EQUITY BASED COMPENSATION

9 Months Ended

Sep. 30, 2020

Share-based Payment Arrangement [Abstract]

The following table summarizes the expense associated with equity-based compensation for the three and nine months ended September 30, 2020 and 2019, respectively.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Equity Incentive Plans	$	42,488	$	54,395	$	133,424	$	157,891
KKR Holdings Principal Awards	21,759		22,539		63,358		69,008
Total ⁽¹⁾	$	64,247	$	76,934	$	196,782	$	226,899

(1)

Includes approximately $26.4 thousand and $0.4 million of equity based compensation for the three and nine months ended September 30, 2020, respectively, and $0.6 million and $1.1 million of equity based compensation for the three and nine months ended September 30, 2019, respectively, related to employees of equity method investees. Such amounts are included in Net Gains (Losses) from Investment Activities in the consolidated statements of operations.

Equity Incentive Plans

Under the 2019 Equity Incentive Plan, KKR is permitted to grant equity awards representing ownership interests in KKR & Co. Inc. common stock. The total number of shares of common stock that may be issued under the 2019 Equity Incentive Plan is equivalent to 15% of the aggregate number of the shares of common stock and KKR Group Partnership Units (excluding KKR Group Partnership Units held by KKR & Co. Inc. or its wholly-owned subsidiaries), subject to annual adjustment. Vested awards under the Equity Incentive Plans dilute KKR & Co. Inc. common stockholders and KKR Holdings pro rata in accordance with their respective percentage interests in KKR Group Partnership.

Equity awards have been granted under the Equity Incentive Plans and are generally subject to service-based vesting, typically over a three to five year period from the date of grant. In certain cases, these awards are subject to transfer restrictions and/or minimum retained ownership requirements. The transfer restriction period, if applicable, lasts for (i) one year with respect to one-half of the interests vesting on any vesting date and (ii) two years with respect to the other one-half of the interests vesting on such vesting date. While providing services to KKR, if applicable, certain of these awards are also subject to minimum retained ownership rules requiring the award recipient to continuously hold shares of common stock equivalents equal to at least 15% of their cumulatively vested awards that have the minimum retained ownership requirement.

Expense associated with the vesting of these awards is based on the closing price of the KKR & Co. Inc. common stock on the date of grant, discounted for the lack of participation rights in the expected dividends on unvested shares.

The following table presents information regarding the discount for the lack of participation rights in the expected dividends by grant date:



Date of Grant	Discount per share ⁽¹⁾
January 1, 2016 to December 31, 2016	$	0.64
January 1, 2017 to December 31, 2017	$	0.68
January 1, 2018 to June 30, 2018	$	0.68
July 1, 2018 to December 31, 2019	$	0.50
January 1, 2020 to Present	$	0.54


(1)	Represents the annual discount for the lack of participation rights on expected dividends. The total discount on any given tranche of unvested shares is calculated as the discount per share multiplied by the number of years in the applicable vesting period.

Expense is recognized on a straight line basis over the life of the award and assumes a forfeiture rate of up to 7% annually based upon expected turnover by class of recipient.

Market Condition Awards

On November 2, 2017, KKR's Co-Presidents and Co-Chief Operating Officers were each granted equity awards representing 2.5 million shares of KKR common stock subject to a market price-based vesting condition ("Market Condition Awards"). These awards were granted under the 2010 Equity Incentive Plan. All of such awards will vest upon the market price of KKR common stock reaching and maintaining a closing market price of $40 per share for 10 consecutive trading days on or prior to December 31, 2022, subject to the employee's continued service to the time of such vesting. If the $40 price target is not achieved by the close of business on December 31, 2022, the unvested Market Condition Awards will be automatically canceled and forfeited. These Market Condition Awards are subject to additional transfer restrictions and minimum retained ownership requirements after vesting. Due to the existence of the market condition, the vesting period for the Market Condition Awards is not explicit, and as such, compensation expense will be recognized over the period derived from the valuation technique used to estimate the grant-date fair value of the award (the "Derived Vesting Period"). The fair value of the Market Condition Awards at the date of grant was $4.02 per share based on a Monte-Carlo simulation valuation model due to the existence of the market condition described above.

Below is a summary of the significant assumptions used to estimate the grant date fair value of the Market Condition Awards:



Closing KKR share price as of valuation date	$19.90
Risk Free Rate	2.02	%
Volatility	25.00	%
Dividend Yield	3.42	%
Expected Cost of Equity	11.02	%

In addition, the grant date fair value assumes that holders of the Market Condition Awards will not participate in dividends until such awards have met their vesting requirements. Compensation expense is recognized over the Derived Vesting Period, which was estimated to be 3 years from the date of grant, on a straight-line basis. As of September 30, 2020, there was approximately $0.6 million of estimated unrecognized compensation expense related to unvested Market Condition Awards and such awards did not meet their market-price based vesting condition.

As of September 30, 2020, there was approximately $168.8 million of total estimated unrecognized expense related to unvested awards, including Market Condition Awards. That cost is expected to be recognized as follows:



Year	Unrecognized Expense (in millions)
Remainder of 2020	$	31.6
2021	86.4
2022	39.7
2023	9.1
2024	1.7
2025	0.3
Total	$	168.8

A summary of the status of unvested awards granted under the Equity Incentive Plans, excluding Market Condition Awards as described above, from January 1, 2020 through September 30, 2020 is presented below:



	Shares		Weighted Average Grant Date Fair Value
Balance, January 1, 2020	22,697,645		$	18.46
Granted	437,942		25.91
Vested	(6,687,215	)	15.57
Forfeitures	(798,170	)	19.21
Balance, September 30, 2020	15,650,202		$	19.87

The weighted average remaining vesting period over which unvested awards are expected to vest is 0.9 years.

A summary of the remaining vesting tranches of awards granted under the Equity Incentive Plans is presented below:



Vesting Date		Shares
October 1, 2020		4,013,270
April 1, 2021		4,639,350
October 1, 2021		2,648,552
April 1, 2022		1,620,660
October 1, 2022		1,402,618
April 1, 2023		837,401
October 1, 2023		168,537
April 1, 2024		187,970
October 1, 2024		5,133
April 1, 2025		126,711
		15,650,202

KKR Holdings Awards

KKR Holdings units are exchangeable for KKR Group Partnership Units and allow for their exchange into common stock of KKR & Co. Inc. on a one-for-one basis. As of September 30, 2020 and 2019, KKR Holdings owned approximately 33.0% or 278,781,478 units and 35.1% or 295,746,147 units, respectively, of outstanding KKR Group Partnership Units. Awards for KKR Holdings units that have been granted are generally subject to service based vesting, typically over a three to five year period from the date of grant. They are also generally subject to transfer restrictions which last for (i) one year with respect to one-half of the interests vesting on any vesting date and (ii) two years with respect to the other one-half of the interests vesting on such vesting date. While providing services to KKR, the recipients are also subject to minimum retained ownership rules requiring them to continuously hold 25% of their vested interests. Upon separation from KKR, award recipients are subject to the terms of a confidentiality and restrictive covenants agreement that would require the forfeiture of certain vested and unvested units should the terms of the agreement be violated. Holders of KKR Holdings units are not entitled to participate in distributions made on KKR Group Partnership Units underlying their KKR Holdings units until such units are vested. All of the KKR Holdings units (except for less than 1.2% of the outstanding KKR Holdings units) have been granted as of September 30, 2020, and certain Holdings units remain subject to vesting.

The fair value of awards granted out of KKR Holdings is generally based on the closing price of KKR & Co. Inc. common stock on the date of grant discounted for the lack of participation rights in the expected distributions on unvested units. KKR determined this to be the best evidence of fair value as KKR & Co. Inc. common stock is traded in an active market and has an observable market price. Additionally, a KKR Holdings unit is an instrument with terms and conditions similar to those of KKR & Co. Inc. common stock. Specifically, units in KKR Holdings and shares of KKR & Co. Inc. represent ownership interests in KKR Group Partnership Units and, subject to any vesting, minimum retained ownership requirements and transfer restrictions, each KKR Holdings unit is exchangeable into a KKR Group Partnership Unit and then into a share of KKR & Co. Inc. common stock on a one-for-one basis.

In February 2016, approximately 28.9 million KKR Holdings units were granted that were originally subject to market condition and service-based vesting that were subsequently modified in November 2016 to eliminate the market condition vesting and instead require only service-based vesting in equal annual installments over a five year period. At the date of modification, total future compensation expense amounted to $320.9 million, net of estimated forfeitures, to be recognized over the remaining vesting period of the modified awards.

The awards described above were granted from outstanding but previously unallocated units of KKR Holdings, and consequently these grants did not increase the number of KKR Holdings units outstanding or outstanding KKR & Co. Inc. common stock on a fully-diluted basis. If and when vested, these awards will not dilute KKR's respective ownership interests in KKR Group Partnership.

KKR Holdings awards give rise to equity-based compensation in the consolidated statements of operations based on the grant-date fair value of the award discounted for the lack of participation rights in the expected distributions on unvested units. This discount is consistent with that noted above for shares issued under the Equity Incentive Plans.

Expense is recognized on a straight line basis over the life of the award and assumes a forfeiture rate of up to 7% annually based on expected turnover by class of recipient.

As of September 30, 2020, there was approximately $87.1 million of estimated unrecognized expense related to unvested KKR Holdings awards. That cost is expected to be recognized as follows:



Year	Unrecognized Expense (in millions)
Remainder of 2020	$	16.5
2021	44.8
2022	25.8
Total	$	87.1

A summary of the status of unvested awards granted under the KKR Holdings Plan from January 1, 2020 through September 30, 2020 is presented below:



	Units		Weighted Average Grant Date Fair Value
Balance, January 1, 2020	16,569,479		$	14.43
Granted	—		—
Vested	(3,029,479	)	11.86
Forfeitures	(360,000	)	11.19
Balance, September 30, 2020	13,180,000		$	15.12

The weighted average remaining vesting period over which unvested awards are expected to vest is 1.0 years.

A summary of the remaining vesting tranches of awards granted under the KKR Holdings Plan is presented below:



Vesting Date		Units
October 1, 2020		2,940,000
May 1, 2021		2,905,000
October 1, 2021		3,425,000
October 1, 2022		3,910,000
		13,180,000