on each applicable Service Vesting Date as set forth on the RSU Grant Certificate pursuant to Section 2.1(a)(i) shall be Settled at each such Service Vesting Date in accordance with the foregoing sentence. The date on which any RSU is to be Settled hereunder is referred to as a “ Delivery Date.   The Settlement of each RSU shall be effected in accordance with, and subject to the provisions of, Section 2.2(b) below.


(b)
On any   Delivery Date, each vested RSU that is then being Settled shall be cancelled in exchange for the Corporation delivering, or causing to be delivered by the Designated Service Recipient, to the Grantee either (i) the number of Class A Common Stock equal to the number of RSUs that are to be Settled on such Delivery Date pursuant to Section 2.2(a) above or (ii) an amount of cash, denominated in U.S. dollars, equal to the Fair Market Value of the foregoing number of Class A Common Stock (a “ Cash Payment ”). The Administrator may elect in its sole discretion whether to Settle the RSUs in Class A Common Stock or by a Cash Payment.

2


(c)
Subject to the provisions of this Article II relating to the number of RSUs that are to be Settled on any applicable Delivery Date and solely to the extent permitted under Section 409A, if applicable, the Corporation may impose such other conditions and procedures in relation to the Settlement of RSUs as it may reasonably determine.


(d)
Any of the foregoing payments or deliveries shall in all instances be subject to Sections 4.3 and 4.5 below, as applicable.

Section 2.3.
No Dividend Payments

The RSUs granted to the Grantee hereunder do not include the right to receive any dividend payments.

ARTICLE III
RESTRICTIONS ON TRANSFERS

Section 3.1.
Transfers of RSUs


(a)
The Grantee may not Transfer all or any portion of the Grantee’s RSUs (including to any Family Related Holder) without the prior written consent of the Administrator, which consent may be given or withheld, or made subject to such conditions (including the receipt of such legal or tax opinions and other documents that the Corporation may require) as are determined by the Administrator, in its sole discretion.  Prior to a Transfer of any RSUs to any Other Holder, the Other Holder must consent in writing to be bound by this Agreement as an Other Holder and deliver such consent to the Administrator.  Any purported Transfer that is not in accordance with this Agreement shall be null and void.


(b)
In the event of a property settlement or separation agreement between the Grantee and his or her spouse, the Grantee agrees that he or she shall use reasonable efforts to retain all of his or her RSUs and shall reimburse his or her spouse for any interest he or she may have under this Agreement out of funds, assets or proceeds separate and distinct from his or her interest under this Agreement.

ARTICLE IV
MISCELLANEOUS

Section 4.1.
Governing Law

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, United States of America, without giving effect to any otherwise governing principles of conflicts of law that would apply the Laws of another jurisdiction.

3

Section 4.2.
Arbitration


(a)
Any and all disputes which cannot be settled amicably, including any ancillary claims of any party, arising out of, relating to or in connection with the validity, negotiation, execution, interpretation, performance or non-performance of this Agreement (including the validity, scope and enforceability of this arbitration provision) shall be finally settled by arbitration conducted by a single arbitrator in New York, New York in accordance with the then-existing Rules of Arbitration of the International Chamber of Commerce.  If the parties to the dispute fail to agree on the selection of an arbitrator within 30 days of the receipt of the request for arbitration, the International Chamber of Commerce shall make the appointment.  The arbitrator shall be a lawyer and shall conduct the proceedings in the English language. Performance under this Agreement shall continue if reasonably possible during any arbitration proceedings.  Except as required by Law or as may be reasonably required in connection with ancillary judicial proceedings to compel arbitration, to obtain temporary or preliminary judicial relief in aid of arbitration, or to confirm or challenge an arbitration award, the arbitration proceedings, including any hearings, shall be confidential, and the parties shall not disclose any awards, any materials in the proceedings created for the purpose of the arbitration, or any documents produced by another party in the proceedings not otherwise in the public domain. Judgment on any award rendered by an arbitration tribunal may be entered in any court having jurisdiction thereover.


(b)
Notwithstanding the provisions of Section 4.2(a), the Corporation may bring an action or special proceeding in any court of competent jurisdiction for the purpose of compelling the Grantee to arbitrate, seeking temporary or preliminary relief in aid of an arbitration hereunder, or enforcing an arbitration award and, for the purposes of this clause (b), the Grantee (i) expressly consents to the application of Section 4.2(c) below to any such action or proceeding, (ii) agrees that proof shall not be required that monetary damages for breach of the provisions of this Agreement would be difficult to calculate and that remedies at law would be inadequate, and (iii) irrevocably appoints the Secretary or General Counsel of the Corporation (or any officer of the Corporation) at the address identified for the Corporation as set forth in Section 4.6 below as such Grantee’s agent for service of process in connection with any such action or proceeding and agrees that service of process upon such agent, who shall promptly advise such Grantee of any such service of process, shall be deemed in every respect effective service of process upon the Grantee in any such action or proceeding.


(c)
EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE U.S. FEDERAL AND STATE COURTS LOCATED IN NEW YORK, NEW YORK FOR THE PURPOSE OF ANY JUDICIAL PROCEEDING BROUGHT IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION 4.2, OR ANY JUDICIAL PROCEEDING ANCILLARY TO AN ARBITRATION OR CONTEMPLATED ARBITRATION ARISING OUT OF OR RELATING TO OR CONCERNING THIS AGREEMENT.  Such ancillary judicial proceedings include any suit, action or proceeding to compel arbitration, to obtain temporary or preliminary judicial relief in aid of arbitration, or to confirm or challenge an arbitration award.  The parties acknowledge that the forums designated by this clause (c) have a reasonable relation to this Agreement and to the parties’ relationship with one another. The parties hereby waive, to the fullest extent permitted by applicable Law, any objection which they now or hereafter may have to personal jurisdiction or to the laying of venue of any such ancillary suit, action or proceeding referred to in this Section 4.2 brought in any court referenced therein and such parties agree not to plead or claim the same.

4

Section 4.3.
Remedies; Recoupment; Right to Set-Off


(a)
The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies.  Said rights and remedies are given in addition to any other rights the parties may have by Law or under the terms of any other applicable agreement.


(b)
To the extent required or advisable, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules promulgated thereunder and any other similar Laws, the Administrator may specify in any other document or a policy to be incorporated into this Agreement by reference, that the Grantee’s rights, payments, and benefits with respect to RSUs awarded hereunder and/or Class A Common Stock delivered to the Grantee in respect of RSUs awarded hereunder shall be subject to reduction, cancellation, forfeiture or recoupment.


(c)
The Administrator may set-off any amounts due under this Agreement or otherwise against any amounts which may be owed to the Corporation or its Affiliates by the Grantee under this Agreement, any other relationship or otherwise. The Grantee hereby expressly authorizes the Corporation and its Affiliates to take any and all actions on the Grantee’s behalf (including, without limitation, payment, credit and satisfaction of amounts owed)  in connection with the set-off of any amounts owed to the Corporation or its Affiliates or otherwise.

Section 4.4.
Amendments and Waivers


(a)
This Agreement (including the Definitions contained in Appendix A attached hereto, the RSU Grant Certificate attached as Appendix B hereto, and any other provisions as may be required to be appended to this Agreement under applicable local Law) may be amended, supplemented, waived or modified only in accordance with Section 4(c) of the Plan or Section 13 of the Plan, as applicable, or as may be required for purposes of compliance or enforceability with applicable local Law; provided, however, that the RSU Grant Certificate shall be deemed amended from time to time to reflect any adjustments provided for under the Plan.


(b)
No failure or delay by any party in exercising any right, power or privilege hereunder (other than a failure or delay beyond a period of time specified herein) shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

Section 4.5.
Withholding

Notwithstanding anything herein to the contrary, if applicable, the Corporation may require payment of any amount it may determine to be necessary to withhold for any applicable federal, state, local or other taxes in connection with any vesting, payments or deliveries made to the Grantee under this Agreement, including, without limitation, pursuant to Article II herein. Unless otherwise determined by the Administrator, to the extent that such withholding arises in connection with the vesting or Settlement of any RSUs through (i) the delivery of Class A Common Stock, such withholding payments may, as determined by the Administrator, be funded by reducing the number of Class A Common Stock otherwise deliverable to the Grantee upon Settlement by an amount of Class A Common Stock having an aggregate Fair Market Value equal to the amount of taxes that are then due or (ii) the payment of a Cash Payment due to the Grantee upon Settlement, such withholding payments shall be funded by the withholding of the amount of taxes that are then due from such Cash Payment.

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Section 4.6.
Notices

All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by courier service, by fax or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or with respect to subsections (a) and (b), at such other address for a party as shall be specified for purposes of notice given in accordance with this Section 4.6):


(a)
If to the Corporation, to:

KKR & Co. Inc.
9 West 57th Street, Suite 4200
New York, New York 10019
Attention: Chief Financial Officer


(b)
If to the Grantee, to the most recent address for the Grantee in the books and records of the Corporation.

Section 4.7.
Entire Agreement; Termination of Agreement; Survival


(a)
This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings, whether oral or written, pertaining thereto. The Grantee acknowledges that the grant of RSUs provided for under this Agreement is in full satisfaction of any and all grants of equity or equity-based awards that representatives of the Corporation or its Affiliates, on or prior to the date hereof, may have informed the Grantee that such Grantee is entitled to receive.


(b)
This Agreement shall terminate when the Grantee and all Other Holders cease to hold any of the RSUs that have been granted hereunder. Notwithstanding anything to the contrary herein, this Article IV shall survive any termination of this Agreement.

Section 4.8.
Severability

If any term or other provision of this Agreement is held to be invalid, illegal or incapable of being enforced by any rule of Law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions is not affected in any manner materially adverse to any party.  Upon a determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.

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Section 4.9.
Binding Effect

This Agreement shall be binding upon and inure to the benefit of all of the parties and, to the extent permitted by this Agreement, their successors, executors, administrators, heirs, legal representatives and assigns.

Section 4.10.
Further Assurances

The Grantee shall perform all other acts and execute and deliver all other documents as may be necessary or appropriate to carry out the purposes and intent of this Agreement.

Section 4.11.
Interpretation; Defined Terms; Section 409A; Service with Designated Service Recipient; Headings


(a)
Throughout this Agreement, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable.  Unless otherwise specified, all references herein to “Articles,” “Sections” and clauses shall refer to corresponding provisions of this Agreement.  The word “including” is not meant to be exclusive, but rather shall mean “including without limitation” wherever used in this Agreement.   Reference to “hereto”, “herein” and similar words is to this entire Agreement (including any Appendices) and not a particular sentence or section of this Agreement. All references to “date” and “time” shall mean the applicable date (other than a Saturday or Sunday or any day on which the Federal Reserve Bank of New York is closed or any day on which banks in the city of New York, New York are required to close, in which case such date refers to the next occurring date that is not described in this parenthetical) or time in New York, New York.


(b)
All references to any “separation from service” or termination of the Services provided by the Grantee shall be deemed to refer to a “separation from service” within the meaning of Section 409A, if applicable.  Notwithstanding anything herein to the contrary, (i) if at the time of the Grantee’s termination of Service the Grantee is a “specified employee” as defined in Section 409A of the Code and the deferral of the commencement of any payments or delivery of Class A Common Stock otherwise payable or provided hereunder as a result of such termination of Service is necessary in order to prevent any accelerated or additional tax under Section 409A, then the Corporation will defer the commencement of the payment of any such payments or delivery hereunder (without any reduction in such payments or delivery of Class A Common Stock ultimately paid or provided to the Grantee) until the date that is six months following the Grantee’s termination of Service (or the earliest date as is permitted under Section 409A) and (ii) if any other payments or other deliveries due to the Grantee hereunder could cause the application of an accelerated or additional tax under Section 409A, such payments or other deliveries shall be deferred if deferral will make such payment or other delivery compliant under Section 409A, or otherwise such payment or other delivery shall be restructured, to the extent possible, in a manner, determined by the Administrator, that does not cause such an accelerated or additional tax.  The Corporation shall use commercially reasonable efforts to implement the provisions of this Section 4.11(b) in good faith; provided that none of the Corporation, the Administrator nor any of the Corporation’s or its affiliates’ employees, directors or representatives shall have any liability to the Grantee with respect to this Section 4.11(b).

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(c)
For the avoidance of doubt, any references to the Service of the Grantee in this Agreement refer solely to the Service of the Grantee to the Corporation.  The grant of RSUs under this Agreement in no way implies any employment relationship with the Corporation or with any of its affiliates.


(d)
The headings and subheadings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof.

Section 4.12.
Counterparts

This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.  Copies of executed counterparts transmitted by telecopy or other electronic transmission service shall be considered original executed counterparts for purposes of this Agreement.

[Rest of page intentionally left blank]

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IN WITNESS WHEREOF , the Corporation has executed this Agreement as of the date specified under the signature of the Grantee.

KKR & CO. INC.
 
     
By:
   

Name:
 

Title:
 

1

IN WITNESS WHEREOF, the undersigned Grantee has caused this counterpart signature page to this Agreement to be duly executed as of the date specified under the signature of the Grantee.

GRANTEE

Electronic Signature

Name: Participant Name

Dated: Grant Date

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APPENDIX A
DEFINITIONS

In addition to the defined terms set forth in the preamble and recitals of the Agreement, as well as the defined terms set forth in the Plan, the following terms shall have the following meanings for purposes of the Agreement:

Disability ” means, as to any Person, such Person’s inability to perform in all material respects such Person’s duties and responsibilities to the Corporation by reason of a physical or mental disability or infirmity which inability is reasonably expected to be permanent and has continued (i) for a period of six consecutive months or (ii) such shorter period as the Administrator may reasonably determine in good faith.

Family Related Holder ” means, in respect of the Grantee, any of the following: (i) such Grantee’s spouse, parents, parents-in-law, children, siblings and siblings-in-law, descendants of siblings, and grandchildren, (ii) any trust or other personal or estate planning vehicle established by such Grantee, (iii) any charitable organization established by such Grantee and (iv) any successor-in-interest to such Grantee, including but not limited to a conservator, executor or other personal representative.

Law ” means any statute, law, ordinance, regulation, rule, code, executive order, injunction, judgment, decree or other order issued or promulgated by any national, supranational, state, federal, provincial, local or municipal government or any administrative or regulatory body with authority therefrom with jurisdiction over the Corporation or any Participant, as the case may be.

Other Holder ” means any Person that holds an RSU, other than the Grantee.

RSU Grant Certificate ” means the RSU Grant Certificate delivered to the Grantee and attached to this Agreement, as the same may be modified pursuant to Section 4.4(a) of the Agreement.

Section 409A ” means Section 409A of the Code, as the same may be amended from time to time, and the applicable regulations, including temporary regulations, promulgated under such Section, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

Service Vesting Date ” means, with respect to any RSU, the date set forth in the RSU Grant Certificate as the “Service Vesting Date.”

Settle ,” “ Settled ” or “ Settlement ” means the discharge of the Corporation’s obligations in respect of an RSU through the delivery to the Grantee of (i) Class A Common Stock or (ii) a Cash Payment, in each case in accordance with Article II.

Transfer ” or “ Transferred ” means with respect to any RSU, any (i) sale, assignment, transfer or other disposition thereof or any interests therein or rights attached thereto, whether voluntarily or by operation of Law, or (ii) creation or placement of any mortgage, claim, lien, encumbrance, conditional sales or other title retention agreement, right of first refusal, preemptive right, pledge, option, charge, security interest or other similar interest, easement, judgment or imperfection of title of any nature whatsoever.

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APPENDIX B

RSU GRANT CERTIFICATE



Grantee Name:  Participant Name

Grant Date: Grant Date

Number of RSUs: Number of Awards Granted

Service Vesting Date:
The following sets forth each applicable Service Vesting Date upon which the RSUs granted hereunder shall become vested, subject to the Grantee’s continued Service through each such date:

 
Percentage of RSUs that Become Vested on Applicable Service Vesting Date
 
Applicable Service Vesting Date
       

Vesting and Settlement of the RSUs is subject to all terms and conditions contained in the Agreement to which this RSU Grant Certificate is attached.

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APPENDIX C

Amended and Restated
KKR & Co. Inc.
2010 Equity Incentive Plan

1.
Purpose of the Plan

This Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan (the “ Plan ”) is designed to promote the long term financial interests and growth of KKR & Co. Inc., a Delaware corporation (the “ Corporation ”), and its Affiliates by (i) attracting and retaining directors, officers, employees, consultants or other service providers of the Corporation or any of its Affiliates and (ii) aligning the interests of such individuals with those of the Corporation and its Affiliates by providing them with equity-based awards based on shares of Class A Common Stock, $0.01 par value per share, of the Corporation (the “ Class A Common Stock ”).

The Plan was originally adopted as the KKR & Co. L.P. 2010 Equity Incentive Plan (the “ Original Plan ”), and was amended and restated in accordance with Section 9 of the Original Plan on July 1, 2018 to reflect changes relating to the conversion of KKR & Co. L.P., a Delaware limited partnership (the “ Partnership ”), into the Corporation (the “ Conversion ”), including to reflect that the Awards granted under the Plan shall relate to Class A Common Stock rather than common units representing limited partner interests in the Partnership (the “ Common Units ”), such amendment and restatement effective as of the effectiveness of the Conversion (the “ Conversion Time ”). Awards granted under the Original Plan shall remain outstanding under the Plan, with adjustments made to such Awards, pursuant to Section 9 of the Original Plan and effective as of the Conversion Time, such that references thereunder to (i) Common Units shall instead refer to Class A Common Stock, (ii) the Partnership shall instead refer to the Corporation, and (iii) to any other defined term that was defined in an applicable Award by reference to Section 2 of the Original Plan shall instead refer to the defined terms set forth in Section 2 hereof.

2.
Definitions

The following capitalized terms used in the Plan have the respective meanings set forth in this Section:

(a)            Act :  The Securities Exchange Act of 1934, as amended, or any successor thereto.

(b)            Administrator : The Board, or the committee or subcommittee thereof, or other employee or group of employees, to whom authority to administer the Plan has been delegated by the Board.

(c)            Affiliate :  With respect to any specified Person, any other Person that directly or indirectly through one or more intermediaries Controls, is Controlled by or is under common control with such specified Person. As used herein, the term “ Control ” (including the terms “ Controlled by ” and “ under common Control with ”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person.

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(d)            Award :  Individually or collectively, any Option, Stock Appreciation Right, or Other Stock-Based Awards based on or relating to the Class A Common Stock issuable under the Plan.

(e)            Board :  The board of directors of the Corporation.

(f)            Change in Control :  Except as otherwise set forth in any applicable Award agreement, (i) the occurrence of any Person, other than KKR Management LLC or a Person approved by KKR Management LLC, becoming the Class B Stockholder (as defined in the Certificate of Incorporation of the Corporation), (ii) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation) in one or more series of related transactions of all or substantially all of the combined assets of the Group Partnerships taken as a whole to any Person other than a Permitted Person, (iii) the consummation of any transaction or a series of related transactions (including any merger or consolidation) that results in any Person (other than a Permitted Person) becoming the beneficial owner of a majority of the controlling interests in any one or more Group Partnerships that together hold all or substantially all of the combined assets of the Group Partnerships taken as a whole, or (iv) the occurrence of any other event as determined by the Board to constitute a Change in Control. Solely for the purpose of this definition, the term “ person ” shall have the meaning given to such term under Section 13(d)(3) of the Act or any successor provision thereto; and for purposes of the Plan, the term “ beneficial owner ” shall have the meaning given to such term under Rule 13d-3 promulgated under the Act or any successor provision thereto, and the combined assets of the Group Partnerships shall exclude the portion of any such assets that are allocable to holders of any non-controlling interests in any consolidated subsidiaries.

(g)            Code :  The Internal Revenue Code of 1986, as amended, or any successor thereto.

(h)            Effective Date :  July 15, 2010.

(i)            Employee Exchange Agreement :  That certain Second Amended and Restated Exchange Agreement, dated as of May 3, 2018, by and among KKR Management Holdings L.P., KKR Fund Holdings L.P., KKR International Holdings L.P., KKR Holdings L.P., KKR & Co. L.P., KKR Group Holdings L.P., KKR Subsidiary Partnership L.P., KKR Group Limited and KKR Group Holdings Corp.

(j)            Employment :  The term “Employment” as used herein shall be deemed to refer to (i) a Participant’s employment if the Participant is an employee of the Corporation or any of its Affiliates, (ii) a Participant’s services as a consultant or partner, if the Participant is consultant to, or partner of, the Corporation or of any of its Affiliates, and (iii) a Participant’s services as an non-employee director, if the Participant is a non-employee member of the Board.

(k)            Fair Market Value :  Of a share of Class A Common Stock on any given date means (i) the closing sale price per share of Class A Common Stock on the New York Stock Exchange or The NASDAQ Stock Market (a “ U.S. Exchange ”) on that date (or, if no closing sale price is reported, the last reported sale price), (ii) if Class A Common Stock is not listed for trading on a U.S. Exchange, the closing sale price (or, if no closing sale price is reported, the last reported sale price) as reported on that date in composite transactions for the principal national securities exchange registered pursuant to the Act on which the Class A Common Stock is listed, (iii) if Class A Common Stock is not so listed on a U.S. Exchange, the last quoted bid price for Class A Common Stock on that date in the over-the-counter market as reported by OTC Markets Group Inc. or a similar organization, or (iv) if Class A Common Stock is not so quoted by OTC Markets Group Inc. or a similar organization, the average of the mid-point of the last bid and ask prices for Class A Common Stock on that date from a nationally recognized independent investment banking firm selected by the Board for this purpose.

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(l)            Group Partnerships :   KKR Management Holdings L.P., a Delaware limited partnership,   KKR Fund Holdings L.P., a Cayman Island exempted limited partnership, and KKR International Holdings L.P., a Cayman Island exempted limited partnership, along with any partnership designated in the future as a “Group Partnership” by the Corporation.

(m)            Group Partnership Unit :  A “Group Partnership Unit” as defined in the Pre-Listing Plan.

(n)            KKR Group :  The Group Partnerships, the direct and indirect parents of the Group Partnerships (the “ Parents ”), any direct or indirect subsidiaries of the Parents or the Group Partnerships, the general partner or similar controlling entities of any investment fund or vehicle that is managed, advised or sponsored by the KKR Group (the “ Funds ”) and any other entity through which any of the foregoing directly or indirectly conducts its business, but shall exclude any company over which a Fund exercises a significant degree of control as an investor.

(o)            Option :  An option to purchase Class A Common Stock granted pursuant to Section 6 of the Plan.

(p)            Option Price :  The purchase price per share of Class A Common Stock of an Option, as determined pursuant to Section 6(a) of the Plan.

(q)            Other Stock-Based Awards :  Awards granted pursuant to Section 8 of the Plan.

(r)            Participant :  A director, officer, employee, consultant or other service provider of the Corporation or of any of its Affiliates   who is selected by the Administrator to participate in the Plan.

(s)             Permitted Person :  The term “Permitted Person” means (i) an individual who (a) is an executive of the KKR Group, (b) devotes substantially all of his or her business and professional time to the activities of the KKR Group and (c) did not become an executive of the KKR Group or begin devoting substantially all of his or her business and professional time to the activities of the KKR Group in contemplation of a Change in Control or (ii) any Person in which any one or more such individuals directly or indirectly holds a majority of the controlling interests.

(t)            Person :  A ny individual, corporation, partnership, limited partnership, limited liability company, limited company, joint venture, trust, unincorporated or governmental organization or any agency or political subdivision thereof .

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(u)          Pre-Listing Award :  Any equity-based award (whether an option, unit appreciation right, restricted equity unit, phantom equity unit, or other equity-based award based in whole or in part on the fair market value of any equity unit or otherwise) granted pursuant to the Pre-Listing Plan.

(v)            Pre-Listing Plan :  KKR Management Holdings L.P. 2009 Equity Incentive Plan.

(w)              Stock Appreciation Right :  A stock appreciation right granted pursuant to Section 7 of the Plan.

3.
Class A Common Stock Subject to the Plan

 Subject to Section 9 hereof, the total number of shares of Class A Common Stock which shall be available for issuance under the Plan shall be equal to the total number of Common Units available under the Original Plan immediately prior to the Conversion Time (the “ Original Plan Amount ”), of which all or any portion may be issued as Class A Common Stock.  Notwithstanding the foregoing, beginning with the first fiscal year of the Corporation commencing after the Conversion Time and continuing with each subsequent fiscal year of the Corporation occurring thereafter, the aggregate number of shares of Class A Common Stock covered by the Plan will be increased, on the first day of each fiscal year of the Corporation occurring during the term of the Plan and commencing after the Conversion Time, by a number of shares of Class A Common Stock equal to the positive difference, if any, of (x) 15% of the aggregate number of shares of Class A Common Stock (determined on a fully converted and diluted basis) outstanding on the last day of the immediately preceding fiscal year of the Corporation minus (y) the Original Plan Amount, as such amount may have been increased by this sentence in any prior fiscal year, unless the Administrator should decide to increase the number of shares of Class A Common Stock covered by the Plan by a lesser amount on any such date.  The issuance of shares of Class A Common Stock or the payment of cash upon the exercise of an Award or any Pre-Listing Award or in consideration of the settlement, cancellation or termination of an Award or any Pre-Listing Award shall reduce the total number of shares of Class A Common Stock covered by and available for issuance under the Plan, as applicable (with any Awards or Pre-Listing Awards settled in cash reducing the total number of shares of Class A Common Stock by the number of shares of Class A Common Stock determined by dividing the cash amount to be paid thereunder by the Fair Market Value of one share of Class A Common Stock on the date of payment), and the issuance of Group Partnership Units in consideration of the settlement, cancellation or termination of any Pre-Listing Award shall reduce the total number of shares of Class A Common Stock covered by and available for issuance under the Plan by a number of shares of Class A Common Stock equal to the number of Group Partnership Units so issued multiplied by the Exchange Rate (as defined in the Employee Exchange Agreement).  Shares of Class A Common Stock which are subject to Awards which are cancelled, forfeited, terminated or otherwise expired by their terms without the payment of consideration, and shares of Class A Common Stock which are used to pay the exercise price of any Award, may be granted again subject to Awards under the Plan.   For the avoidance of doubt, shares of Class A Common Stock which are subject to Awards other than Options or Stock Appreciation Rights which are withheld to pay tax withholding obligations will be deemed not to have been delivered and will be available for further Awards under the Plan.

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For purposes of this Section 3, the number of shares of Class A Common Stock that, as of a particular date, will be considered to be “covered by” the Plan will be equal to the sum of (i) the number of shares of Class A Common Stock available for issuance pursuant to the Plan but which are not subject to an outstanding Award or Pre-Listing Award as of such date, (ii) the number of shares of Class A Common Stock subject to outstanding Awards or Pre-Listing Awards as of such date and (iii) the number of Group Partnership Units subject to outstanding Pre-Listing Awards as of such date multiplied by the Exchange Rate (as defined in the Employee Exchange Agreement) as in effect on such date.  For purposes of this Section 3, (A) an Option or Stock Appreciation Right that has been granted under the Plan or the Pre-Listing Plan will be considered to be an “outstanding” Award or Pre-Listing Award, as applicable, until it is exercised or cancelled, forfeited, terminated or otherwise expires by its terms, (B) a share of Class A Common Stock that has been granted as an Award under the Plan that is subject to vesting conditions will be considered an “outstanding” Award until the vesting conditions have been satisfied or the Award otherwise terminates or expires unvested by its terms, (C) a Group Partnership Unit that has been granted as a Pre-Listing Award under the Pre-Listing Plan that is subject to vesting conditions will be considered an “outstanding” Pre-Listing Award until the vesting conditions have been satisfied or the Pre-Listing Award otherwise terminates or expires unvested by its terms and (D) any Award or Pre-Listing Award other than an Option, Stock Appreciation Right, share of Class A Common Stock or Group Partnership Unit that is subject to vesting conditions will be considered to be an “outstanding” Award or Pre-Listing Award, as applicable, until it has been settled.

4.
Administration

(a)          Administration and Delegation .  The Plan shall be administered by the Administrator.  The Administrator may delegate the authority to grant Awards under the Plan to any employee or group of employees of the Corporation or of any Affiliate of the Corporation; provided   that such delegation and grants are consistent with applicable law and guidelines established by the Board from time to time.  The Administrator may delegate the day-to-day administration of the Plan to any employee or group of employees of the Corporation or any of its Affiliates or a nationally recognized third-party stock plan administrator.

(b)          Substitution of Prior Awards .  Awards may, in the discretion of the Administrator, be made under the Plan in assumption of, or in substitution for, outstanding awards previously granted by the Corporation, any Affiliate of the Corporation or any entity acquired by the Corporation or with which the Corporation combines.  The number of shares of Class A Common Stock underlying such substitute awards shall be counted against the aggregate number of shares of Class A Common Stock available for Awards under the Plan.

(c)            Interpretation; Corrections; Final and Binding Decisions .  The Administrator is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan.  The Administrator may correct any defect or supply any omission or reconcile any inconsistency in the Plan or Award agreement in the manner and to the extent the Administrator deems necessary or desirable, without the consent of any Participant.  Any decision of the Administrator in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their beneficiaries and successors).

(d)            Establishment of Award Terms .  The Administrator shall have the full power and authority to establish the terms and conditions of any Award consistent with the provisions of the Plan and to waive any such terms and conditions at any time (including, without limitation, accelerating or waiving any vesting conditions).

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(e)            Payment of Taxes Due .  The Administrator shall require payment of any amount it may determine to be necessary to withhold for federal, state, local or other taxes as a result of the exercise, grant or vesting of an Award.  To the extent that such withholding arises in connection with the settlement of an Award with Class A Common Stock, the Administrator may, in its sole discretion, cause such payments to be funded by reducing the Class A Common Stock delivered upon settlement by an amount of Class A Common Stock having a Fair Market Value equal to the amount of payments that would then be due (and if an Award is settled in cash, the Administrator may withhold cash in respect to such taxes due). The Administrator shall establish the manner in which any such tax obligation may be satisfied by the Participant.

5.
Limitations

No Award may be granted under the Plan after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date.

6.
Terms and Conditions of Options

Options granted under the Plan shall be non‑qualified options for federal income tax purposes, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Administrator shall determine:

(a)            Option Price .  The Option Price per share of Class A Common Stock shall be determined by the Administrator, provided that, solely for the purposes of an Option granted under the Plan to a Participant who is a U.S. taxpayer, in no event will the Option Price be less than 100% of the Fair Market Value on the date an Option is granted.

(b)            Exercisability .  Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Administrator, but in no event shall an Option be exercisable more than ten years after the date it is granted.

(c)            Exercise of Options .

(i)        Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the shares of Class A Common Stock for which it is then exercisable.  For purposes of this Section 6 of the Plan, the exercise date of an Option shall be the later of the date a notice of exercise is received by the Corporation and, if applicable, the date payment is received by the Corporation pursuant to clauses (A), (B), (C) or (D) in the following sentence.

(ii)        The Option Price for share of the Class A Common Stock as to which an Option is exercised shall be paid to the Corporation, and in the manner designated by the Administrator, pursuant to one or more of the following methods: (A) in cash or its equivalent (e.g., by personal check); (B) in Class A Common Stock having a Fair Market Value equal to the aggregate Option Price for the shares of Class A Common Stock being purchased and satisfying such other requirements as may be imposed by the Administrator; provided   that such Class A Common Stock have been held by the Participant for such period as may be established from time to time by the Administrator in order to avoid adverse accounting treatment applying generally accepted accounting principles; (C) partly in cash and partly in such Class A Common Stock; (D) if there is a public market for the Class A Common Stock at such time, through the delivery of irrevocable instructions to a broker to sell Class A Common Stock obtained upon the exercise of the Option and to deliver promptly to the Corporation an amount out of the proceeds of such sale equal to the aggregate Option Price for the Class A Common Stock being purchased, or (E) to the extent permitted by the Administrator, through net settlement in Class A Common Stock.

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(iii)       To the extent compliant with applicable laws, no Participant shall have any rights to distributions or other rights of a holder with respect to Class A Common Stock subject to an Option until the Participant has given written notice of exercise of the Option, paid in full the Option Price for such Class A Common Stock and, if applicable, has satisfied any other conditions imposed by the Administrator pursuant to the Plan.

(d)          Attestation .  Wherever in this Plan or any agreement evidencing an Award a Participant is permitted to pay the Option Price of an Option or taxes relating to the exercise of an Option by delivering Class A Common Stock, the Participant may, subject to procedures satisfactory to the Administrator, satisfy such delivery requirement by presenting proof of beneficial ownership of such Class A Common Stock, in which case the Corporation shall treat the Option as exercised without further payment and/or shall withhold such number of shares of Class A Common Stock from the Class A Common Stock acquired by the exercise of the Option, as appropriate.

7.
Terms and Conditions of Stock Appreciation Rights

(a)            Grants .  The Administrator may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof.  A Stock Appreciation Right granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same number of shares of Class A Common Stock covered by an Option (or such lesser number of shares of Class A Common Stock as the Administrator may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 7 (or such additional limitations as may be included in an Award agreement).

(b)           Exercise Price .  The exercise price per share of Class A Common Stock of a Stock Appreciation Right shall be an amount determined by the Administrator; provided , however , that in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the exercise price may not be less than the Option Price of the related Option; provided , further that, solely for the purposes of a Stock Appreciation Right granted under the Plan to a Participant who is a U.S. taxpayer, in the case of a Stock Appreciation Right that was not granted in conjunction with an Option, the exercise price per Stock Appreciation Right shall not be less than 100% of the Fair Market Value on the date the Stock Appreciation Right is granted.

(c)            Terms of Grant :  Each Stock Appreciation Right granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one share of Class A Common Stock over (B) the exercise price per share of Class A Common Stock, times (ii) the number of shares of Class A Common Stock covered by the Stock Appreciation Right.  Each Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Corporation the unexercised Option, or any portion thereof, and to receive from the Corporation in exchange therefore an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one share of Class A Common Stock over (B) the Option Price per share of Class A Common Stock, times (ii) the number of shares of Class A Common Stock covered by the Option, or portion thereof, which is surrendered.  Payment shall be made in Class A Common Stock or in cash, or partly in Class A Common Stock and partly in cash (any such Class A Common Stock valued at such Fair Market Value), all as shall be determined by the Administrator.

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(d)            Exercisability :  Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Corporation of written notice of exercise stating the number of shares of Class A Common Stock with respect to which the Stock Appreciation Right is being exercised.  The date a notice of exercise is received by the Corporation shall be the exercise date.  The Administrator, in its sole discretion, may determine that no fractional Class A Common Stock will be issued in payment for Stock Appreciation Rights, but instead cash will be paid for the fractional Class A Common Stock and the number of shares of Class A Common Stock to be delivered will be rounded downward to the next whole share of Class A Common Stock.

(e)            Limitations .  The Administrator may impose, in its discretion, such conditions upon the exercisability of Stock Appreciation Rights as it may deem fit, but in no event shall a Stock Appreciation Right be exercisable more than ten years after the date it is granted.

8.
Other Stock-Based Awards

The Administrator, in its sole discretion, may grant or sell Awards of Class A Common Stock, restricted Class A Common Stock, deferred restricted Class A Common Stock, phantom restricted Class A Common Stock or other Class A Common Stock-based awards based in whole or in part on the Fair Market Value of the Class A Common Stock (“ Other Stock-Based Awards ”).  Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Administrator shall determine, including, without limitation, the right to receive, or vest with respect to, one or more shares of Class A Common Stock (or the equivalent cash value of such Class A Common Stock) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives.  Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan.  Subject to the provisions of the Plan, the Administrator shall determine to whom and when Other Stock-Based Awards will be made, the number of shares of Class A Common Stock to be awarded under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Class A Common Stock, or other assets or a combination of cash, Class A Common Stock and other assets; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof and provisions ensuring that all Class A Common Stock so awarded and issued shall be fully paid and non-assessable).

9.
Adjustments Upon Certain Events

Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan:

(a)            Equity Restructurings . In the event of any extraordinary Class A Common Stock distribution or split, recapitalization, rights offering, split-up or spin-off or any other event that constitutes an “equity restructuring” (as defined under Financial Accounting Standards Board (FASB) Accounting Standards Codification 718) with respect to the Class A Common Stock, the Administrator shall, in the manner determined appropriate or desirable by the Administrator and without liability to any person, adjust any or all of (i) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) with respect to which Awards may be granted under the Plan, and (ii) the terms of outstanding Awards, including, but not limited to (A) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) subject to outstanding Awards or to which outstanding Awards relate, (B) the Option Price or exercise price of any Option or Stock Appreciation Right and (C) any performance targets or other applicable terms.

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(b)            Mergers, Reorganizations and Other Corporate Transactions . In the event of any reorganization, merger, consolidation, combination, repurchase or exchange of Class A Common Stock or other securities of the Corporation, issuance of warrants or other rights to purchase Class A Common Stock or other securities of the Corporation, or other similar corporate transaction or event that affects the Class A Common Stock such that an adjustment is determined by the Administrator in its discretion to be appropriate or desirable, the Administrator in its sole discretion and without liability to any person shall make such substitution or adjustment, if any, as it deems to be equitable as to (i) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) with respect to which Awards may be granted under the Plan, and (ii) the terms of any outstanding Award, including (A) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) subject to outstanding Awards or to which outstanding Awards relate, (B) the Option Price or exercise price of any Option or Stock Appreciation Right and (C) any performance targets or other applicable terms.

(c)            Change in Control . In the event of a Change in Control after the Effective Date, (i) if determined by the Administrator in the applicable Award agreement or otherwise, any outstanding Awards then held by Participants which are unexercisable or otherwise unvested or subject to lapse restrictions shall automatically be deemed exercisable or otherwise vested or no longer subject to lapse restrictions, as the case may be, as of immediately prior to such Change in Control and (ii) the Administrator may (subject to Sections 16 and 18), but shall not be obligated to: (A) accelerate, vest or cause the restrictions to lapse with respect to all or any portion of an Award; (B) cancel such Awards for fair value (as determined in the sole discretion of the Administrator) which, in the case of Options and Stock Appreciation Rights, may equal the excess, if any, of value of the consideration to be paid in the Change in Control transaction to holders of the same number of shares of Class A Common Stock subject to such Options or Stock Appreciation Rights (or, if no consideration is paid in any such transaction, the Fair Market Value of the Class A Common Stock subject to such Options or Stock Appreciation Rights) over the aggregate exercise price of such Options or Stock Appreciation Rights; (C) provide that any Options or Stock Appreciation Right having an exercise price per share of Class A Common Stock that is greater than the per share value of the consideration to be paid in the Change in Control transaction to a holder of a share of Class A Common Stock shall be cancelled without payment of any consideration therefor; (D) provide for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted hereunder as determined by the Administrator in its sole discretion; or (E) provide that for a period of at least 15 days prior to the Change in Control, such Options shall be exercisable as to all shares subject thereto and that upon the occurrence of the Change in Control, such Options shall terminate and be of no further force and effect.

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10.
No Right to Employment or Awards

The granting of an Award under the Plan shall impose no obligation on the Corporation or any Affiliate to continue the Employment of a Participant and shall not lessen or affect the Corporation’s or Affiliate’s right to terminate the Employment of such Participant.  No Participant or other Person shall have any claim to be granted any Award (including as a result of recurring prior Award), and there is no obligation for uniformity of treatment of Participants, or holders or beneficiaries of Awards.  No Award shall constitute compensation for purposes of determining any benefits under any benefit plan.  The terms and conditions of Awards and the Administrator’s determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated).

11.
Successors and Assigns

The Plan shall be binding on all successors and assigns of the Corporation and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.

12.
Nontransferability of Awards

Unless otherwise determined or approved by the Administrator, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution.  Any transfer or assignment in violation of the prior sentence shall be null and void.  An Award exercisable after the death of a Participant may be exercised by the legatees, personal representatives or distributees of the Participant.

13.
Amendments or Termination

The Board may amend, alter or discontinue the Plan or any outstanding Award, but no amendment, alteration or discontinuation shall be made, without the consent of a Participant, if such action would materially diminish any of the rights of the Participant under any Award theretofore granted to such Participant under the Plan; provided , however , that the Administrator may without the Participant’s consent (a) amend the Plan or any outstanding Award in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws (including, without limitation, to avoid adverse tax consequences to the Corporation or to Participants as provided in Section 14 and Section 18 below), and (b) amend any outstanding Awards in a manner that is not adverse (other than in a de minimis manner) to a Participant, except as otherwise may be permitted pursuant to Section 9 hereof or as is otherwise contemplated pursuant to the terms of the Award, without the Participant’s consent.

14.
International Participants

With respect to Participants who reside or work outside the United States of America, the Administrator may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant, the Corporation or an Affiliate.

15.
Choice of Law

The Plan shall be governed by and construed in accordance with the law of the State of New York without giving effect to any otherwise governing principles of conflicts of law that would apply the laws of another jurisdiction.

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16.
Other Laws; Restrictions on Transfer of Class A Common Stock

The Administrator may refuse to issue or transfer any Class A Common Stock or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Class A Common Stock or such other consideration might violate any applicable law or regulation or entitle the Corporation to recover the same under Section 16(b) of the Act, as amended, and any payment tendered to the Corporation by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Corporation, and no such offer shall be outstanding, unless and until the Administrator in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the United States federal and any other applicable securities laws.

17.
Effectiveness of the Plan

The Plan shall be effective as of the Effective Date.

18.
Section 409A

To the extent applicable, this Plan and Awards issued hereunder shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date.   Notwithstanding other provisions of the Plan or any Award agreements issued thereunder, no Award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a Participant.  In the event that it is reasonably determined by the Administrator that, as a result of Section 409A of the Code, payments in respect of any Award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant Award agreement, as the case may be, without causing the Participant holding such Award to be subject to taxation under Section 409A of the Code, consistent with the provisions of Section 13(a) above, the Corporation may take whatever actions the Administrator determines necessary or appropriate to comply with, or exempt the Plan and Award agreement from the requirements of Section 409A of the Code and related Department of Treasury guidance and other interpretive materials as may be issued after the Effective Date including, without limitation, (a) adopting such amendments to the Plan and Awards and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Administrator determines necessary or appropriate to preserve the intended tax treatment of the benefits provided by the Plan and Awards hereunder and/or (b) taking such other actions as the Administrator determines necessary or appropriate to avoid the imposition of an additional tax under Section 409A of the Code, which action may include, but is not limited to, delaying payment to a Participant who is a “specified employee” within the meaning of Section 409A of the Code until the first day following the six-month period beginning on the date of the Participant’s termination of Employment .  The Corporation shall use commercially reasonable efforts to implement the provisions of this Section 18 in good faith; provided that neither the Corporation, the Administrator nor any employee, director or representative of the Corporation or of any of its Affiliates shall have any liability to Participants with respect to this Section 18 .


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Exhibit 10.4

PUBLIC COMPANY HOLDINGS UNIT AWARD AGREEMENT
OF
KKR & CO. INC.

(Executive Officers)


CONFIDENTIAL



Table of Contents
 
   
Page
   
ARTICLE I GRANT OF PUBLIC COMPANY HOLDINGS UNITS
2
   
 
Section 1.1.
Grant of Public Company Holdings Units; Conditions of Grant
2
 
Section 1.2.
RSUs and Agreement Subject to Plan; Administrator
2
   
ARTICLE II VESTING and SETTLEMENT OF RSUS
3
   
 
Section 2.1.
Vesting of RSUs
3
 
Section 2.2.
Settlement of RSUs
4
 
Section 2.3.
No Dividend Payments
5
   
ARTICLE III RESTRICTIONS ON TRANSFERS AND OTHER LIMITATIONS
5
   
 
Section 3.1.
Transfer Restrictions on RSUs
5
 
Section 3.2.
Confidentiality and Restrictive Covenants
5
 
Section 3.3.
Post-Settlement Transfer Restrictions on Class A Common Stock
5
 
Section 3.4.
Transfers to Other Holders
7
 
Section 3.5.
Minimum Retained Ownership Requirement
8
   
ARTICLE IV MISCELLANEOUS
9
   
 
Section 4.1.
Governing Law
9
 
Section 4.2.
Arbitration
9
 
Section 4.3.
Remedies; Recoupment; Right to Set-Off
10
 
Section 4.4.
Amendments and Waivers
10
 
Section 4.5.
Withholding
11
 
Section 4.6.
Notices
12
 
Section 4.7.
Entire Agreement; Termination of Agreement; Survival
12
 
Section 4.8.
Severability
13
 
Section 4.9.
Binding Effect
13
 
Section 4.10.
Appendices
13
 
Section 4.11.
Further Assurances
13
 
Section 4.12.
Interpretation; Defined Terms; Section 409A; Employment with Designated Service Recipient; Headings
13
 
Section 4.13.
Counterparts
14
       
APPENDIX A DEFINITIONS
A-1
   
APPENDIX B RSU GRANT CERTIFICATE
B-1
   
APPENDIX C ADDITIONAL TERMS AND CONDITIONS
C-1
   
APPENDIX D CONFIDENTIALITY AND RESTRICTIVE COVENANT OBLIGATIONS
D-1
   
APPENDIX E AMENDED AND RESTATED KKR & CO. INC. 2010 EQUITY INCENTIVE PLAN
E-1
 
i

PUBLIC COMPANY HOLDINGS UNIT AWARD AGREEMENT
OF
KKR & CO. INC.
 
This PUBLIC COMPANY HOLDINGS UNIT AWARD AGREEMENT (this “ Agreement ”) of KKR & CO. INC. (the “ Corporation ”) is made by and between the Corporation and the undersigned (the “ Grantee ”).  Capitalized terms used herein and not otherwise defined herein or in the Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan, as amended from time to time (the “ Plan ”), shall be as defined in Appendix A attached hereto and the Plan is hereby attached as Appendix E and incorporated by reference herein.
 
RECITALS
 
WHEREAS , the board of directors of the Corporation (the “ Board ”) has determined it is in the best interests of the Corporation to provide the Grantee with this Agreement pursuant to and in accordance with the terms of the Plan.
 
NOW, THEREFORE , in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties hereto agree to the following:
 
ARTICLE I
GRANT OF PUBLIC COMPANY HOLDINGS UNITS
 
Section 1.1.
Grant of Public Company Holdings Units; Conditions of Grant
 
The Corporation hereby grants to the Grantee, effective as of the Grant Date specified on the RSU Grant Certificate attached hereto as Appendix B (the “ Grant Date ”), the number of “public company holdings units”, which are restricted stock units set forth in the RSU Grant Certificate attached hereto, subject to the terms and conditions of this Agreement. Each restricted stock unit that is granted pursuant to this Agreement represents the right to receive delivery of one share of Class A Common Stock, subject to any adjustment pursuant to Section 9 of the Plan (each such restricted stock unit, an “ RSU ”).  Notwithstanding the foregoing, the grant of RSUs hereunder is conditioned upon the Grantee’s agreement to the covenants and obligations contained in the Confidentiality and Restrictive Covenant Obligations attached hereto as Appendix D incorporated herein by reference.

Section 1.2.
RSUs and Agreement Subject to Plan; Administrator
 
This Agreement and the grant of RSUs provided for herein shall be subject to the provisions of the Plan, except that if there are any express differences or inconsistencies between the provisions of the Plan and this Agreement, the provisions of this Agreement shall govern. For the avoidance of doubt, the Corporation may delegate to any employee of the KKR Group its duties and powers hereunder, and any reference to the “Administrator” contained herein shall be deemed to include any such delegate.

2

  ARTICLE II
  VESTING AND SETTLEMENT OF RSUS
 
Section 2.1.
Vesting of RSUs
 

(a)
The following vesting provisions shall apply to the RSUs:
 

(i)
Subject to the Grantee’s continued Employment through the Service Vesting Date or Service Vesting Dates, as applicable, as specified in the RSU Grant Certificate attached hereto, the RSUs shall become vested on such date or dates, as applicable, as to the percentage(s) set forth in such RSU Grant Certificate.
 

(ii)
If, prior to the date the RSUs are vested as provided in Section 2.1(a)(i) above or otherwise terminate and are forfeited pursuant to Section 2.1(b) and (c) below: (A) the Grantee’s Employment terminates due to the Grantee’s Retirement, if applicable, then all Retirement RSUs shall, in the discretion of the Administrator,  be fully vested as a result thereof; (B) the Grantee dies or experiences a Disability, then all unvested RSUs shall be vested as a result thereof, provided that if the Grantee is not an employee of the KKR Group, then any vesting of unvested RSUs described in this clause (B) shall be in the discretion of the Administrator; or (C) there occurs a Change in Control prior to any termination of the Grantee’s Employment, then all or any portion of any unvested RSUs may, in the discretion of the Administrator, be vested as a result thereof.  Notwithstanding the foregoing, if the Corporation receives an opinion of counsel that there has been a legal judgment and/or legal development in the Grantee’s jurisdiction that would likely result in the favorable treatment applicable to the Retirement RSUs pursuant to this Section 2.1(a)(ii) being deemed unlawful and/or discriminatory, then the Corporation will not apply the favorable treatment at the time the Grantee’s Employment terminates due to the Grantee’s Retirement under clause (A) above, and the RSUs will be treated as set forth in Section 2.1(a)(i), 2.1(b), 2.1(c) or the other provisions of this Section 2.1(a)(ii), as applicable.
 

(iii)
All RSUs that become vested under this Section 2.1(a) are eligible to be Settled pursuant to Section 2.2 of this Agreement.
 

(b)
If the Grantee’s Employment terminates for any reason other than due to the Grantee’s death, Disability or Retirement, each as provided for in Section 2.1(a) above, all then unvested RSUs (including any RSUs that are not Retirement RSUs) shall immediately terminate and be forfeited without consideration, and no Class A Common Stock shall be delivered hereunder.
 

(c)
The Grantee’s right to vest in the RSUs under the Plan, if any, will terminate effective as of the date that the Grantee is no longer actively providing services (even if still considered employed or engaged under local Law) and will not be extended by any notice period mandated under local Law (e.g., active Employment would not include a period of “garden leave” or similar period pursuant to local Law) except as may be otherwise agreed in writing by the Corporation or the Designated Service Recipient with the Grantee; the Administrator shall have the exclusive discretion to determine when the Grantee is no longer actively employed or engaged for purposes of the RSUs.
 
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Section 2.2.
Settlement of RSUs
 

(a)
To the extent that (i) an RSU granted hereunder becomes vested pursuant to Section 2.1(a) above and (ii) the related Service Vesting Date has also occurred, then with respect to such percentage of RSUs set forth next to the applicable Service Vesting Date on the RSU Grant Certificate, such RSU shall be Settled as soon as administratively practicable on or following the applicable Service Vesting Date for such RSU; provided that the Administrator may determine that such Settlement may instead occur on or as soon as administratively practicable after the first day of the next permissible trading window of Class A Common Stock that opens for employees of the KKR Group to sell Class A Common Stock (provided that in any event such Settlement shall not be later than the time permitted under Section 409A, if applicable).  For the avoidance of doubt, the Settlement of any RSUs that become vested pursuant to Section 2.1(a)(ii) above shall not be accelerated, such that, with respect to any such RSUs, only that percentage of such RSUs that would otherwise have become vested on each applicable Service Vesting Date as set forth on the RSU Grant Certificate pursuant to Section 2.1(a)(i) shall be Settled at each such Service Vesting Date in accordance with the foregoing sentence. The date on which any RSU is to be Settled hereunder is referred to as a “ Delivery Date.   The Settlement of each RSU shall be effected in accordance with, and subject to the provisions of, Section 2.2(b) below.
 

(b)
On any   Delivery Date, each vested RSU that is then being Settled shall be cancelled in exchange for the Corporation delivering to the Grantee either (i) the number of Class A Common Stock equal to the number of RSUs that are to be Settled on such Delivery Date pursuant to Section 2.2(a) above or (ii) an amount of cash, denominated in U.S. dollars, equal to the Fair Market Value of the foregoing number of Class A Common Stock (a “ Cash Payment ”). The Administrator may elect in its sole discretion whether to Settle the RSUs in Class A Common Stock or by a Cash Payment, and in the case of the Cash Payment, whether to have the Cash Payment delivered by the member of the KKR Group that employs or engages the Grantee or to which the Grantee otherwise is rendering services (the “ Designated Service Recipient ”).
 

(c)
Subject to the provisions of this Article II relating to the number of RSUs that are to be Settled on any applicable Delivery Date and solely to the extent permitted under Section 409A, if applicable, the Corporation may impose such other conditions and procedures in relation to the Settlement of RSUs as it may reasonably determine. In addition to the foregoing and notwithstanding anything else in this Agreement, the Administrator may require that any or all of Class A Common Stock that may be delivered to the Grantee under this Section 2.2 that the Grantee intends to sell, from time to time, may only be sold through a coordinated sales program as defined by the Administrator.
 

(d)
Any of the foregoing payments or deliveries shall in all instances be subject to Sections 4.3 and 4.5 below, as applicable.
 
4

Section 2.3.
No Dividend Payments
 
The RSUs granted to the Grantee hereunder do not include the right to receive any dividend payments.

ARTICLE III
RESTRICTIONS ON TRANSFERS AND OTHER LIMITATIONS
 
Section 3.1.
Transfer Restrictions on RSUs
 

(a)
The Grantee may not Transfer all or any portion of the Grantee’s RSUs to any Other Holder (including to any Family Related Holder) without the prior written consent of the Administrator, which consent may be given or withheld, or made subject to such conditions (including the receipt of such legal or tax opinions and other documents that the Corporation may require) as are determined by the Administrator, in its sole discretion.
 

(b)
Any Transfer of RSUs by the Grantee to Other Holders permitted by the Administrator pursuant to Section 3.1(a) shall be made in accordance with Section 3.4.
 

(c)
Any purported Transfer of RSUs that is not in accordance with this Section 3.1 is null and void.
 
Section 3.2.
Confidentiality and Restrictive Covenants
 
The Grantee acknowledges and agrees that Grantee is bound by and will comply with the Confidentiality and Restrictive Covenant Obligations contained in Appendix D, which obligations are incorporated by reference herein, and any other agreements that the Grantee has entered into with the Designated Service Recipient, the Corporation, KKR Holdings L.P., KKR Associates Holdings L.P., or any other member of the KKR Group, with respect to the Grantee’s obligation to keep confidential the nonpublic, confidential or proprietary information of the KKR Group and its Affiliates and any restrictive covenants concerning the Grantee’s obligations not to compete with the KKR Group or solicit its clients or employees after termination of Employment), as such agreements may be amended from time to time.  If the Grantee is a limited partner of KKR Holdings L.P. or KKR Associates Holdings L.P., the Grantee further acknowledges and agrees that references to a Confidentiality and Restrictive Covenant Agreement in the limited partnership agreements of KKR Holdings L.P. and KKR Associates Holdings L.P. shall be deemed to include and also refer to the Confidentiality and Restrictive Covenant Obligations contained in Appendix D hereto.

Section 3.3.
Post-Settlement Transfer Restrictions on Class A Common Stock
 
The provisions of this Section 3.3 shall or shall not be applicable to the RSUs granted to the Grantee hereunder as indicated on the RSU Grant Certificate.
 

(a)
The Grantee may not Transfer all or any portion of the Grantee’s Transfer Restricted Class A Common Stock (as defined below) (including to any Family Related Holder) without the prior written consent of the Administrator, which consent may be given or withheld, or made subject to such conditions (including the receipt of such legal or tax opinions and other documents that the Corporation may require) as are determined by the Administrator, in its sole discretion.  For the avoidance of doubt, Transfer Restricted Class A Common Stock may only be held in an account with an institution, and subject to terms and conditions, which have been approved by the Administrator from time to time.  Any Transfer of Transfer Restricted Class A Common Stock by the Grantee to Other Holders permitted by the Administrator pursuant to Section 3.3(a) shall be made in accordance with Section 3.4.
 
5


(b)
A “ Transfer Restricted Class A Common Stock ” refers to all Class A Common Stock delivered upon Settlement of a vested RSU until (i) the first anniversary of the Service Vesting Date related thereto, in the case of 50% of such Class A Common Stock and (ii) the second anniversary of such Service Vesting Date, in the case of the other 50% of such Class A Common Stock.
 

(c)
If the Grantee breaches in any significant or intentional manner, as determined by the Administrator in his sole discretion, any of the Grantee’s covenants as stated in the Confidentiality and Restrictive Covenant Obligations contained in Appendix D, the Administrator, in his sole discretion, may direct that the Grantee forfeit all or a portion of the Transfer Restricted Class A Common Stock held by the Grantee in an amount determined by the Administrator in his sole discretion.  The Grantee hereby consents and agrees to immediately surrender and deliver such Transfer Restricted Class A Common Stock to the Corporation, without the payment of any consideration, receipt of any further notice or fulfillment of any other condition.
 

(d)
If for any reason the Grantee’s Employment is terminated for Cause, unless otherwise determined by the Administrator in writing, all Transfer Restricted Class A Common Stock held by the Grantee shall automatically be forfeited by the Grantee without payment of any consideration.  The Grantee hereby consents and agrees to immediately surrender and deliver such Transfer Restricted Class A Common Stock to the Corporation, without the payment of any consideration, receipt of any further notice or fulfillment of any other condition.
 

(e)
Any forfeiture of Transfer Restricted Class A Common Stock contemplated by Section 3.3(c) or Section 3.3(d) shall require no additional procedures on the part of the Corporation or its Affiliates.  The Grantee hereby acknowledges that the Administrator may take any and all actions to reflect the forfeiture of Transfer Restricted Class A Common Stock hereunder, including but not limited to the delivery of a written notice to the institution contemplated in Section 3.3(a) that holds the Transfer Restricted Class A Common Stock, and agrees to take any further action to memorialize such forfeiture as the Administrator may require.
 

(f)
The Administrator may, from time to time, waive the provisions of this Section 3.3, subject to the imposition of any conditions or further requirements, as determined by the Administrator in his sole discretion.  Without limiting the foregoing, (i) the Administrator may impose equivalent transfer or forfeiture restrictions on the Grantee’s other equity, if any, held in KKR Holdings, L.P., the Corporation or any of their respective Affiliates (or any of their respective equity incentive plans) to the extent that the provisions of this Section 3.3 are waived, and (ii) the Grantee hereby consents in advance to the imposition of such equivalent transfer or forfeiture restrictions for purposes of the governing documents of Grantee’s other equity, if any, held in KKR Holdings, L.P., the Corporation or any of their respective Affiliates (or any of their respective equity incentive plans) to the extent the Administrator waives the application of this Section 3.3 to the Transfer Restricted Class A Common Stock.
 
6


(g)
For the avoidance of doubt, the provisions of this Section 3.3 also apply in the event the Grantee receives a Cash Payment in Settlement of a vested RSU on a Delivery Date as provided in Section 2.2(b).
 

(h)
Any purported Transfer of Transfer Restricted Class A Common Stock that is not in accordance with this Section 3.3 is null and void.
 
Section 3.4.
Transfers to Other Holders
 

(a)
Transfers of RSUs or Transfer Restricted Class A Common Stock by the Grantee to Other Holders are not permitted unless the Administrator provides his prior written consent pursuant Section 3.1 or Section 3.3.  Prior to a Transfer of any RSUs or Transfer Restricted Class A Common Stock to any Other Holder, the Other Holder must consent in writing to be bound by this Agreement as an Other Holder and deliver such consent to the Administrator.
 

(b)
If an RSU or Transfer Restricted Class A Common Stock is held by an Other Holder, such Other Holder shall be bound by this Agreement in the same manner and to the same extent as the Grantee is bound hereby (or would be bound hereby had the Grantee continued to hold such RSU or Transfer Restricted Class A Common Stock). Any Transfer to an Other Holder must be undertaken in compliance with Section 3.1(a). For the avoidance of doubt, any vesting requirement of Section 2.1 above that applies to an RSU or transfer or forfeiture restrictions that are applicable to Transfer Restricted Class A Common Stock (including those Transfer Restricted Class A Common Stock delivered upon Settlement of a Transferred RSU) held by an Other Holder shall be satisfied or deemed to be satisfied under this Article III only to the extent that such vesting requirement or transfer or forfeiture restrictions, as applicable, would otherwise have been satisfied if the RSU or Transfer Restricted Class A Common Stock had not been Transferred by the Grantee, and any RSU and Transfer Restricted Class A Common Stock, as applicable, that is held by an Other Holder shall cease to be held by such Other Holder under this Article III if the RSU or Transfer Restricted Class A Common Stock, as applicable, would have then ceased to be held by the Grantee if the RSU or Transfer Restricted Class A Common Stock had not been Transferred by the Grantee to such Other Holder.
 

(c)
In the event of a property settlement or separation agreement between the Grantee and his or her spouse, the Grantee agrees that he or she shall use reasonable efforts to retain all of his or her RSUs and Transfer Restricted Class A Common Stock and shall reimburse his or her spouse for any interest he or she may have under this Agreement out of funds, assets or proceeds separate and distinct from his or her interest under this Agreement.
 
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Section 3.5.
Minimum Retained Ownership Requirement
 
The provisions of this Section 3.5 shall or shall not be applicable to the RSUs granted to the Grantee hereunder as indicated on the RSU Grant Certificate.


(a)
For so long as the Grantee retains his or her Employment, the Grantee (collectively with all Family Related Holders who become Other Holders, if applicable) must continuously hold an aggregate number of Class A Common Stock Equivalents that is at least equal to fifteen percent (15%) of the cumulative amount of (x) all RSUs granted to the Grantee under this Agreement and (y) all other RSUs designated as “public company holdings units” that have been or are hereafter granted to the Grantee under the Plan, in each case that have become vested pursuant to Section 2.1(a) (or similar provision in any other “public company holdings units” grant agreement), prior to any net Settlement permitted by Section 4.5.
 

(b)
Class A Common Stock Equivalents ” means any combination of: (i) RSUs that are or become vested pursuant to Section 2.1 of this Agreement and Class A Common Stock delivered upon Settlement of any such RSUs (even if they are Transfer Restricted Class A Common Stock) and (ii) RSUs designated as “public company holdings units” granted to the Grantee under the Plan that are or become vested pursuant to a provision similar to Section 2.1 of this Agreement and Class A Common Stock delivered upon Settlement of any such RSUs (even if a provision similar to the transfer restrictions on Transfer Restricted Class A Common Stock has not yet been satisfied).
 

(c)
The Administrator may, from time to time, waive the provisions of this Section 3.5, subject to the imposition of any conditions or further requirements, as determined by the Administrator in his sole discretion.  Without limiting the foregoing, (i) the Administrator may impose equivalent transfer restrictions on the Grantee’s other equity, if any, held in KKR Holdings, L.P., the Corporation or any of their respective Affiliates (or any of their respective equity incentive plans) to the extent that the provisions of this Section 3.5 are waived, and (ii) the Grantee hereby consents in advance to the imposition of such equivalent transfer restrictions for purposes of the governing documents of Grantee’s other equity, if any, held in KKR Holdings, L.P., the Corporation or any of their respective Affiliates (or any of their respective equity incentive plans) to the extent the Administrator waives the application of this Section 3.5 to Class A Common Stock Equivalents.
 

(d)
Any purported Transfer of any Class A Common Stock that would result in a violation of this Section 3.5 is null and void.  Notwithstanding anything to the contrary contained in this Agreement (including, without limitation, Section 4.7) this Section 3.5 shall survive any termination of this Agreement.
 
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ARTICLE IV
MISCELLANEOUS
 
Section 4.1.
Governing Law
 
This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, United States of America, without giving effect to any otherwise governing principles of conflicts of law that would apply the Laws of another jurisdiction.
 
Section 4.2.
Arbitration
 

(a)
Any and all disputes which cannot be settled amicably, including any ancillary claims of any party, arising out of, relating to or in connection with the validity, negotiation, execution, interpretation, performance or non-performance of this Agreement (including the validity, scope and enforceability of this arbitration provision) shall be finally settled by arbitration conducted by a single arbitrator in New York, New York in accordance with the then-existing Rules of Arbitration of the International Chamber of Commerce.  If the parties to the dispute fail to agree on the selection of an arbitrator within 30 days of the receipt of the request for arbitration, the International Chamber of Commerce shall make the appointment.  The arbitrator shall be a lawyer and shall conduct the proceedings in the English language. Performance under this Agreement shall continue if reasonably possible during any arbitration proceedings.  Except as required by Law or as may be reasonably required in connection with ancillary judicial proceedings to compel arbitration, to obtain temporary or preliminary judicial relief in aid of arbitration, or to confirm or challenge an arbitration award, the arbitration proceedings, including any hearings, shall be confidential, and the parties shall not disclose any awards, any materials in the proceedings created for the purpose of the arbitration, or any documents produced by another party in the proceedings not otherwise in the public domain. Judgment on any award rendered by an arbitration tribunal may be entered in any court having jurisdiction thereover.
 

(b)
Notwithstanding the provisions of Section 4.2(a), the Corporation may bring an action or special proceeding in any court of competent jurisdiction for the purpose of compelling the Grantee to arbitrate, seeking temporary or preliminary relief in aid of an arbitration hereunder, or enforcing an arbitration award and, for the purposes of this clause (b), the Grantee (i) expressly consents to the application of Section 4.2(c) below to any such action or proceeding, (ii) agrees that proof shall not be required that monetary damages for breach of the provisions of this Agreement would be difficult to calculate and that remedies at law would be inadequate, and (iii) irrevocably appoints the Secretary or General Counsel of the Corporation (or any officer of the Corporation) at the address identified for the Corporation as set forth in Section 4.6 below as such Grantee’s agent for service of process in connection with any such action or proceeding and agrees that service of process upon such agent, who shall promptly advise such Grantee of any such service of process, shall be deemed in every respect effective service of process upon the Grantee in any such action or proceeding.
 
9


(c)
EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE U.S. FEDERAL AND STATE COURTS LOCATED IN NEW YORK, NEW YORK FOR THE PURPOSE OF ANY JUDICIAL PROCEEDING BROUGHT IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION 4.2, OR ANY JUDICIAL PROCEEDING ANCILLARY TO AN ARBITRATION OR CONTEMPLATED ARBITRATION ARISING OUT OF OR RELATING TO OR CONCERNING THIS AGREEMENT.  Such ancillary judicial proceedings include any suit, action or proceeding to compel arbitration, to obtain temporary or preliminary judicial relief in aid of arbitration, or to confirm or challenge an arbitration award.  The parties acknowledge that the forums designated by this clause (c) have a reasonable relation to this Agreement and to the parties’ relationship with one another. The parties hereby waive, to the fullest extent permitted by applicable Law, any objection which they now or hereafter may have to personal jurisdiction or to the laying of venue of any such ancillary suit, action or proceeding referred to in this Section 4.2 brought in any court referenced therein and such parties agree not to plead or claim the same.
 
Section 4.3.
Remedies; Recoupment; Right to Set-Off
 

(a)
The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies.  Said rights and remedies are given in addition to any other rights the parties may have by Law or under the terms of any other applicable agreement.
 

(b)
To the extent required or advisable, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules promulgated thereunder and any other similar Laws including but not limited to the European Directives 2011/61/EU, 2013/36/EU and 2014/91/EU, the Administrator may specify in any other document or a policy to be incorporated into this Agreement by reference, that the Grantee’s rights, payments, and benefits with respect to RSUs awarded hereunder and/or Class A Common Stock delivered to the Grantee in respect of RSUs awarded hereunder shall be subject to reduction, cancellation, forfeiture or recoupment.
 

(c)
The Administrator may set-off any amounts due under this Agreement or otherwise against any amounts which may be owed to the Corporation or its Affiliates by the Grantee under this Agreement, any other relationship or otherwise. The Grantee hereby expressly authorizes the Corporation and its Affiliates to take any and all actions on the Grantee’s behalf (including, without limitation, payment, credit and satisfaction of amounts owed) in connection with the set-off of any amounts owed to the Corporation or its Affiliates or otherwise.
 
Section 4.4.
Amendments and Waivers
 

(a)
This Agreement (including the Definitions contained in Appendix A attached hereto, the RSU Grant Certificate attached as Appendix B hereto, the Additional Terms and Conditions attached as Appendix C hereto, the Confidentiality and Restrictive Covenant Obligations attached as Appendix D hereto, and any other provisions as may be required to be appended to this Agreement under applicable local Law) may be amended, supplemented, waived or modified only in accordance with Section 4(c) of the Plan or Section 13 of the Plan, as applicable, or as may be required for purposes of compliance or enforceability with applicable local Law; provided, however, that the RSU Grant Certificate shall be deemed amended from time to time to reflect any adjustments provided for under the Plan.
 
10


(b)
No failure or delay by any party in exercising any right, power or privilege hereunder (other than a failure or delay beyond a period of time specified herein) shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
 
Section 4.5.
Withholding
 
Regardless of any action the Corporation or the Designated Service Recipient takes with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“ Tax-Related Items ”), the Grantee acknowledges that the ultimate liability for all Tax-Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by the Corporation or the Designated Service Recipient.  The Grantee further acknowledges that the Corporation and/or the Designated Service Recipient (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including, but not limited to, the grant, vesting or Settlement of the RSUs, the delivery of Class A Common Stock or a Cash Payment upon Settlement of the RSUs, the lapse of any restrictions imposed on the Grantee’s Transfer Restricted Class A Common Stock, the subsequent sale of Class A Common Stock acquired under the Plan and the receipt of any dividends; and (2) do not commit to and are under no obligation to structure the terms of the RSUs or any aspect of the RSUs to reduce or eliminate the Grantee’s liability for Tax-Related Items or achieve any particular tax result.  Further, if the Grantee has become subject to tax in more than one jurisdiction, the Grantee acknowledges that the Corporation and/or the Designated Service Recipient (or the Affiliate formerly employing, engaging or retaining the Grantee, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
 
Prior to any relevant taxable or tax withholding event, as applicable, the Grantee will pay or make adequate arrangements satisfactory to the Corporation and/or the Designated Service Recipient to satisfy all Tax-Related Items.  In this regard, the Grantee authorizes the Corporation and/or the Designated Service Recipient, or their respective agents, at their discretion, to satisfy the obligations with regard to all Tax-Related Items by one or a combination of the following:
 

(a)
withholding from the Cash Payment, the Grantee’s wages or other cash compensation paid to the Grantee by the Corporation and/or the Designated Service Recipient; or
 

(b)
withholding from proceeds of the sale of Class A Common Stock delivered upon Settlement of the RSUs either through a voluntary sale or through a mandatory sale arranged by the Corporation (on the Grantee’s behalf pursuant to this authorization); or
 

(c)
withholding in Class A Common Stock to be delivered upon Settlement of the RSUs.
 
11

To avoid negative accounting treatment, the Corporation may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding amounts or other applicable withholding rates.  If the obligation for Tax-Related Items is satisfied by withholding in Class A Common Stock, for tax purposes, the Grantee is deemed to have been issued the full number of shares of Class A Common Stock subject to the Settled Class A Common Stock, notwithstanding that a number of shares of Class A Common Stock are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Grantee’s participation in the Plan.
 
Finally, the Grantee shall pay to the Corporation or the Designated Service Recipient any amount of Tax-Related Items that the Corporation or the Designated Service Recipient may be required to withhold or account for as a result of the Grantee’s participation in the Plan that cannot be satisfied by the means previously described.  The Corporation may refuse to issue or deliver Class A Common Stock, the Cash Payment or the proceeds of the sale of Class A Common Stock, if the Grantee fails to comply with the Grantee’s obligations in connection with the Tax-Related Items.
 
Section 4.6.
Notices
 
All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by courier service, by fax or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified for purposes of notice given in accordance with this Section 4.6):
 

(a)
If to the Corporation, to:
 
KKR & Co. Inc.
9 West 57th Street, Suite 4200
New York, New York 10019
U.S.A.
Attention: Chief Financial Officer
 

(b)
If to the Grantee, to the most recent address for the Grantee in the books and records of the Corporation or the Designated Service Recipient.
 
Section 4.7.
Entire Agreement; Termination of Agreement; Survival
 

(a)
This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings, whether oral or written, pertaining thereto. The Grantee acknowledges that the grant of RSUs provided for under this Agreement is in full satisfaction of any and all grants of equity or equity-based awards that representatives of the Corporation or its Affiliates, on or prior to the date hereof, may have informed the Grantee that such Grantee is entitled to receive.
 

(b)
This Agreement shall terminate when the Grantee and all Other Holders cease to hold any of the RSUs or Transfer Restricted Class A Common Stock that have been granted or delivered, as applicable, hereunder. Notwithstanding anything to the contrary herein, this Article IV shall survive any termination of this Agreement.
 
12

Section 4.8.
Severability
 
If any term or other provision of this Agreement is held to be invalid, illegal or incapable of being enforced by any rule of Law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions is not affected in any manner materially adverse to any party.  Upon a determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.

Section 4.9.
Binding Effect
 
This Agreement shall be binding upon and inure to the benefit of all of the parties and, to the extent permitted by this Agreement, their successors, executors, administrators, heirs, legal representatives and assigns.
 
Section 4.10.
Appendices
 
Appendices A, B, C and D constitute part of this Agreement.  Notwithstanding the provisions of this Article IV, the provisions of Sections 10 through 19 (inclusive) of Appendix D shall govern solely with respect to, and shall be applicable only to the interpretation, administration and enforcement of, the provisions of Appendix D, but not to any other provisions of this Agreement or any other of its Appendices, including but not limited to Sections 3.2 and 3.3(c) of this Agreement.  For the further avoidance of doubt, and without limiting the foregoing sentence, Sections 3.2 and 3.3(c) of this Agreement shall only be governed by, and shall only be subject to administration and enforcement under, the provisions of this Article IV, and shall not be governed by or subject to interpretation, administration or enforcement under any of Sections 10 through 19 (inclusive) of Appendix D.
 
Section 4.11.
Further Assurances
 
The Grantee shall perform all other acts and execute and deliver all other documents as may be necessary or appropriate to carry out the purposes and intent of this Agreement.
 
Section 4.12.
Interpretation; Defined Terms; Section 409A; Employment with Designated Service Recipient; Headings
 

(a)
Throughout this Agreement, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable.  Unless otherwise specified, all references herein to “Articles,” “Sections” and clauses shall refer to corresponding provisions of this Agreement.  The word “including” is not meant to be exclusive, but rather shall mean “including without limitation” wherever used in this Agreement.   Reference to “hereto”, “herein” and similar words is to this entire Agreement (including any Appendices) and not a particular sentence or section of this Agreement. All references to “date” and “time” shall mean the applicable date (other than a Saturday or Sunday or any day on which the Federal Reserve Bank of New York is closed or any day on which banks in the city of New York, New York are required to close, in which case such date refers to the next occurring date that is not described in this parenthetical) or time in New York, New York.
 
13


(b)
This Section 4.12(b) applies to Grantees who are U.S. tax residents (such as, a U.S. citizen, greencard holder or a U.S. tax resident under the substantial presence test) to the extent applicable.  All references to any “separation from service” or termination of the Employment of, or the services to be provided by, the Grantee, shall be deemed to refer to a “separation from service” within the meaning of Section 409A, if applicable.  Notwithstanding anything herein to the contrary, (i) if at the time of the Grantee’s termination of Employment the Grantee is a “specified employee” as defined in Section 409A of the Code and the deferral of the commencement of any payments or delivery of Class A Common Stock otherwise payable or provided hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A, then the Corporation will defer the commencement of the payment of any such payments or delivery hereunder (without any reduction in such payments or delivery of Class A Common Stock ultimately paid or provided to the Grantee) until the date that is six months following the Grantee’s termination of Employment (or the earliest date as is permitted under Section 409A) and (ii) if any other payments or other deliveries due to the Grantee hereunder could cause the application of an accelerated or additional tax under Section 409A, such payments or other deliveries shall be deferred if deferral will make such payment or other delivery compliant under Section 409A, or otherwise such payment or other delivery shall be restructured, to the extent possible, in a manner, determined by the Administrator, that does not cause such an accelerated or additional tax.  The Corporation shall use commercially reasonable efforts to implement the provisions of this Section 4.12(b) in good faith; provided that none of the Corporation, the Administrator nor any of the Corporation’s, KKR Group’s employees, directors or representatives shall have any liability to the Grantee with respect to this Section 4.12(b).
 

(c)
For the avoidance of doubt, any references to the Employment of the Grantee in this Agreement refer solely to the Employment of the Grantee by the Designated Service Recipient or any other member of the KKR Group.  The grant of RSUs under this Agreement in no way implies any Employment relationship with the Corporation or with any other member of the KKR Group, other than the Designated Service Recipient with which a formal Employment relationship is currently in effect with the Grantee, or any other member of the KKR Group with which a formal Employment relationship is currently in effect with the Grantee. If the Grantee changes Employment from the Designated Service Recipient as of the Grant Date to another member of the KKR Group, references to Designated Service Recipient hereunder shall refer to such other member of the KKR Group with which the Grantee has Employment.
 

(d)
The headings and subheadings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof.
 
Section 4.13.
Counterparts
 
This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.  Copies of executed counterparts transmitted by telecopy or other electronic transmission service shall be considered original executed counterparts for purposes of this Agreement.

[Rest of page intentionally left blank]
 
14

IN WITNESS WHEREOF , the Corporation has executed this Agreement as of the date specified under the signature of the Grantee.
 
KKR & CO. INC.
 
By:
   
 
Name:
 
 
Title:
 
 
15

IN WITNESS WHEREOF , the undersigned Grantee has caused this counterpart signature page to this Agreement to be duly executed as of   the date specified under the signature of the Grantee.
 
“GRANTEE”
 
Electronic Signature

Name: Participant Name

Dated: Grant Date
 
16

APPENDIX A
DEFINITIONS
 
In addition the defined terms set forth in the Plan, the following terms shall have the following meanings for purposes of the Agreement:
 
Cause ” means, with respect to the Grantee, the occurrence or existence of any of the following as determined fairly on an informed basis and in good faith by the Administrator: (i) any act of fraud, misappropriation, dishonesty, embezzlement or similar conduct by the Grantee against any member of the KKR Group (including the Corporation), KKR Holdings L.P., KKR Associates Holdings L.P., a Fund, or a Portfolio Company, (ii) a Regulatory Violation that has a material adverse effect on (x) the business of any member of the KKR Group or (y) the ability of the Grantee to function as an employee, associate or in any similar capacity (including consultant) with respect to the KKR Group, taking into account the services required of the Grantee and the nature of the business of the KKR Group, or (iii) a material breach by the Grantee of a material provision of any Written Policies or the deliberate failure by the Grantee to perform the Grantee’s duties to the KKR Group, provided that in the case of this clause (iii), the Grantee has been given written notice of such breach or failure within 45 days of the KKR Group becoming aware of such breach or failure and, where such breach or failure is curable, the Grantee has failed to cure such breach or failure within (A) 15 days of receiving notice thereof or (B) such longer period of time, not to exceed 30 days, as may be reasonably necessary to cure such breach or failure provided that the Grantee is then working diligently to cure such breach or failure. If such breach or failure is not capable of being cured, the notice given to the Grantee may contain a date of termination that is earlier than 15 days after the date of such notice.
 
Disability ” means, as to any Person, such Person’s inability to perform in all material respects such Person’s duties and responsibilities to the KKR Group by reason of a physical or mental disability or infirmity which inability is reasonably expected to be permanent and has continued (i) for a period of six consecutive months or (ii) such shorter period as the Administrator may reasonably determine in good faith.
 
Employment ” means the Grantee’s employment or engagement (including any similar association determined by the Administrator to constitute employment or engagement for purposes of this Agreement) with (x) the Designated Service Recipient or any other member of the KKR Group or (y) any consultant or service provider that provides services to any member of the KKR Group; provided that in the case of clause (y), service provided as a consultant or service provider must be approved by the Administrator in order to qualify as “Employment” hereunder.
 
Family Related Holder ” means, in respect of the Grantee, any of the following: (i) such Grantee’s spouse, parents, parents-in-law, children, siblings and siblings-in-law, descendants of siblings, and grandchildren, (ii) any trust or other personal or estate planning vehicle established by such Grantee, (iii) any charitable organization established by such Grantee and (iv) any successor-in-interest to such Grantee, including but not limited to a conservator, executor or other personal representative.
 
Group Partnerships ” means KKR Management Holdings L.P., a Delaware limited partnership, KKR Fund Holdings L.P., a Cayman Island exempted limited partnership, and KKR International Holdings L.P., a Cayman Island exempted limited partnership, along with any partnership designated in the future as a “Group Partnership” by the Corporation.
 
A-1

KKR Capstone ” means (i) KKR Capstone Americas LLC, KKR Capstone EMEA LLP, KKR Capstone EMEA (International) LLP, KKR Capstone Asia Limited and any other “Capstone” branded entity that provides similar consulting services to the KKR Group and Portfolio Companies and (ii) the direct and indirect parents and subsidiaries of the foregoing.
 
KKR Group ” means the Group Partnerships, the direct and indirect parents of the Group Partnerships (the “ Parents ”), any direct or indirect subsidiaries of the Parents or the Group Partnerships, the general partner or similar controlling entities of any investment fund, account or vehicle that is managed, advised or sponsored by the KKR Group (the “ Funds ”) and any other entity through which any of the foregoing directly or indirectly conducts its business, but shall exclude Portfolio Companies.
 
Law ” means any statute, law, ordinance, regulation, rule, code, executive order, injunction, judgment, decree or other order issued or promulgated by any national, supranational, state, federal, provincial, local or municipal government or any administrative or regulatory body with authority therefrom with jurisdiction over the Corporation or any Participant, as the case may be.
 
Other Holder ” means any Person that holds an RSU, other than the Grantee.
 
Portfolio Company ” means a company over which a Fund exercises a significant degree of control as an investor.
 
Regulatory Violation ” means, with respect to the Grantee (i) a conviction of the Grantee based on a trial or by an accepted plea of guilt or nolo contendere of any felony or misdemeanor crime involving moral turpitude, false statements, misleading omissions, forgery, wrongful taking, embezzlement, extortion or bribery, (ii) a final determination by any court of competent jurisdiction or governmental regulatory body (or an admission by the Grantee in any settlement agreement) that the Grantee has violated any U.S. federal or state or comparable non-U.S. securities laws, rules or regulations or (iii) a final determination by self-regulatory organization having authority with respect to U.S. federal or state or comparable non-U.S. securities laws, rules or regulations (or an admission by the Grantee in any settlement agreement) that the Grantee has violated the written rules of such self-regulatory organization that are applicable to any member of the KKR Group.
 
Retirement ” means the resignation by the Grantee of the Grantee’s Employment with the KKR Group (other than for Cause), on or after the date that the Grantee’s age, plus the Grantee’s years of Employment with the KKR Group equals at least 80; provided that such date shall be no earlier than December 31, 2012.
 
Retirement RSUs ” means, with respect to any Grantee whose Employment terminates due to Retirement, any RSUs with a Service Vesting Date that would, if the Grantee’s Employment were not so terminated, occur within two years after the date of such termination due to Retirement.
 
RSU Grant Certificate ” means the RSU Grant Certificate delivered to the Grantee and attached to this Agreement, as the same may be modified pursuant to Section 4.4(a) of the Agreement.
 
Section 409A ” means Section 409A of the U.S. Internal Revenue Code of 1986, as the same may be amended from time to time, and the applicable regulations, including temporary regulations, promulgated under such Section, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
 
A-2

Service Vesting Date ” means, with respect to any RSU, the date set forth in the RSU Grant Certificate as the “Service Vesting Date.”
 
Settle ”, “ Settled ” or “ Settlement ” means the discharge of the Corporation’s obligations in respect of an RSU through the delivery to the Grantee of (i) Class A Common Stock or (ii) a Cash Payment, in each case in accordance with Article II.
 
Transfer ” or “ Transferred ” means with respect to any RSU or Class A Common Stock, any (i) sale, assignment, transfer or other disposition thereof or any interests therein or rights attached thereto, whether voluntarily or by operation of Law, or (ii) creation or placement of any mortgage, claim, lien, encumbrance, conditional sales or other title retention agreement, right of first refusal, preemptive right, pledge, option, charge, security interest or other similar interest, easement, judgment or imperfection of title of any nature whatsoever.
 
Written Policies ” means the written policies of the KKR Group included in its employee manual, code of ethics and confidential information and information barrier policies and procedures and other documents relating to the Grantee's Employment, association or other similar affiliation with the KKR Group.

A-3

APPENDIX B

RSU GRANT CERTIFICATE
 
Grantee Name:  Participant Name
 
Grant Date: Grant Date
 
Number of RSUs: Number of Awards Granted
 
Service Vesting Date:
The following sets forth each applicable Service Vesting Date upon which the RSUs granted hereunder shall become vested, subject to the Grantee’s continued Employment through each such date:

Percentage of RSUs that Become
Vested on Applicable Service
Vesting Date
Applicable Service Vesting Date
   
   
   

Vesting and Settlement of the RSUs is subject to all terms and conditions contained in the Agreement to which this RSU Grant Certificate is attached. Notwithstanding the foregoing:

The post-settlement transfer restrictions contained in Section 3.3 of the Agreement ☐ shall / shall not be applicable to the RSUs (and any resulting Class A Common Stock) granted under this RSU Grant Certificate.
 
The minimum retained ownership requirements contained in Section 3.5 of the Agreement shall / shall not be applicable to the RSUs (and any resulting Class A Common Stock) granted under this RSU Grant Certificate.
 
B-1

APPENDIX C

ADDITIONAL TERMS AND CONDITIONS
 
The terms and conditions in this Appendix C supplement the provisions of the Agreement, unless otherwise indicated herein. Capitalized terms contained in this Appendix C and not defined herein shall have the same meaning as such terms are defined in the Agreement into which this Appendix C is incorporated by reference therein and to which this Appendix C is attached, or the Plan, as applicable.

1.
Data Privacy

The Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Grantee’s personal data as described in this Agreement and any other Award materials (“Data”) by and among, as applicable, the Designated Service Recipient, the Corporation and its Affiliates for the exclusive purpose of implementing, administering and managing the Grantee’s participation in the Plan.
 
The Grantee understands that the Corporation and the Designated Service Recipient may hold certain personal information about the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport  or other identification number (e.g. resident registration number), salary, nationality, job title, any Class A Common Stock or directorships held in the Corporation, details of all RSUs or any other entitlement to Class A Common Stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor, for the exclusive purpose of implementing, administering and managing the Plan.
 
The Grantee understands that Data will be transferred to any third parties assisting the Corporation with the implementation, administration and management of the Plan.  The Grantee understands that the recipients of the Data may be located in the United States or elsewhere, and that the recipients’ country (e.g., the United States) may have different data privacy laws and protections than the Grantee’s country.  The Grantee understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative.  The Grantee authorizes the Corporation, its subsidiaries, the Designed Service Recipient and any other possible recipients which may assist the Corporation (presently or in the future) with implementing, administering and managing the Plan to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan.  The Grantee understands that Data will be held only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan.  The Grantee understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative.  Further, the Grantee understands that he or she is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke his or her consent, the Grantee’s employment status or service and career with the Designated Service Recipient will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Corporation would not be able to grant him or her RSUs or other awards or administer or maintain such awards.  Therefore, the Grantee understands that refusing or withdrawing his or her consent may affect the Grantee’s ability to participate in the Plan.  For more information on the consequences of the Grantee’s refusal to consent or withdrawal of consent, the Grantee understands that he or she may contact his or her local human resources representative.
 
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2.
Nature of Grant
 
In accepting the Award, the Grantee acknowledges, understands and agrees that:
 

(a)
the Plan is established voluntarily by the Corporation, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Corporation at any time;
 

(b)
the grant of the RSUs is voluntary and occasional and does not create any contractual or other right to receive future grants, or benefits in lieu of RSUs, even if RSUs have been granted in the past;
 

(c)
all decisions with respect to future grants of RSUs, if any, will be at the sole discretion of the Corporation;
 

(d)
the Grantee’s participation in the Plan shall not create a right to further Employment with the Designated Service Recipient and shall not interfere with the ability of the Designated Service Recipient to terminate the Grantee’s Employment or service relationship (if any) at any time;
 

(e)
the Grantee is voluntarily participating in the Plan;
 

(f)
the RSUs and Class A Common Stock subject to the RSUs, and the income and value of same, are extraordinary items, which are outside the scope of the Grantee’s Employment or service contract, if any;
 

(g)
the RSUs and Class A Common Stock subject to the RSUs, and the income and value of same, are not part of normal or expected compensation for purposes of calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments;
 

(h)
the grant of RSUs and the Grantee’s participation in the Plan will not be interpreted to form an Employment or service contract or relationship with the Corporation, the Designated Service Recipient or any Affiliate;
 

(i)
the future value of the underlying Class A Common Stock is unknown, indeterminable and cannot be predicted with certainty;
 

(j)
no claim or entitlement to compensation or damages shall arise from forfeiture of the RSUs resulting from termination of the Grantee’s Employment (for any reason whatsoever and whether or not in breach of local labor laws and whether or not later found to be invalid), and in consideration of the grant of RSUs, the Grantee agrees not to institute any claim against the Corporation, the Designated Service Recipient or any Affiliate;
 

(k)
unless otherwise agreed with the Corporation in writing, the RSUs and Class A Common Stock subject to the RSUs, and the income and value of same, are not granted as consideration for, or in connection with, the service the Grantee may provide as a director of the Designated Service Recipient, the Corporation or any Affiliate;
 
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(l)
subject to Section 9 of the Plan, the RSUs and the benefits under the Plan, if any, will not automatically transfer to another company in the case of a merger, take-over or transfer of liability; and
 

(m)
the following provisions apply only if the Grantee is providing services outside the United States:
 

(i)
the RSUs and Class A Common Stock subject to the RSUs, and the income and value of same, are not part of normal or expected compensation or salary for any purpose;
 

(ii)
the RSUs and Class A Common Stock subject to the RSUs, and the income and value of same, are not intended to replace any pension rights or compensation; and
 

(iii)
neither the Designated Service Recipient, the Corporation nor any Affiliate shall be liable for any foreign exchange rate fluctuation between the Grantee’s local currency and the United States Dollar that may affect the value of the RSUs or of any amounts due to the Grantee pursuant to the vesting of the RSUs or the subsequent sale of any Class A Common Stock acquired upon vesting.
 
3.
No Advice Regarding Award
 
The Corporation is not providing any tax, legal or financial advice, nor is the Corporation making any recommendations regarding the Grantee’s participation in the Plan, or the Grantee’s acquisition or sale of the underlying Class A Common Stock.  The Grantee should consult with his or her own personal tax, legal and financial advisors regarding his or her participation in the Plan before taking any action related to the Plan.
 
4.
Language
 
If the Grantee has received the Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different than the English version, the English version will control.
 
5.
Electronic Delivery and Acceptance
 
The Corporation may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means.  The Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or a third party designated by the Corporation.
 
6.
Restrictions on Trading in Securities
 
In addition to any policies and procedures which govern Grantee's ability to trade in Class A Common Stock as well as other securities of the Corporation set forth in the Corporation's trading window policy, Grantee may be subject to additional securities trading and market abuse laws in his or her country of residence.  These laws may affect Grantee's ability to acquire or dispose of Class A Common Stock or rights to Class A Common Stock (e.g., RSUs) under the Plan, particularly during such times as the Grantee is considered to have access to material nonpublic information concerning the Corporation (as defined by the Laws of the Grantee's country).  Any restrictions under these Laws or regulations are separate from and in addition to any policies and procedures set forth by the Corporation.  The Grantee is responsible for ensuring compliance with any applicable restrictions and should consult his or her personal legal advisor on this matter.
 
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7.
Foreign Asset / Account, Exchange Control Reporting
 
Depending upon the country to which Laws the Grantee is subject, the Grantee may have certain exchange control, foreign asset and/or account reporting requirements that may affect the Grantee’s ability to acquire or hold Class A Common Stock under the Plan or cash received from participating in the Plan (including from any sale proceeds arising from the sale of Class A Common Stock) in the Grantee’s Fidelity brokerage account or a bank or other brokerage account outside the Grantee’s country of residence. The Grantee’s country may require that he or she report such accounts, assets or transactions to the applicable authorities in the Grantee’s country.  The Grantee also may be required to repatriate sale proceeds or other funds received as a result of his or her participation in the Plan to his or her country through a designated bank or broker and/or within a certain time after receipt. The Grantee is responsible for knowledge of and compliance with any such regulations and should speak with his or her own personal tax, legal and financial advisors regarding same.
 
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APPENDIX D

Confidentiality and Restrictive Covenant Obligations
 
A.            Capitalized terms contained in this Appendix D and not defined herein shall have the same meaning as such terms are defined in the Agreement into which this Appendix D is incorporated by reference therein and to which this Appendix D is attached, or the Plan, as applicable. Further, for the purposes of this Appendix D, the “ Company ” shall refer to the KKR Group;
 
B.            In connection with the Grantee’s employment, engagement, association or other similar affiliation with an entity of the KKR Group, the Grantee is being issued one or more RSUs pursuant to the Agreement to which this Appendix D is attached;
 
C.            The Grantee acknowledges and agrees that the Grantee will receive financial benefits from the KKR Group’s business through their participation in the value of the RSUs;
 
D.            The Grantee further acknowledges and agrees that (i) during the course of the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group, the Grantee will receive and have access to confidential information of the KKR Group and the Portfolio Companies (collectively, the “ KKR Related Entities ”) and have influence over and the opportunity to develop relationships with Clients, Prospective Clients, Portfolio Companies and partners, members, employees and associates of the Company; and (ii) such confidential information and relationships are extremely valuable assets in which the KKR Group has invested, and will continue to invest, substantial time, effort and expense in developing and protecting; and
 
E.            The Grantee acknowledges and agrees that (i) the RSUs will materially benefit the Grantee; (ii) it is essential to protect the business interests and goodwill of the Company and that the Company be protected by the restrictive covenants and confidentiality undertaking set forth herein; (iii) it is a condition precedent to the Grantee receiving RSUs that the Grantee agree to be bound by the restrictive covenants and confidentiality undertaking contained herein; and (iv) the KKR Group would suffer significant and irreparable harm from a violation by the Grantee of the confidentiality undertaking set forth herein as well as the restrictive covenants set forth herein for a period of time after the termination of the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group.
 
F.             This Appendix D is made in part for the benefit of the KKR Group and the Designated Service Recipient and the parties intend, acknowledge, and agree that the KKR Group and the Designated Service Recipient are third party beneficiaries of this Appendix D and any one of them is authorized to waive compliance with any provision hereof by delivering a written statement clearly expressing the intent to waive such compliance to the Grantee and a duly authorized representative of the KKR Group or Designated Service Recipient.
 
NOW, THEREFORE, to provide the Company with reasonable protection of its interests and goodwill and in consideration for (i) the RSUs and any other consideration that the Grantee will receive in connection with and as a result of the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group; (ii) the material financial and other benefits that the Grantee will derive from such RSUs and other consideration (if any); and (iii) other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Grantee hereby agrees to the following restrictions:
 
D-1

1.
Outside Business Activities.
 
The Grantee acknowledges that, during the course of the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group, the Grantee will be subject to the Written Policies. The Written Policies include restrictions that limit the ability of the Grantee to engage in outside business and other activities without the prior approval of the Company. If the Grantee has an employment, engagement or other similar contract with the KKR Group, the Grantee may be subject to similar restrictions under that agreement. The Grantee hereby agrees that, during the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group, the Grantee will comply with all such restrictions that are from time to time in effect which are applicable to the Grantee.
 
2.
Confidentiality Undertaking.
 
The Grantee acknowledges that, during the course of the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group, the Grantee will receive and have access to Confidential Information (as defined below) of the Company and the Portfolio Companies.  Recognizing that any disclosure of such information could have serious consequences to one or more of the Company and the Portfolio Companies, the Grantee hereby agrees that, except as provided herein, the Grantee will not under any circumstances (either while employed, engaged, associated or otherwise affiliated with the KKR Group, or at any time after the Termination Date) for any purpose other than in the ordinary course of the performance of the Grantee’s duties as an employee, consultant, associate or other affiliated person of the KKR Group, use or divulge, communicate, publish, make available, or otherwise disclose any Confidential Information to any person or entity, including but not limited to any business, firm, governmental body, partnership, corporation, press service or otherwise, other than to (i) any executive or employee of the Company in the ordinary course of the performance of Grantee’s duties as an employee, consultant, associate or other affiliated person of the KKR Group; (ii) any person or entity to the extent explicitly authorized by an executive of the Company in the ordinary course of the performance of Grantee’s duties as an employee, consultant, associate or other affiliated person of the KKR Group; (iii) any attorney, accountant, consultant or similar service provider retained by the Company who is required to know such information and is obligated to keep such information confidential; or (iv) any person or entity to the extent the law or legal process requires disclosure by the Grantee, provided that, in the case of clause (iv), the Grantee must first give the Corporation or the Designated Service Recipient  prompt written notice of any such requirement, disclose no more information than is so required in the opinion of competent legal counsel, and cooperate fully with all efforts by the Company to obtain a protective order or similar confidentiality treatment for such information.
 
Nothing in this Appendix D shall prohibit or impede the Grantee from communicating, cooperating or filing a complaint on possible violations of U.S. federal, state or local law or regulation to or with any governmental agency or regulatory authority (collectively, a “Governmental Entity”), including, but not limited to, the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Equal Employment Opportunity Commission or the National Labor Relations Board, or from making other disclosures to any Governmental Entity that are protected under the whistleblower provisions of U.S. federal, state or local law or regulation, provided that in each case such communications and disclosures are consistent with applicable law.  The Grantee shall not be held criminally or civilly liable under any U.S. federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a U.S. federal, state, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal; and does not disclose the trade secret, except pursuant to court order.   The Grantee shall not be required to give prior notice to (or get prior authorization from) the Company regarding any such communication or disclosure.  Except as otherwise provided in this paragraph or under applicable law, under no circumstance is the Grantee authorized to disclose any information covered by the Company’s or its Affiliates’ attorney-client privilege or attorney work product or the Company’s trade secrets without the prior written consent of the Company.
 
D-2

As used in this Section 2, an “ executive ” of the KKR Group means an employee of the Company with the title of “Member,” “Managing Director,” “Director,” “Principal” or other employee of the Company acting in a managerial or supervisory capacity. “ Confidential Information ” means (a) all confidential, proprietary or non-public information of, or concerning the business, operations, activities, personnel, finances, plans, personal lives, habits, history, clients, investors, or otherwise of the KKR Related Entities or any person who at any time is or was a member, partner, officer, director, other executive, employee or stockholder of any of the foregoing, (b) all confidential, proprietary or non-public information of or concerning any member of a family of any of the individuals referred to in clause (a), whether by birth, adoption or marriage (including but not limited to any of their current or former spouses or any living or deceased relatives), and (c) all confidential, proprietary or non-public information of or concerning any of the clients or investors of the KKR Related Entities or any other person or entity with which or whom any of the KKR Related Entities or their respective clients or investors does business or has a relationship. Confidential Information includes information about the KKR Related Entities relating to or concerning any of their (i) finances, investments, profits, pricing, costs, and accounting, (ii) intellectual property (including but not limited to patents, inventions, discoveries, plans, research and development, processes, formulae, reports, protocols, computer software, databases, documentation, trade secrets, know-how and business methods), (iii) personnel, compensation, recruiting and training, and (iv) any pending or completed settlements, arbitrations, litigation, governmental investigations and similar proceedings. Notwithstanding the foregoing, Confidential Information does not include any portions of the foregoing that the Grantee can demonstrate by sufficient evidence satisfactory to the Company that has been (i) lawfully published in a form generally available to the public prior to any disclosure by the Grantee in breach of this Appendix D or (ii) made legitimately available to the Grantee by a third party without breach of any obligation of confidence owed to the Company or any Portfolio Company.
 
Without limiting the generality of the foregoing, the Grantee agrees that it will be a breach of this Appendix D to write about, provide, disclose or use in any fashion at any time any Confidential Information that is or becomes part of the basis for, or is used in any way in connection with any part of any book, magazine or newspaper article, any interview or is otherwise published in any media of any kind utilizing any technology now known or created in the future.
 
Upon termination of the Grantee's employment, engagement, association or other similar affiliation with the KKR Group for any reason, the Grantee hereby agrees to (i) cease and not thereafter commence any and all use of any Confidential Information; (ii) upon the request of the Company promptly deliver to the Company or, at the option of the Company destroy, delete or expunge all originals and copies of any Confidential Information in any form or medium in the Grantee’s possession or control (including any of the foregoing stored or located in the Grantee’s home, laptop or other computer that is not the property of the Company, its Affiliates or Portfolio Companies); (iii) notify and fully cooperate with the Company regarding the delivery or destruction of any other Confidential Information of which the Grantee is aware; and (iv) upon the request of the Company sign and deliver a statement that the foregoing has been accomplished.
 
D-3

The Grantee acknowledges that he or she is aware that applicable securities laws place certain restrictions on any person who has received from an issuer material, non-public information concerning the issuer with respect to purchasing or selling securities of such issuer or from communicating such information to any other person and further agrees to comply with such securities laws.  Without limiting anything in this Appendix D, the Grantee hereby expressly confirms his or her explicit understanding that the Grantee’s obligations hereunder are in addition to, and in no way limit, the Grantee’s obligations under compliance procedures of the Company including those contained in the Written Policies.
 
Notwithstanding anything in this Appendix D to the contrary, the Grantee may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of any member of the Company in which the Grantee holds an interest and all materials of any kind (including opinions or other tax analyses) that are provided to the Grantee relating to such tax treatment and tax structure.
 
3.
Notice Period.
 
The Grantee acknowledges and agrees that the Designated Service Recipient may terminate his or her employment, engagement, association or other similar affiliation with the Designated Service Recipient at any time for any reason or for no reason at all with or without reasons constituting Cause.  The Designated Service Recipient or the Grantee, as applicable, shall provide advance written notice (which may be by email) of the termination of  the Grantee’s employment, engagement, association or other similar affiliation with the Designated Service Recipient at least 90 days prior to actual termination (such 90-day period, the “ Notice Period ”); provided, however, that no advance notice shall be required by the Designated Service Recipient and the provisions of this Section 3 shall not be applicable to the Designated Service Recipient if the Grantee’s employment, engagement, association or other similar affiliation is terminated by the Designated Service Recipient for reasons constituting Cause or due to any conduct by Grantee that, in the judgment of the Designated Service Recipient in its sole discretion, amounts to gross negligence or reckless or willful misconduct.  Notice pursuant to this Section 3 shall be provided by the Grantee to any of the Chief Executive Officers, General Counsel or Chief Human Resources Officer of the KKR Group.

During the Notice Period, the Grantee shall perform his or her regular duties and any transitional responsibilities (including but not limited to helping to transition work, projects, and Client relationships internally to others) as determined and directed by the Designated Service Recipient in its sole discretion, and Grantee shall not be employed, engaged, associated or otherwise similarly affiliated with any business other than the business of the KKR Group; provided, however, the Designated Service Recipient reserves the right to require the Grantee not to be in the offices of the KKR Group, not to undertake all or any of the Grantee’s duties or not to contact Clients or Prospective Clients (as defined in Section 5 below), other persons employed, engaged, associated or otherwise similarly affiliated with the KKR Group, or others (or any combination thereof) unless otherwise instructed during all or any part of the Notice Period.  During the Notice Period, and except as provided in the next sentence, the Grantee shall continue to receive his or her salary, and the Grantee shall not be entitled to receive or be considered for payment of any other amount for his or her services during the Notice Period (including without limitation any bonus or equity award).  In addition, the Designated Service Recipient in its sole discretion may elect to reduce the Notice Period and pay the Grantee his or her salary, but no other amount, for the period from the conclusion of the reduced Notice Period to the end of the original Notice Period, and the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group, shall be terminated as of the day immediately following the conclusion of the reduced Notice Period.

D-4

4.
Non-Compete.
 
The Grantee hereby agrees that, while employed, engaged, associated or otherwise similarly affiliated with the KKR Group, and in addition during the Non-Compete Period (as defined below), the Grantee will not directly or indirectly set up, be employed or engaged by, hold an office in or provide consulting, advisory or other similar services to or for the benefit of, a Competing Business (i) where the activities or services of the Grantee in relation to the Competing Business are similar or substantially related to any activity that the Grantee engaged in or any service that the Grantee provided, in connection with the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group or (ii) that competes with a business for which the Grantee had direct or indirect managerial or supervisory responsibility with the KKR Group, including through the Grantee’s position on the Management Committee or similar committee or group, including without limitation the Public Markets & Distribution Management Committee, for one or more businesses of the KKR Group, in each case, at any time during the 12 months preceding the Termination Date.
 
For the purposes of this Appendix D, a “ Competing Business ” means a business that competes (i) in a Covered Country with any business conducted by the Company on the date on which the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group is terminated (the “ Termination Date ”) or (ii) in any country with any business that the Company was, on the Termination Date, formally considering conducting.  A “ Covered Country ” means the United States, United Kingdom, the Republic of Ireland, France, Hong Kong, China, Japan, the Republic of Korea, Australia, India, United Arab Emirates, Saudi Arabia, Canada, Singapore, Spain, Luxembourg or any other country where the Company conducted business on the Termination Date; provided that if the Grantee is located in Japan, the definition of Covered Country shall exclude the phrase “any other country where the Company conducted business on the Termination Date” to the extent unenforceable under applicable law.  The “ Non-Compete Period ” for the Grantee shall commence on the Termination Date and shall expire upon the twelve month anniversary of the Termination Date.  Notwithstanding the foregoing, if the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group, is terminated involuntarily and for reasons not constituting Cause, the Non-Compete Period will expire on the six month anniversary of the Termination Date.
 
Notwithstanding the foregoing, nothing in this Appendix D shall be deemed to prohibit the Grantee from (i) associating with any business whose activities consist principally of making passive investments for the account and benefit of the Grantee or members of the Grantee’s immediate family where such business does not, within the knowledge of the Grantee, compete with a business of the KKR Group for specific privately negotiated investment opportunities; (ii) making and holding passive investments in publicly traded securities of a Competing Business where such passive investment does not exceed 5% of the amount of such securities that are outstanding at the time of investment; or (iii) making and holding passive investments in limited partner or similar interests in any investment fund or vehicle with respect to which the Grantee does not exercise control, discretion or influence over investment decisions.
 
D-5

5.
Non-Solicitation of Clients and Prospective Clients; Non-Interference.
 
The Grantee hereby agrees that, while employed, engaged, associated or otherwise similarly affiliated with the KKR Group, and in addition during the Post-Termination Restricted Period (as defined below), the Grantee will not, directly or indirectly, (i) solicit, or assist any other person in soliciting, the business of any Client or Prospective Client for, or on behalf of, a Competing Business; (ii) provide, or assist any other person in providing, for any Client or Prospective Client any services that are substantially similar to those that the Company provided or proposed to be provided to such Client or Prospective Client; or (iii) impede or otherwise interfere with or damage, or attempt to impede or otherwise interfere with or damage, any business relationship or agreement between the Company and any Client or Prospective Client. As used in this Section 5, “ solicit ” means to have any direct or indirect communication inviting, advising, encouraging or requesting any person to take or refrain from taking any action with respect to the giving by such person of business to a Competing Business, regardless of who initiated such communication.
 
For purposes of this Appendix D, “ Client ” means any person (a) for whom the Company provided services, including any investor in any Fund, any client of the KKR Group’s broker-dealer business, or any Portfolio Company and (b) with whom the Grantee, individuals reporting to the Grantee or any other individuals over whom the Grantee had direct or indirect managerial or supervisory responsibility  had any contact or dealings on behalf of, and involving Confidential Information of, the Company during the 12 months prior to the Termination Date; and “ Prospective Client ” means any person with whom (I) the Company has had negotiations or discussions concerning becoming a Client and (II) the Grantee, individuals reporting to the Grantee or any other individuals over whom the Grantee had direct or indirect managerial or supervisory responsibility had any contact or dealings on behalf of, and involving Confidential Information of, the Company during the 12 months prior to the Termination Date.
 
6.
Non-Solicitation of Personnel; No Hire.
 
The Grantee hereby agrees that, while employed, engaged, associated or otherwise similarly affiliated with the KKR Group, and in addition during the Post-Termination Restricted Period, the Grantee will not, directly or indirectly, solicit, employ, engage or retain, or assist any other person in soliciting, employing, engaging or retaining, any Covered Person. As used in this Section 6, “ solicit ” means to have any direct or indirect communication inviting, advising, encouraging or requesting any Covered Person to terminate his or her employment, engagement, association or other affiliation with the KKR Group or KKR Capstone or recommending or suggesting that a third party take any of the foregoing actions, including by way of identifying such Covered Person to the third party, in each case regardless of who initiated such communication.
 
For purposes of this Appendix D, a “ Covered Person ” means a person who is or on the Termination Date was either (i) employed or engaged by the KKR Group as an employee or officer or otherwise associated or similarly affiliated with the KKR Group in any position, including as a member or partner, having functions and duties substantially similar to those of an employee or officer; (ii) a Senior Advisor, Industry Advisor or KKR Advisor to the KKR Group; (iii) employed or engaged by KKR Capstone as an employee or officer or otherwise associated or similarly affiliated with KKR Capstone in any position, including as a member or partner, having functions and duties substantially similar to those of an employee or officer; or (iv) a person who provides services exclusively to the Company or any Portfolio Company and has functions and duties that are substantially similar to those of a person listed in sub-clauses (i), (ii) or (iii) above.
 
D-6

7.
Post-Termination Restricted Period.
 
The “ Post-Termination Restricted Period ” for the Grantee shall commence on the Termination Date and shall expire upon the eighteen month anniversary of the Termination Date.   Notwithstanding the foregoing, if the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group is terminated involuntarily and for reasons not constituting Cause, the Post-Termination Restricted Period will expire on the nine month anniversary of the Termination Date.  To the extent that the Grantee continues to be employed or engaged by, or otherwise associated or similarly affiliated with, the KKR Group, during any “garden leave” or “notice” period in which the Grantee is required to not perform any services for or enter the premises of the Company, and to otherwise comply with all terms and conditions imposed on the Grantee during such “garden leave” or “notice” period, the applicable Post-Termination Restricted Period shall be reduced by the amount of any such “garden leave” or “notice” period in which the Grantee complies with such terms.
 
8.
Intellectual Property; Works Made for Hire
 
Except as otherwise agreed in writing between the Grantee and the Corporation, the Designated Service Recipient or other member of the KKR Group, as applicable, the Grantee agrees that all work and deliverables that the Grantee prepares, creates, develops, authors, contributes to or improves, either alone or with third parties, during the course of the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group,  within the scope of the services provided to or with the use of any of the resources of the KKR Group, including but not limited to notes, drafts, scripts, documents, designs, inventions, data, presentations, research results, developments, reports, processes, programs, spreadsheets and other materials and all rights and intellectual property rights thereunder including but not limited to rights of authorship (collectively, “ Work Product ”), are works-made-for-hire owned exclusively by the KKR Group.  The Grantee hereby irrevocably assigns, transfers and conveys, to the maximum extent permitted by law, all right, title and interest that the Grantee may have in such Work Product (and any written records thereof) to the KKR Group (or any of its designees), to the extent ownership of any such rights does not vest originally with the KKR Group.  The Grantee acknowledges and agrees that the Units issued pursuant to the Agreement are sufficient compensation for such assignment, transference and conveyance. To the extent the foregoing assignment is deemed to be invalid or unenforceable, Grantee grants the KKR Group, at no additional charge an exclusive, worldwide, irrevocable, royalty-free, perpetual, assignable license under all intellectual property in and to the Work Product.
 
9.
Non-Disparagement.
 
The Grantee hereby agrees that the Grantee will not at any time during his or her employment, engagement, association or other similar affiliation with the Designated Service Recipient or for five years thereafter make any disparaging, defamatory, or derogatory written or oral statements or other communications about or in reference to the Designated Service Recipient, the Corporation or any other member of the KKR Group or KKR Capstone (including their respective businesses or reputations), including but not limited to any of their Clients, Prospective Clients, Portfolio Companies, or Covered Persons; provided that this provision shall not prevent the Grantee from (i) making reports to or testifying before any court, governmental agency, or regulatory body, including the U.S. Securities and Exchange Commission, or pursuant to any legal or regulatory process or proceeding or (ii) engaging in activity protected by applicable law, rule or regulations, including the U.S. National Labor Relations Act.
 
D-7

10.
Representations; Warranties; Other Agreements.
 
The Grantee acknowledges and agrees that the Grantee will derive material financial and other benefits from the Grantee’s employment, engagement, association or other similar affiliation with the KKR Group, and that the restrictions contained herein are reasonable in all circumstances and necessary to protect the legitimate business interests of the Company, to have and enjoy the full benefit of its business interests and goodwill. The Grantee further agrees and acknowledges that such restrictions will not unnecessarily or unreasonably restrict or otherwise limit the professional opportunities of the Grantee should his or her employment, engagement, association or other similar affiliation with the KKR Group terminate, that the Grantee is fully aware of the Grantee’s obligations under this Appendix D and that the livelihood of the Grantee is not impaired by the Grantee’s entry into the covenants contained herein. The Corporation and the Designated Service Recipient shall have the right, exercisable in its sole discretion, to directly or indirectly make a payment to the Grantee or grant other consideration if, and to the extent, necessary to enforce the restrictions contained herein in accordance with any applicable law.
 
11.
Certain Relationships.
 
The Grantee acknowledges and agrees that the Grantee’s compliance with this Appendix D is a material part of the Grantee’s arrangements with the Company. Notwithstanding anything to the contrary herein, this Appendix D does not constitute an employment, engagement or other similar agreement between the Grantee and the Company, or any other of the KKR Related Entities (including but not limited to the Corporation), and shall not interfere with or otherwise affect any rights any such person or entity may have to terminate the Grantee’s employment, engagement, association or other similar affiliation at any time upon such notice as may be required by law or the terms of any agreement or arrangement with the Grantee.
 
12.
Injunctive Relief; Third Party Beneficiaries.
 
The Grantee acknowledges and agrees that the remedies of the Corporation and the Designated Service Recipient at law for any breach of this Appendix D would be inadequate and that for any breach of this Appendix D, the Designated Service Recipient may terminate your employment, engagement, association or other similar affiliation with the Company and shall, in addition to any other remedies that may be available to it at law or in equity, or as provided for in this Appendix D, be entitled to an injunction, restraining order or other equitable relief, without the necessity of posting a bond, restraining the Grantee from committing or continuing to commit any violation of this Appendix D. The Grantee further acknowledges and agrees that the Corporation and the Designated Service Recipient shall not be required to prove, or offer proof, that monetary damages for a breach of this Appendix D would be difficult to calculate and that any remedies at law would be inadequate for any breach of this Appendix D. The parties intend, acknowledge, and agree that each member of the KKR Group is a third party beneficiary of this Agreement and is authorized to enforce any provision hereof by delivering a written statement expressing the intent to enforce the provisions hereof to the Grantee or the Designated Service Recipient. The Grantee has executed this Agreement for the benefit of each member of the KKR Group.

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13.
Amendment; Waiver.
 
This Appendix D may not be amended, restated, supplemented or otherwise modified other than by an agreement in writing signed by the parties hereto; provided, however, that the Corporation, the KKR Group or the Designated Service Recipient may reduce the scope of, or waive compliance with any part of, any obligation of the Grantee arising under this Appendix D, at any time without any action, consent or agreement of any other party. No failure to exercise and no delay in exercising, on the part of any party, of any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The waiver of any particular right, remedy, power or privilege shall not affect or impair the rights, remedies, powers or privileges of any person with respect to any subsequent default of the same or of a different kind by any party hereunder. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. No waiver of any provision hereto shall be effective unless it is in writing and signed by the person asserted to have granted such waiver.
 
14.
Assignment.
 
This Appendix D may not be assigned by any party hereto without the prior written consent of the other party hereto, except that the consent of the Grantee shall be deemed to have been given to the Corporation and the Designated Service Recipient (and the Grantee acknowledges that the Corporation and the Designated Service Recipient shall therefore have the right without further consent) to assign its rights hereunder, in whole or in part, to (i) any member of the KKR Group that becomes a Designated Service Recipient or (ii) any person who is a successor of the Corporation or the Designated Service Recipient by merger, consolidation or purchase of all or substantially all of its assets, in which case such assignee shall be substituted for the Corporation and the Designated Service Recipient hereunder with respect to the provisions so assigned and be bound under this Appendix D and by the terms of the assignment in the same manner as the Corporation and the Designated Service Recipient was bound hereunder. Any purported assignment of this Appendix D in violation of this section shall be null and void.
 
15.
Governing Law.
 
This Appendix D shall be governed by and construed in accordance with the laws of the State of New York.
 
16.
Resolution of Disputes.
 

(a)
Subject to paragraphs (b) and (c) below, any and all disputes which cannot be settled amicably, including any ancillary claims of any party, arising out of, relating to or in connection with the validity, negotiation, execution, interpretation, performance, non performance or termination of this Appendix D (including the validity, scope and enforceability of this arbitration provision) (each a “ Dispute ”) shall be finally settled by arbitration conducted by a single arbitrator in New York, New York in accordance with the then existing Rules of Arbitration of the International Chamber of Commerce (the “ ICC ”). If the parties to the Dispute fail to agree on the selection of an arbitrator within 30 days of the receipt of the request for arbitration, the ICC shall make the appointment. The arbitrator shall be a lawyer and shall conduct the proceedings in the English language. Performance under this Appendix D shall continue if reasonably possible during any arbitration proceedings.
 
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(b)
Prior to filing a Request for Arbitration or an Answer under the Rules of Arbitration of the ICC, as the case may be, the Corporation or the Designated Service Recipient may, in its sole discretion, require all Disputes or any specific Dispute to be heard by a court of law in accordance with paragraph (e) below and, for the purposes of this paragraph (b), each party expressly consents to the application of paragraphs (e) and (f) below to any such suit, action or proceeding. If an arbitration proceeding has already been commenced in connection with a Dispute at the time that the Corporation or the Designated Service Recipient commences such proceedings in accordance with this paragraph (b), such Dispute shall be withdrawn from arbitration.
 

(c)
Subject to paragraph (b) above, either party may bring an action or special proceeding in any court of law (or, if applicable, equity) for the purpose of compelling a party to arbitrate, seeking temporary or preliminary relief in aid of an arbitration hereunder or enforcing an arbitration award and, for the purposes of this paragraph (c), each party expressly consents to the application of paragraphs (e) and (f) below to any such suit, action or proceeding.
 

(d)
Except as required by law or as may be reasonably required in connection with judicial proceedings to compel arbitration, to obtain temporary or preliminary judicial relief in aid of arbitration or to confirm or challenge an arbitration award, the arbitration proceedings, including any hearings, shall be confidential, and the parties shall not disclose any awards, any materials in the proceedings created for the purpose of the arbitration or any documents produced by another party in the proceedings not otherwise in the public domain. Judgment on any award rendered by an arbitration tribunal may be entered in any court having jurisdiction thereover.
 

(e)
EACH PARTY HEREBY IRREVOCABLY SUBMITS AND AGREES TO THE EXCLUSIVE JURISDICTION OF THE COURTS, AND VENUE, LOCATED IN NEW YORK, NEW YORK FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING BROUGHT IN ACCORDANCE WITH THE PROVISIONS OF PARAGRAPHS (B) OR (C) ABOVE. The parties acknowledge that the forum designated by this paragraph (e) has a reasonable relation to this Appendix D, and to the parties' relationship with one another. The parties hereby waive, to the fullest extent permitted by applicable law, any objection which they now or hereafter may have to personal jurisdiction or to the laying of venue of any suit, action or proceeding brought in any court referred to in the preceding sentence or pursuant to paragraphs (b) or (c) above and such parties agree not to plead or claim the same.
 

(f)
The parties agree that if a suit, action or proceeding is brought under paragraphs (b) or (c) proof shall not be required that monetary damages for breach of the provisions of this Appendix D would be difficult to calculate and that remedies at law would be inadequate, and they irrevocably appoint the Secretary or General Counsel of the Corporation or the Designated Service Recipient or an officer of   the Corporation or the Designated Service Recipient (at the then-current principal business address of the Corporation or the Designated Service Recipient) as such party’s agent for service of process in connection with any such action or proceeding and agrees that service of process upon such agent, who shall promptly advise such party of any such service of process, shall be deemed in every respect effective service of process upon the party in any such action or proceeding.
 
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17.
Entire Agreement.
 
This Appendix D contains the entire agreement and understanding among the parties hereto with respect to the subject matter of this Appendix D and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with the Corporation, the Company, or KKR Holdings L.P. with respect to the subject matter of this Appendix D (including but not limited to any prior grant agreement for an equity award under the Plan that contains one or more appendices with respect to the subject matter of this Appendix D) or any Confidentiality and Restrictive Covenant Agreement previously executed with the Corporation, the Company or KKR Holdings L.P. The express terms of this Appendix D control and supersede any course of performance and any usage of the trade inconsistent with any of the terms of this Appendix D.
 
18.
Severability .
 
Notwithstanding Section 13 or any other provision of this Appendix D to the contrary, any provision of this Appendix D that is prohibited or unenforceable in any jurisdiction (including but not limited to the application, if applicable, of Rule 5.6 of the New York Rules of Professional Conduct (or successor rule)) shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In such event, the invalid provision shall be partially enforced, reformed or substituted with a valid provision which most closely approximates the intent and the economic effect of the invalid provision to give effect to the provision to the maximum extent permitted in such jurisdiction or in such case.  Grantee specifically acknowledges that Grantee has been provided with valuable consideration in exchange for the covenants set forth herein and, accordingly, such partial enforcement or reformation is necessary to avoid frustrating the Company’s purpose in awarding the Grantee such consideration.
 
19.
Interpretation .
 
Notwithstanding anything contained in Article IV of the Agreement, the provisions of Sections 10 through 19 (inclusive) of this Appendix D shall govern with respect to, and shall be applicable only to the interpretation, administration and enforcement of, the provisions of this Appendix D, and shall not govern or otherwise apply to, or have any administrative or interpretive effect on, any other provisions of the remainder of the Agreement or any other of its Appendices.
 
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APPENDIX E
 
Amended and Restated
KKR & Co. Inc.
2010 Equity Incentive Plan
 
1.
Purpose of the Plan
 
This Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan (the “ Plan ”) is designed to promote the long term financial interests and growth of KKR & Co. Inc., a Delaware corporation (the “ Corporation ”), and its Affiliates by (i) attracting and retaining directors, officers, employees, consultants or other service providers of the Corporation or any of its Affiliates and (ii) aligning the interests of such individuals with those of the Corporation and its Affiliates by providing them with equity-based awards based on shares of Class A Common Stock, $0.01 par value per share, of the Corporation (the “ Class A Common Stock ”).
 
The Plan was originally adopted as the KKR & Co. L.P. 2010 Equity Incentive Plan (the “ Original Plan ”) and was amended and restated in accordance with Section 9 of the Original Plan on July 1, 2018 to reflect changes relating to the conversion of KKR & Co. L.P., a Delaware limited partnership (the “ Partnership ”), into the Corporation (the “ Conversion ”), including to reflect that the Awards granted under the Plan shall relate to Class A Common Stock rather than common units representing limited partner interests in the Partnership (the “ Common Units ”), such amendment and restatement effective as of the effectiveness of the Conversion (the “ Conversion Time ”). Awards granted under the Original Plan shall remain outstanding under the Plan, with adjustments made to such Awards, pursuant to Section 9 of the Original Plan and effective as of the Conversion Time, such that references thereunder to (i) Common Units shall instead refer to Class A Common Stock, (ii) the Partnership shall instead refer to the Corporation, and (iii) to any other defined term that was defined in an applicable Award by reference to Section 2 of the Original Plan shall instead refer to the defined terms set forth in Section 2 hereof.
 
2.
Definitions
 
The following capitalized terms used in the Plan have the respective meanings set forth in this Section:
 
(a)       Act :  The Securities Exchange Act of 1934, as amended, or any successor thereto.
 
(b)       Administrator : The Board, or the committee or subcommittee thereof, or other employee or group of employees, to whom authority to administer the Plan has been delegated by the Board.
 
(c)       Affiliate :  With respect to any specified Person, any other Person that directly or indirectly through one or more intermediaries Controls, is Controlled by or is under common control with such specified Person. As used herein, the term “ Control ” (including the terms “ Controlled by ” and “ under common Control with ”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise, including the ownership, directly or indirectly, of securities having the power to elect a majority of the board of directors or similar body governing the affairs of such Person.
 
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(d)       Award :  Individually or collectively, any Option, Stock Appreciation Right, or Other Stock-Based Awards based on or relating to the Class A Common Stock issuable under the Plan.
 
(e)       Board :  The board of directors of the Corporation.
 
(f)       Change in Control :  Except as otherwise set forth in any applicable Award agreement, (i) the occurrence of any Person, other than KKR Management LLC or a Person approved by KKR Management LLC, becoming the Class B Stockholder (as defined in the Certificate of Incorporation of the Corporation), (ii) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation) in one or more series of related transactions of all or substantially all of the combined assets of the Group Partnerships taken as a whole to any Person other than a Permitted Person, (iii) the consummation of any transaction or a series of related transactions (including any merger or consolidation) that results in any Person (other than a Permitted Person) becoming the beneficial owner of a majority of the controlling interests in any one or more Group Partnerships that together hold all or substantially all of the combined assets of the Group Partnerships taken as a whole, or (iv) the occurrence of any other event as determined by the Board to constitute a Change in Control. Solely for the purpose of this definition, the term “ person ” shall have the meaning given to such term under Section 13(d)(3) of the Act or any successor provision thereto; and for purposes of the Plan, the term “ beneficial owner ” shall have the meaning given to such term under Rule 13d-3 promulgated under the Act or any successor provision thereto, and the combined assets of the Group Partnerships shall exclude the portion of any such assets that are allocable to holders of any non-controlling interests in any consolidated subsidiaries.
 
(g)       Code :  The Internal Revenue Code of 1986, as amended, or any successor thereto.
 
(h)       Effective Date :  July 15, 2010.
 
(i)       Employee Exchange Agreement :  That certain Second Amended and Restated Exchange Agreement, dated as of May 3, 2018, by and among KKR Management Holdings L.P., KKR Fund Holdings L.P., KKR International Holdings L.P., KKR Holdings L.P., KKR & Co. L.P., KKR Group Holdings L.P., KKR Subsidiary Partnership L.P., KKR Group Limited and KKR Group Holdings Corp.
 
(j)        Employment :  The term “Employment” as used herein shall be deemed to refer to (i) a Participant’s employment if the Participant is an employee of the Corporation or any of its Affiliates, (ii) a Participant’s services as a consultant or partner, if the Participant is consultant to, or partner of, the Corporation or of any of its Affiliates, and (iii) a Participant’s services as an non-employee director, if the Participant is a non-employee member of the Board.
 
(k)       Fair Market Value :  Of a share of Class A Common Stock on any given date means (i) the closing sale price per share of Class A Common Stock on the New York Stock Exchange or The NASDAQ Stock Market (a “ U.S. Exchange ”) on that date (or, if no closing sale price is reported, the last reported sale price), (ii) if Class A Common Stock is not listed for trading on a U.S. Exchange, the closing sale price (or, if no closing sale price is reported, the last reported sale price) as reported on that date in composite transactions for the principal national securities exchange registered pursuant to the Act on which the Class A Common Stock is listed, (iii) if Class A Common Stock is not so listed on a U.S. Exchange, the last quoted bid price for Class A Common Stock on that date in the over-the-counter market as reported by OTC Markets Group Inc. or a similar organization, or (iv) if Class A Common Stock is not so quoted by OTC Markets Group Inc. or a similar organization, the average of the mid-point of the last bid and ask prices for Class A Common Stock on that date from a nationally recognized independent investment banking firm selected by the Board for this purpose.
 
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(l)        Group Partnerships :   KKR Management Holdings L.P., a Delaware limited partnership, KKR Fund Holdings L.P., a Cayman Island exempted limited partnership, and KKR International Holdings L.P., a Cayman Island exempted limited partnership, along with any partnership designated in the future as a “Group Partnership” by the Corporation.
 
(m)      Group Partnership Unit :  A “Group Partnership Unit” as defined in the Pre-Listing Plan.
 
(n)       KKR Group :  The Group Partnerships, the direct and indirect parents of the Group Partnerships (the “ Parents ”), any direct or indirect subsidiaries of the Parents or the Group Partnerships, the general partner or similar controlling entities of any investment fund or vehicle that is managed, advised or sponsored by the KKR Group (the “ Funds ”) and any other entity through which any of the foregoing directly or indirectly conducts its business, but shall exclude any company over which a Fund exercises a significant degree of control as an investor.
 
(o)       Option :  An option to purchase Class A Common Stock granted pursuant to Section 6 of the Plan.
 
(p)       Option Price :  The purchase price per share of Class A Common Stock of an Option, as determined pursuant to Section 6(a) of the Plan.
 
(q)       Other Stock-Based Awards :  Awards granted pursuant to Section 8 of the Plan.
 
(r)       Participant :  A director, officer, employee, consultant or other service provider of the Corporation or of any of its Affiliates   who is selected by the Administrator to participate in the Plan.
 
(s)       Permitted Person :  The term “Permitted Person” means (i) an individual who (a) is an executive of the KKR Group, (b) devotes substantially all of his or her business and professional time to the activities of the KKR Group and (c) did not become an executive of the KKR Group or begin devoting substantially all of his or her business and professional time to the activities of the KKR Group in contemplation of a Change in Control or (ii) any Person in which any one or more such individuals directly or indirectly holds a majority of the controlling interests.
 
(t)        Person :  A ny individual, corporation, partnership, limited partnership, limited liability company, limited company, joint venture, trust, unincorporated or governmental organization or any agency or political subdivision thereof .
 
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(u)       Pre-Listing Award :  Any equity-based award (whether an option, unit appreciation right, restricted equity unit, phantom equity unit, or other equity-based award based in whole or in part on the fair market value of any equity unit or otherwise) granted pursuant to the Pre-Listing Plan.
 
(v)       Pre-Listing Plan :  KKR Management Holdings L.P. 2009 Equity Incentive Plan.
 
(a)       Stock Appreciation Right :  A stock appreciation right granted pursuant to Section 7 of the Plan.
 
3.
Class A Common Stock Subject to the Plan
 
Subject to Section 9 hereof, the total number of shares of Class A Common Stock which shall be available for issuance under the Plan shall be equal to the total number of Common Units available under the Original Plan immediately prior to the Conversion Time (the “ Original Plan Amount ”), of which all or any portion may be issued as Class A Common Stock.  Notwithstanding the foregoing, beginning with the first fiscal year of the Corporation commencing after the Conversion Time and continuing with each subsequent fiscal year of the Corporation occurring thereafter, the aggregate number of shares of Class A Common Stock covered by the Plan will be increased, on the first day of each fiscal year of the Corporation occurring during the term of the Plan and commencing after the Conversion Time, by a number of shares of Class A Common Stock equal to the positive difference, if any, of (x) 15% of the aggregate number of shares of Class A Common Stock (determined on a fully converted and diluted basis) outstanding on the last day of the immediately preceding fiscal year of the Corporation minus (y) the Original Plan Amount, as such amount may have been increased by this sentence in any prior fiscal year, unless the Administrator should decide to increase the number of shares of Class A Common Stock covered by the Plan by a lesser amount on any such date.  The issuance of shares of Class A Common Stock or the payment of cash upon the exercise of an Award or any Pre-Listing Award or in consideration of the settlement, cancellation or termination of an Award or any Pre-Listing Award shall reduce the total number of shares of Class A Common Stock covered by and available for issuance under the Plan, as applicable (with any Awards or Pre-Listing Awards settled in cash reducing the total number of shares of Class A Common Stock by the number of shares of Class A Common Stock determined by dividing the cash amount to be paid thereunder by the Fair Market Value of one share of Class A Common Stock on the date of payment), and the issuance of Group Partnership Units in consideration of the settlement, cancellation or termination of  any Pre-Listing Award shall reduce the total number of shares of Class A Common Stock covered by and available for issuance under the Plan by a number of shares of Class A Common Stock equal to the number of Group Partnership Units so issued multiplied by the Exchange Rate (as defined in the Employee Exchange Agreement).  Shares of Class A Common Stock which are subject to Awards which are cancelled, forfeited, terminated or otherwise expired by their terms without the payment of consideration, and shares of Class A Common Stock which are used to pay the exercise price of any Award, may be granted again subject to Awards under the Plan.   For the avoidance of doubt, shares of Class A Common Stock which are subject to Awards other than Options or Stock Appreciation Rights which are withheld to pay tax withholding obligations will be deemed not to have been delivered and will be available for further Awards under the Plan.

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For purposes of this Section 3, the number of shares of Class A Common Stock that, as of a particular date, will be considered to be “covered by” the Plan will be equal to the sum of (i) the number of shares of Class A Common Stock available for issuance pursuant to the Plan but which are not subject to an outstanding Award or Pre-Listing Award as of such date, (ii) the number of shares of Class A Common Stock subject to outstanding Awards or Pre-Listing Awards as of such date and (iii) the number of Group Partnership Units subject to outstanding Pre-Listing Awards as of such date multiplied by the Exchange Rate (as defined in the Employee Exchange Agreement) as in effect on such date.  For purposes of this Section 3, (A) an Option or Stock Appreciation Right that has been granted under the Plan or the Pre-Listing Plan will be considered to be an “outstanding” Award or Pre-Listing Award, as applicable, until it is exercised or cancelled, forfeited, terminated or otherwise expires by its terms, (B) a share of Class A Common Stock that has been granted as an Award under the Plan that is subject to vesting conditions will be considered an “outstanding” Award until the vesting conditions have been satisfied or the Award otherwise terminates or expires unvested by its terms, (C) a Group Partnership Unit that has been granted as a Pre-Listing Award under the Pre-Listing Plan that is subject to vesting conditions will be considered an “outstanding” Pre-Listing Award until the vesting conditions have been satisfied or the Pre-Listing Award otherwise terminates or expires unvested by its terms and (D) any Award or Pre-Listing Award other than an Option, Stock Appreciation Right, share of Class A Common Stock or Group Partnership Unit that is subject to vesting conditions will be considered to be an “outstanding” Award or Pre-Listing Award, as applicable, until it has been settled.

4.
Administration
 
(a)       Administration and Delegation .  The Plan shall be administered by the Administrator.  The Administrator may delegate the authority to grant Awards under the Plan to any employee or group of employees of the Corporation or of any Affiliate of the Corporation; provided   that such delegation and grants are consistent with applicable law and guidelines established by the Board from time to time.  The Administrator may delegate the day-to-day administration of the Plan to any employee or group of employees of the Corporation or any of its Affiliates or a nationally recognized third-party stock plan administrator.
 
(b)       Substitution of Prior Awards .  Awards may, in the discretion of the Administrator, be made under the Plan in assumption of, or in substitution for, outstanding awards previously granted by the Corporation, any Affiliate of the Corporation or any entity acquired by the Corporation or with which the Corporation combines.  The number of shares of Class A Common Stock underlying such substitute awards shall be counted against the aggregate number of shares of Class A Common Stock available for Awards under the Plan.
 
(c)       Interpretation; Corrections; Final and Binding Decisions .  The Administrator is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan.  The Administrator may correct any defect or supply any omission or reconcile any inconsistency in the Plan or Award agreement in the manner and to the extent the Administrator deems necessary or desirable, without the consent of any Participant.  Any decision of the Administrator in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their beneficiaries and successors).
 
(d)       Establishment of Award Terms .  The Administrator shall have the full power and authority to establish the terms and conditions of any Award consistent with the provisions of the Plan and to waive any such terms and conditions at any time (including, without limitation, accelerating or waiving any vesting conditions).
 
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(e)       Payment of Taxes Due .  The Administrator shall require payment of any amount it may determine to be necessary to withhold for federal, state, local or other taxes as a result of the exercise, grant or vesting of an Award.  To the extent that such withholding arises in connection with the settlement of an Award with Class A Common Stock, the Administrator may, in its sole discretion, cause such payments to be funded by reducing the Class A Common Stock delivered upon settlement by an amount of Class A Common Stock having a Fair Market Value equal to the amount of payments that would then be due (and if an Award is settled in cash, the Administrator may withhold cash in respect to such taxes due). The Administrator shall establish the manner in which any such tax obligation may be satisfied by the Participant.
 
5.
Limitations
 
No Award may be granted under the Plan after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date.
 
6.
Terms and Conditions of Options
 
Options granted under the Plan shall be non‑qualified options for federal income tax purposes, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Administrator shall determine:
 
(a)       Option Price .  The Option Price per share of Class A Common Stock shall be determined by the Administrator, provided that, solely for the purposes of an Option granted under the Plan to a Participant who is a U.S. taxpayer, in no event will the Option Price be less than 100% of the Fair Market Value on the date an Option is granted.
 
(b)       Exercisability .  Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Administrator, but in no event shall an Option be exercisable more than ten years after the date it is granted.
 
(c)       Exercise of Options .
 
(i)             Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the shares of Class A Common Stock for which it is then exercisable.  For purposes of this Section 6 of the Plan, the exercise date of an Option shall be the later of the date a notice of exercise is received by the Corporation and, if applicable, the date payment is received by the Corporation pursuant to clauses (A), (B), (C) or (D) in the following sentence.
 
(ii)            The Option Price for share of the Class A Common Stock as to which an Option is exercised shall be paid to the Corporation, and in the manner designated by the Administrator, pursuant to one or more of the following methods: (A) in cash or its equivalent (e.g., by personal check); (B) in Class A Common Stock having a Fair Market Value equal to the aggregate Option Price for the shares of Class A Common Stock being purchased and satisfying such other requirements as may be imposed by the Administrator; provided   that such Class A Common Stock have been held by the Participant for such period as may be established from time to time by the Administrator in order to avoid adverse accounting treatment applying generally accepted accounting principles; (C) partly in cash and partly in such Class A Common Stock; (D) if there is a public market for the Class A Common Stock at such time, through the delivery of irrevocable instructions to a broker to sell Class A Common Stock obtained upon the exercise of the Option and to deliver promptly to the Corporation an amount out of the proceeds of such sale equal to the aggregate Option Price for the Class A Common Stock being purchased, or (E) to the extent permitted by the Administrator, through net settlement in Class A Common Stock.
 
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(iii)            To the extent compliant with applicable laws, no Participant shall have any rights to distributions or other rights of a holder with respect to Class A Common Stock subject to an Option until the Participant has given written notice of exercise of the Option, paid in full the Option Price for such Class A Common Stock and, if applicable, has satisfied any other conditions imposed by the Administrator pursuant to the Plan.
 
(d)       Attestation .  Wherever in this Plan or any agreement evidencing an Award a Participant is permitted to pay the Option Price of an Option or taxes relating to the exercise of an Option by delivering Class A Common Stock, the Participant may, subject to procedures satisfactory to the Administrator, satisfy such delivery requirement by presenting proof of beneficial ownership of such Class A Common Stock, in which case the Corporation shall treat the Option as exercised without further payment and/or shall withhold such number of shares of Class A Common Stock from the Class A Common Stock acquired by the exercise of the Option, as appropriate.
 
7.
Terms and Conditions of Stock Appreciation Rights
 
(a)      Grants .  The Administrator may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof.  A Stock Appreciation Right granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same number of shares of Class A Common Stock covered by an Option (or such lesser number of shares of Class A Common Stock as the Administrator may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as are contemplated by this Section 7 (or such additional limitations as may be included in an Award agreement).
 
(b)       Exercise Price .  The exercise price per share of Class A Common Stock of a Stock Appreciation Right shall be an amount determined by the Administrator; provided , however , that in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the exercise price may not be less than the Option Price of the related Option; provided , further that, solely for the purposes of a Stock Appreciation Right granted under the Plan to a Participant who is a U.S. taxpayer, in the case of a Stock Appreciation Right that was not granted in conjunction with an Option, the exercise price per Stock Appreciation Right shall not be less than 100% of the Fair Market Value on the date the Stock Appreciation Right is granted.
 
(c)       Terms of Grant :  Each Stock Appreciation Right granted independent of an Option shall entitle a Participant upon exercise to an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one share of Class A Common Stock over (B) the exercise price per share of Class A Common Stock, times (ii) the number of shares of Class A Common Stock covered by the Stock Appreciation Right.  Each Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Corporation the unexercised Option, or any portion thereof, and to receive from the Corporation in exchange therefore an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one share of Class A Common Stock over (B) the Option Price per share of Class A Common Stock, times (ii) the number of shares of Class A Common Stock covered by the Option, or portion thereof, which is surrendered.  Payment shall be made in Class A Common Stock or in cash, or partly in Class A Common Stock and partly in cash (any such Class A Common Stock valued at such Fair Market Value), all as shall be determined by the Administrator.
 
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(d)       Exercisability :  Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Corporation of written notice of exercise stating the number of shares of Class A Common Stock with respect to which the Stock Appreciation Right is being exercised.  The date a notice of exercise is received by the Corporation shall be the exercise date.  The Administrator, in its sole discretion, may determine that no fractional Class A Common Stock will be issued in payment for Stock Appreciation Rights, but instead cash will be paid for the fractional Class A Common Stock and the number of shares of Class A Common Stock to be delivered will be rounded downward to the next whole share of Class A Common Stock.
 
(e)       Limitations .  The Administrator may impose, in its discretion, such conditions upon the exercisability of Stock Appreciation Rights as it may deem fit, but in no event shall a Stock Appreciation Right be exercisable more than ten years after the date it is granted..
 
8.
Other Stock-Based Awards
 
The Administrator, in its sole discretion, may grant or sell Awards of Class A Common Stock, restricted Class A Common Stock, deferred restricted Class A Common Stock, phantom restricted Class A Common Stock or other Class A Common Stock-based awards based in whole or in part on the Fair Market Value of the Class A Common Stock (“ Other Stock-Based Awards ”).  Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Administrator shall determine, including, without limitation, the right to receive, or vest with respect to, one or more shares of Class A Common Stock (or the equivalent cash value of such Class A Common Stock) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives.  Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan.  Subject to the provisions of the Plan, the Administrator shall determine to whom and when Other Stock-Based Awards will be made, the number of shares of Class A Common Stock to be awarded under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Class A Common Stock, or other assets or a combination of cash, Class A Common Stock and other assets; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof and provisions ensuring that all Class A Common Stock so awarded and issued shall be fully paid and non-assessable).
 
9.
Adjustments Upon Certain Events
 
Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan:

E-8

(a)       Equity Restructurings . In the event of any extraordinary Class A Common Stock distribution or split, recapitalization, rights offering, split-up or spin-off or any other event that constitutes an “equity restructuring” (as defined under Financial Accounting Standards Board (FASB) Accounting Standards Codification 718) with respect to the Class A Common Stock, the Administrator shall, in the manner determined appropriate or desirable by the Administrator and without liability to any person, adjust any or all of (i) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) with respect to which Awards may be granted under the Plan, and (ii) the terms of outstanding Awards, including, but not limited to (A) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) subject to outstanding Awards or to which outstanding Awards relate, (B) the Option Price or exercise price of any Option or Stock Appreciation Right and (C) any performance targets or other applicable terms.
 
(b)      Mergers, Reorganizations and Other Corporate Transactions . In the event of any reorganization, merger, consolidation, combination, repurchase or exchange of Class A Common Stock or other securities of the Corporation, issuance of warrants or other rights to purchase Class A Common Stock or other securities of the Corporation, or other similar corporate transaction or event that affects the Class A Common Stock such that an adjustment is determined by the Administrator in its discretion to be appropriate or desirable, the Administrator in its sole discretion and without liability to any person shall make such substitution or adjustment, if any, as it deems to be equitable as to (i) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) with respect to which Awards may be granted under the Plan, and (ii) the terms of any outstanding Award, including (A) the number of shares of Class A Common Stock or other securities of the Corporation (or number and kind of other securities or property) subject to outstanding Awards or to which outstanding Awards relate, (B) the Option Price or exercise price of any Option or Stock Appreciation Right and (C) any performance targets or other applicable terms.
 
(c)      Change in Control . In the event of a Change in Control after the Effective Date, (i) if determined by the Administrator in the applicable Award agreement or otherwise, any outstanding Awards then held by Participants which are unexercisable or otherwise unvested or subject to lapse restrictions shall automatically be deemed exercisable or otherwise vested or no longer subject to lapse restrictions, as the case may be, as of immediately prior to such Change in Control and (ii) the Administrator may (subject to Sections 16 and 18), but shall not be obligated to: (A) accelerate, vest or cause the restrictions to lapse with respect to all or any portion of an Award; (B) cancel such Awards for fair value (as determined in the sole discretion of the Administrator) which, in the case of Options and Stock Appreciation Rights, may equal the excess, if any, of value of the consideration to be paid in the Change in Control transaction to holders of the same number of shares of Class A Common Stock subject to such Options or Stock Appreciation Rights (or, if no consideration is paid in any such transaction, the Fair Market Value of the Class A Common Stock subject to such Options or Stock Appreciation Rights) over the aggregate exercise price of such Options or Stock Appreciation Rights; (C) provide that any Options or Stock Appreciation Right having an exercise price per share of Class A Common Stock that is greater than the per share value of the consideration to be paid in the Change in Control transaction to a holder of a share of Class A Common Stock shall be cancelled without payment of any consideration therefor; (D) provide for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted hereunder as determined by the Administrator in its sole discretion; or (E) provide that for a period of at least 15 days prior to the Change in Control, such Options shall be exercisable as to all shares subject thereto and that upon the occurrence of the Change in Control, such Options shall terminate and be of no further force and effect.
 
E-9

10.
No Right to Employment or Awards
 
The granting of an Award under the Plan shall impose no obligation on the Corporation’s or any Affiliate to continue the Employment of a Participant and shall not lessen or affect the Corporation’s or Affiliate’s right to terminate the Employment of such Participant.  No Participant or other Person shall have any claim to be granted any Award (including as a result of recurring prior Award), and there is no obligation for uniformity of treatment of Participants, or holders or beneficiaries of Awards.  No Award shall constitute compensation for purposes of determining any benefits under any benefit plan.  The terms and conditions of Awards and the Administrator’s determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated).
 
11.
Successors and Assigns
 
The Plan shall be binding on all successors and assigns of the Corporation and a Participant, including without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.
 
12.
Nontransferability of Awards
 
Unless otherwise determined or approved by the Administrator, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution.  Any transfer or assignment in violation of the prior sentence shall be null and void.  An Award exercisable after the death of a Participant may be exercised by the legatees, personal representatives or distributees of the Participant.
 
13.
Amendments or Termination
 
The Board may amend, alter or discontinue the Plan or any outstanding Award, but no amendment, alteration or discontinuation shall be made, without the consent of a Participant, if such action would materially diminish any of the rights of the Participant under any Award theretofore granted to such Participant under the Plan; provided , however , that the Administrator may without the Participant’s consent (a) amend the Plan or any outstanding Award in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws (including, without limitation, to avoid adverse tax consequences to the Corporation or to Participants as provided in Section 14 and Section 18 below), and (b) amend any outstanding Awards in a manner that is not adverse (other than in a de minimis manner) to a Participant, except as otherwise may be permitted pursuant to Section 9 hereof or as is otherwise contemplated pursuant to the terms of the Award, without the Participant’s consent.
 
14.
International Participants
 
With respect to Participants who reside or work outside the United States of America, the Administrator may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant, the Corporation or an Affiliate.
 
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15.
Choice of Law
 
The Plan shall be governed by and construed in accordance with the law of the State of New York without giving effect to any otherwise governing principles of conflicts of law that would apply the laws of another jurisdiction.
 
16.
Other Laws; Restrictions on Transfer of Class A Common Stock
 
The Administrator may refuse to issue or transfer any Class A Common Stock or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Class A Common Stock or such other consideration might violate any applicable law or regulation or entitle the Corporation to recover the same under Section 16(b) of the Act, as amended, and any payment tendered to the Corporation by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Corporation, and no such offer shall be outstanding, unless and until the Administrator in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the United States federal and any other applicable securities laws.

17.
Effectiveness of the Plan
 
The Plan shall be effective as of the Effective Date.
 
18.
Section 409A
 
To the extent applicable, this Plan and Awards issued hereunder shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date.   Notwithstanding other provisions of the Plan or any Award agreements issued thereunder, no Award shall be granted, deferred, accelerated, extended, paid out or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A of the Code upon a Participant.  In the event that it is reasonably determined by the Administrator that, as a result of Section 409A of the Code, payments in respect of any Award under the Plan may not be made at the time contemplated by the terms of the Plan or the relevant Award agreement, as the case may be, without causing the Participant holding such Award to be subject to taxation under Section 409A of the Code, consistent with the provisions of Section 13(a) above, the Corporation may take whatever actions the Administrator determines necessary or appropriate to comply with, or exempt the Plan and Award agreement from the requirements of Section 409A of the Code and related Department of Treasury guidance and other interpretive materials as may be issued after the Effective Date including, without limitation, (a) adopting such amendments to the Plan and Awards and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Administrator determines necessary or appropriate to preserve the intended tax treatment of the benefits provided by the Plan and Awards hereunder and/or (b) taking such other actions as the Administrator determines necessary or appropriate to avoid the imposition of an additional tax under Section 409A of the Code, which action may include, but is not limited to, delaying payment to a Participant who is a “specified employee” within the meaning of Section 409A of the Code until the first day following the six-month period beginning on the date of the Participant’s termination of Employment .  The Corporation shall use commercially reasonable efforts to implement the provisions of this Section 18 in good faith; provided that neither the Corporation, the Administrator nor any employee, director or representative of the Corporation or of any of its Affiliates shall have any liability to Participants with respect to this Section 18 .
 
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Fidelity Stock Plan Services, LLC
PARTICIPANT CONSENT
KKR & Co. Inc.

PARTICIPANT CONSENT

Pursuant to provisions of this grant agreement between me and KKR & Co. Inc. (the “Company”) and/or other parties thereto, and as a condition of receiving such grant agreement, I hereby authorize Fidelity Stock Plan Services, LLC and its affiliates (including, but not limited to Fidelity Brokerage Services LLC, National Financial Services LLC, and Fidelity Personal Trust Company, FSB) (“Fidelity”) (i) to act upon the directions of Company or its designee direction to restrict my ability to sell, transfer or to take other actions with respect to certain Company equity that I may hold, and (ii) to act the directions of the Company or its designee, pursuant to provisions of the Company’s plans and this grant agreement requiring my forfeiture of Company equity if I violate certain restrictive covenants, to transfer in kind Company equity held by Fidelity on my behalf to the Company or its designee.

Participant Name:
Participant Name
   
Participant Signature:
Electronic Signature
   
Date:
Acceptance Date





Exhibit 31.1
 
CO-CHIEF EXECUTIVE OFFICER CERTIFICATION
 
I, Henry R. Kravis, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2018 of KKR & Co. Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
 All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 2, 2018
 
 
 
 
 
 
/s/ Henry R. Kravis
 
 
Henry R. Kravis
 
 
Co-Chief Executive Officer





Exhibit 31.2
 
CO-CHIEF EXECUTIVE OFFICER CERTIFICATION
 
I, George R. Roberts, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2018 of KKR & Co. Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 2, 2018
 
 
 
 
 
 
/s/ George R. Roberts
 
 
George R. Roberts
 
 
Co-Chief Executive Officer





Exhibit 31.3
 
CHIEF FINANCIAL OFFICER CERTIFICATION
 
I, William J. Janetschek, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2018 of KKR & Co. Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 2, 2018
 
 
 
 
 
 
/s/ William J. Janetschek
 
 
William J. Janetschek
 
 
Chief Financial Officer





Exhibit 32.1
 
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
 
Pursuant to 18 U.S.C. §1350, 
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of KKR & Co. Inc. (the "Corporation") on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission (the "Report"), I, Henry R. Kravis, Co-Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
 
Date:
November 2, 2018
 
 
 
 
 
 
/s/ Henry R. Kravis
 
 
Henry R. Kravis
 
 
Co-Chief Executive Officer
 

*                                          The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.





Exhibit 32.2
 
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
 
Pursuant to 18 U.S.C. §1350,
 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of KKR & Co. Inc. (the "Corporation") on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission (the "Report"), I, George R. Roberts, Co-Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
 
Date:
November 2, 2018
 
 
 
 
 
 
/s/ George R. Roberts
 
 
George R. Roberts
 
 
Co-Chief Executive Officer
 

*                                          The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.





Exhibit 32.3
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
Pursuant to 18 U.S.C. §1350,
 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of KKR & Co. Inc. (the "Corporation") on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission (the "Report"), I, William J. Janetschek, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
 
Date:
November 2, 2018
 
 
 
 
 
 
/s/ William J. Janetschek
 
 
William J. Janetschek
 
 
Chief Financial Officer
 

*                                          The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.