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As filed with the Securities and Exchange Commission on July 3, 2007.

Registration No. 333-            



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


KKR & CO. L.P.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  6282
(Primary Standard Industrial
Classification Code Number)
  26-0426107
(I.R.S. Employer
Identification No.)

9 West 57th Street, Suite 4200
New York, NY 10019
Telephone: (212) 750-8300

(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)



William J. Janetschek
Chief Financial Officer
KKR & Co. L.P.
9 West 57th Street, Suite 4200
New York, NY 10019
Telephone: (212) 750-8300

(Name, address, including zip code, and telephone number,
including area code, of agent for service)


Copies to:
Joseph H. Kaufman, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017-3954
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
  Richard D. Truesdell, Jr., Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telephone: (212) 450-4000
Facsimile: (212) 450-4800

        Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement becomes effective.


        If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

        If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o


CALCULATION OF REGISTRATION FEE


Title Of Each Class
Of Securities To Be Registered

  Proposed Maximum Aggregate Offering
Price(1)(2)

  Amount of
Registration Fee


Common Units Representing Limited Partner Interests   $1,250,000,000   $38,375

(1)
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

(2)
Includes units subject to the underwriters' option to purchase additional common units.


        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 3, 2007

PRELIMINARY PROSPECTUS

         GRAPHIC


       Common Units
Representing Limited Partner Interests


        This is the initial public offering of our common units, which represent limited partner interests in our partnership. We are selling all of the common units in this offering. None of our existing owners is selling any common units or will otherwise receive any of the net proceeds from this offering.

        Prior to this offering, there has been no public market for our common units. We expect the public offering price will be between $          and $          per common unit. We intend to list our common units on the New York Stock Exchange under the symbol "KKR."

        We are managed by a general partner and do not have our own directors or officers. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights and will have no right to elect or remove our general partner or its directors. In addition, immediately following this offering, our principals will generally have sufficient voting power to determine the outcome of any matters that may be submitted for a vote of our unitholders.

        Investing in our common units involves a high degree of risk. See "Risk Factors" beginning on page 26 of this prospectus.



 
  Per Common Unit
  Total

Initial public offering price   $   $

Underwriting discount   $   $

Proceeds, before expenses, to us   $   $

        To the extent that the underwriters sell more than          common units, the underwriters have the option to purchase up to an additional          common units from us at the initial public offering price less the underwriting discount.

        Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the common units to purchasers on or about    , 2007.


Morgan Stanley       Citi

The date of this prospectus is    , 2007.


GRAPHIC



TABLE OF CONTENTS

 
  Page
Summary   1
Risk Factors   26
Use of Proceeds   53
Distribution Policy   54
Capitalization   56
Dilution   57
Organizational Structure   58
Unaudited Pro Forma Financial Information   64
Selected Historical Financial and Other Data   76
Management's Discussion and Analysis of Financial Condition and Results of Operations   77
Private Equity Valuations and Related Data   112
Industry   114
Business   121
Management   155
Security Ownership   160
Certain Relationships and Related Party Transactions   161
Conflicts of Interest and Fiduciary Responsibilities   166
Description of Our Common Units   172
Description of Our Limited Partnership Agreement   173
Common Units Eligible for Future Sale   183
Material U.S. Federal Tax Considerations   185
Underwriting   200
Legal Matters   204
Experts   204
Where You Can Find More Information   204

Index to Financial Statements

 

F-1
Appendix A: Form of Amended and Restated Limited Partnership Agreement   A-1

        You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. We and the underwriters are offering to sell, and seeking offers to buy, our common units only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common units.

        We have prepared this prospectus using a number of conventions, which you should consider when reading the information contained herein. Unless the context suggests otherwise, references in this prospectus to "KKR," "we," "us," "our" and "our partnership" refer:

prior to our reorganization into a holding company structure, to the KKR Group, which comprises certain consolidated and combined entities under the common control of our senior principals, and under the common ownership of our principals and certain other individuals who have been involved in our business, whom we refer to collectively as our "existing owners," and

after our reorganization into a holding company structure, to KKR & Co. L.P. and its consolidated subsidiaries, which will continue to be under the common control of our senior principals.

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        References in this prospectus to our (i) "principals" are to our senior investment and other professionals who hold interests in our Group Partnerships and (ii) "senior principals" are to those identified as senior principals in "Business—Employees." References in this prospectus to our "traditional private equity funds" are to our private equity funds other than KKR Private Equity Investors (our private equity-oriented permanent capital fund).

        In this prospectus, we also periodically refer to our "assets under management," which represent the assets as to which we are entitled to receive a fee or carried interest. We calculate the amount of assets under management as of any date as the sum of: (i) the fair value of the investments of our traditional private equity funds and our carry-paying co-investment vehicles plus the capital that we are entitled to call from investors in our traditional private equity funds with respect to their unfunded capital commitments; (ii) the net asset value, or "NAV," of KKR Private Equity Investors and the KKR Strategic Capital Funds (our three private side-by-side credit opportunity funds); (iii) the equity of KKR Financial (our New York Stock Exchange-listed debt vehicle); and (iv) the capital raised by structured finance vehicles that we manage. Unless otherwise indicated, our assets under management as of March 31, 2007 have been adjusted to include unfunded capital commitments that have been made to the 2006 Fund and our newly-formed Asian Fund and capital raised by our structured finance vehicles since that date. You should bear in mind that our calculation of assets under management may differ from the calculations of other asset managers and, as a result, our measurements of our assets under management may not be comparable to similar measures presented by other asset managers. Our definition of assets under management is not based on any definition of assets under management that is set forth in the agreements governing the investment funds that we manage. See "Private Equity Valuations and Related Data" for more information.

        Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of the option to purchase up to an additional          common units from us and that the common units to be sold in this offering will be sold at a price of $          per common unit, which is the midpoint of the price range indicated on the front cover of this prospectus.


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements, 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" or the negative version of these words or other comparable words. 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. We believe these factors include, but are not limited to, those described under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.


MARKET AND INDUSTRY DATA

        This prospectus includes market and industry data and forecasts that we have derived from independent reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable. Our internal data and estimates are based upon information obtained from investors in our funds, trade and business organizations and other contacts in the markets in which we operate and our understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.

ii



SUMMARY

        This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in our common units. You should read this entire prospectus carefully, including the section entitled "Risk Factors" and the historical financial statements and related notes included elsewhere herein, before you decide to invest in our common units.


Our Company

        Founded in 1976, we are a leading global alternative asset manager. Our 399 employees, including our 139 investment professionals, are led by our founders, Henry Kravis and George Roberts, who are pioneers of the leveraged buyout industry. Our history of landmark achievements in private equity includes the first leveraged buyout in excess of $1 billion, several of the largest leveraged buyouts announced worldwide to date, the first buyout of a public company by tender offer and the largest leveraged buyouts completed or announced in each of the United States, the Netherlands, Denmark, India, Australia, Singapore and France. We have continued our history of innovation by establishing new debt and public equity strategies that leverage the power of our brand and the intellectual capital in our private equity business.

        Today, through our offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong and Tokyo, we sponsor and manage funds that make investments worldwide in private equity and debt transactions on behalf of third-party investors and our firm. We also manage substantial investments in public equity. During our 31-year history, we have raised 16 funds and received approximately $59.7 billion of capital and capital commitments from investors. We have grown our assets under management significantly, from approximately $18.3 billion as of December 31, 2002 to approximately $53.4 billion as of March 31, 2007, representing a compounded annual growth rate of 28.7%. Of our total assets under management, approximately $6.8 billion is "permanent capital," which is not required to be returned to investors and is able to be re-deployed as investments are realized.

        As a global alternative asset manager, we earn ongoing management fees for providing management and other services to our funds as well as transaction, monitoring and other potential fees in connection with our private equity and other investments. We also earn investment income from investing our own capital alongside fund investors and from our carried interest in fund investments, which provides us with a disproportionate share of the funds' investment gains. We are also selectively pursuing opportunities to develop new investment structures and products that we believe will help us increase the amount of managed capital that we are able to commit to individual transactions, grow our assets under management and capture additional income streams.


Our Investment Approach

        We approach our business and our investments as industrialists. We seek to invest in high quality companies that have strong business franchises, attractive growth prospects, leading market positions and the ability to generate superior returns. When we make investments, we partner with highly motivated management teams to design and implement strategic and operational changes that create value in the businesses we acquire and we align our interests with other stakeholders by putting our own capital at risk. We believe that our leading position in the alternative asset management industry is due to the strategies we have created for sourcing investments and creating value for stakeholders.

Sourcing Advantage

        We source new investments through our internal deal generation strategies and business relationships with leaders in the business and financial communities. We believe that we have a number of advantages for sourcing investments that differentiate our firm. These advantages include:

    Industry Team Focus.    Our investment professionals are organized into global industry teams. Each team conducts its own primary research and is responsible for developing a list of industry themes and trends, identifying companies that will benefit from those themes and trends, determining

1


      which companies would make an attractive investment and building relationships with industry leaders and management teams. Through the work of our industry teams, we have developed a detailed understanding of the economic drivers, inherent risks and opportunities for value creation across the industries in which we invest.

    Direct Contacts with Business Leaders.    We have consistently focused on making investments in large companies. Over our 31-year history, we have focused on cultivating direct relationships with key decision-makers at major companies throughout the world, which often provides us with direct investment opportunities. We believe that we currently have direct relationships with the chief executive officers or members of the boards of directors of two-thirds of the companies in the S&P 500 and the S&P Global 100.

    Strong Relationships with Financial Leaders.    We actively cultivate our relationships with major investment banking firms and other financial intermediaries and are among those firms' most significant clients. We believe our repeated and consistent dealings with major financial services firms over a long period of time, and our completion of a significant number of large transactions, have led to our being one of the first parties considered for potential investments.

        By combining our industry team efforts with our established network of relationships, we believe we have a differentiated capability to source investments in large global companies.

Value Creation

        We have developed an institutionalized process for creating value in the companies in which we invest by focusing on the operational and strategic aspects of their businesses. We are a patient investor and we have consistently approached the management of our investments with the goal of creating value over the long-term rather than realizing short-term gains through rapid dispositions. Our value creation process begins before we commit to make an investment and continues until the investment is fully realized. Important components of this process include:

    Operationally Focused Investment Professionals.    Our investment professionals focus on the operations of our portfolio companies and the ways in which we can improve their businesses. Given our operational focus, our recruiting efforts have emphasized hiring executives with significant operating experience, including former chief executive officers, chief financial officers and managers of companies operating in a wide range of industry sectors.

    Capstone Consultants.    Our value-creation efforts are supported by Capstone Consulting, a team of approximately 25 operational consultants who work exclusively with our investment professionals and portfolio companies. Capstone works to address issues relating to top-line growth, cost optimization, efficient capital allocation and other challenges and opportunities that arise during the life of an investment.

    Senior Advisors.    To complement the expertise of our investment professionals and operational consultants, we have retained a team of 19 senior advisors who have held leading positions in major corporations and public agencies worldwide. Our senior advisors provide us with additional operational and strategic insights, serve on the boards of our portfolio companies, help us evaluate individual investment opportunities and assist our portfolio companies with operational matters.

    Disciplined Value Creation Process.    Before we invest in a company, our investment professionals identify the measures we will take to create new value for stakeholders. Because we believe that value creation must begin from the first day of an investment, our investment professionals and Capstone prepare "100-Day Plans" for investments that detail specific changes our portfolio company managers, investment professionals and operational consultants will implement during the first 100 days following our investment to drive value creation. We closely monitor our investments during and after the first 100 days with the goal of measuring progress, identifying additional opportunities for value creation and addressing any issues or challenges that may arise.

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Private Equity

        We are a world leader in private equity, having sponsored and managed 14 private equity funds that have received more than $56.9 billion of capital and capital commitments during our 31-year history. Our private equity funds focus on investing in large capitalization companies. We believe this focus allows us to invest in industry-leading franchises with global operations, attract world class management teams, deploy large amounts of capital in individual transactions and optimize amounts of income that we earn on a per transaction basis. Our approach leverages our capital base, infrastructure, skill set, global network and industry and operating expertise, which we believe sets us apart from others.

        As of March 31, 2007, our private equity funds had investments in 40 companies with more than $100 billion of annual revenues and more than 560,000 employees worldwide. Those portfolio companies were based in more than 10 countries and operated in 11 industry sectors. The following charts present information concerning the amount of capital invested by our private equity funds by geography and industry from January 1, 1996 through March 31, 2007.

Dollars Invested by Geography Since 1996   Dollars Invested by Industry Since 1996

GRAPHIC

 

GRAPHIC

        When we make private equity investments, we adhere to a disciplined investment approach that seeks to generate large multiples of invested capital and attractive gross internal rates of return, or IRRs, by focusing on fundamentals and implementing operational and strategic changes that allow us to create and realize long-term value in our portfolio companies. We place significant emphasis on selecting high-quality investments that may be made at attractive prices, working with management to design and implement changes that drive value creation, and making informed decisions when developing investment exit strategies.

        The following charts present information concerning the amount of capital invested and the amounts of realized and unrealized returns generated by our traditional private equity funds from our inception through March 31, 2007.

Amount Invested and Total Value   Realized and Unrealized Value
GRAPHIC   GRAPHIC

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        From our inception through March 31, 2007, our first ten traditional private equity funds (representing all of our private equity funds that have invested for at least 30 months) achieved a multiple of invested capital of 2.7x and a cumulative gross IRR of 26.3%, compared to the 13.6% gross IRR achieved by the S&P 500 Index over the same period. The table below presents information as of March 31, 2007 relating to the historical performance of each of our traditional private equity funds since our inception, which we believe illustrates the benefits of our approach to making private equity investments. This data has been adjusted to give effect to subsequent commitments to the 2006 Fund and the Asian Fund, but does not otherwise reflect acquisitions or disposals of investments, changes in investment values or distributions occurring after March 31, 2007. We encourage you to review the cautionary note below for a description of reasons why the future results of our private equity funds may differ from the historical results of our private equity funds. You should also see "Private Equity Valuations and Related Data" for a description of how the values in the table below were calculated.

 
  Amount
  Fair Value of Investments
   
   
   
 
Private Equity Fund

  Gross
IRR

   
  Multiple of
Invested
Capital

 
  Committed
  Invested
  Realized
  Unrealized
  Total
  Net IRR
 
 
  ($ in millions)

 
Historical Excluded Funds(1):                                            
1976 Fund   $ 31   $ 31   $ 537   $   $ 537   39.5 % 35.4 % 17.1 x
1980 Fund     357     357     1,828         1,828   29.0   25.8   5.1  
1982 Fund     328     328     1,290         1,290   48.1   39.2   3.9  
1984 Fund     1,000     1,000     5,963         5,963   34.6   28.9   6.0  
1986 Fund     672     672     9,081         9,081   34.4   28.9   13.5  
1987 Fund     6,130     6,130     14,746     252     14,997   12.2   9.0   2.5  
1993 Fund     1,946     1,946     4,124     33     4,157   23.6   16.8   2.1  
1996 Fund     6,012     6,012     10,183     2,039     12,222   18.5   13.8   2.0  

Included Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
European Fund (1999)(2)     3,085     3,085     3,942     3,694     7,636   30.9   23.3   2.5  
Millennium Fund (2002)     6,000     5,881     4,264     6,991     11,255   53.6   40.6   1.9  
European Fund II (2005)(3)     5,650     3,857         4,218     4,218   *   *   *  
2006 Fund     16,625     1,236         1,236     1,236   *   *   *  
Asian Fund (2007)     4,000                   *   *   *  
   
 
 
 
 
             
Total Funds(4)   $ 51,836   $ 30,535   $ 55,958   $ 18,463   $ 74,421   26.3 % 20.2 % 2.7 x
Total Funds in Accounting Predecessor(1)   $ 41,372   $ 20,071   $ 18,389   $ 18,178   $ 36,567   23.9 % 18.3 % 1.8 x
Total Included Funds   $ 35,360   $ 14,059   $ 8,206   $ 16,139   $ 24,345   36.5 % 27.5 % 1.7 x

(1)
We will not acquire interests in the 1996 Fund and prior funds in connection with the Reorganization Transactions and this offering, because the general partners of those funds are not expected to receive meaningful proceeds from further realizations. The predecessor combined financial statements included in this prospectus consolidate the 1996 Fund and subsequent traditional private equity funds. See "Organizational Structure."

(2)
The European Fund's capital commitments include euro-denominated commitments of €196.5 million. We have converted these amounts into U.S. dollars based on the exchange rate prevailing on the dates on which capital was called.

(3)
The European Fund II's capital commitments include euro-denominated commitments of €2,597,160,000. We have converted these amounts into U.S. dollars based on the exchange rate prevailing on (i) the dates on which capital was called in the case of funded commitments and (ii) March 31, 2007 in the case of unfunded commitments.

(4)
The gross IRRs, net IRRs, and multiples of invested capital are calculated based on our first ten traditional private equity funds, which represent all of our private equity funds that have invested for at least 30 months.

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        Additionally, because our private equity approach has produced significant distributions for our fund investors, we believe that it has been an important contributor to the extended relationships that we have developed with our investor base. The following table presents information concerning the total distributions made by our traditional private equity funds during the periods indicated.

 
  Year Ended December 31,
   
   
Year

  2007
(through
March 31)

   
  2002
  2003
  2004
  2005
  2006
  Total
 
  ($ in millions)

Distributions to Investors   $ 897   $ 3,016   $ 7,035   $ 3,569   $ 5,251   $ 780   $ 20,548

        We have also announced an additional 11 pending transactions in the United States, Europe and Asia that are expected to have an aggregate transaction value of $140 billion. We expect that these investments will close during the second half of 2007 and we anticipate that our total equity investment will be approximately $11.7 billion. Whether and when these transactions will be consummated depends on a number of factors, some or all of which may be outside of our control.

        KKR Private Equity Investors, which is not reflected in the foregoing tables, is an entity listed on Euronext Amsterdam focused primarily on making private equity investments through and alongside our private equity funds but with the flexibility to make other types of opportunistic investments, including credit and public equity investments. Unlike our other private equity funds, the fund has a perpetual investment period and is considered by us to be a permanent capital vehicle, in that fund investors generally are not entitled to have their capital returned. As of March 31, 2007, KKR Private Equity Investors had a NAV of $5.2 billion, which includes amounts invested in our traditional private equity funds.


Credit

        We believe the intellectual capital of our people, our integrated global investment platform and our ability to effectively adapt our investment strategies to market conditions allow us to capitalize on investment opportunities at every level of a company's capital structure. Commencing in 2004, we began to actively pursue debt investments as a separate asset class and we now sponsor and manage a group of private and publicly traded investment funds that invest primarily in corporate debt investments and manage structured finance vehicles. These funds, which we refer to as credit strategy funds, currently consist of KKR Financial, a New York Stock Exchange listed finance company, and the KKR Strategic Capital Funds, three side-by-side private credit strategy funds.

        As of March 31, 2007, our credit strategy funds had approximately $8.2 billion of corporate debt investments, $11.9 billion of residential mortgage investments, and $297.3 million of equity investments. We earn a management fee for managing our credit strategy funds based on the amount of capital under management in each fund. As of March 31, 2007, our credit strategy funds had $2.8 billion of capital, of which $1.6 billion related to KKR Financial and consisted of permanent capital, and our credit strategy funds currently manage $6.5 billion in structured finance vehicles. We have a right to earn management fees for managing our structured finance vehicles based on the amount of investments under management within each vehicle.

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        The table below presents information relating to the historical performance of our credit strategy funds as of March 31, 2007. We encourage you to review the cautionary note below for a description of reasons why the future results of our credit strategy funds may differ from the historical results of our credit strategy funds.

 
   
   
   
   
   
  Annualized
Benchmark Return

 
 
  Inception
  Capital
Under
Management

  Annualized
Gross IRR

  Annualized
Net
IRR(1)

  Total
Investments(2)

  Lehman
Aggregate
Bond Index

  Merrill Lynch
High
Yield Index

 
 
  ($ in millions)

 
KKR Financial(3)   2004   $ 1,610.4   19.5 % 17.1 % $ 5,692.7   3.7 % 9.1 %
KKR Strategic Capital Funds   2006     1,141.0   41.3   34.8     2,809.5   5.6   14.7  
       
         
         
Total       $ 2,751.4           $ 8,502.2          
       
         
         

(1)
The annualized Net IRR represents the return on invested equity after giving effect to payments of management fees, incentive fees and carried interest, as applicable, assumes reinvestment of all distributions and excludes non-investment expenses. Returns for the KKR Strategic Capital Funds, which were organized in October 2006, have been annualized based on actual returns from inception through March 31, 2007 of 15.8%, which compares to actual returns for the Lehman Aggregate Bond Index and the Merrill Lynch High Yield Index of 2.8% and 7.0%, respectively, for the same period.

(2)
Total investments include investments held directly and synthetically through total rate of return swaps and credit default swaps and also includes both funds' pro rata interest in the holdings of an unconsolidated affiliate.

(3)
Excludes investments by KKR Financial in residential mortgage-backed securities, which totaled $11.9 billion as of March 31, 2007. In connection with its restructuring, KKR Financial has announced that it is evaluating various alternatives to reducing these types of investments.


New Business Initiatives

        Our principal growth strategy throughout our firm's 31-year history has been to expand our existing private equity businesses and to enter attractive new businesses. While most of our recent growth has come from our private equity and debt activities, we believe significant growth opportunities exist for developing new business areas.

Public Equity

        Although our funds have historically focused on private equity and debt investments, we have managed investments in public equity throughout our history. Initially, our public equity investments consisted of minority and structured investments in public companies that were made by our private equity funds. More recently, our private equity-oriented permanent capital fund and our two credit strategy funds have provided us with more investment flexibility than traditional private equity funds and an additional capital base for making equity investments in public companies. Using this capital base, we have been able to build a portfolio of public equity and equity-linked securities that had a market value of $1.3 billion as of March 31, 2007.

        Our public equity strategies generally seek to leverage the intellectual capital developed in the course of our traditional private equity business, which may otherwise not be utilized if a private equity transaction is not consummated, to make public equity investments. We generally invest in companies whose market prices we believe significantly understate the quality of their assets. We believe that significant opportunities exist for us to expand our public equity activities and take advantage of the increasing number of suitable public equity investments that we identify. To achieve these results, we recently hired additional investment personnel who have specialized experience in the public equity markets.

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Capital Markets Activities

        Capital markets activities represent an opportunity to efficiently increase our available investment capital, capture certain financing fees otherwise paid to third parties and earn incremental margins on committed capital. We are currently building this business in the United States, Europe and Asia with the objective of increasing the amount of third-party capital that we are able to commit to individual transactions, thereby growing our third-party assets under management and capturing additional income streams. We have hired experienced professionals with long-standing investor relationships to help us build this business. We expect that our capital markets activities initially will focus on syndicating to a broader base of investors a portion of the equity that we commit to provide in our larger private equity transactions, which we believe will help us reduce the need to partner with large consortiums of private equity firms on large leveraged buyouts, retain greater operational control over our portfolio companies and capture a greater portion of the economics that are generated by our private equity investments. Over time, we may expand our capital markets activities in a manner that similarly complements our other business activities.


Our Values

        When our founders started KKR in 1976, leveraged buyouts were a novel form of corporate finance. With no financial services firm to model ourselves on and with little interest in copying an existing formula, we sought to build a firm based on principles and values that would provide a proper institutional foundation for years to come.

        We believe that our success to date has been largely attributable to our culture and values. As we continue to grow, our future performance will depend on both our ability to protect and remain true to our culture and our willingness to hire new people with different work experiences. We believe that adhering to the following values is critical to extending our record of success:

Honesty.    We believe that integrity is the value upon which all other values are built. We are honest with one another and everyone with whom we work outside of our firm. We invest in companies and work with people with whom we are proud to associate ourselves.

Respect.    We believe a collegial culture fostering a positive working environment benefits our firm as a whole. A guiding principle of our firm is to treat others as we would like to be treated. We believe in the importance of being fair, courteous and respectful to all.

Teamwork.    We operate as a single worldwide team, working together to create the best outcome for our firm, our investors, the managers with whom we partner and other stakeholders. We seek solutions that benefit the businesses in which we invest, the people they employ and the constituencies they serve. We maintain a "flat" organizational structure in which our people help one another irrespective of where an issue or opportunity resides within our firm or our offices.

Excellence and Innovation.    We strive to be the best at what we do. We believe that creativity is a competitive advantage and endeavor to put innovative ideas to work to solve problems. We are not afraid to assume prudent risks.

Accountability.    We believe in the importance of firm-wide accountability. If an investment does not perform, we do not point fingers or assign blame. Rather, we collectively take responsibility, learn from our mistakes and improve our performance as individuals and as a team.

Fortitude.    We believe in having the courage to say "no" to a deal—even at a late stage—if we become uncomfortable with any aspect of the transaction.

Sharing.    We share financial results throughout our firm and we share the credit for our successes. No one in our firm claims sole possession of any idea or successful transaction.

        These values are easy to write down, but hard to live by. They are, however, a healthy antidote to overconfidence, internal politics and other behaviors that could otherwise jeopardize our long-term success. We do not intend to change our values or the way we conduct our business as a result of this

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offering. Indeed, we would not be proceeding with this offering if we felt that it would move us away from our principles. We believe that if we continue live by these values we will be able to maintain our industry leadership far into the future.


Our Strengths

        We believe that we possess a number of strengths that differentiate us from other alternative asset managers and provide us with competitive advantages for raising capital, securing investment opportunities, obtaining financing for transactions, consummating investments, creating value in our portfolio companies and generating attractive investment returns. These strengths include the following:

One Firm with a Global Reach and Best-in-Class Processes

        We are truly a global firm. With offices in seven major financial centers located on three continents, we have created an integrated global platform for sourcing and making investments in multiple asset classes. Our global and diversified operations are supported by our sizeable capital base and our extensive company, industry, asset-specific and local market knowledge, which allow us to deploy capital across a number of geographical markets in a broad range of companies, industry sectors and asset classes. As of March 31, 2007, 34% of our investment professionals were based outside the United States and 63% of the unrealized value of our private equity portfolio consisted of investments in companies outside the United States. Although our operations span multiple continents and business lines, we are still managed as one firm with a common culture and are highly focused on sharing knowledge, experience, resources and best practices throughout our offices and across our various investment classes. Our investment processes are overseen by three committees that operate globally, which consist of our equity investment committee, which reviews all investments made by our private equity funds, our debt investment committee, which reviews all investments made by our credit strategy funds, and our portfolio management committee, which monitors the performance of our private equity investments. Our founders, Henry Kravis and George Roberts, are active members of each of these committees. We believe that operating as a centrally managed firm that is both global and diversified enhances the growth and stability of our business and helps us make informed decisions across asset classes and geographies.

Distinguished Track Record Across Economic Cycles

        During our 31-year history, we have successfully invested under all types of economic and financial conditions, developing a track record that we believe distinguishes our firm. From our inception through March 31, 2007, our ten private equity funds that had invested for at least 30 months had achieved a cumulative gross IRR of 26.3%. During 2007, we were named "Best Private Equity Firm" by Global Finance and "European Large Buyout Firm of the Year" by Financial News and the KKR Strategic Capital Funds were named "Hedge Fund Launch of the Year" by Alternative Investment News. Our other accomplishments include completing or announcing more than 60 leveraged buyouts valued in excess of $1 billion, including the first leveraged buyout in excess of $1 billion and sponsoring or co-sponsoring many of the largest leveraged buyouts completed anywhere to date.

Alignment of Interests

        One of our fundamental philosophies has been to align our interests and the interests of our people with those of our fund investors. Since our inception, our investment professionals, senior advisors and other executives have invested or committed to invest approximately $1.5 billion of their personal capital in or alongside our funds. In structuring this offering, we have sought to achieve the same alignment of interests between our unitholders and our people through their significant and long-term ownership of our equity. Our principals will not receive any of the proceeds from this offering. Our principals will collectively own more than          % of the equity in our business immediately following this offering and they will benefit from the financial success of our business in the form of distributions and payments received from KKR Holdings, the entity through which they will hold their equity, and the potential

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appreciation in the value of the equity that KKR Holdings owns. Our other employees are expected to receive equity grants at the time of this offering, which we believe will similarly align their interests. To promote long-term alignment of interests, the equity directly or indirectly held by our principals and employees will be subject to significant forfeiture and transfer restrictions that require such persons to remain actively employed by us in order to realize the full value of their equity interests.

Experienced Investment Professionals and Continuity of Senior Leadership

        We have built our firm with the intellectual capital of our people, and we are guided daily by the diversity, depth and breadth of their collective knowledge and experience. We currently employ 139 investment professionals who are led by our founders, Henry Kravis and George Roberts and supported by 19 senior advisors and 25 Capstone consultants. Our investment professionals have demonstrated an ability to address the challenges of cyclical markets by effectively adapting our investment strategies, financial structures and operational resources to existing market conditions. Our investment professionals come from a variety of financial and operational backgrounds, which when combined with the extensive expertise of our senior principals provide us with a significant competitive advantage. We have also benefited from a high degree of continuity in our senior leadership.

Distinct Ability to Source Proprietary Investments

        We believe that we are able to source new investment opportunities as a result of our internal deal generation strategies and our global network of business relationships with leading executives from major companies, commercial and investment banks, financial intermediaries, other investment and advisory institutions and former political leaders. Our investment professionals are organized into global industry teams and have developed a thorough understanding of their industries by meeting with management teams, attending product seminars and industry conferences and conducting their own primary research. Our industry teams work across our offices to develop a list of industry themes and trends, to identify companies that will benefit from those trends and to determine which of those companies would make an attractive investment. When team members identify an investment opportunity, they leverage our network of global relationships with the goal of winning exclusive or limited access to the investment. We believe that our industry focus, when combined with our global network and the industry-specific knowledge that we have developed over time, provides us with an important source of proprietary investments.

Strong Relationships With Financial Leaders

        We actively cultivate our relationships with major investment banking firms and other financial intermediaries and are among those firms' most significant clients. Our investment professionals meet regularly with major investment banking firms concerning potential investment opportunities, and we often work with the same group of financial institutions when seeking financing arrangements for our transactions. We believe our repeated and consistent dealings with the major financial services firms over a long period of time, and our completion of a significant number of larger transactions, have led to our being one of the first parties considered for potential investments. We also believe that our relationships with financial institutions and the credibility that we have established through our past successes help us obtain financing for our transactions at attractive prices and with favorable terms.

Focus on Value Creation

        We have developed an institutionalized process for creating value in our investments. As part of our effort, we created Capstone Consulting, a team of operational consultants that works exclusively with our investment professionals and portfolio company management teams. In addition, we have hired senior advisors to assist us, including the former chairmen or chief executive officers of Proctor & Gamble, Wells Fargo, HSBC, Eastman Kodak and Accenture. Our investment professionals, senior advisors and consultants work with our portfolio companies to address issues relating to top-line growth, cost

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optimization and efficient capital allocation and assist management in designing and implementing strategic and operational changes that drive value creation. In most cases, the work initially involves developing operating and financial metrics for tracking progress and identifying problems during the early stages of an investment. Ultimately, the focus shifts to capitalizing on business opportunities to drive value creation over the long term. The objective of these measures is to drive growth in revenue, cash flows and operating margins, which allows us to reduce the leverage in our portfolio companies, and create value for our investors.

Long-Standing Investor Relationships

        Over our 31-year history, we have established strong relationships with investors that have allowed us to raise significant amounts of capital for investment in a broad range of asset classes. Our fund investors consist of a diversified group of some of the largest public and private pension plans, global financial institutions, university endowments, funds of funds and high net worth individuals, many of whom have invested with us for decades across multiple funds that we have sponsored. For example, our 10 largest investors have invested with us for an average of 16 years. More recently, through the listing of two of our funds, we have expanded our investor base to include public market investors, such as mutual funds and hedge funds, providing us with an additional source of capital. We believe that the strength, breadth, duration and diversity of our investor relationships provide us with a significant advantage for raising capital from existing and new sources and will help us continue to grow our assets under management.

Long-Term Capital Base with a Significant Amount of Permanent Capital

        As of March 31, 2007, we had $53.4 billion of assets under management, making us one of the largest independent alternative asset managers in the world. These assets were invested or available for investment in private equity, debt and public equity transactions. We have created two listed permanent capital funds that are able to grow organically through the continuous investment and reinvestment of capital, which we believe provides us with stability and with a valuable potential source of long-term income.

Proven Ability to Innovate

        We pioneered the development of the leveraged buyout and have worked throughout our history on creating innovative financing structures that allow us to compete aggressively for transactions while maintaining ongoing financial flexibility. Examples of recent innovative financing structures include using a complex power hedging program in connection with our acquisition of Texas Genco and structuring our acquisition of Capmark Financial Group in a manner that allowed the company to achieve an investment grade credit rating. More recently, our ability to innovate has allowed us to grow our permanent capital base and diversify our operations through the establishment of two permanent capital vehicles, KKR Private Equity Investors and KKR Financial, that have the flexibility to invest across asset classes.


Our Growth Strategy

        We believe the "KKR" name is associated with the successful execution of many of the largest and most complex private equity transactions worldwide; a focus on operational value creation; a strong investor base; a global network of strong business relationships; a reputation for integrity and fair dealing; and a distinguished track record of generating attractive investment returns. We intend to capitalize on the name recognition that we have developed and leverage the strength of our brand as we seek to grow our business.

Deliver Attractive Returns Through Strong Investment Performance

        We intend to adhere to the disciplined investment approach that we have developed over our 31-year history, focusing in particular on driving value creation from the time an investment is made. Our investment approach will continue to emphasize company, industry and economic fundamentals and the

10



operational and strategic aspects of the companies in which we invest, and we will continue to subject our investments to the same stringent due diligence, monitoring and oversight practices that we have developed over time, drawing in each case on the company, industry, asset-specific and local market knowledge of our people. We believe that by maintaining investment discipline and taking a "hands-on" approach to our investments, we will be best positioned to continue to generate attractive returns for our funds and create long-term value for our unitholders.

Grow Globally Across Existing Asset Classes

        We intend to pursue opportunities within North America to increase the amount of managed capital that we are able to deploy in private equity and debt investments, while continuing to grow our public equity business. Outside of North America, we intend to focus on increasing the amount of private equity investments that we make in Europe and Asia, while building out our debt and public equity operations in those regions. Since October 2005, we have raised five new funds that received approximately $32.4 billion of capital and capital commitments from investors, including approximately $5.1 billion of permanent capital and a new $4.0 billion private equity fund that is focused on investment opportunities in Asia. These funds provide us with a flexible capital base that we may use to fund investments in a broad range of asset classes throughout the world.

Selectively Pursue Opportunities to Expand Our Investment Structures and Products

        We believe that opportunities exist to develop and sponsor new investment vehicles and structures, including co-investment vehicles, and to raise new types of funds, such as long-oriented public equity funds, structured product funds and industry- or geography-specific funds, that allow us to deploy a greater amount of managed capital in our investments and thereby capture a greater share of the economics generated by these investments. To support these initiatives, we are currently developing a capital markets business in the United States, Europe and Asia, which we believe will provide us with new alternatives and capabilities for distributing our investment products to investors worldwide and to further broaden our investor base. We may also consider selectively partnering or entering into joint venture arrangements with one or more financial intermediaries in order to provide us with access to additional classes of investors.

Maintain Our Long-Term Focus

        We have consistently approached the management of our business and our investments with the goal of creating and realizing value over the long-term. We intend to maintain this long-term focus after we become a public company even though this may lead to increased volatility in our results from period to period. We do not intend to permit the short-term perspectives of some public market investors to influence our investment, operational or strategic decisions, our duties or commitments to our fund investors or our focus on creating long-term value for our unitholders.

Why We Are Going Public

        None of our existing owners is selling any common units in this offering or will otherwise receive any of the net proceeds that we raise. Our decision to go public is based on our conclusion that the offering will benefit our firm and stakeholders over the long term by enabling us to grow in a manner that complements our businesses. In particular, we are going public for the following reasons:

We Want to Leverage Our Industry and Company Research Efforts by Building New Businesses.    We believe that significant opportunities exist for us to build new businesses by leveraging the intellectual capital of our firm and increasing the utilization of our people. While our private equity teams conduct in-depth research and have developed specific views on trends and participants in their industries, a large number of our private equity efforts do not result in actual private equity transactions. Historically, when we were unable to complete a private equity transaction, much of the work that we had completed remained unutilized. With our integrated efforts in debt and public market investing, we have in recent years been able to leverage the work and contacts of our private equity teams and deploy capital behind our ideas.

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    We believe that becoming a public company will enable us to invest more heavily behind these activities and the ideas that we develop in the normal course of our business.

We Want to Reduce Our Reliance on Third Party Sources of Capital.    Since our inception, we have completed or announced more than $410 billion in private equity transactions, while investing or agreeing to invest approximately $42 billion of our own funds' equity in those transactions. The balance of the financing consisted of debt and equity that was syndicated to others, including other private equity firms. We recently launched a new capital markets initiative to capture a greater share of the economics in the transactions we originate and increase the operational control that we are able to exercise over our private equity investments. We expect to expand these capital markets activities utilizing a portion of the proceeds from this offering.

Going Public Will Provide Us with a Currency for Potential Future Acquisitions.    We believe that our strong brand name in the financial services industry will support growth through acquisitions or combinations with similarly strong franchises that will complement our existing activities. By adding our products and brand to the products of acquired companies, we believe we will be well positioned to create significant value for our stakeholders. While we do not have any current acquisition plans, becoming a public company will provide us with a currency that we may use to pursue those alternatives when attractive opportunities arise.

        We place a strong emphasis on our culture and our values, and we intend to continue to operate our firm in the same manner we have throughout our 31-year history. In structuring this offering, we have sought to preserve and enhance our culture and values by continuing the approach we have followed over time for compensating and managing our people. Our founders and other principals do not want our people to be advantaged or disadvantaged as a result of their title or tenure at our firm at the time we complete this offering.


Investment Risks

        An investment in our common units involves substantial risks and uncertainties. Some of the more significant challenges and risks relating to an investment in our partnership include those associated with our susceptibility to economic and financial conditions; our dependence on our principals, including our founders and other key personnel; the volatility of our net income and cash flow; our ability to attract, retain and motivate high quality employees who will bring value to our operations; and our ability to develop and sponsor new investment vehicles and structures, including co-investment vehicles, and to raise new types of funds. In addition, members of the U.S. Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Separately, members of the U.S. Congress have introduced legislation that would, if enacted, treat income received for performing investment management services as ordinary income received for the performance of services, which would also preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes. If any of these pieces of legislation or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability, which could result in a reduction in the value of our common units. Please see "Risk Factors" for a discussion of additional factors you should consider before making an investment in our common units.


Cautionary Note Regarding Historical Fund Performance

        The historical results for our private equity and credit strategy funds included above may not be indicative of the future results that you should expect from us. In particular, our funds' future results may differ significantly from their historical results for the following reasons:

    the rates of returns of our funds reflect unrealized gains as of the applicable valuation date that may never be realized, which may adversely affect the ultimate value realized from those funds' investments;

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    you will not benefit from any value that was created in our funds prior to your investment in our common units to the extent such value has been realized;

    the historical returns of our funds and their future performance has been and will be affected by macroeconomic factors, including factors that may not have been prevalent in the periods relevant to the return data above;

    in the past few years, the rates of returns of some of our funds have been positively influenced by a number of investments that experienced a substantial decrease in the average holding period of such investments and rapid and substantial increases in value following the dates on which those investments were made, trends and rates of return that are not expected to continue;

    our funds' returns have benefited from investment opportunities and general market conditions that may not repeat themselves, including favorable borrowing conditions in the debt markets, and there can be no assurance that our current or future funds will be able to avail themselves of comparable investment opportunities or market conditions or that such market conditions will continue; and

    we may create new funds in the future that reflect a different asset mix in terms of allocations among funds, investment strategies, geographic and industry exposure and vintage year.


Our Common Units Are Not Intended for Investors with a Short-Term Focus

        We have substantially grown our business, particularly during the past several years, due largely to the successful investment performance of our funds. While we believe that the long-term growth trends in our businesses are favorable, our financial results are subject to significant volatility and we are unable to predict our financial performance from quarter to quarter or year to year. Our asset management activities have benefited from high levels of investments in alternative asset classes in recent years. These activity levels may continue, but they could also decline at any time.

        When managing our business, we focus closely on actual and expected changes in economic and financial conditions and we seek to adjust our activities in response to those developments. In the past, changing economic and financial conditions have led to variations in the level of our investment activities during any particular time period. We expect such variations to occur in future periods, which may lead to significant volatility in our net income and cash flow from period to period. However, we believe that by continuing to adhere to the disciplined investment approach that we have developed over our 31-year history rather than focusing on short-term financial results, we will be best positioned to continue to grow and prosper over the long term. We also believe that continuing to follow our long-term investment philosophy will allow us to continue to build the value of each of our existing portfolio companies, whether or not such growth produces distributable cash flow in a particular period. Because of the nature of our businesses and our long-term focus, our common units should be purchased only by investors who expect to remain unitholders for an extended period of time.

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Summary Organizational Structure

        We are a Delaware limited partnership. As is commonly the case with limited partnerships, our partnership agreement provides for the management of our business and affairs by a general partner rather than a board of directors. Our general partner, which we refer to as our Managing Partner, has a board of directors that is co-chaired by Henry Kravis and George Roberts, founders of our firm, and officers that are appointed by its board. Messrs. Kravis and Roberts will serve as Co-Chief Executive Officers of our Managing Partner. Upon completion of this offering, the board will consist of a majority of independent directors and will have an audit committee and a conflicts committee each composed entirely of independent directors. Our Managing Partner will not have an economic interest in our partnership except for one common unit. The following diagram illustrates, in summary format, the ownership and organizational structure that we will have upon the completion of this offering. For a detailed diagram of the ownership and organizational structure that we will have upon the completion of this offering, see "Organizational Structure."

GRAPHIC

        Prior to the completion of this offering, we will complete a series of transactions, which we refer to as the Reorganization Transactions, pursuant to which our business will be reorganized into a holding company structure. After the completion of the Reorganization Transactions, our business will be conducted through two limited partnerships, which we refer to as the "Group Partnerships," as described below. We will directly or indirectly serve as general partner of the Group Partnerships, which will provide us with control over their business and affairs, and we will hold a portion of the partner interests in the Group Partnerships, which will entitle us to a pro rata share of their assets, liabilities, profits, losses and distributions. As a result, we will become the parent company for the Group Partnerships and the businesses that they conduct.

        Each Group Partnership will have an identical number of partner interests and, when held together, one partner interest in each of the Group Partnerships will represent a "Group Partnership unit." We will

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indirectly hold a number of Group Partnership units that is equal to the number of our outstanding common units, and the balance of the outstanding Group Partnership units initially will be owned by KKR Holdings L.P., or KKR Holdings, which is owned by our founders, principals and certain of our former personnel and controlled by our founders. Assuming that the underwriters do not exercise their option to purchase additional common units from us, we will indirectly own          % of the outstanding Group Partnership units upon the completion of this offering, and KKR Holdings will own the remaining          % of the outstanding Group Partnership units. See "—About KKR Holdings."

        Following the Reorganization Transactions, the Group Partnerships will own the following components of our historical businesses:

controlling and economic interests in the companies that provide management and other services to our funds, which we refer to as our "management companies";

controlling and economic interests in the general partners of our private equity funds, other than the 1996 Fund and our earlier funds, whose general partners are not expected to receive meaningful proceeds from further realizations; and

an economic (but not controlling) interest in the general partner of the KKR Private Equity Investors master fund.

        In addition to the "principals' interests" that will result from KKR Holdings' ownership of Group Partnership units, certain minority investors who have been or are involved in our business also will retain economic interests in some or all of the above entities following the completion of the Reorganization Transactions. Those retained interests, which will be accounted for as "non-controlling interests in consolidated entities," will consist of:

economic interests in the general partners of our consolidated private equity funds that will entitle minority investors to          % of the capital invested by or on behalf of those general partners before the completion of the offering and any profit thereon;

interests in our management companies for our private equity funds and the general partners of our consolidated funds that will entitle a minority investor to           % of the net income earned by the management companies and          % of the carried interest received by those general partners with respect to the funds' investments for a specified period of time; and

a 35% interest in the management company for our credit strategy funds that will allocate to other members of that management company their share of the management company's net income.


About KKR Holdings

        Our principals and certain former personnel will hold equity interests in our business through KKR Holdings, which will hold the Group Partnership units not held by us. As a result, those individuals will receive financial benefits from our business in the form of distributions and payments received from KKR Holdings and the appreciation in the value of the Group Partnership units that KKR Holdings owns. The Group Partnership units held by KKR Holdings will be subject to applicable transfer restrictions, and will not be exchangeable for our common units before                        .

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The Offering

Common units offered by us             common units.

Common units to be outstanding after
    the offering

 

          common units (or          common units if all Group Partnership units, other than those held by us, are exchanged for newly-issued common units on a one-for-one basis).

Use of proceeds

 

We estimate that we will receive approximately $          of net proceeds from this offering after deducting estimated underwriting discounts and offering expenses, or $          if the underwriters exercise in full their option to purchase an additional           common units from us. We intend to contribute the net proceeds we receive from the offering to the Group Partnerships in exchange for newly issued units in the Group Partnerships. The Group Partnerships will use the proceeds that they receive from us to grow our existing business, to expand into new related businesses, to make additional capital commitments to our funds and portfolio companies and for other general corporate purposes. None of our principals are selling any common units or will otherwise receive any of the net proceeds from this offering.

Voting rights; special voting units

 

Our Managing Partner, which serves as our sole general partner, will manage all of our business and affairs. You will not hold securities of our Managing Partner. Unlike the holders of common stock in a corporation, you will have only limited voting rights relating to certain matters affecting your investment and you will not have the right to elect or remove our Managing Partner or its directors, who will be appointed by certain of our senior principals.

 

 

Immediately following this offering, KKR Holdings, which is owned by our principals and certain of our former personnel and controlled by our founders, will beneficially own    % of the equity in our business. KKR Holdings will also hold an equivalent amount of special voting units in our partnership, which will entitle it to cast an equivalent number of votes on those few matters that may be submitted to a vote of our unitholders. Due to the foregoing, our founders generally will have sufficient voting power to determine the outcome of any matter that may be submitted to a unitholder vote. See "Description of Our Partnership Agreement—Meetings; Voting."

Distribution policy

 

We intend to make quarterly cash distributions to our unitholders in amounts that in the aggregate are expected to constitute substantially all of our adjusted cash flow from operations each year in excess of amounts determined by our Managing Partner to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law, any
         

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of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the ensuing four quarters. We expect that our first quarterly distribution will be paid in            in respect of the period from the completion of this offering through                        . Because we will not know what our available adjusted cash flow from operations will be for any year until the end of such year, we expect that our first three quarterly distributions in respect of any given year will generally be smaller than the final quarterly distribution in respect of such year.

 

 

Our distribution policy reflects our belief that distributing substantially all of our adjusted cash flow from operations will provide transparency for our unitholders and impose on us an investment discipline with respect to the businesses and strategies that we pursue. The actual amount and timing of distributions on our common units will be subject to the discretion of our Managing Partner's board of directors, and we cannot assure you that we will in fact make distributions as intended, or at all. See "Distribution Policy."

 

 

We are a holding company and will have no material assets other than our ownership of Group Partnership units held directly and indirectly through our direct subsidiary, KKR Management Holdings Corp., which we refer to as our intermediate holding company. We intend to cause the Group Partnerships to make distributions on the Group Partnership units in order to fund any distributions that we may declare on our common units. If the Group Partnerships make such distributions, holders of Group Partnership units generally will be entitled to receive equivalent distributions pro rata based on their partner interests in the Group Partnerships, except as described under "—Priority distributions for the benefit of unitholders prior to          ."

 

 

If distributions from the Group Partnerships would otherwise be insufficient to cover the tax liabilities of a holder of a Group Partnership unit, the partnership agreement of each Group Partnership will provide for tax distributions to the holders of Group Partnership Units. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the relevant partnership allocable to a holder of a Group Partnership unit multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). A portion of any such tax distributions received by us, net of amounts used by our subsidiaries to pay their tax liability, will be distributed to our unitholders. Such amounts are generally expected to be sufficient to permit our U.S. unitholders to fund their estimated U.S. tax obligations (including any federal, state and local income taxes) with respect
         

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to their distributive shares of net income or gain, after taking into account any withholding tax imposed on us. We cannot assure you that, for any particular unitholder, such distributions will be sufficient to pay the unitholder's actual U.S. or non-U.S. tax liability.

Priority distributions for the benefit of
    unitholders prior to        

 

The partnership agreements of the Group Partnerships will provide that until    , the distributions of the Group Partnerships each year will be as follows:

 

 


 

first, to our partnership and our intermediate holding company until sufficient amounts have been so distributed to permit us to make aggregate distributions to our unitholders of $          per common unit on an annualized basis for such year;

 

 


 

second, to the other holders of Group Partnership units until an equivalent amount on a per unit basis has been distributed to such other holders for such year; and

 

 


 

thereafter, pro rata to all holders of Group Partnership units in accordance with their respective percentage interests.

 

 

Accordingly, until    , our principals will not receive distributions, other than tax distributions, in respect of Group Partnership units held by KKR Holdings with respect to a given year unless and until our unitholders receive aggregate distributions of $          per common unit on an annualized basis for such year. We do not intend to maintain this priority distribution after          . After          , all the income of the Group Partnerships will be distributed pro rata to holders of Group Partnership units in accordance with their respective partner interests.

Distributions prior to this offering

 

Prior to this offering, we intend to make one or more cash and in-kind distributions to certain of our existing owners representing substantially all of the cash-on-hand and certain personal property of the management company for our private equity funds. If the offering had occurred on March 31, 2007, we estimate that the aggregate amount of such distributions would have been $       million. However, the actual amount of such distributions will depend on the amount of the management company's cash on hand at the time of the offering.

 

 

 

 

 

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Exchange rights relating to Group
    Partnership units

 

Prior to this offering, we will enter into an exchange agreement with KKR Holdings in connection with the Reorganization Transactions pursuant to which KKR Holdings or transferees of its Group Partnership units may up to four times each year (subject to the terms of the exchange agreement) exchange Group Partnership units held by them (together with corresponding special voting units) for our common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. The Group Partnership units are also subject to transfer restrictions, and will not be exchangeable before                . We have not yet determined how any such future exchange will be accounted for in our consolidated financial statements.

Tax receivable agreement

 

The acquisition by our intermediate holding company of Group Partnership units from KKR Holdings or transferees of its Group Partnership units from time to time pursuant to the exchange agreement is expected to result in an increase in our intermediate holding company's share of the tax basis of the tangible and intangible assets of KKR Management Holdings L.P. that would not otherwise have been available. This increase in tax basis may increase (for tax purposes) depreciation and amortization and therefore reduce the amount of income tax that our intermediate holding company would otherwise be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. We will enter into a tax receivable agreement with KKR Holdings requiring our intermediate holding company to pay to KKR Holdings or transferees of its Group Partnership units 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the intermediate holding company actually realizes (or is deemed to realize, in the case of an early termination payment by our intermediate holding company or a change of control) as a result of this increase in tax basis, as well as 85% of the amount of any such savings the intermediate holding company actually realizes (or is deemed to realize) as a result of increases in tax basis that arise due to future payments under the tax receivable agreement. In the event that other of our current or future subsidiaries become taxable as corporations and acquire Group Partnership units in the future, or if we become taxable as a corporation for U.S. federal income tax purposes, we expect that each will become subject to a tax receivable agreement with substantially similar terms. See "Certain Relationships and Related Party Transactions—Tax Receivable Agreement."

Risk factors

 

See "Risk Factors" for a discussion of risks you should carefully consider before deciding to invest in our common units.

Proposed New York Stock Exchange symbol

 

"KKR"

19



        In this prospectus, unless otherwise indicated, the number of common units outstanding and the other information that is based thereon does not reflect:

common units issuable upon exchange of Group Partnership units that will be held by KKR Holdings or transferees of its Group Partnership units following the completion of the Reorganization Transactions, which Group Partnership units (together with a corresponding amount of special voting units) are exchangeable up to four times each year for our common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications and compliance, as well as significant transfer restrictions, and will therefore not be exchangeable before                      ;

common units that are issuable upon exercise of the underwriters' option to purchase additional common units from us;

unvested restricted common units that we intend to grant to employees who are not our principals at the time of this offering under our 2007 Equity Incentive Plan; and

additional common units that have been reserved for issuance under our 2007 Equity Incentive Plan.


        KKR & Co. L.P. was formed as a Delaware limited partnership on June 25, 2007. Our Managing Partner was formed as a Delaware limited liability company on June 25, 2007. Our principal executive offices are located at 9 West 57th Street, 42nd Floor, New York, New York 10019, and our telephone number is (212) 750-8300. Our website is located at www.kkr.com. The information on our website is not part of this prospectus or the registration statement of which this prospectus forms a part and is not being incorporated by reference into either such document.

20



Summary Historical Financial Data

        The following summary historical combined financial information and other data of the KKR Group should be read together with "Organizational Structure," "Unaudited Pro Forma Financial Information," "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical predecessor combined financial statements and related notes included elsewhere in this prospectus. We derived the summary historical combined financial data of the KKR Group as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 from our audited predecessor combined financial statements included elsewhere in this prospectus. We derived the summary historical combined financial data of the KKR Group as of and for the three months ended March 31, 2006 and 2007 from our unaudited predecessor combined financial statements which are included elsewhere in this prospectus. The KKR Group consists of (i) the management companies for our funds, (ii) the general partners of the 1996 Fund and our subsequently formed private equity funds, (iii) the general partners of two of the entities that constitute the KKR Strategic Capital Funds and (iv) the consolidated subsidiaries of the foregoing. The KKR Group is considered our predecessor for accounting purposes and its combined financial statements will be our historical financial statements following the Reorganization Transactions and this offering.

 
  Year Ended December 31,
  Three Months Ended
March 31,

 
 
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

   
   
 
Statements of Income Data:                                

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Fee income   $ 183,462   $ 232,945   $ 410,329   $ 93,798   $ 68,840  
                     
 
 
Expenses                                
  Employee compensation and benefits     69,956     79,643     131,667     22,601     27,345  
  Occupancy and related charges     10,688     13,534     19,295     6,482     4,624  
  General, administrative and other     36,931     54,336     78,154     15,934     31,555  
  Fund expenses     16,470     20,778     38,350     4,778     16,810  
   
 
 
 
 
 
    Total expenses     134,045     168,291     267,466     49,795     80,334  

Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net gains from investment activities     3,026,396     2,984,504     3,105,523     933,407     1,482,054  
  Dividend income     14,611     729,926     714,069     51,725     19,471  
  Interest income     54,060     27,166     210,872     11,119     68,269  
  Interest expense     (524 )   (697 )   (29,542 )   (1,366 )   (15,593 )
   
 
 
 
 
 
    Total investment income     3,094,543     3,740,899     4,000,922     994,885     1,554,201  

Income before non-controlling interests in income of consolidated entities and income taxes

 

 

3,143,960

 

 

3,805,553

 

 

4,143,785

 

 

1,038,888

 

 

1,542,707

 

Non-controlling interests in income of consolidated entities

 

 

2,364,309

 

 

2,861,186

 

 

3,026,913

 

 

777,505

 

 

1,161,162

 
   
Net income

 

$

773,386

 

$

941,467

 

$

1,112,709

 

$

260,616

 

$

380,918

 

Statements of Financial Condition Data (period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

$

13,369,412

 

$

23,292,783

 

 

 

 

$

25,887,304

 
Total liabilities           418,778     1,281,923           2,079,731  
Non-controlling interests in consolidated entities           11,413,885     20,201,548           21,907,784  
Total partners' capital           1,536,749     1,809,312           1,899,789  
                                 

21



Statement of Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Provided By (Used In) Operating Activities

 

$

1,799,767

 

$

(106,448

)

$

(5,531,144

)

$

390,582

 

$

(593,269

)
   
 
 
 
 
 
Net Cash Used in Investing Activities   $ (2,575 ) $ (5,052 ) $ (130,110 ) $ (2,933 ) $ (71,432 )
   
 
 
 
 
 
Net Cash (Used in) Provided By Financing Activities   $ (1,737,509 ) $ 134,271   $ 5,657,952   $ (403,974 ) $ 668,879  
   
 
 
 
 
 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total Segment fee related earnings(1)   $ 58,790   $ 89,611   $ 197,061   $ 38,289   $ 64,224  
Adjusted cash flow from operations(2)     716,976     666,755     1,108,874     411,556     161,556  
Assets under management (period end)     15,147,300     23,350,700     43,873,400     22,294,000     53,418,200  
Private equity dollars invested(3)     2,065,603     2,913,427     6,661,698     1,183,957     1,748,602  
Uncalled private equity commitments (period end)(4)     4,846,500     7,341,600     17,597,400     18,639,900     21,334,600  

(1)
"Total segment fee related earnings" is the aggregate of a profit measure that is reported by our two reportable business segments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Performance Measures—Segment Operating and Performance Measures—Fee Related Earnings" and Note 9 to the audited predecessor combined financial statements included elsewhere in this prospectus. The difference between total segment fee related earnings and income before taxes presented in accordance with generally accepted accounting principles in the United States, or GAAP, is that total segment fee related earnings represents income before taxes adjusted to (i) exclude the expenses of consolidated funds, (ii) include management fees earned from consolidated funds that were eliminated in consolidation, (iii) exclude investment income and (iv) exclude non-controlling interests in income of consolidated entities.


Management uses total segment fee related earnings as a supplemental non-GAAP measure of operating performance. Management makes operating decisions and assesses the performance of our business based on financial and operating metrics and data that are presented without the consolidation of any of our investment funds. Our current operations are managed based in part on total segment fee related earnings, which consist primarily of the management, transaction and monitoring fees that we earn as the sponsor of our private equity funds and the management fees, incentive fees and carried interest, as applicable, that we earn as the sponsor of our credit strategy funds, after payment of our operating expenses. It has been and remains a key objective of our firm to maximize total segment fee related earnings, because those amounts directly affect our profits. As a public entity, we will continue to focus on positive fee earnings generation and use total segment fee related earnings levels to make operating decisions and assess the performance of our business, because those amounts will directly affect the returns to our investors. However, unlike net income presented in accordance with GAAP, a limitation of total segment fee related earnings is that it is not a complete view of amounts that will ultimately accrue to investors as it excludes investment income and expenses of consolidated funds and their respective management companies, which could be significant.


The following table presents a reconciliation of our total segment fee related earnings to income before taxes calculated in accordance with GAAP for the periods indicated. Total segment fee related earnings should not be considered in isolation or as an alternative to income before taxes.

 
  Year Ended December 31,
  Three Months Ended March 31,
 
 
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

   
   
 
Total segment fee related earnings   $ 58,790   $ 89,611   $ 197,061   $ 38,289   $ 64,224  
Investment income     3,094,543     3,740,899     4,000,922     994,885     1,554,201  
Non-controlling interests in income of consolidated entities     (2,364,309 )   (2,861,186 )   (3,026,913 )   (777,505 )   (1,161,162 )
Expenses of consolidated funds     (9,942 )   (11,312 )   (22,334 )   (3,251 )   (149 )
Fee income (earned from) paid to consolidated funds     569     (13,645 )   (31,864 )   8,965     (75,569 )
   
 
 
 
 
 
Income before taxes   $ 779,651   $ 944,367   $ 1,116,872   $ 261,383   $ 381,545  
   
 
 
 
 
 

22


(2)
"Adjusted cash flow from operations" is a supplemental non-GAAP measure that we use to assess liquidity and amounts available for distribution to our equity holders. See "Distribution Policy." Under GAAP, a significant number of our investment funds have been and will continue to be consolidated in our financial statements notwithstanding the fact that we hold only a minority economic interest in these funds. Consequently, our historical predecessor combined financial statements reflect, and our future consolidated financial statements will continue to reflect, the cash flows of our consolidated funds on a gross basis rather than the cash flows attributable to us.


Adjusted cash flow from operations is intended to reflect the actual cash flow attributable to us and is equal to cash flow from operations presented in accordance with GAAP, adjusted to exclude cash flow relating to (i) the investment activities of our consolidated funds, (ii) the realized and unrealized income attributable to non-controlling interests in our consolidated funds and (iii) changes in our operating assets and liabilities. We believe that adjusted cash flow from operations provides investors with useful information with respect to cash flows relating to our required capital investments and our ability to make annual cash distributions in accordance with our distribution policy. However, adjusted cash flow from operations should not be considered in isolation or as an alternative to cash flow from operations or income before taxes presented in accordance with GAAP.


The following table presents a reconciliation of our adjusted cash flow from operations to our net cash (used in) provided by operating activities presented in accordance with GAAP for the periods indicated.

 
  Year Ended December 31,
  Three Months Ended
March 31,

 
 
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

   
   
 
Net Cash Provided By (Used In) Operating Activities   $ 1,799,767   $ (106,448 ) $ (5,531,144 ) $ 390,582   $ (593,269 )
Change in operating assets and liabilities     (141,592 )   154,221     2,179,945     189,960     (584,481 )
KKR Funds related investment activities     (1,560,775 )   763,353     4,369,235     (484,136 )   1,224,305  
Net realized gains on investments     2,932,802     1,567,312     3,244,931     1,651,340     417,997  
Change in unrealized (gains) losses on investments allocable to non-controlling interests     37,184     1,142,480     (143,243 )   (566,991 )   844,695  
Non-controlling interests in income of consolidated entities     (2,364,309 )   (2,861,186 )   (3,026,913 )   (777,505 )   (1,161,162 )
Other non-cash adjustments     13,899     7,023     16,063     8,308     13,471  
   
 
 
 
 
 

Adjusted cash flow from operations

 

$

716,976

 

$

666,755

 

$

1,108,874

 

$

411,558

 

$

161,556

 
   
 
 
 
 
 
(3)
"Private equity dollars invested" is the aggregate amount of capital invested by our private equity funds and carry-paying co-investment vehicles in private equity transactions. Such amounts include both capital contributed by fund investors and carry-paying co-investors with respect to which we are entitled to a carried interest and capital contributed by us as the general partner of a private equity fund with respect to which we are entitled to returns generated on the invested capital. From our inception through March 31, 2007, our first ten traditional private equity funds (representing all of our private equity funds that have invested for at least 30 months) achieved a multiple of invested capital of 2.7x the amount of capital they invested in private equity investments.

(4)
"Uncalled private equity commitments" represent unfunded commitments by limited partners of our traditional private equity funds to contribute capital to fund the purchase price to be paid for future portfolio company investments made by the funds. Such amounts do not include capital of our private equity-oriented permanent capital fund or our credit strategy funds that may be used to make private equity investments.

23



Summary Pro Forma Financial Data

        The following table presents our summary condensed unaudited pro forma financial data, which has been derived from the unaudited pro forma financial information included under "Unaudited Pro Forma Financial Information." This data gives pro forma effect to the Reorganization Transactions, this offering and transactions relating to this offering, all as described under "Unaudited Pro Forma Financial Information," as if such transactions had occurred on January 1, 2006 for purposes of the unaudited pro forma statement of income data and as of March 31, 2007 for purposes of the unaudited pro forma statement of financial condition.

        The pro forma adjustments principally give effect to the Reorganization Transactions, the elimination of the consolidated financial results of the general partners of the 1996 Fund, the deconsolidation of the KKR Private Equity Investors master fund and its general partner, and other transactions described under "Unaudited Pro Forma Financial Information."

        These adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the transactions described above. The adjustments are described in more detail in the notes to the unaudited pro forma statements of income and the unaudited pro forma statement of financial condition included under "Unaudited Pro Forma Financial Information." Because information relating to these transactions is currently not determinable, this data is subject to completion and may change. In addition, this pro forma financial data has been included for informational purposes only and does not purport to reflect the results of operations or financial position that would have occurred had the transactions referred to above occurred on the dates indicated or had we operated as a public company during the periods presented or for any future period or date.

 
  Year Ended
December 31, 2006

  Three Months Ended
March 31, 2007

 
  ($ in thousands)

Pro Forma Statements of Income Data:            

Revenues

 

 

 

 

 

 
  Fee income   $     $  
   
 

Expenses

 

 

 

 

 

 
  Employee compensation and benefits            
  Occupancy and related charges            
  General, administrative and other            
  Fund expenses            
   
 
    Total expenses            

Investment Income

 

 

 

 

 

 
  Net gains from investment activities            
  Dividend income            
  Interest income            
  Interest expense            
   
 
    Total investment income            

Income before non-controlling and principals' interests in income of consolidated entities and income taxes

 

 

 

 

 

 

Non-controlling interests in income of consolidated entities

 

 

 

 

 

 
Principals' interests in income of consolidated entities            
    Net income            

24


 
  Year Ended
December 31, 2006

  Three Months Ended
March 31, 2007

Net Income Per Common Unit        
  Basic        
  Diluted        
Weighted Average Common Units        
  Basic        
  Diluted        
 
  As of
March 31, 2007

 
  ($ in thousands)

Pro Forma Statement of Financial Condition Data:      
Total assets   $  
Total liabilities      
Non-controlling interests in consolidated entities      
Principals' interests in consolidated entities      
Total partners' capital      

25



RISK FACTORS

        An investment in our common units involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our common units.

Risks Related to Our Business

Difficult market conditions can adversely affect our business in many ways, including by reducing the value or performance of the private equity, debt and public equity 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.

        Our business is materially affected by conditions in the financial markets and economic conditions throughout the world, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors are outside our control and may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these conditions. The market conditions surrounding each of our businesses, and in particular our private equity business, have been quite favorable for a number of years. Future market conditions may not continue to be as favorable. In the event of a market downturn, our business could be affected in different ways. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in net income relating to changes in market and economic conditions.

        Our funds may be affected by reduced opportunities to exit and realize value from their investments and by the fact that we may not be able to find suitable investments for the funds to effectively deploy capital, which could adversely affect our ability to raise new funds. During periods of difficult market conditions or slowdowns in a particular sector, companies in which we invest may experience decreased revenues, financial losses, difficulty in obtaining access to financing and increased funding costs. During such periods, these companies may also have difficulty in expanding their businesses and operations and be unable to meet their debt service obligations or other expenses as they become due, including expenses payable to us. In addition, during periods of adverse economic conditions, we may have difficulty accessing financial markets, which could make it more difficult or impossible for us to obtain funding for additional investments and harm our assets under management and operating results. A general market downturn, or a specific market dislocation, may result in lower investment returns for our funds, which would adversely affect our net income. Furthermore, such conditions would also increase the risk of default with respect to private equity, credit and public equity investments that we manage.

Our earnings and cash flow are highly variable due to the nature of our business and we do not intend to provide earnings guidance, each of which may cause the price of our common units to be volatile.

        Our earnings are highly variable from quarter to quarter due to the volatility of investment returns of most of our funds and other investment vehicles and the fee income earned from our funds. We recognize earnings on investments in our funds based on our allocable share of realized and unrealized gains (or losses) reported by such funds, and a decline in realized or unrealized gains, or an increase in realized or unrealized losses, would adversely affect our net income. Fee income, which we recognize when contractually earned, can vary due to fluctuations in assets under management, the number of investment transactions made by our funds and the number of portfolio companies we manage. We may also experience fluctuations in our results from quarter to quarter due to a number of other factors, including changes in the amount of dividends or interest earned in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. Such variability may lead to variability in the trading price of our common units and can cause our results for a particular period not to be indicative of our performance in future periods. It may be difficult for us

26



to achieve steady growth in net income and cash flow on a quarterly basis, which could in turn lead to large adverse movements in the price of our common units or increased volatility in our common unit price generally.

        The timing and receipt of carried interest from our private equity funds are unpredictable and will contribute to the volatility of our cash flows. Carried interest from private equity investments depend on our funds' performance and opportunities for realizing gains, which may be limited. It takes a substantial period of time to identify attractive private equity investment opportunities, to raise all the funds needed to make an investment and then to realize the cash value (or other proceeds) of an investment through a sale, public offering or other exit. Even if a private equity investment proves to be profitable, it may be several years before any profits can be realized in cash. We cannot predict when, or if, any realization of investments will occur. If we were to have a realization event in a particular quarter, the event may have a significant impact on our cash flows during the quarter that may not be replicated in subsequent quarters. A decline in realized or unrealized gains, or an increase in realized or unrealized losses, would adversely affect our investment income, which could further increase the volatility of our quarterly results. In addition, in our traditional private equity funds, if the performance of one of the fund's later investments results in the fund failing to achieve overall profitability over the life of the fund, we may be obligated to repay any excess profits previously distributed to us in respect of a carried interest. This may require some repayment of carried interest previously received.

        Because our earnings and cash flow can be highly variable from quarter to quarter and year to year, we do not plan to provide any guidance regarding our expected quarterly and annual operating results and cash flows. The lack of guidance may affect the expectations of public market analysts and could cause increased volatility in the price of our common units.

We depend on our founders and other key personnel, the loss of whose services would have a material adverse effect on our business, results and financial condition.

        We depend on the efforts, skill, reputations and business contacts of our principals, including our founders Henry Kravis and George Roberts, and other key personnel, the information and deal flow they and others generate during the normal course of their activities and the synergies among the diverse fields of expertise and knowledge held by our professionals. Accordingly, our success will depend on the continued service of these individuals, who are not obligated to remain employed with us. The loss of the services of any of them could have a material adverse effect on our revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing funds or raise additional funds in the future.

        Our principals and other key personnel possess substantial experience and expertise and have strong business relationships with investors in our funds and other members of the business community. As a result, the loss of these personnel could jeopardize our relationships with investors in our funds and members of the business community and result in the reduction of assets under management or fewer investment opportunities. For example, if any of our principals were to join or form a competing firm, our business, results and financial condition could suffer.

Our structure involves complex provisions of U.S. federal income tax laws for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.

        The U.S. federal income tax treatment of unitholders depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax laws for which no clear precedent or authority may be available. You should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the Internal Revenue Service, or IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The present U.S. federal income tax treatment of an investment in our common units may be modified by administrative, legislative

27



or judicial interpretation at any time, and any such action may affect investments and commitments previously made. Changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible to be treated as a partnership that is not taxable as a corporation for U.S. federal income tax purposes, affect or cause us to change our investments and commitments, affect the tax considerations of an investment in us, change the character or treatment of portions of our income (including, for instance, the treatment of carried interest as ordinary income rather than capital gain) and adversely affect an investment in our common units. On June 22, 2007, legislation was introduced to treat all or part of the capital gain and dividend income that is recognized by an investment partnership and allocable to a partner affiliated with the sponsor of the partnership (a portion of the carried interest) as ordinary income to such partner for U.S. federal income tax purposes, which would have the effect of precluding us from qualifying as a partnership for U.S. federal income tax purposes. In addition, on June 14, 2007, legislation was introduced that would tax as a corporation any publicly traded partnership that directly or indirectly derives income from investment adviser or asset management services. If either of these pieces of legislation or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units. See the discussions below under "—Legislation has been introduced that would, if enacted, preclude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units."

        Our organizational documents and agreements permit our Managing Partner to modify our amended and restated partnership agreement from time to time, without the consent of the unitholders, to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all unitholders. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to unitholders in a manner that reflects such unitholders' beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, those assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Internal Revenue Code and/or Treasury regulations and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects unitholders.

Legislation has been introduced that would, if enacted, preclude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units.

        On June 14, 2007, the Chairman and the Ranking Republican Member of the U.S. Senate Committee on Finance introduced legislation that would tax as corporations publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services. In addition, they concurrently issued a press release stating that they do not believe that proposed public offerings of private equity and hedge fund management firms are consistent with the intent of the existing rules regarding publicly traded partnerships because the majority of their income is derived from the active provision of services to investment funds and limited partner investors in such funds. Further, they have sent letters to the Secretary of the Treasury and the Chairman of the U.S. Securities and Exchange Commission, or the SEC, regarding these tax issues in which they express a view that recent initial public offerings of private equity and hedge funds "raise serious tax questions that if left unaddressed have the potential to jeopardize the integrity of the tax code and the corporate tax base over the long term." As explained in the technical explanation accompanying the proposed legislation:

      Under the bill, the exception from corporate treatment for a publicly traded partnership does not apply to any partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from services provided by any person

28


      as an investment adviser, as defined in the Investment Advisers Act of 1940, or as a person associated with an investment adviser, as defined in that Act. Further, the exception from corporate treatment does not apply to a partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from asset management services provided by an investment adviser, a person associated with an investment adviser, or any person related to either, in connection with the management of assets with respect to which investment adviser services were provided. For purposes of the bill, these determinations are made without regard to whether the person is required to register as an investment adviser under the Investment Advisers Act of 1940.

If enacted, the proposed legislation would be effective as of the date it was introduced, with transition relief that would not apply to us.

        On June 20, 2007, similar legislation was introduced in the House of Representatives. If the proposed legislation survives the legislative and executive process in its proposed form and were to be enacted into law, we would incur a material increase in our tax liability. If we were taxed as a corporation, our effective tax rate would increase significantly. The federal statutory rate for corporations is currently 35%, and the state and local tax rates, net of the federal benefit, aggregate approximately        %. If a variation of this proposed legislation or any other change in the tax laws, rules, regulations or interpretations preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules, our tax liability would materially increase, which could result in a reduction in the value of our common units.

        On June 22, 2007, legislation was introduced by a member of the House Ways and Means Committee, co-sponsored by the committee chairs, eleven other members and the chair of the House Financial Services Committee, that would treat income received by a partner with respect to an investment services partnership interest as ordinary income received for the performance of services. The enactment of such legislation would cause such income to be non-qualifying income under the publicly traded partnership rules, which would preclude us from qualifying as a partnership for U.S. federal income tax purposes, thereby materially increasing our tax liability, which could result in a reduction of the value of our common units.

Our transition to a publicly-traded structure may adversely affect our ability to retain and motivate our principals and other key personnel and to recruit, retain and motivate new principals and other key personnel, both of which could adversely affect our business, results and financial condition.

        Our most important asset is our people, and our continued success is highly dependent upon the efforts of our principals and other professionals. Our future success and growth depends to a substantial degree on our ability to retain and motivate our principals and other key personnel and to strategically recruit, retain and motivate new talented personnel, including new principals. However, we may not be successful in our efforts to recruit, retain and motivate the required personnel as the market for qualified investment professionals is extremely competitive.

        In connection with the Reorganization Transactions and this offering, our current principals and certain of our former personnel will receive interests in KKR Holdings, which will hold Group Partnership units. Moreover, transfer restrictions to which interests in KKR Holdings are subject in certain instances lapse over time, may not be enforceable in all cases and can be waived. There is no guarantee that the non-competition, non-solicitation and confidentiality agreements to which our principals will be subject, together with our other arrangements with them, will prevent them from leaving us, joining our competitors or otherwise competing with us or that these agreements will be enforceable in all cases. In addition, these agreements will expire after a certain period of time, at which point each of our principals would be free to compete against us and solicit investors in our funds, clients and employees. See "Management—Non-Competition, Non-Solicitation and Confidentiality Agreements."

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        Our ability to recruit, retain and motivate our professionals is dependent on our ability to offer highly attractive incentive opportunities. If legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our unitholders would be required to pay, thereby adversely affecting our ability to offer such attractive incentive opportunities. See "—Our structure involves complex provisions of U.S. federal income tax laws for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis," and "—Legislation has been introduced that would, if enacted, preclude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units."

        We strive to maintain a work environment that reinforces our culture of collaboration, motivation and alignment of interests with investors. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain our culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations.

The requirements of being a public entity and sustaining our growth may strain our resources.

        As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, and requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act will require that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act will require that we maintain effective disclosure controls and procedures and internal controls over financial reporting, which are discussed below. In order to maintain and improve the effectiveness of our disclosure controls and procedures, significant resources and management oversight will be required. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management's attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We will also incur costs that we have not previously incurred for director fees, investor relations expenses, expenses for compliance with the Sarbanes-Oxley Act and rules of the SEC and the New York Stock Exchange, and various other costs relating to being a public company. Operational risks may disrupt our businesses, result in losses or limit our growth.

        We rely heavily on our financial, accounting and other data processing systems. If any of these systems does not operate properly or is disabled, we could suffer financial loss, a disruption of our businesses, liability to our funds, regulatory intervention or reputational damage. In addition, we operate in businesses that are highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us. Furthermore, we depend on our principal offices in New York City, where most of our administrative personnel are located, for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our principal offices, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

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We have not evaluated our internal controls over financial reporting for purposes of compliance with Section 404 of the Sarbanes-Oxley Act.

        We have not previously been required to comply with requirements of the Sarbanes-Oxley Act, including the internal control evaluation and certification requirements of Section 404 of that statute, and we will not be required to comply with all of those requirements until after we have been subject to the reporting requirements of the Exchange Act for a specified period of time. Accordingly, we have not determined whether or not our existing internal controls over financial reporting systems comply with Section 404. The process of determining whether internal controls over financial reporting comply with Section 404 will divert internal resources and will take a significant amount of time, effort and expense to complete. If it is determined that we are not in compliance with Section 404, we will be required to implement remedial procedures and re-evaluate our internal control over financial reporting. We may experience higher than anticipated operating expenses as well as higher independent auditor and consulting fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to comply with Section 404. If we are unable to implement any necessary changes effectively or efficiently, our operations, financial reporting or financial results could be adversely affected and we could obtain an adverse report on internal controls from our independent registered public accountants.

Our use of leverage to finance our business will expose us to substantial risks, which are exacerbated by our funds' investments in leveraged companies.

        It is our intention over time to use borrowings in order to finance our business operations as a public company. Using a significant degree of leverage will expose us to the typical risks associated with the use of substantial leverage, including those discussed below under "—Dependence on significant leverage in investments by our funds could adversely affect our ability to achieve attractive rates of return on those investments." These risks are exacerbated by our funds' use of leverage to finance investments.

The time and attention that our principals and other employees devote to assets that are not being contributed to the Group Partnerships will not financially benefit us and may reduce the time and attention these individuals devote to our business.

        We currently manage three private equity funds (the 1987 Fund, the 1993 Fund and the 1996 Fund) whose investment periods have ended. Because we believe the general partners of these funds will not receive meaningful proceeds from further realizations, we will not acquire general partner interests in them in connection with the Reorganization Transactions. We will, however, continue to provide the funds with management and other services until their liquidation. While we will not receive meaningful fees for providing these services, our principals and other employees will be required to devote a portion of their time and attention to the management of those entities. The devotion of the time and attention of our principals and employees to those activities will not financially benefit us and may reduce the time and attention they devote to our business.

We face risks and uncertainties in developing our new business initiatives.

        Part of our growth strategy is to develop new business areas, including sponsoring new investment vehicles and structures, including co-investment vehicles, and raising new types of funds, such as long-oriented public equity funds, structured product funds and industry- or geography-specific funds. In addition, to support these initiatives, we are currently developing a capital markets business in the United States, Europe and Asia. As a result, we are subject to all of the risks and uncertainties associated with the expansion into any new line of business, including the risk that these new business initiatives will not assist us in achieving our objectives. Any failure of these initiatives to meet or exceed expectations could have an adverse effect on our results of operations.

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Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our business. Changes in tax laws and other legislative or regulatory changes could adversely affect us.

        Our business is subject to extensive regulation. See "Business—Regulation." We are subject to regulation, by governmental and self-regulatory organizations in the jurisdictions in which we operate around the world. Many of these regulators, including U.S. and foreign government agencies and self-regulatory organizations, are empowered to conduct investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of applicable licenses and memberships. Even if an investigation or proceeding does not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing clients or fail to gain new clients.

        We regularly rely on exemptions in the United States from various requirements of the Securities Act of 1933, or the Securities Act, the Exchange Act, the Investment Company Act of 1940, or the Investment Company Act, the Investment Advisers Act of 1940, or the Investment Advisers Act, and the U.S. Employee Retirement Income Security Act of 1974, or ERISA, in conducting our asset management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business could be materially and adversely affected. See "—Risks Related to Our Organizational Structure—If we were deemed to be an "investment company" under the Investment Company Act, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business." Lastly, the requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our funds and are not designed to protect our unitholders. Consequently, these regulations often serve to limit our activities. In addition, the regulatory environment in which our fund investors operate may affect our business. For example, changes in state laws may limit investment activities of state pension plans.

        The regulatory environment in which we operate may become more burdensome. We may become registered as an investment adviser under the Investment Advisers Act. As a registered investment advisor, we would be subject to the requirements and regulations of the Investment Advisers Act, which relate to, among other things, recordkeeping and reporting requirements, disclosure requirements, limitations on agency and principal transactions between an advisor and advisory clients. We may also be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. In addition, we may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

        Legislative proposals have recently been introduced in Denmark and Germany that would limit the tax deductibility of interest expense incurred by companies in those countries. If adopted, these measures would adversely affect Danish and German companies in which our private equity funds have investments and limit the benefits of additional investments in those countries. Our private equity business is subject to the risk that similar measures might be introduced in other countries in which it currently has investments or plans to invest in the future, or that other legislative or regulatory measures might be promulgated in any of the countries in which we operate that adversely affect our business.

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        It has been reported in the press that certain participants in the private equity industry have received information requests relating to private equity transactions from the Antitrust Division of the Department of Justice. In addition, in the United Kingdom, the Financial Services Authority recently published a discussion paper on the impact that the growth in the private equity market has had on the markets in the United Kingdom and the suitability of its regulatory approach in addressing risks posed by the private equity market.

We are subject to substantial litigation risks and may face significant liabilities and damage to our professional reputation as a result of litigation allegations and negative publicity.

        The investment decisions we make in our asset management business and the activities of our investment professionals on behalf of our portfolio companies may subject them and us to the risk of third-party litigation arising from investor dissatisfaction with the performance of those funds, the activities of our portfolio companies and a variety of other litigation claims. For example, in early 2007, thirteen private equity firms, including us, were named as defendants in a purported class action complaint by shareholders in public companies recently acquired by private equity firms. In June 2007 this suit was dismissed by the plaintiffs without prejudice.

        To the extent investors in our private equity funds suffer losses resulting from fraud, gross negligence, willful misconduct or other similar misconduct, investors may have remedies against us, our private equity funds, our principals or our affiliates under the federal securities law and state law. While the general partners and investment advisers to our private equity funds, including their directors, officers, other employees and affiliates, are generally indemnified to the fullest extent permitted by law with respect to their conduct in connection with the management of the business and affairs of our private equity funds, such indemnity does not extend to actions determined to have involved fraud, gross negligence, willful misconduct or other similar misconduct.

        If any lawsuits were brought against us and resulted in a finding of substantial legal liability, the lawsuit could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could seriously impact our business. We depend to a large extent on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain investors and to pursue investment opportunities for our funds. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities or the private equity industry in general, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses.

        In addition, with a workforce composed of many highly paid professionals, we face the risk of litigation relating to claims for compensation, which may, individually or in the aggregate, be significant in amount. The cost of settling any such claims could negatively impact our business, financial condition and results of operations.

Employee misconduct could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm.

        There is a risk that our employees could engage in misconduct that adversely affects our business. We are subject to a number of obligations and standards arising from our business and our authority over the assets we manage. The violation of these obligations and standards by any of our employees would adversely affect our clients and us. Our business often requires that we deal with confidential matters of great significance to companies in which we may invest. If our employees were improperly to use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships, as well as face potentially significant litigation. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take to detect and prevent this activity may not be effective in all cases. If any of our employees were to engage in misconduct or were to be accused of such misconduct, our business and our reputation could be adversely affected.

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Risks Relating to the Investments We Manage

Poor performance of the investments we manage would cause a decline in our net income and cash flow, may obligate us to repay some carried interest previously paid to us, and could adversely affect our ability to raise capital for future funds.

        In the event that any of the significant investments we manage were to perform poorly, our net income and cash flow would decline because the value of our assets under management would decrease, which would result in a reduction in some of our management fees, and our investment returns would decrease, resulting in a reduction in the carried interest we earn. Moreover, we could experience losses on our investments of our own capital as a result of poor performance by the investments we manage. Furthermore, if, as a result of poor performance of later investments in one of our traditional private equity funds' life, the fund does not achieve overall profitability, we will be obligated to repay the amount by which carried interest that was previously distributed to us exceeds amounts to which we are ultimately entitled. These repayment obligations may be related to amounts previously distributed to our principals prior to the completion of this offering, with respect to which our unitholders did not receive any benefit. Poor performance of our funds could make it more difficult for us to raise new capital. Investors in funds might decline to invest in future funds we raise. Investors and potential investors in our funds continually assess our funds' performance, and our ability to raise capital for existing and future funds will depend on our funds' continued satisfactory performance.

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the fair value of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our funds.

        There are no readily ascertainable market prices for a substantial majority of illiquid investments of our funds. When determining fair values of investments, we use the last reported market price as of the statement of financial condition date for investments that have readily observable market prices. When an investment does not have a readily available market price, the fair value of the investment represents the value, as determined by us in good faith, at which the investment could be sold in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. There is no single standard for determining fair value in good faith and in many cases fair value is best expressed as a range of fair values from which a single estimate may be derived. When making fair value determinations, we typically use a market multiples approach that considers a specified financial measure (such as EBITDA) or a discounted cash flow or liquidation analysis. We also consider a range of additional factors that we deem relevant, including the price at which the investment was acquired, the nature of the investment (such as whether it is a controlling interest), local market conditions, market prices for comparable securities and financing transactions and internal models that consider the current and expected operating performance and cash flows of the company in which the investment was made.

        Because valuations, and in particular valuations of investments for which market quotations are not readily available, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, determinations of fair value may differ materially from the values that would have resulted if a ready market had existed. Even if market quotations are available for our investments, such quotations may not reflect the value that we would actually be able to realize because of various factors, including possible illiquidity. Our partners' capital could be adversely affected if the values of investments that we record are materially higher than the values that are ultimately realized upon the disposal of the investments and changes in values attributed to investments from quarter to quarter may result in volatility in our assets under management and such changes could materially affect the results of operations that we report from period to period. We cannot assure you that the investment values that we record from time to time will ultimately be realized. We also cannot assure you that you will be able to realize the investment values that are presented in this prospectus.

        Because there is significant uncertainty in the valuation of, or in the stability of the value of illiquid investments, the fair values of investments reflected in a fund's NAV do not necessarily reflect the prices

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that would actually be obtained by us on behalf of the fund when such investments are realized. Realizations at values significantly lower than the values at which investments have been reflected in prior fund NAVs would result in losses for the applicable fund and the loss of potential carried interest and other fees. Also, if realizations of our investments produce values materially different than the carrying values reflected in prior fund NAVs, investors may lose confidence in us, which would in turn result in difficulty in raising additional funds.

        Even if market quotations are available for our investments, such quotations may not reflect the value that could actually be realized because of various factors, including the possible illiquidity associated with a large ownership position, subsequent illiquidity in the market for a company's securities, future market price volatility or the potential for a future loss in market value based on poor industry conditions or the market's view of overall company and management performance.

        In addition, because we value our investments on a quarterly basis only, subsequent events that may have a material impact on those valuations will not be reflected until the next quarterly valuation date.

The historical returns attributable to our funds, including those presented in this prospectus, should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our common units.

        We have presented in this prospectus net and gross IRRs, multiples of invested capital and realized and unrealized investment values for funds that we have sponsored and managed. The historical and potential future returns of the funds that we manage are not directly linked to returns on our common units. Therefore, you should not conclude that continued positive performance of the funds that we manage will necessarily result in positive returns on an investment in our common units. However, poor performance of the funds that we manage would cause a decline in our income from such funds and would therefore have a negative effect on our performance and in all likelihood the returns on an investment in our common units.

        Moreover, with respect to the historical returns of our funds:

the rates of returns of our funds reflect unrealized gains as of the applicable valuation date that may never be realized, which may adversely affect the ultimate value realized from those funds' investments;

you will not benefit from any value that was created in our funds prior to your investment in our common units to the extent such value has been realized;

the historical returns of our funds and their future performance has been and will be affected by macroeconomic factors, including factors that may not have been prevalent in the periods relevant to the return data above;

in the past few years, the rates of returns of some of our funds have been positively influenced by a number of investments that experienced a substantial decrease in the average holding period of such investments and rapid and substantial increases in value following the dates on which those investments were made, trends and rates of return that are not expected to continue;

our funds' returns have benefited from investment opportunities and general market conditions that may not repeat themselves, including favorable borrowing conditions in the debt markets, and there can be no assurance that our current or future funds will be able to avail themselves of comparable investment opportunities or market conditions or that such market conditions will continue; and

we may create new funds in the future that reflect a different asset mix in terms of allocations among funds, investment strategies, geographic and industry exposure and vintage year.

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        In addition, future returns will be affected by the risks described elsewhere in this prospectus, including risks of the industry sectors and businesses in which a particular fund invests.

Dependence on significant leverage in investments by our funds could adversely affect our ability to achieve attractive rates of return on those investments.

        Because many of our funds' investments rely heavily on the use of leverage, our ability to achieve attractive rates of return on investments will depend on our continued ability to access sufficient sources of indebtedness at attractive rates. For example, our credit strategy funds use varying degrees of leverage when making investments. Similarly, in many private equity investments, indebtedness may constitute 70% or more of a portfolio company's total debt and equity capitalization, including debt that may be incurred in connection with the investment. An increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive to finance those investments. In addition, increases in interest rates could also decrease the value of fixed-rate debt investments that our funds make. Increases in interest rates could also make it more difficult to locate and consummate private equity investments because other potential buyers, including operating companies acting as strategic buyers, may be able to bid for an asset at a higher price due to a lower overall cost of capital. In addition, a portion of the indebtedness used to finance private equity investments often includes high-yield debt securities issued in the capital markets. Availability of capital from the high-yield debt markets is subject to significant volatility, and there may be times when we might not be able to access those markets at attractive rates, or at all, when completing an investment.

        Investments in highly leveraged entities are also inherently more sensitive to declines in revenues, increases in expenses and interest rates and adverse economic, market and industry developments. The incurrence of a significant amount of indebtedness by an entity could, among other things:

subject the entity to a number of restrictive covenants, terms and conditions, any violation of which would be viewed by creditors as an event of default and could materially impact our ability to realize value from our investment;

give rise to an obligation to make mandatory prepayments of debt using excess cash flow, which might limit the entity's ability to respond to changing industry conditions to the extent additional cash is needed for the response, to make unplanned but necessary capital expenditures or to take advantage of growth opportunities;

limit the entity's ability to adjust to changing market conditions, thereby placing it at a competitive disadvantage compared to its competitors who have relatively less debt;

limit the entity's ability to engage in strategic acquisitions that might be necessary to generate attractive returns or further growth; and

limit the entity's ability to obtain additional financing or increase the cost of obtaining such financing, including for capital expenditures, working capital or other general corporate purposes.

        A leveraged company's income and equity also tend to increase or decrease at a greater rate than would otherwise be the case if money had not been borrowed. As a result, the risk of loss associated with a leveraged company is generally greater than for companies with comparatively less debt.

        Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of operations and cash flow.

The asset management business is intensely competitive.

        We compete as an alternative asset manager for both investors and investment opportunities. Our competitors consist primarily of sponsors of public and private investment funds, business development companies, investment banks, commercial finance companies and operating companies acting as strategic

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buyers. We believe that competition for investors is based primarily on investment performance; business reputation; the duration of relationships with investors; the quality of services provided to investors; pricing; and the relative attractiveness of the types of investments that have been or are to be made. We believe that competition for investment opportunities is based primarily on the pricing, terms and structure of a proposed investment and certainty of execution. A number of factors serve to increase our competitive risks:

a number of our competitors in some of our businesses have greater financial, technical, marketing and other resources and more personnel than we do;

several of our competitors have recently raised, or are expected to raise, significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit;

some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities;

some of our competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments;

our competitors that are corporate buyers may be able to achieve synergistic cost savings in respect of an investment, which may provide them with a competitive advantage in bidding for an investment;

there are relatively few barriers to entry impeding the formation of new funds, including a relatively low cost of entering these businesses, and the successful efforts of new entrants into our various lines of business, including major commercial and investment banks and other financial institutions, have resulted in increased competition;

some investors may prefer to invest with an investment manager that is not publicly traded; and

other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

        We may lose investment opportunities in the future if we do not match investment prices, structures and terms offered by competitors. Alternatively, we may experience decreased investment returns and increased risks of loss if we match investment prices, structures and terms offered by competitors. In addition, if interest rates were to rise or if market conditions for competing investment products improve and such products begin to offer rates of return superior to those achieved by our funds, the attractiveness of our funds relative to investments in other investment products could decrease. This competitive pressure could adversely affect our ability to make successful investments and limit our ability to raise future funds, either of which would adversely impact our business, results of operations and cash flow.

The due diligence process that we undertake in connection with our investments may not reveal all facts that may be relevant in connection with an investment.

        Before making our investments, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. The objective of the due diligence process is to identify attractive investment opportunities based on the facts and circumstances surrounding an investment and, in the case of private equity investments, and to prepare a framework that may be used from the date of an acquisition to drive operational achievement and value creation. When conducting due diligence, we typically evaluate a number of important business, financial, tax, accounting, environmental and legal issues in determining whether or not to proceed with an investment. Outside consultants, legal advisers, accountants and investment banks are involved in the due diligence process in varying degrees

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depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. The due diligence process may at times be subjective with respect to newly organized companies for which only limited information is available. Accordingly, we cannot be certain that the due diligence investigation that we will carry out with respect to any investment opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. We also cannot be certain that our due diligence investigations will result in investments being successful.

Our asset management activities involve investments in relatively high-risk, illiquid assets, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of the capital invested.

        Our funds hold investments in securities that are not publicly traded. In many cases, our funds may be prohibited by contract or by applicable securities laws from selling such securities for a period of time. Our funds will generally not be able to sell these securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration is available. The ability of many of our funds to dispose of investments is heavily dependent on the public equity markets. For example, the ability to realize any value from an investment may depend upon the ability to complete an initial public offering of the portfolio company in which such investment is made. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing our investment returns to risks of downward movement in market prices during the intended disposition period. Accordingly, under certain conditions, our funds may be forced to either sell securities at lower prices than they had expected to realize or defer sales that they had planned to make, potentially for a considerable period of time. We have made and expect to continue to make significant capital investments in our current and future funds. Contributing capital to these funds is risky, and we may lose some or all of the principal amount of our investments.

The investments of our funds are subject to a number of inherent risks.

        Our results are highly dependent on our continued ability to generate attractive returns from our investments. Investments made by our private equity funds involve a number of significant risks inherent to private equity investing, including the following:

companies in which private equity investments are made may have limited financial resources and may be unable to meet their obligations under their securities, which may be accompanied by a deterioration in the value of their equity securities or any collateral or guarantees provided with respect to their debt;

companies in which private equity investments are made are more likely to depend on the management talents and efforts of a small group of persons and, as a result, the death, disability, resignation or termination of one or more of those persons could have a material adverse impact on their business and prospects and the investment made;

companies in which private equity investments are made generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and

executive officers, directors and employees of an equity sponsor may be named as defendants in litigation involving a company in which a private equity investment is made or is being made.

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Our private equity investments are typically among the largest in the industry, which involve certain complexities and risks that are not encountered in small- and medium-sized investments.

        Our private equity funds make investments primarily in companies with large capitalizations, which involves certain complexities and risks that are not encountered in small- and medium-sized investments. For example, larger transactions may be more difficult to finance and exiting larger deals may present incremental challenges. In addition, larger transactions may pose greater challenges in implementing changes in the company's management, culture, finances or operations, and may entail greater scrutiny by regulators, labor unions and other third parties. Recently, labor unions have been more active in opposing certain larger investments by our private equity funds and private equity firms generally.

        In recent years, the amount of equity capital that is required to complete a large capitalization private equity transaction has increased significantly, which has resulted in some of the largest private equity transactions being structured as "consortium transactions." A consortium transaction involves an equity investment in which two or more private equity firms serve together or collectively as equity sponsors. While we have sought to limit where possible the amount of consortium transactions in which we have been involved, we have participated in a significant number of those transactions. Consortium transactions generally entail a reduced level of control by our firm over the investment because governance rights must be shared with the other private equity sponsors. Accordingly, we may not be able to control decisions relating to a consortium investment, including decisions relating to the management and operation of the company and the timing and nature of any exit, which could result in the risks described in "—Our funds have made investments in companies that we do not control, exposing us to the risk of decisions made by others with which we may not agree." Any of these factors could increase the risk that our larger investments could be less successful. The consequences to our investment funds of an unsuccessful larger investment could be more severe given the size of the investment.

Our funds have made investments in companies that we do not control, exposing us to the risk of decisions made by others with which we may not agree.

        Our funds hold investments that include debt instruments and equity securities of companies that we do not control. Such instruments and securities may be acquired by our funds through trading activities or through purchases of securities from the issuer. In addition, our funds may acquire minority equity interests, particularly when sponsoring investments as part of a large investor consortium, and may also dispose of a portion of their majority equity investments in portfolio companies over time in a manner that results in the funds retaining a minority investment. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the value of investments by our funds could decrease and our financial condition, results of operations and cash flow could suffer as a result.

We expect to 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.

        Many of our funds invest a significant portion of their assets in the equity, debt, loans or other securities of issuers that are based outside of the United States. Investing in companies that are based outside of the United States, particularly in countries characterized as having emerging markets, involves risks and considerations that are not typically associated with investments in companies established in the United States. These risks may include the following:

the possibility of exchange control regulations, political and social instability, nationalization or expropriation of assets;

the imposition of non-U.S. taxes;

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less liquid markets;

reliance on a more limited number of commodity inputs, service providers and/or distribution mechanisms;

adverse fluctuations in currency exchange rates;

higher rates of inflation;

less available current information about an issuer;

higher transaction costs;

less government supervision of exchanges, brokers and issuers;

less developed bankruptcy laws;

difficulty in enforcing contractual obligations;

lack of uniform accounting, auditing and financial reporting standards;

less stringent requirements relating to fiduciary duties;

fewer investor protections; and

greater price volatility.

        Although we expect that most of our funds' capital commitments will be denominated in U.S. dollars, investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, levels of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that such strategies will be effective. If we engage in hedging transactions, we may be exposed to additional risks associated with such transactions. See "—Risk management activities may adversely affect the return on our investments."

Our equity investments and many of our debt investments often rank junior to investments made by others, exposing us to greater risk of losing our investment.

        In most cases, the companies in which our funds invest have, or are permitted to have, outstanding indebtedness or equity securities that rank senior to our fund's investment. By their terms, such instruments may provide that their holders are entitled to receive payments of dividends, interest or principal on or before the dates on which payments are to be made in respect of our investment. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a company in which an investment is made, holders of securities ranking senior to our investment would typically be entitled to receive payment in full before distributions could be made in respect of our investment. After repaying senior security holders, the company may not have any remaining assets to use for repaying amounts owed in respect of our investment. To the extent that any assets remain, holders of claims that rank equally with our investment would be entitled to share on an equal and ratable basis in distributions that are made out of those assets. Also, during periods of financial distress or following an insolvency, the ability of our funds to influence a company's affairs and to take actions to protect their investments may be substantially less than that of the senior creditors.

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Risk management activities may adversely affect the return on our investments.

        When managing our exposure to market risks, we frequently use hedging strategies or certain forms of derivative instruments to limit our exposure to changes in the relative values of investments that may result from market developments, including changes in prevailing interest rates and currency exchange rates. The scope of risk management activities undertaken by us varies based on the level and volatility of interest rates, prevailing foreign currency exchange rates, the types of investments that are made and other changing market conditions. The use of hedging transactions and other derivative instruments to reduce the effects of a decline in the value of a position does not eliminate the possibility of fluctuations in the value of the position or prevent losses if the value of the position declines. However, such activities can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of the position. Such transactions may also limit the opportunity for gain if the value of a position increases. Moreover, it may not be possible to limit the exposure to a market development that is so generally anticipated that a hedging or other derivative transaction cannot be entered into at an acceptable price.

        The success of any hedging or other derivative transactions that we enter into generally will depend on our ability to correctly predict market changes. As a result, while we may enter into such transactions in order to reduce our exposure to market risks, unanticipated market changes may result in poorer overall investment performance than if the hedging or other derivative transaction had not been executed. In addition, the degree of correlation between price movements of the instruments used in connection with hedging activities and price movements in a position being hedged may vary. Moreover, for a variety of reasons, we may not seek or be successful in establishing a perfect correlation between the instruments used in a hedging or other derivative transactions and the position being hedged. An imperfect correlation could prevent us from achieving the intended result and could give rise to a loss. In addition, it may not be possible to fully or perfectly limit our exposure against all changes in the value of our investments, because the value of investments is likely to fluctuate as a result of a number of factors, some of which will be beyond our control or ability to hedge.

Certain of our funds may make a limited number of investments, or investments that are concentrated in certain geographic regions or asset types, which could negatively affect their performance to the extent those concentrated investments perform poorly.

        The governing agreements of our funds contain only limited investment restrictions and only limited requirements as to diversification of fund investments, either by geographic region or asset type. During periods of difficult market conditions or slowdowns in these sectors or geographic regions, decreased revenues, difficulty in obtaining access to financing and increased funding costs may be exacerbated by this concentration of investments, which would result in lower investment returns.

Our funds may make investments that could give rise to a conflict of interest.

        Our funds invest in a broad range of asset classes throughout the corporate capital structure. These investments include investments in corporate loans and debt securities, preferred equity securities and common equity securities. In certain cases, we may manage separate funds that invest in different parts of the same company's capital structure. For example, our credit strategy funds may invest in different classes of the same company's debt and may make debt investments in a company that is owned by one of our private equity funds. In those cases, the interests of our funds may not always be aligned, which could create actual or potential conflicts of interest or the appearance of such conflicts. For example, one of our private equity funds could have an interest in pursuing an acquisition, divestiture or other transaction that, in our judgment, could enhance the value of the private equity investment, even though the proposed transaction would subject one of our credit strategy fund's debt investments to additional or increased risks. Similarly, our ability to effectively implement our public equity strategies may be limited to the extent that contractual obligations entered into in the ordinary course of our traditional private equity business

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impose restrictions on our engaging in transactions that we may be interested in otherwise pursuing. Appropriately dealing with conflicts of interest is complex and difficult and we could suffer reputational damage or potential liability if we fail, or appear to fail, to deal appropriately with conflicts as they arise.

Risks Related to Our Organizational Structure

Our unitholders do not control our Managing Partner or vote in the election or removal of its directors and will have limited ability to influence decisions regarding our business.

        Our Managing Partner, which serves as our sole general partner and manages our business and affairs, is owned by our senior principals, including our founders. Pursuant to its limited liability company agreement, our Managing Partner has established a board of directors that will be responsible for the oversight of our business and operations. The board of directors, co-chaired by our founders, appoints the officers of the Managing Partner. Our unitholders do not control our Managing Partner or its board of directors and, unlike the holders of common stock in a corporation, they will have only limited voting rights under our partnership agreement and generally will be unable to influence decisions regarding our business. Our unitholders also will not have the right to remove our Managing Partner as the general partner of our partnership without our Managing Partner's consent.

Our founders will be able to determine the outcome of any matter that may be submitted for a vote of the limited partners.

        Immediately following this offering, KKR Holdings, which is owned by our principals and certain of our former personnel and controlled by our founders, will beneficially own           % of the equity in our business. KKR Holdings will also hold an equivalent amount of special voting units in our partnership, which will entitle it to cast an equivalent number of votes on those few matters that may be submitted to a vote of our unitholders. Due to the foregoing, immediately following this offering, our founders, who will have the power to vote the special voting units held by KKR Holdings, will generally have sufficient voting power to determine the outcome of those few matters that may be submitted for a vote of our unitholders, including amendments to our partnership agreement that may be materially adverse to our unitholders. In addition, our partnership agreement contains provisions that enable us to take actions that would materially and adversely affect all unitholders or a particular class of unitholders upon the majority vote of all outstanding voting units, and since          % of our voting units will be controlled by our founders immediately following this offering, our founders will have the ability to take actions that could materially and adversely affect unitholders either as a whole or as a particular class.

        Our unitholders' voting rights are further restricted by provisions in our partnership agreement stating that any common units held by a person that beneficially owns          % or more of any class of our common units then outstanding (other than our Managing Partner or its affiliates, or a direct or subsequently approved transferee of our Managing Partner or its affiliates) cannot be voted on any matter. Our partnership agreement also contains provisions limiting the ability of our unitholders to call meetings, to acquire information about our operations, and to influence the manner or direction of our management. Our partnership agreement also does not restrict our Managing Partner's ability to take actions that may result in our being treated as an entity taxable as a corporation for U.S. federal (and applicable state) income tax purposes. Furthermore, unitholders are not entitled to dissenters' rights of appraisal under our partnership agreement or applicable Delaware law in the event of a merger or consolidation, a sale of substantially all of our assets or any other transaction or event.

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        In addition, as a result of these matters and the provisions referred to under "—Our unitholders do not control our Managing Partner or vote in the election or removal of its directors and will have limited ability to influence decisions regarding our business," our unitholders may be deprived of an opportunity to receive a premium for their common units in the future through a sale of our partnership, and the trading prices of our common units may be adversely affected by the absence or reduction of a takeover premium in the trading price.

We are permitted to repurchase all of the outstanding common units under certain circumstances, and this repurchase may occur at an undesirable time or price.

        We have the right to acquire all of our then-outstanding common units at the then-current trading price either if    % or less of our common units are held by persons other than our Managing Partner and its affiliates or if we, the Managing Partner or its directors, officers, trustees or agents are in any manner subjected to the provisions of the Investment Company Act. As a result of our Managing Partner's right to purchase outstanding common units, a holder of common units may have his common units purchased at an undesirable time or price.

We are a limited partnership and as a result will qualify for and intend to rely on some exemptions from the corporate governance and other requirements of the New York Stock Exchange.

        We are a limited partnership and will qualify for exceptions from certain corporate governance and other requirements of the rules of the New York Stock Exchange. Pursuant to these exceptions, limited partnerships may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including the requirements (i) that a majority of the board of directors of the listed company consist of independent directors, (ii) that the listed company have a nominating and corporate governance committee that is composed entirely of independent directors and (iii) that the listed company have a compensation committee that is composed entirely of independent directors. In addition, as a limited partnership, we will not be required to hold annual unitholder meetings. While our Managing Partner's board of directors will consist of a majority of directors who are independent under New York Stock Exchange Rules and have a nominating and governance committee, our nominating and governance committee will not consist entirely of independent directors or meet other substantive requirements that would be applicable absent such an exemption, and we do not intend to have a compensation committee. Accordingly, you will not have the same protections afforded to equity holders of entities that are subject to all of the corporate governance requirements of the New York Stock Exchange.

Potential conflicts of interest may arise among our Managing Partner, its affiliates and us. Our Managing Partner and its affiliates have limited fiduciary duties to us and our unitholders, which may permit them to favor their own interests to the detriment of us and our unitholders.

        Conflicts of interest may arise among our Managing Partner and its affiliates, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our Managing Partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following:

our Managing Partner determines the amount and timing of our investments and dispositions, indebtedness, issuances of additional partner interests and amounts of reserves, each of which can affect the amount of cash that is available for distribution to you;

our Managing Partner is allowed to take into account the interests of parties other than our partnership in resolving conflicts of interest, which has the effect of limiting its duties, including fiduciary duties, to our unitholders. For example, our affiliates that serve as the general partners of our funds have fiduciary and contractual obligations to our fund investors, and such obligations may cause such affiliates to regularly take actions that might adversely affect our near-term results of operations or cash flow. Our Managing Partner would have no obligation to intervene in, or to notify our unitholders of, such actions by such affiliates;

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because our principals will indirectly hold Group Partnership units that are not subject to corporate income taxation and we will hold some of our Group Partnership units through a wholly-owned subsidiary that is taxable as a corporation, conflicts may arise between our principals and our partnership relating to the selection and structuring of investments;

as discussed below, our Managing Partner has limited its liability and reduced or eliminated its duties, including fiduciary duties, under our partnership agreement, while also restricting the remedies available to our unitholders for actions that, without these limitations, might constitute breaches of duty, including fiduciary duties. In addition, we have agreed to indemnify our Managing Partner and its affiliates to the fullest extent permitted by law, except with respect to conduct involving bad faith, fraud or willful misconduct. By purchasing our common units, you will have agreed and consented to the provisions set forth in our partnership agreement, including the provisions regarding conflicts of interest situations that, in the absence of such provisions, might constitute a breach of fiduciary or other duties under applicable state law;

our partnership agreement does not restrict our Managing Partner from causing us to pay it or its affiliates for any services rendered, or from entering into additional contractual arrangements with any of these entities on our behalf, so long as the terms of any such additional contractual arrangements are fair and reasonable to us as determined under the partnership agreement;

our Managing Partner determines how much debt we incur and that decision may adversely affect our credit ratings;

our Managing Partner determines which costs incurred by it and its affiliates are reimbursable by us;

other than as set forth in the non-competition, non-solicitation and confidentiality agreements to which our principals will be subject, which may not be enforceable, affiliates of our Managing Partner and existing and former personnel employed by our Managing Partner are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us;

our Managing Partner controls the enforcement of obligations owed to us by it and its affiliates; and

our Managing Partner decides whether to retain separate counsel, accountants or others to perform services for us.

        See "Certain Relationships and Related Party Transactions" and "Conflicts of Interest and Fiduciary Responsibilities."

Our partnership agreement will contain provisions that reduce or eliminate duties (including fiduciary duties) of our Managing Partner and limit remedies available to unitholders for actions that might otherwise constitute a breach of duty. It will be difficult for a unitholder to successfully challenge a resolution of a conflict of interest by our Managing Partner or by its conflicts committee.

        Our partnership agreement will contain provisions that require our unitholders to waive or consent to conduct by our Managing Partner and its affiliates that might otherwise raise issues about compliance with fiduciary duties or applicable law. For example, our partnership agreement will provide that when our Managing Partner is acting in its individual capacity, as opposed to in its capacity as our Managing Partner, it may act without any fiduciary obligations to us or our unitholders whatsoever. When our Managing Partner, in its capacity as our general partner, is permitted to or required to make a decision in its "sole discretion" or "discretion" or that it deems "necessary or appropriate" or "necessary or advisable," then our Managing Partner will be entitled to consider only such interests and factors as it desires, including its own interests, and will have no duty or obligation (fiduciary or otherwise) to give any consideration to any interest of or factors affecting us or any unitholders and will not be subject to any different standards imposed by the partnership agreement, the Delaware Revised Uniform Limited Partnership Act, which we refer to as the Delaware Limited Partnership Act, or under any other law, rule or regulation or in equity.

        The above modifications of fiduciary duties are expressly permitted by Delaware law. Hence, we and our unitholders will only have recourse and be able to seek remedies against our Managing Partner if our

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Managing Partner breaches its obligations pursuant to our partnership agreement. Unless our Managing Partner breaches its obligations pursuant to our partnership agreement, we and our unitholders will not have any recourse against our Managing Partner even if our Managing Partner were to act in a manner that was inconsistent with traditional fiduciary duties. Furthermore, even if there has been a breach of the obligations set forth in our partnership agreement, our partnership agreement provides that our Managing Partner and its officers and directors will not be liable to us or our unitholders for errors of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that the Managing Partner or its officers and directors acted in bad faith or engaged in fraud or willful misconduct. These provisions are detrimental to the unitholders because they restrict the remedies available to unitholders for actions that without those limitations might constitute breaches of duty including fiduciary duties.

        Whenever a potential conflict of interest exists between us and our Managing Partner, our Managing Partner may resolve such conflict of interest. If our Managing Partner determines that its resolution of the conflict of interest is on terms no less favorable to us than those generally being provided to or available from unrelated third parties or is fair and reasonable to us, taking into account the totality of the relationships between us and our Managing Partner, then it will be presumed that in making this determination, our Managing Partner acted in good faith. A unitholder seeking to challenge this resolution of the conflict of interest would bear the burden of overcoming such presumption. This is different from the situation with Delaware corporations, where a conflict resolution by an interested party would be presumed to be unfair and the interested party would have the burden of demonstrating that the resolution was fair.

        Also, if our Managing Partner obtains the approval of the conflicts committee of our Managing Partner, the resolution will be conclusively deemed to be fair and reasonable to us and not a breach by our Managing Partner of any duties it may owe to us or our unitholders. This is different from the situation with Delaware corporations, where a conflict resolution by a committee consisting solely of independent directors may, in certain circumstances, merely shift the burden of demonstrating unfairness to the plaintiff. If you choose to purchase a common unit, you will be treated as having consented to the provisions set forth in the partnership agreement, including provisions regarding conflicts of interest situations that, in the absence of such provisions, might be considered a breach of fiduciary or other duties under applicable state law. As a result, unitholders will, as a practical matter, not be able to successfully challenge an informed decision by the conflicts committee. See "Conflicts of Interest and Fiduciary Responsibilities."

The control of our Managing Partner may be transferred to a third party without unitholder consent.

        Our Managing Partner may transfer its general partner interest to a third party in a merger or consolidation or in a transfer of all or substantially all of its assets without the consent of our unitholders. Furthermore, at any time, the members of our Managing Partner may sell or transfer all or part of their limited liability company interests in our Managing Partner without the approval of the unitholders, subject to certain restrictions as described elsewhere in this prospectus. A new general partner may not be willing or able to form new funds and could form funds that have investment objectives and governing terms that differ materially from those of our current funds. A new owner could also have a different investment philosophy, employ investment professionals who are less experienced, be unsuccessful in identifying investment opportunities or have a track record that is not as successful as our track record. If any of the foregoing were to occur, we could experience difficulty in making new investments, and the value of our existing investments, our business, our results of operations and our financial condition could materially suffer.

We intend to pay periodic distributions to our unitholders, but our ability to do so may be limited by our holding company structure, applicable provisions of Delaware law and contractual restrictions.

        Following the completion of this offering, we intend to pay cash distributions on a quarterly basis. We are a holding company and will have no material assets other than the Group Partnership units that we will

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hold through wholly-owned subsidiaries and will have no independent means of generating income. Accordingly, we intend to cause the Group Partnerships to make distributions on the Group Partnership units, including Group Partnership units that we directly or indirectly hold, in order to provide us with sufficient amounts to fund distributions we may declare on our common units. If the Group Partnerships make such distributions, other holders of Group Partnership units, including KKR Holdings, will be entitled to receive equivalent distributions pro rata based on their Group Partnership units, except that we will be entitled to priority distributions of income through          as described under "Distribution Policy."

        The declaration and payment of any future distributions will be at the sole discretion of our Managing Partner, which may change our distribution policy at any time. Our Managing Partner will take into account general economic and business conditions, our strategic plans and prospects, our business and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, including payment obligations pursuant to the tax receivable agreement, legal, tax and regulatory restrictions, restrictions or other implications on the payment of distributions by us to our unitholders or by our subsidiaries to us and such other factors as our Managing Partner may deem relevant. Under the Delaware Limited Partnership Act, we may not make a distribution to a partner if after the distribution all our liabilities, other than liabilities to partners on account of their partner interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of our assets. If we were to make such an impermissible distribution, any limited partner who received a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Limited Partnership Act would be liable to us for the amount of the distribution for three years. In addition, the Group Partnerships' cash flow from operations may be insufficient to enable it to make required minimum tax distributions to its partners, in which case the Group Partnerships may have to borrow funds or sell assets, and thus our liquidity and financial condition could be materially adversely affected.

        Furthermore, by paying cash distributions rather than investing that cash in our businesses, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise.

        Our ability to characterize such distributions as capital gains or qualified dividend income may be limited, and you should expect that some or all of such distributions may be regarded as ordinary income.

We will be required to pay our principals for most of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of the tax basis step-up we receive in connection with subsequent exchanges of our common units and related transactions.

        We and our intermediate holding company may be required to acquire Group Partnership units from time to time pursuant to our exchange agreement with KKR Holdings. To the extent this occurs, the exchanges are expected to result in an increase in our intermediate holding company's share of the tax basis of the tangible and intangible assets of KKR Management Holdings L.P. that would not otherwise have been available. This increase in tax basis may increase (for tax purposes) depreciation and amortization and therefore reduce the amount of income tax our intermediate holding company would otherwise be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

        We will enter into a tax receivable agreement with KKR Holdings requiring our intermediate holding company to pay to KKR Holdings or transferees of its Group Partnership units 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the intermediate holding company actually realizes (or is deemed to realize, in the case of an early termination payment by our intermediate holding company or a change of control) as a result of this increase in tax basis, as well as 85% of the amount of any such savings the intermediate holding company actually realizes (or is deemed to realize) as a result of increases in tax basis that arise due to future payments under the agreement. This payment obligation will be an obligation of our intermediate holding company and not of either Group Partnership. In the event

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that other of our current or future subsidiaries become taxable as corporations and acquire Group Partnership units in the future, or if we become taxable as a corporation for U.S. federal income tax purposes, we expect that each will become subject to a tax receivable agreements with substantially similar terms. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our common units at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our taxable income, we expect that as a result of the size of the increases in the tax basis of the tangible and intangible assets of our Group Partnerships, the payments that we may be required to make to our existing owners will be substantial. The payments under the tax receivable agreement are not conditioned upon our existing owners' continued ownership of us. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement as a result of timing discrepancies or otherwise.

        Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, our existing owners will not reimburse us for any payments previously made under the tax receivable agreement if such tax basis increase is successfully challenged by the IRS. As a result, in certain circumstances payments to our existing owners under the tax receivable agreement could be in excess of the intermediate holding company's cash tax savings. The intermediate holding company's ability to achieve benefits from any tax basis increase, and the payments to be made under this agreement, will depend upon a number of factors, as discussed above, including the timing and amount of our future income.

If we were deemed to be an "investment company" under the Investment Company Act, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

        A person will generally be deemed to be an "investment company" for purposes of the Investment Company Act if:

it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

        We believe that we are engaged primarily in the business of providing asset management services and not in the business of investing, reinvesting or trading in securities. We regard ourselves as an asset management firm and do not propose to engage primarily in the business of investing, reinvesting or trading in securities. Accordingly, we do not believe that we are, or following this offering will be, an "orthodox" investment company as defined in section 3(a)(1)(A) of the Investment Company Act and described in the first bullet point above. Further, following the completion of this offering, we will have no material assets other than our equity interest as general partner of one of the Group Partnerships and our equity interest in a wholly-owned subsidiary, which in turn will have no material assets other than the equity interest as general partner of the other Group Partnership. Through these interests, we will directly or indirectly be the sole general partners of the Group Partnerships and will be vested with all management and control over the Group Partnerships. We do not believe our equity interest in our wholly-owned subsidiary or our equity interests directly or through our wholly-owned subsidiary in the Group Partnerships are investment securities. Moreover, because we believe that the capital interests of the general partners of our funds in their respective funds are neither securities nor investment securities, we believe that less than 40% of our partnership's total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis after this offering will be comprised of assets that could be considered investment securities. Accordingly, we do not believe we are, or following this offering will be, an inadvertent investment company by virtue of the 40% test in Section 3(a)(1)(C) of the Investment

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Company Act as described in the second bullet point above. In addition, we believe we are not an investment company under Section 3(b)(1) of the Investment Company Act because we are primarily engaged in a non-investment company business.

        The Investment Company Act and the rules thereunder contain detailed parameters for the organization and operation of investment companies. Among other things, the Investment Company Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain governance requirements. We intend to conduct our operations so that we will not be deemed to be an investment company under the Investment Company Act. If anything were to happen which would cause our partnership to be deemed to be an investment company under the Investment Company Act, requirements imposed by the Investment Company Act, including limitations on our capital structure, ability to transact business with affiliates (including us) and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among our partnership, the Group Partnerships and KKR Holdings, or any combination thereof, and materially adversely affect our business, financial condition and results of operations. In addition, we may be required to limit the amount of investments that we make as a principal or otherwise conduct our business in a manner that does not subject us to the registration and other requirements of the Investment Company Act.

Risks Related to Our Common Units and this Offering

There may not be an active trading market for our common units, which may cause our common units to trade at a discount from the initial offering price and make it difficult to sell the common units you purchase.

        Prior to this offering, there has not been a public trading market for our common units. It is possible that after this offering an active trading market will not develop or continue, which would make it difficult for you to sell your common units at an attractive price or at all. The initial public offering price per common unit will be determined by agreement among us and the representatives of the underwriters and may not be indicative of the price at which our common units will trade in the public market after this offering.

Our common unit price may decline due to the large number of common units eligible for future sale and for exchange.

        The market price of our common units could decline as a result of sales of a large number of common units in the market after the offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell common units in the future at a time and at a price that we deem appropriate. Upon completion of this offering, we will have          common units outstanding or          common units outstanding assuming the underwriters exercise in full their option to purchase additional common units from us. All of the common units will have been sold in this offering and will be freely tradable without restriction or further registration under the Securities Act by persons other than our "affiliates." See "Common Units Eligible for Future Sale." Subject to lock-up restrictions described under "Underwriting," we may issue and sell in the future additional common units.

        In addition, upon completion of this offering, KKR Holdings, which is owned by our principals and certain of our former personnel and controlled by our founders, will own an aggregate of           Group Partnership units. Over time, KKR Holdings may distribute to its members these Group Partnership units. These members would then have the right to compel the Group Partnerships to redeem these Group Partnership units for cash or our common units, at the option of the Group Partnerships. When a member of KKR Holdings gives the Group Partnerships notice of his or her intention to compel a redemption, our partnership, with respect to our direct interests in KKR Fund Holdings L.P., and our intermediate holding company with respect to interests in KKR Management Holdings L.P., will have superseding rights to instead acquire Group Partnership units for cash or our common units. The common units issued upon

48



such exchanges would be "restricted securities," as defined in Rule 144 under the Securities Act, unless we register such issuances. However, we will enter into a registration rights agreement with KKR Holdings that will require us to register these common units under the Securities Act. While we intend to contractually restrict our existing owners' ability to transfer Group Partnership units or common units that they may hold, these contractual provisions may lapse over time or be waived, modified or amended at any time.

        In addition, our partnership agreement authorizes us to issue an unlimited number of additional partnership securities and options, rights, warrants and appreciation rights relating to partnership securities for the consideration and on the terms and conditions established by our Managing Partner in its sole discretion without the approval of our unitholders, including awards under the 2007 Equity Incentive Plan. In accordance with the Delaware Limited Partnership Act and the provisions of our partnership agreement, we may also issue additional partner interests that have designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to our common units.

The market price of our common units may be volatile, which could cause the value of your investment to decline.

        Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of common units in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or distributions to unitholders, additions or departures of key management personnel, failure to meet analysts' earnings estimates, publication of research reports about our industry, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, and in response the market price of our common units could decrease significantly. You may be unable to resell your common units at or above the initial public offering price.

Risks Relating to U.S. Taxation

If we were treated as a corporation for U.S. federal income tax or state tax purposes, then our distributions to you would be substantially reduced and the value of our common units could be adversely affected.

        The value of your investment in us depends in part on our being treated as a partnership for U.S. federal income tax purposes, which requires that 90% or more of our gross income for every taxable year consist of qualifying income, as defined in Section 7704 of the Internal Revenue Code and that our partnership not be registered under the Investment Company Act. Qualifying income generally includes dividends, interest, capital gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We may not meet these requirements or current law may change so as to cause, in either event, us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject to U.S. federal income tax. We have not requested, and do not plan to request, a ruling from the IRS, on this or any other matter affecting us.

        If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal, state and local income tax on our taxable income at the applicable tax rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would otherwise flow through to you. Because a tax would be imposed upon us as a corporation, our distributions to you would be substantially reduced which could cause a reduction in the value of our common units.

        Current law may change, causing us to be treated as a corporation for U.S. federal or state income tax purposes or otherwise subjecting us to entity level taxation. See "—Risks Related to Our Business—Legislation has been introduced that would, if enacted, preclude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and

49



apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units." Because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an entity, our distributions to you would be reduced.

You will be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash dividends from us.

        As long as 90% of our gross income for each taxable year constitutes qualifying income as defined in Section 7704 of the Internal Revenue Code, we are not required to register as an investment company under the Investment Company Act on a continuing basis, and assuming there is no change in law (see "—Risks Related to Our Business—Legislation has been introduced that would, if enacted, prelude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units"), we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly-traded partnership taxable as a corporation. As a result, you will be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on your allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow through basis) for each of our taxable years ending with or within your taxable year, regardless of whether or not you receive cash dividends from us.

        You may not receive cash dividends equal to your allocable share of our net taxable income or even the tax liability that results from that income, although we intend to make tax distributions, a portion of which will be distributed to our unitholders. See "Distribution Policy." In addition, certain of our holdings, including holdings, if any, in a controlled foreign corporation, or a CFC, and a passive foreign investment company, or a PFIC, may produce taxable income prior to the receipt of cash relating to such income, and unitholders that are U.S. taxpayers will be required to take such income into account in determining their taxable income. In the event of an inadvertent termination of our partnership status for which the IRS has granted us limited relief, each holder of our common units may be obligated to make such adjustments as the IRS may require to maintain our status as a partnership. Such adjustments may require persons holding our common units to recognize additional amounts in income during the years in which they hold such units.

        In addition, because of our methods of allocating income and gain among our unitholders, you may be taxed on amounts that accrued economically before you became a unitholder. See "Material U.S. Federal Tax Considerations."

Our interest in certain of our businesses will be held through the intermediate holding company, which will be treated as a corporation for U.S. federal income tax purposes; such corporation will be liable for significant taxes and may create other adverse tax consequences, which could potentially adversely affect the value of your investment.

        In light of the publicly-traded partnership rules under U.S. federal income tax laws and other requirements, we will hold our interest in certain of our businesses through the intermediate holding company which will be treated as corporations for U.S. federal income tax purposes. The intermediate holding company will be liable for significant U.S. federal income taxes and applicable state, local and other taxes that would not otherwise be incurred, which could adversely affect the value of your investment, and which could be increased if the IRS were to successfully reallocate deductions or income of the related entities conducting our business. Those additional taxes have not applied to our existing owners in our organizational structure in effect before this offering and will not apply to our existing owners following this offering to the extent they own equity interests directly or indirectly in the Group Partnerships.

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Complying with certain tax-related requirements may cause us to invest through foreign or domestic corporations subject to corporate income tax or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into.

        In order for us to be treated as a partnership for U.S. federal income tax purposes and not as an association or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed below on a continuing basis and we must not be required to register as an investment company under the Investment Company Act. In order to effect such treatment, we or our subsidiaries may be required to invest through foreign or domestic corporations subject to corporate income tax, or enter into acquisitions, borrowings, financings or other transactions we may not have otherwise entered into.

Tax gain or loss on disposition of our common units could be more or less than expected.

        If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and the adjusted tax basis in those common units. Prior distributions to you in excess of the total net taxable income allocated to you, which decreased the tax basis in your common units, will in effect become taxable income to you if the common units are sold at a price greater than your tax basis in those common units, even if the price is less than the original cost. A portion of the amount realized, whether or not representing gain, may be ordinary income to you.

We do not intend to make, or cause to be made, an election under Section 754 of the Internal Revenue Code to adjust our asset basis or the asset basis of certain of the Group Partnerships. Thus, a holder of common units could be allocated more taxable income in respect of those common units prior to disposition than if such an election were made.

        We currently do not intend to make, or cause to be made, an election to adjust asset basis under Section 754 of the Internal Revenue Code with respect to us. If no such election is made, there will generally be no adjustment for a transferee of common units even if the purchase price of those common units is higher than the common units' share of the aggregate tax basis of our assets immediately prior to the transfer. In that case, on a sale of an asset, gain allocable to a transferee could include built-in gain allocable to the transferee at the time of the transfer, which built-in gain would otherwise generally be eliminated if a Section 754 election had been made. See "Material U.S. Federal Tax Considerations—U.S. Taxes—Consequences to U.S. Holders of Common Units—Section 754 Election."

We may hold or acquire certain investments through an entity classified as a PFIC or CFC for U.S. federal income tax purposes.

        Certain of our funds' investments may be in foreign corporations or may be acquired through a foreign subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an entity may be a PFIC or a CFC for U.S. federal income tax purposes. Unitholders indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences. See "Material U.S. Federal Tax Considerations—U.S. Taxes—Consequences to U.S. Holders of Common Units—Passive Foreign Investment Companies" and "—Controlled Foreign Corporations."

Non-U.S. persons face unique U.S. tax issues from owning common units that may result in adverse tax consequences to them.

        We may be, or may become, engaged in a U.S. trade or business for U.S. federal income tax purposes, including by reason of investments in U.S. real property holding corporations in which case some portion of our income would be treated as effectively connected income with respect to non-U.S. holders, or ECI. To the extent our income is treated as ECI, non-U.S. holders generally would be subject to withholding tax on distributions they receive of such income, would be required to file a U.S. federal income tax return for such year reporting their allocable share of income effectively connected with such trade or business and any other income treated as ECI, and would be subject to U.S. federal income tax at regular U.S. tax rates on any such income (state and local income taxes and filings may also apply in that event). Non-U.S. holders that are corporations may also be subject to a 30% branch profits tax on their distributions of such

51



income. In addition, certain income from U.S. sources that is not ECI allocable to non-U.S. holders will be reduced by withholding taxes imposed at the highest effective applicable tax rate.

Tax-exempt entities face unique tax issues from owning common units that may result in adverse tax consequences to them.

        In light of our intended investment activities, we are likely to derive income that constitutes unrelated business taxable income, or UBTI, because we will likely incur acquisition indebtedness. Consequently, a holder of common units that is a tax-exempt organization will likely be subject to unrelated business income tax to the extent that its allocable share of our income consists of UBTI. A tax-exempt partner of a partnership would be treated as earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner, if the partnership derives income from debt-financed property or if the partner interest itself is debt-financed.

We cannot match transferors and transferees of common units, and we will therefore adopt certain income tax accounting conventions that may not conform with all aspects of applicable tax requirements. The IRS may challenge this treatment, which could adversely affect the value of our common units.

        Because we cannot match transferors and transferees of common units, we will adopt depreciation, amortization and other tax accounting positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of common units and could have a negative impact on the value of our common units or result in audits of and adjustments to our unitholders' tax returns.

The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our partnership for U.S. federal income tax purposes.

        We will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. A termination of our partnership would, among other things, result in the closing of our taxable year for all unitholders. See "Material U.S. Federal Tax Considerations" for a description of the consequences of our termination for U.S. federal income tax purposes.

Unitholders may be subject to state and local taxes and return filing requirements as a result of investing in our common units.

        In addition to U.S. federal income taxes, our unitholders may be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if our unitholders do not reside in any of those jurisdictions. Our unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each unitholder to file all U.S. federal, state and local tax returns that may be required of such unitholder. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

We do not expect to be able to furnish to each unitholder specific tax information within 90 days after the close of each calendar year, which means that holders of common units who are U.S. taxpayers should anticipate the need to file annually a request for an extension of the due date of their income tax return.

        As a publicly traded partnership, our operating results, including distributions of income, dividends, gains, losses or deductions, and adjustments to carrying basis, will be reported on Schedule K-1 and distributed to each unitholder annually. It will require longer than 90 days after the end of our fiscal year to obtain the requisite information from all lower-tier entities so that K-1s may be prepared for the Partnership. For this reason, holders of common units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year. See "Material U.S. Federal Tax Considerations—U.S. Taxes—Administrative Matters—Information Returns."

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USE OF PROCEEDS

        We estimate that we will receive approximately $          of net proceeds from this offering after deducting estimated underwriting discounts and offering expenses, or $          if the underwriters exercise in full their option to purchase additional common units from us, in each case at the assumed offering price of $                based on the midpoint of the price range indicated on the cover page of this prospectus. We intend to contribute the net proceeds we receive from this offering to the Group Partnerships in exchange for newly issued units in the Group Partnerships. The Group Partnerships will use the proceeds that they receive from us to grow our existing business, to expand into new related businesses, to make additional capital commitments to our funds and portfolio companies and for other general corporate purposes. None of our principals are selling any common units or will otherwise receive any of the net proceeds from this offering.

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DISTRIBUTION POLICY

        We intend to make quarterly cash distributions to our unitholders in amounts that in the aggregate are expected to constitute substantially all of our adjusted cash flow from operations each year in excess of amounts determined by our Managing Partner to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law and any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the ensuing four quarters. Our distribution policy reflects our belief that distributing substantially all of our adjusted cash flow from operations will provide transparency for our unitholders and impose on us an investment discipline with respect to the businesses and strategies that we pursue.

        Adjusted cash flow from operations is intended to reflect the actual cash flow attributable to us and is equal to cash flow presented in accordance with GAAP, adjusted to exclude cash flow relating to (i) the investment activities of our consolidated funds, (ii) the realized and unrealized income attributable to non-controlling interests in consolidated funds and (iii) changes in our operating assets and liabilities. We expect that our first quarterly distribution will be paid in                        in respect of the period from the completion of this offering through                        . Because we will not know what our available adjusted cash flow from operations will be for any year until the end of such year, we expect that our first three quarterly distributions in respect of any given year will generally be smaller than the final quarterly distribution in respect of such year.

        Because we are a holding company and do not own any material cash-generating assets other than our direct and indirect interests in the Group Partnerships, we will depend on cash distributions that we receive on the Group Partnership units that we hold directly or through our intermediate holding company to fund any distributions that we make on our common units. Our Managing Partner intends to cause the Group Partnerships to make cash distributions on the Group Partnership units that we directly and indirectly hold in amounts that are sufficient to allow us to fund any distributions that are declared on our common units. We will fund distributions, if any, in three steps:

first, the Managing Partner will cause the Group Partnerships to make distributions to holders of Group Partnership units pro rata in accordance with their respective percentage interests in the Group Partnerships (except as set forth in the following paragraph);

second, we will cause our intermediate holding company to distribute to us its share of such distributions, after deducting taxes and amounts payable under the tax receivables agreement; and

third, we will distribute our net share of such distributions to our unitholders on a pro rata basis.

        The partnership agreements of the Group Partnerships will provide that until          , distributions from the Group Partnerships, if any, will be allocated each year in three steps:

first, to us and our intermediate holding company until sufficient amounts have been so allocated to permit us to make aggregate distributions to our unitholders of $          per common unit on an annualized basis for such year;

second, to the other holders of Group Partnership units until an equivalent amount on a per unit basis has been distributed to such other holders for such year; and

thereafter, pro rata to all holders of Group Partnership units.

        Accordingly, until          , our principals will not receive distributions, other than tax distributions, in respect of their Group Partnership units for a year unless and until our unitholders receive aggregate distributions of $          per common unit on an annualized basis for such year. We do not intend to maintain this priority distribution after          . After          , all the income (and accordingly distributions) of

54



the Group Partnerships will be allocated pro rata to holders of Group Partnership units in accordance with their respective percentage interests in the Group Partnerships.

        The actual amount and timing of distributions on our common units will be subject to the discretion of our Managing Partner's board of directors, and we cannot assure you that we will in fact make distributions as intended. In particular, the amount and timing of distributions will depend upon a number of factors, including, among others, our available cash and current and anticipated cash needs; general economic and business conditions; our strategic plans and prospects; our results of operations and financial condition; our capital requirements; legal, contractual and regulatory restrictions on the payment of distributions by us or our subsidiaries and such other factors as the board of directors of our Managing Partner considers relevant. In addition, under Section 17-607 of the Delaware Limited Partnership Act, we will not be permitted to make a distribution if, after giving effect to the distribution, our liabilities would exceed the fair value of our assets. To the extent that we enter into one or more credit facilities from time to time, the terms of such facilities may also limit our ability to make distributions to unitholders under certain circumstances.

        If the general partners of the Group Partnerships determine that distributions from the Group Partnerships would otherwise be insufficient to cover the tax liabilities of a holder of a Group Partnership unit, the partnership agreement of each Group Partnership will provide for tax distributions to the holders of Group Partnership units. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the relevant Group Partnership allocable to a holder of a Group Partnership unit multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the non-deductibility of certain expenses and the character of the income). If we had completed the Reorganization Transactions and this offering on January 1, 2006, the assumed effective tax rate for the tax year ended December 31, 2006 would have been approximately 46%. A portion of any such tax distributions received by us, net of amounts used by our subsidiaries to pay their tax liability, will be distributed to our unitholders. Such amounts are generally expected to be sufficient to permit our U.S. unitholders to fund their estimated U.S. tax obligations (including any federal, state and local income taxes) with respect to their distributive shares of net income or gain, after taking into account any withholding tax imposed on us. We cannot assure you that, for any particular unitholder, such distributions will be sufficient to pay the unitholder's actual U.S. or non-U.S. tax liability.

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CAPITALIZATION

        The following table presents our combined cash and cash equivalents and capitalization as of March 31, 2007:

on an actual basis; and

on a pro forma basis giving effect to the Reorganization Transactions, this offering, our use of the proceeds from this offering and the other transactions described under "Unaudited Pro Forma Financial Information."

        You should read this information together with the information included elsewhere in this prospectus, including the information set forth under "Organizational Structure," "Use of Proceeds," "Unaudited Pro Forma Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our predecessor combined financial statements and related notes thereto.

 
  March 31, 2007
 
  Actual
  Pro Forma(1)
 
  ($ in thousands)

Cash and cash equivalents   $ 97,169   $  
Cash and cash equivalents held at consolidated entities     1,851,718      
   
 
Restricted cash and cash equivalents     174,141      
   
 
  Total cash, cash equivalents and restricted cash   $ 2,123,028   $  
   
 

Debt obligations

 

$

1,685,687

 

$

 
Accounts payable, accrued expenses and other liabilities     394,043      
  Total liabilities     2,079,730      

Non-controlling interests in consolidated entities

 

 

21,907,784

 

 

 
Principals' interests in consolidated entities          
Partners' capital     1,892,527      
Accumulated other comprehensive income     7,262      
   
 
  Total partners' capital     1,899,789      
   
 
    Total capitalization   $ 25,887,303   $  
   
 

(1)
A $1.00 increase or decrease in the assumed initial public offering price of $          per common unit, based on the midpoint of the price range indicated on the cover page of this prospectus, would increase or decrease cash and cash equivalents, total cash, cash equivalents and restricted cash, partners' capital, total partners' capital and total capitalization by $           million, $           million, $           million $           million and $             million, respectively, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated expenses payable by us.

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DILUTION

        If you invest in our common units, your interest will be diluted to the extent of the difference between the initial public offering price per common unit and the pro forma net tangible book value per common unit after this offering. Dilution results from the fact that the offering price per common unit is substantially in excess of the book value per common unit attributable to existing equity holders.

        Our pro forma net tangible book value as of March 31, 2007 was approximately $          , or $          per common unit. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, after giving effect to the Reorganization Transactions, and pro forma net tangible book value per common unit represents pro forma net tangible book value divided by the number of common units outstanding, after giving effect to the Reorganization Transactions and assuming that all holders of Group Partnership units (other than our intermediate holding company) exchanged their Group Partnership units for newly-issued common units on a one-for-one basis.

        After giving effect to the Reorganization Transactions and the sale of          common units in this offering at an assumed initial public offering price of $          per common unit, representing the midpoint of the price range on the cover of this prospectus, our pro forma net tangible book value would have been $          , or $          per common unit. This represents an immediate increase in net tangible book value of $          per common unit to existing equity holders and an immediate dilution in net tangible book value of $           per common unit to new investors.

        The following table illustrates this dilution on a per common unit basis assuming the underwriters do not exercise their option to purchase additional common units.

Assumed initial public offering price per common unit         $  
  Pro forma net tangible book value per common unit as of March 31, 2007   $        
  Increase in pro forma net tangible book value per common unit attributable to new investors            
   
     
Pro forma net tangible book value per common unit after the offering            
         
Dilution in pro forma net tangible book value per common unit to new investors         $  
         

        The following table summarizes, on the same pro forma basis as of March 31, 2007, the total number of common units purchased from us, the total cash consideration paid to us and the average price per common unit paid by existing equity holders and by new investors purchasing common units in this offering, assuming that all of the holders of Group Partnership units (other than our intermediate holding company) exchanged their Group Partnership units for newly-issued common units on a one-for-one basis.

 
  Common Units
Purchased

  Total
Consideration

   
 
  Average
Price Per
Common Unit

 
  Number
  Percent
  Amount
  Percent
Existing equity holders                    
New investors                    
  Total                    

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ORGANIZATIONAL STRUCTURE

        The following diagram illustrates the ownership and organizational structure that we will have immediately after the completion of the Reorganization Transactions and this offering.

GRAPHIC


Note:

(*)
Except for KKR Management Holdings Corp., all entities are taxable as partnerships for U.S. federal income tax purposes. KKR Management Holdings Corp. will be taxable as a corporation for U.S. federal income tax purposes. For a discussion of pending legislation that may preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes, see "Risk Factors—Risks Related to Our Business—Legislation has been introduced that would, if enacted, preclude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units."

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The KKR Group

        Prior to the Reorganization Transactions, our business was comprised of certain consolidated and combined entities under the common control of our senior principals, and under the common ownership of our principals and our other existing owners. These entities, which we refer to as the KKR Group, consist of:

the management companies for our funds;

the general partners of the 1996 Fund and our subsequently formed private equity funds;

the general partners of two of the entities that constitute the KKR Strategic Capital Funds; and

the consolidated subsidiaries of the foregoing.

        The KKR Group is considered our predecessor for accounting purposes and its combined financial statements will be our historical financial statements following the Reorganization Transactions and this offering. Because the legal entities that comprise the KKR Group are under the common control of our senior principals and will continue to be under their common control following the completion of the Reorganization Transactions and this offering, we will account for the Reorganization Transactions and this offering as a transfer of interests under common control. You should note, however, that we will not acquire all of the interests in the KKR Group in connection with the Reorganization Transactions and, accordingly, that the combined financial statements of the KKR Group are therefore not representative of the results of operations and financial condition that we will have following the completion of this offering. See "—Group Partnerships," "Unaudited Pro Forma Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Our Partnership

        We were formed as a Delaware limited partnership on June 25, 2007 to act as a holding company for the Group Partnerships following the completion of the Reorganization Transactions. We will directly or indirectly serve as sole general partner of each of the Group Partnerships, which will provide us with control over their business and affairs. In addition, we will use the net proceeds that we receive from this offering to directly or indirectly acquire a number of Group Partnership units that is equal to our outstanding common units, which will entitle us to share ratably (along with our principals through KKR Holdings) in the assets, liabilities, profits, losses and distributions of the Group Partnerships. Assuming that the underwriters do not exercise their option to purchase additional common units from us, we will directly and indirectly own an aggregate of          % of the outstanding Group Partnership units upon the completion of this offering assuming the midpoint of the price range indicated on the cover page of this prospectus. We will account for the portion of outstanding Group Partnership units that we do not own as principals' interests in our consolidated financials statements.

        KKR Holdings will initially own all of the outstanding Group Partnership units that we do not acquire in connection with the offering. It will also hold an equivalent amount of special voting units in our partnership, which will entitle it to cast an equivalent number of votes on any matters that may be submitted to a vote of our unitholders. We will enter into an exchange agreement with KKR Holdings in connection with the Reorganization Transactions pursuant to which KKR Holdings or certain of the transferees of its Group Partnership units may up to four times each year (subject to the terms of the exchange agreement) exchange Group Partnership units held by them (together with corresponding special voting units) for our common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications and compliance with other applicable transfer restrictions. We have not yet determined how any such future exchanges will be accounted for in our consolidated financial statements. To the extent that Group Partnership units held by KKR Holdings or its transferees are exchanged for our common units, our interests in the Group Partnerships will be correspondingly increased. Any common units received upon such an exchange will be subject to any

59



restrictions that were applicable to the exchanged Group Partnership units, including any applicable transfer restrictions.

        After the completion of this offering, our Managing Partner intends to cause the Group Partnerships to make distributions on their outstanding Group Partnership units in amounts that are sufficient to allow us to fund any distributions that we make on our common units. See "Distribution Policy." To the extent that we receive any distributions on the Group Partnership units that we hold, KKR Holdings and any other holder of Group Partnership units will be entitled to receive pro rata distributions on their Group Partnership units, except that we will be entitled to priority distributions of income through          as described under "Distribution Policy."

Our Managing Partner

        As is commonly the case with limited partnerships, our partnership agreement provides for the management of our business and affairs by a general partner rather than a board of directors. Our Managing Partner, which serves as our sole general partner, has a board of directors that is co-chaired by our founders Henry Kravis and George Roberts and officers that are appointed by its board. Upon completion of this offering, we expect our Managing Partner's board to consist of a majority of independent directors and to have an audit committee and a conflicts committee composed entirely of independent directors. Our Managing Partner will not have an economic interest in our partnership, except for one common unit. Messrs. Kravis and Roberts will serve as Co-Chief Executive Officers of our Managing Partner.

        Our unitholders do not hold securities of our Managing Partner and are not entitled to vote in the election of its directors or other matters affecting its governance. Accordingly, only those persons holding limited liability company interests in our Managing Partner will be entitled to vote in the election or removal of its directors, on proposed amendments to its charter documents or on other matters that require approval of its equity holders. Our Managing Partner's outstanding limited liability company interests consist of Class A shares, which are entitled to vote on the election and removal of directors and all other matters that have not been delegated to the board of directors or reserved for the vote of Class B shareholders, and Class B shares, which are entitled to vote only with respect to the manner in which our subsidiaries vote any voting interests that they hold in the general partners of our foreign funds. All of our Managing Partner's outstanding Class A shares and Class B shares will be held by our senior principals upon the completion of the Reorganization Transactions and this offering. See "Management—Managing Partner Board Structure and Practices—Election and Removal of Directors" and "Security Ownership—Our Managing Partner."

Group Partnerships

        Following the Reorganization Transactions, the Group Partnerships will consist of the following components of our business:

controlling and economic interests in our management companies, allowing us to control our management companies and their respective subsidiaries (including the entities through which we conduct capital markets activities) as well as share ratably in the management, monitoring, transaction and other potential fees paid by all of our funds, portfolio companies and investment targets and other amounts paid by our credit strategy funds;

60


controlling and economic interests in the general partners of our traditional private equity funds (other than the 1996 Fund and our earlier funds, as the general partners of those funds are not expected to receive meaningful proceeds from further realizations), which will allow us to control those entities and share ratably in the carried interest received from those funds as well as any returns on investments made by or on behalf of those general partners after the completion of the offering; and

an economic (but not controlling) interest in the general partner of the KKR Private Equity Investors master fund, which will allow us to share ratably in the carried interest paid by that fund.

        In addition to the principals' interests that will result from KKR Holdings' ownership of Group Partnership units, certain minority investors who have been or are involved in our business also will retain economic interests in some or all of the above entities following the completion of the Reorganization Transactions. Those retained interests, which will be accounted for as "non-controlling interests in consolidated entities," will consist of:

economic interests in the general partners of our private equity funds that will entitle minority investors to          % of the capital invested by or on behalf of those general partners before the completion of the offering and any profit thereon;

interests in our management companies and the general partners of our funds that will entitle a minority investor to          % of the net profits of our management companies and          % of the carried interest received from those general partners with respect to the funds' investments for a specified period of time; and

a 35% interest in the management company for our credit strategy funds that will allocate to the members of that management company their allocable share of the management company's net income.

        The Group Partnerships will not acquire any interests in the 1987 Fund, the 1993 Fund or the 1996 Fund (as the general partners of those private equity funds are not expected to receive meaningful proceeds from further realizations) or control over the KKR Private Equity Investors master fund. In accordance with GAAP, we have included the 1996 Fund and the KKR Private Equity Investors master fund in our predecessor combined financial statements, because both funds were under the common control of our senior principals and were significant to our operations during the periods for which historical financial information has been presented in this prospectus. KKR Private Equity Investors consists of an upper tier limited partnership, which we refer to as the feeder fund, that makes all of its investments through a lower tier limited partnership, which we refer to as the master fund, of which it is the sole limited partner. Because we will not control those funds following the completion of the offering, we will not consolidate them in our financial statements for future periods, although we will account for our economic interest in the KKR Private Equity Investors master fund under the equity method of accounting. For information concerning the pro forma impact that the elimination or deconsolidation of these entities would have had on our historical predecessor combined financial statements, please see "Unaudited Pro Forma Financial Information."

Tax Receivable Agreement

        The acquisition by our intermediate holding company of Group Partnership units from KKR Holdings or transferees of its Group Partnership units from time to time pursuant to the exchange agreement is expected to result in an increase in our intermediate holding company's share of the tax basis of the tangible and intangible assets of KKR Management Holdings L.P. that would not otherwise have been available. This increase in tax basis may increase (for tax purposes) depreciation and amortization and therefore reduce the amount of tax our intermediate holding company would otherwise be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. We will enter into a tax receivable agreement with KKR Holdings requiring our intermediate holding company to pay to KKR

61



Holdings or transferees of its Group Partnership units 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the intermediate holding company actually realizes (or is deemed to realize, in the case of an early termination payment by our intermediate holding company or a change of control) as a result of this increase in tax basis, as well as 85% of the amount of any such savings the intermediate holding company actually realizes (or is deemed to realize) as a result of increases in tax basis that arise due to future payments under the agreement. See "Certain Relationships and Related Party Transactions—Tax Receivable Agreement." In the event that other of our current or future subsidiaries become taxable as corporations and acquire Group Partnership units in the future, or if we become taxable as a corporation for U.S. federal income tax purposes, we expect that each will become subject to a tax receivable agreement with substantially similar terms.

Other Tax Matters

        As discussed in "Material U.S. Federal Tax Consequences," under existing laws and regulations our partnership will be treated as a partnership and not as a corporation for U.S. federal income tax purposes. An entity that is treated as a partnership for U.S. federal income tax purposes is not a taxable entity and incurs no U.S. federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss and deduction of the partnership in computing its U.S. federal income tax liability, regardless of whether cash distributions are made. Distributions of cash by a partnership to a partner are generally not taxable unless the amount of cash distributed to a partner is in excess of the partner's adjusted basis in its partner interest. However, our partnership agreement does not restrict our ability to take actions that may result in us being treated as an entity taxable as a corporation for U.S. federal (and applicable state) income tax purposes. See "Material U.S. Federal Tax Consequences" for a summary discussing certain U.S. federal tax considerations related to the purchase, ownership and disposition of our common units as of the date of this prospectus. Also see "Risk Factors—Risks Related to Our Business—Legislation has been introduced that would, if enacted, preclude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units."

        We believe that the Group Partnerships will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the holders of Group Partnership units, including our intermediate holding company, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Group Partnerships. Subject to the priority distribution rights, net profits and net losses of a Group Partnership will generally be allocated to its partners (including our partnership and our intermediate holding company) pro rata in accordance with the percentages of their respective partner interests. Because we will directly and indirectly own an aggregate of          % of the outstanding Group Partnership units upon completion of this offering, our partnership will initially be indirectly allocated          % of the net profits and net losses of the Group Partnerships, subject to priority distribution rights in favor of our partnership and our intermediate holding company through          as described under "Distribution Policy." The remaining net profits and net losses will be allocated to the other holders of Group Partnership units, which will initially consist of KKR Holdings. These percentages are subject to change, including upon an exchange of Group Partnership units for our common units and upon issuance of additional common units by our partnership.

        If the general partners of the Group Partnerships determine that distributions from the Group Partnerships would otherwise be insufficient to cover the tax liabilities of a holder of a Group Partnership unit, the partnership agreement of each Group Partnership will provide for cash distributions, which we refer to as tax distributions, to the holders of Group Partnership units. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the relevant partnership allocable to a holder of a Group Partnership unit multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate

62



resident in New York, New York (taking into account the non-deductibility of certain expenses and the character of the income). If we had completed the Reorganization Transactions and this offering on January 1, 2006, the assumed effective tax rate for the year ended December 31, 2006 would have been approximately 46%. A portion of any such tax distributions received by us, net of amounts used by our subsidiaries to pay their tax liability, will be distributed to our unitholders. Such amounts are generally expected to be sufficient to permit our U.S. unitholders to fund their estimated U.S. tax obligations (including any federal, state and local income taxes) with respect to their distributive shares of net income or gain, after taking into account any withholding tax imposed on us. We cannot assure you that, for any particular unitholder, such distributions will be sufficient to pay the unitholder's actual U.S. or non-U.S. tax liability.

KKR Holdings

        Our principals and certain former personnel will hold equity interests in our business through KKR Holdings, which will hold the Group Partnership units not held by us. As a result, those individuals will receive financial benefits from our business in the form of distributions and payments received from KKR Holdings and the appreciation in the value of the Group Partnership units that KKR Holdings owns. The Group Partnership units held by KKR Holdings will be subject to applicable transfer restrictions, and will not be exchangeable for our common units before                   .

IPO Date Equity Awards

        At the time of this offering, we intend to grant to our employees who are not principals an aggregate of          restricted common units under our 2007 Equity Incentive Plan, which restricted common units will be allocated based on each employee's seniority. We will settle the restricted common units granted to these employees in the form of unrestricted common units or in cash. Holders of restricted common units will not be entitled to any voting rights or distributions with respect to their restricted common units. See "Management—IPO Date Equity Awards."

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

        The unaudited pro forma financial information contained in this prospectus is subject to completion due to the fact that information relating to the Reorganization Transactions and this offering currently is not determinable. We intend to complete this pro forma financial information, including amounts relating to the pro forma adjustments set forth in the accompanying unaudited condensed pro forma statement of financial condition and unaudited condensed pro forma statements of income, as and when we update this prospectus and such information becomes available.

        The following unaudited condensed pro forma statements of income for the year ended December 31, 2006 and three months ended March 31, 2007 and the unaudited condensed pro forma statement of financial condition as of March 31, 2007 are based upon the historical combined financial statements of the KKR Group, our accounting predecessor, included elsewhere in this prospectus. In addition, the following pro forma measure of economic net income for the year ended December 31, 2006 and the three months ended March 31, 2007, which represents a supplemental measure used by management to make operating decisions, assess performance and allocate resources, is based upon historical measures included elsewhere in this prospectus. These pro forma financial statements and supplemental financial measure present our consolidated results of operations and financial position giving pro forma effect to the Reorganization Transactions, this offering and the other transactions described below as if such transactions had been completed as of January 1, 2006 with respect to the unaudited condensed pro forma statements of income and as of March 31, 2007 with respect to the unaudited pro forma statement of financial condition. You should read this information together with "Organizational Structure," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical predecessor combined financial statements and related notes included elsewhere in this prospectus.

        The KKR Group is considered our predecessor for accounting purposes and its combined financial statements will be our historical financial statements following the completion of the Reorganization Transactions and this offering. Because the legal entities that comprise the KKR Group are under the common control of our senior principals and will be under the common control of our senior principals following the completion of the Reorganization Transactions and this offering, we will account for the Reorganization Transactions as a transfer of interests under common control. Accordingly, we will carry forward into our consolidated financial statements the value of assets, liabilities and non-controlling interests in the combined entities recognized in the KKR Group's combined financial statements, except as described below.

        The pro forma adjustments described under "Reorganization Adjustments" principally give effect to:

the deconsolidation of both the 1996 Fund (a private equity fund whose general partners are not expected to receive meaningful proceeds from further realizations) and the fund's general partners, because the Group Partnerships will not acquire an interest in those general partners in connection with the Reorganization Transactions;

the deconsolidation of both the KKR Private Equity Investors master fund, our private equity-oriented permanent capital fund, and the master fund's general partner and the accounting for the Group Partnerships' interest in the master fund general partner instead under the equity method of accounting (which accounting treatment will not impact our consolidated net income or partners' capital), because the Group Partnerships will acquire an economic (but not controlling) partner interest in the master fund general partner;

the inclusion of non-controlling interests in consolidated entities representing the economic interests that our existing owners will retain in the general partners of our private equity funds following the acquisition of general partner interests in those entities by the Group Partnerships, which economic interests will allocate to the existing owners           % of the capital invested by or on behalf of those general partners before the completion of the offering and any profits thereon; and

64


the inclusion of non-controlling interests in consolidated entities representing the economic interests that a minority investor will retain in the management companies and general partners of our funds following the acquisition of general partner or controlling interests in those entities by the Group Partnerships, which economic interests will allocate to the minority investor          % of the net profits earned by the management companies and          % of the carried interest received by those general partners with respect to the funds' investments, in each case for a specified period of time.

        The pro forma adjustments described under "Other Adjustments" principally give effect to:

the issuance of          common units in this offering at an assumed initial public offering price of $          per common unit, representing the midpoint of the price range indicated on the front cover of this prospectus, and the use of proceeds therefrom as described under "Use of Proceeds;"

the inclusion of principals' interests representing the Group Partnership units that KKR Holdings will hold in the Group Partnerships, which principals' interests will allocate to KKR Holdings          % of the equity in the Group Partnerships upon completion of this offering, assuming the underwriters do not exercise their option to purchase additional common units from us;

one or more cash and in-kind distributions that we intend to make to certain of our existing owners prior to the completion of the offering, which distributions will consist of substantially all of the cash-on-hand and certain personal property of the management company for our private equity funds;

our recognition of non-cash employee compensation charges associated with the vesting of interests in KKR Holdings that are held by our principals, which non-cash charges will be offset in full by corresponding credits to our income statement attributable to principals' interests in income of consolidated entities and other income and will not impact our income before taxes or net income;

our recognition of cash and non-cash employee compensation charges associated with grants of restricted common units under our 2007 Equity Incentive Plan at the time of this offering; and

a provision for corporate income taxes on the income of our intermediate holding company, which will indirectly hold our interests in the management companies for our funds and our capital markets companies and will be taxable as a corporation for U.S. federal income tax purposes.

        As a public company, our costs for such items as insurance, accounting and legal advice may increase. We will also incur costs which we have not previously incurred for director fees, additional investor relations expenses, expenses for compliance with the Sarbanes-Oxley Act and new rules implemented by the SEC and the New York Stock Exchange, and various other costs associated with being a public company. We have not made any pro forma adjustments relating to these costs, because estimates of those expenses are not objectively determinable.

        This unaudited pro forma financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position that would have occurred had the above transactions occurred on the dates indicated or had we operated as a public company during the periods presented or for any future period or date. In addition, the pro forma adjustments described herein are based on available information and upon assumptions that management believes are reasonable in order to reflect, on a pro forma basis, the impact of the above transactions on the historical financial information of the KKR Group. You are cautioned not to place undue reliance on this unaudited pro forma financial information.

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Unaudited Pro Forma Condensed Statement of Financial Condition

As of March 31, 2007

 
  KKR Group
Combined
Historical

  Reorganization
Adjustments

  KKR Group
after the
Reorganization
Adjustments

  Other
Adjustments

  KKR & Co. L.P.
Consolidated
Pro Forma

 
  ($ in thousands)

Assets                      
  Cash and cash equivalents   $ 97,169                                                        
  Cash and cash equivalents held at consolidated entities     1,851,718                                                        
  Restricted cash and cash equivalents     174,141                                                        
  Investments, at fair value     23,568,572                                                        
  Due from affiliates     78,163                                                        
  Other assets     117,541                                                        
   
               
    Total assets   $ 25,887,304                                                        
   
               

Liabilities and partners' capital

 

 

 

 

 

 

 

 

 

 

 
  Debt obligations   $ 1,685,687                                                        
  Accounts payable, accrued Expenses and other liabilities     394,044                                                        
   
               
    Total liabilities     2,079,731                                                        
   
               

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Non-controlling interests in consolidated entities

 

 

21,907,784

 

           

 

           

 

           

 

           
   
               
Principals' interests in consolidated entities                      

Partners' capital

 

 

 

 

 

 

 

 

 

 

 
  Partners' capital     1,892,527                                                        
  Accumulated other comprehensive income     7,262                                                        
   
               
    Total partners' capital     1,899,789                                                        
   
               
      Total liabilities and partners' capital   $ 25,887,304                                                        
   
               

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Unaudited Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 2006

 
  KKR
Group
Combined
Historical

  Reorganization
Adjustments

  KKR Group after
the
Reorganization
Adjustments

  Other
Adjustments

  KKR & Co. L.P.
Consolidated
Pro Forma

 
  ($ in thousands)

Revenues                      
  Fee income   $ 410,329                
   
 
 
 
 
Expenses                      
  Employee compensation and benefits     131,667                
  Occupancy and related charges     19,295                
  General, administrative and other     78,154                
  Fund expenses     38,350                
   
 
 
 
 
    Total expenses     267,466                
Investment Income                      
  Net gains from investment activities     3,105,523                
  Dividend income     714,069                
  Interest income     210,872                
  Interest expense     (29,542 )              
   
 
 
 
 
    Total investment income     4,000,922                
  Income before non-controlling and principals' interests in income of consolidated entities and income taxes     4,143,785                
  Non-controlling interests in income of consolidated entities     3,026,913                
  Principals' interests in income of consolidated entities                    
  Income before taxes     1,116,872                
  Income taxes     4,163                
   
 
 
 
 
Net income   $ 1,112,709                
Net Income Per Common Unit                               
  Basic                               
  Diluted                               
Weighted Average Common Units                               
  Basic                               
  Diluted                               

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Unaudited Pro Forma Condensed Consolidated Statement of Income
Three Months Ended March 31, 2007

 
  KKR
Group
Combined
Historical

  Reorganization
Adjustments

  KKR Group after
the
Reorganization
Adjustments

  Other
Adjustments

  KKR & Co. L.P.
Consolidated
Pro Forma

 
  ($ in thousands)

Revenues                      
  Fee income   $ 68,840                
   
 
 
 
 
Expenses                      
  Employee compensation and benefits     27,345                
  Occupancy and related charges     4,624                
  General, administrative and other     31,555                
  Fund expenses     16,810                
   
 
 
 
 
    Total expenses     80,334                
Investment Income                      
  Net gains from investment activities     1,482,054                
  Dividend income     19,471                
  Interest income     68,269                
  Interest expense     (15,593 )              
   
 
 
 
 
    Total investment income     1,554,201                
  Income before non-controlling and principals' interests in income of consolidated entities and income taxes     1,542,707                
  Non-controlling interests in income of consolidated entities     1,161,162                
  Principals' interests in income of consolidated entities                    
  Income before taxes     381,545                
  Income taxes     627                
   
 
 
 
 
Net income   $ 380,918                
Net Income Per Common Unit                      
  Basic                      
  Diluted                      
Weighted Average Common Units                      
  Basic                      
  Diluted                      

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Notes to Unaudited Pro Forma Condensed Financial Information

1.     Reorganization Adjustments.

        The Reorganization Adjustments present the effects of the elimination of the financial results of non-contributed entities and the reorganization of our business into a holding company structure as described under "Organizational Structure."

(a)
The adjustments reflect the elimination of the consolidated financial results of the general partners of the 1996 Fund because the Group Partnerships will not acquire an interest in those general partners in connection with the Reorganization Transactions. In addition, the adjustments reflect the deconsolidation of the KKR Private Equity Investors master fund and its general partner and the accounting for the Group Partnerships' interest in the the master fund general partner instead under the equity method of accounting, because the Group Partnerships will acquire an economic (but not controlling) partner interest in the master fund general partner in connection with the Reorganization Transactions. The above general partners are entitled to carried interests that entitle them to a percentage of the net profits generated on the funds' investments, subject to certain requirements. The above funds pay management fees to us in exchange for providing them with management and other services.

    The 1996 Fund general partners consolidate the 1996 Fund, and the KKR Private Equity Investors master fund general partner consolidates the KKR Private Equity Investors master fund, under EITF 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights," or EITF 04-5, notwithstanding the fact that they hold only minority economic interests in those funds, as a result of their substantive, controlling general partner interests. Those consolidated funds have been combined in the historical combined financial statements of the KKR Group for the periods presented in this prospectus. When funds are consolidated, the KKR Group's combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the consolidated funds on a gross basis, and the majority of the economic interests in the consolidated funds, which are held by third-party investors, are reflected as non-controlling interests. All inter-company transactions are eliminated in consolidation.

    The elimination of the 1996 Fund general partners' consolidated financial results resulted in a $            decrease in partners' capital as of March 31, 2007, representing the excess of eliminated assets of $            over eliminated liabilities of $            and eliminated non-controlling interests of $            . For the year ended December 31, 2006 and the three months ended March 31, 2007, the elimination of the 1996 Fund general partners' consolidated results resulted in the recognition of $            million and $            million, respectively, of fee income from management fees paid by the 1996 Fund that had been eliminated in consolidation as inter-company transactions as well as eliminations of $            and $            of expenses, $            and $            of investment income and $            and $            of non-controlling interests in income from consolidated entities, respectively, because those items will no longer be reflected in our consolidated financial statements following the completion of the Reorganization Transactions. The foregoing adjustments resulted in reductions in income before taxes of $            and $            and reductions in net income of $            and $            for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively.

    The deconsolidation of the KKR Private Equity Investors master fund and its general partner and the accounting for the Group Partnerships' interest in the master fund general partner instead under the equity method of accounting did not impact partners' capital as of March 31, 2007, because the elimination of previously consolidated assets was offset by the elimination of a corresponding amount of liabilities and non-controlling interests. The economic interest that the Group Partnerships will hold in the master fund general partner upon the completion of the Reorganization Transactions will

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    be accounted for as an investment in our consolidated statement of financial condition. That interest will allocate to the Group Partnerships            % of the carried interest received by the master fund general partner pursuant to its carried interests once the fund's capitalization costs have been recouped in accordance with the fund's governing instruments. Because the fund's capitalization costs had not been recouped as of March 31, 2007, the master fund general partner would not be entitled to receive any amounts pursuant to this interest in the event of a termination of the master fund. The investment has therefore been reflected at a value of zero.

    For the year ended December 31, 2006 and the three months ended March 31, 2007, the deconsolidation of the KKR Private Equity Investors master fund and its general partner and the accounting for the Group Partnerships' interest in the master fund general partner instead under the equity method of accounting resulted in the recognition of $            million and $            million, respectively, of fee income from management fees paid by the fund that had been eliminated in consolidation as inter-company transactions as well as eliminations of $            and $            of expenses, $            and $            of investment income and $            and $            of non-controlling interests of fund investors in income from consolidated entities, respectively, because those items will no longer be reflected in our financial statements following the deconsolidation of the master fund general partner. For the year ended December 31, 2006 and the three months ended March 31, 2007, no expense or investment income was allocable to the economic interest that the Group Partnerships will have in the master fund general partner upon the completion of the Reorganization Transactions and this offering.

(b)
The adjustments reflect the inclusion of non-controlling interests in consolidated entities representing the economic interests that our existing owners will retain in the general partners of our private equity funds that will be consolidated by the Group Partnerships, which economic interests will allocate to our existing owners            % of the capital invested by or on behalf of those general partners before the completion of the offering and any profits thereon. As of March 31, 2007, these non-controlling interests were valued at $            and reduced partners' capital by a corresponding amount. For the year ended December 31, 2006 and the three months ended March 31, 2007, the inclusion of non-controlling interests resulted in net charges accounted for as non-controlling interests in income of consolidated subsidiaries of $            and $            , respectively, representing amounts of expenses and investment income attributable to the non-controlling interests. The foregoing adjustments resulted in reductions in income before taxes of $            and $            and reductions in net income of $            and $            for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively.

(c)
The adjustments reflect the inclusion of non-controlling interests in consolidated entities representing the economic interests that a minority investor will retain in the management companies and general partners of our consolidated funds following the acquisition of interests in those entities by the Group Partnerships, which economic interests will allocate to the minority investor            % of the net profits earned by the management companies and            % of the carried interest received by those general partners with respect to the funds' investments, in each case, for a specified period of time. As of March 31, 2007, these non-controlling interests were recorded at $            and reduced partners' capital by a corresponding amount. For the year ended December 31, 2006 and the three months ended March 31, 2007, the inclusion of non-controlling interests resulted in net charges accounted for as non-controlling interests in income of consolidated subsidiaries of $            and $            , respectively, representing amounts of fee income, expenses and investment income attributable to the non-controlling interests. The foregoing adjustments resulted in reductions in income before taxes of $            and $            and reductions in net income of $            and $            for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively.

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2.     Other Adjustments

        The Other Adjustments present the effects of the other transactions that will be entered into in connection with the Reorganization Transactions, this offering and the other transactions described in this section.

(d)
The adjustments reflect the receipt of $            of net proceeds from the issuance of            common units in this offering at an assumed initial offering price of $            per common unit, representing the midpoint of the price range indicated on the front cover of this prospectus, after deducting $            of estimated underwriting discounts and offering expenses. We intend to contribute the net proceeds that we receive from this offering to the Group Partnerships in exchange for newly issued Group Partnership units, which will use the proceeds that they receive from us to grow our existing business, to expand into new related businesses and for other general corporate purposes. The issuance of            common units described above resulted in a $            net increase in cash and cash equivalents and a $            net increase in partners' capital as of March 31, 2007.

(e)
The adjustments reflect our use of $            of assumed net proceeds from the issuance of common units in this offering to acquire newly issued Group Partnership units from the Group Partnerships. Assuming that the underwriters do not exercise their option to purchase additional common units from us, we will directly and indirectly own            % of the outstanding Group Partnership units upon the completion of this offering and the balance of the outstanding Group Partnership units will be owned by KKR Holdings and reflected in our consolidated financial statements as principals' interests. As of March 31, 2007, these non-controlling interests were recorded at $            and reduced partners' capital by a corresponding amount. For the year ended December 31, 2006 and the three months ended March 31, 2007, the inclusion of principals' interests resulted in net charges accounted for as principals' interests in income of consolidated entities of $            and $            , respectively, representing amounts of fee income, expenses and investment income attributable to the principals' interests. The foregoing adjustments resulted in reductions in income before taxes of $            and $            and reductions in net income of $            and $            for the year ended December 31, 2006 and the three months ended March 31, 2007, respectively.

    We will enter into an exchange agreement with KKR Holdings in connection with the Reorganization Transactions pursuant to which KKR Holdings or certain transferees of its Group Partnership units may up to four times each year (subject to the terms of the exchange agreement) exchange Group Partnership units held by them (together with corresponding special voting units) for our common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. The Group Partnership units are also subject to transfer restrictions, and will therefore not be exchangeable before                . We have not yet determined the manner in which such future exchanges will be accounted for in our consolidated financial statements.

(f)
The adjustments reflect the effect of one or more cash and in-kind distributions to certain of our existing owners representing substantially all of the cash-on-hand and certain personal property of the management company for our private equity funds in an assumed aggregate amount of $            million as of March 31, 2007. The actual amount of such distributions will depend on the amount of the management company's cash on hand at the time of the offering.

(g)
The adjustments reflect the impact of the vesting of interests in KKR Holdings and the vesting of restricted common units issued under our 2007 Equity Incentive Plan on our income.

    Our principals and certain former personnel will hold equity interests in our business through KKR Holdings, which will hold the Group Partnership units not directly or indirectly held by us. As a result, those individuals will receive financial benefits from our business in the form of distributions and payments received from KKR Holdings and the appreciation in the value of the Group Partnership units that KKR Holdings owns. A portion of the equity interests held by our principals in KKR

71


    Holdings are subject to vesting. We will be required to record periodic non-cash employee compensation charges over time with respect to the vesting of interests in KKR Holdings that are held by our principals. When incurred, however, those non-cash charges will be offset in full by corresponding credits in our statements of income attributable to principals' interests in income of consolidated entities and other income and, as a result, will not impact our income before taxes, our net income or amounts that are available for distribution to our unitholders.

    In addition, at the time of this offering, we will grant to our employees who are not principals an aggregate of            unvested restricted common units under our 2007 Equity Incentive Plan. We may settle these restricted common units with unrestricted common units or in cash. The vesting of these restricted common units will result in cash and non-cash charges as the restricted common units vest.

    The following table summarizes the pro forma effects of the above items on the KKR Group's combined statements of income for the year ended December 31, 2006 and the three months ended March 31, 2007.

 
  Year Ended
December 31, 2006

  Three Months Ended
March 31, 2007

 
 
  ($ in thousands)

 
Historical employee compensation and benefits expense   $ 131,667   $ 27,345  
Addition of non-cash charges relating to vesting of interests in KKR Holdings(1)                                
Addition of cash and non-cash charges relating to vesting of restricted common units issued to other employees(2)                                
   
 
 
Total change in employee compensation and benefits expense                                
   
 
 
Employee compensation and benefits expense attributable to principals' interests in income of consolidated entities     (           )   (           )
Other income     (           )   (           )
   
 
 
Change in income before taxes                                

(1)
Upon completion of the Reorganization Transactions and this offering, our principals will hold an aggregate of            interests in KKR Holdings, of which            will be vested and            will be unvested. The unvested interests will vest over periods ranging in duration from                  to                  years. We intend to reflect the vesting of unvested interests in KKR Holdings as non-cash employee compensation charges in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

(2)
At the time of this offering, we will grant our employees    unvested restricted common units that may be settled with unrestricted common units and     unvested restricted common units that may be settled with cash. We will account for awards that may be settled with unrestricted common units as equity awards with the fair value of the award determined at the service inception date, which will be concurrent with the completion of this offering. We will account for awards that may be settled in cash as a liability at each reporting date subsequent to the service inception date, which will be concurrent with the completion of this offering. The fair value of these awards will be charged to compensation expense over the applicable service periods. The amounts presented above have been derived based upon an assumed initial offering price of                   per common unit, representing the midpoint of the price range indicated on the front cover of this prospectus, multiplied by the number of restricted common units to be granted, expensed over the assumed service periods, which range from                  

72


    to                  years. In addition, the calculation of the expense assumes a forfeiture rate of                  %, which is based upon historical turnover rates.

(h)
We have historically operated as a group of partnerships for U.S. federal income tax purposes and, in the case of certain entities located outside the United States, corporate entities for foreign income tax purposes. Because most of the entities in our consolidated group are taxed as partnerships, our income is generally allocated to, and the resulting tax liability is generally borne by, our partners and we generally are not taxed at the entity level. Accordingly, income tax provisions shown on our historical combined statements of income of $           million for the year ended December 31, 2006 and $          million for the three months ended March 31, 2007 were primarily attributable to the New York City unincorporated business tax and foreign income taxes imposed on certain entities located outside the United States.

    Following the Reorganization Transactions and this offering, the Group Partnerships and their subsidiaries will continue to operate as partnerships for U.S. federal income tax purposes and, in the case of certain entities located outside the United States, corporate entities for foreign income tax purposes. Accordingly, those entities will continue to be subject to New York City unincorporated business taxes or foreign income taxes. In addition, our intermediate holding company will be subject to additional entity-level taxes that will be reflected in our consolidated financial statements. For a discussion of pending legislation that may preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes, see "Risk Factors—Risks Related to Our Business—Legislation has been introduced that would, if enacted, prelude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units."

    In calculating the pro forma income tax provision for the periods presented, the following assumptions were made:

    The amount of net income before taxes was attributed to the entities subject to corporate taxes (income of $          million for the year ended December 31, 2006 and income of $          million for the three months ended March 31, 2007) with the remainder attributed to the entities not subject to corporate income taxes. Net income was attributed to these entities based on income or losses of the subsidiaries of the entities. Please see "Material U.S. Federal Tax Considerations" for a discussion of the different tax requirements of our subsidiaries.

    Income before taxes attributed to entities subject to corporate tax was adjusted to add back expenses of $          million for the year ended December 31, 2006 and $          million for the three months ended March 31, 2007, which are not deductible for corporate income tax purposes. Such expenses relate primarily to compensation charges recognized for book purposes that will not be deductible for tax.

    The resulting balances of $          million for the year ended December 31, 2006 and $          million for the three months ended March 31, 2007 were then multiplied by a blended statutory tax rate of          % and such amounts were added to the estimated foreign jurisdiction tax provisions to arrive at the aggregate tax provisions of $          million for the year ended December 31, 2006 and $          million for the three month period ended March 31, 2007. The blended statutory rate reflects statutory rate of          % for federal taxes and the blended state rate (net of federal benefit) of          %.

    The amount of the adjustment reflects the difference between the actual tax provision for the historical organizational structure and the estimated tax provision that would have resulted had the Reorganization Transactions and the offering been effected on January 1, 2006.

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3.     Determination of Earnings Per Common Unit

(i)
For the purposes of the pro forma net income per common unit computation, the weighted average common units outstanding, basic and diluted, were calculated in the following manner.

 
  Year Ended
December 31, 2006

  Three Months Ended
March 31, 2007

 
  Basic and Diluted
  Basic and Diluted
Common units to be outstanding immediately following the completion of the Reorganization Transactions and this offering        
Restricted common units to be outstanding immediately following the completion of the Reorganization Transactions and this offering        
Group Partnership units to be outstanding immediately following the completion of the Reorganization Transactions and this offering(1)        
   
 
Weighted average common units outstanding        

    (1)
    We will enter into an exchange agreement with KKR Holdings in connection with the Reorganization Transactions pursuant to which KKR Holdings or transferees of its Group Partnership units may up to four times each year (subject to the terms of the exchange agreement) exchange Group Partnership units held by them (together with corresponding special voting units) for our common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications and compliance with other applicable transfer restrictions. Group Partnership units are not included in the calculation of weighted average common units outstanding because to do so would have been anti-dilutive for the periods presented. If these Group Partnership units were to be exchanged for common units, net income available to holders of common units would increase due to the elimination of the principals' interests associated with the Group Partnership units (offset by the associated tax effect) by a greater proportion than the corresponding increase in weighted average common units outstanding. As a result, diluted net income per common unit calculated assuming the exchange of all exchangeable Group Partnership units for common units would be greater than basic net income per common unit. We have not yet determined how any such future exchanges will be accounted for in our consolidated financial statements.

(j)
Pro forma basic and diluted net income per common unit were computed in the following manner.

 
  Year Ended
December 31, 2006

  Three Months Ended
March 31, 2007

 
  Basic and Diluted
  Basic and Diluted
Net income available to holders of common units   $     $  
Weighted average common units outstanding            
   
 
Net income per common unit            

    Our special voting units are not entitled to receive distributions from our partnership. Those units do not share in our earnings and no earnings are allocable to that class. Accordingly, pro forma basic and diluted net income per special voting unit has not been presented.

Economic Net Income

        Economic net income is a key performance measure used by management when making operating decisions, assessing performance and allocating resources. Economic net income represents net income

74



excluding the impact of income taxes and the impact of non-cash employee compensation charges associated with equity interests in our business and charges relating to the amortization of intangible assets. Because our historical combined financial statements do not include any such non-cash employee compensation charges or charges relating to the amortization of intangible assets, economic net income is the equivalent of income before taxes for the historical periods presented. However, amounts of pro forma economic net income for the year ended December 31, 2006 and the three months ended March 31, 2007 include the impact of non-cash employee compensation charges described in Note (g) above and, accordingly, are not equivalent to pro forma income before taxes.

        The following table presents the adjustments to pro forma income before taxes used to derive pro forma economic net income for the year ended December 31, 2006 and the three months ended March 31, 2007.

 
  Year Ended
December 31, 2006

  Three Months Ended
March 31, 2007

Pro forma income before taxes   $              $           
Adjustment for non-cash employee compensation expense                              
Adjustment for amortization expense                              
   
 
Pro forma economic net income                              
   
 

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SELECTED HISTORICAL FINANCIAL AND OTHER DATA

        The following tables set forth the selected historical combined financial data of the KKR Group as of and for the years ended December 31, 2002, 2003, 2004, 2005 and 2006 and as of and for the three months ended March 31, 2006 and 2007. We derived the selected historical combined data of the KKR Group as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 from the audited predecessor combined financial statements included elsewhere in this prospectus. We derived the selected historical combined data of the KKR Group as of March 31, 2006 and 2007 and for the three months ended March 31, 2006 and 2007 from the unaudited predecessor combined financial statements included elsewhere in this prospectus. We derived the selected historical combined data of the KKR Group as of December 31, 2002, 2003 and 2004 and for the years ended December 31, 2002 and 2003 from our unaudited predecessor combined financial statements which are not included in this prospectus. Our unaudited predecessor combined financial statements have been prepared on substantially the same basis as our audited predecessor combined financial statements and include all adjustments that we consider necessary for a fair presentation of our combined financial position and results of operations for all periods presented. You should read the following data together with the "Organizational Structure," "Unaudited Pro Forma Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the predecessor combined financial statements and related notes included elsewhere in this prospectus.

 
  Year Ended December 31,
  Three Months Ended
March 31,

 
 
  2002
  2003
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

   
   
 
Income Statement Data:                                            

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Fee income   $ 67,850   $ 50,516   $ 183,462   $ 232,945   $ 410,329   $ 93,798   $ 68,840  
   
 
 
 
 
 
 
 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Employee compensation and benefits     38,510     46,724     69,956     79,643     131,667     22,601     27,345  
  Occupancy and related charges     8,013     8,858     10,688     13,534     19,295     6,482     4,624  
  General, administrative and other     27,315     35,315     36,931     54,336     78,154     15,934     31,555  
  Fund expenses     7,340     26,024     16,470     20,778     38,350     4,778     16,810  
   
 
 
 
 
 
 
 
    Total expenses     81,178     116,921     134,045     168,291     267,466     49,795     80,334  

Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net gains from investment activities     (189,813 )   2,325,294     3,026,396     2,984,504     3,105,523     933,407     1,482,054  
  Dividend income     129     32,285     14,611     729,926     714,069     51,725     19,471  
  Interest income     11,730     36,807     54,060     27,166     210,872     11,119     68,269  
  Interest expense     (299 )   (234 )   (524 )   (697 )   (29,542 )   (1,366 )   (15,593 )
   
 
 
 
 
 
 
 
    Total investment income (loss)     (178,253 )   2,394,152     3,094,543     3,740,899     4,000,922     994,885     1,554,201  

Income (loss) before non-controlling interests in income of consolidated entities and income taxes

 

 

(191,581

)

 

2,327,747

 

 

3,143,960

 

 

3,805,553

 

 

4,143,785

 

 

1,038,888

 

 

1,542,707

 

Non-controlling interests in income of consolidated entities

 

 

(293,440

)

 

1,846,073

 

 

2,364,309

 

 

2,861,186

 

 

3,026,913

 

 

777,505

 

 

1,161,162

 
   
 
 
 
 
 
 
 
Income before taxes     101,859     481,674     779,651     944,367     1,116,872     261,383     381,545  
Income taxes     1,745     2,425     6,265     2,900     4,163     767     627  
   
 
 
 
 
 
 
 
    Net income   $ 100,114   $ 479,249   $ 773,386   $ 941,467   $ 1,112,709   $ 260,616   $ 348,151  

Statement of Financial Condition (period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,379,763

 

$

8,142,353

 

$

9,701,478

 

$

13,369,412

 

$

23,292,783

 

 

 

 

$

25,887,304

 
Total liabilities     19,243     124,338     313,672     418,778     1,281,923           2,079,730  
Non-controlling interests in consolidated entities     6,683,047     7,188,088     8,257,063     11,413,885     20,201,548           21,907,784  
Total partners' capital     677,473     829,927     1,130,743     1,536,749     1,809,312           1,899,789  

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis should be read in conjunction with the predecessor combined financial statements and the related notes included elsewhere in this prospectus. The historical combined financial data discussed below reflects the historical results and financial position of the KKR Group, which is considered our predecessor for accounting purposes. While the historical combined financial statements of the KKR Group will be our historical financial statements following the completion of this offering, the data does not give effect to the Reorganization Transactions or this offering and is not necessarily representative of our future results and financial condition. See "Organizational Structure" and "Unaudited Pro Forma Financial Information." In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under "Risk Factors" and "Forward-Looking Statements." Actual results may differ materially from those contained in any forward-looking statements.

Overview

        Founded in 1976, we are a leading global alternative asset manager. Our 399 employees, including our 139 investment professionals, are led by our founders, Henry Kravis and George Roberts, who are pioneers of the leveraged buyout industry. Our history of landmark achievements in private equity includes the first leveraged buyout in excess of $1 billion, several of the largest leveraged buyouts announced worldwide to date, the first buyout of a public company by tender offer and the largest leveraged buyouts completed or announced in each of the United States, the Netherlands, Denmark, India, Australia, Singapore and France. We have continued our history of innovation by establishing new debt and public equity strategies that leverage the power of our brand and the intellectual capital in our private equity business.

        Today, through our offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong and Tokyo, we sponsor and manage funds that make investments worldwide in private equity and debt transactions on behalf of third-party investors and our firm. We also manage substantial investments in public equity. During our 31-year history, we have raised 16 funds and received approximately $59.7 billion of capital and capital commitments from investors. We have grown our assets under management significantly, from approximately $18.3 billion as of December 31, 2002 to approximately $53.4 billion as of March 31, 2007, representing a compounded annual growth rate of 28.7%. Of our total assets under management, approximately $6.8 billion is permanent capital, which is not required to be returned to investors and is able to be re-deployed as investments are realized.

        As a global alternative asset manager, we earn ongoing management fees for providing management and other services to our funds as well as transaction, monitoring and other potential fees in connection with our private equity and other investments. We also earn investment income from investing our own capital alongside fund investors and from our carried interest in fund investments, which provide us with a disproportionate share of the funds' investment gains. We are also selectively pursuing opportunities to develop new investment structures and products that we believe will help us increase the amount of managed capital that we are able to commit to individual transactions, grow our assets under management and capture additional income streams.

Business Segments

        For management reporting purposes, we operate through two reportable business segments: private equity and credit.

Private Equity

        Through our private equity segment, we sponsor and manage a number of traditional private equity funds and a private equity-oriented permanent capital vehicle that make primarily control-oriented investments in connection with leveraged buyouts and other similar investment opportunities. Our private

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equity funds focus on investing in large capitalization companies, which we believe allows us to invest in industry-leading franchises with global operations, attract world class management teams, deploy large amounts of capital in individual transactions and optimize amounts of income that we earn on a per transaction basis. Our private equity segment had $44.1 billion of assets under management as of March 31, 2007 and generated approximately $1.1 billion and $369.0 million of economic net income during the year ended December 31, 2006 and the three months ended March 31, 2007. Though our private equity funds focus on investments in equity, they may also make a small percentage of their investments in debt and other asset classes and the results of such investments are included in the results of our private equity segment.

Credit

        We believe the intellectual capital of our people, our integrated global investment platform and our ability to effectively adapt our investment strategies to market conditions allow us to capitalize on investment opportunities at every level of a company's capital structure. Commencing in 2004, we began to actively pursue debt investments as a separate asset class and, through our credit segment, we now sponsor and manage a group of private and publicly traded credit strategy funds that invest primarily in corporate debt investments and manage structured finance vehicles. Our credit strategy funds currently consist of KKR Financial, a New York Stock Exchange listed finance company, and the KKR Strategic Capital Funds, consisting of three side-by-side private credit strategy funds. As of March 31, 2007, our credit strategy funds had $2.8 billion of capital, including $1.6 billion of permanent capital, and our credit strategy funds currently manage $6.5 billion of structured finance vehicles. During the year ended December 31, 2006 and the three months ended March 31, 2007, our credit segment generated $34.5 million and $12.6 million of economic net income, respectively. Though our credit strategy funds focus on investments in debt, these funds may also make a small percentage of their investments in equity and other asset classes and the results of such investments are included in the results of our credit segment.

Business Environment

        As a global alternative asset manager, we are affected by financial and economic conditions in the United States, Europe, Asia and elsewhere in the world. The diversity of our operations and product lines has allowed us to generate attractive returns in different business climates. Generally, business conditions characterized by low inflation, low or declining interest rates and strong equity markets provide a positive environment for us to generate attractive returns on existing investments. We also benefit, however, from periods of market volatility and disruption which allow us to use our large capital base and our experience with troubled companies and distressed securities to make investments at attractive prices and on favorable terms.

Market Conditions

        Our ability to grow our revenue and net income depends on our ability to continue to attract capital and investors, secure investment opportunities, obtain financing for transactions, consummate investments and deliver attractive investment returns. These factors are impacted by a number of market conditions, including:

    The strength and competitive dynamics of the alternative asset management industry, including the amount of capital invested in, and withdrawn from, alternative investments. Our share of the capital that is allocated to alternative assets depends on the strength of our investment performance relative to the investment performance of our competitors. The amount of capital that we attract and our investment returns directly affect the level of our assets under management, which in turn affects the fees, carried interest and other amounts that we are able to earn in connection with our asset management activities.

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    The strength and liquidity of debt markets. Our private equity funds use debt financing to fund portfolio company acquisitions. Our credit strategy funds make significant investments in debt instruments and use varying degrees of leverage in order to enhance investment returns and to fund working capital requirements. As a result, our business generally benefits from strong and liquid debt markets that support our funds' investment activities, although periods of market volatility and disruption may create attractive investment opportunities.

    The strength and liquidity of equity markets. Strong equity market conditions enable our private equity funds to increase the value of and to effect realizations of their portfolio company investments. Equity market conditions also affect the carried interest that we receive. In addition, recent general increases in stock market prices have made it more difficult to find businesses that may be acquired at attractive prices and have resulted in higher purchase prices for portfolio companies, which has increased the amount of equity and debt financing that is required to complete an acquisition.

    Market volatility. Volatility within the debt and equity markets increases both the opportunities and risks within our segments and directly affects the performance of our funds. Similarly, fluctuations in interest rates and foreign currency exchange rates, if not suitably hedged, may affect the performance of our funds. Historical trends in these markets are not necessarily indicative of our future performance.

        We believe recent market conditions have created a favorable environment for our two reportable business segments and our business as a whole. In particular:

    The U.S. economy has grown rapidly and the U.S. capital markets have seen increased activity and rising market indexes during recent periods, creating a favorable environment for making private equity investments and growing and realizing value from such investments, as well as for the expansion of our credit activities. We have also successfully identified and capitalized on opportunities to expand into Europe, Asia and elsewhere where trends have been favorable for investment, and we continue to identify what we believe to be attractive opportunities in new markets globally.

    Institutions and other investors have increased their capital allocations to the alternative asset management industry. As a leader in this industry, we have been and expect to continue to be able to attract a significant amount of new capital for our funds. In addition, we believe that strong capital flows to the alternative asset sector have played, and will continue to play, an important role in our new business initiatives, including our capital markets initiative.

    The U.S. and other debt markets have been particularly strong during recent years, contributing to our ability to finance portfolio company acquisitions at attractive rates, at attractive leverage ratios and on attractive terms. In addition, historically low interest rates and tight credit spreads during recent years have enhanced the ability of our credit strategy funds to employ leverage to increase investment returns. While current benchmark interest rates and credit spreads remain near long-term historical lows, increases in rates and spreads could have a negative impact on our returns as the incremental cash flow required to service debt would reduce cash flow available to investors in our funds and could lead to higher equity contribution requirements by our fund investors to effect future transactions. A reduction in leverage ratios or more restrictive covenants and other credit terms could also negatively impact our business.

    The allocation of capital to the alternative asset management industry depends in part on the performance of alternative assets relative to other asset classes. The primary markets in which we conduct our business have experienced relatively steady growth. The performance of our funds has continued to exceed various traditional benchmarks of market performance enabling us to raise increasingly larger pools of capital.

        The market conditions discussed above have been generally favorable to our performance over the periods presented. Future market conditions may not continue to be as favorable and could adversely affect our business. For a more detailed description of the manner in which economic and financial market conditions may materially affect our results of operations and financial condition, see "Risk Factors—Risks Related to Our Business."

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Legal and Regulatory Environment

        Members of the U.S. Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the rules governing publicly traded partnerships and would require that we be treated as a corporation for U.S. federal income tax purposes. Separately, members of the U.S. Congress have introduced legislation that would, if enacted, treat income received for performing investment management services as ordinary income received for the performance of services, which would have a similar effect. If any of these pieces of legislation or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability, which could result in a reduction in the value of our common units. See "Risk Factors—Risks Related to Our Business—Legislation has been introduced that would, if enacted, prelude us from qualifying as a partnership for U.S. federal income tax purposes. If this or any similar legislation or regulation were to be enacted and apply to us, we would incur a material increase in our tax liability that could result in a reduction in the value of our common units."

Becoming a Public Company

        As a privately owned firm, we have consistently approached the management of our business and our investments with the goal of creating and realizing value over the long term. Both in building and expanding our business and in determining the types of investments to make, we have focused on the best outcomes for our business and fund investors measured over a period of years rather than on short-term financial performance. Our long-term approach encourages us to continue to build value in all of our portfolio companies, including those with a long period remaining before producing distributable cash flow. However, our results of operations are affected by the timing of our investments and changes in the value of our investments, each of which may vary significantly in the short term.

        We nonetheless intend to maintain our long-term focus after we become a public company even though this approach may lead to significant and unpredictable variations in our results from period to period. In addition, while a significant portion of the management and monitoring fees paid by our funds and portfolio companies are earned pursuant to multi-year contracts, other amounts that we earn, such as transaction fees and carried interest, are subject to significant variability based on transaction volume and size, as well as investment performance. We do not intend to permit the short-term perspectives of some public market investors to influence our investment, operational or strategic decisions, our duties or commitments to our fund investors or our focus on creating long-term value for our unitholders.

Impact of the Reorganization Transactions, this Offering and Related Transactions

        The KKR Group is considered our predecessor for accounting purposes and its combined financial statements will be our historical financial statements following the completion of the Reorganization Transactions and this offering. This historical combined financial data does not give effect to the Reorganization Transactions, the completion of this offering or other related transactions. Because the legal entities that comprise the KKR Group are under the common control of our senior principals and will be under the common control of our senior principals following the completion of the Reorganization Transactions, we will account for the Reorganization Transactions and this offering as a transfer of interests under common control. Accordingly, we will carry forward into our combined financial statements the value of assets, liabilities and non-controlling interests in the combined entities recognized in the KKR Group's historical combined financial statements, except as described below.

        While the combined financial statements of the KKR Group will be our historical financial statements following the completion of the Reorganization Transactions and this offering, our financial statements for future periods will differ from the financial statements of the KKR Group in many significant respects. In particular, following the completion of the Reorganization Transactions and this offering:

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    we will deconsolidate both the 1996 Fund and the fund's general partners, because the Group Partnerships will not acquire an interest in those general partners in connection with the Reorganization Transactions;

    we will deconsolidate both the KKR Private Equity Investors master fund and the master fund's general partner and account for the Group Partnerships' interest in the master fund general partner instead under the equity method of accounting (which accounting treatment will not impact our consolidated net income or partners' capital), because the Group Partnerships will acquire an economic (but not controlling) partner interest in the master fund general partner;

    we will include non-controlling interests in consolidated entities representing the economic interests that our existing owners will retain in the general partners of our consolidated private equity funds following the acquisition of general partner interests in those entities by the Group Partnerships, which economic interests will allocate to the existing owners          % of the capital invested by or on behalf of those general partners before the completion of the offering and any profits thereon;

    we will include non-controlling interests in consolidated entities representing the economic interests that a minority investor will retain in the management companies and general partners of our consolidated funds following the acquisition of general partner or controlling interests in those entities by the Group Partnerships, which economic interests will allocate to the minority investor          % of the net profits earned by the management companies and          % of the carried interest received by those general partners with respect to the funds' investments, in each case for a specified period of time;

    we will issue          common units in this offering at an assumed initial public offering price of $          per common unit, representing the midpoint of the price range indicated on the front cover of this prospectus, which issuance will increase our partners' capital;

    we will include principals' interests representing the Group Partnership units that KKR Holdings will hold in the Group Partnerships, which principals' interests will allocate to KKR Holdings          % of the equity in the Group Partnerships upon completion of this offering, assuming the underwriters do not exercise their option to purchase additional common units from us;

    we will make one or more cash and in-kind distributions to certain of our existing owners prior to the completion of the offering, which distributions will consist of substantially all of the cash-on-hand and certain personal property of the management company for our private equity funds;

    we will recognize non-cash employee compensation charges associated with the vesting of interests in KKR Holdings that are held by our principals, which non-cash charges will be offset in full by corresponding credits to our income statement attributable to principals' interests in consolidated entities and other income and will not impact our income before taxes, net income or partners' capital;

    we will recognize employee compensation charges associated with the vesting of grants of restricted common units and other awards under our 2007 Equity Incentive Plan; and

    we will record a provision for corporate income taxes on the income of our intermediate holding company, which will indirectly hold our interest in the management companies for our funds and our capital markets companies and will be taxable as a corporation for U.S. federal income tax purposes.

        Due to the differences described above, the predecessor combined financial statements and related historical data included in this prospectus are not necessarily representative of our future results of operations and financial condition. To provide additional information illustrating the impact that the changes described above will have on our results of operations and financial condition, we have presented elsewhere in this prospectus unaudited pro forma financial information for the year ended December 31, 2006 and as of and for the three months ended March 31, 2007. The pro forma data give effect to the

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Reorganization Transactions, this offering and related transactions as if such transactions had occurred on January 1, 2006 for purposes of the unaudited pro forma statement of income data and as of March 31, 2007 for purposes of the unaudited pro forma statement of financial condition. Such information has been presented for informational purposes only and does not purport to present the results of operations or financial condition that we would have achieved if those transactions had occurred on such dates or that we may achieve in the future. See "Unaudited Pro Forma Financial Information."

Basis of Financial Presentation

Combined Results

Impact of the Consolidation of Our Funds on Our Financial Presentation

        In accordance with GAAP, a substantial number of our funds are consolidated in our predecessor combined financial statements notwithstanding the fact we hold only a minority economic interest in those funds. In particular, we have consolidated (i) those entities in which our predecessor, through the ownership interests of our senior principals, has majority ownership and had control over significant operating, financial and investing decisions of the entities and (ii) those funds, which we refer to as our consolidated funds, in which our predecessor, through the ownership interests of our senior principals, held a general partner or managing member interest, which gave our predecessor substantive controlling rights over such funds. With respect to our consolidated funds, we generally have operational discretion and control over the funds and fund investors do not hold any substantive rights that would enable them to impact the funds' ongoing governance and operating activities.

        As noted above, in connection with the Reorganization Transactions and this offering, we will deconsolidate the 1996 Fund and the KKR Private Equity Investors master fund, but will continue to consolidate the other funds that are currently consolidated in our combined financial statements. Those consolidated funds consist of the European Fund, the Millennium Fund, the European Fund II, the 2006 Fund and two of the side-by-side funds that constitute the KKR Strategic Capital Funds. See "Unaudited Pro Forma Financial Information." In addition, because we expect to continue to maintain a controlling interest in funds that we sponsor and manage, we expect to consolidate additional funds in future periods, including our recently formed Asian Fund, which is expected to have its final closing in the third quarter of 2007.

        When we consolidate a fund, our combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the consolidated fund on a gross basis. The majority of the economic interests in the consolidated fund, which are held by third-party investors, are reflected as non-controlling interests in our combined financial statements. Substantially all of the management fees and certain other amounts that we earn from the consolidated fund are eliminated in combination. However, because those amounts are earned from non-controlling interest holders, our allocable share of the net income from the consolidated fund is increased by the amounts eliminated. Accordingly, the consolidation of a fund does not have a net effect on the amounts of income before taxes, net income or partners' capital that we report. The consolidation does, however, significantly impact other aspects of our financial statement presentation, because the assets, liabilities, income and expense of the consolidated funds are reflected on a gross basis while the allocable share of those amounts that are attributable to non-controlling interest holders are reflected as single line items on our statement of financial condition (non-controlling interests in consolidated entities) and in our statement of income (non-controlling interests in income of consolidated entities).

Segment Results

        We present the results of our two reportable business segments in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard is based on a management approach, which requires segment presentation based on internal organization and the internal financial reporting used by management to make operating

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decisions, assess performance and allocate resources. Our management makes operating decisions, assesses performance and allocates resources based on financial and operating data and measures that are presented without giving effect to the consolidation of any of the funds that we manage. As a result, unlike the reporting in our predecessor combined financial statements, our segment reporting does not give effect to the consolidation of our funds. The deconsolidation of our funds in our segment reporting results in the inclusion in fee income of management fees that would otherwise be eliminated in consolidation, the elimination of investment income and expense that is attributable to non-controlling interests held by third-party fund investors and the elimination of corresponding charges and credits that we account for as non-controlling interests in the income of consolidated entities. See "—Combined Results—Impact of the Consolidation of Our Funds on Our Financial Presentation" and "—Key Operating and Performance Measures—Segment Operating and Performance Earnings."

Key Financial Measures

Revenues

Fee Income

        Our combined fee income consists primarily of transaction and monitoring fees that we receive from our portfolio companies and the management and incentive fees that we receive directly from our unconsolidated funds, including both the base management fees and incentive fees that are paid by our unconsolidated credit strategy funds. These fees are based upon the contractual terms of the management and other agreements that we enter into with the applicable funds and portfolio companies. For a description of these management and other agreements, see "Business."

        Our combined fee income does not include the management fees that we charge our consolidated funds, because those fees are eliminated in consolidation as transactions between consolidated entities. However, because those management fees are earned from, and funded by, third-party fund investors who hold non-controlling interests in the consolidated funds, our allocable share of the net income from the consolidated funds is increased by the amount of the management fees that are eliminated in consolidation. Accordingly, while the consolidation of our funds impacts the amount of fee income that we recognize on a combined basis, it does not affect the ultimate amount of income before taxes, net income, or partners' capital that we recognize in our combined financial statements.

Expenses

Employee Compensation and Benefits Expense

        Our employee compensation and benefits expense historically has consisted primarily of the cash salaries and bonuses that we have paid personnel who are not senior principals. Because our compensation arrangements with those individuals have involved a significant performance-based bonus component, our employee compensation and benefits expense has increased as our net income has grown. Our employee compensation and benefits expense has also grown in recent years as a result of the expansion of our business, which has increased the number of our salaried employees. Our employee compensation and benefits expense is not borne by fund investors and are not offset by credits attributable to our fund investors' non-controlling interests in our consolidated funds.

        Unlike our other personnel, our senior principals historically have not been paid any cash salaries or bonuses for their services to us. Instead, these individuals have relied on cash distributions that they have received on their equity interests in our business. Because those cash distributions have been paid to senior principals in their capacities as owners of our business, the distributions have been accounted for as distributions of partners' capital rather than employee compensation and benefits expense and, accordingly, we have not reflected those amounts as employee compensation and benefits expense in our statements of income.

        Our principals will hold equity interests in our business through KKR Holdings, which will hold the Group Partnership units not held by us. As a result, those individuals will receive financial benefits from

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our business in the form of distributions and payments received from KKR Holdings and the appreciation in the value of the Group Partnership units that KKR Holdings owns. The Group Partnership units held by KKR Holdings will be subject to applicable transfer restrictions, and will not be exchangeable for our common units before              .

        A portion of the equity interests held by our principals in KKR Holdings are subject to vesting. We will be required to record periodic non-cash employee compensation charges over time with respect to the vesting of interests in KKR Holdings that are held by our principals. When incurred, however, those non-cash charges will be offset in full by corresponding credits in our statements of income attributable to principals' interests in income of consolidated entities and other income and, as a result, will not impact our income before taxes, our net income or amounts that are available for distribution to our unitholders. See "—Principals' Interests in the Income of Consolidated Entities" and "Unaudited Pro Forma Financial Information."

        At the time of this offering, we intend to grant to our employees who are not principals an aggregate of            restricted common units under our 2007 Equity Incentive Plan as described under "Management—2007 Equity Incentive Plan." We will record periodic employee compensation charges in our statements of income associated with the grants and vesting of these awards, as well as any future awards that we may grant under our 2007 Equity Incentive Plan.

General, Administrative and Other Expense

        Our general, administrative and other expense consists primarily of professional fees paid to legal advisors, accountants, senior advisors and consultants; insurance costs; travel and related expenses; communications and information services; depreciation and amortization charges and other general and operating expenses. These expenses have increased in recent years due to fees paid to our senior advisors that are based in part on returns generated by our investments, which have increased significantly during recent periods, as well as increases in overhead resulting from the expansion and growth of our business. A substantial portion of our general, administrative and other expense is not borne by fund investors and is not offset by credits attributable to our fund investors' non-controlling interests in our consolidated funds.

        As a public company our costs for such items as insurance, accounting and legal advice may increase. We will also incur costs which we have not previously incurred for director fees, investor relations expenses, expenses for compliance with the Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission and the New York Stock Exchange, and various other costs associated with being a public company.

Fund Expenses

        Our fund expenses consist primarily of costs that we incur in connection with potential investments that do not result in completed transactions (such as travel expenses, professional fees and research costs) and costs relating to holding our annual investor conference.

Investment Income

        We recognize investment income with respect to our carried interests in investments of our private equity funds, the capital invested by or on behalf of the general partners of our private equity funds and the non-controlling interests that third party fund investors hold in our consolidated funds. Grants of restricted equity interests in our publicly listed credit strategy fund, KKR Financial, are not included as investment income. When the equity interests vest, however, we include the interests as investments on our statement of financial condition and thereafter recognize investment income or loss with respect to changes in their fair value and any dividends or distributions paid thereon. See "Business—Credit—KKR Financial."

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Net Gains from Investment Activities

        Our net gains from investment activities consist primarily of the unrealized and realized gains and losses on investments that are made by our funds. Unrealized gains or losses result from changes in the fair value of these investments during a period. Upon disposition of an investment, previously recognized unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period. While this reversal does not affect the amount of net gains that we recognize from investment activities, it does impact the cash flows that we record.

        When determining the fair values of investments, we use the last reported market price as of the statement of financial condition date for investments that have readily available market prices. When an investment does not have a readily available market price, the fair value of the investment represents the value, as determined by us in good faith, at which the investment could be sold in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. There is no single standard for determining fair value in good faith and in many cases fair value is best expressed as a range of fair values from which a single estimate may be derived. When making fair value determinations, we typically use a market multiples approach that considers a specified financial measure (such as EBITDA) or a discounted cash flow or liquidation analysis. We also consider a range of additional factors that we deem relevant, including the price at which the investment was acquired, the nature of the investment (such as whether it is a controlling interest), local market conditions, market prices for comparable securities and financing transactions and internal models that consider the current and expected operating performance and cash flows of the company in which the investment was made.

        A significant portion of our funds' investments consists of private equity investments that do not have readily observable market prices and, accordingly, have been valued by us in good faith using the valuation methodologies described above. Since December 31, 2005, our valuations of those investments have been reviewed on a quarterly basis by Duff & Phelps, LLC, our independent valuation firm, who has provided us with third-party valuation assistance as described elsewhere in this prospectus. Our determinations of the fair values of these investments may differ materially from the values that would have resulted if readily available market prices had existed. Additional external factors may cause those values, and the values of investments for which readily observable market prices exist, to increase or decrease over time, which may create volatility in our net income and the amounts of assets and partners' capital that we report from time to time. See "Risk Factors—Risks Relating to the Investments We Manage—Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the fair value of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our funds" and "—Critical Accounting Policies—Fair Value of Investments."

Dividend Income

        Our dividend income consists primarily of the dividends and distributions that our private equity funds receive from the portfolio companies in which they invest. Typically, our private equity funds recognize dividend income primarily in connection with dispositions of operations by portfolio companies and other significant portfolio company transactions. Our dividend income has increased substantially in recent periods as a result of distributions by our portfolio companies following such dispositions or other transactions.

Interest Income

        Our interest income consists primarily of interest that is paid on the fixed income instruments in which our consolidated funds invest and, to a lesser extent, interest payments that our private equity funds are paid when they provide bridge financing to a portfolio company in connection with a portfolio company acquisition. See "Private Equity Valuations and Related Data—Bridge Financing Provided by Private Equity Funds." Our interest income has increased substantially in recent periods as a result of interest earned from cash management activities carried out by our private equity-oriented permanent capital fund, which began operations in May 2006 and made significant fixed income investments in connection with its cash management activities.

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Interest Expense

        Our interest expense consists primarily of interest that is payable by our funds or their general partners in connection with indebtedness that they incur to finance investments. A significant portion of our interest expense relates to long-term indebtedness that is used by our credit strategy funds to leverage their investments. The balance of this expense consists of short-term borrowings that are used by the general partners of our private equity funds and indebtedness that is used by our private equity-oriented permanent capital fund to leverage its investments in public companies. Given the degree of leverage in the capital structures of our portfolio companies (which leverage is not reflected in our statements of income), our private equity funds do not incur debt at the fund level.

Impact of the Consolidation of Our Funds on the Presentation of Investment Income

        Due to the consolidation of a majority of our funds, the amount of our funds' investment income that is allocable to our carried interests and capital investments is not readily shown in our combined financial statements. Instead, the portion of investment income that is allocable to us, after allocating amounts to non-controlling interests, is reflected in our net income. Because the substantial majority of our funds are consolidated and because we hold only a minority economic interest in our funds' investments, our allocable share of our funds' investment income is significantly less than the total amount of investment income presented in our predecessor combined financial statements.

Income Taxes

        We have historically operated as a group of partnerships for U.S. federal income tax purposes and, in the case of certain entities located outside the United States, corporate entities for foreign income tax purposes. Because most of the entities in our consolidated group are taxed as partnerships, our income is generally allocated to, and the resulting tax liability is generally borne by, our principals and we generally are not taxed at the entity level. The income taxes included in our predecessor combined financial statements are attributable to the New York City unincorporated business tax and foreign income taxes imposed on certain entities located outside the United States.

        Following the Reorganization Transactions and this offering, the Group Partnerships and their subsidiaries will continue to operate as partnerships for U.S. federal income tax purposes and, in the case of certain entities located outside the United States, corporate entities for foreign income tax purposes. Accordingly, those entities will continue to be subject to New York City unincorporated business taxes or foreign income taxes, as the case may be. In addition, our intermediate holding company will be subject to additional entity-level taxes that will be reflected in our combined financial statements.

Non-Controlling Interests in the Income of Consolidated Entities

        Non-controlling interests in the income of consolidated entities represent the ownership interests that unaffiliated third parties hold in entities that are consolidated in our financial statements. The allocable share of income and expense attributable to those interests is accounted for as non-controlling interests in the income of consolidated entities.

        Historically, the amount of non-controlling interests in consolidated entities that we have recognized has been substantial and has resulted in significant charges and credits in our statements of income. As of March 31, 2007, non-controlling interests in consolidated entities represented approximately 85% of our combined total assets and consisted primarily of:

    economic interests that fund investors held in our consolidated funds, which economic interests allocated to the fund investors approximately 85% of our combined total assets as of March 31,

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      2007 and resulted in approximately $1.2 billion and $777 million of net charges in our statements of income during the three months ended March 31, 2007 and 2006, respectively; and

    an interest in the management company for our credit strategy funds that currently allocates 35% of the net income of that management company to other members of that management company.

        We expect to continue to recognize substantial non-controlling interests in the income of consolidated entities following the completion of the Reorganization Transactions and this offering and anticipate that those non-controlling interests will continue to give rise to significant charges and credits in our statements of income. In particular, non-controlling interests in the income of consolidated entities are expected to consist primarily of:

    economic interests that fund investors hold in our consolidated funds (which will exclude the 1996 Fund and the KKR Private Equity Investors master fund as a result of the deconsolidation of those funds as described under "Basis of Financial Presentation—Combined Results");

    the 35% interest that other members of the management company of our credit strategy funds will hold in the management company for our credit strategy funds as described above;

    economic interests in the general partners of our consolidated private equity funds that will entitle our existing owners to 100% of the capital invested by or on behalf of those general partners before the completion of this offering and any profits thereon; and

    interests in our management companies and general partners of our consolidated funds that will entitle a minority investor to          % of the net income earned by the management companies and          % of the carried interest received by the general partners, in each case with respect to the funds' investments for a specified period of time.

Principals' Interests in the Income of Consolidated Entities

        In addition to the non-controlling interests in consolidated entities described above, our principals will retain substantial economic interests in our business following the completion of this offering through KKR Holdings' ownership of Group Partnership units. Assuming that the underwriters do not exercise their option to purchase additional common units from us, these interests will represent approximately          % of our total assets that are not allocable to holders of non-controlling interests upon completion of the offering. We will account for these interests in the same manner that we account for non-controlling interests in consolidated entities that are held by unaffiliated third parties, except that our principals' interests will be classified separately for financial reporting purposes in order to provide investors with a more meaningful financial presentation. See "Unaudited Pro Forma Financial Information."

Key Operating and Performance Measures

        The alternative asset management business is complex and unusual in its ability to support rapid growth without requiring substantial capital investment. However, there may also be volatility associated with the net income and cash flow of alternative asset managers as a result of changes in market conditions and other factors described in this prospectus. In order to assess and monitor the effectiveness of our value creation strategies and operating performance, we have developed and use the following supplemental operating metrics. As a public company, we expect to continue to use these supplemental operating and performance metrics, in addition to traditional financing measures, because we believe that the supplemental measures represent the best measures of the productivity of our investment activities.

Assets Under Management

        Our assets under management represent the assets with respect to which we are entitled to receive a fee or carried interest. We calculate the amount of assets under management as of any date as the sum of:

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(i) the fair value of the investments of our traditional private equity funds and our carry-paying co-investment vehicles plus the capital that we are entitled to call from investors in our traditional private equity funds with respect to their unfunded capital commitments; (ii) the NAV of KKR Private Equity Investors and the KKR Strategic Capital Funds; (iii) the equity of KKR Financial; and (iv) the capital raised by structured finance vehicles that we manage. As a result of raising new funds with sizeable capital commitments and increases in the NAV of our permanent capital funds and their retained profits, our assets under management have increased significantly over the periods discussed below.

Segment Operating and Performance Measures

Fee Related Earnings

        Fee related earnings is a profit measure that is reported by our two reportable business segments. The difference between fee related earnings and income before taxes presented in accordance with GAAP is that fee related earnings represent income before taxes adjusted to (i) exclude the expenses of consolidated funds; (ii) include management fees earned from consolidated funds that were eliminated in consolidation; (iii) exclude investment income and (iv) exclude non-controlling interests in income of consolidated entities. Our current operations are managed based in part on our reported levels of fee related earnings, which consist primarily of the management, transaction and monitoring fees that we earn as the sponsor of our private equity funds and our allocable share of the management and incentive fees that we earn as the sponsor of our credit strategy funds. It has been and remains a key objective of our firm to maximize our fee related earnings, because those amounts directly affect our net income.

Segment Economic Net Income

        Segment economic net income is a key performance measure used by management when making operating decisions, assessing operating performance and allocating resources. Economic net income represents net income excluding the impact of income taxes and the impact of non-cash employee compensation charges. Because our predecessor combined financial statements do not include any non-cash employee benefits and compensation charges, economic net income is the equivalent of income before taxes for the historical periods presented. See "Unaudited Pro Forma Financial Information."

Private Equity Dollars Invested

        Private equity dollars invested is the aggregate amount of capital invested by our private equity funds and carry-paying co-investment vehicles in private equity transactions during a reporting period. Such amounts include both capital contributed by fund investors and carry-paying co-investment vehicles with respect to which we are entitled to a carried interest and capital contributed by us as the general partner of a private equity fund with respect to which we are entitled to profits generated on the invested capital. From our inception through March 31, 2007, our first ten traditional private equity funds (representing all of our private equity funds that have invested at least 30 months) achieved returns equal to 2.7x the amount of private equity dollars invested.

Combined Results of Operations

        The following is a discussion of our predecessor combined results of operations for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007. You should read this discussion in conjunction with the information included under "—Basis of Financial Presentation—Combined Results" and the predecessor combined financial statements and related notes included elsewhere in this prospectus. For a more detailed discussion of the factors that affected the results of operations of our two business segments in these periods, see "—Segment Analysis."

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        The following tables set forth information regarding our combined results of operations for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2006 and 2007.

 
  Year Ended December 31,
  Three Months Ended March 31,
 
 
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

  ($ in thousands)

 
Revenues                                
  Fee income   $ 183,462   $ 232,945   $ 410,329   $ 93,798   $ 68,840  
                     
 
 
Expenses                                
  Employee compensation and benefits     69,956     79,643     131,667     22,601     27,345  
  Occupancy and related charges     10,688     13,534     19,295     6,482     4,624  
  General, administrative and other     36,931     54,336     78,154     15,934     31,555  
  Fund expenses     16,470     20,778     38,350     4,778     16,810  
   
 
 
 
 
 
    Total expenses     134,045     168,291     267,466     49,795     80,334  

Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net gains from investment activities     3,026,396     2,984,504     3,105,523     933,407     1,482,054  
  Dividend income     14,611     729,926     714,069     51,725     19,471  
  Interest income     54,060     27,166     210,872     11,119     68,269  
  Interest expense     (524 )   (697 )   (29,542 )   (1,366 )   (15,593 )
   
 
 
 
 
 
    Total investment income     3,094,543     3,740,899     4,000,922     994,885     1,554,201  
   
 
 
 
 
 

Income before non-controlling interests in income of consolidated entities and income taxes

 

 

3,143,960

 

 

3,805,553

 

 

4,143,785

 

 

1,038,888

 

 

1,542,707

 

Non-controlling interests in income of consolidated entities

 

 

2,364,309

 

 

2,861,186

 

 

3,026,913

 

 

777,505

 

 

1,161,162

 
   
 
 
 
 
 
Income before taxes     779,651     944,367     1,116,872     261,383     381,545  
Income taxes     6,265     2,900     4,163     767     627  
   
 
 
 
 
 
    Net income   $ 773,386   $ 941,467   $ 1,112,709   $ 260,616   $ 380,918  
   
 
 
 
 
 

Assets under management (period end)

 

$

15,147,300

 

$

23,350,700

 

$

43,873,400

 

 

 

 

$

53,418,200

 

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Fee Income

        Fee income was $68.8 million for the three months ended March 31, 2007, a decrease of $24.9 million, or 26.6%, from the three months ended March 31, 2006. The decrease was primarily due to a $30.4 million decrease in transaction fees earned in our private equity segment, which resulted from fewer transactions closed during the first quarter of 2007 compared to the first quarter of 2006. The effect of this decrease was offset, in part, by a $8.9 million increase in the base management and incentive fees earned in our credit segment during the three months ended March 31, 2007, which was due to an increase in the amount of our credit strategy funds' assets under management and the positive performance of the credit strategy funds' investments.

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Expenses

        Expenses were $80.3 million for the three months ended March 31, 2007, an increase of $30.5 million, or 61.3%, from the three months ended March 31, 2006. The increase was primarily due to a $15.6 million increase in general, administrative and other expenses resulting from the growth of our business, including openings and expansions of offices occurring after March 31, 2006, and a $12.0 million increase in fund expenses, which resulted from expenses incurred in our private equity segment in connection with the placement of limited partners in connection with newly formed funds.

Net Gains from Investment Activities

        Net gains from investment activities were $1.5 billion for the three months ended March 31, 2007, an increase of $548.6 million, or 58.8%, from the three months ended March 31, 2006. The increase was primarily attributable to unrealized appreciation in the value of our private equity investments. While we recognized $422.3 million of realized gains from the sale of private equity investments, which positively impacted our cash flow during the three months ended March 31, 2007, a corresponding amount of unrealized gains on those investments had been recognized in prior periods resulting in no net impact on net gains from investment activities for the current period from these realizations.

Dividend Income

        Dividend income was $19.5 million for the three months ended March 31, 2007, a decrease of $32.3 million, or 62.4%, from the three months ended March 31, 2006. Dividend income was greater during the three months ended March 31, 2006 as a result of increased dividends received from portfolio companies in our private equity segment during the period in connection with sales of significant operations or other restructuring transactions completed by our portfolio companies during the three months ended March 31, 2006.

Interest Income

        Interest income was $68.3 million for the three months ended March 31, 2007, an increase of $57.2 million from the three months ended March 31, 2006. The increase primarily reflects $35.3 million of interest earned from cash management activities carried out by our private equity-oriented permanent capital fund, which began operations in May 2006, as well as a $28.8 million increase in interest income earned in our credit segment that was attributable to an increase in the amount of assets under management.

Interest Expense

        Interest expense was $15.6 million for the three months ended March 31, 2007, compared to $1.4 million for the three months ended March 31, 2006. The increase was primarily due to an increase in the amount of assets under management in our credit segment, which utilized additional leverage to enhance returns.

Non-Controlling Interests in Income of Consolidated Entities

        Non-controlling interests in income of consolidated entities were $1.2 billion for the three months ended March 31, 2007, an increase of $383.7 million, or 49.3%, from the three months ended March 31, 2006. The increase primarily reflects an increase in the total investment income that was allocable to non-controlling interests, which increase was driven by the overall changes in the components of investment income described above.

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Income before Taxes

        Due to the factors described above, income before taxes was $381.5 for the three months ended March 31, 2007, an increase of $120.2 million, or 46.0%, from the three months ended March 31, 2006.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Fee Income

        Fee income was $410.3 million for the year ended December 31, 2006, an increase of $177.4 million, or 76.1%, from the year ended December 31, 2005. The increase was primarily due to a $128.1 million increase in the transaction fees earned in our private equity segment, which resulted from increased transaction activity and larger transaction sizes, and a $18.5 million increase in monitoring fees earned in our private equity segment, which was attributable to the acquisition by our private equity funds of new portfolio companies during the period. Our fee income was also positively affected by a $30.9 million increase in the base management and the incentive fees earned in our credit segment, which was due to an increase in the amount of our credit strategy funds' assets under management and the positive performance of the credit strategy funds' investments.

Expenses

        Expenses were $267.5 million for the year ended December 31, 2006, an increase of $99.1 million, or 58.9%, from the year ended December 31, 2005. The increase was primarily due to a $52.0 million increase in employee compensation and benefits, which was attributable to an increase in the amount of incentive compensation paid to existing personnel reflecting our favorable financial performance and the hiring of additional personnel to support the growth of our business segments and our continued geographical expansion. All other expense categories collectively increased by $47.2 million as a result of the growth of our business, including openings and expansions of offices.

Net Gains from Investment Activities

        Net gains from investment activities were $3.1 billion for the year ended December 31, 2006, an increase of $121.0 million, or 4.1%, from the year ended December 31, 2005. The increase was primarily attributable to unrealized appreciation in the value of our private equity investments. While we recognized $3.2 billion of realized gains from the sale of private equity investments that positively impacted our cash flow during the year ended December 31, 2006 a corresponding amount of unrealized gains on those investments had been recognized in prior periods resulting in no net impact on income for the current period from these realizations.

Dividend Income

        Dividend income was $714.1 million for the year ended December 31, 2006, a decrease of $15.9 million, or 2.2%, from the year ended December 31, 2005. The decrease was primarily due to a decrease in dividends received from portfolio companies in our private equity segment in connection with sales of significant operations or other restructuring transactions completed by two of our portfolio companies during the year ended December 31, 2006.

Interest Income

        Interest income was $210.9 million for the year ended December 31, 2006, an increase of $183.7 million from the year ended December 31, 2005. The increase primarily reflects $143.3 million of interest earned from cash management activities carried out by our private equity-oriented permanent capital fund, which began operations in May 2006, and to a lesser extent a $25.2 million increase in interest

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income earned in our credit segment that was attributable to an increase in the amount of assets under management.

Interest Expense

        Interest expense was $29.5 million for the year ended December 31, 2006, compared to less than $1 million for the year ended December 31, 2005. The increase was primarily due to an increase in the amount of assets under management in our credit segment, which utilized additional leverage to enhance returns.

Non-Controlling Interests in Income of Consolidated Entities

        Non-controlling interests in income of consolidated entities were $3.0 billion for the year ended December 31, 2006, an increase of $165.7 million, or 5.8%, from the year ended December 31, 2005. The increase primarily reflects an increase in the total investment income that was allocable to non-controlling interests, which increase was driven by the overall changes in the components of investment income described above.

Income before Taxes

        Due to the factors described above, income before taxes was $1.1 billion for the year ended December 31, 2006, an increase of $172.5 million, or 18.3%, from the year ended December 31, 2005.

Assets Under Management

        Our assets under management were $43.9 billion as of December 31, 2006, an increase of $20.5 billion, or 87.9%, from December 31, 2005. The increase was due primarily to our formation of the 2006 Fund, which received $16.1 billion of capital commitments from fund investors, and KKR Private Equity Investors, which had $5.0 billion of permanent capital as of December 31, 2006, and the formation of the KKR Strategic Capital Funds, which received $0.5 billion of capital commitments from investors. Additionally, the total capital of structured finance vehicles that we manage increased by $1.0 billion. Our assets under management were also positively affected during the period by a $3.2 billion net increase in the value of the investments of our traditional private equity funds, which offset $5.3 billion of distributions of realized value from those funds.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Fee Income

        Fee income was $232.9 million for the year ended December 31, 2005, an increase of $49.5 million, or 27.0%, from the year ended December 31, 2004. The increase was partially due to a $19.6 million increase in the monitoring fees earned in our private equity segment, which resulted from the acquisition by our private equity funds of new portfolio companies during the period. Our reported fee income was also positively affected by a approximately $29.0 million increase in the base management and the incentive fees earned in our credit segment, which was due to an increase in the amount of our credit strategy assets under management and the positive performance of the funds' investments.

Expenses

        Expenses were $168.3 million for the year ended December 31, 2005, an increase of $34.2 million, or 25.5%, from the year ended December 31, 2004. The increase was partially due to a $9.7 million increase in employee compensation and benefits, which was attributable to an increase in the amount of incentive compensation paid to existing personnel reflecting our favorable financial performance and the hiring of additional personnel to support the growth of our business segments and our continued geographical

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expansion. All other expense categories collectively increased by $42.5 million as a result of the growth of our business, including office openings and expansions primarily in London and Hong Kong.

Net Gains from Investment Activities

        Net gains from investment activities were $3.0 billion for the year ended December 31, 2005, a decrease of $41.9 million, or 1.4%, from the year ended December 31, 2004. The decrease in net gains from investment activities was due partially to the fact that that a significant number of the investments that we held during the year ended December 31, 2005 had only recently been made and, accordingly, were still carried at cost. While we recognized approximately $1.6 billion of realized gains from the sale of private equity investments that positively impacted our cash flow during the year ended December 31, 2005, a corresponding amount of unrealized gains on those investments that had been recognized in prior periods resulting in no net impact on our income for the current period from these realizations.

Dividend Income

        Dividend income was $729.9 million for the year ended December 31, 2005, an increase of $715.3 million from $14.6 million for year ended December 31, 2004. The increase in the amount of dividend income was due to an increase in dividends received from portfolio companies in our private equity segment in connection with sales of significant operations or other restructuring transactions completed by three of our portfolio companies during the year ended December 31, 2005 and reflects favorable business conditions and overall growth in our portfolio companies' revenues and profits.

Interest Income

        Interest income was $27.2 million for the year ended December 31, 2005, a decrease of $26.9 million, or 49.7%, from the year ended December 31, 2004. The decrease reflects a reduction in interest received from portfolio companies in our private equity segment that was attributable to a reduction in bridge financing provided by our private equity funds.

Interest Expense

        We did not record a significant amount of interest expense during the years ended December 31, 2004 or 2005.

Non-Controlling Interests in Income of Consolidated Entities

        Non-controlling interests in income of consolidated entities were $2.9 billion for the year ended December 31, 2005, an increase of $496.9 million, or 21.0%, from the year ended December 31, 2004. The increase primarily reflects an increase in the total investment income allocable to non-controlling interests, which increase was driven by the overall changes in the components of investment income described above.

Income before Taxes

        Due to the factors described above, income before taxes was $944.4 million for the year ended December 31, 2005, an increase of $164.7 million, or 21.1%, from the year ended December 31, 2004.

Assets under Management

        Our assets under management were $23.4 billion as of December 31, 2005, an increase of $8.2 billion, or 54.2%, from December 31, 2004. The increase was due primarily to our formation of the European Fund II, which received $5.6 billion of capital commitments from fund investors, and a $3.4 billion increase in the value of the investments of our traditional private equity funds, which offset $3.6 billion of distributions of realized value from those funds. Our assets under management were also positively

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affected during the period by the initial public offering of KKR Financial, which raised $0.8 billion of additional permanent capital for our credit segment, and $2.0 billion of capital raised by structured finance vehicles that we manage.

Segment Analysis

        The following is a discussion of the results of our two reportable business segments for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007. You should read this discussion in conjunction with the information included under "—Basis of Financial Presentation—Segment Results" and the predecessor combined financial statements and related notes included elsewhere in this prospectus.

Private Equity Segment

        The following tables set forth information regarding the results of operations and certain key operating metrics for our private equity segment for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007.

 
  Year Ended December 31,
  Three Months Ended March 31,
 
 
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

   
   
 
Fee income   $ 172,808   $ 202,106   $ 361,467   $ 69,364   $ 117,288  
Expenses     (119,744 )   (139,098 )   (214,277 )   (40,734 )   (71,004 )
   
 
 
 
 
 
  Fee related earnings     53,064     63,008     147,190     28,630     46,284  
   
 
 
 
 
 
Investment income     723,700     864,812     935,136     227,078     322,687  
   
 
 
 
 
 
Income before non-controlling interests in income of consolidated entities and income taxes     776,764     927,820     1,082,326     255,708     368,971  
   
 
 
 
 
 
Non-controlling interests in income of consolidated entities                      
   
 
 
 
 
 
Economic net income   $ 776,764   $ 927,820   $ 1,082,326   $ 255,708   $ 368,971  
   
 
 
 
 
 

Assets under management (period end)

 

$

14,391,300

 

$

19,696,600

 

$

38,722,700

 

 

 

 

$

44,145,500

 
Private equity dollars invested   $ 2,065,603   $ 2,913,427   $ 6,661,698         $ 1,748,602  

Three months ended March 31, 2007 Compared to Three months ended March 31, 2006

Fee Income

        Fee income in our private equity segment was $117.3 million for the three months ended March 31, 2007, an increase of $47.9 million, or 69.1%, from the three months ended March 31, 2006. The increase was primarily due to an increase in the management fees that we earned from our private equity funds of $55.2 million, which resulted from the inclusion of new management fees from the 2006 Fund and our private equity-oriented permanent capital fund following the closing of those funds during the second quarter of 2006. The inclusion of these additional fees more than offset a $30.4 decrease in transaction fees, which resulted from fewer transactions closed during the first quarter of 2007 compared to the first quarter of 2006.

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Expenses

        Expenses in our private equity segment were $71.0 million for the three months ended March 31, 2007, an increase of $30.3 million, or 74.3%, from the three months ended March 31, 2006. The increase was primarily due to a $17.7 million increase in general, administrative and other expenses resulting from the growth of our business, including openings and expansions of offices occurring after March 31, 2006, and an increase of $11.5 in fund expenses, which resulted from expenses incurred in connection with the placement of limited partner interests.

Fee Related Earnings

        Due to the factors described above, fee related earnings in our private equity segment were $46.3 million for the three months ended March 31, 2007, an increase of $17.7 million, or 61.7%, from the three months ended March 31, 2006.

Investment Income

        Investment income in our private equity segment was $322.7 million for the three months ended March 31, 2007, an increase of $95.6 million, or 42.1%, from the three months ended March 31, 2006. The increase was due to the effect of increases in our allocated share of net gains from investment activities and interest income earned by our private equity funds, offset by a decrease in allocated share of dividend income in the three months ended March 31, 2007 compared with March 31, 2006.

Economic Net Income

        Due to the factors described above, economic net income in our private equity segment was $369.0 million for the three months ended March 31, 2007, an increase of $113.3 million, or 44.3%, from the three months ended March 31, 2006.

Private Equity Dollars Invested

        Private equity dollars invested were $1.7 billion for the three months ended March 31, 2007, an increase of $564.6 million, or 47.7%, from the three months ended March 31, 2006. The increase reflected an increase in the average enterprise value of the companies that we acquired. As of March 31, 2007, our traditional private equity funds had $16.8 billion of remaining unused capital commitments that could be called for investment in new private equity commitments.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Fee Income

        Fee income in our private equity segment was $361.5 million for the year ended December 31, 2006, an increase of $159.4 million, or 78.9%, from the year ended December 31, 2005. The increase was primarily due to a $62.0 million increase in transaction fees, which resulted from increased transaction activity and larger transaction sizes. Our segment fee income was also positively affected by a $78.7 million increase in the management fees earned from our private equity funds, which was due to an increase in the amount of assets under management resulting from the formation of the 2006 Fund during the year and the fact that we received a full year of management fees from the European Fund II, which closed during the fourth quarter of 2005.

Expenses

        Expenses in our private equity segment were $214.3 million for the year ended December 31, 2006, an increase of $75.2 million, or 54.0%, from the year ended December 31, 2005. The increase was primarily due to an increase of $47.6 million in employee compensation and benefits, which was attributable to an

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increase in the amount of incentive compensation paid to existing personnel reflecting our favorable financial performance, and the hiring of additional personnel to support the growth of our private equity segment and our continued geographical expansion. Other expense categories collectively increased by $27.6 million as a result of the growth of our business, including office openings and expansions primarily in London, Tokyo and Hong Kong as well as an increase in transaction related expenses reflecting increased transaction activity.

Fee Related Earnings

        Due to the factors described above, fee related earnings in our private equity segment were $147.2 million for the year ended December 31, 2006, an increase of $84.2 million, or 133.6%, from the year ended December 31, 2005.

Investment Income

        Investment income in our private equity segment was $935.1 million for the year ended December 31, 2006, an increase of $70.3 million, or 8.1%, from the year ended December 31, 2005. The increase was due to the effect of increases in our allocated share of net gains from investment activities, dividend income and interest income earned by our private equity funds, offset by our allocated share of mark-to-market adjustments on foreign exchange forward contracts.

Economic Net Income

        Due to the factors described above, economic net income in our private equity segment was $1.1 billion for the year ended December 31, 2006, an increase of $154.5 million, or 16.7%, from the year ended December 31, 2005.

Assets Under Management

        Assets under management in our private equity segment were $38.7 billion as of December 31, 2006, an increase of $19.0 billion, or 96.6%, from December 31, 2005. The increase was due primarily to our formation of the 2006 Fund, which had received $16.1 billion of capital commitments from fund investors as of December 31, 2006, and KKR Private Equity Investors, which provided us with an additional $5.0 billion of permanent capital as of December 31, 2006, and a $3.2 billion net increase in the value of the investments of our traditional private equity funds, which offset $5.3 billion of distributions of realized value from those funds.

Private Equity Dollars Invested

        Private equity dollars invested were $6.7 billion for the year ended December 31, 2006, an increase of $3.7 billion, or 128.7%, from the year ended December 31, 2005. The increase reflected an increase in the average enterprise value of the companies that we acquired. As of December 31, 2006, our traditional private equity funds had $17.6 billion of remaining unused capital commitments that could be called for investment in new private equity commitments, compared to $7.3 billion of remaining capital commitments that were uncalled as of December 31, 2005.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Fee Income

        Fee income in our private equity segment was $202.1 million for the year ended December 31, 2005, an increase of $29.3 million, or 17.0%, from the year ended December 31, 2004. The increase was primarily due to a $40.1 million increase in the amount of management fees earned from our private equity funds, which increase was due to an increase in the amount of assets under management resulting from the

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formation of the European Fund II during the year. These increases were offset by an overall decrease in transaction fees resulting from smaller transaction sizes reflecting decreased transaction activity.

Expenses

        Expenses in our private equity segment were $139.1 million for the year ended December 31, 2005, an increase of $19.4 million, or 16.2%, from the year ended December 31, 2004. The increase was primarily due to an increase in general and administrative expenses of approximately $14.4 million, which was attributable to the growth of our business, including office openings and expansions primarily in London and Hong Kong as well as an increase in transaction related expenses reflecting increased transaction activity.

Fee Related Earnings

        Due to the factors described above, fee related earnings in our private equity segment were $63.0 million for the year ended December 31, 2005, an increase of $9.9 million, or 18.7%, from the year ended December 31, 2004.

Investment Income

        Investment income in our private equity segment was $864.8 million for the year ended December 31, 2005, an increase of $141.1 million, or 19.5%, from the year ended December 31, 2004. The increase was due to the effect of net increases in our allocated share of dividend income, interest income and mark-to-market adjustments on foreign exchange forward contracts earned by our funds, offset by our allocated share of decreases in net gains from investment activities.

Economic Net Income

        Due to the factors described above, economic net income in our private equity segment was $927.8 million for the year ended December 31, 2005, an increase of $151.1 million, or 19.4%, from the year ended December 31, 2004.

Assets Under Management

        Assets under management in our private equity segment were $19.7 billion as of December 31, 2005, an increase of $5.3 billion, or 36.9%, from December 31, 2004. The increase was due primarily to our formation of the European Fund II, which received $5.5 billion of capital commitments from fund investors, and a $3.4 billion increase in the value of the investments of our traditional private equity funds, which offset $3.6 billion of distributions of realized value from those funds.

Private Equity Dollars Invested

        Private equity dollars invested were $2.9 billion for the year ended December 31, 2005, an increase of $0.8 billion, or 41.0%, from the year ended December 31, 2004. The increase reflected an increase in the average enterprise value of the companies that we acquired. As of December 31, 2005, our traditional private equity funds had $7.3 billion of remaining unused capital commitments that could be called for investment in new private equity commitments, compared to $4.8 billion of remaining capital commitments that were uncalled as of December 31, 2004.

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Credit Segment

        The following tables set forth information regarding the results of operations and certain key operating metrics for our credit segment for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2006 and 2007.

 
  Year Ended December 31,
  Three Months Ended March 31,
 
 
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

   
   
 
Fee income   $ 10,085   $ 44,484   $ 80,726   $ 15,469   $ 27,121  
Expenses     (4,359 )   (17,881 )   (30,855 )   (5,810 )   (9,181 )
   
 
 
 
 
 
  Fee related earnings     5,726     26,603     49,871     9,659     17,940  
Investment income         3,268     10,103     456     2,490  
   
 
 
 
 
 
Income before non-controlling interests in income of consolidated entities and income taxes     5,726     29,871     59,974     10,115     20,430  
Non-controlling interests in income of consolidated entities(1)     (2,839 )   (13,324 )   (25,428 )   (4,440 )   (7,856 )
   
 
 
 
 
 
Economic net income   $ 2,887   $ 16,547   $ 34,546   $ 5,675   $ 12,574  
   
 
 
 
 
 
Assets under management (period end)   $ 754,507   $ 3,614,261   $ 5,140,909         $ 9,272,700  

(1)
Non-controlling interests represent the interest that other members of the management company for our credit strategy funds have in that management company's net income.

Three months ended March 31, 2007 Compared to Three months ended March 31, 2006

Fee Income

        Fee income in our credit segment was $27.1 million for the three months ended March 31, 2007, an increase of $11.7 million, or 75.3%, from the three months ended March 31, 2006. The increase was primarily due to increased assets under management resulting from the formation of the KKR Strategic Capital Funds during the fourth quarter of 2006 and increased incentive fees earned from the favorable performance of KKR Financial.

Expenses

        Expenses in our credit segment were $9.2 million for the three months ended March 31, 2007, an increase of $3.4 million, or 58.0%, from the three months ended March 31, 2006. The increase was primarily due to an increase in employee compensation and benefits, which was attributable to an increase in the amount of incentive compensation paid to existing personnel reflecting our favorable financial performance, and the hiring of additional personnel to support the growth of our credit segment.

Fee Related Earnings

        Due to the factors described above, fee related earnings in our credit segment were $17.9 million for the three months ended March 31, 2007, an increase of $8.3 million, or 85.7%, from the three months ended March 31, 2006.

Investment Income

        Investment income in our credit segment was $2.5 million for the three months ended March 31, 2007, an increase of $2.0 million from the three months ended March 31, 2006. The increase was due primarily to

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the post-vesting return on equity interests in KKR Financial that we were allocated as the fund manager's compensation for management activities.

Non-Controlling Interests in Income of Consolidated Entities

        Non-controlling interests in income of consolidated entities were $7.9 million for the three months ended March 31, 2007, an increase of $3.4 million, or 76.9%, from the three months ended March 31, 2006. The increase primarily reflects an increase in segment fee related earnings that were allocable to other members of the management company for our credit strategy funds, which increase was driven by the overall changes in the components of investment income described above.

Economic Net Income

        Due to the factors described above, economic net income in our credit segment was $12.6 million for the three months ended March 31, 2007, an increase of $6.9 million, or 121.7%, from the three months ended March 31, 2006.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Fee Income

        Fee income in our credit segment was $80.7 million for the year ended December 31, 2006, an increase of $36.2 million, or 81.5%, from the year ended December 31, 2005. The increase was primarily due to increased assets under management resulting from the formation of the KKR Strategic Capital Funds during the year ended December 31, 2006 and increased incentive fees earned from the favorable performance of KKR Financial during the year.

Expenses

        Expenses in our credit segment were $30.9 million for the year ended December 31, 2006, an increase of $13.0 million, or 72.6%, from the year ended December 31, 2005. The increase was primarily due to an increase in employee compensation and benefits, which was attributable to an increase in the amount of incentive compensation paid to existing personnel reflecting our favorable financial performance, and the hiring of additional personnel to support the growth of our credit segment.

Fee Related Earnings

        Due to the factors described above, fee related earnings in our credit segment were $49.9 million for the year ended December 31, 2006, an increase of $23.3 million, or 87.5%, from the year ended December 31, 2005.

Investment Income

        Investment income in our credit segment was $10.1 million for the year ended December 31, 2006, an increase of $6.8 million from the year ended December 31, 2005. The increase was due primarily to the post-vesting return on equity interests in KKR Financial that we were allocated as the fund manager's compensation for management activities.

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Economic Net Income

        Due to the factors described above, economic net income in our credit segment was $34.5 million for the year ended December 31, 2006, an increase of $18.0 million, or 108.8%, from the year ended December 31, 2005.

Assets Under Management

        Assets under management in our credit segment were $5.1 billion as of December 31, 2006, an increase of $1.5 billion, or 42.2%, from December 31, 2005. The increase was due primarily to $1.0 billion of additional capital raised by structured finance vehicles and our formation of the KKR Strategic Capital Funds, which raised an additional $0.4 billion of capital.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Fee Income

        Fee income in our credit segment was $44.5 million for the year ended December 31, 2005, an increase of $34.4 million from the year ended December 31, 2004. The increase was primarily due to increased assets under management resulting from KKR Financial commencing significant business activity during the year ended December 31, 2005.

Expenses

        Expenses in our credit segment were $17.9 million for the year ended December 31, 2004, an increase of $13.5 million from the year ended December 31, 2004. The increase was primarily due to increases in employee compensation and benefits, which was attributable to an increase in the amount of incentive compensation paid to existing personnel reflecting our favorable financial performance and the hiring of additional personnel to support the growth of our credit strategy segment.

Fee Related Earnings

        Due to the factors described above, fee related earnings in our credit segment were $26.6 million for the year ended December 31, 2005, an increase of $20.9 million, or 364.6%, from the year ended December 31, 2004.

Investment Income

        There was no significant investment income in our credit segment for the years ending December 31, 2004 or the year ended December 31, 2005.

Economic Net Income

        Due to the factors described above, economic net income in our credit segment was $16.5 million for the year ended December 31, 2005, an increase of $13.7 million from the year ended December 31, 2004.

Assets Under Management

        Assets under management in our credit segment were $3.6 billion as of December 31, 2005, an increase of $2.9 billion from December 31, 2004. The increase was due primarily to the initial public offering of KKR Financial, which raised $0.8 billion of additional permanent capital, and $2.0 billion of additional capital that we raised in structured finance vehicles.

Liquidity and Capital Resources

Historical Liquidity and Capital Resources

        We require capital to fund investments, grow our business and support our working capital requirements. Historically, we have funded investments using the capital resources of our existing owners,

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capital committed by our fund investors and indebtedness incurred by our credit strategy funds or our portfolio companies. We generally have used the capital resources of our existing owners and accumulated net income from our business activities to fund our working capital requirements and to support our new business and growth initiatives.

        Our combined statements of cash flows include the cash flows of our consolidated funds despite the fact that we have only a minority economic interest in those funds. The assets of our consolidated funds, on a gross basis, are substantially larger than the assets of our business and, accordingly, have a substantial effect on the cash flows reflected in our combined statements of cash flows. The assets of our consolidated funds have grown significantly during the periods reflected in our combined financial statements due to an increase in the number and size of the funds that we have raised, the amount of capital that we have invested and the appreciation in the value of our funds' investments.

        The growth in the assets of our consolidated funds has significantly increased their cash flows and, in turn, has been the primary cause of the increase in the gross cash flows that are reflected in our combined statements of cash flows. In particular, the primary cash flow activities of our consolidated funds involve (i) raising capital from fund investors; (ii) using the capital of fund investors to make investments; (iii) financing certain investments 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 are treated as investment companies for accounting purposes, these cash flow amounts are included in our cash flows from operations.

        We have managed our historical liquidity and capital requirements by focusing on our cash flows before the consolidation of our funds and the effect of normal changes in assets and liabilities, which we anticipate will be settled for cash within one year. Our primary cash flow activities on a deconsolidated basis involve (i) generating cash flow from operations; (ii) funding capital commitments that we make to our funds as general partners (which amounts are eliminated when we consolidate funds); (iii) generating income from investment activities; (iv) funding our growth and new business initiatives; and (v) distributing cash flow to our owners. Normal movements in our short-term assets and liabilities do not affect our distribution decisions given our current and historically available borrowing capability.

        We use adjusted cash flow from operations as a supplemental non-GAAP measure to assess and manage our liquidity and amounts that we have available for distribution to our owners. See "Distribution Policy." Adjusted cash flow from operations is intended to reflect our actual cash flows on a deconsolidated basis and is equal to cash flow from operations presented in accordance with GAAP, adjusted to exclude cash flow relating to (i) the investment activities of our consolidated funds; (ii) the realized and unrealized income attributable to non-controlling interests in consolidated funds; and (iii) changes in our operating assets and liabilities. We believe that adjusted cash flow from operations provides investors with useful information with respect to cash flows relating to our required capital investments and our ability to make annual cash distributions in accordance with our distribution policy. However, adjusted cash flow from operations should not be considered in isolation or as an alternative to cash flow from operations or income before taxes presented in accordance with GAAP.

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        The following table presents a reconciliation of our adjusted cash flow from operations to our net cash (used in) provided by operating activities presented in accordance with GAAP for the periods indicated.

 
  Year Ended December 31,
  Three Months Ended
March 31,

 
 
  2004
  2005
  2006
  2006
  2007
 
 
  ($ in thousands)

   
   
 
Net Cash Provided By (Used In) Operating Activities   $ 1,799,767   $ (106,448 ) $ (5,531,144 ) $ 390,582   $ (593,269 )
Change in operating assets and liabilities     (141,592 )   154,221     2,179,945     189,960     (584,481 )
KKR Funds related investment activities     (1,560,775 )   763,353     4,369,235     (484,136 )   1,224,305  
Net realized gains on investments     2,932,802     1,567,312     3,244,931     1,651,340     417,997  
Change in unrealized (gains) losses on investments allocable to non-controlling interests     37,184     1,142,480     (143,243 )   (566,991 )   844,695  
Non-controlling interests in income of consolidated entities     (2,364,309 )   (2,861,186 )   (3,026,913 )   (777,505 )   (1,161,162 )
Other non-cash adjustments     13,899     7,023     16,063     8,308     13,471  
   
 
 
 
 
 

Adjusted cash flow from operations

 

$

716,976

 

$

666,755

 

$

1,108,874

 

$

411,558

 

$

161,556

 
   
 
 
 
 
 

Net Cash Flow Provided by (Used in) Operating Activities

        Our net cash flow provided by (used in) operating activities was $(5.5) billion, $(106) million and $1.8 billion during the years ended December 31, 2006, 2005, and 2004, respectively. These amounts primarily included (i) purchases of investments by our consolidated funds, net of proceeds from sales of investments, of $4.4 billion, $763 million and $1.56 billion during the years ended December 31, 2006, 2005, and 2004, respectively, (ii) net realized gains on investments of the consolidated funds of $3.2 billion, $1.6 billion and $2.9 billion during the years ended December 31, 2006, 2005 and 2004, respectively, and (iii) non-controlling interests in income of consolidated entities of $3.0 billion, $2.9 billion and $2.4 billion during the years ended December 31, 2006, 2005 and 2004, respectively. These amounts are reflected as operating activities in accordance with investment company accounting.

Net Cash Flow Used in Investing Activities

        Our net cash flow used in investing activities was $130.1 million, $5.0 million and $2.6 million during the years ended December 31, 2006, 2005, and 2004, respectively. Our investing activities included the purchases of furniture, fixtures, equipment and leasehold improvements.

Net Cash Flow Provided by (Used in) Financing Activities

        Our net cash flow (used in) provided by financing activities was $5.7 billion, $134 million, and $(1.7) billion during the years ended December 31, 2006, 2005, and 2004, respectively. Our financing activities primarily included (i) contributions made by, net of distributions made to, the investors in our consolidated funds, reflected in our historical combined financial statements as non-controlling interests in consolidated entities, of $5.8 billion, $300 million and $(1.3) billion during the years ended December 31, 2006, 2005, and 2004, (ii) meeting net capital requirements of our consolidated funds of $699.4 , $249.4 million, and $0 for the years ended December 31, 2006, 2005 and 2004, respectively, and (iii) distributions to, net of contributions by, our equity holders of $(796) million, $(415) million and $(442) million during the years ended December 31, 2006, 2005 and 2004, respectively.

Future Sources of Cash and Liquidity Needs

Liquidity Needs

        We expect that our primary liquidity needs will consist of cash required to (i) continue to grow our asset management business, including funding capital commitments that we make, as general partner, to

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our funds; (ii) finance our new business initiatives, including any net capital requirements of our capital markets companies; (iii) fund our cash operating expenses, including cash salaries and bonuses of employees; (iv) pay amounts that may become due under our tax receivable agreement with KKR Holdings; and (v) fund distributions to our unitholders and holders of Group Partnership units in accordance with our distribution policy. See "Distribution Policy." We believe that the sources of liquidity described below will be sufficient to fund our working capital requirements for the next 12 months.

        The following table presents our unfunded general partner capital commitments to our private equity funds as of March 31, 2007, as adjusted to reflect the capital commitment we made to the Asian Fund subsequent to that date:

Private Equity Funds

  Original Commitment
  Unfunded Commitment
 
  ($ in thousands)

Millennium Fund   $ 150,000   $ 2,898
European Fund II     121,271     37,486
2006 Fund     375,000     345,692
Asian Fund     100,000     100,000
   
 
Total   $ 746,271   $ 486,076
   
 

        In addition to the above capital commitments, we have entered into an investment agreement with KKR Private Equity Investors, our private equity oriented permanent capital vehicle, pursuant to which we have agreed to periodically acquire limited partner interests in the fund in an amount equal to 25% of the pre-tax distributions on the fund's investments that are allocated to us or our affiliates pursuant to a carried interest. As a result of the investment agreement, we expect to periodically acquire newly issued limited partner interests in the fund from time to time with a portion of the distributions that we receive from the fund.

        In connection with the Reorganization Transactions and this offering, we will enter into an exchange agreement with KKR Holdings pursuant to which KKR Holdings or transferees of its Group Partnership units may up to four times each year (subject to the terms of the exchange agreement) exchange Group Partnership units (together with corresponding special voting units) for our common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. We will also enter into a tax receivables agreement with KKR Holdings or certain transferees of its Group Partnership units pursuant to which our subsidiaries, in particular our intermediate holding company, will be required to pay 85% of the amount of cash savings, if any, in U.S. federal, state and local income taxes that it realizes as a result of increases in the tax basis of certain of the assets of our subsidiaries arising from any exchanges of Group Partnership units for our common units. See "Certain Relationships and Related Party Transactions—Tax Receivable Agreement." This payment obligation will be an obligation of our subsidiaries and not of either Group Partnership. While the actual increase in tax basis and amount and timing of any payments under our tax receivables agreement will vary depending upon a number of factors, including the timing of exchanges, the price of our common units at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our taxable income, we expect that as a result of the size of the increases in the tax basis of the tangible and intangible assets of the Group Partnerships, the payments that we may be required to make could be substantial.

        We intend to make quarterly cash distributions to our unitholders in amounts that in the aggregate are expected to constitute substantially all of our adjusted cash flow from operations each year in excess of amounts determined by our Managing Partner to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the ensuing four quarters. Our distribution policy reflects our belief that distributing substantially all of our adjusted cash flow from operations will provide transparency for

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our unitholders and impose on us an investment discipline with respect to the businesses and strategies that we pursue.

        Adjusted cash flow from operations is intended to reflect the actual cash flow attributable to us and is equal to cash flow presented in accordance with GAAP, adjusted to exclude cash flow relating to (i) the investment activities of our consolidated funds; (ii) the realized and unrealized income attributable to non-controlling interests in consolidated funds; and (iii) changes in our operating assets and liabilities. We expect that our first quarterly distribution will be paid in                        in respect of the period from the completion of this offering through                        . Because we will not know what our available adjusted cash flow from operations will be for any year until the end of such year, we expect that our first three quarterly distributions in respect of any given year will generally be smaller than the final quarterly distribution in respect of such year.

Sources of Cash

        Our initial source of cash will consist of the net proceeds that we receive from this offering. Based on the midpoint of the price range set forth on the cover page of this prospectus, we estimate that we will receive approximately $          of net proceeds from this offering after deducting estimated underwriting discounts and offering expenses, or $          if the underwriters exercise in full their option to purchase additional common units from us. We will also receive cash from time to time from (i) our operating activities, including management, transaction and monitoring fees that we earn under the management and other agreements that we enter into with our funds and portfolio companies; (ii) gains on investments that are allocated to us in respect of our carried interests; and (iii) realized returns that are generated on investments that are made with capital invested by or on behalf of the general partners of our funds. We may also issue additional common units and other securities to investors with the objective of increasing our available capital.

        In addition, as a public company, we intend to use leverage to create the most efficient capital structure for our partnership and our public unitholders. In furtherance of this objective, we intend to enter into a revolving credit facility with one or more financial institutions that we may draw down from time to time to optimize our capital structure. We may also borrow from other sources. We do not anticipate approaching significant levels of leverage during the first one or two years following this offering, because we believe that the net proceeds that we will receive from this offering will initially provide us with the principal source of financing for our business. This strategy may change, however, depending on our liquidity requirements.

Contractual Obligations, Commitments and Contingencies

        In the ordinary course of our business, we and our consolidated funds enter into contractual arrangements that may require future cash payments. The following table sets forth information relating to

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the anticipated future cash payments that were associated with those contractual obligations as of March 31, 2007.

 
  Payments due by Period
Type of Contractual Obligations

  <1 Year
  1 to 3 Years
  3 to 5 Years
  >5 Years
  Total
 
  ($ in millions)

Before Consolidation of Funds:                              
Capital commitments to traditional private equity funds(1)   $ 486.1   $   $   $   $ 486.1
Lease obligations     14.9     28.6     24.8     48.4     116.7
   
 
 
 
 
Total   $ 501.0   $ 28.6   $ 24.8   $ 48.4   $ 602.8

After Consolidation of Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Equity commitments(2)   $ 4,914.0   $   $   $   $ 4,914.0
Lease obligations     14.9     28.6     24.8     48.4     116.7
Debt payment obligations(3)     1,335.7         350.0         1,685.7
   
 
 
 
 
Total   $ 6,264.6   $ 28.6   $ 374.8   $ 48.4   $ 6,716.4

(1)
These capital commitments represent commitments by the general partners of our traditional private equity funds to contribute capital to fund a portion of the purchase price paid for each portfolio company investment made by the fund. Because these amounts are due on demand, they have been presented as falling due within one year. However, given the size of our funds' capital commitments and the rates at which our funds make investments, we expect that the capital commitments presented above will be called over a period of several years, if not longer. The amounts presented above do not, however, include amounts that may become due to KKR Private Equity Investors under our investment agreement with it, because those amounts will depend on the fund's returns and are not objectively determinable. See "—Future Sources of Cash and Liquidity Needs—Liquidity Needs."

(2)
These equity commitments represent contractual commitments entered into by our private equity funds to fund a portion of the purchase price of unconsummated portfolio company investments. Our funds pay amounts due with respect to these commitments using capital contributed by fund investors and capital provided by us and, in the case of our larger transactions, with amounts funded by third-party co-investors or financial intermediaries to whom a portion of the equity commitment is syndicated. Whether and when the transactions regarding which we have entered into commitments will be consummated depends on a number of factors, some or all of which may be outside of our control, and we cannot assure you that any of these commitments will be funded. As a result, the equity commitments presented above do not necessarily reflect our fund's actual future cash outflows.

(3)
Debt payment obligations include interest to be paid over the maturity of the related debt obligation, which has been calculated assuming no prepayments are made and the debt is held until its final maturity date. Future interest rates have been calculated using rates in effect as of March 31, 2007, including both variable and fixed rates provided for by the relevant debt agreements.

        In the normal course of business, we also enter into contractual arrangements that contain a variety of representations and warranties and that include general indemnification obligations. Our maximum exposure under these arrangements is unknown due to the fact that the exposure would relate to claims that may be made against us in the future. Accordingly, no amounts have been included in our combined financial statements as of March 31, 2007 relating to indemnification obligations.

        The instruments governing our traditional private equity funds include clawback provisions that require the general partner of a fund to repay any amounts previously received in respect of its carried interest if the fund's investments do not achieve a profit on all investments as a whole upon the liquidation of the fund. As of March 31, 2007, based on the investment performance of our traditional private equity funds, none of the general partners of those funds had a clawback obligation.

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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.

Critical Accounting Policies

        The preparation of our 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 revenues, income and expense. Our management bases these estimates and judgments on available information, historical experience and other assumptions that we believe are reasonable under the circumstances. These estimates, judgments and assumptions, however, 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 our combined financial statements for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying estimates, judgments or assumptions. Please see the notes to the predecessor combined financial statements included elsewhere in this prospectus for further detail regarding our critical accounting policies.

Fair Value of Investments

        Our consolidated funds are treated as investment companies under the AICPA Audit and Accounting Guide, "Investment Companies," for the purposes of GAAP and, as a result, reflect their investments on our predecessor combined statement of financial condition at fair value, with unrealized gains or losses resulting from changes in fair value reflected as a component of investment income in our predecessor combined statements of income. We have retained the specialized accounting of the our consolidated funds pursuant to EITF Issue No. 85-12, Retention of Specialized Accounting for Investments in Consolidation.

        When determining fair values of investments, we use the last reported market price as of the statement of financial condition date for investments that have readily observable market prices. If no sales occurred on such day, we use the "bid" price at the close of business on that date and, if sold short, the "asked" price at the close of business on that date day. Forward contracts are valued based on market rates or prices obtained from recognized financial data service providers. When an investment does not have a readily available market price, the fair value of the investment represents the value, as determined by us in good faith, at which the investment could be sold in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale.

        There is no single standard for determining fair value in good faith and in many cases fair value is best expressed as a range of fair values from which a single estimate may be derived. When making fair value determinations, we typically use a market multiples approach that considers a specified financial measure (such as EBITDA) or a discounted cash flow or liquidation analysis. We also consider a range of additional factors that we deem relevant, including the price at which the investment was acquired, the nature of the investment (such as whether it is a controlling interest), local market conditions, market prices for comparable securities and financing transactions and models that consider the current and expected operating performance and cash flows of the company in which the investment was made. Fair values of investments that do not have readily observable market prices are based on the best information available in light of the circumstances and may incorporate or involve significant assumptions or judgments by management.

        Approximately 72%, or $12.9 billion, and 67%, or $13.4 billion, of the value of the investments of our consolidated private equity funds were valued in the absence of readily observable market prices as of December 31, 2006 and March 31, 2007, respectively. Our determinations of the fair values of these investments may differ materially from the values that would have resulted if readily observable market

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prices had existed. Additional external factors may cause those values, and the values of investments for which readily observable market prices 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 the investments of our consolidated private equity funds may impact our results of operations as follows:

    The management fees that we are paid by our private equity-oriented permanent capital fund are based on the approximate net asset value of the fund, which in turn is impacted by the fair values of its investments. A change in the fair values of the fund's investments during a reporting period would affect the amount of management fees that are payable following the completion of the reporting period, but would not have an immediate impact on our results. We estimate that an immediate 10% decrease in the fair value of the fund's private equity investments as of March 31, 2007 would decrease the management fee that is payable by the fund by approximately $2.1 million. The management fees paid by our traditional private equity funds are calculated based on the amount of capital committed to, or invested by, the funds and are not directly affected by changes in the fair value of the funds' investments.

    The net gains from investment activities of our private equity funds are directly affected by changes in the fair values of the funds investments as described under "—Key Financial Measures—Investment Income—Net Gains from Investment Activities." Based on the investments of our private equity funds as of March 31, 2007, we estimate that an immediate 10% decrease in the fair value of the funds' investments generally would result an a 10% immediate change in net gains from the funds' investment activities. However, we estimate the impact that the consequential decrease in investment income would have on our reported amounts of income before taxes and net income would be significantly less than the amount presented above, given that a substantial majority of the change in fair value would be absorbed by fund investors who hold non-controlling interests in the funds.

        Given the significance of fair value determination to our financial reporting, we employ an independent valuation firm to provide us with third party valuation assistance when calculating fair values of private equity investments. The procedures employed by our independent valuation firm do not, however, involve an audit, review, compilation or any other form of examination or attestation under generally accepted auditing standards and the terms of our independent valuation firm's engagement provides that the firm is not responsible for determining the fair value of any individual investments and that its role is limited to being an advisor and providing additional support to our existing valuation policy and process. Based on the results of its application of these procedures and its review of relevant information, a substantial amount of which was provided by our investment professionals and was assumed to be accurate and complete, including valuations, our independent valuation firm has concluded that our valuation of private equity investments as of March 31, 2007 did not appear to be unreasonable. See "Private Equity Valuations and Related Data" for a further discussion of our private equity investment valuations.

Revenue Recognition

        Fee income consists primarily of transaction and monitoring fees that we receive from our portfolio companies and the management and other fees that we receive directly from our unconsolidated funds, including both the base management fees and the incentive fees that are paid by our unconsolidated credit strategy funds. These fees are based upon the contractual terms of the management and other agreements that we enter into with the applicable funds and portfolio companies. We recognize fee income in the period during which the related services are performed and the amounts have been contractually earned.

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Recognition of Investment Income

        Investment income consists primarily of the unrealized and realized gains on investments, dividend and interest income received from investments and foreign currency gains as reduced by unrealized and realized losses on investments, interest expense incurred in connection with investment activities and foreign currency losses on investments. Unrealized gains or losses result from changes in the fair value of our funds' investments during a period. Upon disposition of an investment, previously recognized unrealized gains or losses are reversed and a corresponding realized gain or loss is recognized in the current period. While this reversal does not impact the net amounts of gains that we recognize from investment activities, it affects the manner in which we classify our gains and losses for reporting purposes.

        We recognize investment income with respect to our carried interests in investments of our private equity funds, the capital invested by or on behalf of the general partners of our private equity funds and the non-controlling interests that third-party fund investors hold in our consolidated funds. A carried interest entitles us to a percentage of the gain generated on third-party capital invested by a private equity fund, subject in the case of our traditional private equity funds to the fund achieving a profit on all investments as a whole. If due to the performance of a fund's later investments the fund does not achieve overall profitability over the life of the fund, the general partner of the fund is obligated to repay some or all of the carried interest it previously received. This feature, which is referred to as a clawback, operates only with respect to the investments of an individual fund and does not provide for netting of gains and losses across funds.

        Because carried interests allocate to us a disproportionate share of our private equity funds' earnings relative to our capital contributions, those interests reduce the amount of our funds' earnings that are allocated to fund investors' non-controlling interests in consolidated funds. We recognize investment income attributable to a carried interest in a fund to the extent that the fund's investment returns are positive. When a carried interest is subject to a clawback provision, we recognize the related investment income based on the terms of the fund's instruments assuming that the fund was terminated on that date and that the fair value of the fund's investments were then realized in full. Given the long durations during which our private equity funds hold investments, management believes that this approach results in income recognition that best reflects our performance in any given period as the manager of our private equity funds.

        Due to the consolidation of the majority of our funds, the share of our funds' investment income that is allocable to our carried interests and capital investments is not shown in our combined financial statements. Instead, the investment income that we retain in our net income, after allocating amounts to non-controlling interests, represents the portion of our investment income that is allocable to us. Because the substantial majority of our funds are consolidated and because we hold only a minority economic interest in our funds' investments, our share of the investment income generated by our investment activities is significantly less than the total amount of investment income presented in our predecessor combined financial statements.

Recent Accounting Pronouncements

        In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (R), "Share-Based Payment" ("SFAS 123 (R)"), which requires all equity-based payments to employees to be recognized using a fair value based method. On January 1, 2006, the Company adopted SFAS No. 123 (R) using the prospective method and therefore there was no impact on prior period amounts. The adoption of SFAS 123 (R) did not impact the Company's combined financial statements.

        In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments," ("SFAS 155"). Key provisions of SFAS No. 155 include: (1) a broad fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation; (2) clarification that only the simplest separations of interest payments and principal

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payments qualify for the exception afforded to interest-only strips and principal-only strips from derivative accounting under paragraph 14 of SFAS No. 133, thereby narrowing such exception; (3) a requirement that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or whether they are hybrid instruments that contain embedded derivatives requiring bifurcation; (4) clarification that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) elimination of the prohibition on a qualifying special purpose entity holding passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. In general, these changes will reduce the operational complexity associated with bifurcating embedded derivatives, and increase the number of beneficial interests in securitization transactions, including interest-only strips and principal-only strips, required to be accounted for in accordance with SFAS No. 133. SFAS 155 is effective for all financial instruments acquired, issued or subject to remeasurement after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 did not have a material impact on the Company's combined financial statements.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to reporting periods beginning after November 15, 2007. The Company is currently assessing the impact of adopting SFAS 157 on the combined financial statements.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with changes in fair value recognized in earnings. SFAS 159 applies to reporting periods beginning after November 15, 2007. The Company is currently assessing the impact of adopting SFAS 159 on the combined financial statements.

        In June 2007, the AICPA issued Statement of Position No. 07-1, "Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies" ("SOP 07-1"), for issuance. SOP 07-1 addresses whether the accounting principles of the AICPA Audit and Accounting Guide Investment Companies may be applied to an entity by clarifying the definition of an investment company and whether those accounting principles may be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. SOP 07-1 applies to the later of (i) reporting periods beginning on or after December 15, 2007 or (ii) the first permitted early adoption date of the FASB's fair value option statement. The Company is currently assessing the impact of adopting SOP 07-1 on the Company's combined financial statements.

        In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. The tax benefit recognized is the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company's combined financial statements.

Qualitative and Quantitative Disclosures About Market Risk

        Our exposure to market risks primarily relates to our role as general partner or manager of our funds and sensitivities to movements in the fair value of their investments, including the effect that those movements have on the management fees and carried interests that we receive. The fair value of our funds' investments may fluctuate in response to changes in the value of securities, foreign currency exchange rates and interest rates.

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        Although our funds share many common themes, we generally maintain separate investment and risk management processes for monitoring and managing market risks in our private equity and credit segments. In particular:

    The investment process for our private equity funds involves a detailed analysis of potential acquisitions and industry-specific investment teams are assigned to oversee the operations, strategic development, financing and capital deployment decisions of our funds' portfolio companies. Investment decisions are subject to approval by our equity investment committee, which consists of a group of our senior principals, and portfolio company investments are monitored by our portfolio management committee, which consists of a group of our senior principals and senior advisors.

    Our approach to making debt investments focuses on creating investment portfolios that generate attractive leveraged risk-adjusted returns on invested capital, allocating capital across multiple asset classes, selecting high-quality investments that may be made at attractive prices, applying rigorous standards of due diligence when making investment decisions, subjecting investments to regular monitoring and oversight and making buy and sell decisions based on price targets and relative value parameters. We employ both "top-down" and "bottom-up" analyses when making debt investments. Our top-down analysis involves a macro analysis of relative asset valuations, long-term industry trends, business cycles, interest rate expectations, credit fundamentals and technical factors to target specific industry sectors and asset classes in which to invest. Our bottom-up analysis includes a rigorous analysis of the credit fundamentals and capital structure of each credit considered for investment and a thorough review of the impact of credit and industry trends and dynamics and dislocations events on such potential investment.

Market Risk

        Our consolidated funds hold investments that are reported at fair value. Net changes in the fair value of investments impact the net gains from investments in our combined statements of income. Based on the investments of our funds as of March 31, 2007, we estimate that a 10% decrease in the fair value of our funds' investments would result in a corresponding reduction in investment income. However, we estimate the impact that the consequent decrease in investment income would have on our reported amounts of income before taxes and net income would be significantly less than the amount presented above, given that a substantial majority of the change in fair value would be absorbed by fund investors who hold non-controlling interests in our funds.

        Our base management fees are calculated based on the amount of capital committed or invested by a fund or the NAV of a fund's investments, as described under "Business—Private Equity—Traditional Private Equity Funds." In the case of our credit strategy funds, our incentive fees are calculated based on the performance of a fund's investments, which in the case of one of our credit strategy funds is calculated based on the appreciation in the NAV of the fund's investments. To the extent that base management or other amounts are calculated based on the NAV of the fund's investments, the amount of fees that we may charge will be increased or decreased in direct proportion to the effect of changes in the fair value of the fund's investments. The proportion of our management and other amounts that are based on NAV depends on the number and type of funds in existence.

Exchange Rate Risk

        Our private equity funds make investments from time to time in currencies other than those in which their capital commitments are denominated. Those investments expose us and our fund investors to the risk that the value of the investments will be affected by changes in exchange rates between the currency in which the capital commitments are denominated and the currency in which the investments are made. Our policy is to minimize these risks by employing hedging techniques, including using foreign exchange contracts to reduce exposure to future changes in exchange rates when our funds have invested a

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meaningful amount of capital in currencies other than the currencies in which their capital commitments are denominated.

        Because most of the capital commitments to our funds are denominated in U.S. dollars, our primary exposure to exchange rate risk relates to movements in the value of exchange rates between the U.S. dollar and other currencies in which our investments are denominated (primarily euro and Australian dollars). We estimate that a simultaneous parallel movement by 10% in the exchange rates between the U.S. dollar and all of the foreign currencies in which our funds' investments were denominated as of March 31, 2007 would result in net gains or losses from investment activities of our funds of $250 million. However, we estimate that the effect on our income before taxes and our net income from such a change would be significantly less than the amount presented above, because a substantial majority of the gain or loss would be absorbed by fund investors who hold non-controlling interests in our funds.

Interest Rate Risk

        Our credit strategy funds and our private equity-oriented permanent capital fund have outstanding indebtedness that accrues interest at variable rates. As a result, changes in interest rates affect the amount of interest payments that those funds are required to make, which may impact the earnings and cash flows of those funds. However, we estimate the effect on our income before taxes and our net income from such an increase would be significantly less than the amount presented above, given that a substantial majority of the increased expense would be absorbed by fund investors who hold non-controlling interests in the funds.

        In addition, our credit strategy funds and our private equity-oriented permanent capital fund make investments in fixed income instruments that bear interest at fixed rates. Changes in interest rates may affect the values of those investments, which may affect the amount of revenues and investment income that we earn from those funds.

Credit Risk

        Certain of our funds enter into derivative instruments that subject us to the risk that the counterparties may be unable to meet their obligations under those agreements. We seek to minimize our risk exposure by limiting the counterparties with which we enter into contracts to highly rated major financial institutions with strong credit ratings.

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PRIVATE EQUITY VALUATIONS AND RELATED DATA

        This prospectus presents valuation and related data, such as net and gross IRRs and multiples of invested capital, relating to our traditional private equity funds. Unless otherwise indicated, this data is presented as of March 31, 2007, which we refer to as the valuation date, and has been prepared using the methodologies described below. Please keep this in mind as you read this prospectus.

Realized Values

        We calculated the aggregate realized value of a traditional fund's portfolio investments as the historical amount of the net cash and other marketable securities actually received by the fund from all of the investments made from the date of the fund's formation through the valuation date. Such amounts do not give effect to the allocation of any realized returns to the fund's general partner or manager pursuant to a carried interest, or the payment of any applicable management fees to the fund's manager. Where the value of an investment was only partially realized, we classified the actual cash and other consideration received by the fund as realized value and classified the balance of the value of the investment as unrealized value, which is valued using the methodology described below under "—Unrealized Values."

Unrealized Values

Methodology

        We calculated the aggregate unrealized value of a traditional private equity fund's investments by adding together the individual unrealized values of the fund's investments.

        When determining fair values of investments, we use the last reported market price as of the statement of financial condition date for investments that have readily observable market prices. If no sales occurred on such day, we use the "bid" price at the close of business on that date and, if sold short, the "asked" price at the close of business on that date day. Forward contracts are valued based on market rates or prices obtained from recognized financial data service providers. When an investment does not have a readily available market price, the fair value of the investment represents the value, as determined by us in good faith, at which the investment could be sold in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale.

        There is no single standard for determining fair value in good faith and in many cases fair value is best expressed as a range of fair values from which a single estimate may be derived. When making fair value determinations, we typically use a market multiples approach that considers a specified financial measure (such as EBITDA) or a discounted cash flow or liquidation analysis. We also consider a range of additional factors that we deem relevant, including the price at which the investment was acquired, the nature of the investment (such as whether it is a controlling interest), local market conditions, market prices for comparable securities and financing transactions and models that consider the current and expected operating performance and cash flows of the company in which the investment was made. Fair values of investments that do not have readily available market prices are based on the best information available in light of the circumstances and may incorporate or involve significant assumptions or judgments by management. Because we valued our investments as of March 31, 2007, subsequent events that may have a material impact on those valuations are not reflected.

Independent Valuation Firm

        An aggregate of 27 of the private equity investments that we valued as of the valuation date (representing approximately $13.4 million, or 67%, of the total unrealized value of all private equity investments valued as of the valuation date) did not have a readily available market and were valued using fair value pricing. Our calculations of the fair values of private equity investments were reviewed by Duff & Phelps, LLC, or "Duff & Phelps," our independent valuation firm, who provided third-party valuation assistance in accordance with limited procedures that we identified and requested it to perform. Those procedures did not involve an audit, review, compilation or any other form of examination or attestation under generally accepted auditing standards. Among other things, the terms of Duff & Phelps's engagement provide that it is not responsible for

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determining the fair value of any individual investments and its role is limited to being an advisor and providing additional support to our existing valuation policy and process. Based on the results of its application of these limited procedures and its review of relevant information, a substantial amount of which was provided by our investment professionals and was assumed to be accurate and complete, including valuations, Duff & Phelps concluded that our valuation of each of these investments did not appear to be unreasonable.

IRRs

        IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period. We calculated net IRRs after giving effect to the allocation of realized and unrealized returns on a fund's investments to the fund's general partner pursuant to a carried interest and the payment of any applicable management fees. These amounts measure returns based on amounts that, if distributed, would be paid to fund investors. We calculated gross IRRs before giving effect to the allocation of realized and unrealized returns on a fund's investments to the fund's general partner or manager pursuant to a carried interest and the payment of any applicable management fees. These amounts measure the returns on the fund's investments as a whole without regard to whether all of the returns would, if distributed, be payable to fund investors. In all cases, we computed IRRs using what is known as a "dollar-weighted" IRR, which takes into account the timing of cash flows and amounts invested at any given time, and we determined realized and unrealized returns using the methodologies described above.

Multiples of Invested Capital

        The multiples of invested capital measure the aggregate returns generated by a fund's investments in absolute terms. We calculated each multiple of invested capital 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 any realized and unrealized returns on a fund's investments to the fund's general partner or manager pursuant to a carried interest or the payment of any applicable management fees. In all cases, we determined the realized and unrealized values of a fund's investments using the methodologies described above.

Bridge Financing Provided by Private Equity Funds

        In certain instances, our traditional private equity funds may provide temporary or "bridge" financing to a portfolio company in connection with a portfolio company investment. This financing, which may be in the form of debt or equity, is designated as bridge financing prior to the time that the investment is made. If bridge financing that is extended by a private equity fund is not repaid within eighteen months from the date the financing was extended, the bridge financing is considered to be permanent financing and is included in the amount of the fund's portfolio company investment. If the bridge financing is repaid within eighteen months from the date the financing was extended, the repayment is considered a repayment of principal and any additional amounts received are treated as interest income from the portfolio company. For the purposes of calculating IRRs and multiples of invested capital, we disregarded both the principal amount of any bridge financing that was not considered permanent financing and any related interest income.

Calculation of Dollar Weighted Average Holding Periods

        We measure the length of time during which our funds hold portfolio investments on a dollar weighted basis. We calculated the dollar weighted average holding period for a fund's portfolio investments by dividing (i) the holding period of each of the fund's investments multiplied by the cost basis of such investment by (ii) the aggregate cost basis of all of the fund's investments. An investment's holding period is equal to the period of time between the date on which the investment was made and the date on which the amount invested was realized or, if the investment was held as of the valuation date, the valuation date. The cost basis of an investment is equal to the amount of capital invested by the fund. Where the value of an investment was only partially realized as of the valuation date, we considered the holding periods and cost bases of the realized and unrealized portions of the investment separately for the purposes of the calculation.

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INDUSTRY

Overview

        Asset management is the professional management of investments by third-party portfolio managers on behalf of investors. Asset managers earn a contracted fee by employing various strategies to meet the investment goals of their investors. These strategies are generally considered to be either "traditional" or "alternative." Traditional asset management generally involves the use of equity, debt and/or derivative securities while alternative asset management utilizes a variety of investment strategies. The asset management industry has grown significantly over the past ten years, with the total value of assets under management worldwide estimated at greater than $50 trillion in 2006. This growth has been driven by aging populations in both developed and emerging markets around the world which have increased the pools of savings and particularly pension assets. Alternative asset management strategies have been the fastest-growing sector of the industry as investors have sought to diversify their investment portfolios, and alternative asset managers have often delivered superior returns when compared to traditional asset managers.

        Traditional asset managers manage portfolios of securities by investing through investment companies registered under the Investment Company Act (for example, mutual funds and exchange traded funds) or through separate unregistered accounts managed on behalf of individuals or institutions. Investment objectives generally include total return, capital appreciation, current income and/or replicating the performance of a particular index. Investors in these funds generally have unrestricted access to their funds either through market transactions (in the case of closed-end mutual funds and exchange traded funds) or through withdrawals (in the case of open-end mutual funds and separately managed accounts). Traditional asset managers are generally compensated on a monthly or quarterly basis with fees that are calculated as a percentage of assets under management. Managers of such portfolios in the United States are typically registered with the SEC under the Investment Advisers Act.

        Alternative asset managers utilize a variety of investment strategies to deliver investment performance on an absolute return basis within certain predefined risk parameters and investment guidelines. These investment returns tend to have a lower correlation to the broader market than traditional asset management strategies. Alternative asset managers include private equity funds, real estate funds, venture capital funds, hedge funds, funds of funds (that is, funds that invest in investment funds), and mezzanine and structured debt funds. Many alternative asset vehicles, particularly private equity funds, require investors to fund committed capital over the investment period of the vehicle and limit investors' access to invested capital until such time as investments yield returns or are realized. Nearly all alternative asset management fee arrangements include a significant performance component. Generally, depending upon, among other things, the composition of the investor base and the nature of investment activities, alternative asset vehicles may not be required to register as investment companies under the Investment Company Act, and managers of such funds may not be required to register with the SEC under the Investment Advisers Act.

        A further discussion of private equity funds, structured debt funds and hedge funds is set forth below.

Alternative Asset Management

Private Equity Funds

        Private equity funds are managed pools of capital invested in non-public, non-actively traded common equity, preferred stock, or mezzanine or distressed debt securities. In certain cases, private equity funds engage in the acquisition and delisting of public companies or invest in publicly listed companies. Private equity fund managers often seek to exploit dislocations in the market where other investors do not recognize the value of, or may lack the required expertise to generate additional value from, a certain

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company or security. These investments may include significant changes to a company's capital structure through the use of borrowed capital, a strategy referred to as a "leveraged buyout."

        Private equity funds are generally fixed-lived vehicles, with provisions to extend their term under certain circumstances, and are generally organized as unregistered limited partnerships or limited liability companies. The business, affairs and investment decisions of private equity firms are usually controlled by a general partner. The fund obtains capital commitments from certain qualified investors that are high net-worth individuals or institutions who thereafter become passive limited partners in the fund partnership. At such time as the general partner identifies an appropriate investment opportunity, it is entitled to call the capital on an "as needed" basis (typically over the first three to six years of the fund's term) from its investors, and this capital is returned through distributions upon realizations of the underlying investments (typically within five to eight years). General partners are typically compensated with a combination of management fees (based on committed or contributed capital), transaction and monitoring fees (paid by portfolio companies for advisory and other services rendered) and carried interest (based on the net profits generated by the fund). Private equity fund managers typically commit a portion of their own capital to the funds they manage.

        Private equity fund-raising has experienced significant growth over the last several years, reaching record levels in 2006. According to DowJones, there has been more than $400 billion of capital raised in the United States since the beginning of 2002, and according to the Russell Investment Group, allocations to private equity funds are forecast to reach record levels in all markets in 2007. The growth of private equity funds can be observed in how private equity sponsor-led deals become a much more significant portion of overall mergers and acquisitions ("M&A") volume. Sponsor-led deals represented more than 25% of the global M&A volume in 2006, up from 5% in 1999.

U.S. Corporate Private Equity Funds Raised   Private Equity Global M&A Volume and Percentage of Total M&A
GRAPHIC   GRAPHIC
Source: DowJones   Source: Thomson Financial

Note:    Compound Annual Growth Rate, or "CAGR," represents the annual rate of growth over a period, assuming growth at a steady rate.

Returns for Private Equity

        Private equity fund managers have, on average, historically outperformed the broader stock indices over the past 20 years. High risk-adjusted returns are the driving attraction of private equity and provide incentive in the face of the illiquidity and administrative complexity associated with the asset class.

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Private Equity and Public Market Returns
As of December 31, 2006

Private Equity

  1 Yr
  3 Yr
  5 Yr
  10 Yr
  20 Yr
 
U.S. Buyouts   24.0 % 14.1 % 10.3 % 8.5 % 12.2 %
European Buyouts   29.6   15.3   8.3   14.3   14.4  

Public Equity


 

 


 

 


 

 


 

 


 

 


 
NASDAQ   9.5 % 6.4 % 4.4 % 6.5 % 10.2 %
S&P 500 Index   13.7   8.5   4.3   6.7   9.2  

Note:   Past performance is not indicative of future results. Buyouts represent returns from private equity funds that tend to acquire companies with established markets and current revenue streams.
Source:   From Thomson Financial and Bloomberg; includes Thomson Financial U.S. Buyouts and Mezzanine Index, Thomson Financial European Buyouts and Mezzanine Index, NASDAQ and S&P 500 Index.

Structured Debt Funds

        Structured debt funds are investment vehicles backed by a diversified pool of fixed income assets that may include senior secured loans, high-yield notes, investment grade bonds, mezzanine securities and other debt and credit-linked securities. These funds take a variety of forms and often target specific assets classes, such as portfolios of primarily non-investment grade senior credit facilities or portfolios of investment grade and high-yield bonds to create a new set of fixed income securities. These funds finance their purchases of debt securities through issuances of multiple tranches of debt and equity securities that are structured to achieve specific credit ratings. Structured debt vehicles seek to earn a return for investors by borrowing funds at a lower cost than the yield the vehicles earn on their underlying investments. A collateralized debt obligation is a type of structured debt fund that invests in leveraged portfolios of fixed income investments of various types, including collateralized bond obligations, or CBOs, collateralized mortgage obligations, or CMOs, collateralized fund obligations, or CFOs, among other structures. An arbitrage collateralized debt obligation, or CDO, is typically backed by a pool of high yield corporate bonds and/or loans and is designed to take advantage of the difference between the CDO's investment grade funding costs and the underlying assets' investment returns. Set forth below are charts that show total global CDO issuance and total U.S. leveraged loan arbitrage CDO activity over the last eight years.

Global CDO Issuance   U.S. Leveraged Loan Arbitrage CDO Activity
GRAPHIC   GRAPHIC
Source: Thomson Financial   Source: Standard & Poor's

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Hedge Funds

        The term hedge fund generally refers to an investment vehicle that seeks to generate positive risk-adjusted returns under various market conditions. Unlike a traditional asset management fund, a hedge fund invests in diverse asset classes and employs a variety of investment strategies to exploit market opportunities. Some of these strategies include various forms of arbitrage, long/short equity, event driven, global macro and other quantitative and fundamental strategies. In light of their often superior risk-adjusted performance and for diversification purposes, hedge funds have been utilized by an increasing number of institutional asset managers, and, as a result, have experienced significant inflows in recent years. Global assets under management in the hedge fund industry, as reported by HFR Industry Reports, have grown from approximately $456 billion at December 31, 1999 to an estimated $1.4 trillion at December 31, 2006, a 17.7% compound annual growth rate.

        Hedge funds are typically structured as limited partnerships or limited liability companies that are generally exempt from registration under the Investment Company Act. Advisers to such hedge funds are often not registered under the Investment Advisers Act and can pursue investment strategies not typically available via registered investment companies. Usually the manager of a hedge fund will receive both a base management fee and a performance fee. The base management fee is based on the net asset value of the fund, and the performance fee is computed as a percentage of the fund's profits (i.e., the net realized and unrealized gains in the portfolio). Some hedge funds set a "hurdle rate" under which the fund manager does not earn a performance fee until the fund's performance exceeds a benchmark rate. Another feature common to hedge funds is the "high water mark" under which a fund manager does not receive its performance fees until the fund's net asset value exceeds the highest historical value on which performance fees were last paid. Typical hedge fund investors are high net worth individuals and institutions that are permitted to invest and withdraw funds periodically in accordance with the terms of the funds. Hedge fund managers typically commit a portion of their own capital in the funds they manage.

Hedge Fund AUM and Net Asset Flows   Number of Hedge Funds and Average AUM

GRAPHIC

 

GRAPHIC
            Source: HFR Industry Reports               Source: HFR Industry Reports

Industry Trends

Growing Investor Demand and Increased Institutional Investor Allocations

        Growth in assets under management is driven by appreciation in the value of managed assets and net inflows of capital from investors. The industry has experienced significant growth in worldwide assets under management over the past ten years, primarily fueled by net capital inflows from an aging population. Within the U.S., approximately half of assets under management are retirement-related assets. Total pension assets in the United States grew from $6.8 trillion at the end of 1996 to $14.0 trillion at the end of 2006. Shifting demographics and the drive towards "privatization" of retirement planning present an opportunity for the asset management industry. These investors are expected to seek products with absolute return and greater risk management characteristics, and demand more investment advice.

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        Alternative asset management vehicles have been the fastest growing segment of the industry as investors have sought to achieve greater portfolio diversification and improve the risk adjusted return profile of their portfolios. However, despite these alternative products becoming a more significant source of industry growth, these strategies still account for a relatively small portion of total institutional assets. For example, the average allocation to alternative investments by U.S. corporate and public defined benefit pension plans was 4.4% and 4.3% respectively in 2006.

Product Innovation

        The alternative asset management industry is highly competitive, and asset managers compete for both investors and investment opportunities. Leading alternative asset managers have developed new investment strategies and structures which have enabled them to attract additional capital from existing investors as well as new capital from investors who have not invested with them previously. Some of these newer fund offerings include investing in distressed securities, the development of mezzanine and infrastructure funds and expansion into new geographic regions. Opportunities also exist to develop new investment vehicles and structures, including co-investment vehicles, and to raise new types of funds, such as proprietary hedge funds and structured product funds, allowing asset managers to deploy more managed capital and capture a greater share of the economics generated by the new investments. Further, the managers of some private equity funds are seeking to expand their investor base by creating publicly-traded permanent capital vehicles which co-invest in their funds, giving public investors exposure to these asset classes. These publicly-traded vehicles provide asset managers with permanent capital that may be organically grown through continuous reinvestment in a broad range of asset classes, and, as a result, offer stability and a valuable potential source of long-term income.

Convergence of Private Equity and Hedge Funds

        In recent years, hedge funds have increasingly become activist investors in public companies, functioning as transaction catalysts with the goal of maximizing shareholder value. This trend, together with private equity funds' continued focus on finding undervalued public companies to pursue leveraged buyout opportunities have brought the two types of alternative asset managers into closer proximity and frequent overlap. An increasing number of hedge funds have taken controlling positions in companies while private equity funds have from time to time made minority investments in public companies.

        Large alternative asset managers are increasingly expanding their operations to include both private equity and hedge fund businesses. Combining the businesses within one entity can lead to significant operational efficiencies as hedge funds and private equity funds often compete for capital and talent. The intellectual capital and complementary skill set of hedge funds and private equity managers also can be leveraged within one combined organization to identify and realize new investment opportunities.

Growth and Returns of Larger Funds

        Institutional investors are attracted to larger funds with well-established track records, systems and operations, and advanced risk management capabilities. Managers of larger funds typically control multiple funds with various strategies. As a result, the number of larger funds in the private equity fund sector has increased in recent years. According to Thomson Financial, the percentage of new private equity buyout funds with more than $1 billion in capital raised increased from 4% of all new private equity buyout funds formed in 1996 to 25% by the end of 2006.

        Further, "mega" private equity funds (typically private equity funds with over $5 billion in assets under management) have benefited from the increased fund size as the average annual returns for such mega funds are increasingly outperforming the returns of their smaller counterparts. Based on the data compiled by Thomson Financial, during the three year span of 2004-2006, the average annual returns of the mega funds were approximately 30%, as opposed to the average returns of large ($2 billion to $5 billion in assets under management) and mid-sized funds ($500 million to $2 billion in assets under management) of 21%.

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Increasing Size of Private Equity M&A Transactions

        Several factors including larger fund sizes, greater liquidity in the senior and high-yield debt markets, and joint buying power of consortiums have collectively increased the volume of large, sponsor-driven M&A transactions. Globally, financial sponsors were involved in 115 buyout transactions valued at over $1 billion in 2006, with a significant portion of these transactions resulting in the target going private. Furthermore, six out of the top seven leveraged buyouts to date were announced over the past 12 months with an average transaction value of over $30 billion.

$1 Billion+ Global Private Equity Buyout Deals   Private Equity Buyout Average Deal Size

GRAPHIC

 

GRAPHIC
Source: Thomson Financial   Source: Thomson Financial

Increased Depth of Financing Markets Leading to Lower Cost of Funding

        The institutional loan and high yield markets, the principal sources of funding for private equity mergers and acquisitions, have experienced unprecedented liquidity over the past few years, as fund inflows have outpaced investments. Increasing investor demand for non-investment grade debt has kept fixed income yields and spreads at low levels. In addition, the increased prevalence of alternative sources of fixed income financing, including asset-based financing, securitizations, and property financings, among others, have also increased the depth of the fixed income markets offering potential low cost financing alternatives to the private equity buyer. These market dynamics have led to significant growth in private equity related mergers and acquisitions, as tightening fixed income spreads and low yields improve a private equity buyer's cost of capital, resulting in higher returns and the ability to offer additional purchase consideration in a merger or acquisition.


Average All-in Spread of BB/BB- Institutional Loans

GRAPHIC

                                            Source: Standard & Poor's


Note:
All-in spread includes upfront fee (original issue discount), amortized evenly over an assumed three-year life.

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Ability to Deliver Non-Correlated and Higher Risk-Adjusted Investment Returns

        Private equity has historically been relatively uncorrelated to the real estate, public debt and equity markets. This low correlation to other asset classes has made private equity an attractive component of a diversified investment portfolio. The combination of low correlation and strong performance of private equity relative to other asset classes has been an important catalyst in the growth of the industry. By including private equity investments in their portfolios, investors often reduce portfolio volatility, increase portfolio duration and contribute to an overall improvement in a portfolio's risk/return profile.

Increased Sector Scrutiny

        The institutionalization of the alternative asset management industry has required alternative asset managers to develop more advanced internal controls and management information systems, as large institutional investors require greater transparency and robust risk management systems. The larger, more institutionalized alternative asset managers are better positioned to develop these processes and controls. In addition, as the number of investors who invest their funds with alternative asset managers continues to expand, there has been increased regulatory attention to the sector. Particularly, recently introduced tax legislation would, if enacted, preclude alternative asset managers from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules and tax carried interest using income tax rates rather than capital gains tax rates.

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BUSINESS

Overview

        Founded in 1976, we are a leading global alternative asset manager. Our 399 employees, including our 139 investment professionals, are led by our founders, Henry Kravis and George Roberts, who are pioneers of the leveraged buyout industry. Our history of landmark achievements in private equity includes the first leveraged buyout in excess of $1 billion, several of the largest leveraged buyouts announced worldwide to date, the first buyout of a public company by tender offer and the largest leveraged buyouts completed or announced in each of the United States, the Netherlands, Denmark, India, Australia, Singapore and France. We have continued our history of innovation by establishing new debt and public equity strategies that leverage the power of our brand and the intellectual capital in our private equity business.

        Today, through our offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong and Tokyo, we sponsor and manage funds that make investments worldwide in private equity and debt transactions on behalf of third-party investors and our firm. We also manage substantial investments in public equity. During our 31-year history, we have raised 16 funds and received approximately $59.7 billion of capital and capital commitments from investors. We have grown our assets under management significantly, from approximately $18.3 billion as of December 31, 2002 to approximately $53.4 billion as of March 31, 2007, representing a compounded annual growth rate of 28.7%. Of our total assets under management, approximately $6.8 billion is permanent capital, which is not required to be returned to investors and is able to be re-deployed as investments are realized.

        As a global alternative asset manager, we earn ongoing management fees for providing management and other services to our funds as well as transaction, monitoring and other potential fees in connection with our private equity and other investments. We also earn investment income from investing our own capital alongside fund investors and from our carried interest in fund investments, which provide us with a disproportionate share of the funds' investment gains. We are also selectively pursuing opportunities to develop new investment structures and products that we believe will help us increase the amount of managed capital that we are able to commit to individual transactions, grow our assets under management and capture additional income streams.

        We seek to consistently generate attractive investment returns by employing highly qualified professionals, making among the largest private equity investments worldwide and adhering to a disciplined investment approach. Our investment teams are supported by a substantial and diversified capital base, a centrally managed and integrated global investment platform and a worldwide network of business relationships that provide us with a significant source of investment opportunities, specialized knowledge during due diligence and substantial resources for creating and realizing value for investors. We also believe that these aspects of our business will help us continue to grow our assets under management and deliver strong investment performance in a variety of economic and financial conditions.


Our Strengths

        We believe that we possess a number of strengths that differentiate us from other alternative asset managers and provide us with competitive advantages for raising capital, securing investment opportunities, obtaining financing for transactions, consummating investments, creating value in our portfolio companies and generating attractive investment returns. These strengths include the following:

One Firm with a Global Reach and Best-in-Class Processes

        We are truly a global firm. With offices in seven major financial centers located on three continents, we have created an integrated global platform for sourcing and making investments in multiple asset classes. Our global and diversified operations are supported by our sizeable capital base and our extensive company, industry, asset-specific and local market knowledge, which allow us to deploy capital across a

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number of geographical markets in a broad range of companies, industry sectors and asset classes. As of March 31, 2007, 34% of our investment professionals were based outside the United States and 63% of the unrealized value of our private equity portfolio consisted of investments in companies outside the United States. Although our operations span multiple continents and business lines, we are still managed as one firm with a common culture and are highly focused on sharing knowledge, experience, resources and best practices throughout our offices and across our various investment classes. Our investment processes are overseen by three committees that operate globally, which consist of our equity investment committee, which reviews all investments made by our private equity funds, our debt investment committee, which reviews all investments made by our credit strategy funds, and our portfolio management committee, which monitors the performance of our private equity investments. Our founders, Henry Kravis and George Roberts, are active members of each of these committees. We believe that operating as a centrally managed firm that is both global and diversified enhances the growth and stability of our business and helps us make informed decisions across asset classes and geographies.

Distinguished Track Record Across Economic Cycles

        During our 31-year history, we have successfully invested under all types of economic and financial conditions, developing a track record that we believe distinguishes our firm. From our inception through March 31, 2007, our ten private equity funds that had invested for at least 30 months had achieved a cumulative gross IRR of 26.3%. During 2007, we were named "Best Private Equity Firm" by Global Finance and "European Large Buyout Firm of the Year" by Financial News and the KKR Strategic Capital Funds were named "Hedge Fund Launch of the Year" by Alternative Investment News. Our other accomplishments include completing or announcing more than 60 leveraged buyouts valued in excess of $1 billion, including the first leveraged buyout in excess of $1 billion and sponsoring or co-sponsoring many of the largest leveraged buyouts completed anywhere to date.

Alignment of Interests

        One of our fundamental philosophies has been to align our interests and the interests of our people with those of our fund investors. Since our inception, our investment professionals, senior advisors and other executives have invested or committed to invest approximately $1.5 billion of their personal capital in or alongside our funds. In structuring this offering, we have sought to achieve the same alignment of interests between our unitholders and our people through their significant and long-term ownership of our equity. Our principals will not receive any of the proceeds from this offering. Our principals will collectively own more than          % of the equity in our business immediately following this offering and they will benefit from the financial success of our business in the form of distributions and payments received from KKR Holdings, the entity through which they will hold their equity, and the potential appreciation in the value of the equity that KKR Holdings owns. Our other employees are expected to receive equity grants at the time of this offering, which we believe will similarly align their interests. To promote long-term alignment of interests, the equity directly or indirectly held by our principals and employees will be subject to significant forfeiture and transfer restrictions that require such persons to remain actively employed by us in order to realize the full value of their equity interests.

Experienced Investment Professionals and Continuity of Senior Leadership

        We have built our firm with the intellectual capital of our people, and we are guided daily by the diversity, depth and breadth of their collective knowledge and experience. We currently employ 139 investment professionals who are led by our founders, Henry Kravis and George Roberts and supported by 19 senior advisors and 25 Capstone consultants. Our investment professionals have demonstrated an ability to address the challenges of cyclical markets by effectively adapting our investment strategies, financial structures and operational resources to existing market conditions. Our investment professionals come from a variety of financial and operational backgrounds, which when combined with the extensive expertise

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of our senior principals provide us with a significant competitive advantage. We have also benefited from a high degree of continuity in our senior leadership.

Distinct Ability to Source Proprietary Investments

        We believe that we are able to source new investment opportunities as a result of our internal deal generation strategies and our global network of business relationships with leading executives from major companies, commercial and investment banks, financial intermediaries, other investment and advisory institutions and former political leaders. Our investment professionals are organized into global industry teams and have developed a thorough understanding of their industries by meeting with management teams, attending product seminars and industry conferences and conducting their own primary research. Our industry teams work across our offices to develop a list of industry themes and trends, to identify companies that will benefit from those trends and to determine which of those companies would make an attractive investment. When team members identify an investment opportunity, they leverage our network of global relationships with the goal of winning exclusive or limited access to the investment. We believe that our industry focus, when combined with our global network and the industry-specific knowledge that we have developed over time, provides us with an important source of proprietary investments.

Strong Relationships With Financial Leaders

        We actively cultivate our relationships with major investment banking firms and other financial intermediaries and are among those firms' most significant clients. Our investment professionals meet regularly with major investment banking firms concerning potential investment opportunities, and we often work with the same group of financial institutions when seeking financing arrangements for our transactions. We believe our repeated and consistent dealings with the major financial services firms over a long period of time, and our completion of a significant number of larger transactions, have led to our being one of the first parties considered for potential investments. We also believe that our relationships with financial institutions and the credibility that we have established through our past successes help us obtain financing for our transactions at attractive prices and with favorable terms.

Focus on Value Creation

        We have developed an institutionalized process for creating value in our investments. As part of our effort, we created Capstone Consulting, a team of operational consultants that works exclusively with our investment professionals and portfolio company management teams. In addition, we have hired senior advisors to assist us, including the former chairmen or chief executive officers of Proctor & Gamble, Wells Fargo, HSBC, Eastman Kodak and Accenture. Our investment professionals, senior advisors and consultants work with our portfolio companies to address issues relating to top-line growth, cost optimization and efficient capital allocation and assist management in designing and implementing strategic and operational changes that drive value creation. In most cases, the work initially involves developing operating and financial metrics for tracking progress and identifying problems during the early stages of an investment. Ultimately, the focus shifts to capitalizing on business opportunities to drive value creation over the long term. The objective of these measures is to drive growth in revenue, cash flows and operating margins, which allows us to reduce the leverage in our portfolio companies, and create value for our investors.

Long-Standing Investor Relationships

        Over our 31-year history, we have established strong relationships with investors that have allowed us to raise significant amounts of capital for investment in a broad range of asset classes. Our fund investors consist of a diversified group of some of the largest public and private pension plans, global financial institutions, university endowments, funds of funds and high net worth individuals, many of whom have

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invested with us for decades across multiple funds that we have sponsored. For example, our 10 largest investors have invested with us for an average of 16 years. More recently, through the listing of two of our funds, we have expanded our investor base to include public market investors, such as mutual funds and hedge funds, providing us with an additional source of capital. We believe that the strength, breadth, duration and diversity of our investor relationships provide us with a significant advantage for raising capital from existing and new sources and will help us continue to grow our assets under management.

Long-Term Capital Base with a Significant Amount of Permanent Capital

        As of March 31, 2007, we had $53.4 billion of assets under management, making us one of the largest independent alternative asset managers in the world. These assets were invested or available for investment in private equity, debt and public equity transactions. We have created two listed permanent capital funds that are able to grow organically through the continuous investment and reinvestment of capital, which we believe provides us with stability and with a valuable potential source of long-term income.

Proven Ability to Innovate

        We pioneered the development of the leveraged buyout and have worked throughout our history on creating innovative financing structures that allow us to compete aggressively for transactions while maintaining ongoing financial flexibility. Examples of recent innovative financing structures include using a complex power hedging program in connection with our acquisition of Texas Genco and structuring our acquisition of Capmark Financial Group in a manner that allowed the company to achieve an investment grade credit rating. More recently, our ability to innovate has allowed us to grow our permanent capital base and diversify our operations through the establishment of two permanent capital vehicles, KKR Private Equity Investors and KKR Financial, that have the flexibility to invest across asset classes.


Our Growth Strategy

        We believe the "KKR" name is associated with the successful execution of many of the largest and most complex private equity transactions worldwide; a focus on operational value creation; a strong investor base; a global network of strong business relationships; a reputation for integrity and fair dealing; and a distinguished track record of generating attractive investment returns. We intend to capitalize on the name recognition that we have developed and leverage the strength of our brand as we seek to grow our business.

Deliver Attractive Returns Through Strong Investment Performance

        We intend to adhere to the disciplined investment approach that we have developed over our 31-year history, focusing in particular on driving value creation from the time an investment is made. Our investment approach will continue to emphasize company, industry and economic fundamentals and the operational and strategic aspects of the companies in which we invest, and we will continue to subject our investments to the same stringent due diligence, monitoring and oversight practices that we have developed over time, drawing in each case on the company, industry, asset-specific and local market knowledge of our people. We believe that by maintaining investment discipline and taking a "hands-on" approach to our investments, we will be best positioned to continue to generate attractive returns for our funds and create long-term value for our unitholders.

Grow Globally Across Existing Asset Classes

        We intend to pursue opportunities within North America to increase the amount of managed capital that we are able to deploy in private equity and debt investments, while continuing to grow our public equity business. Outside of North America, we intend to focus on increasing the amount of private equity

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investments that we make in Europe and Asia, while building out our debt and public equity operations in those regions. Since October 2005, we have raised five new funds that received approximately $32.4 billion of capital and capital commitments from investors, including approximately $5.1 billion of permanent capital and a new $4.0 billion private equity fund that is focused on investment opportunities in Asia. These funds provide us with a flexible capital base that we may use to fund investments in a broad range of asset classes throughout the world.

Selectively Pursue Opportunities to Expand Our Investment Structures and Products

        We believe that opportunities exist to develop and sponsor new investment vehicles and structures, including co-investment vehicles, and to raise new types of funds, such as long-oriented public equity funds, structured product funds and industry- or geography-specific funds, that allow us to deploy a greater amount of managed capital in our investments and thereby capture a greater share of the economics generated by these investments. To support these initiatives, we are currently developing a capital markets business in the United States, Europe and Asia, which we believe will provide us with new alternatives and capabilities for distributing our investment products to investors worldwide and to further broaden our investor base. We may also consider selectively partnering or entering into joint venture arrangements with one or more financial intermediaries in order to provide us with access to additional classes of investors.

Maintain Our Long-Term Focus

        We have consistently approached the management of our business and our investments with the goal of creating and realizing value over the long-term. We intend to maintain this long-term focus after we become a public company even though this may lead to increased volatility in our results from period to period. We do not intend to permit the short-term perspectives of some public market investors to influence our investment, operational or strategic decisions, our duties or commitments to our fund investors or our focus on creating long-term value for our unitholders.

Our Firm

History and Development

        We were founded in 1976 as a private equity firm specializing in leveraged buyouts. We completed our first acquisition in 1977 with capital raised from a small group of investors and, since that time, we have sponsored and managed a total of 16 investment funds and built a brand name, a global franchise, a broad investor base and a diversified investment institution. We now maintain offices in seven major financial centers located across three continents and we have diversified our operations to include actively managing investments across a broad range of major asset classes.

        During the first 28 years of our operations, we focused our efforts primarily on building a leading private equity business. Our initial focus on private equity allowed us to develop and refine financial and structuring skills that we believe are prerequisites for success in any investment business. In 2000, we began placing a greater emphasis on the operational aspects of portfolio companies, which we believe is an essential component for creating value. Since then, our operational approach to building value in portfolio companies has become an integral part of our firm and a cornerstone of the way in which we evaluate and approach equity investments. While we manage our firm and our investments differently today than we did during the earlier years of our development, we have not changed our principles, our performance-based culture or our investment objective, which is to generate large multiples of invested capital and attractive IRRs for investors.

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        We have acquired significant credit experience over time by sponsoring investments in financially distressed companies, by using significant amounts of leverage to finance acquisitions and by monitoring investment portfolios of financial services companies acquired by our funds. Commencing in 2004, we began to actively pursue debt investments as a separate asset class through our formation of KKR Financial. To support the operations of KKR Financial, we hired additional investment professionals with significant experience evaluating and managing fixed income investments, including investments in corporate debt, bank loans, asset-backed securities, real estate assets and other credit products, and we built a platform for identifying, assessing, making, monitoring and exiting debt investments. The experience that we gained through our management and operation of KKR Financial and the resources provided by these additional personnel created a strong foundation for growing our debt operations and enabled us to form the KKR Strategic Capital Funds in 2006 to take advantage of larger debt investment opportunities.

        Although our business activities have historically focused significantly on private equity and credit investments, we have managed investments in public equity throughout our history. Initially, our public equity investments consisted of minority and structured investments in public companies that were made by our private equity funds. More recently, we formed KKR Private Equity Investors, our private equity-oriented permanent capital fund, and our credit strategy funds, which have provided us with more investment flexibility than traditional private equity funds and an additional capital base for making equity investments in public companies. Our public equity strategies generally seek to leverage, where appropriate, the intellectual capital developed in the course of our traditional private equity business, which may otherwise not be utilized if a private equity transaction is not consummated, to make public equity investments. We believe that significant opportunities exist for us to expand our public equity activities and take advantage of the increasing number of suitable public equity investments that we identify. To achieve these results, we recently hired additional investment personnel who have specialized experience in the public equity markets.

        In addition to taking steps to build out our public equity business, during 2007 we began the process of establishing a capital markets business in the United States, Europe and Asia with the objective of increasing the amount of third-party capital that we are able to commit to individual transactions, thereby growing our assets under management and capturing additional income streams. We have hired experienced professionals with long-standing investor relationships to help us build this business. We expect that our capital markets activities initially will focus on syndicating to a broader base of investors a portion of the equity that we commit in our larger private equity transactions, which we believe will help us reduce the need to partner with large consortiums of private equity firms on large leveraged buyouts, retain greater operational control over our portfolio companies and capture a greater portion of the economics that are generated by our private equity investments. Over time, we may expand our capital markets activities in a manner that similarly complements our other business activities.

Global Operations

        With offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong and Tokyo, we have established our firm as a leading global alternative asset manager. Our expansion outside of the United States began in 1995, when we made our first investment in Canada. Since that time, we have taken a long-term strategic approach to investing globally and have established a presence in Europe and Asia with multilingual and multicultural investment teams that have local market knowledge and significant business, investment and operational experience in the countries in which we invest. We believe that our global capabilities have assisted us in raising capital and capturing a greater number of investment opportunities, while enabling us to diversify our operations. From January 1, 1996 through March 31, 2007, our 1996 Fund and subsequent funds collectively invested more than $11.3 billion of capital outside of North America.

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        The following table presents information concerning the composition of our investment portfolio by country as of March 31, 2007.

 
  Private Equity Portfolio
Country

  Number of
Investments

  Fair Value
 
  ($ in millions)

United States   18   $ 6,176.0
France   3     4,247.6
Netherlands   5     3,420.9
Germany   6     2,676.6
Australia   2     787.9
Singapore   1     672.7
Denmark   1     512.2
Canada   1     428.5
India   1     269.7
Italy   1     243.5
Bermuda   1     126.8
   
 
  Total   40   $ 19,562.4
   
 

        While our operations span multiple continents and asset classes, our investment professionals are supported by a centralized and integrated infrastructure and operate under a common set of principles and business practices that are monitored by our global committees. We believe that we have created a single culture that rewards investment discipline, creativity, determination and patience and the sharing of information, resources, expertise and best practices across our offices. When appropriate, we staff transactions across multiple offices in order to take advantage of the industry-specific expertise of our investment professionals, and we hold regular meetings in which investment professionals throughout our offices share their knowledge and experiences. We believe that the ability to draw on the local cultural fluency of our investment professionals while maintaining a centralized and integrated global infrastructure distinguishes us from other alternative asset managers and has been a substantial contributing factor to our ability to raise funds and invest internationally.

Our Team

Equity Investment Professionals

        We currently employ approximately 139 investment professionals who focus primarily on equity investments. These individuals come from diverse backgrounds in private equity, operations, strategic consulting and finance and include some of the most experienced equity investors in the world. Over the past six years, we have focused our senior-level equity recruiting efforts on executives with significant operating experience, including former chief executive officers and chief financial officers of companies operating in a wide range of industry sectors. As a group, our equity investment professionals provide us with a powerful global team for identifying businesses with durable competitive advantages; developing capital structures for portfolio companies that support their business strategies; working with management teams to create value for unitholders; providing portfolio companies with access to a global network of resources that strengthen their operations; and generating superior investment returns.

Debt Investment Professionals

        We currently employ more than 20 investment professionals who focus primarily on corporate debt investments. These individuals have backgrounds in debt investments, risk management, asset liability management, capital markets, finance and portfolio management and provide us with significant experience for managing our credit strategy funds. Our six most experienced debt investment professionals

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have on average 17 years of credit experience, including experience investing in and trading leveraged bank loans, second lien loans, high yield bonds, subordinated bonds, mezzanine bonds, preferred stock, credit and interest rate derivative instruments, structured products, real-estate investments and other debt and equity investments. Together, they provide us with significant expertise for evaluating and managing credit risks and creating diversified investment portfolios of corporate debt investments that have the ability to generate attractive leverage-adjusted returns.

Senior Advisors

        To complement the expertise of our investment professionals, we have retained a team of senior advisors to provide us with additional operational and strategic insights. The responsibilities of our senior advisors include serving on the boards of our portfolio companies, helping us evaluate individual investment opportunities and assisting our portfolio companies with operational matters. Our team of senior advisors currently includes Edwin L. Artzt (the former Chairman and Chief Executive Officer of Proctor & Gamble), Sir John Bond (the former Group Chairman of HSBC Holdings plc), Richard L. Clemmer (the former Chief Executive Officer of Agere Systems), George M.C. Fisher (the former Chairman, Chief Executive Officer and President of Eastman Kodak Company), Hirashi Hosokawa (the former Japanese Vice Minister for International and Economic Affairs), and Dr. Edward Tian Suning (the Chairman of China Broadband Capital L.P. and the Vice Chairman and former Chief Executive Officer of China Netcom Group) as well as other individuals who have held leading positions in major corporations and public agencies worldwide. Five of our senior advisors also participate on our portfolio management committee, which monitors the performance of our private equity investments.

Operating Consultants

        We have developed an institutionalized process for creating value in our investments. As part of our effort, we created Capstone Consulting, a team of operational consultants that works exclusively with our investment professionals and portfolio company management teams. We utilize the services of Capstone, which has approximately 25 consultants located in New York, Menlo Park and London, to provide us with additional expertise for assessing investment opportunities and assisting managers of our portfolio companies in defining strategic priorities and implementing operational changes. During the initial phases of an investment, Capstone's work seeks to implement our thesis for value creation. Its consultants may assist our portfolio companies in addressing top-line growth, cost optimization and efficient capital allocation and in developing operating and financial metrics. Over time, Capstone's work shifts to identifying challenges and taking advantage of business opportunities that arise during the life of an investment. While we do not require our portfolio companies to engage Capstone, in our experience most portfolio company managers embrace its involvement as a result of the operational expertise and bottom-line focus of its consultants. In addition, to assist us with investments in the insurance industry, we have established an exclusive relationship with Fisher Capital, an insurance advisory firm that was founded by Jim Fisher after the successful sale of our investment in American Re-insurance, where Mr. Fisher served as the Chief Financial Officer.

Global Committees

        Our investment processes are overseen by three committees that operate globally. These committees consist of separate investment committees for our private equity and credit strategy funds and a portfolio management committee for our private equity funds. Our equity investment committee and our debt investment committee are responsible for reviewing and approving all investments made by our funds; monitoring due diligence practices; and providing advice in connection with the structuring, negotiation, execution and pricing of investments. Our portfolio management committee is responsible for working with our investment professionals from the date on which an investment is made by a private equity fund until the time the investment is exited in order to ensure that strategic and operational objectives are

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accomplished and that the performance of the investment is closely monitored. Our founders, Henry Kravis and George Roberts, are active members of our three committees. Other members consist of our senior principals. Our portfolio management committee is also advised by certain of our senior advisors and consultants from Capstone.

Private Equity

        Our private equity business involves sponsoring and managing a group of investment funds that make primarily control-oriented investments in connection with leveraged buyouts and build-ups and other similar investment opportunities. These funds, which we refer to as private equity funds, are managed by Kohlberg Kravis Roberts & Co. L.P. and currently consist of a number of private equity funds that have a finite life and investment period, which we refer to as traditional private equity funds, and a private equity-oriented permanent capital fund that has a perpetual existence and investment period. We also sponsor and manage credit strategy funds that sometimes make private equity investments alongside our private equity funds, although we include those funds in our credit segment for management reporting purposes. As of March 31, 2007, our private equity funds had $44.1 billion of assets under management, including $5.2 billion of permanent capital, making us one of the largest private equity fund sponsors in the world.

Private Equity Experience

        We are a world leader in private equity, having sponsored and managed 14 private equity funds that have received more than $56.9 billion of capital and capital commitments during our 31-year history. Our private equity funds focus on investing in large capitalization companies. We believe this focus allows us to invest in industry-leading franchises with global operations, attract world class management teams, deploy large amounts of capital in individual transactions and optimize amounts of income that we earn on a per transaction basis. Our approach leverages our capital base, infrastructure, skill set, global network and industry and operating expertise, which we believe sets us apart from others. From our inception through March 31, 2007, our private equity funds invested $30.5 billion of capital in more than 150 separate private equity transactions with a total transaction value of more than $280 billion. As of March 31, 2007, these investments had generated $74.4 billion of realized and unrealized value, of which $56 billion had been distributed in the form of cash.

        As of March 31, 2007, our private equity funds had investments in 40 companies with more than $100 billion of annual revenues and more than 560,000 employees worldwide. Those portfolio companies were based in more than 10 countries and operated in 11 industries, which has provided us with broad and deep industry and operating experience. These investments do not include commitments we have entered into to acquire an additional 10 portfolio companies in transactions having an aggregate value of $140 billion. We expect that these acquisitions will close during the second half of 2007 and we anticipate that our total equity investment in the transactions will be approximately $11.6 billion. Whether and when these transactions will be consummated depends on a number of factors, some or all of which may be outside of our control.

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        The following charts present information concerning the amount of capital invested by our 1996 Fund and our subsequent funds by geography and industry through March 31, 2007.

Dollars Invested by Geography   Dollars Invested by Industry

GRAPHIC

 

GRAPHIC

        The following table presents information concerning the investments that our private equity funds have made or committed to make since January 1, 2004, some of which have been significantly or fully realized.

Company

  Year
  Industry
  Country
  Equity
Investment(1)

  Transaction
Value

 
  ($ in millions)

Investments                        
Jazz Pharmaceuticals, Inc   2004   Health Care   United States   $ 130.0   $ 250
Sealy Corporation   2004   Consumer Products   United States     327.6     1,566
Maxeda*   2004   Retail   Netherlands     531.1     3,061
Dynamit Nobel AG   2004   Chemicals   Germany     265.6     2,967
PanAmSat Holdings Corporation*   2004   Media   United States     134.5     4,343
Auto-Teile-Unger Holding AG   2004   Retail   Germany     534.8     1,843
Visant Corp.   2004   Media   United States     156.3     2,322
Texas Genco Holdings, Inc.*   2004   Energy   United States     120.5     3,813
Duales System Deutschland GmbH*   2005   Recycling   Germany     46.9     393
Masonite International Corporation   2005   Industrial   Canada     428.6     2,576
Toys "R" Us, Inc   2005   Retail   United States     418.3     7,575
Sungard Data Systems, Inc   2005   Technology   United States     482.5     11,969
SBS Broadcasting S.a r.l   2005   Media   Pan European     412.3     2,664
Accellent Inc   2005   Health Care   United States     448.3     1,342
Avago Technologies, Ltd.   2005   Technology   Singapore     426.5     2,787
Fl Selenia S.p.A   2005   Chemicals   Italy     243.5     1,033
TDC A/S   2005   Telecom   Denmark     512.2     14,953
Capmark Financial Group Inc   2006   Financial Services   United States     673.0     16,770
AVR Bedrijven N.V   2006   Recycling   Netherlands     139.1     1,579
The Nielsen Company B.V.   2006   Media   Netherlands     698.5     12,031
BIS/Cleanaway   2006   Recycling   Australia     260.0     1,372
Aricent, Inc (f/k/a SDS)   2006   Technology   United States     269.7     936
NXP B.V.   2006   Technology   Netherlands     1,254.0     10,973
PagesJaunes Groupe S.A.   2006   Media   France     787.0     4,044
HCA Inc   2006   Health Care   United States     1,166.0     33,030
Kion Group GmbH   2006   Industrial   Germany     613.0     5,479
Seven Media Group   2006   Media   Australia     528.0     3,218
ProSeibenSat.1 Media   2007   Media   Germany     849.0     4,235
Tarkett S.A.   2007   Industrial   France     640.0     1,949

Pending Investments(2)

 

 

 

 

 

 

 

 

 

 

 

 
Tianru Group Cement Co., Ltd.   2007   Industrial   China     125.0     300
                         

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MMI Holdings Ltd   2007   Industrial   Singapore     175.0     757
Yageo Corporation   2007   Technology   Taiwan     125.0     307
Harman International Industries, Inc.   2007   Technology   United States     1,000.0     8,000
Alliance Boots plc   2007   Retail   United Kingdom     2,100.0     24,900
First Data Corporation   2007   Financial Services   United States     2,100.0     29,000
Dollar General Corporation   2007   Retail   United States     1,150.0     7,600
TXU Corp.   2007   Energy   United States     2,100.0     46,500
Laureate Education, Inc.   2007   Media   United States     400.0     4,100
U.S. Food Services   2007   Retail   United States     1,125.0     7,300
Biomet, Inc.   2007   Health Care   United States     1,300.0     11,600

(*)
Indicates that the investment has been significantly or fully realized.

(1)
Equity invested consists of the amount of equity invested or committed to be invested by our private equity funds. See "Certain Relationships and Related Party Transactions—Side-by-Side and Other Investments."

(2)
We expect that the pending investments will be consummated in the second half of 2007. Whether and when these transactions will be consummated depends on a number of factors, some or all of which may be outside of our control.

        We believe that our broad and deep experience and long-term track record of investing large amounts of capital in a wide range of industry sectors and geographical regions and economic and financial conditions are among the many factors that distinguish our private equity business. We have also achieved a number of other milestones that we believe differentiate us. These accomplishments include:

    completing or announcing more than 60 private equity transactions valued in excess of $1 billion, including the first leveraged buyout in excess of $1 billion ever completed;

    sponsoring the first private equity transaction using a tender offer structure;

    sponsoring or co-sponsoring many of the largest private equity transactions completed worldwide and the largest private equity transaction announced anywhere to date; and

    sponsoring or co-sponsoring the three largest private equity transactions completed in Canada, the two largest leveraged buyouts completed in France and the largest leveraged buyouts completed in each of Denmark, the Netherlands, Australia, India and Singapore.

        We take a long-term approach to private equity investments and measure the success of our investments over a period of years rather than months. Given the duration of our private equity investments, we focus on generating large multiples of invested capital and attractive IRRs when deploying capital in private equity transactions.

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        The following charts present information concerning the amount of capital invested and the amounts of realized and unrealized returns generated by our traditional private equity funds from our inception through March 31, 2007.

Amount Invested and Total Value   Realized and Unrealized Value

GRAPHIC

 

GRAPHIC

        Additionally, because our emphasis on generating large multiples of invested capital and attractive IRRs has produced significant cash flows for our fund investors, we believe that our private equity approach has also been an important contributor to the extended relationships that we have developed with our investor base. The following table presents information concerning the total distributions to investors made by our traditional private equity funds during the periods indicated.

 
  Year Ended December 31,
   
   
Year

  Three Months
Ended March 31,
2007

   
  2002
  2003
  2004
  2005
  2006
  Total
 
  ($ in millions)

Distributions to Investors   $ 897   $ 3,016   $ 7,035   $ 3,569   $ 5,251   $ 780   $ 20,548

        From our inception through March 31, 2007, our first ten traditional private equity funds (representing all of our private equity funds that have invested for at least 30 months) achieved a multiple of invested capital of 2.7x and a cumulative gross IRR of 26.3%, compared to the 13.6% gross IRR achieved by the S&P 500 Index over the same period. The S&P 500 Index is an unmanaged index and its returns assume reinvestment of dividends and do not reflect any fees or expenses. The table below presents information as of March 31, 2007 relating to the historical performance of each of our traditional private equity funds since our inception, which we believe illustrates the benefits of our approach to making private equity investments. This data has been adjusted to give effect to subsequent commitments to the 2006 Fund and the Asian Fund, but does not otherwise reflect acquisitions or disposals of investments, changes in investment values or distributions occurring after March 31, 2007. We encourage you to review the cautionary note below for a description of reasons why the future results of our private equity funds may differ from the historical results of our private equity funds. You should also see "Private Equity Valuations and Related Data" for a description of how the values below were calculated.

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  Amount
  Fair Value of Investments
   
   
   
 
Private Equity Fund

  Gross
IRR

   
  Multiple of
Invested
Capital

 
  Committed
  Invested
  Realized
  Unrealized
  Total
  Net IRR
 
 
  ($ amounts in millions)

 
Historical Excluded Funds(1):                                            
1976 Fund   $ 31   $ 31   $ 537   $   $ 537   39.5 % 35.4 % 17.1 x
1980 Fund     357     357     1,828         1,828   29.0   25.8   5.1  
1982 Fund     328     328     1,290         1,290   48.1   39.2   3.9  
1984 Fund     1,000     1,000     5,963         5,963   34.6   28.9   6.0  
1986 Fund     672     672     9,081         9,081   34.4   28.9   13.5  
1987 Fund     6,130     6,130     14,746     252     14,997   12.2   9.0   2.5  
1993 Fund     1,946     1,946     4,124     33     4,157   23.6   16.8   2.1  
1996 Fund     6,012     6,012     10,183     2,039     12,222   18.5   13.8   2.0  

Included Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
European Fund (1999)(2)     3,085     3,085     3,942     3,694     7,636   30.9   23.3   2.5  
Millennium Fund (2002)     6,000     5,881     4,264     6,991     11,255   53.6   40.6   1.9  
European Fund II (2005)(3)     5,650     3,857         4,218     4,218   *   *   *  
2006 Fund     16,625     1,236         1,236     1,236   *   *   *  
Asian Fund (2007)     4,000                   *   *   *  
   
 
 
 
 
             
Total Funds(4)   $ 51,836   $ 30,535   $ 55,958   $ 18,463   $ 74,421   26.3 % 20.2 % 2.7 x
Total Funds in Accounting Predecessor(1)   $ 41,372   $ 20,038   $ 18,389   $ 18,145   $ 36,534   23.9 % 18.3 % 1.8 x
Total Included Funds   $ 35,360   $ 14,059   $ 8,206   $ 16,139   $ 24,345   36.5 % 27.5 % 1.7 x

(1)
We will not acquire interests in the 1996 Fund and prior funds in connection with the Reorganization Transactions and this offering, because the general partners of those funds are not expected to receive meaningful proceeds from further realizations. The predecessor combined financial statements included in this prospectus consolidate the 1996 Fund and subsequent traditional private equity funds. See "Organizational Structure."

(2)
The European Fund's capital commitments include euro-denominated commitments of €196.5 million. We have converted these amounts into U.S. dollars based on the exchange rate prevailing on the dates on which capital was called.

(3)
The European Fund II's capital commitments include euro-denominated commitments of €2,597,160,000. We have converted these amounts into U.S. dollars based on the exchange rate prevailing on (i) the dates on which capital was called in the case of funded commitments and (ii) March 31, 2007 in the case of unfunded commitments.

(4)
The gross IRRs, net IRRs, and multiple of invested capital are calculated based on our first ten traditional private equity funds, which represent all of our private equity funds that have invested for at least 30 months.

Private Equity Investment Approach

        Our approach to making private equity investments focuses on achieving large multiples of invested capital and attractive IRRs by selecting high-quality investments that may be made at attractive prices, applying rigorous standards of due diligence when making investment decisions, implementing strategic and operational changes that drive value creation in the businesses we acquire, carefully monitoring investments and making informed decisions when developing investment exit strategies. We believe that we have achieved a leading position in the private equity industry by applying a disciplined investment approach and by building strong partnerships with highly motivated management teams who put their own capital at risk. When making private equity investments, we seek out large capitalization companies with strong business franchises, attractive growth prospects, defensible market positions and the ability to generate attractive returns. We do not participate in "hostile" transactions that are not supported by a target company's board of directors.

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Sourcing and Selecting Investments

        We have access to significant opportunities for making private equity investments as a result of our sizeable capital base, our global infrastructure and our worldwide network of contacts at major companies, commercial and investment banks, financial intermediaries, other investment and advisory institutions and political leaders. Members of our global network frequently contact us with new investment opportunities, including a substantial number of exclusive investment opportunities and opportunities that are made available to only a very limited number of other firms, which has generated substantial deal flow for us. We also proactively pursue business development strategies that are designed to generate deals internally based on the depth of our industry knowledge and our reputation as a leading financial sponsor.

        To enhance our ability to identify and consummate private equity investments, we have organized our private equity professionals in industry-specific teams that focus on the nine industry sectors in which we are most active: chemicals; consumer products; energy and natural resources; financial services; health care; industrial; media and communications; retail and technology. The investment professionals in each of our industry teams are responsible for developing a network of industry experts and an in-depth understanding of their industry's economic drivers, inherent risks and opportunities for value creation. Each team is led by one of our principals and staffed with three to five other investment professionals. Industry teams work together across our offices and hold frequent conference calls to share ideas and identify potential acquisition candidates. Former operating executives have recently joined our firm to augment our industry teams and lend an additional operating perspective to our investment analyses.

        We believe that our industry-specific expertise provides us with important proprietary investment opportunities. We believe that our deep and broad industry expertise enables us to identify market opportunities and trends and provides us with a significant advantage when investing in more complex and regulated industries, such as banking, insurance and power generation and transmission. Utilizing our insights and industry contacts to access new markets or target strategic acquisitions also helps us when we work with managers to develop value-creating strategies and, in some instances, can lead to additional revenue opportunities for our portfolio companies.

Due Diligence and the Investment Decision

        Once a private equity investment opportunity has been identified, the investment team that is responsible for the investment introduces the opportunity to our other equity professionals during one of our weekly video conference calls. These calls provide a forum in which investment teams may leverage the collective skills, experiences and resources of all of our equity professionals in connection with the investment decision process. When an investment team determines that an investment proposal is worth serious consideration, the proposal is formally presented to our equity investment committee and the due diligence process commences.

        The objective of the due diligence process is to identify attractive investment opportunities based on the facts and circumstances surrounding an investment and to prepare a framework that may be used from the date of an acquisition to drive operational achievement and value creation. When conducting due diligence, our investment teams evaluate a number of important business, financial, tax, accounting, environmental and legal issues in order to determine whether an investment is suitable. In connection with the due diligence process, our investment professionals spend significant amounts of time meeting with a company's management and operating personnel, visiting plants and facilities and speaking with customers and suppliers in order to understand the opportunities and risks associated with the proposed investment. Our investment professionals also use the services of outside accountants, consultants, lawyers, investment banks and industry experts as appropriate to assist them in this process. These due diligence practices are monitored by our equity investment committee, which must approve an investment before it may be made, and often provide important insights for creating value once an investment is completed.

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Building a Successful Business

        Once an investment is made in a portfolio company, we and our outside consultants closely monitor the company's performance with the objective of driving growth, enhancing profitability and optimizing long-term value for shareholders. We work closely with management teams to define strategic priorities and develop operating budgets and encourage our portfolio companies to invest for future competitiveness, improve operating efficiencies, make strategic acquisitions and incentivize employees by giving them ownership in the business. We establish clear monitoring guidelines to measure a portfolio company's performance and frequently meet with members of management to review the company's financial and operating results and strategic priorities. Our investment teams and the managers of our portfolio companies appear before our portfolio management committee at regular intervals to report on their progress and to discuss potential areas of concern and proposed solutions for addressing any issues that are identified.

Realizing Investments

        We have developed substantial expertise for realizing private equity investments. From our inception through March 31, 2007, we generated approximately $56.0 billion of cash proceeds from the sale of our portfolio companies in initial public offerings, secondary offerings, recapitalizations and sales to strategic buyers. When we exit an investment, our objective is to structure the exit in a manner that optimizes returns for investors and, in the case of publicly traded companies, minimizes the impact that the exit has on the trading price of the company's securities. We believe that our ability to successfully realize investments is attributable in part to the strength and discipline of our portfolio management committee and our longstanding relationships with corporate buyers and members of the investment banking and investing communities.

Traditional Private Equity Funds

Overview

        Most of the private equity funds that we sponsor and manage have finite lives and investment periods. These funds are organized as limited partnerships and are controlled by a general partner. Fund investors are limited partners who agree to contribute capital to the fund from time to time for use in qualifying investments during the investment period, which generally lasts up to six years depending on how quickly we are able to deploy the capital. Each fund's general partner is entitled to a carried interest that allocates to it 20% of the net profits realized from the fund's investments. If due to the performance of a fund's later investments the fund does not achieve overall profitability over the life of the fund, the general partner of the fund is obligated to repay any excess profits that it received in respect of its carried interest. This feature, which is referred to as a clawback, operates only with respect to the investments of an individual fund and does not provide for netting of gains and losses across funds.

        We enter into management agreements with our traditional private equity funds pursuant to which we generally receive management fees in exchange for providing the funds with management and other services. These management fees are calculated based on the amount of capital committed to a fund during the investment period and thereafter on the cost basis of the fund's investments, which causes the fees to be reduced over time as investments are liquidated. These management fees are paid by our fund investors, who generally contribute capital to the fund in order to allow the fund to pay the fees to us. Our funds generally allocate management fees across individual investments and, as and when an investment generates returns, 20% of the allocated management fee is deducted from the carried interest that we would otherwise receive.

        We also generally enter into monitoring agreements with our portfolio companies pursuant to which we receive periodic monitoring fees in exchange for providing them with management, consulting and other services, and we typically receive transaction fees from portfolio companies for providing them with

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financial advisory and other services in connection with specific transactions. In some cases, we may be entitled to other potential fees that are paid by an investment target when a potential investment is not consummated. The terms of our fund documents typically require us to share a portion of any monitoring, transaction and other potential fees that are allocable to a fund with fund investors in the form of a management fee reduction after reduction for certain expenses. These management fee reductions typically amount to 80% of the amount of the monitoring, transaction and other potential fees that are reasonably allocable to a fund.

        Because fund investors typically are unwilling to invest their capital in a fund unless the fund's manager also invests its own capital in the fund's investments, our private equity fund documents generally require the general partners of our traditional private equity funds to make minimum capital commitments to the funds. The amounts of these commitments, which are negotiated by fund investors, generally range from 2% to 3% of a fund's total capital commitments at closing. In connection with the Reorganization Transactions, we will not be allocated any of the capital contributions made by the general partners of our funds prior to the completion of the Reorganization Transactions and this offering or any returns generated on those contributions. We will, however, be required to fund the general partners' obligations with respect to future investments and we will record investment income to the extent that those investments generate profits.

        The table below presents information as of March 31, 2007 relating to the traditional private equity funds that we will acquire an interest in as part of the Reorganization Transactions. This data has been adjusted to give effect to subsequent commitments to the 2006 Fund and the Asian Fund, but does not otherwise reflect acquisitions or disposals of investments, changes in investment values or distributions occurring after March 31, 2007.

 
  As of March 31, 2007
 
  Investment Period
  Amount
  Outstanding Investments
Private Equity Fund

  Commencement
Date

  End
Date

  Committed
  Invested
  Realized
  Cost
  Fair Value
 
  ($ in millions)

Asian Fund*       $ 4,000.0                
2006 Fund*   9/2006   9/2012     16,625.0   $ 1,236.4       $ 1,236.2   $ 1,236.2
European Fund II   11/2005   11/2011     5,650.0     3,856.9         3,856.9     4,218.2
Millennium Fund   12/2002   12/2008     6,000.0     5,881.0   $ 4,263.7     5,127.6     6,990.4
European Fund   12/1999   12/2005     3,085.4     3,085.4     3,942.4     1,674.7     3,693.9

*
The committed amounts give effect to commitments received subsequent to March 31, 2007.

Asian Fund

        The Asian Fund is our newest private equity fund and was formed to make private equity investments in Asia. The fund is expected to hold its final closing in the third quarter of 2007 with an aggregate of $4.0 billion of capital commitments from fund investors, including a $100 million commitment from the fund's general partner.

        The investment period for the fund will commence on the date of the fund's first investment and will remain open for a period of up to six years, unless terminated earlier in accordance with the fund's governing documents.

2006 Fund

        The 2006 Fund is one of the largest private equity funds ever raised and was formed to make private equity investments in the United States and Canada, although the fund is permitted to invest up to 25% of capital in other jurisdictions. The fund has an aggregate of $16.6 billion of capital commitments from fund

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investors, including a $375 million commitment from the fund's general partner and a $1.975 billion commitment from our private equity-oriented permanent capital fund.

        The investment period for the fund commenced in September 2006 and will remain open for a period of up to six years, unless terminated earlier in accordance with the fund's governing documents. As of March 31, 2007, the fund had invested $1.2 billion of capital in six transactions, and the fund had $15.0 billion of unfunded capital