Upload
ravi-chaurasia
View
24
Download
7
Embed Size (px)
Citation preview
KKR Asset Management Bill Sonneborn Bob Howard Erik Falk
July 17, 2012
CONFIDENTIAL AND PROPRIETARY
For One-on-One Use by
Investment Professionals Only
1 1
IMPORTANT INFORMATION
This presentation is furnished on a confidential basis exclusively to the named recipient to this presentation (the “Recipient”) and is not for redistribution or public use.
The data and information presented are for informational purposes only. The information contained herein should be treated in a confidential manner and may not be
transmitted, reproduced or used in whole or in part for any other purpose, nor may it be disclosed without the prior written consent of KKR Asset Management LLC
(“KAM”). By accepting this material, the Recipient agrees not to distribute or provide this information to any other person.
The information in this presentation is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. The information
in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, KAM does not guarantee the accuracy, adequacy or
completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or
other decision. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any
investment strategy.
The information in this presentation may contain projections or other forward-looking statements regarding future events, targets or expectations regarding the strategies
described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from
that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate
and may be superseded by subsequent market events or for other reasons. KAM assumes no duty to, and does not undertake to update forward looking statements.
Participation of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in the public investment process is subject to applicable law and inside information
barrier policies and procedures, which may limit the involvement of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in certain circumstances and
KAM’s ability to leverage such integration with KKR. Discussions with Senior Advisors and employees of KKR’s managed portfolio companies are also subject to the inside
information barrier policies and procedures, which may restrict or limit discussions and/or collaborations with KAM.
References to “KKR Capstone” or “Capstone” are to all or any of Capstone Consulting LLC, Capstone Europe Limited, and KKR Capstone Asia Limited, each of which is
owned and controlled by their senior management and not by KKR. KKR Capstone uses the “KKR” name under license from KKR. KKR Capstone is not a subsidiary or
other affiliate of KKR.
I
II
III
I KAM Overview Bill Sonneborn
II Credit Platforms Erik Falk
1. Leveraged Credit Platform
2. Direct Lending Platform
3. Mezzanine Platform
4. Special Situations Platform
III Direct Hedge Fund Strategy Erik Falk / Bob Howard
1. KKR Credit Relative Value
2. KKR Equity Strategies
2
TABLE OF CONTENTS
2
I. KAM Overview
4 4
KKR BUSINESS PLATFORM
Note: As of March 31, 2012. Please see Endnotes for important information regarding the calculation of AUM. Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. (1) AUM for the Marketable Securities Division includes non-fee paying AUM. The Marketable Securities Division of KAM claims compliance with GIPS.
• Team of ~45
professionals focused
on building, maintaining
and expanding
client relationships
• Integrated investment
and transaction processes
• Share best practices
across KKR’s portfolios
• Team of ~60 senior
operations professionals
• Work side-by-side with
portfolio company senior
managers on operational
improvements
• ~30 senior industry
experts
• Provides global network
of industry insights
and contacts
Capital Markets & Principal Activities
Marketable Securities Division(1)
KKR Capstone
Senior Advisors Client and Partner
Group (“CPG”) Stakeholder Management
Alternative Investments
Division
Real Assets
Private Equity
Private Markets ($46.0bn AUM)
Public Markets / KAM ($16.3bn AUM)
Marketable Securities Division
Alternative Investments Division
KKR ASSET MANAGEMENT (“KAM”) OVERVIEW
KKR launched KAM as its credit investing business in 2004. Focused on leveraging the intellectual capital of KKR’s more than 800
people, advisors, and 77 PE portfolio companies, KAM currently manages approximately $16.3 billion in assets with over 100 dedicated
employees, including ~60 investment professionals
KAM AUM by Strategy(1)
($ in millions)
• Bank Loans
• High Yield
• Bank Loans Plus High Yield
• Opportunistic Credit
• Mezzanine
• Special Situations (Focus
on Distressed and Rescue
Finance)
• Long / Short Equity
• Long / Short Credit
• Direct Lending
Capital Solutions (multi asset-class products spanning all KKR strategies)
1) Data as of March 31, 2012. Please see Endnotes for important information regarding the calculation of AUM. Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
KAM Strategies
5
Separately Managed Accounts
Funds
Special
Situations
$1,366
Mezzanine
$1,412 Leveraged
Credit
$12,239
Private Markets
$919 Equities
Strategies
$371
6 6
SENIOR INVESTMENT PROFESSIONALS
ROLE YEARS OF EXPERIENCE
Marc Ciancimino Mezzanine Investment Analyst 15
Scott Cullerton Private Credit Investment Analyst 9
Erik A. Falk Co-Head of Leveraged Credit 19
Ami Goldfein Public Equities Investment Analyst 11
Frederick M. Goltz Head of Credit and Mezzanine 18
Dev Gopalan Industry Credit Investment Analyst 9
Robert Howard Head of Public Equities 16
Scott Henkin KKR Credit Relative Value 15
Omar Kara Public Equities Investment Analyst 12
Jeremiah S. Lane Industry Credit Investment Analyst 9
Ralph Marron Head Public Equities Trader 29
John Massad Client Portfolio Management (Equity Strategies) 13
Mubashir Mukadam Special Situations Investment Analyst 13
John M. Reed Head Credit Trader 15
Christopher A. Sheldon Co-Head of Leveraged Credit 13
Jason Ridloff Mezzanine Investment Analyst 16
William C. Sonneborn Business Unit Head 20
Lynette Vanderwarker Client Portfolio Management (Credit Strategies) 15
Jamie M. Weinstein Co-Head of Special Situations 13
Nathaniel L. Yap Industry Credit Investment Analyst 12
Nathaniel Zilkha Co-Head of Special Situations 13
The KAM team has ~60 dedicated equity and credit professionals with the 19 senior-most investment professionals averaging nearly
15 years of experience and ability to leverage deep resources
Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
KAM INVESTMENT TEAM STRUCTURE
Industry Analysts
KKR Private Equity Industry Groups
Investment Committee
Leveraged Credit
Execution Team
Risk & Trading
~60 KKR Capstone Professionals
~30 KKR Senior Advisors
~30 KKR Capital Markets Professionals
KKR Public Affairs, IT, Legal / Compliance, etc.
Mezzanine
Distressed / Special
Situations
Equities Direct
Lending
7 7
KAM’s focus is on utilizing a fundamental investment approach and leveraging proprietary resources to seek out long-term capital
appreciation and attractive risk-adjusted returns over a 3-5 year investment horizon (not short-term trading or index replication)
Note: Portfolio managers may use some or all of the techniques described above or herein. Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
• “Single-platform sourcing”
• KAM’s team has long-standing relationships
with a wide network of issuers
• KKR is a valued client to Wall Street and
often receives priority calls regarding
proprietary deals
• KAM’s Direct Lending, Mezzanine and
Distressed Debt teams have experienced,
dedicated sourcing professionals who are
focused on finding opportunities through PE
sponsors, banks and companies/issuers
• KAM’s team leverages the full KKR network:
Private Equity, KKR Capital Markets, KKR
Capstone, portfolio company management and
KKR’s Senior Advisor network
• We appreciate that our investors have
entrusted us with their capital, and we
steward it as if it were our own
• KAM recognizes that credit investing comes
with limited upside (par) and asymmetric
downside risk
• KAM Investment Committee (“IC”)
requires detailed, proprietary research
and a thorough IC memo for any credit
considered for portfolio inclusion
• Each approved name is re-underwritten
each quarter by the Portfolio Management
Committee; this discipline has resulted in
extremely low default statistics
• Each investment decision is predicated on
a clear thesis, leveraging appropriate Firm
resources and knowledge
• KAM will only invest in a credit once its
deep due diligence analysis has distinguished
a competitive advantage and a differentiated
view relative to the market
• Re-evaluate and re-underwrite each credit
in the quarterly Portfolio Management
Committee meetings
• Active portfolio management process
necessitates ongoing re-evaluation of
portfolio structure and risk measures;
continuous portfolio optimization
Proprietary Sourcing
Capital Preservation
Active Portfolio
Management
KAM INVESTMENT PHILOSOPHY
8 8
KAM INVESTMENT PROCESS
Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
KAM Investment Approval Process
KAM Investment Professionals
KKR Private Equity Investment
Professionals
KKR Capital Markets
KKR Senior Advisors
KKR Relationships
KAM Analysts
KKR Private Equity Professionals
KKR Capstone
KKR Senior Advisors
KKR Portfolio Companies
Initial Investment Discussion
Final Investment Approval
Active Portfolio Management
Sourcing Due Diligence
9
CREDIT INVESTMENT STRATEGIES
Note: KAM will consider a number of factors, including, for example, projected cash flows, projected future valuations of target assets and businesses, relevant other market dynamics (including interest rate and currency markets), anticipated contingencies, and regulatory issues. Actual results and events may, however, differ materially from the assumptions underlying such analysis. Such returns are subject to significant economic, market, and other uncertainties that may adversely affect the performance of actual investments. Investments may be acquired in respect of any KAM fund, vehicle of account that have an anticipated internal rate of return below or above the projected return indicated herein. Such projections are neither guarantees nor predictions or projections of future performance of any KAM fund, vehicle or account, and are not to be relied upon as such. There can be no assurance that any particular investment or strategy will achieve such returns, that KAM will achieve the investment objectives noted above or that investors in any KAM fund, vehicle or account will receive a return of capital. An investment’s targeted gross and net internal rate of return may change over time and may go down as well as up.
KAM has a number of active investment strategies across its Marketable Securities and Alternative Investments divisions that
represent a range of risk/return and liquidity profiles
Marketable Securities Division
Alternative Investments Division
Bank Loans Bank loans based on fundamental credit analysis, with a significant focus on principal protection
Bank Loans Plus High Yield
Bank loans and high yield based on fundamental credit analysis, with a significant focus
on principal protection
High Yield High yield bonds based on fundamental credit analysis
Opportunistic Credit
Dynamic allocations to bank loans, high yield,
mezzanine and distressed debt
Mezzanine Directly sourced mezzanine financings
Special Situations Strategic investments in
distressed companies
Retu
rn
Po
ten
tial
Risk
Proprietarily sourced senior debt financings Direct Lending
II.1 Leveraged Credit Platform Marketable Securities Division
The Marketable Securities Division of KAM claims compliance with GIPS.
• Member of KKR and Co-
head of Leveraged
Credit; joined KKR in
2008
• Former Managing
Director at Deutsche
Bank Securities Inc.
where he was most
recently Global Co-Head
of the Securitized
Products Group
• Over 19 years of
industry experience
• Member of KKR and Co-
head of Leveraged
Credit; joined KKR in
2004
• Former Vice President,
Senior Investment
Analyst at Wells Fargo
Bank, High Yield
Securities Group
• Over 13 years of
experience in leveraged
credit
11
LEVERAGED CREDIT SENIOR INVESTMENT TEAM
~60 KKR Capstone Professionals(1)
~60 Dedicated KAM Investment Professionals
~30 KKR Capital Markets Professionals(1)
~150 KKR Private Equity Investment Professionals(1) ~30 KKR Senior Advisors
Experienced Team with
Diverse Backgrounds
Erik Falk, Co-Head Chris Sheldon, Co-
Head Nat Yap Jeremiah Lane John Reed
• Joined KKR in 2004
• Former senior
investment analyst at
J.P. Morgan
specializing in paper,
packaging and
chemicals
• Over 12 years of
experience in
leveraged credit
• Joined KKR in 2005
• Former Associate in
the Investment
Banking/Technology,
Media and Telecom
Group at J.P. Morgan
Chase
• Over 9 years
industry experience
• Head of Credit
Trading; joined KKR in
2008
• Former Associate
Director at Bear
Stearns & Co. in
Institutional Sales &
Trading
• Over 15 years of
industry experience
Leveraged Credit Senior Team
(1) Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. Marketable Securities
Division
Dev Gopalan
• Joined KKR in 2010
• Former Principal at the
Canada Pension Plan
Investment Board in
Private Investments
and Private Debt
• Over 9 years
industry experience
LEVERAGED CREDIT STRATEGY OVERVIEW
12
MA
RK
ET
O
PP
OR
TU
NIT
Y
IN
VE
STM
EN
T
OB
JEC
TIV
E
PO
RTFO
LIO
FO
CU
S
IN
CEP
TIO
N
DA
TE
Secondary
Market Trading
Asset-Based
Financing
Private Lending/
Recapitalizations
Control
Investing Bank Loans
Bank Loans
Plus High Yield High Yield Opportunistic Credit
• Strong risk-adjusted
return potential
• Senior position in
capital structure
• Call protection based on
discounted purchase price
• LIBOR floors on growing
percentage of loans
• Strong risk-adjusted return
potential
• Strong risk-adjusted
return potential
• Favorable market technicals
• Relative liquidity
• Call Protection
• Strong risk-adjusted
return potential
Outperform above the relevant
LSTA index over a 3 to 5 year
period while focusing on the
most senior part of the
capital structure
Outperform above a blended
index comprised of the Merrill
Lynch HY index and LSTA
index over a 3 to 5 year period
Outperform above the Merrill
Lynch HY index over a 3 to 5
year period
Outperform above the Merrill
Lynch HY index over a 3 to 5
year period
Bank loans based on
fundamental credit analysis,
with a significant focus on
principal protection
Bank loans and high yield
based on fundamental credit
analysis, with a significant
focus on principal protection
High yield bonds based on
fundamental credit analysis,
with a significant focus on
principal protection
Dynamic allocations
across the full spectrum
of below investment grade
credit markets
October 2004 July 2008 October 2004 May 2008
Marketable Securities Division
Note: There is no guarantee that any investment objective will be met.
PERFORMANCE HISTORY FOR MARKETABLE SECURITIES STRATEGIES AS OF MARCH 31, 2012
13 Note: See Endnotes for important information relating to the information presented herein. The High Yield Carve Out is supplemental to the GIPS performance presentations shown in the Endnotes. Past performance is not indicative of future results and there can be no assurance that comparable results will be achieved in respect of such strategies going forward or that investors in any KAM fund, vehicle or account will receive a return of capital.
Inception-to-Date Annualized Performance vs. Benchmark by Strategy
Marketable Securities Division
10.9%11.4%
16.7%
10.2%10.7%
15.0%
8.1%8.1%
10.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Bank Loans Plus High Yield
(65% LSTA / 35% BoA ML HY) Inception July 2008
High Yield Carve Out
(100% BoA ML HY) Inception September 2004
Supplemental Information
Opportunistic Credit
(100% BoA ML HY) Inception May 2008
KAM Gross KAM Net Benchmark
II.2 Direct Lending Platform Marketable Securities Division
The Marketable Securities Division of KAM claims compliance with GIPS.
• Member of KKR and Head of KAM Credit and Mezzanine
• Joined KKR in 1995
• Former Co-head of the Energy and Natural Resources private equity team
• Over 19 years of industry experience
• Member of the KAM and Capital Solutions Investment Committees
15 15
SENIOR LEVERAGED CREDIT INVESTMENT & ORIGINATION TEAM
Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
~60 KKR Capstone Professionals(1)
~60 Dedicated KAM Investment Professionals and Trading Team
~30 KKR Capital Markets Professionals
~150 KKR Private Equity Investment Professionals ~30 KKR Senior Advisors
• Member of KKR and Head of KAM
• Joined KKR in 2008
• Former President and COO of The TCW Group, Inc.
• 19 years of industry experience
• Member of the KAM and Capital Solutions Investment Committees
Bill Sonneborn
• Member of KKR and Co-head of Leveraged Credit; joined KKR in 2008
• Former Managing Director at Deutsche Bank Securities Inc.; Global Co-Head of the Securitized Products Group
• Over 19 years of industry experience
Erik Falk
• Joined KKR in 2008
• Formerly Managing Director with GSC Group in the European Mezzanine business
• Over 15 years industry experience in sourcing and evaluating middle and large market transactions
Marc Ciancimino
• Joined KKR in 2004
• Former senior investment analyst at J.P. Morgan specializing in paper, packaging and chemicals
• Over 11 years of experience in leveraged credit
Nat Yap
• Joined KKR in 2008
• Formerly at Credit Suisse/Donaldson, Lufkin & Jenrette specializing in leveraged finance
• Over 15 years industry experience
Jason Ridloff
• Joined KKR in 2006
• Former Vice President at GE Capital focused on media and healthcare
• Over 10 years industry experience
Doug Tapley
• Member of KKR and Head of KCM; joined KKR in 2006
• Former Managing Director and Co-Head of North American Equity Capital Markets at Citigroup
• Member of Risk Management Committee
Craig Farr
Fred Goltz
• Member of KKR and Co-head of Leveraged Credit; joined KKR in 2004
• Former Vice President, Senior Investment Analyst at Wells Fargo Bank, High Yield Securities Group
• Over 13 years of experience in leveraged credit
Chris Sheldon
• Joined KKR in 2005
• Former Associate in the Investment Banking/Technology, Media and Telecom Group at J.P. Morgan Chase
• Over 9 years industry experience
Jeremiah Lane
• Joined KKR in 2010
• Previously, Principal in Private Investments at Canada Pension Plan Investment Board
• Over 9 years industry experience
Dev Gopalan
• Joined KKR in 2008
• Former Vice President at Morgan Stanley Capital Partners; initial member of Morgan Stanley’s renewed Private Equity group
• Over 9 years industry experience
Scott Cullerton
• Member of KKR and Head of KCM Europe; joined KKR in 2008
• Former Head of JP Morgan’s European leveraged capital markets business
• Over 20 years industry experience
John Empson
• Co-Head of KCM North America; joined KKR in 2009
• Former Managing Director and Head of U.S. High Yield Capital Markets at Barclays Capital
• Over 17 years industry experience
Jeff Rowbottom
Experienced Team with Diverse Backgrounds
• Joined KKR in 2010
• Former Managing Director at Barclays in Investment Banking focusing on leveraged finance
• Over 20 years industry experience
Peter Glaser
Denotes KCM employees who are not employed by KAM
Marketable Securities Division
WE BELIEVE REFINANCING SUPPLY WILL SIGNIFICANTLY EXCEED DEMAND
• Despite the recent flurry of
refinancing activity,
significant volume remains in
the middle market space
• Traditional capital providers
are impaired
– Few new CLOs are being issued
– The bulk of existing CLOs are
exiting their reinvestment
periods
– Consequently, one of the
largest historic suppliers of
capital has largely left the
market for the time being
16
(1) As of March 31, 2012. “Middle Market” is defined as issuers with EBITDA of $50 million or less. Standard and Poor’s LCD Middle Market Lending 1Q12 Review.
(2) As of July 25, 2011. Source: LCD News.
Middle Market Loan Par Outstanding Volume ($ billions)(1)
Number of CLOs In Reinvestment Period(2)
1.63.4
5.3 5.9 6.1 6.9 7.0
10.6
16.8
20.7 20.418.5 18.3
11.8
14.4 13.7
$0
$5
$10
$15
$20
$25
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
196
161
114
48
2 0
0
60
120
180
240
2010 2011 2012 2013 2014 2015
Note: This presentation reflects the current market views, opinions and expectations of KAM based on its historic experience. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment or any KAM fund, vehicle or account which, may differ materially, and are not to be relied upon as such. There can be no assurance that investors in any KAM fund, vehicle or account will receive a return of capital.
Marketable Securities
Division
17
ENVIRONMENT LEADS TO LENDER-FRIENDLY TERMS
• Middle market debt presents
potential for favorable terms
and structure
– Leverage levels are lower
– Spreads are wider
– Terms are tighter
– Coverage ratios are higher;
– Often come with arrangement
fees and / or OID
• We are seeing compensation
for middle market transactions
through structure and pricing,
which was not as apparent in
2007
Note: The information in this slide is intended to be generally indicative of a company's capital structure as well as the terms of middle market investments in a typical leveraged buyout transaction, based on KAM's experience, its belief as to current market conditions and its expectations as to market conditions in the near future. The actual capitalization of KKR Direct Lending Strategy’s portfolio companies and the terms of its investments may differ substantially from this illustration on a case-by-case basis. There can be no guarantee that future capital structures or investment terms will correspond with KAM's expectations. “Middle Market” defined as issues with annual EBTIDA of $50 million or less. (1) Source: LCD Quarterly Leveraged Lending Report. Data as of March 31, 2012.
Typical Transaction Comparison
Large Corporate Middle Market Large Corporate Middle Market
Subordinated Debt
Senior Unsecured
Senior Secured Debt
6.2x 5.6x
4.5x
4.3x
Below 3.25x Secured Leverage
2007 Vintage 2011 Vintage
Large Corporate Middle Market
Nominal Spread(1) 568bp 701bp
Call Protection Not frequent Hard or soft call
Fee / OID Often small OID Typically significant fees or OID;
2-4%
Covenants Limited; mostly incurrence based Extensive; mostly maintenance based
Diligence Syndicate level Much more than syndicate level
Documentation Borrower-friendly Creditor-friendly
Investors Wide syndication, Including CLOs,
mutual funds, hedge funds and banks
Likely to be limited to relationship investors with long-term investment horizon
Marketable Securities Division
18
KKR DIRECT LENDING STRATEGY SUMMARY
(1) Based on current market rates and conditions, subject to change. (2) Target returns are based on statistical analysis of historical information. There is no guarantee that targeted returns will be realized or achieved or that an investment strategy will be successful. Investors should keep in mind that the securities markets are
volatile and unpredictable. There are no guarantees that the historical performance of an investment, portfolio, or asset class will have a direct correlation with its future performance. Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
Strategy
Sourcing Proprietarily sourced secured debt either through direct origination or “clubbed” situations from 3rd parties
Seniority Focus on secured debt; primarily 1st lien (at least 75%) and some 2nd lien loans and bonds
Target Pricing
Cash coupons of L + 5-9% with PIK of 0-5%;
Total Coupon: L+ 5-10%;
Libor floors of 1-2%;
OID/Fees in the 1-4% range
Size Focus on middle market companies:
$25 to $100mm of EBITDA
Documentation Highly-negotiated, well-structured transactions
Financing Proceeds Financings primarily for acquisitions, recapitalizations,
leverage buyouts, growth, working capital and/or general corporate purposes
Leverage Seeks 1.5x-2.0x leverage with financing rates of L+250bp(1), gross equity returns in the high teens(2)
Liquidity Low liquidity
Geography Global, with a North American focus
Targeted Returns Target net returns in 11-14% range(2)
Marketable Securities Division
WASTEQUIP
Company Overview
• Wastequip is the largest manufacturer of waste handling and recycling equipment used to collect, process and transport solid and liquid waste in North America, with product lines that include steel containers, plastic containers, hoists, compactors, balers, tarpers, vacuum trucks, parts and services
• Founded in 1989, Wastequip is headquartered in Charlotte, North Carolina and has 24 manufacturing facilities in North America
• The Company serves over 5,000 customers nationwide, including national, regional and local waste haulers, chain and convenience stores, municipalities, distributors, and recycling companies
KKR Edge
• KKR has a strong relationship with the transaction intermediary, Goldman Sachs, with different parts of KKR having been an important client to Goldman for a number of years. This relationship was not just institutional in nature; the KKR deal team also had prior relationships with the deal team at Goldman
• KKR had followed this situation for over a year, first as a distressed opportunity and then anticipating the new issue. As a result, we were able to act quickly, drive terms, and invest in a meaningful size across KAM’s managed funds and accounts
Situation Overview
• Wastequip (“the Company”) completed a recapitalization on June 15th, 2012. The recapitalization included a new $150 million term loan and $40 million revolver. Proceeds from the Term Loan were be used to finance a restructuring
• Through recapitalization, Wastequip eliminated over $500 million of debt and reduced its annual interest expense by over 80%
• The investment opportunity arose because of KAM’s relationship with the transaction intermediary, Goldman Sachs, and focus on the name when it was distressed, highlighting the benefit of KAM’s multi-strategy approach
Investment Thesis / Risks / Diligence
Investment Thesis
• Strong market position: Company derives 90% of its revenue from products in which it has a leading position. On the steel products side of the business, Wastequip is the only company in North America with national scale and is 5x the size of its next largest competitor
• Company is early in its cycle and has solid earnings momentum: LTM EBITDA of $38m vs. peak of $77m and trough of $19m. Backlog/orders are improving significantly
• Non‐discretionary nature of product/market. While timing of purchases of waste
equipment can be delayed, and the waste equipment market is highly cyclical, over time we believe waste collection is essential and growing, and the company’s products are essential to this
• Localized market for steel products
• Free Cash Flow Profile: LTM EBITDA of $38m vs. FCF breakeven of $17m ($5m capex and $12m cash interest)
• Low debt / historical EV
Investment Risks
• Plastics business has seen continued top-line declines through 2011
• Highly cyclical industry – the majority of products are large-ticket discretionary goods, in addition, waste collection is tried to construction
• Commodity inputs – steel and resin together represent half of COGS, or 40% of revenue
Summary of Terms
Transaction Overview • Borrower/Company: Wastequip, LLC (the “Company”) • Industry: Waste Handling / Recycling • Geography (Headquarters): United States (Charlotte, NC) • Purpose: Refinance Existing Term Loan • Sponsor/Corporate: Centerbridge • LTM Revenue / EBITDA: $344.0 million / $38.0 million • Sr. Sec / Total Leverage: 3.9x / 3.9x
Facility Overview • New Facility: Senior Secured Term Loan • Facility Size: $150 million • KKR LP Hold: $24.8 million • UOP: Restructuring • Key Terms: L+675, 1.50% LIBOR Floor, 97.5 OID, 1% amortization
19 Marketable Securities Division
THINGS REMEMBERED
20
Situation Overview
• Things Remembered Inc. (“Things Remembered”, or “the Company”), headquartered in Highland Heights, Ohio, is the leading destination for personalized gifts in the U.S. with 40 years of brand history. It was previously acquired by private equity firms Bruckmann, Rosser, Sherrill & Co. and Gordon Brothers Merchant Partners in 2006
• On April 22, 2012, Madison Dearborn Partners signed a definitive agreement to acquire Things Remembered for a purchase price of $295mm, or ~7.5x LTM pro forma adjusted EBITDA
• The financing structure is as follows: $30mm Senior Secured Revolver, $117mm Senior Secured Term Loan, $30mm Mezzanine Notes, and $163mm equity contribution from the sponsor, management, and mezzanine investors
• KCM acted as the Lead Arranger and Lead Bookrunner for the Senior Secured Facilities around KAM’s commitment. KAM committed to $35mm of the tranche
Investment Thesis / Risks / Diligence
Investment Thesis
• Leading player in the personalized gift space. As evidence of the uniqueness of its concept, most customers cannot name a competitor
• Strong management team that has led impressive improvement in business since taking over in 2006; resilient performance during the recent economic downturn
• Attractive customer demographics, with high degree of loyalty and strong database
• Lower than average seasonality given event-driven nature of purchases (weddings, birthdays, etc.)
• Highly profitable store base with strong unit level economics
• Opportunities for business improvement including both store growth and direct channel/online growth, as well as driving personalization revenue through new initiatives
Investment Risks
• Limited history operating at current profitability levels -business had underperformed prior to current management team
• Competitive landscape is benign today, but there is potential for increased pressure
• High operating leverage with rent adjusted leverage of 5.5x
• Mall-based, discretionary retailer dependent on keeping fresh product in the stores
• Execution risk. Management is in the process of finalizing an acquisition and plans to open new stores to further expand the business
Summary of Terms
Transaction Overview • Borrower/Company: Things Remembered • Industry: Retail • Geography (Headquarters): United States (Highland Heights, OH) • Purpose: Sale • Sponsor/Corporate: Madison Dearborn Partners, LLC • LTM Revenue/EBITDA: $305.0million / $41.4million • Sr. Sec / Total Debt: 2.8x /3.5x
Facility Overview • Facility: Senior Secured Term Loan • Facility Size: $117 million • KKR LP Hold: $35 million • UOP: Acquisition Financing • Key Terms: L+650, 1.5% LIBOR floor, 98.0 OID (plus underwriting fees), 1%
amortization, 101 soft call for year 1, 50% FCF sweep; 40mm Incremental Facility subject to leverage test, maintenance covenants and MFN
Company Overview
• Things Remembered operates in the highly fragmented $15bn U.S. gift industry and is a leading destination for personalized gifts in the U.S. The majority of their products sold are engraved
• The company operates a broad geographic network of 650 retail locations in 49 states, as well as a rapidly growing online business
• All locations are equipped with engravers. Proprietary products are designed to establish emotional connection with the customer and create high levels of customer satisfaction
• High quality retail model in a variety of configurations with good growth and strong store-level margins across both full store locations and smaller footprint kiosks
KKR Edge
• KKR has significant credit investment experience in the retail space
• This deal highlights KKR’s capability as a one-stop-shop, complementing its ability to offer investment strategies across flexible pools of capital with its capital market platform. Our level of input is a direct result of our early involvement with the Company and sponsors as a potential capital markets arranger, mezzanine provider, or lending partners investor
The investments shown on pages 26 though 31 represent all transactions completed in KKR Lending Partners LP as of March 31, 2012. The specific investments identified are not representative of all of the investments purchased, sold or recommended for KAM clients, and it should not be assumed that the investments identified was or will be profitable. Actual holdings will vary for each client and there is no guarantee that a particular client’s account will hold any or all of the investments listed.
Marketable Securities Division
21
KKR DIRECT LENDING STRATEGY MODEL TRACK RECORD
37 Obligors, 43 individual
transactions; ~$1.8 billion
invested
• 35 1st Lien deals, 8 2nd Lien deals
• 75%/25% reweighting of 1st vs.
2nd lien more indicative of the
proposed strategy
– Generated a 8.2% unlevered
gross IRR, outpacing broad
market leveraged loans, as
represented by the S&P LSTA
index returns of 5.0%
– Applying leverage, 5 year
hypothetical returns would be in
the mid-teens
Note: See page 1 for important information relating to the information presented herein. Past performance is not indicative of future results and there can be no assurance that comparable results will be achieved in respect of such strategies going forward or that investors in any KAM fund, vehicle or account will receive a return of capital. All data is as of March 31, 2012. The performance presented reflects model performance an investor may have obtained had it invested in the manner shown and does not represent performance that any investor actually attained. The model performance presented is based upon the following assumptions: leverage calculation assumes 70% advance rate, financing rate of L+225, and upfront fee of 1.5% and a 3 year investment period with a turnover of 30%. Calculation assumes current 5 year swap rate. Credits chosen for the track record meet all of the following criteria: KAM participated in more than 15% of the tranche at the time of trade, secured transactions only, time period from KAM inception to March 31, 2012. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Model returns have many inherent limitations and may not reflect the impact that material economic and market factors may have had on the decision-making process if client funds were actually managed in the manner shown. Actual performance may differ substantially from the model performance presented. Changes in the assumptions may have a material impact on the model returns presented. Strategy was based in a declining rate environment. Other periods selected may have different results, including losses. There can be no assurance that KAM will achieve profits or avoid incurring substantial losses.
KAM Model Gross Unlevered Performance vs. S&P LSTA
KAM IRR S&P LSTA
KKR Direct Lending Strategy (75% 1st Lien/25% 2nd Lien) 8.2% 5.0%
KAM Gross Hypothetical Performance Assuming Leverage Deployment
Annualized
1 year 3 year 5 year
15.7% 17.0% 17.9%
Cumulative
1 year 3 year 5 year
15.7% 60.3% 127.7%
KKR Direct Lending Strategy Deal Volume & Gross Unlevered IRR Since 2005 ($mm)
$71.5
$407.4
$359.9
$0.0
$237.6
$373.3$362.5
9.1%
6.3%4.6%
14.8% 14.2%
10.4%
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010 2011
Notional Gross IRR
II.3 Mezzanine Platform Alternative Investments Division
The Alternative Investments Division of KAM does not claim compliance with GIPS.
• Member of KKR and Head
of KKR Credit and
Mezzanine
• Joined KKR in 1995
• Formerly Co-head of the
Energy and Natural
Resources private equity
industry team
• Over 18 years of industry
experience
• Member of the KAM and
Capital Solutions
Investment Committee
• Joined KKR in 2008
• Formerly Managing
Director with GSC Group
in the European
Mezzanine business
• Over 15 years industry
experience in sourcing
and evaluating middle
and large market
transactions
MEZZANINE SENIOR INVESTMENT TEAM
23
~60 KKR Capstone Professionals(1)
~60 Dedicated KAM Investment Professionals
~30 KKR Capital Markets Professionals(1)
~150 KKR Private Equity Investment Professionals(1) ~30 KKR Senior Advisors
Experienced Team with
Diverse Backgrounds
Fred Goltz, Head of Mezzanine
Marc Ciancimino Jason Ridloff Doug Tapley
• Joined KKR in 2008
• Formerly at Credit
Suisse/Donaldson,
Lufkin & Jenrette
specializing in
leveraged finance
• Over 15 years industry
experience
• Joined KKR in March
2006
• Formerly Vice President
at GE Capital
specializing in media,
communications and
healthcare
• Over 10 years of
investment experience
(1) Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. Alternative Investments
Division
Scott Cullerton
• Joined KKR in 2008
• Former Vice President at Morgan Stanley Capital Partners; initial member of Morgan Stanley’s renewed Private Equity group
• Over 9 years industry experience
Mezzanine Senior Team
24
SIGNIFICANT DEMAND DRIVER FOR MEZZANINE OVER COMING 5 YEARS
Numerous
non-sponsor
companies with
financing needs
~$380 billion of
un-invested private
equity capital
commitments
seeking transactions(1)
Additional deal
flow expected to be
driven by ongoing
restructuring of
corporate landscape
~$850 billion of
leverage debt
due for
refinancing in
next 5 years(2)
Majority of
Mezzanine investors
are focused
on smaller sized
transactions
Over $70 billion of
mezzanine capital
raised globally in
last 5 years, at least
half of which
has already been
invested(1)
Demand Supply
• We believe private equity activity and a major wave of refinancings will drive a significant demand for mezzanine
• We believe this demand is relatively under-supplied due to the limited amount of mezzanine capital available
(1) Source: Preqin; data based on global fundraising as of April 2012. (2) Debt maturities from JP Morgan, as of December 2011. Alternative Investments
Division
25
KEY STEPS TO STRONG MEZZANINE INVESTING
• Global network
• Integrated “One-Firm”
origination capabilities
• Leverage KKR’s scale advantage with
Wall Street
• ~ $3 billion of KAM-sourced deals
since inception in 2004
Sourcing
We believe that the following characteristics distinguish KKR’s approach to mezzanine investing:
• Integrated approach
• ~60 Investment professionals
• Industry aligned verticals with private
equity teams
• Underwriting process: private equity-
like diligence
• Invest only when a competitive
advantage exists
Diligence
• High attention to governance issues
• Intensive regular review of
companies/instruments
• Ability to be active investors
Portfolio Construction and Management
KKR Mezzanine Deals Done in Last 5 Years(1)
(1) Portfolio companies presented represent all suitable mezzanine investments from the period 2005 – March 31, 2012. The specific companies identified are not representative of all the companies purchased, sold or recommended for clients, and it should not be assumed that an investment in the companies identified was or will be profitable. Alternative Investments
Division
• Mast, a subsidiary of Limited Brands (“Limited”), is an international apparel sourcing and logistics company that acts as an intermediary between their clients, North American-based specialty retailers and their partners, apparel factories throughout Asia and South America.
• Mast is the #3 player globally in apparel sourcing by market share. The Company offers its customers customized design, sourcing, and logistics value-added services that are mission-critical to its customers. For Mast’s specialty retailer customers, lowest price sourcing is secondary to quality and flexibility.
• Mast’s current customers are comprised of Express, Chico’s/White House Black Market, New York & Company, Victoria’s Secret Direct, Limited Stores, Lane Bryant, and Christopher & Banks.
• Mast generated LTM 6/30/11 revenue and PF Standalone EBITDA of $1,039 million and $38 million, respectively.
Company Overview Transaction Overview
KKR Approach
• On September 13, 2011, Sycamore Partners signed an agreement to acquire Mast Industries, Inc. for a total purchase price of approximately $227.5 million. The EV of the business represents a 6.4x multiple of LTM 9/30/11E EBITDA of $38 million.
• The debt financing will include a new $175 million revolving credit facility ($50 million drawn at close) and $40 million of second lien secured subordinated notes, with total leverage of 2.4x. The Sponsor will invest $79 million of new cash equity (inclusive of KAM equity co-invest) and Limited will roll $76 million (combined 63% of the purchase price).
• The transaction was sourced through our strong relationships with the Sponsor, Sycamore Partners, formed by the ex-Golden Gate Capital retail team Stefan Kaluzny and Peter Morrow. KAM previously worked with Stefan and Peter on our investments in J.Jill, Eddie Bauer, and Express.
• Our competitive advantages in this transaction included: – A long history of working with the Sycamore Partners team and their view of KAM as an
excellent partner;
– Deep knowledge of the specialty retail space in particular through our debt and equity
investments in Toys R Us, J.Jill, Eddie Bauer, and Express;
– Our Capstone team, which helped provide important insight and perspective into the carve-out
economics and transition services agreement
– Insight gained from significant market due diligence
Investment Highlights
• Strong Market Position • Strong Sponsor and Operator (Sycamore
Partners formed by ex-Golden Gate Capital retail team)
• High Cash Flow Conversion • Stable Customer Relationships with
Significant Interdependence • Strong and Experienced Management
Team • Conservative Credit Profile
Alternative Investments Division
• BSN medical is a leading global medical device company that develops, manufactures and markets wound care, compression therapy and orthopedics products mainly to hospitals, pharmacies and sanitary shops
• Headquartered in Hamburg, BSN medical operates in 35 countries, has eleven production sites and employed 3,995 at the end of 2011
• In 2011 BSN medical generated total sales of €667m and EBITDA of €169m (25.3% margin)
Transaction Update Transaction Overview
KKR Approach
• On June 9, 2012, EQT signed an agreement to acquire BSN Medical, for a total consideration of €1.8 billion from Montagu. The EV of the business represents a 10.3x multiple of LTM EBITDA of €174 million
• The acquisition will be financed with €740 million of funded senior term loans bringing senior leverage to 4.25x and €391.5 million of mezzanine brining leverage through the tranche to 6.5x
• KAM started working on this opportunity in February 2012 with EQT by working alongside them to provide mezzanine to help finance the acquisition
• Following a failed pre-emption attempt by EQT in early March which KAM supported, KAM continued to support the sponsor through out the entire auction that followed which ultimately led to the successful SPA signing in June
• We believe our competitive advantages in this transaction included: – Deep knowledge of the medical device space, having gained significant insights from
previous investments in the sector (Convatec, KCI, DJO)
– Approach of leveraging broader KKR franchise, with insights from the PE team (had
analysed the space in detail) and accessing KKR portfolio companies in our diligence
process (HCA and Boots)*
– Deep market due diligence with industry consultants, vendors, resellers and end-
customers
– Strong relationship with EQT
Investment Highlights
• Stable, non-cyclical markets with strong resilience in the last downturn
• Broad diversification of sales across products, geographies and channels limits exposure to one-off events or deteriorations of local market conditions
• Strong positions in multiple market segments with access to strong growth geographies and expansion markets
• Market factors provide competitive advantage
• Leading European sponsor • Strong cash flow conversion
*Participation of KKR Private Equity, KKR Capital Markets, and KKR Capstone personnel in the public markets investment process is subject to applicable law and inside information barrier policies and procedures, which may limit the
involvement of such personnel in certain circumstances and KAM’s ability to leverage such integration with KKR. Discussions with Senior Advisors and employees of the Firm’s managed portfolio companies are also subject to the inside
information barrier policies and procedures, which may restrict or limit discussions and/or collaborations with Public Markets/KAM. Alternative Investments
Division
28
MEZZANINE PERFORMANCE
KKR Mezzanine Partners L.P.
Inception to 3/31/2012
(Amounts in millions)
Date of Investment Invested Realized Unrealized Total Gross Gross Multiple of
Original Investment Name Amount1 Value2 Value3 Value4 IRR5 Invested Amount6
July-10 Altegrity Holdings 27.3$ 5.0$ 26.2$ 31.2$ 8.7% 1.14
November-10 RBS WorldPay, Inc. 64.6 7.4 69.8 77.2 14.6% 1.19
December-10 J Jill 34.2 36.4 - 36.4 21.0% 1.06
February-11 IMCD Group BV 53.3 4.0 55.3 59.3 10.3% 1.11
September-11 TelX Group, Inc., The 35.2 2.4 37.8 40.2 29.6% 1.14
October-11 Mast Industries Inc 45.1 2.2 47.3 49.5 25.1% 1.10
October-11 OpenLink International, Inc. 65.6 2.9 66.8 69.7 16.5% 1.06
November-11 Norcell Sweden Holding 2 AB 29.8 9.4 24.7 34.1 46.3% 1.15
January-12 Capital Safety Group 27.2 1.2 27.2 28.3 23.5% 1.04
January-12 Genesys Telecommunications Laboratories Inc.24.2 0.5 25.0 25.4 35.6% 1.05
Total 406.6$ 71.3$ 380.0$ 451.3$ 1.11
Gross Unhedged IRR= 16.1%
FX Hedge Impact= -0.1%
Gross Hedged IRR= 16.0%
Fees & Expenses1= -10.0%
Other Capital Transaction Timing2= -1.2%
Net Hedged IRR= 4.8%
Note: As of March 31, 2012. Please refer to the next slide for important information regarding the investments included on this slide. Fund level IRR will differ from the asset-level IRR as it considers management fees, expenses, accrued carried interest, the timing of capital calls and capital distributions, and the effect of carrying other assets and liabilities, including cash, on the balance sheet. Past performance of any KAM-sponsored fund, vehicle, account or investment referred to therein is not necessarily indicative of future results and there can be no assurance that the investments will perform similarly to those comprising the Investment Experience. 1) Includes inception to date management fee and organizational costs billed or accrued. 2) Timing difference between capital called and capital deployed.
29
MEZZANINE PERFORMANCE (NOTES)
1. Unless otherwise specified, the Invested Amount with respect to each investment represents the equity amount of the original investment therein together with any related follow-on investments made thereafter. Cash flows on which multiple and IRR calculations were based include all such investments as of the date made. 2. Consists of principal and interest payments (including capitalized PIK interest plus accrued but unpaid cash and PIK interest), dividends and proceeds from sales. Prospective investors should note that under the terms of the fund, accrued but unpaid PIK interest would not be deemed realized until actually paid to the Fund. 3. Estimated current value determined in accordance with KAM’s valuation policy as of the applicable date, which provides that (i) quoted market prices in active markets are the best evidence of the fair value of a financial instrument; and (ii) if quoted market prices in active markets are not available, fair value may be estimated using a variety of methods depending on the nature of the instrument and the manner in which it is traded. KAM’s estimate of fair value was undertaken in good faith and was based on the consistent application of a variety of factors, with the objective being to determine the value that would be received upon the sale of the instrument or paid to transfer the instrument in an orderly transaction between market participants at the relevant measurement date. Results include all writedowns and realizations as of 9/30/10. The actual realized returns on unrealized investments will depend on, among other factors, actual default rates, future operating results and cash flows, the ability to make coupon payments when due by the portfolio companies, the value of investments and market conditions at the time of disposition, legal and contractual restrictions on transfer that may limit liquidity, any related transaction costs, the performance of equity securities, the actual amount, cost and other terms of leverage and the timing and manner of disposition of investments, all of which may differ from the assumptions on which the valuations used in the prior performance data contained herein are based. Accordingly, the actual realized return of unrealized investments may differ materially from the returns indicated herein. Prospective investors should note that the performance of the investments shown in the Investment Experience may differ from the performance of such investments reported to investors in the applicable KAM managed funds, vehicles and accounts in which the investments were actually made as a result of the differing procedures and methodologies used to create the Investment Experience, including conventions adopted for consistency of presentation among investments included in the Investment Experience, such as frequency of cash flows for computing Gross IRRs (i.e., monthly vs. annually vs. quarterly), IRR methodology (i.e., time-weighted vs. dollar-weighted) and the effects of currency gains and losses. 4. Computed as sum of Realized Value plus Unrealized Value. 5. “Gross IRR” for purposes hereof shall mean an aggregate, annual, compound, gross internal rate of return on investments. The aggregate Gross IRR for the Investment Experience is a hypothetical Gross IRR given that the investments included therein were not made as part of a single portfolio, but rather by separate funds, vehicles and accounts managed by KAM. Gross IRRs do not reflect management fees, “carried interest,” taxes, transaction costs in connection with the disposition of unrealized investments and other expenses to be borne by investors in the applicable fund, vehicle or account, which will reduce returns and in the aggregate are expected to be substantial; for a description of such fees, carried interest and expenses, see the Original Memorandum including Section X entitled “Summary of Principal Terms” and Part II of Form ADV maintained by KAM, a copy of which will be furnished to each investor prior to its admission to the Fund. 6. Computed as Total Value divided by Invested Amount.
II.4 Special Situations Platform Alternative Investments Division
The Alternative Investments Division of KAM does not claim compliance with GIPS.
SPECIAL SITUATIONS SENIOR INVESTMENT TEAM
31
Experienced Team with
Diverse Backgrounds
Jamie Weinstein, Co-Head Nat Zilkha, Co-Head Mubashir Mukadam John Reed
• Co-head of Special
Situations Investing; joined
KKR in 2005
• Involved in portfolio
management and credit
analysis for over 100
transactions
• Over 13 years of industry
experience
• Member of KKR and Co-head
of Special Situations
Investing; joined KKR in
2007
• Director of Harden
Healthcare
• Over 13 years of private
equity and principal debt
investing across numerous
industries at KKR and
previously in Goldman
Sachs’s Principal Investment
Area
• Joined KKR in 2011
• Former Managing Director
focused on European
Distressed at York Capital
and Director within the
Distressed Products Group
at Deutsche Bank
• Over 13 years of industry
experience
• Joined KKR in 2008
• Former Associate
Director at Bear Stearns &
Co. in Institutional Sales
and Trading
• Over 15 years of industry
experience
~60 KKR Capstone Professionals(1)
~60 Dedicated KAM Investment Professionals
~30 KKR Capital Markets Professionals(1)
~150 KKR Private Equity Investment Professionals(1) ~30 KKR Senior Advisors
Special Situations Senior Team
(1) Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. Alternative Investments
Division
32
HOW WE DEFINE SPECIAL SITUATIONS INVESTMENTS
Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
Common Characteristics of Special Situations Investments
Catalyst:
Capital Structure or Broader Market Dislocation
Investment Strategies
The Special Situations team invests in opportunities where KKR has an edge
Secondary Distressed
Portfolio Purchases
Rescue Financing / Recapitalization
FOCUS IN ALL STRATEGIES IS ON PROPRIETARY SOURCING AND
INVESTING WHERE KKR HAS AN EDGE
Control-Oriented Opportunities
Expected to be
~50-70%
of Portfolio
Expected to be
~20-30% of Portfolio
Expected to be
~10-20% of Portfolio
Alternative Investments Division
European Sovereign Crisis and Bank De-levering
• Bank de-levering and associated derivative effect
• Capital markets volatility
• Lack of liquidity
• Maturity walls
Global Healthcare Funding Crisis
• Lack of government funding
• Reform in healthcare payments
• Market dislocation
Asia Pacific Volatility
• Perception of slower near-term growth
• Contagion of economic slowdown in Europe
• Weaker consumer spending environment in Australia
Energy
• Highly cyclical, capital intensive industry
• Market and commodity volatility
• Non-traditional originated financings and trading opportunities
33
THE MARKET OPPORTUNITY
Theme Investment Thesis Indicative Investments
Through our team’s on-going diligence, we have developed investment theses around market themes and identified distinct Special
Situations investment opportunities
Note: Please refer to “Important Information” on page 1 regarding market views. The above listed companies represent all investments reflecting the corresponding investment thesis detailed above. The specific companies identified are not representative of all of the companies purchased, sold or recommended for KAM clients, and it should not be assumed that the investment in the companies identified was or will be profitable. Actual holdings will vary for each KAM client and there is no guarantee that a particular KAM client’s account will hold any or all of the companies listed.
Alternative Investments Division
34
Background
• The Company is an oil and gas producer focused on unconventional natural gas
• In order to support development in the Horn River Basin, the Company and KKR entered into a JV agreement whereby KKR would purchase an interest in an existing pipeline and commit to fund future new-build midstream assets in the Horn River
• Upon the closing in December 2011, KKR delivered a $255mm equity commitment in a proprietary originated structured investment
Investment Highlights
• Attractive risk/reward profile
• Take-or-pay contract with no direct volume or price risk, supported by a parent guarantee
• Drilling commitment provides volume protection
• Substantial potential upside to contracted base return
• Potential for additional 3rd party volumes on the pipeline to be brought into the system
• Potential upside from volumes beyond 10-year term, both from continuation of drilling and from the “tail” associated with wells drilled within the 10-year contract period
• Potential platform upsides associated with future projects within the Horn River
QUICKSILVER
Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. Past performance is no guarantee of future results. This example is included solely to illustrate the terms and strategy which has been utilized by the KKR Special Situations team. Past investments by KAM are not indicative of prospective investments that will be made by any KAM fund, vehicle or account or of the future performance thereof.
KKR Edge
Sourcing Edge
Through proprietary relationships developed by the KKR Energy and Infrastructure team, the Company reached out to KKR when looking to find a JV partner for the development of Horn River midstream assets
Diligence Edge
Longstanding experience investing in energy from both
the equity and fixed income standpoints
KAM has been invested in the Company’s capital structure for over three years and was able to evaluate the counterparty risk quickly
KAM Edge
Special Situations platform provides differentiated ability to
provide capital solutions to partners for differentiated
transactions
Solutions Edge
KKR
EDGE
Alternative Investments Division
35
EDCON
Background
• The Company is the largest non-food retailer in South Africa,
with a 29.3% market share in the South African clothing &
footwear market, nearly twice that of its nearest competitor
• Bain Capital purchased the Company in April 2007 and KKR
private equity was the runner up in the auction
• Through the secondary public markets KAM began investing in
the Company’s Senior Secured Notes in August 2011
Investment Highlights
• The Company is larger than its nearest competitor and has
strong brands, good store locations, and is not fashion focused
• Due to the growing middle class of the country, the South
African retail market is attractive over the long term and also
provides a strategic African entry point for international players
• Through the Senior Secured Notes at our cost basis, we are
implicitly valuing the company at attractive levels: 0.3x
attachment point, 4.2x EBITDA multiple, 14% un-levered FCF
yield and ~16% YTM
Note: Please refer to “Important Information” on page 1 for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. Past performance is no guarantee of future results. This example is included solely to illustrate the terms and strategy which has been utilized by the KKR Special Situations team. Past investments by KAM are not indicative of prospective investments that will be made by any KAM fund, vehicle or account or of the future performance thereof.
KKR Edge
Diligence Edge I
KAM leveraged diligence on the company and jurisdiction, and
had intimate knowledge of the company’s business model and
the South African retail market
The KAM team worked with the KKR private equity retail team
to update its due diligence regarding the business and used
contacts established by the private equity team in the South
African market to evaluate the legal and jurisdictional
considerations
Diligence Edge II
KKR
EDGE
Alternative Investments Division
SPECIAL SITUATIONS PERFORMANCE REALIZED INVESTMENTS
36
The preceding tables (the “Investment Experience”) comprise a composite of the investments made within the special situations strategy managed by KKR through KAM and its subsidiaries. KKR believes that these investments illustrate its general experience in managing special situations investments. The Investment Experience includes investments held within client accounts having a dedicated allocation to the strategy. While certain client accounts that have participated in the strategy have not been included, for example because of their limited ability to participate in each investment made within the strategy and/or differences in their structure, KKR has determined that investments made within the strategy are represented in the Investment Experience and that the exclusion of such accounts is not material. Such assessment involves significant judgment and may, however, differ from another party’s review of KKR-sponsored portfolios over the same period, which may include comparable investments not represented in the table with lower (or negative) investment returns. Composite or model performance information such as that reflected in the Investment Experience has many inherent limitations and is not indicative of the performance of all investments made by KAM, nor is it fully representative of the performance of all investments that may have been made by the Funds if the Funds had been operating over the period during which the included investments were made. The investments referenced in the Investment Experience were made over a period of time that may not include various market and macroeconomic cycles and the circumstances under which such investments were made may differ significantly from those under which the Funds will make their investments. Furthermore, the investments included in the Investment Experience were not made as part of a single portfolio, but rather by separate, multi-strategy accounts, the investment programs of which, individually or on an overall basis, differ significantly from the Funds’ investment program, including by asset class, investment size, geography, duration, leverage, risk and targeted returns. They should not, therefore, be viewed as representative of investments that will be made by the Funds or the profile of the Funds’ portfolio in general. In particular, it is currently anticipated that the Funds’ portfolio will include a lower concentration of liquid, marketable securities and instruments than is currently represented in KKR’s special situations portfolio (although this cannot be guaranteed). The Funds are the first dedicated vehicles formed by KKR to invest specifically in special situation investments. Prospective investors may contact KKR to discuss the procedures and methodologies used to calculate the Investment Experience and other information provided herein.
Note: As of March 31, 2012. Please refer to slide 32 for important information regarding the investments included on this slide. Past performance of any KAM-sponsored fund, vehicle, account or investment referred to therein is not necessarily indicative of future results and there can be no assurance that the Fund’s investments will perform similarly to those comprising the Investment Experience.
Though the portfolio is in its early stages of development, we are pleased with the initial performance
Inception to 3/31/2012
(Amounts in millions)
Investment Date of Invested Realized Unrealized Total
Name Original Investment Amount1 Value2
Value3
Value4
Realized Investments
iPayment Investors LP March-10 30.2$ 44.7$ -$ 44.7$ 1.48
AerCap Funding I B.V. April-10 24.8 35.2 - 35.2 1.42
McJunkin Corporation August-10 17.9 21.8 - 21.8 1.22
Centro Properties Group_ November-10 15.7 22.3 - 22.3 1.42
Countrywide PLC November-10 10.0 10.6 - 10.6 1.06
CMA Corporation Ltd (CMV AU) March-11 34.2 51.5 - 51.5 1.51
Ally Financial Inc August-11 18.2 22.3 - 22.3 1.23
Nine Entertainment Group Limited September-11 25.3 25.9 - 25.9 1.02
176.3$ 234.3$ -$ 234.3$ 1.33
Gross IRR6: 43.0%
Realized Toehold Investments 76.8$ 79.5$ -$ 79.5$ 1.03
Gross IRR6: 12.5%
Total Realized Investments 253.1$ 313.8$ -$ 313.8$ 1.24
Gross IRR6: 39.2%
Multiple of Gross
Invested Amount5
SPECIAL SITUATIONS PERFORMANCE (CONTINUED) UNREALIZED INVESTMENTS
37 Note: As of March 31, 2012. Please refer to slide 32 for important information regarding the investments included on this slide. Past performance of any KAM-sponsored fund, vehicle, account or investment referred to therein is not necessarily indicative of future results and there can be no assurance that the Fund’s investments will perform similarly to those comprising the Investment Experience.
The preceding tables (the “Investment Experience”) comprise a composite of the investments made within the special situations strategy managed by KKR through KAM and its subsidiaries. KKR believes that these investments illustrate its general experience in managing special situations investments. The Investment Experience includes investments held within client accounts having a dedicated allocation to the strategy. While certain client accounts that have participated in the strategy have not been included, for example because of their limited ability to participate in each investment made within the strategy and/or differences in their structure, KKR has determined that investments made within the strategy are represented in the Investment Experience and that the exclusion of such accounts is not material. Such assessment involves significant judgment and may, however, differ from another party’s review of KKR-sponsored portfolios over the same period, which may include comparable investments not represented in the table with lower (or negative) investment returns. Composite or model performance information such as that reflected in the Investment Experience has many inherent limitations and is not indicative of the performance of all investments made by KAM, nor is it fully representative of the performance of all investments that may have been made by the Funds if the Funds had been operating over the period during which the included investments were made. The investments referenced in the Investment Experience were made over a period of time that may not include various market and macroeconomic cycles and the circumstances under which such investments were made may differ significantly from those under which the Funds will make their investments. Furthermore, the investments included in the Investment Experience were not made as part of a single portfolio, but rather by separate, multi-strategy accounts, the investment programs of which, individually or on an overall basis, differ significantly from the Funds’ investment program, including by asset class, investment size, geography, duration, leverage, risk and targeted returns. They should not, therefore, be viewed as representative of investments that will be made by the Funds or the profile of the Funds’ portfolio in general. In particular, it is currently anticipated that the Funds’ portfolio will include a lower concentration of liquid, marketable securities and instruments than is currently represented in KKR’s special situations portfolio (although this cannot be guaranteed). The Funds are the first dedicated vehicles formed by KKR to invest specifically in special situation investments. Prospective investors may contact KKR to discuss the procedures and methodologies used to calculate the Investment Experience and other information provided herein.
Investment Date of Invested Realized Unrealized Total
Name Original Investment Amount1 Value2
Value3
Value4
Unrealized Investments
Harden Healthcare March-10 62.2$ 15.0$ 69.6$ 84.6$ 1.36
Eddie Bauer, Inc. April-10 35.1 20.4 19.7 40.1 1.14
Expro July-10 38.1 2.9 41.5 44.4 1.17
Titan Europe PLC/Ireland September-10 37.7 16.0 33.9 49.9 1.32
Avantha Power & Infrastructure Limited September-10 48.2 4.6 49.3 53.9 1.12
General Motors Corp November-10 36.1 1.1 29.9 31.0 0.86
Oriental Trading Company, Inc. January-11 29.2 - 40.1 40.1 1.37
Kaupthing Hf February-11 45.8 - 47.4 47.4 1.03
General Healthcare Group February-11 65.5 3.6 56.4 60.0 0.92
Enterprise plc March-11 32.3 2.0 39.3 41.3 1.28
Edcon Pty Ltd. August-11 44.1 27.0 25.2 52.2 1.18
Bakkavor Finance 2 Plc September-11 21.3 5.8 20.8 26.6 1.25
Infor Global Solutions Intermediate Holdings Limited September-11 30.2 1.3 38.0 39.3 1.30
Centro Properties Group September-11 28.2 5.0 22.8 27.8 0.99
Cemex October-11 30.4 20.0 18.0 38.0 1.25
Masonite Worldwide Holdings November-11 20.5 - 23.1 23.1 1.13
Quinn Group Limited December-11 24.8 - 25.9 25.9 1.04
Fortune Creek Investment Limited December-11 27.2 - 28.6 28.6 1.05
Travelport LLC December-11 21.2 0.8 23.1 23.9 1.13
QMH Limited February-12 24.9 0.6 28.7 29.3 1.18
Brake Bros Ltd. March-12 20.4 - 20.5 20.5 1.00
Eastman Kodak Company March-12 25.5 0.8 25.9 26.7 1.05
New Enterprise Stone & Lime Co., Inc. March-12 17.3 0.1 17.9 18.0 1.04
766.2$ 127.0$ 745.6$ 872.6$ 1.14
Gross IRR6: 16.8%
Unrealized Toehold Investments 25.7$ 1.8$ 29.2$ 31.0$ 1.21
Gross IRR6: 29.3%
Total Unrealized Investments 791.9$ 128.8$ 774.8$ 903.6$ 1.14
Gross IRR6: 17.2%
Grand Total 1,045.0$ 442.6$ 774.8$ 1,217.4$ 1.16
Grand Total, adjusted for Recycled Capital9
602.4$ -$ 774.8$ 774.8$ 1.29
Gross IRR6: 21.6%
Gross Hedged IRR7: 21.9%
Net Hedged IRR8: 15.3%
Multiple of Gross
Invested Amount5
SPECIAL SITUATIONS PERFORMANCE (CONTINUED) TOEHOLD INVESTMENTS
38 Note: As of March 31, 2012. Please refer to slide 32 for important information regarding the investments included on this slide. Past performance of any KAM-sponsored fund, vehicle, account or investment referred to therein is not necessarily indicative of future results and there can be no assurance that the Fund’s investments will perform similarly to those comprising the Investment Experience.
The preceding tables (the “Investment Experience”) comprise a composite of the investments made within the special situations strategy managed by KKR through KAM and its subsidiaries. KKR believes that these investments illustrate its general experience in managing special situations investments. The Investment Experience includes investments held within client accounts having a dedicated allocation to the strategy. While certain client accounts that have participated in the strategy have not been included, for example because of their limited ability to participate in each investment made within the strategy and/or differences in their structure, KKR has determined that investments made within the strategy are represented in the Investment Experience and that the exclusion of such accounts is not material. Such assessment involves significant judgment and may, however, differ from another party’s review of KKR-sponsored portfolios over the same period, which may include comparable investments not represented in the table with lower (or negative) investment returns. Composite or model performance information such as that reflected in the Investment Experience has many inherent limitations and is not indicative of the performance of all investments made by KAM, nor is it fully representative of the performance of all investments that may have been made by the Funds if the Funds had been operating over the period during which the included investments were made. The investments referenced in the Investment Experience were made over a period of time that may not include various market and macroeconomic cycles and the circumstances under which such investments were made may differ significantly from those under which the Funds will make their investments. Furthermore, the investments included in the Investment Experience were not made as part of a single portfolio, but rather by separate, multi-strategy accounts, the investment programs of which, individually or on an overall basis, differ significantly from the Funds’ investment program, including by asset class, investment size, geography, duration, leverage, risk and targeted returns. They should not, therefore, be viewed as representative of investments that will be made by the Funds or the profile of the Funds’ portfolio in general. In particular, it is currently anticipated that the Funds’ portfolio will include a lower concentration of liquid, marketable securities and instruments than is currently represented in KKR’s special situations portfolio (although this cannot be guaranteed). The Funds are the first dedicated vehicles formed by KKR to invest specifically in special situation investments. Prospective investors may contact KKR to discuss the procedures and methodologies used to calculate the Investment Experience and other information provided herein.
Investment Date of Invested Realized Unrealized Total
Name Original Investment Amount1 Value2
Value3
Value4
Realized Toehold Investments
American Safety Razor Company, LLC August-10 1.0$ 1.1$ -$ 1.1$ 1.10
CAID Holdings II Pty September-10 7.1 6.8 - 6.8 0.96
iStar October-10 0.4 0.4 - 0.4 1.00
Great Atlantic & Pacific Tea Co November-10 5.2 3.0 - 3.0 0.58
Bank Of Ireland November-10 7.1 7.2 - 7.2 1.01
Refresco February-11 3.4 3.7 - 3.7 1.09
Endemol B.V. June-11 1.5 1.3 - 1.3 0.87
Sevan Marine ASA June-11 6.2 5.1 - 5.1 0.82
Education Management August-11 1.0 1.1 - 1.1 1.10
K Hovnanian Enterprises Inc August-11 0.5 0.5 - 0.5 1.00
Nara Cable Funding September-11 7.2 7.9 - 7.9 1.10
Capmark Financial Group Inc. October-11 3.5 4.9 - 4.9 1.40
ConvaTec Healthcare October-11 5.8 6.6 - 6.6 1.14
DFS Furniture Co LTD October-11 3.7 4.1 - 4.1 1.11
Great Atlantic & Pacific Tea Company, Inc., The October-11 3.0 3.1 - 3.1 1.03
GRND 1 October-11 9.4 10.1 - 10.1 1.07
TL Acquisitions, Inc. October-11 0.9 1.2 - 1.2 1.33
Gymboree Corporation, The November-11 2.1 2.5 - 2.5 1.19
Wind Acquisition Finance SA November-11 7.8 8.9 - 8.9 1.14
Total Realized Toehold Investments 76.8$ 79.5$ -$ 79.5$ 1.04
Gross IRR6: 12.5%
Unrealized Toehold Investments
CRC Health Group, Inc. February-10 4.4$ 1.0$ 4.7$ 5.7$ 1.30
Barchester Healthcare Limited February-11 4.7 0.4 3.6 4.0 0.85
ELAN Limited August-11 6.9 0.3 8.2 8.5 1.23
Catalina Marketing Corporation February-12 9.4 - 8.5 8.5 0.90
Petroplus Refining & Marketing Limited February-12 - - 3.9 3.9 -
Arcapita Bank BSC March-12 0.3 - 0.2 0.2 0.67
Total Unrealized Toehold Investments 25.7$ 1.7$ 29.1$ 30.8$ 1.20
Gross IRR6: 29.3%
Multiple of Gross
Invested Amount5
SPECIAL SITUATIONS PERFORMANCE (NOTES)
39
1. Unless otherwise specified, the “Invested Amount” with respect to each investment represents the equity amount of the original investment together with any related follow-on investments made thereafter. Cash flows on which multiple and IRR calculations are based include all such investments as of the date made. The Invested Amount also includes investment transactions for which settlement has not occurred as of March 31, 2012. Non-U.S. dollar investment information is presented using foreign exchange spot rates on the date of settlement of the relevant transaction or, for interest payments and other cash receipts, date of receipt. For investments that have not settled as of March 31, 2012, foreign exchange spot rates on the related trade date are used. For cash interest that is accrued but unpaid, foreign exchange spot rates on the reporting date are used. 2.“Realized Value” consists of principal and interest payments (including accrued but unpaid cash interest), dividends and proceeds from sales. Payment-in-kind interest is treated as realized upon the realization of the principal amount. 3.“Unrealized Value” is estimated current value as of the applicable date. Valuations are determined in accordance with KAM’s valuation policy, which provides that: (i) quoted market prices in active markets are the best evidence of the fair value of a financial instrument; and (ii) if quoted market prices in active markets are not available, fair value may be estimated using a variety of methods depending on the nature of the instrument and the manner in which it is traded. KAM’s estimates of fair value are undertaken in good faith and based on the consistent application of a variety of factors, with the objective being to determine the value that would be received upon the sale of the instrument or paid to transfer the instrument in an orderly transaction between market participants at the relevant measurement date. Results include all write-downs and realizations. The actual realized returns on unrealized investments will depend on, among other factors, actual default rates, future operating results and cash flows, the ability to make coupon payments when due by the portfolio companies, the value of investments and market conditions at the time of disposition, legal and contractual restrictions on transfer that may limit liquidity, any related transaction costs, the performance of equity securities, the actual amount, cost and other terms of leverage and the timing and manner of disposition of investments, all of which may differ from the assumptions on which the valuations used in the prior performance data contained herein are based. Accordingly, the actual realized return of unrealized investments may differ materially from the returns indicated herein. Prospective investors should note that the performance of the investments shown in the Investment Experience may differ from the performance of such investments reported to investors in the applicable accounts in which the investments were actually made as a result of the differing procedures and methodologies used to create the Investment Experience, including conventions adopted for consistency of presentation among investments included in the Investment Experience, such as frequency of cash flows for computing Gross IRRs (i.e., monthly vs. annually vs. quarterly), IRR methodology (i.e., time-weighted vs. dollar-weighted) and the effects of currency gains and losses. 4.“Total Value” is computed as the sum of Realized Value plus Unrealized Value. 5.“Multiple of Gross Invested Amount” is computed as the Total Value divided by the Invested Amount. 6.“Gross IRR” means the aggregate, annual, compound, gross internal rate of return on investments. Internal rates of return are computed on a “dollar-weighted” basis, which takes into account the timing of cash flows, the amounts invested at any given time and unrealized values as of the relevant valuation date. The aggregate Gross IRR for the Investment Experience is a hypothetical Gross IRR given that the investments included therein were not made as part of a single portfolio, but rather by a composite of accounts managed by KAM. Gross IRRs do not reflect management fees, carried interest, taxes, foreign exchange derivative contracts, credit default swap transactions, and transaction costs in connection with the disposition of unrealized investments, organizational expenses and other expenses to be borne by investors in the Funds, which will reduce returns and in the aggregate are expected to be substantial. See Section IX, “Summary of Principal Terms” for more information on such expenses. A general summary of such fees and carried interest is also included in Part 2 of Form ADV maintained by KAM, a copy of which will be furnished upon request. Values shown for non-U.S. dollar investments are derived using foreign and U.S. currency spot rates at the time of valuation. Foreign exchange conversions are embedded within the calculations. In addition, certain positions may include a forward contract as a hedging instrument. Such contracts have been excluded from the relevant position data and, instead, currency hedging is presented at the overall portfolio level. 7.“Gross Hedged IRR” is consistent with the definition of “Gross IRR” above, but is inclusive of foreign exchange derivative contracts and credit default swap transactions. 8.“Net Hedged IRR” is consistent with the definition of Gross Hedged IRR, but is also inclusive of management fees, miscellaneous Fund expenses, including organizational expenses and carried interest. Management fees have been offset by 100% of transaction fees received by KAM or its subsidiaries from portfolio companies. Certain assumptions which KKR believes to be reasonable have been made as to organizational and other Fund expenses. Actual expenses incurred by the Funds may be higher and actual transaction fees may be lower than those reflected in the Investment Experience, which will reduce net returns generated by the Funds. 9.Distributions to Fund investors representing a return of capital, income and gains (“Investment Proceed Distributions”) are recallable during the Funds’ Investment Period. The adjustment for recycled capital reflects a reduction of the total Invested Amount by the amount of Investment Proceed Distributions made, excluding the current ending liquidation date. The adjustment results in a corresponding reduction of the total Realized Value.
III.1 KKR Credit Relative Value
41
KKR CREDIT RELATIVE VALUE
Alternative Investments Division
• KKR Credit Relative Value (KCRV) is a new strategy within KAM, offering:
• Clients a new liquid product with a targeted stable return profile
• Provides a product that is not market directional which diversifies KAM’s credit business
• Opportunity to diversify and scale our hedge fund platform
• Allows us to express investment views already being developed by KAM credit and equity analysts
• KCRV will focus on capturing returns from mispriced credit risk and will target relatively low exposure to credit markets which will diversify KAM’s overall credit exposure
• Investible universe will include investment and non-investment grade credit and credit linked instruments, primarily in developed countries
• Trade construction will be driven by fundamental analysis of a company, industry or asset class followed by the development of the optimal way to express the view
• Trades will fall under the following strategies: curve trades, fundamental trades, capital structure arbitrage, basis trades, and index trades
• The strategy is targeted to:
• Utilize fundamental analysis to arrive at primary view
• Incorporate both position and portfolio level hedges
• Be able to provide sufficient liquidity for investors
• Provide stable return profile
42
KKR CREDIT RELATIVE VALUE (cont’d)
Alternative Investments Division
• Several of KKR’s competitors have built meaningful businesses in long/short credit and our LP investors are increasingly interested in credit hedge funds as part of their alternatives allocation
• This strategy will also allow KKR to access existing and new LP allocations for more liquid strategies
• After a period of portfolio development and systems testing, we went live with this strategy on July 1st
• Initially, KCRV is funded with $50 million from KKR’s balance sheet. This seed capital will allow KCRV to develop a track record before commencing third-party fundraising in early-2013
• Scott Henkin, formerly a portfolio manager in a similar strategy at DE Shaw, joined the firm earlier this summer to lead KCRV trade and portfolio construction
• Scott is well-integrated with the rest of the KAM strategies and leverages ideas and analysis from both equity and credit analysts
• Credit Relative Value is a scalable long / short credit platform, which we estimate could be $2 billion+ at maturity, with an investment approach that leverages our existing personnel, credit expertise, and infrastructure
Strategy Parameters Expected Level Limit
Long Positions (% of Capital) [3-4%] [7%]
Short Positions (% of Capital) [3%] [5%]
# of Core Investments 20-40 [ TBU ]
Target Gross Returns 10%-15% N/A
Target Volatility <8% [ TBU ]
Industry Concentration [10-15% per industry] [30% per industry]
Geographic Exposure [70-80% North America] [50% International]
Leverage (Long + Short) [1x] [3x]
Net Exposure [+/- 20%] [+/- 50%]
Liquidity Quarterly on 45 days notice; 25% investor level gate if fund redemptions exceed 25% of the fund
III.2 KKR Equity Strategies
44
KKR EQUITY STRATEGIES EXECUTIVE SUMMARY
Established Strategy
• Long / short equity strategy focused on the Americas
• Flexibility to include other equity-oriented investment strategies, and in particular, event-driven and
capital structure arbitrage strategies if attractive risk-adjusted equity returns can be found (max
credit exposure generally below 20%)(1)
• Consistent approach with former investment experience
Experienced Team
• Led by Robert Howard, former Head of Goldman Sachs Principal Strategies (“GSPS”) Americas
• 16 years of financial markets experience, including 11 years of portfolio management expertise
• Continuity of 11-person core investment team that worked together in GSPS Americas
Demonstrated Approach
Enhanced by KKR
Resources
• Investment process driven by fundamental research and a “one-team” collaboration honed over 15
years as part of GSPS
• Top-down, macro-driven overlay complemented by bottom-up, in-depth fundamental analysis
performed on individual companies
• Flexible geographic approach with a primary focus on the U.S. and an ability to make opportunistic
allocations to Canada and Latin America (targeted LatAm exposure: 0–25%)(1)
• Integration with KKR, including access to KKR’s global sourcing and knowledge network(2)
Disciplined Risk
Management
• Disciplined portfolio hedging and rigorous risk management on both the aggregate portfolio and
individual strategy level
• Continuity and integration of previous risk management approach from GSPS into KKR’s existing
risk organization
(1) Information regarding KKR Equity Strategies (“KES”) is provided for discussion purposes only. Therefore, the estimates provided herein, including target allocations, caps, and exposures, are subject to change. There is no assurance that these estimates will be achieved, and actual allocations, caps, exposures, and other estimates may be significantly different than that shown here. (2) Please refer to "Important Information" on page 1 for further information on KKR's inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions.
Alternative Investments Division
45
KES INVESTMENT TEAM
Senior members of the KES investment team have 17 years of average industry experience and 10 years average
experience
with GSPS and KKR.
Robert Howard
Head of KES
Trading Investment
Team
Risk
Strategist
Ralph Marron Ami Goldfein Omar Kara Yi Gu
Jason Muenzen Daniel Henriques Antoine Chiche
Atul Joshi Vinesh Motwani
Broader KAM Platform Legal/Compliance Team
50+ Credit Investment Professionals
Established Risk, Operations, and
Technology Infrastructure
Alex Nicolau
Client and Partner Group: John Massad Head of Operations: Ben Dominguez
Alternative Investments Division
Public
Markets
Private
Markets
Portfolio
Companies
Operational
Expertise ~30 Senior Advisors
who are current and former
leaders of major global
corporations and public
agencies
~60 KKR Capstone operational
experts focused on diligence
and portfolio company
performance
~150 dedicated
investment
professionals;
$46.0bn AUM(1)
~75 actively
managed
portfolio companies
• ~$210bn of annual
revenues
• ~900,000
employees
~60 dedicated
investment
professionals in
KAM; $16.3bn
AUM(1)
Global Integration
Idea Sharing
Legal/Compliance
WHY KES TEAM CHOSE KKR?
KKR platform complements the KES strategy.
• Ability to keep team
together
• $100mm of KKR capital
• Existing operational
infrastructure
• Global marketing
presence
• Cultural alignment
• Top-tier Wall Street
access
• Enhanced alpha
generation
Retail Energy &
Infrastructure Consumer Products
Industrials Technology Health Care
Financial Services
Media & Telecom
Critical Factors Driving Team’s Decision
46 Note: Please refer to "Important Information" on page 1 for further information on KKR's inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. (1) As of March 31, 2012.
Alternative Investments Division
KES PORTFOLIO CONSTRUCTION & RISK MANAGEMENT(1)
• Long / short equities
• Americas
• Opportunistic in credit
• Long / short investment ideas
• Typical gross exposure: ~200% (range: 100–
300%)
• Typical net exposure: ~30% (range: 0–50%)
• Targeted LatAm exposure: 0–25%
• Max credit exposure generally below 20%
• 30–60 total portfolio positions
• 5–8 positions per analyst
• 15–30 “Core”
– Highest conviction trades (~70–80% of GMV)
– Expected core size = 3–7% AUM (long);
2–4% AUM (short)
– 2–5 “Core” per analyst
• 15–30 “Feeder”
– Beginning feeder trades (~20–30% of GMV)
– Expected feeder size = 1–2% AUM
– 2–5 “Feeder” per analyst
• Focus on equity returns with low volatility
• Cap on industry exposure: ~20%
• Re-creation of risk reports, hedging tools,
and screens
• Focus on portfolio diversification
• KKR risk infrastructure
• Use of options and tail hedges
• Emphasis on:
– Gross / net exposures
– Beta-adjusted exposures
– Greeks
– Shock scenarios
– Index “explosion”
– Correlations
– Volatility
– Hedge
structure
– Crowded
trades
– Liquidity
profile
Feeder
Core
Strategy
Portfolio Construction(1) Risk Management
47
(1) Information regarding KKR Equity Strategies (“KES”) is provided for discussion purposes only. Therefore, the estimates provided herein, including target allocations, caps, and exposures, are subject to change. There is no assurance that these estimates will be achieved, and actual allocations, caps, exposures, and other estimates may be significantly different than that shown here.
(2) Prices of securities bought in an initial public offering (“IPO”) may rise and fall rapidly, often because of investor perceptions rather than economic reasons. To the extent a fund is small in size, its IPO investments may have a significant impact on its performance since they may represent a larger portion of the fund’s overall portfolio as compared to the portfolio of a larger fund.
• Position- and portfolio-level hedges
• Focus on liquidity (mid- and large-cap companies)
• Typical volatility: <10%
• Opportunistic in new issues(2)
Alternative Investments Division
48
HEDGING PHILOSOPHY
POSITION HEDGES
PORTFOLIO
AGGREGATE POSITIONS
Hedging at the
strategy level
INVESTMENT IDEAS
PORTFOLIO HEDGES
Hedging at the
portfolio level
Seeks to
eliminate
undesired risks
Risks we want
Risks we manage
Risks we don’t want
We proactively size our positions based on various factors including liquidity, risk return, potential loss, quality of the
hedge, and
portfolio diversification.
Alternative Investments Division
49
LIFE CYCLE FOR TYPICAL INVESTMENT STRATEGY
MORNING MEETING: DAILY
To review relevant macro and
micro developments
impacting investments and
recap
previous day’s trading prior
to market open
POSITION SIZE
PM / Analysts
work together on
position initiation
Position
write-up
distributed;
becomes
feeder
position
Further diligence or
market dislocation
supports upsizing
position to core
position
Active trading
based on market
moves to seek to
capture profits and
manage risk
Investment thesis
plays out and / or
changes. Position
reduced /
exited over time
Name and
position
monitored for
new catalyst
opportunities
TIME
CONTINUOUS DIALOGUE BETWEEN PM, ANALYSTS, AND BROADER KKR TEAM MEMBERS
Ramp up
Exit
PORTFOLIO REVIEW: MONTHLY
To review and discuss
monthly performance, risk
assessment, portfolio
analytics and dissect sectors
and / or positions driving the
portfolio
INVESTMENT MEETING: WEEKLY
Investment team, KAM senior
management, and risk team
meet to review portfolio
construction, exposures, risk
limits, and R&D
MACRO MEETING: WEEKLY
To discuss relevant macro
takeaways from primary
research, management team
interactions, and events to
debate broader implications
on the portfolio
The entire investment and risk management process is supported by structured and ad-hoc team interaction. The highest
conviction ideas scale up to core positions, and the portfolio represents a mix of core and feeder positions.
Note: Please refer to "Important Information" on page 1 for further information on KKR's inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions. Note: Portfolio manager may use all or some of the techniques described herein or any other techniques that he deems reasonable.
Alternative Investments Division
50
INVESTMENT PRINCIPLES
We believe that strong performance...
• Begins with the preservation of capital. Differentiated performance requires
attractive returns with less-than-commensurate risk exposure
• Is built upon the fundamental analysis of situations where our global
resources give us a competitive advantage
• Necessitates constant vigilance of the macro environment in an ever more
interconnected world
• Requires a diversity of views and honesty about what we don’t know
• Means investment decisions are made based on facts and without emotion
• Has, at its foundation, one team with aligned incentives
KES seeks to achieve consistent and attractive returns, with low volatility and limited market correlation.
Alternative Investments Division