Newswires
KKR & CO. INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements ofKKR & Co. Inc. , together with its consolidated subsidiaries, and the related notes included elsewhere in this report and our Annual Report, including the audited consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under "Cautionary Note Regarding Forward-looking Statements" and "Business Environment" in this report and our Annual Report and "Risk Factors" in our Annual Report, and our other filings with theSEC . Actual results may differ materially from those contained in any forward-looking statements. The unaudited condensed consolidated financial statements and the related notes included elsewhere in this report are hereafter referred to as the "financial statements." Additionally, the condensed consolidated statements of financial condition are referred to herein as the "consolidated statements of financial condition"; the condensed consolidated statements of operations are referred to herein as the "consolidated statements of operations"; the condensed consolidated statements of comprehensive income (loss) are referred to herein as the "consolidated statements of comprehensive income (loss)"; the condensed consolidated statements of changes in equity are referred to herein as the "consolidated statements of changes in equity"; and the condensed consolidated statements of cash flows are referred to herein as the "consolidated statements of cash flows." Overview We are a leading global investment firm that offers alternative asset management as well as capital markets and insurance solutions. We aim to generate attractive investment returns by following a patient and disciplined investment approach, employing world-class people, and supporting growth in our portfolio companies and communities. We sponsor investment funds that invest in private equity, credit and real assets and have strategic partners that manage hedge funds. Our insurance subsidiaries offer retirement, life and reinsurance products under the management of Global Atlantic. Our asset management business offers a broad range of investment management services to fund investors around the world. As ofSeptember 30, 2022 , we manage$496 billion of assets for our clients. Throughout our history, we have consistently been a leader in the private equity industry, having completed approximately 685 private equity investments in portfolio companies with a total transaction value in excess of$690 billion as ofSeptember 30, 2022 . Since the inception of our firm in 1976, we have expanded our investment strategies and product offerings from traditional private equity to areas such as leveraged credit, alternative credit, infrastructure, energy, real estate, growth equity, core and impact investments. We also provide capital markets services for our firm, our portfolio companies and third parties. Our balance sheet provides a significant source of capital in the growth and expansion of our business, and it has allowed us to further align our interests with those of our fund investors. Building on these efforts and leveraging our industry expertise and intellectual capital have allowed us to capitalize on a broader range of the opportunities we source. Our insurance business is operated by Global Atlantic, in which we acquired a majority controlling interest onFebruary 1, 2021 . GlobalAtlantic is a leadingU.S. retirement and life insurance company that provides a broad suite of protection, legacy and savings products and reinsurance solutions to clients across individual and institutional markets. GlobalAtlantic primarily offers individuals fixed-rate annuities, fixed-indexed annuities and targeted life products through a network of banks, broker-dealers and independent marketing organizations. GlobalAtlantic provides its institutional clients customized reinsurance solutions, including block, flow and pension risk transfer reinsurance, as well as funding agreements. GlobalAtlantic primarily generates income by earning a spread between its investment income and the cost of policyholder benefits. As ofSeptember 30, 2022 , Global Atlantic served approximately three million policyholders. 107
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Asset Management
In our asset management business, we have five business lines: (1) Private
Equity, (2) Real Assets, (3) Credit and Liquid Strategies, (4) Capital Markets,
and (5) Principal Activities.
As an asset management firm, we earn fees, including incentive fees, and carried interest for providing investment management and other services to our funds, vehicles, CLOs, managed accounts and portfolio companies, and we generate transaction-specific income from capital markets transactions. We earn additional investment income by investing our own capital alongside that of our fund investors and from other assets on our balance sheet. Carried interest we receive from our funds and certain other investment vehicles entitles us to a specified percentage of investment gains that are generated on third-party capital that is invested. Our investment teams have deep industry knowledge and are supported by a substantial and diversified capital base; an integrated global investment platform; the expertise of operating professionals, senior advisors and other advisors; and a worldwide network of business relationships that provide a significant source of investment opportunities, specialized knowledge during due diligence and substantial resources for creating and realizing value for stakeholders. These teams invest capital, a substantial portion of which is of a long duration or not subject to predetermined redemption requirements, which provides us with significant flexibility to grow investments and select exit opportunities. As ofSeptember 30, 2022 , approximately 91% of our AUM consists of capital that is not subject to redemption for at least 8 years from inception and what we refer to as perpetual capital. For more information about the limitations of perpetual capital, please see "Risks Related to Our Business-AUM referred to as perpetual capital is subject to material reduction, including through withdrawal, redemption, or dividends, and termination" in our Annual Report. We believe that these aspects of our business help us continue to grow our asset management business and deliver strong investment performance in a variety of economic and financial conditions.
Asset Management - Private Equity
Through our Private Equity business line, we manage and sponsor a group of what we call traditional private equity funds that invest capital for long-term appreciation, either through controlling ownership of a company or strategic minority positions. In addition to our traditional private equity funds that invest in large and mid-sized companies, we sponsor investment funds that invest in core equity and growth equity, which includes our impact investments. Our Private Equity business line includes separately managed accounts that invest in multiple strategies, which may include our credit and real asset strategies in addition to our private equity strategies. These funds and accounts are managed byKohlberg Kravis Roberts & Co. L.P. , anSEC -registered investment adviser, or one of its subsidiaries. As ofSeptember 30, 2022 , our Private Equity business line had$165.5 billion of AUM.
Asset Management - Real Assets
Through our Real Assets business line, we manage and sponsor a group of real assets funds that invest capital in infrastructure, real estate, or energy. These funds and accounts are managed byKohlberg Kravis Roberts & Co. L.P. , anSEC -registered investment adviser, or one of its subsidiaries. As ofSeptember 30, 2022 , our Real Assets business line had$117.8 billion of AUM. The table below presents information as ofSeptember 30, 2022 , relating to our current private equity and real asset funds for which we have the ability to earn carried interest. This data does not reflect acquisitions or disposals of investments, changes in investment values, or distributions occurring afterSeptember 30, 2022 . 108
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Investment Period (1) Amount ($ in millions)
Percentage Gross
Committed Accrued
Start End Uncalled by General Remaining Remaining Carried
Date Date
Commitment (2) Commitments Partner Invested Realized
Cost (3) Fair Value Interest
Private Equity Business Line North America Fund XIII 6/2021 8/2027$ 18,400 $ 14,337 3%$ 4,063 $ -$ 4,063 $ 4,049 $ - Americas Fund XII 1/2017 6/2021 13,500 1,632 4% 12,366 4,948 11,293 18,804 1,454 North America Fund XI 9/2012 1/2017 8,718 410 3% 9,769 22,579 2,556 3,450 236 2006 Fund (4) 9/2006 9/2012 17,642 247 2% 17,309 36,207 973 1,189 97 Millennium Fund (4) 12/2002 12/2008 6,000 - 3% 6,000 14,123 - 6 1 European Fund VI 3/2022 6/2028 6,904 6,904 11% - - - - - European Fund V 3/2019 2/2022 6,307 1,004 2% 5,372 912 5,213 5,711 211 European Fund IV 12/2014 3/2019 3,510 62 6% 3,577 5,122 1,798 2,322 117 European Fund III (4) 3/2008 3/2014 5,500 140 5% 5,360 10,604 669 91 (28) European Fund II (4) 11/2005 10/2008 5,751 - 2% 5,751 8,507 - 34 - Asian Fund IV 7/2020 7/2026 14,735 10,424 4% 4,351 41 4,295 4,889 4 Asian Fund III 4/2017 7/2020 9,000 1,616 6% 7,813 5,031 6,548 10,880 810 Asian Fund II 4/2013 4/2017 5,825 5 1% 7,120 6,246 4,074 2,386 (346) Asian Fund (4) 7/2007 4/2013 3,983 - 3% 3,974 8,728 110 16 3 China Growth Fund (4) 11/2010 11/2016 1,010 - 1% 1,010 1,056 330 180 (17)Next Generation Technology Growth Fund II 12/2019 5/2022 2,088 360 7% 1,925 306 1,779 2,414 121 Next Generation Technology Growth Fund 3/2016 12/2019 659 4 22% 666 863 359 1,108 88 Health Care Strategic Growth Fund II 5/2021 5/2027 3,789 3,657 4% 132 - 132 150 - Health Care Strategic Growth Fund 12/2016 5/2021 1,331 339 11% 1,122 196 1,012 1,552 77 Global Impact Fund II 6/2022 6/2028 1,854 1,854 8% - - - - - Global Impact Fund 2/2019 3/2022 1,242 350 8% 1,042 174 935 1,462 99 Co-Investment Vehicles and Other Various Various 18,843 6,791 Various 12,280 7,734 8,614 10,706 1,095 Core Investment Vehicles Various Various 24,621 12,148 31% 13,289 828 12,931 20,274 138 Unallocated Commitments (5) N/A N/A 4,383 4,383 Various - - - - - Total Private Equity$ 185,595 $ 66,667 $ 124,291 $ 134,205
Real Assets Business Line Energy Income and Growth Fund II 6/2018 3/2022 $ 994 $ - 20%$ 1,187 $ 193 $ 1,024 $ 1,702 $ 43 Energy Income and Growth Fund 9/2013 6/2018 1,974 - 13% 1,974 1,024 1,030 696 - Natural Resources Fund (4) Various Various 887 - Various 887 131 173 44 - Global Energy Opportunities Various Various 915 62 Various 520 185 320 216 - Global Infrastructure Investors IV 8/2021 8/2027 16,487 12,163 2% 4,385 61 4,369 4,295 9 Global Infrastructure Investors III 6/2018 6/2021 7,151 1,379 4% 6,037 1,521 5,253 5,596 73 Global Infrastructure Investors II 10/2014 6/2018 3,039 127 4% 3,163 4,434 1,206 1,637 46 Global Infrastructure Investors 9/2011 10/2014 1,040 - 5% 1,050 2,228 - - -Asia Pacific Infrastructure Investors II 9/2022 9/2028 5,492 5,492 7% - - - - - Asia Pacific Infrastructure Investors 1/2020 9/2022 3,792 1,709 7% 2,367 396 2,117 2,287 43 Diversified Core Infrastructure Fund 12/2020 (6) 8,059 3,550 6% 4,524 155 4,524 4,602 - Real Estate Partners Americas III 12/2020 1/2025 4,253 1,907 5% 2,401 164 2,327 2,576 - Real Estate Partners Americas II 5/2017 12/2020 1,921 255 8% 1,901 2,476 585 811 78 Real Estate Partners Americas 5/2013 5/2017 1,229 138 16% 1,021 1,408 93 60 1 Real Estate Partners Europe II 12/2019 3/2024 2,042 760 10% 1,373 254 1,260 1,344 36 Real Estate Partners Europe 9/2015 12/2019 703 119 9% 663 613 292 336 12 Asia Real Estate Partners 6/2019 7/2023 1,682 1,195 15% 490 9 471 659 14 Real Estate Credit Opportunity Partners II 4/2019 6/2022 950 378 5% 595 114 595 599 12 Real Estate Credit Opportunity Partners 2/2017 4/2019 1,130 122 4% 1,008 394 1,008 1,041 13 Property Partners Americas 12/2019 (6) 2,569 347 19% 2,222 159 2,222 3,083 1 Co-Investment Vehicles and Other Various Various 5,663 1,402 Various 4,322 1,740
3,684 3,803 18
Total Real Assets$ 71,972 $ 31,105 $ 42,090 $ 17,659 $ 32,553 $ 35,387 $ 399 (1)The start date represents a date on or in between the date on which the general partner of the applicable fund commenced investment of the fund's capital and the date of the first closing. The end date represents the approximate date on which the general partner of the applicable fund was or will be required by the fund's governing agreement to cease making investments (other than reserved amounts) on behalf of the fund, unless extended by a vote of the fund investors.
(2)The commitment represents the aggregate capital commitments to the fund,
including capital commitments by third-party fund investors and the general
partner. Foreign currency commitments have been converted into
based on (i) the foreign exchange rate at the date of purchase for each
investment and (ii) the exchange rate that prevailed on
the case of uncalled commitments.
(3)The remaining cost represents the initial investment of the general partner
and limited partners, reduced for returns of capital.
(4)The "Invested" and "Realized" columns do not include the amounts of any
realized investments that restored the unused capital commitments of the fund
investors, if any.
(5)"Unallocated Commitments" represent unallocated commitments from our
strategic investor partnerships.
(6)No pre-determined date of termination.
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The table below presents information as ofSeptember 30, 2022 , relating to the historical performance of certain of our Private Equity and Real Assets business lines investment vehicles since inception, which we believe illustrates the benefits of our investment approach. This data does not reflect additional capital raised sinceSeptember 30, 2022 , or acquisitions or disposals of investments, changes in investment values or distributions occurring after that date. However, the information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of future results. Amount Fair Value of Investments Private Equity and Real Assets Business Lines Gross Net Gross Multiple of Invested Investment Funds Commitment (2) Invested Realized (4) Unrealized Total ValueIRR (5) IRR (5) Capital (5) ($ in millions) Legacy Funds (1) 1976 Fund $ 31$ 31 $ 537 $ -$ 537 39.5 % 35.5 % 17.1 1980 Fund 357 357 1,828 - 1,828 29.0 % 25.8 % 5.1 1982 Fund 328 328 1,291 - 1,291 48.1 % 39.2 % 3.9 1984 Fund 1,000 1,000 5,964 - 5,964 34.5 % 28.9 % 6.0 1986 Fund 672 672 9,081 - 9,081 34.4 % 28.9 % 13.5 1987 Fund 6,130 6,130 14,949 - 14,949 12.1 % 8.9 % 2.4 1993 Fund 1,946 1,946 4,143 - 4,143 23.6 % 16.8 % 2.1 1996 Fund 6,012 6,012 12,477 - 12,477 18.0 % 13.3 % 2.1 Subtotal - Legacy Funds 16,475 16,475 50,269 - 50,269 26.1 % 19.9 % 3.1 Included FundsEuropean Fund (1999) 3,085 3,085 8,758 - 8,758 26.9 % 20.2 % 2.8Millennium Fund (2002) 6,000 6,000 14,123 6 14,129 22.0 % 16.1 % 2.4 European Fund II (2005) 5,751 5,751 8,507 34 8,541 6.1 % 4.5 % 1.5 2006 Fund (2006) 17,642 17,309 36,207 1,189 37,396 11.9 % 9.3 % 2.2Asian Fund (2007) 3,983 3,974 8,728 16 8,744 18.9 % 13.7 % 2.2 European Fund III (2008) 5,500 5,360 10,604 91 10,695 16.4 % 11.3 % 2.0E2 Investors (Annex Fund ) (2009) 196 196 200 - 200 0.6 % 0.5 % 1.0China Growth Fund (2010) 1,010 1,010 1,056 180 1,236 5.1 % 1.1 % 1.2Natural Resources Fund (2010) 887 887 131 44 175 (24.5) % (26.2) % 0.2Global Infrastructure Investors (2011) 1,040 1,050 2,228 - 2,228 17.6 % 15.6 % 2.1 North America Fund XI (2012) 8,718 9,769 22,579 3,450 26,029 24.4 % 19.8 % 2.7 Asian Fund II (2013) 5,825 7,120 6,246 2,386 8,632 5.7 % 4.1 % 1.2 Real Estate Partners Americas (2013) 1,229 1,021 1,408 60 1,468 16.3 % 11.5 % 1.4Energy Income and Growth Fund (2013) 1,974 1,974 1,024 696 1,720 (4.5) % (7.0) % 0.9 Global Infrastructure Investors II (2014) 3,039 3,163 4,434 1,637 6,071 19.5 % 16.8 % 1.9 European Fund IV (2015) 3,510 3,577 5,122 2,322 7,444 23.3 % 17.9 % 2.1 Real Estate Partners Europe (2015) 703 663 613 336 949 13.5 % 9.5 % 1.4Next Generation Technology Growth Fund (2016) 659 666 863 1,108 1,971 34.1 % 29.1 % 3.0Health Care Strategic Growth Fund (2016) 1,331 1,122 196 1,552 1,748 25.5 % 16.5 % 1.6 Americas Fund XII (2017) 13,500 12,366 4,948 18,804 23,752 27.5 % 22.2 % 1.9Real Estate Credit Opportunity Partners (2017) 1,130 1,008 394 1,041 1,435 9.9 % 8.6 % 1.4 Core Investment Vehicles (2017) 24,621 13,289 828 20,274 21,102 21.3 % 20.0 % 1.6 Asian Fund III (2017) 9,000 7,813 5,031 10,880 15,911 33.7 % 26.3 % 2.0 Real Estate Partners Americas II (2017) 1,921 1,901 2,476 811 3,287 31.4 % 26.4 % 1.7 Global Infrastructure Investors III (2018) 7,151 6,037 1,521 5,596 7,117 9.7 % 7.1 % 1.2Global Impact Fund (2019) 1,242 1,042 174 1,462 1,636 33.4 % 24.4 % 1.6 European Fund V (2019) 6,307 5,372 912 5,711 6,623 15.1 % 10.6 % 1.2 Energy Income and Growth Fund II (2019) 994 1,187 193 1,702 1,895 32.3 % 29.3 % 1.6Asia Real Estate Partners (2019) 1,682 490 9 659 668 33.4 % 16.1 % 1.4 Next Generation Technology Growth Fund II (2019) 2,088 1,925 306 2,414 2,720 28.1 % 21.6 % 1.4 Real Estate Credit Opportunity Partners II (2019) 950 595 114 599 713 12.7 % 11.5 % 1.2Asia Pacific Infrastructure Investors (2020) 3,792 2,367 396 2,287 2,683 17.8 % 10.5 % 1.1 Asian Fund IV (2020) 14,735 4,351 41 4,889 4,930 16.4 % 6.7 % 1.1 Real Estate Partners Europe II (2020) 2,042 1,373 254 1,344 1,598 20.4 % 11.3 % 1.2 Real Estate Partners Americas III (2021) (3) 4,253 2,401 164 2,576 2,740 - - - Health Care Strategic Growth Fund II (2021) (3) 3,789 132 - 150 150 - - - Global Infrastructure Investors IV (2021) (3) 16,487 4,385 61 4,295 4,356 - - - North America Fund XIII (2021) (3) 18,400 4,063 - 4,049 4,049 - - - European Fund VI (2022) (3) 6,904 - - - - - - - Global Impact Fund II (2022) (3) 1,854 - - - - - - - Asia Pacific Infrastructure Investors II (2022) (3) 5,492 - - - - - - - Subtotal - Included Funds 220,416 145,794 150,849 104,650 255,499 16.3 % 12.5 % 1.8 All Funds$ 236,891 $ 162,269 $ 201,118 $ 104,650 $ 305,768 25.6 % 18.8 % 1.9 110
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(1)These funds were not contributed to KKR as part of the acquisition of the
assets and liabilities of
Private Equity Investors, L.P.
(2)Where commitments are euro-denominated, such amounts have been converted intoU.S. dollars based on (i) the foreign exchange rate at the date of purchase for each investment and (ii) the exchange rate prevailing onSeptember 30, 2022 , in the case of unfunded commitments. (3)The gross IRR, net IRR and gross multiple of invested capital are calculated for our investment funds that made their first investment at least 24 months prior toSeptember 30, 2022 . We therefore have not calculated gross IRRs, net IRRs and gross multiples of invested capital with respect to these funds.
(4)An investment is considered realized when it has been disposed of or has
otherwise generated disposition proceeds or current income that has been
distributed by the relevant fund.
(5)IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period. Net IRRs are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees and organizational expenses. Gross IRRs are calculated before giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees and organizational expenses. The gross multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the fund. Such amounts do not give effect to the allocation of realized and unrealized carried interest or the payment of any applicable management fees or organizational expenses. KKR's private equity and real assets funds may utilize third-party financing facilities to provide liquidity to such funds. The above net and gross IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund, and the use of such financing facilities generally decreases the amount of time that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. KKR's private equity and real assets funds also generally provide in certain circumstances, which vary depending on the relevant fund documents, for a portion of capital returned to investors to be restored to unused commitments as recycled capital. For KKR's private equity and real assets funds that have a preferred return, we take into account recycled capital in the calculation of IRRs and multiples of invested capital because the calculation of the preferred return includes the effect of recycled capital. For KKR's private equity and real assets funds that do not have a preferred return, we do not take recycled capital into account in the calculation of IRRs and multiples of invested capital. The inclusion of recycled capital generally causes invested and realized amounts to be higher and IRRs and multiples of invested capital to be lower than had recycled capital not been included. The inclusion of recycled capital would reduce the composite net IRR of all Included Funds by 0.1% and the composite net IRR of all Legacy Funds by 0.5% and would reduce the composite multiple of invested capital of Included Funds by less than 0.1 and the composite multiple of invested capital of Legacy Funds by 0.4.
Asset Management - Credit and Liquid Strategies
Through our Credit and Liquid Strategies business line, we report our credit and
hedge funds platforms on a combined basis.
Our credit business invests capital in a broad range of corporate debt and collateral-backed investments across asset classes and capital structures. Our credit strategies are managed byKKR Credit Advisors (US) LLC , which is anSEC -registered investment adviser,KKR Credit Advisors (Ireland) Unlimited Company , which is regulated by theCentral Bank of Ireland ("CBI"),KKR Credit Advisors (EMEA) LLP , which is regulated by theFinancial Conduct Authority , andKKR Credit Advisors (Singapore) Pte. Ltd. , which is regulated by theMonetary Authority of Singapore and also registered with theSEC . We also jointly own with a third partyFS/KKR Advisor, LLC , which is the investment adviser for FS KKR Capital Corp. (NYSE: FSK) ("FSK"), a publicly listed business development company (a "BDC").
Our hedge funds platform consists of strategic partnerships with third-party
hedge fund managers in which KKR owns a minority stake. Our hedge fund
partnerships offer a range of alternative investment strategies, including
long/short equity, hedge fund-of-funds and energy credit investments.
Credit
Our credit business pursues investments in two principal investment strategies:
leveraged credit and alternative credit.
Leveraged Credit. Our leveraged credit strategy is principally directed at investing in leveraged loans, high-yield bonds, opportunistic credit, structured credit and revolving credit investments. Our opportunistic credit strategy seeks to deploy capital across investment themes that take advantage of credit market dislocations, spanning asset types and liquidity profiles. Our revolving credit strategy invests in senior secured revolving credit facilities.
Alternative Credit. Our alternative credit strategy consists of our private
credit strategies and debt and equity investments sourced by our strategic
investments group ("SIG").
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•Private Credit. Our private credit strategies focus on privately or directly originated and negotiated transactions. These strategies include direct lending, mezzanine debt and asset-based finance. Through our direct lending strategy, we seek to make investments in primarily senior debt financings for middle-market companies. Through our mezzanine debt strategy, investments typically consist of subordinated debt, which generates a current yield, coupled with marginal equity exposure for additional upside potential. Our asset-based finance strategy focuses on portfolios of financial loans and loans backed by hard assets. • SIG. Our SIG strategy seeks to pursue investments in corporate credit and asset or real estate-backed credit where market volatility or other investment themes have created the opportunity to generate outsized returns with downside-protected securities. These investments may include stressed or distressed investments (including post-restructuring equity), control-oriented opportunities, rescue financing (debt or equity investments made to address covenant, maturity or liquidity issues), debtor-in-possession or exit financing, and other event-driven investments in debt or equity.
Performance
The following table presents information regarding the larger leveraged credit strategies managed by KKR from inception toSeptember 30, 2022 . The information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of any future result. Leveraged Credit Strategies: Inception-to-Date Annualized Gross Performance vs. Benchmark by Strategy Benchmark Leveraged Credit Gross Net Gross Strategy Inception Date Returns Returns Benchmark (1) Returns Bank Loans Plus High 65% S&P/LSTA Loan Index, 35% BoAML HY Yield Jul 2008 6.41 % 5.81 % Master II Index (2) 5.04 % 50% S&P/LSTA Loan Index, 50% BoAML HY Opportunistic Credit (3) May 2008 9.94 % 8.29 % Master II Index (3) 5.19 % Bank Loans Apr 2011 4.74 % 4.16 % S&P/LSTA Loan Index (4) 3.69 % High-Yield Apr 2011 5.10 % 4.52 % BoAML HY Master II Index (5) 4.42 % European Leveraged Loans CS Inst West European Leveraged Loan (6) Sep 2009 3.88 % 3.37 % Index (7) 2.98 % European Credit S&P European Leveraged Loans (All Opportunities (6) Sept 2007 4.56 % 3.74 % Loans) (8) 3.49 % (1)The benchmarks referred to herein include the S&P/LSTA Leveraged Loan Index (the "S&P/LSTA Loan Index"), S&P/LSTAU.S. B/BB Ratings Loan Index (the "S&P/LSTA BB-B Loan Index"), the Bank of America Merrill Lynch High Yield Master II Index (the "BoAML HY Master II Index"), theBofA Merrill Lynch BB-B US High Yield Index (the "BoAML HY BB-B Constrained"), theCredit Suisse Institutional Western European Leveraged Loan Index (the "CS Inst West European Leveraged Loan Index"), and S&P European Leveraged Loans (All Loans). The S&P/LSTA Loan Index is a daily tradable index for theU.S. loan market that seeks to mirror the market-weighted performance of the largest institutional loans that meet certain criteria. The BoAML HY Master II Index is an index for high-yield corporate bonds. It is designed to measure the broad high-yield market, including lower-rated securities. The CS Inst West European Leveraged Loan Index contains only institutional loan facilities priced above 90, excluding TL and TLa facilities and loans ratedCC, C or are in default. The S&P European Leveraged Loan Index reflects the market-weighted performance of institutional leveraged loan portfolios investing in European credits. While the returns of our leveraged credit strategies reflect the reinvestment of income and dividends, none of the indices presented in the chart above reflect such reinvestment, which has the effect of increasing the reported relative performance of these strategies as compared to the indices. Furthermore, these indices are not subject to management fees, incentive allocations, or expenses. (2)Performance is based on a blended composite of Bank Loans Plus High Yield strategy accounts. The benchmark used for purposes of comparison for the Bank Loans Plus High Yield strategy is based on 65% S&P/LSTA Loan Index and 35% BoAML HY Master II Index. (3)The Opportunistic Credit strategy invests in high-yield securities and corporate loans with no preset allocation. The benchmark used for purposes of comparison for the Opportunistic Credit strategy presented herein is based on 50% S&P/LSTA Loan Index and 50% BoAML HY Master II Index. Funds within this strategy may utilize third-party financing facilities to enhance investment returns. In cases where financing facilities are used, the amounts drawn on the facility are deducted from the assets of the fund in the calculation of net asset value, which tends to increase returns when net asset value grows over time and decrease returns when net asset value decreases over time.
(4)Performance is based on a composite of portfolios that primarily invest in
leveraged loans. The benchmark used for purposes of comparison for the Bank
Loans strategy is based on the S&P/LSTA Loan Index.
(5)Performance is based on a composite of portfolios that primarily invest in high-yield securities. The benchmark used for purposes of comparison for the High Yield strategy is based on the BoAML HY Master II Index.
(6)The returns presented are calculated based on local currency.
(7)Performance is based on a composite of portfolios that primarily invest in
higher quality leveraged loans. The benchmark used for purposes of comparison
for the European Leveraged Loans strategy is based on the CS Inst West European
Leveraged Loan Index.
(8)Performance is based on a composite of portfolios that primarily invest in
European institutional leveraged loans. The benchmark used for purposes of
comparison for the European Credit Opportunities strategy is based on the S&P
European Leveraged Loans (All Loans) Index.
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The following table presents information regarding our credit investment funds where investors are subject to capital commitments from inception toSeptember 30, 2022 . The information presented below is not intended to be representative of any past or future performance for any particular period other than the period presented below. Past performance is no guarantee of any future result. Alternative Credit Strategies: Fund Performance Amount Fair Value of Investments Multiple of Gross Credit and Liquid Strategies Total Gross NetInvested Capital Accrued Investment Funds Inception Date Commitment Invested (1) Realized (1) Unrealized ValueIRR (2) IRR (2) (3) Carried Interest ($ in Millions)Dislocation Opportunities Fund May 2020 $ 2,967 $ 2,299 $ 682$ 1,950 $ 2,632 12.1 % 9.4 % 1.1 $ 35 Special Situations Fund IIDec 2014 3,525 3,241 2,215 1,552 3,767 4.2 % 2.2 % 1.2 -Special Situations Fund Dec 2012 2,274 2,273 1,701 388 2,089 (1.9) % (3.8) % 0.9 -Mezzanine Partners Mar 2010 1,023 990 1,165 116 1,281 8.7 % 5.5 % 1.3 (20)Asset-Based Finance Partners Aug 2020 2,059 555 14 597 611 11.4 % 8.0 % 1.1 9 Private Credit Opportunities Partners IIDec 2015 2,245 1,754 696 1,291 1,987 4.5 % 2.8 % 1.1 - Lending Partners IIIApr 2017 1,498 805 460 775 1,235 15.5 % 12.7 % 1.5 32 Lending Partners IIJun 2014 1,336 1,179 1,149 127 1,276 2.9 % 1.5 % 1.1 - Lending PartnersDec 2011 460 420 451 19 470 3.5 % 1.8 % 1.1 - Lending Partners Europe IIJun 2019 837 637 66 570 636 14.7 % 10.6 % 1.0 2 Lending Partners EuropeMar 2015 848 662 379 248 627 (1.7) % (4.2) % 0.9 - Asia CreditDec 2020 1,084 271 - 286 286 N/A N/A N/A - Other Alternative Credit Vehicles Various 14,011 7,308 5,648 3,716 9,364 N/A N/A N/A 24 All Funds$ 34,167 $ 22,394 $ 14,626 $ 11,635 $ 26,261 $ 82
(1)Recycled capital is excluded from the amounts invested and realized.
(2)These credit funds utilize third-party financing facilities to provide liquidity to such funds, and in such event IRRs are calculated from the time capital contributions are due from fund investors to the time fund investors receive a related distribution from the fund. The use of such financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate IRRs, which tends to increase IRRs when fair value grows over time and decrease IRRs when fair value decreases over time. IRRs measure the aggregate annual compounded returns generated by a fund's investments over a holding period and are calculated taking into account recycled capital. Net IRRs presented are calculated after giving effect to the allocation of realized and unrealized carried interest and the payment of any applicable management fees. Gross IRRs are calculated before giving effect to the allocation of carried interest and the payment of any applicable management fees. (3)The multiples of invested capital measure the aggregate value generated by a fund's investments in absolute terms. Each multiple of invested capital is calculated by adding together the total realized and unrealized values of a fund's investments and dividing by the total amount of capital invested by the investors. The use of financing facilities generally decreases the amount of invested capital that would otherwise be used to calculate multiples of invested capital, which tends to increase multiples when fair value grows over time and decrease multiples when fair value decreases over time. Such amounts do not give effect to the allocation of any realized and unrealized returns on a fund's investments to the fund's general partner pursuant to a carried interest or the payment of any applicable management fees and are calculated without taking into account recycled capital. Hedge Funds Our hedge fund platform consists of strategic partnerships with third-party hedge fund managers in which KKR owns a minority stake. This principally consists of a 39.6% interest inMarshall Wace LLP (together with its affiliates, "Marshall Wace"), a global alternative investment manager specializing in long/short equity products. We also own (i) a 39.9% interest inPAAMCO Prisma Holdings, LLC ("PAAMCO Prisma"), an investment manager focused on liquid alternative investment solutions, including hedge fund-of-fund portfolios, and (ii) a 24.9% interest inBlackGold Capital Management L.P. ("BlackGold"), a credit-oriented investment manager focused on energy and hard asset investments. 113
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Credit and Liquid Strategies AUM
As ofSeptember 30, 2022 , our Credit and Liquid Strategies business line had$213.0 billion of AUM, comprised of$103.7 billion of assets managed in our leveraged credit strategies,$73.3 billion of assets managed in our private credit strategy, and$7.6 billion of assets managed in our SIG strategy,$26.6 billion of assets managed through our hedge fund platform, and$1.7 billion of assets managed in other credit and liquid strategies. We manage$98.5 billion of credit investments for our Global Atlantic insurance companies, which are included in the amounts described in the preceding sentence. Our BDC has approximately$16.8 billion in assets under management, which is reflected in the AUM of our leveraged credit and private credit strategies above. We report all of the assets under management of our BDC in our AUM, but we report only a pro rata portion of the assets under management of our hedge fund partnerships based on our percentage ownership in them. Typical Incentive Fee / Management Carried Preferred Duration ($ in millions) AUM FPAUM Fee Rate Interest Return of Capital Leveraged Credit: Leveraged Credit SMAs/Funds$ 78,256 $ 75,479 0.15% - 1.10% Various (1) Various (1) Subject to redemptions CLOs 23,951 23,951 0.40% - 0.50% Various (1) Various (1) 10-14 Years (2) Total Leveraged Credit 102,207 99,430 Alternative Credit: (3) Private Credit 59,574 51,361 0.30% - 1.50% (4) 10.00 - 20.00% 5.00 - 8.00% 8-15 Years (2) SIG 7,773 3,959 0.50% - 1.75% 10.00 - 20.00% 7.00 - 12.00% 7-15 Years (2) Total Alternative Credit 67,347 55,320 Hedge Funds (5) 26,624 26,624 0.50% - 2.00% Various (1) Various (1) Subject to redemptions BDCs (6) 16,800 16,800 0.60% 8.00% 7.00% Indefinite Total$ 212,978 $ 198,174 (1)Certain funds and CLOs are subject to a performance fee in which the manager or general partner of the funds share up to 20% of the net profits earned by investors in excess of performance hurdles (generally tied to a benchmark or index) and subject to a provision requiring the funds and vehicles to regain prior losses before any performance fee is earned. (2)Duration of capital is measured from inception. Inception dates for CLOs were between 2013 and 2022 and for separately managed accounts and funds investing in alternative credit strategies from 2009 through 2022. (3)Our alternative credit funds generally have investment periods of two to five years and our newer alternative credit funds generally earn management fees on invested capital throughout their lifecycle.
(4)Lower fees on uninvested capital in certain vehicles.
(5)Hedge Funds represent KKR's pro rata portion of AUM and FPAUM of our hedge
fund partnerships.
(6)Consists of FSK. We report all of the assets under management of this BDC in
our AUM and FPAUM.
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Asset Management - Capital Markets
OurCapital Markets business line is comprised of our global capital markets business, which is integrated with KKR's other asset management business lines, and serves our firm, our funds, our portfolio companies and third-party clients by developing and implementing both traditional and non-traditional capital solutions for investments or companies seeking financing. These services include arranging debt and equity financing, placing and underwriting securities offerings, and providing other types of capital markets services that may result in the firm receiving fees, including underwriting, placement, transaction and syndication fees, commissions, underwriting discounts, interest payments and other compensation, which may be payable in cash or securities, in respect of the activities described above. Our capital markets business underwrites credit facilities and arranges loan syndications and participations. When we are sole arrangers of a credit facility, we may advance amounts to the borrower on behalf of other lenders, subject to repayment. When we underwrite an offering of securities on a firm commitment basis, we commit to buy and sell an issue of securities and generate revenue by purchasing the securities at a discount or for a fee. When we act in an agency capacity or best efforts basis, we generate revenue for arranging financing or placing securities with capital markets investors. We may also provide issuers with capital markets advice on security selection, access to markets, marketing considerations, securities pricing, and other aspects of capital markets transactions in exchange for a fee. Our capital markets business also provides syndication services in respect of co-investments in transactions participated in by KKR funds or third-party clients, which may entitle the firm to receive syndication fees, management fees and/or a carried interest. The capital markets business has a global footprint, with local presence and licenses to carry out certain broker-dealer activities in various countries inNorth America ,Europe ,Asia-Pacific and theMiddle East . Our flagship capital markets subsidiary isKKR Capital Markets LLC , anSEC -registered broker-dealer and a member of theFinancial Industry Regulatory Authority ("FINRA").
Asset Management - Principal Activities
Through our Principal Activities business line, we manage the firm's own assets on our firm's balance sheet and deploy capital to support and grow our Private Equity, Real Assets, Credit and Liquid Strategies, and Credit Markets business lines. Typically, the funds that we manage in our Private Equity, Real Assets and Credit and Liquid Strategies business lines contractually require us, as general partner of the funds, to make sizable capital commitments. We believe making general partner commitments assists us in raising new funds from limited partners by demonstrating our conviction in a given fund's strategy. Our commitments to fund capital also occur where we are the holder of the subordinated notes or the equity tranche of investment vehicles that we sponsor, including structured transactions. We also use our balance sheet to bridge investment activity during fundraising, for example by funding investments for new funds and acquiring investments to establish a track record for new investment strategies. We also use our own capital to bridge capital selectively for our funds' investments or finance strategic transactions, although the financial results of an acquired business may be reported in our other business lines. Our Principal Activities business line also provides the required capital to fund the various commitments of our Capital Markets business line when underwriting or syndicating securities, or when providing term loan commitments for transactions involving our portfolio companies and for third parties. Our Principal Activities business line also holds assets that are utilized to satisfy regulatory requirements for our Capital Markets business line and risk retention requirements for certain investment vehicles.
We also make opportunistic investments through our Principal Activities business
line, which include co-investments alongside the funds we manage as well as
Principal Activities investments that do not involve our funds.
We endeavor to use our balance sheet strategically and opportunistically to
generate an attractive risk-adjusted return on equity in a manner that is
consistent with our fiduciary duties, in compliance with applicable laws, and
consistent with our one-firm approach.
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The chart below presents the holdings of our Principal Activities business line
by asset class as of
Holdings by Asset Class (1)
[[Image Removed: kkr-20220930_g2.jpg]]
(1)General partner commitments in our funds are included in the various asset
classes shown above. Assets and revenues of other asset managers with which KKR
has formed strategic partnerships where KKR does not hold more than 50%
ownership interest are not included in our Principal Activities business line
but are reported in the financial results of our other business lines. Private
Equity includes our investments in private equity funds, co-investments
alongside such KKR-sponsored private equity funds, certain core equity
investments, and other opportunistic investments. Equity investments in other
asset classes, such as real estate, special situations and energy appear in
these other asset classes. Other Credit consists of certain leveraged credit and
specialty finance strategies.
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Insurance
Our insurance business is operated by Global Atlantic, which we acquired onFebruary 1, 2021 . As ofSeptember 30, 2022 , KKR owns a 61.5% economic interest in Global Atlantic with the balance of Global Atlantic owned by third-party investors and Global Atlantic employees. Following the Global Atlantic acquisition, Global Atlantic continues to operate as a separate business with its existing brands and management team. Since the first quarter of 2021, we have presented Global Atlantic's financial results as a separate reportable segment. GlobalAtlantic is a leadingU.S. retirement and life insurance company that provides a broad suite of protection, legacy and savings products to customers and reinsurance solutions to clients across individual and institutional markets. GlobalAtlantic focuses on target markets that it believes supports issuing products that have attractive risk and return characteristics. These markets allow Global Atlantic to leverage its strength in distribution and to deploy capital opportunistically across market conditions. GlobalAtlantic primarily offers individual market customers fixed-rate annuities, fixed-indexed annuities, and targeted life products through a network of banks, broker-dealers, and insurance agencies. GlobalAtlantic provides its institutional market clients customized reinsurance solutions, including block, flow and pension risk transfer ("PRT") reinsurance, as well as funding agreements. Subject to changes in asset values, Global Atlantic's assets generally increase when individual market sales and reinsurance transactions exceed run-off of in-force policies. GlobalAtlantic primarily generates income by earning a spread between its investment income and the cost of policyholder benefits. As ofSeptember 30, 2022 , Global Atlantic served approximately three million policyholders. GlobalAtlantic inflows are derived from new business production in its individual and institutional markets channels. GlobalAtlantic expects new business production from its individual markets channel and certain institutional markets products to be largely consistent quarter over quarter while exhibiting growth over time, subject to market and business risks. In contrast, Global Atlantic expects block reinsurance transactions generated in the institutional markets channel to be episodic rather than steady quarter over quarter. Similarly, funding agreements issued in the funding agreement backed note ("FABN") program are subject to capital markets conditions and are not expected to be consistent quarter over quarter. The following table represents Global Atlantic's new business volumes by business and product for the three and nine months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021(4) ($ in millions) Individual market channel: Fixed-rate annuities $ 1,206$ 854 $ 3,726$ 3,437 Fixed-indexed annuities 1,261 809 3,282 2,305 Variable annuities 12 17 34 40
Total retirement products(1) $ 2,479
$ 7,042$ 5,782 Life insurance products $ 7 $ 11 $ 26 $ 28 Preneed life 72 64 210 164 Institutional market channel: Block - 16,010 2,782 17,099 Flow & pension risk transfer 2,571 1,050 6,413 3,443 Funding agreements(3) - 1,500 2,000 2,200 Total institutional channel(2) $ 2,571$ 18,560 $ 11,195$ 22,742 _________________
(1)New business volumes in individual markets are referred to as sales. In
Global Atlantic's individual market channel, sales of annuities include all
money paid into new and existing contracts. Individual market channel sales of
life insurance products are based on commissionable premium and individual
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market channel sales for preneed life are based on the face amount of insurance. Life insurance product sales do not include the recurring premiums that policyholders may pay over time. (2)New business volumes from Global Atlantic's institutional market channel are based on the assets assumed, net of any ceding commission, and is gross of any retrocessions to investment vehicles that participate in qualifying reinsurance transactions sourced by Global Atlantic and to other third party reinsurers. (3)Funding agreement new business volumes represents funding agreements issued in connection with our FABN program only. (4)For the nine month period endedSeptember 30, 2021 , the results of GlobalAtlantic's insurance operations included in our condensed consolidated results of operations are fromFebruary 1, 2021 throughSeptember 30, 2021 . The table below represents a breakdown of Global Atlantic's policy liabilities by business and product type as ofSeptember 30, 2022 , separated by reserves originated through its individual and institutional markets.
Reserves as of
Individual Institutional
market market(5) Total Ceded Total, net Percentage of total
($ in millions, except percentages, if applicable)
Fixed-rate annuity(1) $ 22,691 $ 45,432 $ 68,123 $ (17,465) $ 50,658 48.7 %
Fixed-indexed annuity(1) 22,514 7,566 30,080 (3,088) 26,992 21.5 %
Variable annuity 2,538 3,272 5,810 (646) 5,164 4.2 %
Indexed universal life(1) 13,521 - 13,521 (167) 13,354 9.7 %
Preneed life 2,854 - 2,854 - 2,854 2.0 %
Other life insurance(2) 583 10,165
10,748 (3,672) 7,076 7.7 % Funding agreements(3) 2,099 5,406 7,505 - 7,505 5.4 % Closed block - 1,098 1,098 (1,057) 41 0.8 % Other corporate(4) - 47 47 (47) - - % Total reserves$ 66,800 $ 72,986 $ 139,786 $ (26,142) $ 113,644 100.0 % Total general account$ 64,491 $ 71,243 $ 135,734 $ (26,142) $ 109,592 97.1 % Total separate account 2,309 1,743 4,052 - 4,052 2.9 % Total reserves$ 66,800 $ 72,986 $ 139,786 $ (26,142) $ 113,644 100.0 % _________________ (1)As ofSeptember 30, 2021 , 72% of the account value in its general account associated with its fixed-rate and fixed-annuity products, and 44% of account value in its general account associated with universal life products was protected by surrender charges. (2)"Other life insurance" includes universal life, term and whole life insurance products. (3)"Funding agreements" includes funding agreements associated withFederal Home Loan Bank advances and under our FABN program. (4)"Other corporate" primarily includes accident & health reserves that GlobalAtlantic assumed as part of a reinsurance transaction in 2009. (5)Institutional market reserves are sourced using customized reinsurance solutions such as block, flow and PRT. As ofSeptember 30, 2022 , reserves sourced through for block, flow and PRT transactions were$49.3 billion ,$10.7 billion , and$4.6 billion , respectively. A new accounting standard for targeted improvements to the accounting for long-duration contracts becomes effective onJanuary 1, 2023 with a transition date ofJanuary 1, 2021 . We do not expect the adoption of this standard to have a material effect on our retained earnings and accumulated other comprehensive income (loss) as of the transition date, due to the purchase accounting associated with the acquisition of Global Atlantic onFebruary 1, 2021 . However, we continue to evaluate the impact of this guidance on the acquisition date opening balance sheet and to periods thereafter. The new guidance is expected to increase volatility in our financial statements primarily due to the requirement to measure market risk benefits at fair value, which is recorded in net income, except for changes in value attributable to changes in an entity's non-performance risk, which is recognized in OCI. In addition, the new guidance is expected to have a significant impact on our systems, processes and controls. See "Risk Factors - Risks Related to Global Atlantic - Changes in accounting standards could adversely impact Global Atlantic's reported results of operations and reported financial condition" in our Annual Report and Note 2 "Summary of Significant Accounting Policies - Future application of accounting standards - Targeted improvements to the accounting for long-duration contracts" in this report. 118
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Business Environment
Economic and Market Conditions
Impact of COVID-19. The outbreak of COVID-19 continues to impact various countries throughout the world. For a description of the impact that COVID-19 had and may in the future have on our business, see "Risk Factors-Risks Related to Our Business-COVID-19 continues to impactthe United States and other countries throughout the world, and it has caused and may further cause disruptions to our business and adversely affect our financial results" and "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report. Economic Conditions. As a global investment firm, we are affected by financial and economic conditions globally. Global and regional economic conditions, including those caused by the COVID-19 pandemic, have substantial impact on our financial condition and results of operations, impacting the values of the investments we make, our ability to exit these investments profitably, our ability to raise capital from investors, and our ability to make new investments. Financial and economic conditions inthe United States ,European Union ,China ,Japan , and other major economies are significant contributors to the global economy. During the quarter endedSeptember 30, 2022 ,the United States continued to show signs of slowing economic activity, potentially indicating the early stages of a recession. Inflation continued to present a headwind for theU.S. economy. In keeping with its stated intention to bring down inflation, theU.S. Federal Reserve pursued a more restrictive monetary policy. TheFederal Reserve raised interest rates by 75 basis points in July and 75 basis points in September, leading to increased market volatility. Inthe United States , real GDP is estimated to have expanded at a 2.6% seasonally-adjusted annualized rate in the quarter endedSeptember 30, 2022 , after contracting at a 0.6% seasonally-adjusted annualized rate in the quarter endedJune 30, 2022 ; theU.S. unemployment rate was 3.5% as ofSeptember 30, 2022 , down from 3.6% as ofJune 30, 2022 ; theU.S. consumer price index rose 8.2% year-over-year as ofSeptember 30, 2022 , down from 9.1% year-over-year as ofJune 30, 2022 ; theU.S. core consumer price index rose 6.6% on a year-over-year basis as ofSeptember 30, 2022 , up from 5.9% on a year-over-year basis as ofJune 30, 2022 ; and the effective federal funds rate set by theU.S. Federal Reserve was 3.1% as ofSeptember 30, 2022 , up from 1.6% as ofJune 30, 2022 . During the quarter endedSeptember 30, 2022 , the Euro Area (also known as theEurozone ) economy also experienced slowing economic activity, and the potential for recession for countries in the Euro Area is generally high amid continued disruptions to European energy markets andRussia's ongoing invasion ofUkraine . TheEuropean Central Bank (ECB) raised interest rates by 50 basis points in July and 75 basis points in September, leading to increased market volatility.Euro Area real GDP is estimated to have been unchanged on a seasonally-adjusted quarter-over-quarter basis in the quarter endedSeptember 30, 2022 , compared to a 0.8% increase recorded in the quarter endedJune 30, 2022 . In addition,Euro Area unemployment was 6.6% as ofSeptember 30, 2022 , down from 6.7% as ofJune 30, 2022 ;Euro Area core inflation was 4.8% as ofSeptember 30, 2022 , up from 3.7% as ofJune 30, 2022 ; and the short-term benchmark interest rate set by theEuropean Central Bank was 1.25% as ofSeptember 30, 2022 , up from 0.0% as ofJune 30, 2022 . As ofSeptember 30, 2022 , we have no investments in any portfolio companies whose executive headquarters are located inRussia ,Ukraine orBelarus , and we believe that the direct exposure of our investment portfolio toRussia ,Ukraine andBelarus is insignificant. During the quarter endedSeptember 30, 2022 , the Chinese economy experienced headwinds related to the ongoing slowdown inChina's property sector and the effects of the government's zero-COVID policies. Real GDP inChina is estimated to have increased 3.9% on a seasonally-adjusted quarter-over-quarter basis in the quarter endedSeptember 30, 2022 , compared to contraction of 2.7% reported for the quarter endedJune 30, 2022 . Core inflation inChina was 0.6% on a year-over-year basis as ofSeptember 30, 2022 , down from 1.0% on a year-over-year basis as ofJune 30, 2022 . After the quarter endedSeptember 30, 2022 , PresidentXi Jinping was confirmed to a third term as the general secretary of theCommunist Party and seven new members were appointed to the Politiburo Standing Committee, following which, the MSCI China Index fell 8.2% onOctober 24, 2022 . InJapan , the economic recovery from COVID-19 has continued, despite higher energy costs and significant volatility in currency markets presenting headwinds to GDP growth. InJapan , real GDP growth for the quarter endedSeptember 30, 2022 is estimated to have been 1.4% on a seasonally-adjusted annualized basis, up from 3.5% in the quarter endedJune 30, 2022 ; core inflation rose to 2.8% on a year-over-year basis as ofSeptember 30, 2022 , up from 2.2% as ofJune 30, 2022 ; and the short-term benchmark interest rate set by the Bank of Japan was -0.1% as ofSeptember 30, 2022 , unchanged fromJune 30, 2022 . 119
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These and other key issues could have repercussions across regional and global financial markets, which could adversely affect the valuations of our investments. In particular, in response to persistent inflationary pressure and central bank policy designed to combat inflation, short- and medium-term interest rates may continue to rise, which may adversely impact equity and credit markets with tightening financial conditions and slowing growth. As noted above, theU.S. Federal Reserve has continued to raise interest rates and has indicated that it is prepared to take decisive action to manage inflation, including raising interest rates further and shrinking the size of its balance sheet. In addition, commodity prices are generally expected to rise in inflationary environments, and foreign exchange rates are often affected by countries' monetary and fiscal responses to inflationary trends. TheRussia -Ukraine conflict, including the sanctions imposed in response toRussia's invasion ofUkraine , have exacerbated and may further exacerbate these issues and trends, including with respect to oil and gas prices. See "Commodities Markets" in this report below. Protectionist policies, such as restrictions on exports of food, have also increased globally as a result ofRussia's invasion ofUkraine . Other key issues include (i) further developments regarding infectious diseases, including COVID-19, which may prolong the adverse economic impact of the COVID-19 pandemic on theU.S. and global economies, including supply chain disruptions that promote cost inflation for critical goods and labor shortages, (ii) geopolitical uncertainty such asU.S. -China andU.S. -Russia relations, (iii) political uncertainty caused by, among other things, economic nationalist sentiments, tensions surrounding socioeconomic inequality issues, and partisan sentiments inthe United States , all of which have potentially global ramifications with regards to policy, (iv) regulatory changes regarding, for example, taxation, international trade, cross-border investments, immigration, stimulus programs and rising levels of debt, (v) increased volatility and/or downturn in equity or credit markets, (vi) unexpected shifts in central banks' monetary policies, (vii) rising mortgage rates, which affect demand for housing and housing-related related goods and services, (viii) technological advancements and innovations that may disrupt marketplaces and businesses, and (ix) insurance company regulatory changes regarding, for example, capital and investments held by insurance companies. For a further discussion of how market conditions may affect our businesses, see "Risk Factors-Risks Related to Our Business-Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" in our Annual Report. In addition, governments have enacted and may further enact significant changes in tax law, including changes in the wayU.S. corporations like KKR and many of ourU.S. portfolio companies are taxed. TheU.S. Federal government has recently signed into law the Inflation Reduction Act of 2022 which, among other things, imposes a corporate minimum "book" tax on certain large corporations, which may apply to KKR. It also creates a new non-deductible 1% excise tax on net stock repurchases made by publicly traded corporations like KKR afterDecember 31, 2022 and allocates additional funds to enhance the frequency and breadth of audits and other enforcement actions. In addition,New York State may propose regulations that could significantly affect the determination of the tax base forNew York State tax purposes for corporations that conduct an asset management business like us. These changes could materially increase the amount of taxes and tax-related regulatory and compliance costs we and our portfolio companies are required to pay. See "Risk Factors-Risks Related to Our Business-Changes in relevant tax laws, regulations or treaties or an adverse interpretation of these items by tax authorities could adversely impact our effective tax rate and tax liability" in our Annual Report and Note 18 "Income Taxes" in our financial statements. Equity and Credit Markets. Global equity and credit markets have a substantial effect on our financial condition and results of operations. Tightening liquidity conditions in equity and credit capital markets affect the availability and cost of capital for KKR and our portfolio companies, and the increased cost of credit or degradation in debt financing terms may impact our ability to identify and execute investments on attractive terms. See "Business Conditions-Our ability to successfully deploy capital" in this report below. In general, a climate of reasonable interest rates and high levels of liquidity in the debt and equity capital markets provide a positive environment for us to generate attractive investment returns, which also impacts our ability to generate incentive fees and carried interest. Periods of volatility and dislocation in the capital markets, as have been observed recently, raise substantial risks, but also can present us with opportunities to invest at reduced valuations that position us for future growth and investment returns. Low interest rates related to monetary stimulus and economic stagnation may negatively impact expected returns on all types of investments. Higher interest rates in conjunction with slower growth or weaker currencies in some emerging market economies have caused, and may further cause, the default risk of these countries to increase, and this could impact the operations or value of our investments that operate in these regions. Areas that have central bank quantitative easing or tightening campaigns affecting their interest rates relative tothe United States could potentially experience further currency volatility relative to theU.S. dollar. 120
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In our asset management segment, many of our investments are in equities, so a change in global equity prices or in market volatility directly impacts the value of our investments and our profitability as well as our ability to realize investment gains and the receptiveness of fund investors to our investment products. Volatility across global equity and credit markets, alongside shifting liquidity conditions in new issue activity across equity and non-investment grade credit markets, have adversely impacted (and may continue to adversely impact) the volume of capital markets activity, and therefore, the level of transaction fees that our capital markets business line is able to earn. For the quarter endedSeptember 30, 2022 , global equity markets were negative, with the S&P 500 down 4.9% and the MSCI World Index down 6.1% on a total return basis including dividends. Equity market volatility as evidenced by theChicago Board Options Exchange Market Volatility Index (VIX), a measure of volatility, ended at 31.6 as ofSeptember 30, 2022 , increasing from 28.7 as ofJune 30, 2022 . For a discussion of our valuation methods, see "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" and see also "-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies" in our Annual Report. In our insurance business, a change in equity prices also impacts Global Atlantic's equity-sensitive annuity and life insurance products, including with respect to hedging costs related to and fee-income earned on those products. In our asset management segment, many of our investments are in non-investment grade credit instruments and investment grade credit instruments. Our funds, our portfolio companies and Global Atlantic also rely on credit financing and the ability to refinance existing debt. Consequently, any decrease in the value of credit instruments that we have invested in or any increase in the cost of credit financing reduces our returns and decreases our net income. In our insurance segment, periods of rising or higher interest rates as we are currently experiencing may result in differing impacts on Global Atlantic's business. See "Risk Factors-Risks Related to Global Atlantic- Interest rate fluctuations and sustained periods of low or high interest rates could adversely affect Global Atlantic's business, financial condition, liquidity, results of operations, cash flows and prospects" in our Annual Report. Periods of rising or higher interest rates can benefit Global Atlantic's results of operations and financial condition. We generally expect the yield on new investment purchases and income from any floating rate investments held in Global Atlantic's investment portfolio to increase as interest rates rise. Higher interest rates also generally tend to increase the demand for certain of Global Atlantic's products, as the benefits and solutions Global Atlantic can offer to clients may become more attractive, potentially resulting in higher new business volumes. Rising rates are also expected to result in decreases to certain policy liabilities as a result of forthcoming accounting guidance for insurance and reinsurance companies that issue long-duration contracts such as life insurance and annuities. For a further discussion of this guidance, see "-Summary of Significant Accounting Policies-Future application of accounting standards." On the other hand, higher interest rates can have a negative impact on GlobalAtlantic . For example, higher policyholder surrenders may occur in response to rising interest rates as more attractive products become available to policyholders in a higher rate environment. The majority of our investments at Global Atlantic are in investment grade credit instruments. Sales of those investments at a loss, for example to raise cash to meet policyholder obligations upon surrender earlier than expected maturity or as we rotate out of investments acquired with new reinsurance transactions to our desired asset mix during a period of rising or higher rates compared to when the investment was acquired, is expected to decrease our net income in that period and such decrease could be significant. We also expect that in a higher rate environment we will generally have a higher cost of insurance on new business, including higher hedging costs, as the benefits to policyholders on new business will be generally higher. If Global Atlantic fails to adequately cash flow match liabilities sold with higher benefits and interest rates fall while GlobalAtlantic holds that liability, Global Atlantic may not generate its expected earnings on those liabilities. In addition, rising interest rates will decrease the fair value of Global Atlantic's credit investments and the value of embedded derivatives associated with funds withheld reinsurance transactions. The decrease in the fair value of these credit investments resulted in unrealized losses reported in AOCI and negative carrying value in our insurance segment as ofSeptember 30, 2022 . We do not expect to incur these unrealized losses as we intend to hold the investments to recovery as part of our asset liability cash flow matching strategy. However, if the market, industry and company-specific factors relating to these investments deteriorate meaningfully, Global Atlantic may be required to recognize an impairment to goodwill and may realize losses as a result of credit defaults or impairments on investments, either of which could have a material adverse effect on our results of operations and financial condition. Due in part to holdings of credit instruments such as CLOs on our balance sheet, the performance of the credit markets has had an amplified impact on our financial results, as we directly bear the full extent of losses from credit instruments on our balance sheet. Credit markets can also impact valuations because a discounted cash flow analysis is generally used as one of the methodologies to ascertain the fair value of our investments that do not have readily observable market prices. In addition, with respect to our credit instruments, tightening credit spreads are generally expected to lead to an increase, and widening credit 121
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spreads are generally expected to lead to a decrease, in the value of these credit investments, if not offset by hedging or other factors. In addition, the significant widening of credit spreads is also typically expected to negatively impact equity markets, which in turn would negatively impact our portfolio and us as noted above. Conversely, widening credit spreads may have a positive impact on our insurance business, as the margin Global Atlantic is able to earn between crediting rates offered on its insurance products and the investment income it earns from its credit investments could increase, and tightening credit spreads may negatively impact the pricing and therefore competitiveness of Global Atlantic's products, adversely impacting sales and growth, or may negatively impact the margins that Global Atlantic earns on sales and transactions. During the quarter endedSeptember 30, 2022 ,U.S. investment grade corporate bond spreads (BofA Merrill Lynch US Corporate Index) widened by 42 basis points andU.S. high-yield corporate bond spreads (BofAML HY Master II Index) widened by 244 basis points. The non-investment grade credit indices were mixed during the quarter endedSeptember 30, 2022 , with the S&P/LSTA Leveraged Loan Index up 1.4% and the BAML US High Yield Index down 0.7%. During the quarter endedSeptember 30, 2022 , 10-year government bond yields rose 82 basis points inthe United States , rose 186 basis points in theUnited Kingdom , rose 77 basis points inGermany , fell 7 basis points inChina , and rose 1 basis point inJapan . For a further discussion of how market conditions may affect our businesses, see "Risk Factors-Risks Related to Our Business-Difficult market and economic conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments that we manage or by reducing the ability of our funds to raise or deploy capital, each of which could negatively impact our net income and cash flow and adversely affect our financial condition" and "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition" in our Annual Report. For further discussion of the impact of global credit markets on our financial condition and results of operations, see "Risk Factors-Risks Related to the Assets We Manage-Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income," "Risk Factors-Risks Related to the Assets We Manage-Our investments are impacted by various economic conditions and events outside of our control that are difficult to quantify or predict, which may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our results of operations and financial condition," "Risk Factors-Risks Related to the Assets We Manage-Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" and "Risk Factors-Risks Related to Global Atlantic-Interest rate fluctuations and sustained periods of low or high interest rates could adversely affect Global Atlantic's business, financial condition, liquidity, results of operations, cash flows and prospects" in our Annual Report. For a further discussion of our valuation methods, see "-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies." Foreign Exchange Rates. Foreign exchange rates have a substantial impact on the valuations of our investments that are denominated in currencies other than theU.S. dollar. Currency volatility can also affect our businesses and investments that deal in cross-border trade. The appreciation or depreciation of theU.S. dollar is expected to contribute to a decrease or increase, respectively, in theU.S. dollar value of our non-U.S. investments to the extent unhedged. In addition, an appreciatingU.S. dollar would be expected to make the exports ofU.S. based companies less competitive, which may lead to a decline in their export revenues, if any, while a depreciatingU.S. dollar would be expected to have the opposite effect. Moreover, when selecting investments for our investment funds that are denominated inU.S. dollars, an appreciatingU.S. dollar may create opportunities to invest at more attractiveU.S. dollar prices in certain countries outside ofthe United States , while a depreciatingU.S. dollar would be expected to have the opposite effect. For our investments denominated in currencies other than theU.S. dollar, the depreciation in such currencies will generally contribute to the decrease in the valuation of such investments, to the extent unhedged, and adversely affect theU.S. dollar equivalent revenues of portfolio companies with substantial revenues denominated in such currencies, while the appreciation in such currencies would be expected to have the opposite effect. For the quarter endedSeptember 30, 2022 , the euro fell 6.5%, the British pound fell 8.3%, the Japanese yen fell 6.2%, and the Chinese renminbi fell 5.9%, respectively, relative to theU.S. dollar. For additional information regarding our foreign exchange rate risk, see "Quantitative and Qualitative Disclosure About Market Risk-Exchange Rate Risk" in our Annual Report. LIBOR Transition. OnMarch 15, 2022 , the Consolidated Appropriations Act of 2022, which includes the Adjustable Interest Rate (LIBOR) Act of 2021, was signed into law inthe United States . This legislation establishes a uniform benchmark replacement mechanic for financial contracts that mature afterJune 30, 2023 which do not contain either clearly defined or practicable fallback provisions or are contractually silent on a benchmark replacement rate. The legislation also creates a safe harbor that shields involved parties from liability if they choose to utilize a replacement rate recommended by the Board of 122
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Governors of theFederal Reserve . For a discussion of the LIBOR transition that will impact certain debt obligations, see Note 2 "Summary of Significant Accounting Policies - Adoption of new accounting pronouncements-Reference rate reform" in our financial statements and Note 17 "Debt Obligations" in our financial statements. For a discussion of the risks related to the LIBOR transition, see "Risk Factors - Risks Related to Our Business - Transition away from LIBOR as a benchmark reference for interest rates may affect the cost of capital and requires amending or restructuring existing debt instruments and related hedging arrangements for us, our investment funds and our portfolio companies, and may impact the value of floating rate securities or loans based on LIBOR that we or our investment funds have held, all of which may result in additional costs or adversely affect our or our funds' liquidity, results of results of operations and financial condition" in our Annual Report. Commodity Markets. Our Real Assets business line portfolio contains energy real asset investments, and certain of our other Private Equity, Real Assets and Credit and Liquid Strategies business line strategies have investments in or related to the energy sector. The value of these investments is heavily influenced by the price of natural gas and oil. As noted above, the actions taken byRussia in theUkraine starting inFebruary 2022 have also caused volatility in the commodities markets. During the quarter endedSeptember 30, 2022 , the 3-year forward price of WTI crude oil decreased approximately 12%, and the 3-year forward price of natural gas increased approximately 5%. The 3-year forward price of WTI crude oil decreased from approximately$73.46 per barrel to$64.37 per barrel, and the 3-year forward price of natural gas increased from approximately$4.36 per mcf to$4.58 per mcf as ofJune 30, 2022 andSeptember 30, 2022 , respectively. When commodity prices decline or if a decline is not offset by other factors, we would expect the value of our energy real asset investments to be adversely impacted, to the extent unhedged. In general, we expect downward price movements to have a negative impact on the fair value of our energy portfolio, all other things being equal, given those commodity prices are an input in our valuation models. The reverse is true for upward price movements. However, because we typically use near-term commodity derivative transactions to hedge our exposures, we expect long-term oil and natural gas prices to be a more significant driver of the valuation of our energy investments in asset management than spot prices. In addition, to the extent energy real asset investments are directly held by our balance sheet, price movements can have an amplified impact on our financial results, as we would directly bear the full extent of such gains or losses, subject to hedging. However, as ofSeptember 30, 2022 , energy investments in oil and gas assets made up only approximately 1% of our assets under management, 1% of our total GAAP assets and 1% of our total segment assets. For additional information regarding our energy real assets, see "Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies-Real Asset Investments" and see also "Risk Factors-Risks Related to the Assets We Manage-Our funds and our firm through our balance sheet may make a limited number of investments, or investments that are concentrated in certain issuers, geographic regions or asset types, which could negatively affect our performance or the performance of our funds to the extent those concentrated assets perform poorly" in our Annual Report.
Business Conditions
Our operating revenues consist of fees, performance income, investment income
and other operating income.
Our ability to grow our revenues depends in part on our ability to attract new capital and investors, our successful deployment of capital including from our balance sheet and our ability to realize investments at a profit. Our ability to attract new capital and investors. Our ability to attract new capital and investors in our funds is driven, in part, by the extent to which they continue to see the alternative asset management industry generally, and our investment products specifically, as attractive means for capital appreciation or income. In addition, our ability to attract new capital and investors in our insurance business is driven, in part, by the extent to which they continue to see the life and annuity insurance and reinsurance industry generally, and in certain cases our reinsurance vehicles, as attractive retirement, accumulation, income or business solutions. Since 2010, we have expanded into strategies such as real assets, credit, core, growth, insurance and, through hedge fund partnerships, hedge funds. We have also reached out to new fund investors, including retail and high net worth investors. However, fundraising continues to be competitive. While our Asian Fund IV,European Fund V, North America Fund XIII, Real Estate Partners Americas III, Real Estate Partners Europe II, Global Infrastructure Investors IV, Next Generation Technology Growth Fund II and Health Care Strategic Growth Fund II exceeded the size of their respective predecessor funds, there is no assurance that fundraises for our other flagship investment funds or vehicles or for our newer strategies and their successor funds will experience similar success. If we are unable to successfully raise comparably sized or larger funds, our AUM, FPAUM, and associated fees attributable to new capital raised in future periods may be lower than in prior years. See "Risk Factors-Risks Related to Our Business-Our inability to raise additional or successor funds (or raise successor funds of a comparable size as our predecessor funds) could have a material adverse impact on our business" in our Annual Report. 123
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Our ability to successfully deploy capital. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital available to us as well as our participation in capital markets transactions. Greater competition, high valuations, increased overall cost of credit and other general market conditions may impact our ability to identify and execute attractive investments. Additionally, because we seek to make investments that have an ability to achieve our targeted returns while taking on a reasonable level of risk, we may experience periods of reduced investment activity. We have a long-term investment horizon and the capital deployed in any one quarter may vary significantly from the capital deployed in any other quarter or the quarterly average of capital deployed in any given year. Reduced levels of transaction activity also tends to result in reduced potential future investment gains, lower transaction fees and lower fees for our capital markets business line, which may earn fees in the syndication of equity or debt. In our insurance business, we deploy capital by investing in assets that are anticipated to generate net investment income in excess of the net cost of insurance. If we are unable to originate or source attractive investments, the success and growth in revenues of our insurance business will be adversely impacted. See also "Risk Factors-Risks Related to the Assets We Manage-Changes in the debt financing markets may negatively impact the ability of our investment funds, their portfolio companies and strategies pursued with our balance sheet assets to obtain attractive financing for their investments or to refinance existing debt and may increase the cost of such financing or refinancing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income" in our Annual Report. Our ability to realize investments. Challenging market and economic conditions may adversely affect our ability to exit and realize value from our investments and result in lower-than-expected returns. Although the equity markets are not the only means by which we exit investments from our funds, the strength and liquidity of theU.S. and relevant global equity markets generally, and the initial public offering market specifically, affect the valuation of, and our ability to successfully exit, our equity positions in the portfolio companies of our funds in a timely manner. We may also realize investments through strategic sales. When financing is not available or becomes too costly, it may be more difficult to find a buyer that can successfully raise sufficient capital to purchase our investments. In addition, volatile debt and equity markets may also make the exit of our investments more difficult to execute. In our insurance business, we depend on the ability of our investments to generate their anticipated returns, through the payment of interest and dividends and interest as well as return of principal, in the amounts and at the times that we expect them to be made in order to manage our obligations to make payments to our policyholders. If policyholder behavior differs from our expectations, we may be forced to sell our investments earlier than we anticipated and during market conditions where we may realize losses on the investment. We also may realize losses on investments to rotate portfolios acquired in reinsurance transactions into our preferred investment mix. In addition, material delays in payments or impairments to our anticipated investment returns could have material adverse effects to our results of operations. For additional information about how business environment and market conditions affect Global Atlantic, see "-GlobalAtlantic's Investment Portfolio."
Basis of Accounting
We consolidate the financial results ofKKR Group Partnership and its consolidated entities, which include the accounts of our investment advisers, broker-dealers, Global Atlantic's insurance companies, the general partners of certain unconsolidated investment funds, general partners of consolidated investment funds and their respective consolidated investment funds and certain other entities including collateralized financing entities ("CFEs"). When an entity is consolidated, we reflect the accounts of the consolidated entity, including its assets, liabilities, revenues, expenses, investment income, cash flows and other amounts, on a gross basis. While the consolidation of an investment fund or entity does not have an effect on the amounts of Net Income Attributable to KKR or KKR's stockholders' equity that KKR reports, the consolidation does significantly impact the financial statement presentation under GAAP. This is due to the fact that the accounts of the consolidated entities are reflected on a gross basis while the allocable share of those amounts that are attributable to third parties are reflected as single line items. The single line items in which the accounts attributable to third parties are recorded are presented as noncontrolling interests on the consolidated statements of financial condition and net income (loss) attributable to noncontrolling interests on the consolidated statements of operations. The presentation in the financial statements reflect the significant industry diversification of KKR by its acquisition of Global Atlantic. GlobalAtlantic operates an insurance business, and KKR operates an asset management business, each of which possess distinct characteristics. As a result, KKR developed a two-tiered presentation approach for the financial statements in this Management's Discussion and Analysis. KKR believes that these separate presentations provide a more informative view of the consolidated financial position and results of operations than traditional aggregated presentations. KKR believes that reporting Global Atlantic's insurance operations separately is appropriate given, among other factors, the relative significance of GlobalAtlantic's policy liabilities, which are not obligations of KKR (other than the insurance companies that issued them). If a traditional aggregated presentation were to be used, KKR would expect to eliminate or combine several identical or similar captions, which would condense the presentations but would reduce transparency. KKR also believes that 124
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using a traditional aggregated presentation would result in no new line items compared to the two-tier presentation included in the financial statements in this report. We acquired Global Atlantic onFebruary 1, 2021 ; accordingly, the results of Global Atlantic's insurance operations included in our consolidated results of operations for the nine months endedSeptember 30, 2021 are fromFebruary 1, 2021 (the closing date of the acquisition) throughSeptember 30, 2021 .
All the intercompany transactions have been eliminated.
The summary of the significant accounting policies has been organized considering the two-tiered approach described above and includes a section for common accounting policies and an accounting policy section for each of the two tiers when a policy is specific to one of the tiers.
For a further discussion about our critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies" in the 2021 Form 10-K and Note 2
"Summary of Significant Accounting Policies" in our financial statements.
Key Financial Measures Under GAAP - Asset Management
The following discussion of key financial measures under GAAP is based on KKR's
asset management business as of
Revenues
Fees and Other
Fees and other consist primarily of (i) management and incentive fees from providing investment management services to unconsolidated funds, CLOs, other vehicles, and separately managed accounts; (ii) transaction fees earned in connection with successful investment transactions and from capital markets activities; (iii) monitoring fees from providing services to portfolio companies; (iv) expense reimbursements from certain investment funds and portfolio companies; and (v) consulting fees. These fees are based on the contractual terms of the governing agreements and are recognized when earned, which coincides with the period during which the related services are performed and in the case of transaction fees, upon closing of the transaction. Monitoring fees may provide for a termination payment following an initial public offering or change of control. These termination payments are recognized in the period when the related transaction closes.
Capital Allocation-Based Income (Loss)
Capital allocation-based income (loss) is earned from those arrangements whereby KKR serves as general partner and includes income or loss from KKR's capital interest as well as "carried interest" which entitles KKR to a disproportionate allocation of investment income or loss from an investment fund's limited partners. Expenses Compensation and Benefits
Compensation and Benefits expense includes (i) base cash compensation consisting
of salaries and wages, (ii) benefits, (iii) carry pool allocations, (iv)
equity-based compensation, and (v) discretionary cash bonuses.
To supplement base cash compensation, benefits, carry pool allocations, and equity-based compensation, we typically pay discretionary cash bonuses, which are included in Compensation and Benefits expense in the consolidated statements of operations, based principally on the level of (i) management fees and other fee revenues (including incentive fees), (ii) realized carried interest and (iii) realized investment income earned during the year. The amounts paid as discretionary cash bonuses, if any, are at our sole discretion and vary from individual to individual and from period to period, including having no cash bonus. We accrue discretionary cash bonuses when payment becomes probable and reasonably estimable which is generally in the period when we make the decision to pay discretionary cash bonuses and is based upon a number of factors, including the recognition of fee revenues, realized carried interest, realized investment income and other factors determined during the year.
Beginning in 2021, we expect to pay our employees by assigning a percentage
range to each component of asset management segment revenues. Based on the
current components and blend of our asset management segment revenues on an
annual basis, we expect to use approximately: (i) 2025% of fee related
revenues, (ii) 6070% of realized carried interest and incentive fees not
included in fee related performance revenues or earned from our hedge fund
partnerships, and (iii) 1020% of realized investment income and hedge fund
partnership incentive fees to pay our asset management employees. Because these
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ranges are applied to applicable distributable revenue components independently, and on an annual basis, the amount paid as a percentage of total distributable revenues will vary and will, for example, likely be higher in a period with relatively higher realized carried interest and lower in a period with relatively lower realized carried interest. We decide whether to pay a discretionary cash bonus and determine the percentage of applicable revenue components to pay compensation only upon the occurrence of the realization event. There is no contractual or other binding obligation that requires us to pay a discretionary cash bonus to the asset management employees, except in limited circumstances. Assuming that we had accrued compensation of (i) 65% of the unrealized carried interest earned by the funds that allocate 40% and 43% to the carry pool and (ii) 15% of the unrealized net gains in our Principal Activities business line (in each case at the mid-point of the ranges above),KKR & Co. Inc. Stockholders' Equity - Series I Preferred, Common Stock as ofSeptember 30, 2022 would have been reduced by approximately$1.52 per share, compared to our reported$19.00 per share on such date, and our book value as ofSeptember 30, 2022 would have been reduced by approximately$1.48 per adjusted share, compared to our reported book value of$26.56 per adjusted share on such date.
Carry Pool Allocation
With respect to our funds that provide for carried interest, we allocate a portion of the realized and unrealized carried interest that we earn to a carry pool established atKKR Associates Holdings L.P. , which is not a KKR subsidiary, from which our asset management employees and certain other carry pool participants are eligible to receive a carried interest allocation. The allocation is determined based upon a fixed arrangement betweenKKR Associates Holdings and us, and we do not exercise discretion on whether to make an allocation to the carry pool upon a realization event. These amounts are accounted for as compensatory profit sharing arrangements in Accrued Expenses and Other Liabilities within the accompanying consolidated statements of financial condition in conjunction with the related carried interest income and are recorded as compensation expense. Upon a reversal of carried interest income, the related carry pool allocation, if any, is also reversed. Accordingly, such compensation expense is subject to both positive and negative adjustments. InFebruary 2021 , with the approval of a majority of our independent directors, KKR amended the percentage of carried interest that is allocable to the carry pool to 65% for (i) current investment funds for which no or de minimis amounts of carried interest was accrued as ofDecember 31, 2020 and (ii) all future funds. For all other funds, the percentage of carried interest remains 40% or 43%, as applicable. The percentage of carried interest allocable to the carry pool may be increased above 65% only with the approval of a majority of our independent directors. To account for the difference in the carry pool allocation percentages, we expect to use a portion of realized carried interest from the older funds equal to the difference between 65% and 40% or 43%, as applicable, to supplement the carry pool and to pay amounts as discretionary cash bonus compensation as described above to our asset management employees. The amounts paid as discretionary cash bonuses, if any, are at our discretion and vary from individual to individual and from period to period, including having no cash bonus at all for certain employees. See "-Critical Accounting Policies - Asset Management-Recognition of Carried Interest in the Statement of Operations" and "-Key Financial Measures Under GAAP - Asset Management-Expenses-Compensation and Benefits." On the Sunset Date (as defined in the Reorganization Agreement), KKR will acquire control ofKKR Associates Holdings and will commence making decisions regarding the allocation of carry proceeds pursuant to the limited partnership agreement ofKKR Associates Holdings . Until the Sunset Date, our Co-Founders will continue to make decisions regarding the allocation of carry proceeds to themselves and others, pursuant to the limited partnership agreement ofKKR Associates Holdings , provided that any allocation of carry proceeds to the Co-Founders will be on a percentage basis consistent with past practice.
Equity-based Compensation
In addition to the cash-based compensation and carry pool allocations as described above, employees receive equity awards under our Equity Incentive Plans, most of which are subject to service-based vesting typically over a three to five-year period from the date of grant, and some of which are also subject to the achievement of market-based conditions. Certain of these awards are subject to post-vesting transfer restrictions and minimum retained ownership requirements.
General, Administrative and Other
General, administrative and other expense consists primarily of professional
fees paid to legal advisors, accountants, advisors and consultants, insurance
costs, travel and related expenses, communications and information services,
depreciation and amortization charges, CLOs and investment funds that were
consolidated, costs incurred in connection with pursuing potential investments
that do not result in completed transactions ("broken-deal expenses"), expense
reimbursements, placement fees and other general operating expenses. A portion
of these general administrative and other expenses, in particular broken-deal
expenses, are borne by fund investors.
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Net gains (losses) from investment activities consist of realized and unrealized gains and losses arising from our investment activities as well as income earned from certain equity method investments. Fluctuations in net gains (losses) from investment activities between reporting periods is driven primarily by changes in the fair value of our investment portfolio as well as the realization of investments. The fair value of, as well as the ability to recognize gains from, our investments is significantly impacted by the global financial markets, which, in turn, affects the net gains (losses) from investment activities recognized in any given period. Upon the disposition of an investment, previously recognized unrealized gains and losses are reversed and an offsetting realized gain or loss is recognized in the current period. Since our investments are carried at fair value, fluctuations between periods could be significant due to changes to the inputs to our valuation process over time. For a further discussion of our fair value measurements and fair value of investments, see "-Critical Accounting Policies - Combined-Fair Value Measurements."
Dividend Income
Dividend income consists primarily of distributions that we and our consolidated investment funds receive from portfolio companies or real assets investments in which we and our consolidated investment funds invest. Dividend income is recognized primarily in connection with (i) dispositions of operations by portfolio companies, (ii) distributions of cash generated from operations from portfolio investments or real assets investments, and (iii) other significant refinancings undertaken by portfolio investments.
Interest Income
Interest income consists primarily of interest that is received on our credit instruments in which we and our consolidated investment funds, CLOs and other entities invest as well as interest on our cash and other investments.
Interest Expense
Interest expense is incurred from (i) debt issued by KKR, including debt issued
by KFN, (ii) credit facilities entered into by KKR, (iii) debt securities issued
by consolidated CFEs, (iv) financing arrangements at our majority owned
investment vehicles that have been funded with borrowings that are
collateralized by the investments and assets they own and (v) financing
arrangements at our consolidated funds entered into primarily with the objective
of managing cash flow. KFN's debt obligations are non-recourse to KKR beyond the
assets of KFN. Debt securities issued by consolidated CFEs are supported solely
by the investments held at the CFE and are not collateralized by assets of any
other KKR entity. Our obligations under financing arrangements at our
consolidated investment funds are generally limited to our pro rata equity
interest in such funds. However, in some circumstances, we may provide limited
guarantees of the obligations of our general partners in an amount equal to its
pro rata equity interest in such funds. Our management companies bear no
obligations with respect to financing arrangements at our consolidated funds. We
also may provide other kinds of guarantees. See "-Liquidity."
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Key Financial Measures Under GAAP - Insurance
The following discussion of key financial measures under GAAP is based on KKR's
insurance business as conducted by Global Atlantic as of
Revenues Premiums Premiums primarily relate to payout annuities with life contingencies and whole life and term life insurance policies, recognized when due from the policyholders. Premiums are reported net of premiums ceded under reinsurance agreements. Policy fees
Policy fees include charges assessed against policyholder account balances for
mortality, administration, separate account, benefit rider and surrender fees.
Net investment income
Net investment income reflects the income earned on our investments, net of any associated investment expenses (including management fees charged by the asset management segment) and net of ceded amounts under reinsurance agreements. Net investment income includes, amongst other things (i) interest earned on our fixed income available-for-sale and fixed-income trading investments, (ii) interest income and other related fees from our mortgage and other loan receivables, (iii) interest on funds withheld at interest receivables, (iv) proportional share of income from equity-method investments and (v) income from physical assets, such as renewable energy plants, real estate, railcars, and airplanes (net of depreciation and operating expenses).
Net investment-related gains
Net investment-related gains primarily consists of (i) realized gains and losses
from the disposal of investments, including realized gains and losses on the
disposal of investments not related to asset/liability matching strategies
("variable investment income"), (ii) unrealized gains and losses from
investments held for trading, real estate investments accounted under investment
company accounting, and investments with fair value re-measurements recognized
in earnings as a result of the election of a fair-value option, (iii) unrealized
gains and losses on funds withheld at interest receivable and payable, (iv)
unrealized gains and losses from derivatives not designated in an hedging
relationship and (v) allowances for credit losses, and other impairments of
investments.
Other income
Other income is primarily comprised of expense allowances on ceded reinsurance,
administration, management fees and distribution fees.
Expenses
Policy benefits and claims
Policy benefits and claims represent the current period expense associated with providing insurance benefits to policyholders, including claims and benefits paid, interest credited to policyholders, changes in policy liability reserves (including fair value reserves), amortization of cost of reinsurance liabilities, and amortization of deferred sales inducements.
Amortization of policy acquisition costs
Amortization of policy acquisition costs primarily consist of amortization of
value of business acquired and deferred policy acquisition costs.
Insurance expense
Insurance expenses are primarily comprised of commissions expense, net of
amounts capitalized, reinsurance ceding allowances, premium taxes, amortization
of acquired intangibles and captive financing charges.
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Interest expense
Interest expense is incurred from insurance segment debt issued, including
related interest rate swaps, credit facilities and other financing agreements.
General, administrative and other
General, administrative and other expenses are primarily comprised of employee
compensation and benefit expenses, third-party administrator ("TPA") policy
servicing fees, administrative and professional services, and other operating
expenses.
Other Key Financial Measures Under GAAP
Income Taxes
KKR & Co. Inc. is a domestic corporation forU.S. federal income tax purposes and is subject toU.S. federal, state and local income taxes at the entity level on its share of taxable income. In addition,KKR Group Partnership and certain of its subsidiaries operate as partnerships forU.S. federal tax purposes but as taxable entities for certain state, local or non-U.S. tax purposes. Moreover, certain corporate subsidiaries of KKR, including certain Global Atlantic subsidiaries, are domestic corporations forU.S. federal income tax purposes and are subject toU.S. federal, state, and local income taxes. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties. We review our tax positions quarterly and adjust our tax balances as new information becomes available.
For a further discussion of our income tax policies, see Note 18 "Income Taxes"
in our financial statements.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests primarily represents the ownership interests that certain third parties hold in entities that were consolidated in the financial statements as well as the ownership interests inKKR Group Partnership represented by exchangeable securities. The allocable share of income and expense attributable to these interests is accounted for as net income (loss) attributable to noncontrolling interests. Given the consolidation of certain of our investment funds and the significant ownership interests inKKR Group Partnership held byKKR Holdings , we expect a portion of net income (loss) will continue to be attributed to noncontrolling interests in our business.
For a further discussion of our noncontrolling interests policies, see Note 22
"Equity" in the financial statements.
Key Segment and Non-GAAP Performance Measures
The following key segment and non-GAAP performance measures are used by management in making operational and resource deployment decisions as well as assessing the performance of KKR's businesses. They include certain financial measures that are calculated and presented using methodologies other than in accordance with GAAP. These performance measures as described below are presented prior to giving effect to the allocation of income (loss) betweenKKR & Co. Inc. and holders of exchangeable securities and as such represent the entire KKR business in total. In addition, these performance measures are presented without giving effect to the consolidation of the investment funds and CFEs that KKR manages. We believe that providing these segment and non-GAAP performance measures on a supplemental basis to our GAAP results is helpful to stockholders in assessing the overall performance of KKR's business. These non-GAAP measures should not be considered as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable are included under "-Reconciliations to GAAP Measures."
After-tax Distributable Earnings
After-tax distributable earnings is a non-GAAP performance measure of KKR's
earnings, which is derived from KKR's reported segment results. After-tax
distributable earnings is used to assess the performance of KKR's business
operations and measures the earnings potentially available for distribution to
its equity holders or reinvestment into its business. After-tax distributable
earnings is equal to Distributable Operating Earnings less Interest Expense, Net
Income Attributable to Noncontrolling Interests and Income Taxes Paid. Series C
Mandatory Convertible Preferred Stock dividends have been
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excluded from After-tax Distributable Earnings, because the definition of Adjusted Shares used to calculate After-tax Distributable Earnings per Adjusted Share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of common stock ofKKR & Co. Inc. Income Taxes Paid represents the amount of income taxes that would be paid assuming that all pre-tax distributable earnings were allocated toKKR & Co. Inc. and taxed at the same effective rate, which assumes that all exchangeable securities were exchanged for shares of common stock ofKKR & Co. Inc. Income Taxes Paid includes the benefit of tax deductions arising from equity-based compensation, which reduces income taxes paid or payable during the period. Equity based compensation expense is excluded from After-tax Distributable Earnings, because (i) KKR believes that the cost of equity awards granted to employees does not contribute to the earnings potentially available for distributions to its equity holders or reinvestment into its business and (ii) excluding this expense makes KKR's reporting metric more comparable to the corresponding metric presented by other publicly traded companies in KKR's industry, which KKR believes enhances an investor's ability to compare KKR's performance to these other companies. If tax deductions from equity-based compensation were to be excluded from Income Taxes Paid, KKR's After-tax Distributable Earnings would be lower and KKR's effective tax rate would appear to be higher, even though a lower amount of income taxes would have actually been paid or payable during the period. KKR separately discloses the amount of tax deduction from equity-based compensation for the period reported and the effect of its inclusion in After-tax Distributable Earnings for the period. KKR makes these adjustments when calculating After-tax Distributable Earnings in order to more accurately reflect the net realized earnings that are expected to be or become available for distribution to KKR's equity holders or reinvestment into KKR's business. However, After-tax Distributable Earnings does not represent and is not used to calculate actual dividends under KKR's dividend policy, which is a fixed amount per period, and After-tax Distributable Earnings should not be viewed as a measure of KKR's liquidity.
Book Value
Book Value is a non-GAAP performance measure of the net assets of KKR and is used by management primarily in assessing the unrealized value of KKR's net assets presented on a basis that (i) deconsolidates KKR's investment funds and CFEs that KKR manages, (ii) includes the net assets that are attributable to certain securities exchangeable into shares of common stock ofKKR & Co. Inc. , and (iii) includes KKR's ownership of the net assets of Global Atlantic. We believe this measure is useful to stockholders as it provides additional insight into the net assets of KKR excluding those net assets that are allocated to investors in KKR's investment funds and other noncontrolling interest holders. KKR's book value includes the net impact of KKR's tax assets and liabilities as calculated under GAAP. Series C Mandatory Convertible Preferred Stock has been included in book value, because the definition of adjusted shares used to calculate book value per adjusted share assumes that all shares of Series C Mandatory Convertible Preferred Stock have been converted to shares of common stock ofKKR & Co. Inc. To calculate Global Atlantic book value and to make it more comparable with the corresponding metric presented by other publicly traded companies in Global Atlantic's industry, Global Atlantic book value excludes (i) accumulated other comprehensive income and (ii) accumulated change in fair value of reinsurance balances and related assets, net of deferred acquisition costs and income tax.
Distributable Operating Earnings
Distributable operating earnings is a non-GAAP performance measure that KKR
believes is useful to stockholders as it provides a supplemental measure of our
operating performance without taking into account items that KKR does not
believe arise from or relate directly to KKR's operations. Distributable
Operating Earnings excludes: (i) equity-based compensation charges, (ii)
amortization of acquired intangibles, (iii) strategic corporate
transaction-related charges and (iv) non-recurring items, if any. Strategic
corporate transaction-related items arise from corporate actions and consist
primarily of (i) impairments, (ii) non-monetary gains or losses on divestitures,
(iii) transaction costs from strategic acquisitions, and (iv) depreciation on
real estate that KKR owns and occupies. Inter-segment transactions are not
eliminated from segment results when management considers those transactions in
assessing the results of the respective segments. These transactions include (i)
management fees earned by KKR as the investment adviser for Global Atlantic
insurance companies and (ii) interest income and expense based on lending
arrangements where one or more KKR subsidiaries borrow from a Global Atlantic
insurance subsidiary. Inter-segment transactions are recorded by each segment
based on the definitive documents that contain arms' length terms and comply
with applicable regulatory requirements. Distributable Operating Earnings
represents operating earnings of KKR's asset management and insurance segments,
which are comprised of the following:
•Asset Management Segment Operating Earnings is the segment profitability
measure used to make operating decisions and to assess the performance of the
asset management segment and is comprised of: (i) Fee Related Earnings, (ii)
Realized Performance Income, (iii) Realized Performance Income Compensation,
(iv) Realized Investment Income, and (v) Realized Investment Income
Compensation. Asset Management Segment Operating Earnings excludes (i)
unrealized carried interest, (ii) net unrealized gains (losses) on investments,
and (iii) related unrealized carried interest. Management fees earned by KKR as
the adviser, manager or sponsor for its investment funds, vehicles and accounts,
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including its Global Atlantic insurance companies and co-investment vehicles that participate in qualifying reinsurance transactions sourced by GlobalAtlantic (Ivy Re Limited andIvy Re II Limited ), which are included in Asset Management Segment Operating Earnings. •Insurance Segment Operating Earnings is the segment profitability measure used to make operating decisions and to assess the performance of the insurance segment and is comprised of: (i) Net Investment Income, (ii)Net Cost of Insurance, (iii) General, Administrative, and Other Expenses, (iv) Income Taxes, and (v) Net Income Attributable to Noncontrolling Interests. The non-operating adjustments made to derive Insurance Segment Operating Earnings eliminate the impact of: (i) realized (gains) losses related to asset/liability matching investments strategies, (ii) unrealized investment (gains) losses, (iii) changes in the fair value of derivatives, embedded derivatives, and fair value liabilities for fixed-indexed annuities, indexed universal life contracts and variable annuities, and (iv) the associated income tax effects of all exclusions from Insurance Segment Operating Earnings except for equity-based compensation expense. Insurance Segment Operating Earnings includes (i) realized gains and losses not related to asset/liability matching investments strategies and (ii) the investment management fee expenses that are earned by KKR as the investment adviser of the Global Atlantic insurance companies.
Fee Related Earnings ("FRE")
Fee related earnings is a performance measure used to assess the asset management segment's generation of profits from revenues that are measured and received on a recurring basis and are not dependent on future realization events. KKR believes this measure is useful to stockholders as it provides additional insight into the profitability of KKR's fee generating asset management and capital markets businesses and other recurring revenue streams. FRE equals (i) Management Fees, including fees paid by the insurance segment to the asset management segment and fees paid by certain insurance co-investment vehicles, (ii) Transaction and Monitoring Fees, Net and (iii) Fee Related Performance Revenues, less (x) Fee Related Compensation, and (y) Other Operating Expenses. •Fee Related Performance Revenues refers to the realized portion of Incentive Fees from certain AUM that has an indefinite term and for which there is no immediate requirement to return invested capital to investors upon the realization of investments. Fee-related performance revenues consists of performance fees (i) to be received from our investment funds, vehicles and accounts on a recurring basis, and (ii) that are not dependent on a realization event involving investments held by the investment fund, vehicle or account.
•Fee Related Compensation refers to the compensation expense, excluding
equity-based compensation, paid from (i) Management Fees, (ii) Transaction and
Monitoring Fees, Net, and (iii) Fee Related Performance Revenues.
•Other Operating Expenses represents the sum of (i) occupancy and related
charges and (ii) other operating expenses.
Total Asset Management Segment Revenues
Total Asset Management Segment Revenues is a performance measure that represents the realized revenues of the asset management segment (which excludes unrealized carried interest and unrealized net gains (losses) on investments) and is the sum of (i) Management Fees, (ii) Transaction and Monitoring Fees, Net, (iii) Fee Related Performance Revenues, (iv) Realized Performance Income, and (v) Realized Investment Income. KKR believes that this performance measure is useful to stockholders as it provides additional insight into the realized revenues generated by KKR's asset management segment.
Other Terms and Capital Metrics
Adjusted Shares
Adjusted shares represents shares of common stock ofKKR & Co. Inc. outstanding under GAAP adjusted to include (i) the number of shares of common stock ofKKR & Co. Inc. assumed to be issuable upon conversion of the Series C Mandatory Convertible Preferred Stock and (ii) shares of common stock ofKKR & Co. Inc. issuable upon exchange of all exchangeable securities. Weighted average adjusted shares is used in the calculation of After-tax Distributable Earnings per Adjusted Share, and Adjusted Shares is used in the calculation of Book Value per Adjusted Share. 131
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Assets Under Management ("AUM")
Assets under management represent the assets managed, advised or sponsored by KKR from which KKR is entitled to receive management fees or performance income (currently or upon a future event), general partner capital, and assets managed, advised or sponsored by our strategic BDC partnership and the hedge fund and other managers in which KKR holds an ownership interest. We believe this measure is useful to stockholders as it provides additional insight into the capital raising activities of KKR and its hedge fund and other managers and the overall activity in their investment funds and other managed or sponsored capital. KKR calculates the amount of AUM as of any date as the sum of: (i) the fair value of the investments of KKR's investment funds and certain co-investment vehicles; (ii) uncalled capital commitments from these funds, including uncalled capital commitments from which KKR is currently not earning management fees or performance income; (iii) the asset value of the Global Atlantic insurance companies; (iv) the par value of outstanding CLOs; (v) KKR's pro rata portion of the AUM of hedge fund and other managers in which KKR holds an ownership interest; (vi) all of the AUM of KKR's strategic BDC partnership; (vii) the acquisition cost of invested assets of certain non-US real estate investment trusts and (viii) the value of other assets managed or sponsored by KKR. The pro rata portion of the AUM of hedge fund and other managers is calculated based on KKR's percentage ownership interest in such entities multiplied by such entity's respective AUM. KKR's definition of AUM (i) is not based on any definition of AUM that may be set forth in the governing documents of the investment funds, vehicles, accounts or other entities whose capital is included in this definition, (ii) includes assets for which KKR does not act as an investment adviser, and (iii) is not calculated pursuant to any regulatory definitions.
Capital Invested
Capital invested is the aggregate amount of capital invested by (i) KKR's investment funds and Global Atlantic insurance companies, (ii) KKR's Principal Activities business line as a co-investment, if any, alongside KKR's investment funds, and (iii) KKR's Principal Activities business line in connection with a syndication transaction conducted byKKR's Capital Markets business line, if any. Capital invested is used as a measure of investment activity at KKR during a given period. We believe this measure is useful to stockholders as it provides a measure of capital deployment across KKR's business lines. Capital invested includes investments made using investment financing arrangements like credit facilities, as applicable. Capital invested excludes (i) investments in certain leveraged credit strategies, (ii) capital invested by KKR's Principal Activities business line that is not a co-investment alongside KKR's investment funds, and (iii) capital invested by KKR's Principal Activities business line that is not invested in connection with a syndication transaction byKKR's Capital Markets business line. Capital syndicated byKKR's Capital Markets business line to third parties other than KKR's investment funds or Principal Activities business line is not included in capital invested.
Fee Paying AUM ("FPAUM")
Fee paying AUM represents only the AUM from which KKR is entitled to receive management fees. We believe this measure is useful to stockholders as it provides additional insight into the capital base upon which KKR earns management fees. FPAUM is the sum of all of the individual fee bases that are used to calculate KKR's and its hedge fund and BDC partnership management fees and differs from AUM in the following respects: (i) assets and commitments from which KKR is not entitled to receive a management fee are excluded (e.g., assets and commitments with respect to which it is entitled to receive only performance income or is otherwise not currently entitled to receive a management fee) and (ii) certain assets, primarily in its private equity funds, are reflected based on capital commitments and invested capital as opposed to fair value because fees are not impacted by changes in the fair value of underlying investments.
Uncalled Commitments
Uncalled commitments is the aggregate amount of unfunded capital commitments
that KKR's investment funds and carry-paying co-investment vehicles have
received from partners to contribute capital to fund future investments. The
amount of uncalled commitments is not reduced by capital invested using
borrowings under an investment fund's subscription facility until capital is
called from our fund investors. We believe this measure is useful to
stockholders as it provides additional insight into the amount of capital that
is available to KKR's investment funds and carry paying co-investment vehicles
to make future investments. Uncalled commitments are not reduced for investments
completed using fund-level investment financing arrangements or investments we
have committed to make but remain unfunded at the reporting date.
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Condensed Consolidated Results of Operations (GAAP Basis - Unaudited)
The following is a discussion of our consolidated results of operations on a GAAP basis for the three months endedSeptember 30, 2022 and 2021. You should read this discussion in conjunction with the financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected our segment results in these periods, see "-Analysis of Segment Operating Results." See "Business Environment" for more information about factors that may impact our business, financial performance, operating results and valuations. The presentation of our consolidated results of operations that follows reflects the significant industry diversification of KKR by its acquisition of GlobalAtlantic . GlobalAtlantic operates an insurance business, and KKR operates an asset management business, each of which possess distinct characteristics. As a result, KKR developed a two-tiered presentation approach, where GlobalAtlantic's insurance business is presented separately from KKR's asset management business. Additionally, for the nine months endedSeptember 30, 2021 , the results of Global Atlantic's insurance operations included in our consolidated results of operations are fromFebruary 1, 2021 (closing date of the acquisition) throughSeptember 30, 2021 . Three Months Ended September 30, 2022 September 30, 2021 Change ($ in thousands) Revenues Asset Management Fees and Other $ 673,929
$ 718,968
Capital Allocation-Based Income (Loss)
(572,863) 1,526,667 (2,099,530)
101,066 2,245,635 (2,144,569)
Insurance
Net Premiums 480,462 974,903 (494,441)
Policy Fees 320,206 310,381 9,825
Net Investment Income 1,094,877 758,381 336,496
Net Investment-Related Gains (Losses) (173,830) 162,127 (335,957)
Other Income 35,632 31,938 3,694
1,757,347 2,237,730 (480,383)
Total Revenues 1,858,413 4,483,365 (2,624,952)
Expenses
Asset Management
Compensation and Benefits 244,502 1,012,837 (768,335)
Occupancy and Related Charges 18,683 17,438 1,245
General, Administrative and Other 212,513 203,977 8,536
475,698 1,234,252 (758,554)
Insurance
Net Policy Benefits and Claims 1,087,731 1,697,046 (609,315)
Amortization of Policy Acquisition Costs 8,222 (16,900) 25,122
Interest Expense 26,141 22,437 3,704
Insurance Expenses 158,280 89,534 68,746
General, Administrative and Other 178,443 158,873 19,570
1,458,817 1,950,990 (492,173)
Total Expenses 1,934,515 3,185,242 (1,250,727)
Investment Income (Loss) - Asset Management
Net Gains (Losses) from Investment Activities (379,180) 2,116,647 (2,495,827)
Dividend Income 294,415 121,484 172,931
Interest Income 500,234 402,839 97,395
Interest Expense (391,520) (278,166) (113,354)
Total Investment Income (Loss) 23,949 2,362,804 (2,338,855)
Income (Loss) Before Taxes (52,153) 3,660,927 (3,713,080)
Income Tax Expense (Benefit) 27,434 379,282 (351,848)
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Three Months Ended
September 30,
September 30, 2022 2021 Change
($ in thousands)
Net Income (Loss) (79,587) 3,281,645 (3,361,232)
Net Income (Loss) Attributable to Redeemable
Noncontrolling Interests 1,601 1,519 82
Net Income (Loss) Attributable to
Noncontrolling Interests (6,792) 2,123,569 (2,130,361)
Net Income (Loss) Attributable to KKR & Co.
Inc. (74,396) 1,156,557 (1,230,953)
Series A Preferred Stock Dividends - - -
Series B Preferred Stock Dividends - 7,953 (7,953)
Series C Mandatory Convertible Preferred Stock
Dividends 17,250 17,250 -
Net Income (Loss) Attributable to KKR & Co.
Inc.
Common Stockholders $ (91,646) $ 1,131,354 $ (1,223,000)
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