KKR & Co. Inc. (Form: 10-Q, Received: 05/11/2020 16:11:03)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
 
 
 
 
 
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2020 
 
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Transition period from           to           . 
Commission File Number 001-34820
KKRLOGOA09.JPG
KKR & CO. INC.
(Exact name of Registrant as specified in its charter) 
Delaware
 
26-0426107
(State or other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
  9 West 57th Street, Suite 4200
New York, New York 10019
Telephone: (212) 750-8300
(Address, zip code, and telephone number, including
area code, of registrant's principal executive office.)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock
KKR
New York Stock Exchange
6.75% Series A Preferred Stock
KKR PR A
New York Stock Exchange
6.50% Series B Preferred Stock
KKR PR B
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer 
Non-accelerated filer 
 
Smaller reporting company 
 
 
 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
As of May 8, 2020, there were 558,642,093 shares of common stock of the registrant outstanding.
 




KKR & CO. INC.
FORM 10-Q
For the Quarter Ended March 31, 2020
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
5
 
 
 
 
7
 
 
 
 
8
 
 
 
 
9
 
 
 
 
10
 
 
 
 
12
 
 
 
Item 2.
56
 
 
 
Item 3.
110
 
 
 
Item 4.
110
 
 
 
 
 
 
 
 
Item 1.
111
 
 
 
Item 1A.
111
 
 
 
Item 2.
112
 
 
 
Item 3.
113
 
 
 
Item 4.
113
 
 
 
Item 5.
113
 
 
 
Item 6.
113
 
 
 
115





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as "outlook," "believe," "expect," "potential," "continue," "may," "should," "seek," "approximately," "predict," "intend," "will," "plan," "estimate," "anticipate," the negative version of these words, other comparable words or other statements that do not relate strictly to historical or factual matters. Without limiting the foregoing, statements regarding the declaration and payment of dividends on common or preferred stock of KKR, the timing, manner and volume of repurchases of common stock pursuant to a repurchase program, and the expected synergies and benefits from acquisitions, reorganizations or strategic partnerships, may constitute forward-looking statements. Forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements or cause the anticipated benefits and synergies from transactions to not be realized. We believe these factors include those described under the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 (our "Annual Report"). These factors should be read in conjunction with the other cautionary statements that are included in this report, our Annual Report and in our other filings with the U.S. Securities and Exchange Commission (the "SEC"). We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

 
 
 

In this report, references to "KKR," "we," "us" and "our" refer to KKR & Co. Inc. and its subsidiaries. On January 1, 2020, KKR completed an internal reorganization (the "Reorganization"), which was undertaken to, among other purposes, simplify KKR's internal structure. In the Reorganization, (i) KKR Management Holdings L.P. and KKR International Holdings L.P., which were former intermediate holdings companies for KKR's business, were combined with another intermediate holding company, KKR Fund Holdings L.P., which changed its name to KKR Group Partnership L.P. ("KKR Group Partnership") and became the sole intermediate holding company for KKR's business, (ii) the issuers of each series of KKR’s outstanding senior notes were contributed to KKR Group Partnership and the guarantees by KKR International Holdings L.P. and KKR Management Holdings L.P. under the senior notes were automatically and unconditionally released and discharged pursuant to the terms of the indentures governing such senior notes, with KKR Group Partnership remaining as a guarantor, and (iii) the ownership interests of certain operating subsidiaries of KKR Group Partnership were reorganized. In connection with the 6.75% Series A Preferred Stock ("Series A Preferred Stock") and 6.50% Series B Preferred Stock ("Series B Preferred Stock") of KKR & Co. Inc., KKR Group Partnership has series of preferred units issued and outstanding with economic terms designed to mirror those of the Series A Preferred Stock and Series B Preferred Stock, respectively. Effective May 8, 2020, Class A common stock of KKR & Co. Inc. was renamed as common stock, and Class B common stock and Class C common stock of KKR & Co. Inc. were reclassified into Series I preferred stock and Series II preferred stock, respectively. KKR & Co. Inc. has one class of common stock authorized and outstanding.

References to "KKR Group Partnerships" for periods prior to the Reorganization mean KKR Fund Holdings L.P., KKR Management Holdings L.P. and KKR International Holdings L.P., collectively, and references to "KKR Group Partnership" for periods following the Reorganization mean KKR Group Partnership L.P. References to a "KKR Group Partnership Unit" mean (i) one Class A partner interest in each of KKR Fund Holdings L.P., KKR Management Holdings L.P. and KKR International Holdings L.P., collectively, for periods prior to the Reorganization and (ii) one Class A partner interest in KKR Group Partnership for periods following the Reorganization. References to the "Series I Preferred Stockholder" are to KKR Management LLP, the holder of the sole share of our Series I preferred stock, which converted from a limited liability company named KKR Management LLC to a limited liability partnership in the Reorganization.

Contemporaneously with the Reorganization, KKR acquired KKR Capstone Americas LLC and its affiliates ("KKR Capstone") on January 1, 2020. References to "non-employee operating consultants" for periods prior to the acquisition include employees of KKR Capstone, who were not employees of KKR during such periods. Prior to the acquisition, KKR Capstone was owned and controlled by its senior management and was not a subsidiary or affiliate of KKR.

Unless otherwise indicated, references to equity interests in KKR's business, or to percentage interests in KKR's business, reflect the aggregate equity interests in KKR Group Partnership and are net of amounts that have been allocated to our principals and other employees in respect of the carried interest from KKR's business as part of our "carry pool" and certain minority interests. References to "principals" are to our senior employees who hold interests in KKR's business through KKR

3



Holdings L.P. ("KKR Holdings") or another KKR entity, and references to our "senior principals" are to our senior employees who hold interests in the Series I Preferred Stockholder.

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

We disclose certain financial measures in this report that are calculated and presented using methodologies other than in accordance with GAAP, including after-tax distributable earnings, fee related earnings ("FRE") and book value. We believe that providing these performance measures on a supplemental basis to our GAAP results is helpful to stockholders in assessing the overall performance of KKR's businesses. These non-GAAP financial measures should not be considered as a substitute for, or superior to, similar financial measures calculated in accordance with GAAP. We caution readers that these non-GAAP financial measures may differ from the calculations of other investment managers, and as a result, may not be comparable to similar measures presented by other investment managers. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Reconciliations to GAAP Measures." This report also uses the terms assets under management ("AUM"), fee paying assets under management ("FPAUM"), capital invested and syndicated capital. You should note that our calculations of these and other operating metrics may differ from the calculations of other investment managers and, as a result, may not be comparable to similar metrics presented by other investment managers. These non-GAAP and operating metrics are defined in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Non-GAAP and Other Operating and Performance Measures."

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

Unless otherwise indicated, references in this report to our fully exchanged and diluted common stock outstanding, or to our common stock outstanding on a fully exchanged and diluted basis, reflect (i) actual shares of common stock outstanding and (ii) shares of common stock into which KKR Group Partnership Units held by KKR Holdings are exchangeable pursuant to the terms of the exchange agreement described in our Annual Report and (iii) shares of common stock issuable pursuant to any equity awards actually granted from the Amended and Restated KKR & Co. Inc. 2010 Equity Incentive Plan (the "2010 Equity Incentive Plan") or the KKR & Co. Inc. 2019 Equity Incentive Plan (the "2019 Equity Incentive Plan" and, together with the 2010 Equity Incentive Plan, our "Equity Incentive Plans"). Our fully exchanged and diluted common stock outstanding does not include shares of common stock available for issuance pursuant to the Equity Incentive Plans for which equity awards have not yet been granted. 

The use of any defined term in this report to mean more than one entities, persons, securities or other items collectively is solely for convenience of reference and in no way implies that such entities, persons, securities or other items are one indistinguishable group. For example, notwithstanding the use of the defined terms "KKR," "we" and "our" in this report to refer to KKR & Co. Inc. and its subsidiaries, each subsidiary of KKR & Co. Inc. is a standalone legal entity that is separate and distinct from KKR & Co. Inc. and any of its other subsidiaries.


4



PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
 
March 31,
2020
 
December 31,
2019
Assets
 

 
 

Cash and Cash Equivalents
$
1,982,292

 
$
2,346,713

Cash and Cash Equivalents Held at Consolidated Entities
1,171,245

 
816,441

Restricted Cash and Cash Equivalents
116,506

 
74,262

Investments
48,601,127

 
54,936,268

Due from Affiliates
852,484

 
717,399

Other Assets
2,877,421

 
2,008,236

Total Assets
$
55,601,075

 
$
60,899,319

 
 
 
 
Liabilities and Equity
 

 
 

Debt Obligations
$
26,265,381

 
$
27,013,284

Due to Affiliates
261,720

 
286,098

Accounts Payable, Accrued Expenses and Other Liabilities
2,483,944

 
3,097,563

Total Liabilities
29,011,045

 
30,396,945

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Stockholders' Equity
 

 
 

Series A and B Preferred Stock, $0.01 par value. 13,800,000 and 6,200,000 shares, respectively, issued and outstanding as of March 31, 2020 and December 31, 2019.
482,554

 
482,554

Class A Common Stock, $0.01 par value. 3,500,000,000 shares authorized, 553,701,980 and 560,007,579 shares, issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.
5,537

 
5,600

Class B Common Stock, $0.01 par value. 1 share authorized, 1 share issued and outstanding as of March 31, 2020 and December 31, 2019.

 

Class C Common Stock, $0.01 par value. 499,999,999 shares authorized, 286,477,271 and 290,381,345 shares, issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.
2,865

 
2,904

Additional Paid-In Capital
8,456,154

 
8,565,919

Retained Earnings
433,546

 
1,792,152

Accumulated Other Comprehensive Income (Loss)
(54,694
)
 
(41,639
)
Total KKR & Co. Inc. Stockholders' Equity
9,325,962

 
10,807,490

Noncontrolling Interests
17,264,068

 
19,694,884

Total Equity
26,590,030

 
30,502,374

Total Liabilities and Equity
$
55,601,075

 
$
60,899,319




See notes to financial statements.

5


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Continued)
(Amounts in Thousands)
 
The following presents the portion of the consolidated balances presented in the consolidated statements of financial condition attributable to consolidated variable interest entities ("VIEs"). KKR's consolidated VIEs consist primarily of (i) certain collateralized financing entities ("CFEs") holding collateralized loan obligations ("CLOs") and commercial real estate mortgage-backed securities ("CMBS") and (ii) certain investment funds. With respect to consolidated VIEs, the following assets may only be used to settle obligations of these consolidated VIEs and the following liabilities are only the obligations of these consolidated VIEs. The noteholders, limited partners and other creditors of these VIEs have no recourse to KKR's general assets. Additionally, KKR has no right to the benefits from, nor does KKR bear the risks associated with, the assets held by these VIEs beyond KKR's beneficial interest therein and any income generated from the VIEs. There are neither explicit arrangements nor does KKR hold implicit variable interests that would require KKR to provide any material ongoing financial support to the consolidated VIEs, beyond amounts previously committed, if any.
 
March 31, 2020
 
Consolidated CFEs
 
Consolidated KKR Funds and Other Entities
 
Total
Assets
 
 
 

 
 
Cash and Cash Equivalents Held at Consolidated Entities
$
539,573

 
$
258,537

 
$
798,110

Restricted Cash and Cash Equivalents

 
49,313

 
49,313

Investments
13,327,186

 
18,364,713

 
31,691,899

Other Assets
154,026

 
305,566

 
459,592

Total Assets
$
14,020,785

 
$
18,978,129

 
$
32,998,914

 
 
 
 

 
 
Liabilities
 
 
 

 
 
Debt Obligations
$
13,130,703

 
$
2,078,750

 
$
15,209,453

Accounts Payable, Accrued Expenses and Other Liabilities
629,381

 
132,553

 
761,934

Total Liabilities
$
13,760,084

 
$
2,211,303

 
$
15,971,387

 
 
December 31, 2019
 
Consolidated CFEs
 
Consolidated KKR Funds and Other Entities
 
Total
Assets
 
 
 

 
 
Cash and Cash Equivalents Held at Consolidated Entities
$
634,029

 
$
112,122

 
$
746,151

Restricted Cash and Cash Equivalents

 
34,849

 
34,849

Investments
14,948,237

 
20,851,587

 
35,799,824

Due from Affiliates

 
9,678

 
9,678

Other Assets
100,221

 
178,892

 
279,113

Total Assets
$
15,682,487

 
$
21,187,128

 
$
36,869,615

 
 
 
 

 
 
Liabilities
 
 
 

 
 
Debt Obligations
$
14,658,137

 
$
2,481,937

 
$
17,140,074

Accounts Payable, Accrued Expenses and Other Liabilities
513,057

 
109,575

 
622,632

Total Liabilities
$
15,171,194

 
$
2,591,512

 
$
17,762,706


See notes to financial statements.

6


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
 
Three Months Ended March 31,
 
2020
 
2019
Revenues
 
 
 
Fees and Other
$
380,572

 
$
372,548

Capital Allocation-Based Income (Loss)
(1,382,077
)
 
814,932

Total Revenues
(1,001,505
)
 
1,187,480

 
 
 
 
Expenses
 
 
 
Compensation and Benefits
(262,137
)
 
544,562

Occupancy and Related Charges
16,322

 
14,690

General, Administrative and Other
149,123

 
169,515

Total Expenses
(96,692
)
 
728,767

 
 
 
 
Investment Income (Loss)
 
 
 
Net Gains (Losses) from Investment Activities
(3,944,504
)
 
1,203,878

Dividend Income
168,699

 
22,625

Interest Income
353,455

 
358,511

Interest Expense
(261,469
)
 
(249,088
)
Total Investment Income (Loss)
(3,683,819
)
 
1,335,926

 
 
 
 
Income (Loss) Before Taxes
(4,588,632
)
 
1,794,639

 
 
 
 
Income Tax Expense (Benefit)
(360,679
)
 
167,593

 
 
 
 
Net Income (Loss)
(4,227,953
)
 
1,627,046

Net Income (Loss) Attributable to Noncontrolling Interests
(2,947,429
)
 
917,727

Net Income (Loss) Attributable to KKR & Co. Inc.
(1,280,524
)
 
709,319

 
 
 
 
Series A Preferred Stock Dividends
5,822

 
5,822

Series B Preferred Stock Dividends
2,519

 
2,519

 
 
 
 
Net Income (Loss) Attributable to KKR & Co. Inc.
Class A Common Stockholders
$
(1,288,865
)
 
$
700,978

 
 
 
 
Net Income (Loss) Attributable to KKR & Co. Inc.
Per Share of Class A Common Stock
 
 
 
Basic
$
(2.31
)
 
$
1.31

Diluted
$
(2.31
)
 
$
1.27

Weighted Average Shares of Class A Common Stock Outstanding
 
 
 
Basic
559,149,821

 
533,892,474

Diluted
559,149,821

 
550,046,440


See notes to financial statements.

7


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Amounts in Thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Net Income (Loss)
$
(4,227,953
)
 
$
1,627,046

 
 
 
 
Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
(26,732
)
 
2,366

 
 
 
 
Comprehensive Income (Loss)
(4,254,685
)
 
1,629,412

 
 
 
 
Comprehensive Income (Loss)
Attributable to Noncontrolling Interests
(2,961,543
)
 
920,359

 
 
 
 
Comprehensive Income (Loss)
Attributable to KKR & Co. Inc.
$
(1,293,142
)
 
$
709,053

 
See notes to financial statements.

8


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(Amounts in Thousands, Except Share and Per Share Data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
2020
 
2019
 
Amounts
 
Shares
 
Amounts
 
Shares
Preferred Stock
 
 
 
 
 
 
 
Beginning of Period
482,554

 
20,000,000

 
482,554

 
20,000,000

End of Period
482,554

 
20,000,000

 
482,554

 
20,000,000

Class A Common Stock
 
 
 
 
 
 
 
Beginning of Period
5,600

 
560,007,579

 
5,349

 
534,857,237

Exchange of KKR Holdings Units
39

 
3,904,074

 
4

 
435,954

Repurchases of Class A Common Stock
(102
)
 
(10,209,673
)
 
(14
)
 
(1,370,289
)
End of Period
5,537

 
553,701,980

 
5,339

 
533,922,902

Class B Common Stock
 
 
 
 
 
 
 
Beginning of Period

 
1

 

 
1

End of Period

 
1

 

 
1

Class C Common Stock
 
 
 
 
 
 
 
Beginning of Period
2,904

 
290,381,345

 
2,991

 
299,081,239

Cancellation of Class C Common Stock
(39
)
 
(3,904,074
)
 
(4
)
 
(435,954
)
End of Period
2,865

 
286,477,271

 
2,987

 
298,645,285

Additional Paid-In Capital
 
 
 
 
 
 
 
Beginning of Period
8,565,919

 
 
 
8,106,408

 
 
Exchange of KKR Holdings Units
72,331

 
 
 
7,137

 
 
Tax Effects - Exchange of KKR Holdings Units and Other
(1,426
)
 
 
 
5,255

 
 
Repurchases of Class A Common Stock
(246,058
)
 
 
 
(28,552
)
 
 
Equity-Based Compensation
51,003

 
 
 
54,885

 
 
Transfer of Interests Under Common Control (See Note 1 "Organization")
14,385

 
 
 

 
 
End of Period
8,456,154

 
 
 
8,145,133

 
 
Retained Earnings
 
 
 
 
 
 
 
Beginning of Period
1,792,152

 
 
 
91,953

 
 
Net Income (Loss) Attributable to KKR & Co. Inc.
(1,280,524
)
 
 
 
709,319

 
 
Series A Preferred Stock Dividends ($0.421875 per share)
(5,822
)
 
 
 
(5,822
)
 
 
Series B Preferred Stock Dividends ($0.406250 per share)
(2,519
)
 
 
 
(2,519
)
 
 
Common Stock Dividends ($0.125 per share)
(69,741
)
 
 
 
(66,619
)
 
 
End of Period
433,546

 
 
 
726,312

 
 
Accumulated Other Comprehensive Income (Loss) (net of tax)
 
 
 
 
 
 
 
Beginning of Period
(41,639
)
 
 
 
(39,645
)
 
 
Foreign Currency Translation
(12,618
)
 
 
 
(266
)
 
 
Exchange of KKR Holdings Units
(437
)
 
 
 
(43
)
 
 
End of Period
(54,694
)
 
 
 
(39,954
)
 
 
Total KKR & Co. Inc. Stockholders' Equity
9,325,962

 
 
 
9,322,371

 
 
Noncontrolling Interests (See Note 15 "Equity")
17,264,068

 
 
 
16,885,470

 
 
Total Equity
$
26,590,030

 
 
 
$
26,207,841

 
 
See notes to financial statements.
 
 
 
 

9


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in Thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Operating Activities
 
 
 
Net Income (Loss)
$
(4,227,953
)
 
$
1,627,046

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities:
 
 
 
Equity-Based and Other Non-Cash Compensation
71,379

 
78,268

Net Realized (Gains) Losses on Investments
(63,375
)
 
(129,781
)
Change in Unrealized (Gains) Losses on Investments
4,007,879

 
(1,074,097
)
Capital Allocation-Based (Income) Loss
1,382,077

 
(814,932
)
Other Non-Cash Amounts
(9,857
)
 
(12,111
)
Cash Flows Due to Changes in Operating Assets and Liabilities:
 
 
 
Change in Consolidation and Other

 
(137,498
)
Change in Due from / to Affiliates
(183,129
)
 
(100,529
)
Change in Other Assets
(323,040
)
 
68,077

Change in Accounts Payable, Accrued Expenses and Other Liabilities
(766,087
)
 
381,421

Investments Purchased
(8,312,849
)
 
(5,301,227
)
Proceeds from Investments
7,018,549

 
5,571,641

Net Cash Provided (Used) by Operating Activities
(1,406,406
)
 
156,278

 
 
 
 
Investing Activities
 
 
 
Purchases of Fixed Assets
(41,371
)
 
(19,455
)
Development of Oil and Natural Gas Properties
(4,073
)
 
(451
)
Net Cash Provided (Used) by Investing Activities
(45,444
)
 
(19,906
)
 
 
 
 
Financing Activities
 
 
 
Preferred Stock Dividends
(8,341
)
 
(8,341
)
Common Stock Dividends
(69,741
)
 
(66,619
)
Distributions to Noncontrolling Interests
(524,656
)
 
(856,086
)
Contributions from Noncontrolling Interests
1,120,966

 
1,194,815

Repurchases of Class A Common Stock
(246,160
)
 
(28,566
)
Proceeds from Debt Obligations
3,792,041

 
1,581,043

Repayment of Debt Obligations
(2,543,694
)
 
(1,806,203
)
Financing Costs Paid
(10,198
)
 
(2,795
)
Net Cash Provided (Used) by Financing Activities
1,510,217

 
7,248

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(25,740
)
 
1,636

 
 
 
 
Net Increase/(Decrease) in Cash, Cash Equivalents and Restricted Cash
32,627

 
145,256

Cash, Cash Equivalents and Restricted Cash, Beginning of Period
3,237,416

 
2,641,512

Cash, Cash Equivalents and Restricted Cash, End of Period
$
3,270,043

 
$
2,786,768

 
See notes to financial statements.

10


KKR & CO. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
(Amounts in Thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Supplemental Disclosures of Cash Flow Information
 

 
 

Payments for Interest
$
288,916

 
$
240,889

Payments for Income Taxes
$
24,836

 
$
8,901

Payments for Operating Lease Liabilities
$
13,243

 
$
12,291

 
 
 
 
Supplemental Disclosures of Non-Cash Investing and Financing Activities


 
 

Equity-Based and Other Non-Cash Contributions
$
71,699

 
$
78,003

Debt Obligations - Net Gains (Losses), Translation and Other
$
1,989,846

 
$
(148,312
)
Tax Effects - Exchange of KKR Holdings L.P. Units and Other
$
(1,426
)
 
$
5,255

Right-of-Use Assets obtained in Exchange for new Operating Lease Liabilities
$
2,700

 
$

 


 
 
Change in Consolidation and Other


 
 
Investments
$

 
$
(1,014,813
)
Due From Affiliates
$

 
$
1,642

Other Assets
$

 
$
(19,703
)
Accounts Payable, Accrued Expenses and Other Liabilities
$

 
$
(47,731
)
Redeemable Noncontrolling Interests
$

 
$
(1,122,641
)
 
 
 
 
 
March 31,
2020
 
December 31,
2019
Reconciliation to the Condensed Consolidated Statements of Financial Condition
 
 
 
Cash and Cash Equivalents
$
1,982,292

 
$
2,346,713

Cash and Cash Equivalents Held at Consolidated Entities
1,171,245

 
816,441

Restricted Cash and Cash Equivalents
116,506

 
74,262

Cash, Cash Equivalents and Restricted Cash, End of Period
$
3,270,043

 
$
3,237,416

 
See notes to financial statements.


11


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

1. ORGANIZATION
 
KKR & Co. Inc. (NYSE: KKR), through its subsidiaries (collectively, "KKR"), is a leading global investment firm that manages multiple alternative asset classes including private equity, energy, infrastructure, real estate and credit, with strategic partners that manage hedge funds. KKR aims to generate attractive investment returns for its fund investors by following a patient and disciplined investment approach, employing world-class people, and driving growth and value creation with KKR's portfolio companies. KKR invests its own capital alongside the capital it manages for fund investors and provides financing solutions and investment opportunities through its capital markets business.

KKR & Co. Inc. is the parent company of KKR Group Holdings Corp., which is the general partner of KKR Group Partnership L.P. ("KKR Group Partnership"). KKR & Co. Inc. both indirectly controls KKR Group Partnership and indirectly holds Class A partner units in KKR Group Partnership ("KKR Group Partnership Units") representing economic interests in KKR's business. The remaining KKR Group Partnership Units are held by KKR Holdings L.P. ("KKR Holdings"), which is not a subsidiary of KKR & Co. Inc. As of March 31, 2020, KKR & Co. Inc. held approximately 65.9% of the KKR Group Partnership Units and KKR Holdings held approximately 34.1% of the KKR Group Partnership Units. The percentage ownership in KKR Group Partnership will continue to change as KKR Holdings exchange its KKR Group Partnership Units for shares of Class A common stock of KKR & Co. Inc. or when KKR & Co. Inc. otherwise issues or repurchases shares of Class A common stock of KKR & Co. Inc. KKR Group Partnership also has outstanding limited partner interests that provide for a carry pool and preferred units with economic terms that mirror the Series A and Series B preferred stock issued by KKR & Co. Inc.
 
 
 
 
Reorganization and Acquisition of KKR Capstone

On January 1, 2020, KKR completed an internal reorganization (the "Reorganization"), in which (i) KKR Management Holdings L.P. ("Management Holdings") and KKR International Holdings L.P. ("International Holdings") were combined with KKR Fund Holdings L.P. ("Fund Holdings"), which changed its name to KKR Group Partnership L.P. and became the sole intermediate holding company for KKR's business, (ii) the issuers of each series of KKR’s outstanding senior notes were contributed to KKR Group Partnership and the guarantees by International Holdings and Management Holdings under the senior notes were automatically and unconditionally released and discharged pursuant to the terms of the indentures governing such senior notes, with KKR Group Partnership remaining as a guarantor, and (iii) the ownership interests of certain operating subsidiaries of KKR Group Partnership were reorganized. References to "KKR Group Partnerships" for periods prior to the Reorganization mean Fund Holdings, Management Holdings and International Holdings, collectively, and references to "KKR Group Partnership" for periods following the Reorganization mean KKR Group Partnership L.P. References to a "KKR Group Partnership Unit" mean (i) one Class A partner interest in each of Fund Holdings, Management Holdings and International Holdings, collectively, for periods prior to the Reorganization and (ii) one Class A partner interest in KKR Group Partnership for periods following the Reorganization.

Contemporaneously with the Reorganization, KKR acquired KKR Capstone Americas LLC and its affiliates ("KKR Capstone") on January 1, 2020. KKR Capstone was consolidated prior to January 1, 2020 and consequently, this transaction was accounted for as an equity transaction. This transaction resulted in an increase to the KKR Group Partnership equity. Accordingly, both KKR's equity and noncontrolling interests held by KKR Holdings increased for their proportionate share of the KKR Capstone equity based on their ownership in KKR Group Partnership on January 1, 2020.

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Notes to Financial Statements (Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements of KKR & Co. Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements (referred to hereafter as the "financial statements"), including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) such that the financial statements are presented fairly and that estimates made in preparing the financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The consolidated balance sheet data as of December 31, 2019 was derived from audited financial statements included in KKR's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the "SEC") on February 18, 2020, and the financial statements should be read in conjunction with the audited financial statements included therein. Additionally, in the accompanying financial statements, the condensed consolidated statements of financial condition are referred to hereafter as the "consolidated statements of financial condition"; the condensed consolidated statements of operations are referred to hereafter as the "consolidated statements of operations";  the condensed consolidated statements of comprehensive income (loss) are referred to hereafter as the "consolidated statements of comprehensive income (loss)"; the condensed consolidated statements of changes in equity are referred to hereafter as the "consolidated statements of changes in equity"; and the condensed consolidated statements of cash flows are referred to hereafter as the "consolidated statements of cash flows."
KKR consolidates the financial results of KKR Group Partnership and its consolidated entities, which include the accounts of KKR's investment management and capital markets companies, the general partners of certain unconsolidated investment funds, general partners of consolidated investment funds and their respective consolidated investment funds and certain other entities including CFEs. References in the accompanying financial statements to "principals" are to KKR's senior employees who hold interests in KKR's business through KKR Holdings.
All intercompany transactions and balances have been eliminated.
COVID-19 and Global Economic and Market Conditions
The outbreak of a novel strain of coronavirus ("COVID-19") continues to impact the United States and other countries throughout the world. In March 2020, the World Health Organization declared COVID-19 to be a pandemic and the United States declared a national emergency due to the outbreak. In connection with these declarations, various governments around the world have instituted measures to slow the transmissions of COVID-19, which substantially restrict individual and business activities. These measures include, for example, closures of non-essential businesses, limitations of crowd size, stay-at-home orders, quarantines, heightened border controls and limitations on travel. Governments in the United States and around the world have responded with fiscal and monetary stimuli that aim to provide emergency assistance to individuals and businesses negatively impacted by COVID-19. The outbreak of COVID-19 and the actions taken in response have had far reaching impact on the U.S. and global economies, contributing to significant volatility in the financial markets, resulting in a general decline in equity prices (including our common stock) and lower interest rates, and causing furloughs and layoffs in the labor market.
Given the ongoing nature of the outbreak, at this time we cannot reasonably predict the magnitude of the ultimate impact that COVID-19 will have on KKR’s business, financial performance and operating results. We believe COVID-19's adverse impact on KKR’s business, financial performance and operating results will be significantly driven by a number of factors that we are unable to predict or control, including, for example: the severity and duration of the pandemic; the pandemic's impact on the U.S. and global economies; the timing, scope and effectiveness of additional governmental responses to the pandemic; the timing and speed of economic recovery, including the availability of a treatment or vaccination for COVID-19; and the negative impact on our fund investors, vendors and other business partners that may indirectly adversely affect KKR.

Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and investment income (loss) during the reporting periods. Such estimates include but are not limited to (i) the determination of the income tax provision and (ii) the valuation of investments and financial instruments. Actual results could differ from those estimates, and such differences could be material to the financial statements.

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Notes to Financial Statements (Continued)

Principles of Consolidation
The types of entities KKR assesses for consolidation include (i) subsidiaries, including management companies, broker-dealers and general partners of investment funds that KKR manages, (ii) entities that have all the attributes of an investment company, like investment funds, (iii) CFEs and (iv) other entities. Each of these entities is assessed for consolidation on a case by case basis depending on the specific facts and circumstances surrounding that entity.
Pursuant to its consolidation policy, KKR first considers whether an entity is considered a VIE and therefore whether to apply the consolidation guidance under the VIE model. Entities that do not qualify as VIEs are assessed for consolidation as voting interest entities ("VOEs") under the voting interest model.
KKR's funds are, for GAAP purposes, investment companies and therefore are not required to consolidate their investments in portfolio companies even if majority-owned and controlled. Rather, the consolidated funds and vehicles reflect their investments at fair value as described below in "Fair Value Measurements."
An entity in which KKR holds a variable interest is a VIE if any one of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk (as a group) lack either the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity's activities that have a significant effect on the success of the legal entity or the obligation to absorb the expected losses or right to receive the expected residual returns, or (c) the voting rights of some investors are disproportionate to their obligation to absorb the expected losses of the legal entity, their rights to receive the expected residual returns of the legal entity, or both and substantially all of the legal entity's activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. Limited partnerships and other similar entities where unaffiliated limited partners have not been granted (i) substantive participatory rights or (ii) substantive rights to either dissolve the partnership or remove the general partner ("kick-out rights") are VIEs under condition (b) above. KKR's investment funds that are not CFEs (i) are generally limited partnerships, (ii) generally provide KKR with operational discretion and control, and (iii) generally have fund investors with no substantive rights to impact ongoing governance and operating activities of the fund, including the ability to remove the general partner, and, as such, the limited partners do not hold kick-out rights. Accordingly, most of KKR's investment funds are categorized as VIEs.
KKR consolidates all VIEs in which it is the primary beneficiary. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in a VIE. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The consolidation guidance requires an analysis to determine (i) whether an entity in which KKR holds a variable interest is a VIE and (ii) whether KKR's involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (for example, management and performance related fees), would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment. Fees earned by KKR that are customary and commensurate with the level of effort required to provide those services, and where KKR does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, would not be considered variable interests. KKR factors in all economic interests including interests held through related parties, to determine if it holds a variable interest. KKR determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion when facts and circumstances change.
For entities that are determined not to be VIEs, these entities are generally considered VOEs and are evaluated under the voting interest model. KKR consolidates VOEs it controls through a majority voting interest or through other means.
The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE depends on the facts and circumstances surrounding each entity and therefore certain of KKR's investment funds may qualify as VIEs whereas others may qualify as VOEs.
With respect to CLOs (which are generally VIEs), in its role as collateral manager, KKR generally has the power to direct the activities of the CLO that most significantly impact the economic performance of the entity. In some, but not all cases, KKR, through its residual interest in the CLO may have variable interests that represent an obligation to absorb losses of, or a right to receive benefits from, the CLO that could potentially be significant to the CLO. In cases where KKR has both the power to direct the activities of the CLO that most significantly impact the CLO's economic performance and the obligation to absorb losses of the CLO or the right to receive benefits from the CLO that could potentially be significant to the CLO, KKR is deemed to be the primary beneficiary and consolidates the CLO.

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Notes to Financial Statements (Continued)

With respect to CMBS vehicles (which are generally VIEs), KKR holds unrated and non-investment grade rated securities issued by the CMBS, which are the most subordinate tranche of the CMBS vehicle. The economic performance of the CMBS is most significantly impacted by the performance of the underlying assets. Thus, the activities that most significantly impact the CMBS economic performance are the activities that most significantly impact the performance of the underlying assets. The special servicer has the ability to manage the CMBS assets that are delinquent or in default to improve the economic performance of the CMBS. KKR generally has the right to unilaterally appoint and remove the special servicer for the CMBS and as such is considered the controlling class of the CMBS vehicle. These rights give KKR the ability to direct the activities that most significantly impact the economic performance of the CMBS. Additionally, as the holder of the most subordinate tranche, KKR is in a first loss position and has the right to receive benefits, including the actual residual returns of the CMBS, if any. In these cases, KKR is deemed to be the primary beneficiary and consolidates the CMBS vehicle.
Investments
Investments consist primarily of private equity, credit, investments of consolidated CFEs, real assets, equity method and other investments. Investments denominated in currencies other than the entity's functional currency are valued based on the spot rate of the respective currency at the end of the reporting period with changes related to exchange rate movements reflected in the consolidated statements of operations. Security and loan transactions are recorded on a trade date basis. Further disclosure on investments is presented in Note 4 "Investments."
The following describes the types of securities held within each investment class.
Private Equity - Consists primarily of equity investments in operating businesses, including growth equity investments.
Credit - Consists primarily of investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans), originated, distressed and opportunistic credit, real estate mortgage loans, and interests in unconsolidated CLOs.
Investments of Consolidated CFEs - Consists primarily of (i) investments in below investment grade corporate debt securities (primarily high yield bonds and syndicated bank loans) held directly by the consolidated CLOs and (ii) investments in originated, fixed-rate real estate mortgage loans held directly by the consolidated CMBS vehicles.
Real Assets - Consists primarily of investments in (i) energy related assets, principally oil and natural gas properties, (ii) infrastructure assets, and (iii) real estate, principally residential and commercial real estate assets and businesses.
Equity Method - Other - Consists primarily of (i) certain direct interests in operating companies in which KKR is deemed to exert significant influence under GAAP and (ii) certain interests in partnerships and joint ventures that hold private equity and real assets investments.
Equity Method - Capital Allocation-Based Income - Consists primarily of (i) the capital interest KKR holds as the general partner in certain investment funds, which are not consolidated and (ii) the carried interest component of the general partner interest, which are accounted for as a single unit of account.
Other - Consists primarily of investments in common stock, preferred stock, warrants and options of companies that are not private equity, real assets, credit or investments of consolidated CFEs.
Investments held by Consolidated Investment Funds
The consolidated investment funds are, for GAAP purposes, investment companies and reflect their investments and other financial instruments, including portfolio companies that are majority-owned and controlled by KKR's investment funds, at fair value. KKR has retained this specialized accounting for the consolidated investment funds in consolidation. Accordingly, the unrealized gains and losses resulting from changes in fair value of the investments and other financial instruments held by the consolidated investment funds are reflected as a component of Net Gains (Losses) from Investment Activities in the consolidated statements of operations.
Certain energy investments are made through consolidated investment funds, including investments in working and royalty interests in oil and natural gas properties as well as investments in operating companies that operate in the energy industry. Since these investments are held through consolidated investment funds, such investments are reflected at fair value as of the end of the reporting period. 

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Notes to Financial Statements (Continued)

Investments in operating companies that are held through KKR's consolidated investment funds are generally classified within private equity investments and investments in working and royalty interests in oil and natural gas properties are generally classified as real asset investments.
Energy Investments held by KKR
KKR directly holds certain working and royalty interests in oil and natural gas properties that are not held through investment funds. Oil and natural gas activities are accounted for under the successful efforts method of accounting and such working interests are consolidated based on the proportion of the working interests held by KKR. Accordingly, KKR reflects its proportionate share of these interests on a gross basis and changes in the value of these interests are not reflected as unrealized gains and losses in the consolidated statements of operations. 
Under the successful efforts method, exploration costs, other than the costs of drilling exploratory wells, are charged to expense as incurred. Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. Lease acquisition costs are capitalized when incurred. Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs and costs of certain nonproducing leasehold costs are charged to expense as incurred.
Expenditures for repairs and maintenance, including workovers, are charged to expense as incurred.
The capitalized costs of producing oil and natural gas properties are depleted on a field-by-field basis using the units-of production method based on the ratio of current production to estimated total net proved oil, natural gas and natural gas liquid reserves. Proved developed reserves are used in computing depletion rates for drilling and development costs and total proved reserves are used for depletion rates of leasehold costs.
Estimated dismantlement and abandonment costs for oil and natural gas properties, net of salvage value, are capitalized at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves.
Whenever events or changes in circumstances indicate that the carrying amounts of oil and natural gas properties may not be recoverable, KKR evaluates oil and natural gas properties and related equipment and facilities for impairment on a field-by-field basis. The determination of recoverability is made based upon estimated undiscounted future net cash flows. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flow analysis, with the carrying value of the related asset. Any impairment in value is recognized when incurred and is recorded in General, Administrative, and Other expense in the consolidated statements of operations.
Fair Value Option
For certain investments and other financial instruments, KKR has elected the fair value option. Such election is irrevocable and is applied on a financial instrument by financial instrument basis at initial recognition. KKR has elected the fair value option for certain private equity, real assets, credit, investments of consolidated CFEs, equity method - other and other financial instruments not held through a consolidated investment fund. Accounting for these investments at fair value is consistent with how KKR accounts for its investments held through consolidated investment funds. Changes in the fair value of such instruments are recognized in Net Gains (Losses) from Investment Activities in the consolidated statements of operations. Interest income on interest bearing credit securities on which the fair value option has been elected is based on stated coupon rates adjusted for the accretion of purchase discounts and the amortization of purchase premiums. This interest income is recorded within Interest Income in the consolidated statements of operations.
Equity Method
For certain investments in entities over which KKR exercises significant influence but which do not meet the requirements for consolidation and for which KKR has not elected the fair value option, KKR uses the equity method of accounting. The carrying value of equity method investments, for which KKR has not elected the fair value option, is determined based on the amounts invested by KKR, adjusted for the equity in earnings or losses of the investee allocated based on KKR's respective ownership percentage, less distributions.
For equity method investments for which KKR has not elected the fair value option, KKR records its proportionate share of the investee's earnings or losses based on the most recently available financial information of the investee, which in certain

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Notes to Financial Statements (Continued)

cases may lag the date of KKR's financial statements by no more than three calendar months. As of March 31, 2020, equity method investees for which KKR reports financial results on a lag include Marshall Wace LLP ("Marshall Wace").
KKR evaluates its equity method investments for which KKR has not elected the fair value option for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
The carrying value of investments classified as Equity Method - Capital Allocation-Based Income approximates fair value, because the underlying investments of the unconsolidated investment funds are reported at fair value.
Financial Instruments held by Consolidated CFEs
KKR measures both the financial assets and financial liabilities of the consolidated CFEs in its financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities which results in KKR's consolidated net income (loss) reflecting KKR's own economic interests in the consolidated CFEs including (i) changes in the fair value of the beneficial interests retained by KKR and (ii) beneficial interests that represent compensation for services rendered.
For the consolidated CLOs, KKR has determined that the fair value of the financial assets of the consolidated CLOs is more observable than the fair value of the financial liabilities of the consolidated CLOs. As a result, the financial assets of the consolidated CLOs are being measured at fair value and the financial liabilities are being measured in consolidation as: (1) the sum of the fair value of the financial assets and the carrying value of any nonfinancial assets that are incidental to the operations of the CLOs less (2) the sum of the fair value of any beneficial interests retained by KKR (other than those that represent compensation for services) and KKR's carrying value of any beneficial interests that represent compensation for services. The resulting amount is allocated to the individual financial liabilities (other than the beneficial interests retained by KKR).
For the consolidated CMBS vehicles, KKR has determined that the fair value of the financial liabilities of the consolidated CMBS vehicles is more observable than the fair value of the financial assets of the consolidated CMBS vehicles. As a result, the financial liabilities of the consolidated CMBS vehicles are being measured at fair value and the financial assets are being measured in consolidation as: (1) the sum of the fair value of the financial liabilities (other than the beneficial interests retained by KKR), the fair value of the beneficial interests retained by KKR and the carrying value of any nonfinancial liabilities that are incidental to the operations of the CMBS vehicles less (2) the carrying value of any nonfinancial assets that are incidental to the operations of the CMBS vehicles. The resulting amount is allocated to the individual financial assets.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Except for certain of KKR's equity method investments (see "Equity Method" above) and debt obligations (as described in Note 10 "Debt Obligations"), KKR's investments and other financial instruments are recorded at fair value or at amounts whose carrying values approximate fair value. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve varying levels of management estimation and judgment, the degree of which is dependent on a variety of factors.
GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments and financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:
Level I - Pricing inputs are unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date. The types of financial instruments included in this category are publicly-listed equities and securities sold short.
Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the measurement date, and fair value is determined through the use of models or other valuation methodologies. The

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Notes to Financial Statements (Continued)

types of financial instruments included in this category are credit investments, investments and debt obligations of consolidated CLO entities, convertible debt securities indexed to publicly-listed securities, less liquid and restricted equity securities and certain over-the-counter derivatives such as foreign currency option and forward contracts.
Level III - Pricing inputs are unobservable for the financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. The types of financial instruments generally included in this category are private portfolio companies, real assets investments, credit investments, equity method investments for which the fair value option was elected and investments and debt obligations of consolidated CMBS entities.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. KKR's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.
A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of instrument, whether the instrument has recently been issued, whether the instrument is traded on an active exchange or in the secondary market, and current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by KKR in determining fair value is greatest for instruments categorized in Level III. The variability and availability of the observable inputs affected by the factors described above may cause transfers between Levels I, II, and III, which KKR recognizes at the beginning of the reporting period. 
Investments and other financial instruments that have readily observable market prices (such as those traded on a securities exchange) are stated at the last quoted sales price as of the reporting date. KKR does not adjust the quoted price for these investments, even in situations where KKR holds a large position and a sale could reasonably affect the quoted price.
Management's determination of fair value is based upon the methodologies and processes described below and may incorporate assumptions that are management's best estimates after consideration of a variety of internal and external factors.
Level II Valuation Methodologies
Credit Investments: These financial instruments generally have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that KKR and others are willing to pay for an instrument. Ask prices represent the lowest price that KKR and others are willing to accept for an instrument. For financial instruments whose inputs are based on bid-ask prices obtained from third party pricing services, fair value may not always be a predetermined point in the bid-ask range. KKR's policy is generally to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets KKR's best estimate of fair value.
Investments and Debt Obligations of Consolidated CLO Vehicles: Investments of consolidated CLO vehicles are reported within Investments of Consolidated CFEs and are valued using the same valuation methodology as described above for credit investments. Under ASU 2014-13, KKR measures CLO debt obligations on the basis of the fair value of the financial assets of the CLO.
Securities Indexed to Publicly-Listed Securities: These securities are typically valued using standard convertible security pricing models. The key inputs into these models that require some amount of judgment are the credit spreads utilized and the volatility assumed. To the extent the company being valued has other outstanding debt securities that are publicly-traded, the implied credit spread on the company's other outstanding debt securities would be utilized in the valuation. To the extent the company being valued does not have other outstanding debt securities that are publicly-traded, the credit spread will be estimated based on the implied credit spreads observed in comparable publicly-traded debt securities. In certain cases, an additional spread will be added to reflect an illiquidity discount due to the fact that the security being valued is not publicly-traded. The volatility assumption is based upon the historically observed volatility of the underlying equity security into which

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Notes to Financial Statements (Continued)

the convertible debt security is convertible and/or the volatility implied by the prices of options on the underlying equity security.
Equity Securities: The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction or leverage that collateralized the equity securities.
Derivatives: The valuation incorporates observable inputs comprising yield curves, foreign currency rates and credit spreads.
Level III Valuation Methodologies
Private Equity Investments: KKR generally employs two valuation methodologies when determining the fair value of a private equity investment. The first methodology is typically a market comparables analysis that considers key financial inputs and recent public and private transactions and other available measures. The second methodology utilized is typically a discounted cash flow analysis, which incorporates significant assumptions and judgments. Estimates of key inputs used in this methodology include the weighted average cost of capital for the investment and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. In certain cases the results of the discounted cash flow approach can be significantly impacted by these estimates. Other inputs are also used in both methodologies. In addition, when a definitive agreement has been executed to sell an investment, KKR generally considers a significant determinant of fair value to be the consideration to be received by KKR pursuant to the executed definitive agreement.
Upon completion of the valuations conducted using these methodologies, a weighting is ascribed to each method, and an illiquidity discount is typically applied where appropriate. The ultimate fair value recorded for a particular investment will generally be within a range suggested by the two methodologies, except that the value may be higher or lower than such range in the case of investments being sold pursuant to an executed definitive agreement.
When determining the weighting ascribed to each valuation methodology, KKR considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis, the expected hold period and manner of realization for the investment, and in the case of investments being sold pursuant to an executed definitive agreement, an estimated probability of such sale being completed. These factors can result in different weightings among investments in the portfolio and in certain instances may result in up to a 100% weighting to a single methodology.
When an illiquidity discount is to be applied, KKR seeks to take a uniform approach across its portfolio and generally applies a minimum 5% discount to all private equity investments. KKR then evaluates such private equity investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include (i) whether KKR is unable to freely sell the portfolio company or conduct an initial public offering of the portfolio company due to the consent rights of a third party or similar factors, (ii) whether the portfolio company is undergoing significant restructuring activity or similar factors, and (iii) characteristics about the portfolio company regarding its size and/or whether the portfolio company is experiencing, or expected to experience, a significant decline in earnings. These factors generally make it less likely that a portfolio company would be sold or publicly offered in the near term at a price indicated by using just a market multiples and/or discounted cash flow analysis, and these factors tend to reduce the number of opportunities to sell an investment and/or increase the time horizon over which an investment may be monetized. Depending on the applicability of these factors, KKR determines the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time KKR holds the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by KKR in its valuations.
In the case of growth equity investments, enterprise values may be determined using the market comparables analysis and discounted cash flow analysis described above. A scenario analysis may also be conducted to subject the estimated enterprise values to a downside, base and upside case, which involves significant assumptions and judgments. A milestone analysis may also be conducted to assess the current level of progress towards value drivers that we have determined to be important, which involves significant assumptions and judgments. The enterprise value in each case may then be allocated across the investment's capital structure to reflect the terms of the security and subjected to probability weightings. In certain cases, the values of growth equity investments may be based on recent or expected financings.

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Notes to Financial Statements (Continued)

Real Asset Investments: Real asset investments in infrastructure, energy and real estate are valued using one or a combination of the discounted cash flow analysis, market comparables analysis and direct income capitalization, which in each case incorporates significant assumptions and judgments.
Infrastructure investments are generally valued using the discounted cash flow analysis. Key inputs used in this methodology can include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as exit EBITDA multiples.
Energy investments are generally valued using a discounted cash flow approach, and where applicable, a market approach using comparable companies and transactions. Key inputs used in our valuations include (i) the weighted average cost of capital, (ii) future commodity prices, as quoted on indices, and long-term commodity price forecasts, and (iii) the asset’s future operating performance.
Real estate investments are generally valued using a combination of direct income capitalization and discounted cash flow analysis. Certain real estate investments are valued by KKR based on ranges of valuations determined by an independent valuation firm. Key inputs used in such methodologies that require estimates include an unlevered discount rate and current capitalization rate. The valuations of real assets investments also use other inputs.
Credit Investments: Credit investments are valued using values obtained from dealers or market makers, and where these values are not available, credit investments are generally valued by KKR based on ranges of valuations determined by an independent valuation firm. Valuation models are based on discounted cash flow analyses, for which the key inputs are determined based on market comparables, which incorporate similar instruments from similar issuers.
Real Estate Mortgage Loans: Real estate mortgage loans are illiquid, structured investments that are specific to the property and its operating performance. KKR engages an independent valuation firm to estimate the fair value of each loan. KKR reviews the quarterly loan valuation estimates provided by the independent valuation firm. These loans are generally valued using a discounted cash flow model using discount rates derived from observable market data applied to the capital structure of the respective sponsor and estimated property value. In the event that KKR's estimate of fair value differs from the fair value estimate provided by the independent valuation firm, KKR ultimately relies solely upon the valuation prepared by the investment personnel of KKR.
Other Investments: With respect to other investments including equity method investments for which the fair value election has been made, KKR generally employs the same valuation methodologies as described above for private equity and real assets investments when valuing these other investments.
Investments and Debt Obligations of Consolidated CMBS Vehicles: Under ASU 2014-13, KKR measures CMBS investments, which are reported within Investments of Consolidated CFEs on the basis of the fair value of the financial liabilities of the CMBS. Debt obligations of consolidated CMBS vehicles are valued based on discounted cash flow analyses. The key input is the expected yield of each CMBS security using both observable and unobservable factors, which may include recently offered or completed trades and published yields of similar securities, security-specific characteristics (e.g. securities ratings issued by nationally recognized statistical rating organizations, credit support by other subordinate securities issued by the CMBS and coupon type) and other characteristics.
Key unobservable inputs that have a significant impact on KKR's Level III investment valuations as described above are included in Note 5 "Fair Value Measurements." KKR utilizes several unobservable pricing inputs and assumptions in determining the fair value of its Level III investments. These unobservable pricing inputs and assumptions may differ by investment and in the application of KKR's valuation methodologies. KKR's reported fair value estimates could vary materially if KKR had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if KKR only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies.
There is inherent uncertainty involved in the valuation of Level III investments and there is no assurance that, upon liquidation, KKR will realize the values reflected in our valuations. Our valuations may differ significantly from the values that would have been used had an active market for the investments existed, and it is reasonably possible that the difference could be material. Furthermore, the recent market volatility caused by COVID-19 and the uncertainty surrounding its full impact have amplified the possibility that our future valuations may materially change from those reflected as of March 31, 2020.

20

Notes to Financial Statements (Continued)

Revenues

For the three months ended March 31, 2020 and 2019, respectively, revenues consisted of the following:    
 
Three Months Ended March 31,
 
2020
 
2019
Management Fees
$
222,689

 
$
188,408

Fee Credits
(35,387
)
 
(103,477
)
Transaction Fees
98,996

 
188,203

Monitoring Fees
31,149

 
25,651

Incentive Fees
668

 

Expense Reimbursements
28,224

 
44,060

Oil and Gas Revenue
13,315

 
13,175

Consulting Fees
20,918

 
16,528

Total Fees and Other
380,572


372,548


 
 
 
Carried Interest
(1,210,925
)
 
694,383

General Partner Capital Interest
(171,152
)
 
120,549

Total Capital Allocation-Based Income (Loss)
(1,382,077
)

814,932

 
 
 
 
Total Revenues
$
(1,001,505
)

$
1,187,480


Fees and Other
Fees and Other, as detailed above, are accounted for as contracts with customers. Under ASC 606, Revenue from Contracts with Customers ("ASC 606"), KKR is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) KKR satisfies its performance obligation. In determining the transaction price, KKR has included variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.

21

Notes to Financial Statements (Continued)

The following table summarizes KKR's revenues from contracts with customers:
Revenue Type
Customer
Performance Obligation
Performance Obligation Satisfied Over Time or
Point In Time (1)
Variable or
Fixed Consideration
Payment Terms
Subject to Return Once Recognized
Classification of Uncollected Amounts (2)
Management Fees
Investment funds, CLOs and other vehicles
Investment management services
Over time as services are rendered
Variable consideration since varies based on fluctuations in the basis of the management fee over time
Typically quarterly or annually in arrears
No
Due from Affiliates
Transaction Fees
Portfolio companies and third party companies
Advisory services and debt and equity arranging and underwriting
Point in time when the transaction (e.g. underwriting) is completed
Fixed consideration
Typically paid on or shortly after transaction closes
No
Due from Affiliates (portfolio companies)

Other Assets (third parties)
Monitoring Fees
 
 
 
 
 
 
 
Recurring Fees
Portfolio companies
Monitoring services
Over time as services are rendered
Variable consideration since varies based on fluctuations in the basis of the recurring fee
Typically quarterly in arrears
No
Due from Affiliates
Termination Fees
Portfolio companies
Monitoring services
Point in time when the termination is completed
Fixed consideration
Typically paid on or shortly after termination occurs
No
Due from Affiliates
Incentive Fees
Investment funds and other vehicles
Investment management services that result in achievement of minimum investment return levels
Point in time at the end of the performance measurement period (quarterly or annually) if investment performance is achieved
Variable consideration since contingent upon the investment fund and other vehicles achieving more than stipulated investment return hurdles
Typically paid shortly after the end of the performance measurement period
No
Due from Affiliates
Expense Reimbursements
Investment funds and portfolio companies
Investment management and monitoring services
Point in time when the related expense is incurred
Fixed consideration
Typically shortly after expense is incurred
No
Due from Affiliates
Oil and Gas Revenues
Oil and gas wholesalers
Delivery of oil liquids and gas
Point in time when delivery has occurred and title has transferred
Fixed consideration
Typically shortly after delivery
No
Other Assets
Consulting Fees
Portfolio companies and other companies
Consulting and other services
Over time as services are rendered
Fixed consideration
Typically quarterly in arrears
No
Due from Affiliates
(1)
For performance obligations satisfied at a point in time, there were no significant judgments made in evaluating when a customer obtains control of the promised service.
(2)
For amounts classified in Other Assets, see Note 8 "Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities." For amounts classified in Due from Affiliates, see Note 13 "Related Party Transactions."

Management Fees
KKR provides investment management services to investment funds, CLOs, and other vehicles in exchange for a management fee. Management fees are determined quarterly based on an annual rate and are generally based upon a percentage of the capital committed or capital invested during the investment period. Thereafter, management fees are generally based on a percentage of remaining invested capital, net asset value, gross assets or as otherwise defined in the respective contractual agreements. Since some of the factors that cause the fees to fluctuate are outside of KKR's control, management fees are considered to be constrained and are therefore not included in the transaction price. Additionally, after the contract is established there are no significant judgments made when determining the transaction price.
 

22

Notes to Financial Statements (Continued)

Management fees earned from KKR's consolidated investment funds, CLOs, and other vehicles are eliminated in consolidation. However, because these amounts are funded by, and earned from, noncontrolling interests, KKR's allocated share of the net income from the consolidated investment funds, CLOs, and other vehicles is increased by the amount of fees that are eliminated. Accordingly, the elimination of these fees does not impact the net income (loss) attributable to KKR or KKR stockholders' equity.
Fee Credits
Under the terms of the management agreements with certain of its investment funds, KKR is required to share with such funds an agreed upon percentage of certain fees, including monitoring and transaction fees earned from portfolio companies ("Fee Credits"). Investment funds earn Fee Credits only with respect to monitoring and transaction fees that are allocable to the fund's investment in the portfolio company and not, for example, any fees allocable to capital invested through co-investment vehicles. Fee Credits are calculated after deducting certain costs incurred in connection with pursuing potential investments that do not result in completed transactions ("broken-deal expenses") and generally amount to 80% for older funds, or 100% for newer funds, of allocable monitoring and transaction fees after broken-deal expenses are recovered, although the actual percentage may vary from fund to fund. Fee Credits are recognized and owed to investment funds concurrently with the recognition of monitoring fees, transaction fees and broken-deal expenses. Since Fee Credits are payable to investment funds, amounts owed are generally applied as a reduction of the management fee that is otherwise billed to the investment fund. Fee credits are recorded as a reduction of revenues in the consolidated statement of operations. Fee Credits owed to investment funds are recorded in Due to Affiliates on the consolidated statements of financial condition. See Note 13 "Related Party Transactions."
Transaction Fees
KKR (i) arranges debt and equity financing, places and underwrites securities offerings, and provides other types of capital markets services for companies seeking financing in its Capital Markets business line and (ii) provides advisory services in connection with successful Private Markets and Public Markets business line portfolio company investment transactions, in each case, in exchange for a transaction fee. Transaction fees are separately negotiated for each transaction and are generally based on (i) for Capital Markets business line transactions, a percentage of the overall transaction size and (ii) for Private Markets and Public Markets business line transactions, a percentage of either total enterprise value of an investment or a percentage of the aggregate price paid for an investment. After the contract is established, there are no significant judgments made when determining the transaction price.
Monitoring Fees
KKR provides services in connection with monitoring portfolio companies in exchange for a fee. Recurring monitoring fees are separately negotiated for each portfolio company. In addition, certain monitoring fee arrangements may provide for a termination payment following an initial public offering or change of control as defined in the contractual terms of the related agreement. These termination payments are recognized in the period when the related transaction closes. After the contract is established, there are no significant judgments made when determining the transaction price.
Incentive Fees
KKR provides investment management services to certain investment funds, CLOs and other vehicles in exchange for a management fee as discussed above and, in some cases an incentive fee when KKR is not entitled to a carried interest. Incentive fee rates generally range from 5% to 20% of investment gains. Incentive fees are considered a form of variable consideration as these fees are subject to reversal, and therefore the recognition of such fees is deferred until the end of each fund's measurement period when the performance-based incentive fees become fixed and determinable. Incentive fees are generally paid within 90 days of the end of the investment vehicles' measurement period. After the contract is established, there are no significant judgments made when determining the transaction price.
Incentive fees earned from KKR's consolidated investment funds, CLOs, and other vehicles are eliminated in consolidation. However, because these amounts are funded by, and earned from, noncontrolling interests, KKR's allocated share of the net income from the consolidated investment funds, CLOs, and other vehicles is increased by the amount of fees that are eliminated. Accordingly, the elimination of these fees does not impact the net income (loss) attributable to KKR or KKR stockholders' equity.

23

Notes to Financial Statements (Continued)

Expense Reimbursements
Providing investment management services to investment funds and monitoring KKR’s portfolio companies require KKR to arrange for services on behalf of them. In those situations where KKR is acting as an agent on behalf of its investment funds or portfolio companies, it presents the cost of services on a net basis as a reduction of Revenues. In all other situations, KKR is primarily responsible for fulfilling the services and is therefore acting as a principal for those arrangements for accounting purposes. As a result, the expense and related reimbursement associated with those services is presented on a gross basis. Costs incurred are classified within Expenses and reimbursements of such costs are classified as Expense Reimbursements within Revenues on the consolidated statements of operations. After the contract is established, there are no significant judgments made when determining the transaction price.
Oil and Gas Revenue
KKR directly holds certain working and royalty interests in oil and natural gas properties that are not held through investment funds. Oil and gas revenue is recognized when the performance obligation is satisfied, which occurs at the point in time when control of the product transfers to the customer. Performance obligations are typically satisfied through the monthly delivery of production. Revenue is recognized based on KKR's proportionate share of production from non-operated properties as marketed by the operator. After the contract is established, there are no significant judgments made when determining the transaction price.
Consulting Fees
KKR provides consulting and other services to portfolio companies and other companies in exchange for a consulting fee. Consulting fees are separately negotiated with each portfolio company for which services are provided. After the contract is established, there are no significant judgments made when determining the transaction price.
Capital Allocation-Based Income (Loss)
Capital allocation-based income (loss) is earned from those arrangements where KKR has a general partner capital interest and is entitled to a disproportionate allocation of investment income (referred to hereafter as "carried interest"). KKR accounts for its general partner interests in capital allocation-based arrangements as financial instruments under ASC 323, Investments - Equity Method and Joint Ventures ("ASC 323") since the general partner has significant governance rights in the investment funds in which it invests, which demonstrates significant influence. In accordance with ASC 323, KKR records equity method income based on the proportionate share of the income of the investment fund, including carried interest, assuming the investment fund was liquidated as of each reporting date pursuant to each investment fund's governing agreements. Accordingly, these general partner interests are accounted for outside of the scope of ASC 606. Other arrangements surrounding contractual incentive fees through an advisory contract are separate and distinct and accounted for in accordance with ASC 606. In these incentive fee arrangements, accounted for in accordance with ASC 606, KKR’s economics in the entity do not involve an allocation of capital. See "Incentive Fees" above.
Carried interest is allocated to the general partner based on cumulative fund performance to date, and where applicable, subject to a preferred return to the funds' limited partners. At the end of each reporting period, KKR calculates the carried interest that would be due to KKR for each investment fund, pursuant to the fund agreements, as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as carried interest to reflect either (a) positive performance resulting in an increase in the carried interest allocated to the general partner or (b) negative performance that would cause the amount due to KKR to be less than the amount previously recognized, resulting in a negative adjustment to carried interest allocated to the general partner. In each case, it is necessary to calculate the carried interest on cumulative results compared to the carried interest recorded to date and to make the required positive or negative adjustments. KKR ceases to record negative carried interest allocations once previously recognized carried interest allocations for an investment fund have been fully reversed. KKR is not obligated to make payments for guaranteed returns or hurdles and, therefore, cannot have negative carried interest over the life of an investment fund. Accrued but unpaid carried interest as of the reporting date is reflected in Investments in the consolidated statements of financial condition.

24

Notes to Financial Statements (Continued)

Compensation and Benefits
Compensation and Benefits expense includes (i) cash compensation consisting of salaries, bonuses, and benefits, (ii) equity based compensation consisting of charges associated with the vesting of equity-based awards (see Note 12 "Equity Based Compensation") and (iii) carry pool allocations.
All KKR employees receive a base salary that is paid by KKR or its consolidated entities, and is accounted for as Compensation and Benefits expense in the consolidated statements of operations. These employees are also eligible to receive discretionary cash bonuses based on performance, overall profitability and other matters. While cash bonuses paid to most employees are borne by KKR and certain consolidated entities and result in customary compensation and benefits expense, certain cash bonuses that are paid to certain of KKR's principals can be borne by KKR Holdings. These bonuses are funded with distributions that KKR Holdings receives on KKR Group Partnership Units held by KKR Holdings but are not then passed on to holders of unvested units of KKR Holdings. Because KKR principals are not entitled to receive distributions on units that are unvested, any amounts allocated to principals in excess of a principal's vested equity interests are reflected as employee compensation and benefits expense. These compensation charges, if any, are currently recorded based on the amount of cash expected to be paid by KKR Holdings.
Carry Pool Allocation
With respect to KKR's funds that provide for carried interest, KKR allocates to its employees a portion of the carried interest earned in relation to these funds as part of its carry pool. KKR allocates 40% or 43%, depending on the fund's vintage, of the carry it earns from these funds and vehicles to its carry pool. These amounts are accounted for as compensatory profit‑sharing arrangements in Accounts Payable, Accrued Expenses and Other Liabilities within the accompanying consolidated statements of financial condition in conjunction with the related carried interest income and recorded as compensation expense. Upon a reversal of carried interest income, the related carry pool allocation, if any, is also reversed. Accordingly, such compensation expense is subject to both positive and negative adjustments.
Profit Sharing Plan
KKR provides certain profit sharing programs for KKR employees. In particular, KKR provides a 401(k) plan for eligible employees in the United States. For certain professionals who are participants in the 401(k) plan, KKR may, in its discretion, contribute an amount after the end of the plan year.
General, Administrative and Other
General, administrative and other expense consists primarily of professional fees paid to legal advisors, accountants, advisors and consultants, insurance costs, travel and related expenses, communications and information services, depreciation and amortization charges, expenses (including impairment charges) incurred by oil and gas entities that are consolidated, broken-deal expenses, placement fees and other general operating expenses. A portion of these general administrative and other expenses, in particular broken-deal expenses, are borne by fund investors.
Investment Income
Investment income consists primarily of the net impact of:
(i)
Realized and unrealized gains and losses on investments, securities sold short, derivatives and debt obligations of consolidated CFEs which are recorded in Net Gains (Losses) from Investment Activities. Upon disposition of an investment, previously recognized unrealized gains or losses are reversed and a realized gain or loss is recognized.
(ii)
Foreign exchange gains and losses relating to mark‑to‑market activity on foreign exchange forward contracts, foreign currency options and foreign denominated debt which are recorded in Net Gains (Losses) from Investment Activities.
(iii)
Dividends, which are recognized on the ex‑dividend date, or, in the absence of a formal declaration of a record date, on the date it is received.
(iv)
Interest income, which is recognized as earned.
(v)
Interest expense, which is recognized as incurred.

25

Notes to Financial Statements (Continued)

Income Taxes
KKR & Co. Inc. is a corporation for U.S. federal income tax purposes and thus is subject to U.S. federal, state and local corporate income taxes at the entity level on KKR’s share of net taxable income. In addition, KKR Group Partnership and certain of its subsidiaries operate in the United States as partnerships for U.S. federal income tax purposes and as corporate entities in certain non-U.S. jurisdictions. These entities, in some cases, are subject to U.S. state or local income taxes or non-U.S. income taxes.
Deferred Income Taxes

Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period when the change is enacted.
Deferred tax assets, which are recorded in Other Assets within the statement of financial condition, are reduced by a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. When evaluating the realizability of the deferred tax assets, all evidence, both positive and negative, is considered. Items considered when evaluating the need for a valuation allowance include the ability to carry back losses, future reversals of existing temporary differences, tax planning strategies, and expectations of future earnings.
For a particular tax‑paying component of an entity and within a particular tax jurisdiction, deferred tax assets and liabilities are offset and presented as a single amount within Other Assets or Accounts Payable, Accrued and Other Liabilities, as applicable, in the accompanying statements of financial condition.
Uncertain Tax Positions
KKR analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, KKR determines that uncertainties in tax positions exist, a reserve is established. The reserve for uncertain tax positions is recorded in Accounts Payable, Accrued and Other Liabilities in the accompanying statements of financial condition. KKR recognizes accrued interest and penalties related to uncertain tax positions within the provision for income taxes in the consolidated statements of operations.
KKR records uncertain tax positions on the basis of a two‑step process: (a) determination is made whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (b) those tax positions that meet the more‑likely‑than‑not threshold are recognized as the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Cash and Cash Equivalents
KKR considers all highly liquid short‑term investments with original maturities of 90 days or less when purchased to be cash equivalents.
Cash and Cash Equivalents Held at Consolidated Entities

Cash and cash equivalents held at consolidated entities represents cash that, although not legally restricted, is not available to fund general liquidity needs of KKR as the use of such funds is generally limited to the investment activities of KKR's investment funds and CFEs.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents primarily represent amounts that are held by third parties under certain of KKR's financing and derivative transactions. The duration of this restricted cash generally matches the duration of the related financing or derivative transaction.

26

Notes to Financial Statements (Continued)


Due from and Due to Affiliates
KKR considers its principals and their related entities, unconsolidated investment funds and the portfolio companies of its funds to be affiliates for accounting purposes. Receivables from and payables to affiliates are recorded at their current settlement amount.
Fixed Assets, Depreciation and Amortization
Fixed assets consist primarily of corporate real estate, leasehold improvements, furniture and computer hardware. Such amounts are recorded at cost less accumulated depreciation and amortization and are included in Other Assets within the accompanying consolidated statements of financial condition. Depreciation and amortization are calculated using the straight‑line method over the assets' estimated economic useful lives, which for leasehold improvements are the lesser of the lease terms or the life of the asset, and three to seven years for other fixed assets.
Freestanding Derivatives

Freestanding derivatives are instruments that KKR and certain of its consolidated funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include forward, swap and option contracts related to foreign currencies and interest rates to manage foreign exchange risk and interest rate risk arising from certain assets and liabilities. All derivatives are recognized in Other Assets or Accounts Payable, Accrued Expenses and Other Liabilities and are presented on a gross basis in the consolidated statements of financial condition and measured at fair value with changes in fair value recorded in Net Gains (Losses) from Investment Activities in the accompanying consolidated statements of operations. KKR's derivative financial instruments contain credit risk to the extent that its counterparties may be unable to meet the terms of the agreements. KKR attempts to reduce this risk by limiting its counterparties to major financial institutions with strong credit ratings.
Goodwill
 
Goodwill represents the excess of acquisition cost over the fair value of net tangible and intangible assets acquired in connection with an acquisition. Goodwill is assessed for impairment annually in the third quarter of each fiscal year or more frequently if circumstances indicate impairment may have occurred. Goodwill is recorded in Other Assets in the accompanying consolidated statements of financial condition.

Securities Sold Short
Whether part of a hedging transaction or a transaction in its own right, securities sold short represent obligations of KKR to deliver the specified security at the contracted price at a future point in time, and thereby create a liability to repurchase the security in the market at the prevailing prices. The liability for such securities sold short, which is recorded in Accounts Payable, Accrued Expenses and Other Liabilities in the statement of financial condition, is marked to market based on the current fair value of the underlying security at the reporting date with changes in fair value recorded as unrealized gains or losses in Net Gains (Losses) from Investment Activities in the accompanying consolidated statements of operations. These transactions may involve market risk in excess of the amount currently reflected in the accompanying consolidated statements of financial condition.
Comprehensive Income (Loss)
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from contributions from and distributions to owners. In the accompanying consolidated financial statements, comprehensive income is comprised of (i) Net Income (Loss), as presented in the consolidated statements of operations and (ii) net foreign currency translation.

27

Notes to Financial Statements (Continued)

Foreign Currency
Consolidated entities which have a functional currency that differs from KKR's reporting currency are primarily KKR's investment management and capital markets companies located outside the United States and certain CFEs. Foreign currency denominated assets and liabilities are translated using the exchange rates prevailing at the end of each reporting period. Results of foreign operations are translated at the weighted average exchange rate for each reporting period. Translation adjustments are included as a component of accumulated other comprehensive income (loss) until realized. Foreign currency income or expenses resulting from transactions outside of the functional currency of a consolidated entity are recorded as incurred in general, administrative and other expense in the consolidated statements of operations.
Leases
At contract inception, KKR determines if an arrangement contains a lease by evaluating whether (i) the identified asset has been deployed in the contract explicitly or implicitly and (ii) KKR obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. Additionally, at contract inception KKR will evaluate whether the lease is an operating or finance lease. Right-of-use (“ROU”) assets represent KKR’s right to use an underlying asset for the lease term and lease liabilities represent KKR’s obligation to make lease payments arising from the lease.
ROU assets and the associated lease liabilities are recognized at the commencement date based on the present value of the future minimum lease payments over the lease term. The discount rate implicit in the lease is generally not readily determinable. Consequently, KKR uses its incremental borrowing rate based on the information available including, but not limited to, collateral assumptions, the term of the lease, and the economic environment in which the lease is denominated at the commencement date in determining the present value of the future lease payments. The ROU assets are recognized as the initial measurement of the lease liabilities plus any initial direct costs and any prepaid lease payments less lease incentives received, if any. The lease terms may include options to extend or terminate the lease which are accounted for when it is reasonably certain that KKR will exercise that option. Certain leases that include lease and non-lease components are accounted for as one single lease component. In addition to contractual rent payments, occupancy lease agreements generally include additional payments for certain costs incurred by the landlord, such as building expenses and utilities. To the extent these are fixed or determinable, they are included as part of the lease payments used to measure the Operating Lease Liability.
Operating lease expense is recognized on a straight-line basis over the lease term and is recorded within Occupancy and Related Charges in the accompanying consolidated statements of operations. The ROU assets are included in Other Assets and the lease liabilities are included in Accounts Payable, Accrued Expenses and Other Liabilities in the accompanying consolidated statements of financial condition. See Note 8 "Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities."

28

Notes to Financial Statements (Continued)

Recently Issued Accounting Pronouncements
Adopted in 2020
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which has subsequently been amended by ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, and ASU No. 2019-11. The amended guidance requires a company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Prior to ASU 2016-13, GAAP required an "incurred loss" methodology that delayed recognition until it was probable a loss had been incurred. Under ASU 2016-13, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected and the income statement will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period.

This guidance has been adopted as of January 1, 2020. Financial instruments measured at fair value are not within the scope of this guidance. Consequently, the adoption of ASU 2016-13 did not result in a cumulative-effect adjustment in retained earnings and did not have a material impact to KKR.

Goodwill
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance simplifies the accounting for goodwill impairments by eliminating the second step from the goodwill impairment test. The ASU requires goodwill impairments to be measured on the basis of the fair value of a reporting unit relative to the reporting unit's carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. The ASU also (i) clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and (ii) clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance has been adopted as of January 1, 2020 and this guidance will impact KKR's accounting for any future goodwill impairments.
Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issued ASU No. 2018-15, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement ("CCA") that is a service contract. The ASU aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This guidance has been adopted as of January 1, 2020, on a prospective basis, and the impact to KKR was not material.
Effective on January 1, 2021 and Thereafter
Simplifying the Accounting for Income Taxes
On December 18, 2019, the FASB issued ASU No. 2019-12, which modifies ASC 740 to simplify the accounting for income taxes. The ASU, among other changes, (i) provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and (ii) provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The guidance is effective for fiscal periods beginning after December 15, 2020. KKR is currently evaluating the impact of this guidance on the financial statements.
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
On March 12, 2020, the FASB issued ASU No. 2020-04, which provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The temporary optional expedients and exceptions can be elected through December 31, 2022. For the quarter ended March 31, 2020, KKR has not elected to apply the temporary optional expedients and exceptions and will be reevaluating the application each quarter.

29

Notes to Financial Statements (Continued)

3. NET GAINS (LOSSES) FROM INVESTMENT ACTIVITIES
Net Gains (Losses) from Investment Activities in the consolidated statements of operations consist primarily of the realized and unrealized gains and losses on investments (including foreign exchange gains and losses attributable to foreign denominated investments and related activities) and other financial instruments, including those for which the fair value option has been elected. Unrealized gains or losses result from changes in the fair value of these investments and other financial instruments during a period. Upon disposition of an investment or financial instrument, previously recognized unrealized gains or losses are reversed and an offsetting realized gain or loss is recognized in the current period.
The following table summarizes total Net Gains (Losses) from Investment Activities:
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
 
Net Realized Gains (Losses)
 
Net Unrealized Gains (Losses)
 
Total
 
Net Realized Gains (Losses)
 
Net Unrealized Gains (Losses)
 
Total
Private Equity (1)
$

 
$
(1,282,404
)
 
$
(1,282,404
)
 
$
68,568

 
$
919,625

 
$
988,193

Credit (1)
(40,697
)
 
(905,607
)
 
(946,304
)
 
(17,876
)
 
8,669

 
(9,207
)
Investments of Consolidated CFEs (1)
(40,852
)
 
(2,112,541
)
 
(2,153,393
)
 
(10,530
)
 
233,357

 
222,827

Real Assets (1)
53,363

 
(851,015
)
 
(797,652
)
 
29,547

 
89,581

 
119,128

Equity Method - Other (1)
4,405

 
(445,023
)
 
(440,618
)
 
20,133

 
156,906

 
177,039

Other Investments (1)
(11,453
)
 
(667,719
)
 
(679,172
)
 
1,450

 
(30,361
)
 
(28,911
)
Foreign Exchange Forward Contracts
and Options (2)
83,239

 
331,051

 
414,290

 
25,454

 
54,789

 
80,243

Securities Sold Short (2)
14,655

 
21,523

 
36,178

 
14,426

 
(80,772
)
 
(66,346
)
Other Derivatives (2)
(226
)
 
811

 
585

 
1,465

 
(13,405
)
 
(11,940
)
Debt Obligations and Other (3)
941

 
1,903,045

 
1,903,986

 
(2,856
)
 
(264,292
)
 
(267,148
)
Net Gains (Losses)
From Investment Activities
$
63,375

 
$
(4,007,879
)
 
$
(3,944,504
)
 
$
129,781

 
$
1,074,097

 
$
1,203,878


(1)
See Note 4 "Investments."
(2)
See Note 8 "Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities."
(3)
See Note 10 "Debt Obligations."

4. INVESTMENTS
Investments consist of the following:
 
March 31, 2020
 
December 31, 2019
Private Equity
$
11,790,896

 
$
12,923,600

Credit
10,616,260

 
10,538,139

Investments of Consolidated CFEs
13,327,186

 
14,948,237

Real Assets
2,727,991

 
3,567,944

Equity Method - Other
4,438,206

 
4,846,949

Equity Method - Capital Allocation-Based Income
3,608,812

 
5,329,368

Other Investments
2,091,776

 
2,782,031

Total Investments
$
48,601,127

 
$
54,936,268

 
As of March 31, 2020 and December 31, 2019, there were no investments which represented greater than 5% of total investments. The majority of the securities underlying private equity investments represent equity securities.

 
 
 
 
 

 
 
 
 
 
 
 


30

Notes to Financial Statements (Continued)

5. FAIR VALUE MEASUREMENTS
The following tables summarize the valuation of assets and liabilities measured and reported at fair value by the fair value hierarchy. Investments classified as Equity Method - Other, for which the fair value option has not been elected, and Equity Method - Capital Allocation-Based Income have been excluded from the tables below.
Assets, at fair value:
 
March 31, 2020
 
Level I
 
Level II
 
Level III
 
Total
Private Equity
$
1,159,820

 
$
1,281,628

 
$
9,349,448

 
$
11,790,896

Credit

 
1,611,295

 
9,004,965

 
10,616,260

Investments of Consolidated CFEs

 
13,327,186

 

 
13,327,186

Real Assets

 

 
2,727,991

 
2,727,991

Equity Method - Other
134,562

 
47,784

 
1,352,346

 
1,534,692

Other Investments
210,971

 
203,188

 
1,677,617

 
2,091,776

Total Investments
1,505,353

 
16,471,081

 
24,112,367

 
42,088,801

 
 
 
 
 
 
 
 
Foreign Exchange Contracts and Options

 
518,901

 

 
518,901

Other Derivatives

 
3,243

 
44,368

(1) 
47,611

Total Assets
$
1,505,353

 
$
16,993,225

 
$
24,156,735

 
$
42,655,313

 
 
 
 
 
 
 
 
 
December 31, 2019
 
Level I
 
Level II
 
Level III
 
Total
Private Equity
$
1,393,654

 
$
1,658,264

 
$
9,871,682

 
$
12,923,600

Credit

 
1,320,380

 
9,217,759

 
10,538,139

Investments of Consolidated CFEs

 
14,948,237

 

 
14,948,237

Real Assets

 

 
3,567,944

 
3,567,944

Equity Method - Other
228,999

 
49,511

 
1,656,045

 
1,934,555

Other Investments
431,084

 
196,192

 
2,154,755

 
2,782,031

Total Investments
2,053,737

 
18,172,584

 
26,468,185

 
46,694,506

 
 
 
 
 
 
 
 
Foreign Exchange Contracts and Options

 
188,572

 

 
188,572

Other Derivatives

 
1,333

 
21,806

(1) 
23,139

Total Assets
$
2,053,737

 
$
18,362,489

 
$
26,489,991

 
$
46,906,217

(1)
Includes derivative assets that were valued using a third-party valuation firm. The approach used to estimate the fair value of these derivative assets was generally the discounted cash flow method, which includes consideration of the current portfolio, projected portfolio construction, projected portfolio realizations, portfolio volatility (based on the volatility, correlation, and size of each underlying asset class), and the discounting of future cash flows to the reporting date.

31

Notes to Financial Statements (Continued)

Liabilities, at fair value:
 
March 31, 2020
 
Level I
 
Level II
 
Level III
 
Total
Securities Sold Short
$
115,984

 
$

 
$

 
$
115,984

Foreign Exchange Contracts and Options

 
20,258

 

 
20,258

Unfunded Revolver Commitments

 

 
70,597

(1) 
70,597

Other Derivatives

 
60,460

 

 
60,460

Debt Obligations of Consolidated CFEs

 
13,130,703

 

 
13,130,703

Total Liabilities
$
115,984

 
$
13,211,421

 
$
70,597

 
$
13,398,002

 
December 31, 2019
 
Level I
 
Level II
 
Level III
 
Total
Securities Sold Short
$
251,223

 
$

 
$

 
$
251,223

Foreign Exchange Contracts and Options

 
39,364

 

 
39,364

Unfunded Revolver Commitments

 

 
75,842

(1) 
75,842

Other Derivatives

 
34,174

 

 
34,174

Debt Obligations of Consolidated CFEs

 
14,658,137

 

 
14,658,137

Total Liabilities
$
251,223

 
$
14,731,675

 
$
75,842

 
$
15,058,740


(1)
These unfunded revolver commitments are classified as Level III within the fair value hierarchy and valued using the same valuation methodologies as KKR's Level III credit investments.


The following tables summarize changes in investments and debt obligations measured and reported at fair value for which Level III inputs have been used to determine fair value for the three months ended March 31, 2020 and 2019, respectively: 
 
Three Months Ended March 31, 2020
 
Level III Investments
 
Private
Equity
 
Credit
 
Real Assets
 
Equity Method - Other
 
Other Investments
 
Total
Balance, Beg. of Period
$
9,871,682

 
$
9,217,759

 
$
3,567,944

 
$
1,656,045

 
$
2,154,755

 
$
26,468,185

Transfers In / (Out) Due to Changes in Consolidation

 

 

 

 

 

Transfers In

 

 

 

 

 

Transfers Out

 

 

 

 

 

Asset Purchases / Debt Issuances
114,099

 
1,227,138

 
168,640

 
2,098

 
87,224

 
1,599,199

Sales / Paydowns

 
(620,645
)
 
(210,941
)
 

 
(26,782
)
 
(858,368
)
Settlements

 
(39,473
)
 

 

 

 
(39,473
)
Net Realized Gains (Losses)

 
(20,450
)
 
53,363

 

 
(9,057
)
 
23,856

Net Unrealized Gains (Losses)
(636,333
)
 
(737,333
)
 
(851,015
)
 
(305,797
)
 
(528,523
)
 
(3,059,001
)
Change in Other Comprehensive Income

 
(22,031
)
 

 

 

 
(22,031
)
Balance, End of Period
$
9,349,448

 
$
9,004,965

 
$
2,727,991

 
$
1,352,346

 
$
1,677,617

 
$
24,112,367

 
 
 
 
 
 
 
 
 
 
 
 
Changes in Net Unrealized Gains (Losses) Included in Net Gains (Losses) from Investment Activities related to Level III Assets and Liabilities still held as of the Reporting Date
$
(636,333
)
 
$
(750,837
)
 
$
(844,905
)
 
$
(305,797
)
 
$
(528,523
)
 
$
(3,066,395
)
 
 
 
 
 
 
 
 
 
 
 
 


32

Notes to Financial Statements (Continued)

 
Three Months Ended March 31, 2019
 
 
 
Level III Investments
 
Level III 
Debt Obligations
 
Private
Equity
 
Credit
 
Investments of
Consolidated
CFEs
 
Real Assets
 
Equity Method - Other
 
Other Investments
 
Total
 
Debt 
Obligations of
Consolidated
CFEs
Balance, Beg. of Period
$
6,128,583

 
$
6,764,730

 
$
2,082,545

 
$
3,157,954

 
$
1,503,022

 
$
2,116,586

 
$
21,753,420

 
$
1,876,783

Transfers In / (Out) Due to Changes in Consolidation

 
(1,598
)
 

 

 

 
(42,864
)
 
(44,462
)
 

Transfers In

 

 

 

 

 

 

 

Transfers Out
(56,029
)
 

 

 

 

 

 
(56,029
)
 

Asset Purchases / Debt Issuances
409,621

 
811,957

 

 
67,302

 
137,909

 
95,135

 
1,521,924

 

Sales / Paydowns
(99,603
)
 
(1,028,063
)
 
(38,295
)
 
(130,571
)
 
(41,126
)
 
(27,433
)
 
(1,365,091
)