filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements of KKR and the related notes included elsewhere in this report. The historical consolidated financial data discussed below reflects the historical results and financial position of KKR. 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 “Risk Factors.” Actual results may differ materially from those contained in any forward looking statements.
Overview of Business
For a detailed discussion about our businesses, business segments and our firm, see “Item 1--Business.”
Business Environment
Market Conditions
Global Economic Conditions. As a global investment firm, we are affected by financial and economic conditions globally. Global and regional economic conditions have a 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 and our ability to make new investments. According to the Bureau of Economic Analysis as of January 2016, real GDP in the U.S. increased at a seasonally adjusted annualized rate of 2.4% for the full year ended December 31, 2015. According to the Bureau of Labor Statistics, the U.S. unemployment rate decreased to 5.0% as of December 31, 2015 compared to 5.6% as of December 31, 2014. As of January 2016, Eurostat projects GDP growth for the full year ended December 31, 2015 in the Euro Area of 1.5% relative to the prior year. Continuing controversy and uncertainty surrounding key issues such as immigration, austerity, and globalization and European Union exit risk surrounding Greece and the United Kingdom may continue to impair growth and lead to volatility. In the event of an exit, losses incurred by U.K. and Greek counterparties could have adverse repercussions across financial markets, which could adversely affect valuations within our European investments. As of January 2016, the IMF estimates that China’s economy will expand at a rate of 6.9% for 2015, lower than the 7.3% rate in 2014 but higher than its 6.3% estimate for 2016. This slowdown could adversely impact the value of our investments in China and the global economy generally, and other emerging markets, in particular, could also suffer from weaker Chinese imports of both their commodities and finished goods. In addition, the sharp correction and high volatility in China's stock market coupled with the devaluation of the Chinese yuan may adversely impact the value of our investments in China and make it more difficult to access capital in those markets. For a further discussion of how market conditions may affect our businesses, see “Risk Factors- Risks Related to Our Business - Difficult market conditions can adversely affect our business in many ways, including by reducing the value or performance of the 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.”
Global Equity and Credit Markets. Global equity and debt markets have a substantial effect on our financial condition and results of operations. 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 in our funds that generate carry. Periods of volatility and dislocation in the capital markets present substantial risks, but also can present us with opportunities to invest at reduced valuations that position us for future growth.
Most 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. For the year ended December 31, 2015, global equity markets were mixed, with the S&P 500 Index up 1.4% and the MSCI World Index down 0.3% on a total return basis including dividends. However, since December 31, 2015, equity markets have fallen significantly, with the S&P 500 Index down 4.5% and the MSCI World Index down 6.0% on a total return basis including dividends as of February 22, 2016, adversely impacting, at least for the time being, the overall value of our equity investments, in particular our publicly traded securities, including our sizable holding of First Data Corporation (NYSE:FDC). As of February 22, 2016, the market prices of publicly held equity securities held through our private equity funds and in our Principal Activities segment have declined, which we estimate would result in a decrease of at least approximately $550 million to our economic net income in the first quarter of 2016 if the market prices of these securities do not appreciate or if the declines are not offset by gains in other investments or income elsewhere in our business. Of this amount, First Data Corporation accounts for approximately $350 million of the decrease. With respect to the total decrease to our economic net income, approximately 55.9% would be allocable to KKR & Co. L.P. The foregoing amounts do not reflect changes in value of any of our investments other than our publicly held equity securities and may not, therefore be reflective of
our business as a whole. Equity market volatility as evidenced by the Chicago Board Options Exchange Market Volatility Index, or the VIX, a measure of volatility, ended at 18.2 as of December 31, 2015, remaining relatively unchanged from 19.2 as of December 31, 2014. However, since December 31, 2015, equity market volatility has increased meaningfully, rising from 18.2 as at December 31, 2015 to 28.1 as at February 11, 2016. For a further discussion of our valuation methods, see “Risk Factors-Risks Related to the Assets We Manage - Our investments are impacted by various economic conditions that are difficult to quantify or predict, and may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our financial condition and results of operations” in our Annual Report and “-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies” in this report.
Many of our investments are in credit instruments, and our funds and their portfolio companies 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 particular due in part to holdings of credit assets 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 such losses. Credit markets can also impact valuations because a discounted cash flow analysis is generally used as one of the methodologies used to ascertain the fair value of our investments that do not have readily observable market prices. In addition, with respect to our credit investments, increased credit spreads lead to a reduction in the value of these investments, if not offset by hedging or other factors. Within credit markets, spreads have widened during the fiscal year ended December 31, 2015 with significant increases in spreads in the third and fourth quarters of the year. Low interest rates related to monetary stimulus and economic stagnation also has negatively impact expected returns on all investments, as the demand for relatively higher return assets increases and supply decreases. Higher interest rates in conjunction with slower growth or weaker currencies in some emerging market economies may 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 such as the Eurozone and Japan, which have ongoing central bank quantitative easing campaigns and comparatively low interest rates relative to the Unites States, could potentially endure further currency volatility and weakness relative to the U.S. dollar.
The subinvestment grade credit indices fell during the year ended December 31, 2015, with the S&P/LSTA Leveraged Loan Index down 0.7% and the BoAML HY Master II Index down 4.6%. In the quarter ended December 31, 2015, government bond yields rose as the U.S. Federal Reserve increased the target range for the Fed Funds rate by 25 basis points, raising rates for the first time since December 2008. For the year ended December 31, 2015, 10-year government bond yields rose 10 basis points in the United States and 9 basis points in Germany and fell 6 basis points in Japan and 80 basis points in China. 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 refinance existing debt and may increase the cost of such financing if it is obtained, which could lead to lower-yielding investments and potentially decrease our net income,” “-Risks Related to the Assets We Manage - Our investments are impacted by various economic conditions that are difficult to quantify or predict, and may have a significant impact on the valuation of our investments and, therefore, on the investment income we realize and our financial condition and results of operations” and “- Because we hold interests in some of our portfolio companies both through our management of private equity funds as well as through separate investments in those funds and direct co-investments, fluctuation in the fair values of these portfolio companies may have a disproportionate impact on the investment income earned by us” and “-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies” in this report.
Foreign Exchange Rates. Foreign exchange rates have a substantial impact on the valuations of our investments that are denominated in currencies other than the U.S. dollar. Currency volatility, which has become more pronounced in recent quarters, can also affect our businesses which deal in cross‑border trade. The U.S. dollar has appreciated against a number of currencies over recent periods, which is likely to cause a decrease in the U.S. dollar value of our non‑U.S. investments to the extent unhedged, contributing to portfolio companies that export to the U.S. suffering a decline in revenues, and making the exports of U.S. based companies less competitive. While this may cause a decrease in the U.S. dollar values of our assets and portfolio companies outside the United States, we also expect it to create opportunities to invest at more attractive U.S. dollar prices in certain countries. For the year ended December 31, 2015, the euro and the British pound both fell 10.2 % and 5.4%, respectively, relative to the U.S. dollar. In China, the potential for greater CNY depreciation remains a large source of uncertainty. The cumulative devaluation of the yuan since August 2015, which effectively makes Chinese exports cheaper and imports more expensive, may impact global trade substantially for the reasons discussed above. For additional information regarding our foreign exchange rate risk, see “Quantitative and Qualitative Disclosure About Market Risk - Exchange Rate Risk” in this report.
Commodity Markets. Our Private Markets portfolio contains energy real asset investments and certain of our Public Markets strategies and products, including direct lending, special situations and CLOs, have meaningful investments in energy sector. The value of these investments are heavily influenced by the price of natural gas and oil, which have declined meaningfully over the course of the year. The long-term price of WTI crude oil declined from approximately $67 per barrel to $50 per barrel and the long-term price of natural gas declined from approximately $3.77 per mcf to $2.90 per mcf as of December 31, 2014 and December 31, 2015, respectively. Since December 31, 2015 the long-term price of WTI crude oil and natural gas has continued to decline with the long-term price of WTI crude oil at $45 per barrel and the long-term price of natural gas at $2.56 per mcf, in each case as of February 22, 2016. If such decline in prices persists or worsens or if it is not offset by other factors, we would expect the value of our energy real asset investments to be adversely impacted. In addition, due in part to holdings of direct energy assets on our balance sheet, which had a fair value of $0.6 billion as of December 31, 2015, these price movements have had an amplified impact on our financial results, as we directly bear the full extent of such losses. For additional information regarding our energy real assets, see “-Critical Accounting Policies-Fair Value Measurements-Level III Valuation Methodologies-Real Asset Investments” in this report and “Risk Factors - Risks Related to the Assets We Manage - Because we hold interests in some of our portfolio companies both through our management of private equity funds as well as through separate investments in those funds and direct co-investments, fluctuation in the fair values of these portfolio companies may have a disproportionate impact on the investment income earned by us” in this report.
Business Conditions
Our segment revenues consist of fees, performance income and investment 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.
| • | 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 an attractive vehicle for capital appreciation or income. Since 2010, we have expanded into strategies such as energy, infrastructure, real estate, alternative credit and hedge funds. In several of these strategies, our first time funds have begun raising successor funds, and we expect the cost of raising such successor funds to be lower. We have also reached out to a new investor base of retail and high net worth clients. However, fundraising continues to be competitive. While we had several successful fundraises in 2015 for newer strategies such as real estate, European real estate, infrastructure, direct lending, mezzanine and special situations , there is no assurance that fundraises for other new strategies or successor funds will experience similar success in the future. While our flagship Americas fund has begun fundraising, our other flagship private equity funds have completed fundraising or are not expected to commence fundraising in early 2016. Consequently, our AUM, FPAUM and associated fees attributable to new capital raised may be lower than in prior years. New capital raised for the fiscal years ended December 31, 2013, 2014 and 2015 was $21.2 billion, $13.3 billion and $19.8 billion, which in the case of new capital raised in the fiscal year ended December 31, 2015, includes our pro-rata portion of new capital of other asset managers in which we have a minority interest and the inclusion of new capital commitments for which KKR is eligible to receive fees or carried interest upon deployment of capital. |
| • | Our successful deployment of capital including from our balance sheet. Our ability to maintain and grow our revenue base is dependent upon our ability to successfully deploy the capital from our funds and our balance sheet. 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 which 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 a reduced potential future investment gains, lower transaction fees and lower fees for our capital markets business, which may earn fees in the syndication of equity or debt. Equity invested for the fiscal years ended December 31, 2013, 2014 and 2015 were $7.4 billion, $10.2 billion and $7.7 billion, and syndicated capital for the fiscal years ended December 31, 2013, 2014 and 2015 were $1.1 billion, $2.6 billion and $0.9 billion, such that 2014 reflects unusually high levels of activity for us on a historical basis. |
| • | Our ability to sell investments. The strength and liquidity of the U.S. and relevant global equity markets generally, and the initial public offering market specifically affects the value of, and our ability to successfully exit, our equity positions in our private equity portfolio companies in a timely manner. We may also realize investments through strategic sales. For the fiscal years ended December 31 2013, 2014 and 2015, through exit activity in our investments, we realized carried interest of $0.7 billion, $1.2 billion and $1.0 billion. Since December 31, 2015, we have closed the |
strategic sales of Dalmia Cement (manufacturing sector), Masan Consumer Corporation (consumer products sector) and Legends Outlets Kansas City (real estate asset). We have also completed a dividend recapitalization at US Foods (retail sector). Such sales, however, are episodic and reduced levels of sale activity in future quarters would reduce transaction fees, realized carry and distributions.
Basis of Accounting
We consolidate the financial results of the KKR Group Partnerships and their consolidated subsidiaries, which include the accounts of our investment management and capital markets companies, the general partners of certain unconsolidated funds and vehicles, general partners of consolidated funds and their respective consolidated funds and certain other entities including certain consolidated CLOs and commercial real estate mortgage-backed securities ("CMBS", and together with CLOs, referred to hereafter as collateralized financing entities "CFEs").
In accordance with accounting principles generally accepted in the United States of America, or GAAP, certain entities, including a substantial number of our funds and CFEs, are consolidated notwithstanding the fact that we may hold only a minority economic interest in those entities. In particular, in the majority of our consolidated funds and other investment vehicles, we hold a general partner interest that gives us substantive controlling rights over such funds and vehicles. With respect to our consolidated funds and vehicles, we generally have operational discretion and control, and fund investors have no substantive rights to impact ongoing governance and operating activities of the fund, including the ability to remove the general partner, also known as kick-out rights. As of December 31, 2015, our AUM in our Private Markets segment included 21 consolidated investment funds and 21 unconsolidated investment vehicles. Our AUM in our Public Markets segment included 32 consolidated investment vehicles, including CLOs, and 69 unconsolidated vehicles.
When an entity is consolidated, we reflect the assets, liabilities, fees, expenses, investment income and cash flows of the consolidated entity on a gross basis. While the consolidation of a consolidated fund or entity does not have an effect on the amounts of net income attributable to KKR or KKR's partners' capital that KKR reports, the consolidation does significantly impact the financial statement presentation. This is due to the fact that the assets, liabilities, fees, expenses and investment income of the consolidated funds and 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 assets, liabilities, fees, expenses and investment income attributable to third parties are recorded are presented as noncontrolling interests on the consolidated statements of financial condition and net income attributable to noncontrolling interests on the consolidated statements of operations. For a further discussion of our consolidation policies, see "Item 8. Financial Statements and Supplementary Data--Summary of Significant Accounting Policies."
Key Financial Measures Under GAAP
Fees and Other
Fees and other consist primarily of (i) transaction fees earned in connection with successful investment transactions and from capital markets activities, (ii) management and incentive fees from providing investment management services to unconsolidated funds, CLOs, other vehicles and separately managed accounts, (iii) monitoring fees from providing services to portfolio companies, (iv) revenue earned by oil and gas-producing entities that are consolidated and (v) consulting fees earned by entities that employ non-employee operating consultants. 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.
Fees and other reported in our consolidated financial statements do not include the management or incentive fees that we earn from consolidated funds and other entities, because those fees are eliminated in consolidation. However, because those management and incentive fees are earned from, and funded by, third-party investors who hold noncontrolling interests in the consolidated funds and entities, net income attributable to KKR is increased by the amount of the management fees that are eliminated in consolidation. Accordingly, while the consolidation of funds and other entities impacts the amount of fees that are recognized in our financial statements, it does not affect the ultimate amount of net income attributable to KKR or KKR's partners' capital.
For a further discussion of our fee policies, see “Item 8. Financial Statements and Supplementary Data--Summary of Significant Accounting Policies."
Expenses
Compensation and Benefits
Compensation and benefits expense includes cash compensation consisting of salaries, bonuses, and benefits, as well as equity-based compensation consisting of charges associated with the vesting of equity-based awards and carry pool allocations. All employees and employees of certain consolidated entities receive a base salary that is paid by KKR or its consolidated entities, and is accounted for as compensation and benefits expense. These employees are also eligible to receive discretionary cash bonuses based on performance, overall profitability and other matters. While cash bonuses paid to most employees are borne by KKR and certain consolidated entities and result in customary compensation and benefits expense, cash bonuses that are paid to certain employees are currently borne by KKR Holdings. These bonuses are funded with distributions that KKR Holdings receives on KKR Group Partnership Units held by KKR Holdings but are not then passed on to holders of unvested units of KKR Holdings. The distributions to be paid by KKR are expected to decrease in 2016 and subsequent years as a result of the change in distribution policy announced on October 27, 2015. Because employees are not entitled to receive distributions on units that are unvested, any amounts allocated to employees in excess of an employee's vested equity interests are reflected as employee compensation and benefits expense. These compensation charges are recorded based on the unvested portion of quarterly earnings distributions received by KKR Holdings at the time of the distribution. See "Risks Related to Our Business - If we cannot retain and motivate our principals and other key personnel and recruit, retain and motivate new principals and other key personnel, our business, results and financial condition could be adversely affected" regarding the adequacy of such distributions to fund future discretionary cash bonuses.
With respect to KKR's active and future funds and co-investment vehicles that provide for carried interest, KKR allocates to its employees and other personnel a portion of the carried interest earned as part of its carry pool. KKR currently allocates approximately 40% of the carry it earns from these funds and vehicles to its carry pool. These amounts are accounted for as compensatory profit-sharing arrangements in conjunction with the related carried interest income and recorded as compensation and benefits expense for KKR employees and general, administrative and other expense for certain non-employee consultants and service providers in the consolidated statements of operations.
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, changes in fair value of contingent consideration, expenses incurred by oil and gas-producing entities (including impairment charges) that are consolidated and other general and operating expenses which are not borne by fund investors and are not offset by credits attributable to fund investors' noncontrolling interests in consolidated funds. General, administrative and other expense also consists of costs incurred in connection with pursuing potential investments that do not result in completed transactions, a substantial portion of which are borne by fund investors.
Investment Income (Loss)
Net Gains (Losses) from Investment Activities
Net gains (losses) from investment activities consist of realized and unrealized gains and losses arising from our investment activities. The majority of our net gains (losses) from investment activities are related to our private equity 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 private equity 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—Fair Value Measurements."
Dividend Income
Dividend income consists primarily of distributions that investment funds receive from portfolio companies in which they invest. Dividend income is recognized primarily in connection with (i) dispositions of operations by portfolio companies, (ii) distributions of excess cash generated from operations from portfolio companies and (iii) other significant refinancings undertaken by portfolio companies.
Interest Income
Interest income consists primarily of interest that is received on our cash balances and other investments including credit instruments in which our consolidated funds and other entities invest.
Interest Expense
Interest expense is incurred from debt issued by KKR, including debt issued by KFN which was consolidated upon completion of the acquisition of KFN, credit facilities entered into by KKR, debt securities issued by consolidated CFEs and 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 funds are generally limited to our pro-rata equity interest in such funds. Our management companies bear no obligations with respect to financing arrangements at our consolidated funds. We also capitalize debt financing costs incurred in connection with new debt arrangements. Such costs are amortized into interest expense using either the interest method or the straight-line method, as appropriate. See "—Liquidity".
Income Taxes
The KKR Group Partnerships and certain of their subsidiaries operate in the United States as partnerships for U.S. federal income tax purposes and as corporate entities in non-U.S. jurisdictions. Accordingly, these entities, in some cases, are subject to New York City unincorporated business taxes, or non-U.S. income taxes. Furthermore, we hold our interest in one of the KKR Group Partnerships through KKR Management Holdings Corp., which is treated as a corporation for U.S. federal income tax purposes, and certain other subsidiaries of the KKR Group Partnerships are treated as corporations for U.S. federal income tax purposes. Accordingly, such subsidiaries of KKR, including KKR Management Holdings Corp., and of the KKR Group Partnerships are subject to U.S. federal, state and local corporate income taxes at the entity level and the related tax provision attributable to KKR's share of this income is reflected in the financial statements. We also generate certain interest income to our unitholders and interest deductions to KKR Management Holdings Corp.
We use the asset and liability method to account for income taxes in accordance with GAAP. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis using currently enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized.
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.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income (loss) attributable to noncontrolling interests represents the ownership interests that certain third parties hold in entities that are consolidated in the financial statements as well as the ownership interests in our KKR Group Partnerships that are held by KKR Holdings. The allocable share of income and expense attributable to these interests is accounted for as net income (loss) attributable to noncontrolling interests. Historically, the amount of net income (loss) attributable to noncontrolling interests has been substantial and has resulted in significant charges and credits in the statements of operations. Given the consolidation of certain of our investment funds and the significant ownership interests in our KKR Group Partnerships held by KKR Holdings, we expect this activity to continue.
Segment Operating and Performance Measures
The segment key performance measures that follow are used by management in making operating and resource deployment decisions as well as assessing the overall performance of each of KKR's reportable business segments. The reportable segments for KKR's business are presented prior to giving effect to the allocation of income (loss) between KKR & Co. L.P. and KKR Holdings L.P. and as such represent the business in total. In addition, KKR's reportable segments are presented without giving effect to the consolidation of the funds or CFEs that KKR manages.
We disclose the following financial measures in this report that are calculated and presented using methodologies other than in accordance with GAAP. We believe that providing these performance measures on a supplemental basis to our GAAP results is helpful to unitholders in assessing the overall performance of KKR's businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with GAAP, if available. We caution readers that these non-GAAP financial measures may differ from the calculations of other investment managers, and as a result, may not be comparable to similar measures presented by other investment managers. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, where applicable, are included within "Financial Statements and Supplementary Data — Note 13. Segment Reporting" and later in this report under "—Segment Balance Sheet."
Adjusted Units
Adjusted units are used as a measure of the total equity ownership of KKR that is held by KKR & Co. L.P. (including equity awards issued under the Equity Incentive Plan), KKR Holdings and other holders of securities exchangeable into common units of KKR & Co. L.P. and represent the fully diluted unit count using the if-converted method. We believe this measure is useful to unitholders as it provides an indication of the total equity ownership of KKR as if all outstanding KKR Holdings units, equity awards issued under the Equity Incentive Plan and other exchangeable securities had been exchanged for common units of KKR & Co. L.P.
After-Tax Cash Earnings
After-tax cash earnings is used by management as a measure of the cash earnings of KKR. KKR believes this measure, which was formerly referred to as total distributable earnings, is useful to unitholders as it provides a supplemental measure to assess performance, excluding the impact of mark-to-market gains (losses). After-tax cash earnings excludes certain realized investment losses to the extent unrealized losses on these investments were recognized prior to the combination with KPE on October 1, 2009.
Assets Under Management ("AUM")
Assets under management represent the assets managed by KKR or by its strategic partners from which KKR is entitled to receive fees or a carried interest (either currently or upon deployment of capital) and general partner capital. We believe this measure is useful to unitholders as it provides additional insight into KKR's capital raising activities and the overall activity in its investment funds and strategic partnerships. As of December 31, 2014, AUM has been adjusted to include (i) capital commitments for which we are eligible to receive fees or carried interest upon deployment of capital and (ii) KKR's pro-rata portion of AUM managed by other asset managers in which KKR holds a minority stake. Our reported AUM for periods prior to December 31, 2014 does not include these two items.
As of and subsequent to December 31, 2014, KKR calculates the amount of AUM as the sum of: (i) the fair value of the investments of KKR's investment funds; (ii) uncalled capital commitments from these funds, including uncalled capital commitments from which KKR is currently not earning management fees or carried interest; (iii) the fair value of investments in KKR's co-investment vehicles; (iv) the par value of outstanding CLOs (excluding CLOs wholly-owned by KKR); (v) KKR's pro-rata portion of the AUM managed by strategic partnerships in which KKR holds a minority ownership interest and (vi) the fair value of other assets managed by KKR. The pro-rata portion of the AUM managed by strategic partnerships is calculated based on KKR’s percentage ownership interest in such entities multiplied by such entity’s respective AUM. KKR's definition of AUM is not based on any definition of AUM that may be set forth in the agreements governing the investment funds, vehicles or accounts that it manages or calculated pursuant to any regulatory definitions.
Fee Paying AUM ("FPAUM")
Fee paying AUM ("FPAUM") represents only those assets under management of KKR or its strategic partners from which KKR receives management fees. We believe this measure is useful to unitholders as it provides additional insight into the capital base upon which KKR earns management fees. As of December 31, 2014, FPAUM has been adjusted to include KKR's
pro-rata portion of FPAUM managed by other asset managers in which KKR holds a minority stake. Our reported FPAUM for periods prior to December 31, 2014 does not include this item.
FPAUM is the sum of all of the individual fee bases that are used to calculate KKR's fees and differs from AUM in the following respects: (i) assets and commitments from which KKR does not receive a fee are excluded (i.e., assets and commitments with respect to which it receives only carried interest or is otherwise not currently receiving a 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.
Book Value
Book value is a measure of the net assets of KKR’s reportable segments and is used by management primarily in assessing the unrealized value of KKR’s investment portfolio, including carried interest, as well as KKR’s overall liquidity position. We believe this measure is useful to unitholders as it provides additional insight into the assets and liabilities of KKR excluding the assets and liabilities that are allocated to noncontrolling interest holders. Book value differs from KKR & Co. L.P. partners’ capital on a GAAP basis primarily as a result of the exclusion of ownership interests attributable to KKR Holdings.
Economic net income (loss) (“ENI”)
Economic net income (loss) is a measure of profitability for KKR’s reportable segments and is used by management as an alternative measurement of the operating and investment earnings of KKR and its business segments. We believe this measure is useful to unitholders as it provides additional insight into the overall profitability of KKR’s businesses inclusive of carried interest and related carry pool allocations and investment income. ENI is comprised of total segment revenues less total segment expenses and certain economic interests in KKR’s segments held by third parties. ENI differs from net income (loss) on a GAAP basis as a result of: (i) the inclusion of management fees earned from consolidated funds that were eliminated in consolidation; (ii) the exclusion of fees and expenses of certain consolidated entities; (iii) the exclusion of charges relating to the amortization of intangible assets; (iv) the exclusion of non-cash equity-based charges and other non-cash compensation charges borne by KKR Holdings or incurred under the Equity Incentive Plan and other securities that are exchangeable for common units of KKR & Co. L.P.; (v) the exclusion of certain non-recurring items; (vi) the exclusion of investment income (loss) relating to noncontrolling interests; and (vii) the exclusion of income taxes.
Equity Invested
Equity invested is the aggregate amount of equity capital that has been invested by KKR’s investment funds and carry-yielding co-investment vehicles and is used as a measure of investment activity for KKR and its business segments during a given period. We believe this measure is useful to unitholders as it provides additional insight into KKR’s investments among its investment funds and carry-yielding co-investment vehicles. Such amounts include: (i) capital invested by fund investors and co-investors with respect to which KKR is entitled to a carried interest and (ii) capital invested by KKR’s investment funds, including investments made using investment financing arrangements.
Gross Dollars Invested
Gross dollars invested is the aggregate amount of capital that has been invested by all of KKR’s Public Markets investment vehicles in our private credit non-liquid strategies and is used as a measure of investment activity for a portion of KKR’s Public Markets segment in a given period. We believe this measure is useful to unitholders as it provides additional insight into KKR’s investment of capital across private credit non-liquid strategies for all the investment vehicles in the Public Markets segment. Such amounts include capital invested by fund investors and co-investors with respect to which KKR’s Public Markets business is entitled to a fee or carried interest.
Syndicated Capital
Syndicated capital is generally the aggregate amount of capital in transactions originated by KKR and its investment funds and carry-yielding co-investment vehicles, which has been distributed to third parties in exchange for a fee. It does not include (i) capital invested in such transactions by KKR investment funds and carry-yielding co-investment vehicles, which is instead reported in equity invested and (ii) debt capital that is arranged as part of the acquisition financing of transactions originated by KKR investment funds. Syndicated capital is used as a measure of investment activity for KKR and its business segments during a given period, and we believe that this measure is useful to unitholders as it provides additional insight into levels of syndication activity in KKR's Capital Markets segment and across its investment platform.
Uncalled Commitments
Uncalled commitments are used as a measure 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. We believe this
measure is useful to unitholders as it provides additional insight into the amount of capital that is available to KKR’s investment funds to make future investments. Uncalled commitments are not reduced for investments completed using fund-level investment financing arrangements.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the years ended December 31, 2015 and 2014. You should read this discussion in conjunction with the consolidated financial statements and related notes included elsewhere in this report. For a more detailed discussion of the factors that affected the results of operations of our three business segments in these periods, see “—Segment Analysis.”
Year ended December 31, 2015 compared to year ended December 31, 2014
| Year Ended | |||||||||||
| December 31, 2015 | December 31, 2014 | Change | |||||||||
| ($ in thousands) | |||||||||||
| Revenues | |||||||||||
| Fees and Other | $ | 1,043,768 | $ | 1,110,008 | $ | (66,240 | ) | ||||
| Expenses | |||||||||||
| Compensation and Benefits | 1,180,591 | 1,263,852 | (83,261 | ) | |||||||
| Occupancy and Related Charges | 65,683 | 62,564 | 3,119 | ||||||||
| General, Administrative and Other | 624,951 | 869,651 | (244,700 | ) | |||||||
| Total Expenses | 1,871,225 | 2,196,067 | (324,842 | ) | |||||||
| Investment Income (Loss) | |||||||||||
| Net Gains (Losses) from Investment Activities | 4,672,627 | 4,778,232 | (105,605 | ) | |||||||
| Dividend Income | 850,527 | 1,174,501 | (323,974 | ) | |||||||
| Interest Income | 1,219,197 | 909,207 | 309,990 | ||||||||
| Interest Expense | (573,226 | ) | (317,192 | ) | (256,034 | ) | |||||
| Total Investment Income (Loss) | 6,169,125 | 6,544,748 | (375,623 | ) | |||||||
| Income (Loss) Before Taxes | 5,341,668 | 5,458,689 | (117,021 | ) | |||||||
| Income Tax / (Benefit) | 66,636 | 63,669 | 2,967 | ||||||||
| Net Income (Loss) | 5,275,032 | 5,395,020 | (119,988 | ) | |||||||
| Net Income (Loss) Attributable to Redeemable Noncontrolling Interests | (4,512 | ) | (3,341 | ) | (1,171 | ) | |||||
| Net Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital | 4,791,062 | 4,920,750 | (129,688 | ) | |||||||
| Net Income (Loss) Attributable to KKR & Co. L.P. | $ | 488,482 | $ | 477,611 | $ | 10,871 |
Fees and Other
The net decrease was primarily due to (i) an $87.5 million decrease in transaction fees, (ii) a $74.5 million decrease in revenues earned by consolidated oil and gas producing entities and (iii) a $34.3 million decrease in incentive fees. These decreases were partially offset by a $145.6 million increase in monitoring fees. The decrease in transaction fees was primarily attributable to a decrease in both our Private Markets segment and Capital Markets segment. In our Private Markets segment the decreases were primarily attributable to a decrease in the average fee earned on completed investments. During the year ended December 31, 2015, in our Private Markets segment there were 37 transaction fee-generating investments paying an
average fee of $3.9 million compared to 33 transaction fee-generating investments paying an average fee of $6.5 million during the year ended December 31, 2014. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular discussions as to the amount of the fees, the complexity of the transaction and KKR’s role in the transaction. In our Capital Markets Segment transaction fees decreased primarily due to a decrease in the number and size of capital markets transactions for the year ended December 31, 2015 compared to the year ended December 31, 2014. We completed 116 capital markets transactions for the year ended December 31, 2015 of which 16 represented equity offerings and 100 represented debt offerings, as compared to 139 transactions for the year ended December 31, 2014 of which 15 represented equity offerings and 124 represented debt offerings. The decrease in revenue earned by consolidated oil and gas producing entities was primarily the result of a decrease in oil prices for the year ended December 31, 2015 as compared to the prior period, and to a lesser extent, reduced production volumes that resulted from assets sold in the third and fourth quarters of 2014, partially offset by revenues of oil and gas producing entities of KFN, which was acquired on April 30, 2014. The decrease in incentive fees was due primarily to a decrease in incentive fees received from KFN as a result of our acquisition of it on April 30, 2014, as incentive fees from KFN after that date were eliminated from segment results, as well as lower incentive fees in our hedge fund-of-funds platform and European credit platform driven by less favorable financial performance in the current year. The increase in monitoring fees was primarily the result of $198.8 million of monitoring fees received during 2015 from the termination of monitoring fee arrangements in connection with the initial public offering (IPO) or partial exits of First Data Corporation (NYSE: FDC), Walgreens Boots Alliance, Inc. (NASDAQ: WBA), J.M. Smucker Company (NYSE: SJM), Zimmer Biomet Holdings, Inc. (NYSE: ZBH) and GoDaddy, Inc. (NYSE: GDDY) compared to approximately $23.2 million of such fees received during the year ended December 31, 2014. These types of termination payments may occur in the future; however, they are infrequent in nature and are generally correlated with IPO and other realization activity in our private equity portfolio. This increase in monitoring fees from termination payments was partially offset by a decrease in recurring monitoring fees of $46.1 million. The decrease in recurring monitoring fees was primarily the result of a decrease in the number of portfolio companies paying a monitoring fee and a decrease in the average size of the fee. For the year ended December 31, 2015, we had 43 portfolio companies that were paying an average monitoring fee of $1.5 million compared with 50 portfolio companies that were paying an average monitoring fee of $2.2 million for the year ended December 31, 2014. In future periods, we anticipate that recurring monitoring fees will continue to decrease as a result of realizations and other transactions such as initial public offerings, if not offset by additional portfolio companies paying recurring monitoring fees.
Expenses
The decrease was primarily due to a decrease in general administrative and other expense of $244.7 million and a decrease in compensation and benefits of $83.3 million. The decrease in general administrative and other expense was primarily attributable to (i) a lower level of impairment charges relating to long-lived assets at our consolidated oil and gas producing entities during the year ended December 31, 2015 as compared to the year ended December 31, 2014, (ii) a decrease in operating expenses of our consolidated oil and gas producing entities that resulted primarily from assets sold in the third and fourth quarters of 2014 and a reduction in depreciation in 2015 as a result of an impairment of the long-lived assets of these entities in the fourth quarter of 2014 and (iii) non-recurring amounts accrued for litigation in 2014. The decrease in compensation and benefits is due primarily to (i) lower carry pool allocations as a result of the recognition of a lower level of carried interest during the year ended December 31, 2015 as compared to the year ended December 31, 2014, (ii) lower equity-based compensation related to KKR Holdings reflecting fewer KKR Holdings units vesting for expense recognition purposes and a lower level of amounts allocated to principals in excess of such principal’s vested equity interests. These decreases were partially offset by (i) an increase in cash compensation reflecting a higher level of fees which generally results in higher compensation expense and (ii) higher equity-based compensation relating primarily to additional equity grants under the Equity Incentive Plan.
Net Gains (Losses) from Investment Activities
The following is a summary of net gains (losses) from investment activities:
| Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| ($ in thousands) | |||||||
| Net Gains (Losses) from Private Equity Investments | $ | 5,592,970 | $ | 4,586,193 | |||
| Other Net Gains (Losses) from Investment Activities (1) | (920,343 | ) | 192,039 | ||||
| Net Gains (Losses) from Investment Activities | $ | 4,672,627 | $ | 4,778,232 | |||
| (1) The 2015 amount includes a realized loss of approximately $2 billion on a consolidated basis relating to the write off of Energy Future Holdings (energy sector) which had previously been marked at zero on an unrealized basis. Accordingly, this write off had no impact on our Net Gains (Losses) from Investment Activities during the year ended December 31, 2015. |
The majority of our net gains (losses) from investment activities relate to our private equity portfolio. The following is a summary of the components of net gains (losses) from investment activities for private equity investments which illustrates the variances from the prior period. See “—Segment Analysis—Private Markets Segment” for further information regarding gains and losses in our private equity portfolio.
| Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| ($ in thousands) | |||||||
| Realized Gains | $ | 4,701,511 | $ | 6,224,683 | |||
| Unrealized Losses from Sales of Investments and Realization of Gains (a) | (4,024,214 | ) | (6,278,529 | ) | |||
| Realized Losses | (248,918 | ) | (1,238,897 | ) | |||
| Unrealized Gains from Sales of Investments and Realization of Losses (b) | 239,587 | 1,233,070 | |||||
| Unrealized Gains from Changes in Fair Value | 9,669,247 | 9,218,981 | |||||
| Unrealized Losses from Changes in Fair Value | (4,744,243 | ) | (4,573,115 | ) | |||
| Net Gains (Losses) from Investment Activities - Private Equity Investments | $ | 5,592,970 | $ | 4,586,193 |
| (a) | Amounts represent the reversal of previously recognized unrealized gains in connection with realization events where such gains become realized. |
| (b) | Amounts represent the reversal of previously recognized unrealized losses in connection with realization events where such losses become realized. |
A significant driver of net gains (losses) from investment activities for the year ended December 31, 2015 was related to unrealized gains and losses from changes in fair value in our private equity investments. The net increase in the value of our private markets portfolio was driven primarily by net unrealized gains of $1.8 billion, $1.5 billion and $0.9 billion in our 2006 Fund, North America Fund XI and Asian Fund II, respectively. For the year ended December 31, 2015, the value of our private equity investment portfolio increased 14.2%. This was comprised of a 19.5% increase in the share prices of various publicly held or publicly indexed investments and a 9.3% increase in value of our privately held investments. The most significant increases in share prices of various publicly held or publicly indexed investments were gains in Walgreens Boots Alliance, Inc., PRA Health Sciences, Inc. (NASDAQ: PRAH) and GoDaddy, Inc. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were RigNet (NASDAQ: RNET), HCA Holdings, Inc. (NYSE: HCA) and CITIC Envirotech Ltd. (SES: U19.SI). Subsequent to December 31, 2015, world equity markets declined sharply with both the S&P 500 and the MSCI World Index down on a total return basis, including dividends, as of February 22, 2016. See "--Business Environment". Our privately held investments contributed the remainder of the change in value, the most significant of which were gains relating to Panasonic Healthcare Co. Ltd (healthcare sector), Capital Safety Group (industrial sector) and Alliant Insurance Services (financial services sector). The unrealized gains on our privately held investments were partially offset by unrealized losses relating primarily to BIS Industries Ltd. (industrial sector), Acteon Group Ltd (energy sector) and Aceco TI S.A (technology sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) in the case of Capital Safety Group and Alliant Insurance Services, valuations that reflect agreements to sell these investments in whole or in part, (ii) an increase in the value of market comparables and (iii) individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance or, in certain cases, an unfavorable business outlook and (ii) a decrease in the value of market comparables.
A significant driver of net gains (losses) from investment activities for the year ended December 31, 2014 was related to unrealized gains and losses from changes in fair value in our private equity investments. The net unrealized investment gains in our private equity portfolio were driven primarily by net unrealized gains of $2.2 billion, $1.2 billion and $1.1 billion in our 2006 Fund, European Fund III and North America Fund XI, respectively. Approximately 23% of the net change in value for the year ended December 31, 2014 was attributable to changes in share prices of various publicly-listed investments, the most significant of which were gains on PRA Health Sciences, Inc., HCA, Inc., NXP Semiconductors N.V. (NASDAQ: NXPI) and Yageo Corporation (TW: 2327). These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were Tarkett S.A. (PA:TKTT), ProSiebenSat.1 Media AG (XETRA: PSM) and China Greenland Rundong Auto Group Ltd (HK: 1365). Our privately‑held investments contributed the remainder of the change in value, the most significant of which were gains relating to Alliance Boots GmbH (healthcare sector), Biomet, Inc. (healthcare sector) and WILD Flavors GmbH (consumer products sector). The unrealized gains on our privately‑held investments were partially offset by unrealized losses relating primarily to Northgate Information Solutions (technology sector), Samson Resources (energy sector) and Toys R Us (retail sector). The unrealized gains were also offset by unrealized losses in our energy assets from our Natural Resources Fund and Energy Income and Growth Fund of approximately $352 million. The increased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to (i) an increase in the value of market comparables and individual company performance, (ii) in the case of WILD Flavors GmbH and Biomet, Inc., an increase that primarily reflected agreements to sell these investments, with the sale of WILD Flavors GmbH completed in October 2014, and (iii) in the case of Alliance Boots GmbH, primarily due to an agreement to exit the investment and to a lesser extent an increase in the value of a publicly traded stock that was expected to be delivered pursuant to this agreement, which was completed on December 31, 2014. The decreased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook. The decreased valuation of energy assets are generally related to decreases in commodity prices.
Dividend Income
During the year ended December 31, 2015 we received dividends of $123.7 million from WMF (consumer products sector), $114.9 million from CITIC Envirotech Ltd., $86.2 million from MMI Holdings Limited (technology sector), $80.5 million from Academy Sports and Outdoors (retail sector), $65.9 million from Aricent Inc. (technology sector) and an aggregate of $379.3 million of dividends from other investments. During the year ended December 31, 2014, we received dividends of $178.6 million from Visma (technology sector), $171.6 million from Capsugel (manufacturing sector), $162.1 million from Capital Safety Group, $87.7 million from WMF and an aggregate of $574.5 million of dividends from other investments. Significant dividends from portfolio companies are generally not recurring quarterly dividends, and while they may occur in the future, their size and frequency are variable.
Interest Income
The increase was primarily due to a net increase in (i) the amount of credit instruments in our consolidated Public Markets investment vehicles, including growth in our CLO platform when compared to the prior period, (ii) the consolidation of CMBS entities beginning in the second quarter of 2015, and (iii) the acquisition of KFN on April 30, 2014 which did not contribute to our interest income for the first four months of 2014.
Interest Expense
The increase was primarily due to (i) increased interest expense in connection with the growth of our CLO platforms, the majority of which are consolidated, (ii) interest expense on our 2044 Senior Notes issued on May 29, 2014 and an additional issuance of such notes on March 18, 2015, (iii) increased interest expense related to financing facilities entered into by our consolidated investment funds for purposes of financing their operating and investing activities, (iv) the consolidation of CMBS entities beginning in the second quarter of 2015 and (v) the acquisition of KFN on April 30, 2014 which did not contribute to our interest expense for the first four months of 2014.
Income (Loss) Before Taxes
The decrease was primarily due to lower investment income and lower fees and other, partially offset by lower expenses, as described above.
Income Tax (Benefit)
Income taxes for the year ended December 31, 2015 remained largely unchanged from the year ended December 31, 2014. Because certain investment funds owned by the KKR Group Partnerships are subject to corporate taxes, unrealized losses recognized by those funds during 2015 offset an increase in KKR & Co. L.P.'s weighted average ownership percentage in the KKR Group Partnerships, which increased from approximately 49.5% for the year ended December 31, 2014 to approximately 54.9% for the year ended December 31, 2015. The increase in ownership, primarily the result of exchanges of units in KKR Holdings for KKR common units during 2015, subjects a greater level of income to corporate taxes.
Net Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital
The decrease was primarily driven by lower investment income as described above and a decrease in KKR Holdings' weighted average ownership percentage in the KKR Group Partnerships from approximately 50.5% for the year ended December 31, 2014 to approximately 45.1% for the year ended December 31, 2015. This decrease in ownership percentage is primarily due to exchanges of units in KKR Holdings for KKR common units during the year.
Net Income (Loss) Attributable to KKR & Co. L.P.
Net income attributable to KKR & Co L.P. for the year ended December 31, 2015 remained largely unchanged from the year ended December 31, 2014 due to the net impact of lower investment income as described above, which was offset by an increase in KKR & Co. L.P's weighted average ownership percentage in the KKR Group Partnerships from approximately 49.5% for the year ended December 31, 2014 to approximately 54.9% for the year ended December 31, 2015.
Year ended December 31, 2014 compared to year ended December 31, 2013
| Year Ended | |||||||||||
| December 31, 2014 | December 31, 2013 | Change | |||||||||
| ($ in thousands) | |||||||||||
| Revenues | |||||||||||
| Fees and Other | $ | 1,110,008 | $ | 762,546 | $ | 347,462 | |||||
| Expenses | |||||||||||
| Compensation and Benefits | 1,263,852 | 1,266,592 | (2,740 | ) | |||||||
| Occupancy and Related Charges | 62,564 | 61,720 | 844 | ||||||||
| General, Administrative and Other | 869,651 | 438,826 | 430,825 | ||||||||
| Total Expenses | 2,196,067 | 1,767,138 | 428,929 | ||||||||
| Investment Income (Loss) | |||||||||||
| Net Gains (Losses) from Investment Activities | 4,778,232 | 7,826,082 | (3,047,850 | ) | |||||||
| Dividend Income | 1,174,501 | 695,521 | 478,980 | ||||||||
| Interest Income | 909,207 | 474,759 | 434,448 | ||||||||
| Interest Expense | (317,192 | ) | (99,616 | ) | (217,576 | ) | |||||
| Total Investment Income (Loss) | 6,544,748 | 8,896,746 | (2,351,998 | ) | |||||||
| Income (Loss) Before Taxes | 5,458,689 | 7,892,154 | (2,433,465 | ) | |||||||
| Income Tax / (Benefit) | 63,669 | 37,926 | 25,743 | ||||||||
| Net Income (Loss) | 5,395,020 | 7,854,228 | (2,459,208 | ) | |||||||
| Net Income (Loss) Attributable to Redeemable Noncontrolling Interests | (3,341 | ) | 62,255 | (65,596 | ) | ||||||
| Net Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital | 4,920,750 | 7,100,747 | (2,179,997 | ) | |||||||
| Net Income (Loss) Attributable to KKR & Co. L.P. | $ | 477,611 | $ | 691,226 | $ | (213,615 | ) |
Fees and Other
The net increase was primarily due to an increase in revenues earned by consolidated oil and gas producing entities of $164.8 million, an increase in transaction fees of $137.6 million and an increase in management fees of $37.3 million. The increase in revenue earned by consolidated oil and gas producing entities was primarily the result of the acquisition of KFN, which owned oil and gas producing entities, completed on April 30, 2014, and to a lesser extent, growth in the activities of our other consolidated oil and gas producing entities. The increase in transaction fees was primarily driven by (i) an increase in the size of fee‑generating investments completed during the year ended December 31, 2014 in our Private Markets segment and (ii) an increase in transaction fees in our capital markets business reflecting larger transaction sizes when compared to the prior period, including a capital markets fee received from the syndication of equity in First Data Corporation of approximately $43 million. During the year ended December 31, 2014, our Private Markets segment had 33 transaction fee‑generating investments with a total combined transaction value of approximately $15.4 billion compared to 33 transaction fee‑generating investments with a total combined transaction value of approximately $15.0 billion during the year ended December 31, 2013. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular discussions as to the amount of the fees, the complexity of the transaction and KKR’s role in the transaction. The increase in management fees was primarily the result of the acquisition of Avoca on February 19, 2014 and to a lesser extent new capital raised primarily in our Public Markets segment, partially offset by a decrease in management fees received from KFN as a result of our acquisition of KFN on April 30, 2014, as management fees from KFN after that date are now eliminated in consolidation.
Expenses
The increase was primarily due to an increase in general, administrative and other expenses of $430.8 million, partially offset by a decrease in compensation and benefits of $2.7 million. The increase in general, administrative and other expenses is primarily due to an increase of approximately $330 million relating to the activities of our consolidated oil and gas producing entities which were not consolidated prior to the third quarter of 2013 as well as the activities of oil and gas producing entities acquired in the acquisition of KFN completed on April 30, 2014. This increase included an impairment charge of approximately $220 million relating to long‑lived assets at our consolidated oil and gas producing entities. In addition, general, administrative, and other expenses increased as a result of (i) increased expenses attributable to Avoca which we acquired on February 19, 2014, (ii) expenses incurred by consolidated CLOs that were consolidated subsequent to the acquisition of Avoca and the acquisition of KFN, which was completed on April 30, 2014, and (iii) an increase in amounts accrued for litigation. The decrease in compensation and benefits is due primarily to (i) lower equity‑based compensation reflecting fewer KKR Holdings units vesting for expense recognition purposes under the graded attribution method of expense recognition, (ii) lower carry pool allocations as a result of the recognition of a lower level of carried interest during the year ended December 31, 2014 as compared to the year ended December 31, 2013, partially offset by (i) an increase in cash compensation reflecting a higher level of fees as well as increased headcount and (ii) higher equity‑based compensation relating primarily to additional equity grants under the Equity Incentive Plan.
Net Gains (Losses) from Investment Activities
The following is a summary of net gains (losses) from investment activities:
| Year Ended December 31, | |||||||
| 2014 | 2013 | ||||||
| ($ in thousands) | |||||||
| Net Gains (Losses) from Private Equity Investments | $ | 4,586,193 | $ | 7,716,772 | |||
| Other Net Gains (Losses) from Investment Activities | 192,039 | 109,310 | |||||
| Net Gains (Losses) from Investment Activities | $ | 4,778,232 | $ | 7,826,082 |
The majority of our net gains (losses) from investment activities relate to our private equity portfolio. The following is a summary of the components of net gains (losses) from investment activities for private equity investments which illustrates the variances from the prior period. See “—Segment Analysis—Private Markets Segment” for further information regarding gains and losses in our private equity portfolio.
| Year Ended December 31, | |||||||
| 2014 | 2013 | ||||||
| ($ in thousands) | |||||||
| Realized Gains | $ | 6,224,683 | $ | 4,712,997 | |||
| Unrealized Losses from Sales of Investments and Realization of Gains (a) | (6,278,529 | ) | (4,155,261 | ) | |||
| Realized Losses | (1,238,897 | ) | (1,048,778 | ) | |||
| Unrealized Gains from Sales of Investments and Realization of Losses (b) | 1,233,070 | 1,058,710 | |||||
| Unrealized Gains from Changes in Fair Value | 9,218,981 | 9,361,938 | |||||
| Unrealized Losses from Changes in Fair Value | (4,573,115 | ) | (2,212,834 | ) | |||
| Net Gains (Losses) from Investment Activities - Private Equity Investments | $ | 4,586,193 | $ | 7,716,772 |
| (a) | Amounts represent the reversal of previously recognized unrealized gains in connection with realization events where such gains become realized. |
| (b) | Amounts represent the reversal of previously recognized unrealized losses in connection with realization events where such losses become realized. |
The appreciation in the market value of our private equity portfolio was driven primarily by net unrealized gains of $2.2 billion, $1.2 billion and $1.1 billion in our 2006 Fund, European Fund III and North America Fund XI, respectively. Approximately 23% of the net change in value for the year ended December 31, 2014 was attributable to changes in share prices of various publicly‑listed investments, the most significant of which were gains on PRA Health Sciences, Inc., HCA, Inc., NXP Semiconductors N.V. and Yageo Corporation. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were Tarkett S.A., ProSiebenSat.1 Media AG and China Greenland Rundong Auto Group Ltd. Our privately‑held investments contributed the remainder of the change in value, the
most significant of which were gains relating to Alliance Boots GmbH, Biomet, Inc. and WILD Flavors GmbH. The unrealized gains on our privately‑held investments were partially offset by unrealized losses relating primarily to Northgate Information Solutions, Samson Resources and Toys R Us. The unrealized gains were also offset by unrealized losses in our energy assets from our Natural Resources Fund and Energy Income and Growth Fund of approximately $352 million. The increased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to (i) an increase in the value of market comparables and individual company performance, (ii) in the case of WILD Flavors GmbH and Biomet, Inc., an increase that primarily reflected agreements to sell these investments, with the sale of WILD Flavors GmbH completed in October 2014, and (iii) in the case of Alliance Boots GmbH, primarily due to an agreement to exit the investment and to a lesser extent an increase in the value of a publicly traded stock that is expected to be delivered pursuant to this agreement, which was completed on December 31, 2014. The decreased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook. The decreased valuation of energy assets are generally related to decreases in commodity prices.
Dividend Income
During the year ended December 31, 2014, we received dividends of $178.6 million from Visma, $171.6 million from Capsugel, $162.1 million from Capital Safety Group, $87.7 million from WMF and an aggregate of $574.5 million of dividends from other investments. During the year ended December 31, 2013, we received dividends of $191.6 million from Capsugel, $139.7 million from Pets at Home Ltd. (LSE: PETS.L), $113.9 million from Visma, $85.6 million from Tarkett S.A., $52.0 million from Santander Consumer USA (NYSE: SC) and an aggregate of $112.7 million of dividends from other investments. Significant dividends from portfolio companies are generally not recurring quarterly dividends, and while they may occur in the future, their size and frequency are variable.
Interest Income
The increase was primarily due to the consolidation of debt instruments held by KFN including CLOs, subsequent to the acquisition of KFN on April 30, 2014, as well as a net increase in the amount of credit instruments in our consolidated Public Markets investment vehicles, including CLOs acquired in the Avoca acquisition on February 19, 2014.
Interest Expense
The increase was primarily due to (i) interest expense associated with consolidated CLOs acquired in the Avoca and KFN acquisitions which were completed on February 19, 2014 and April 30, 2014, respectively, (ii) interest expense associated with senior and subordinated debt at KFN and (iii) interest expense on our 2044 Senior Notes issued on May 29, 2014.
Income (Loss) Before Taxes
The decrease was primarily due to a decrease in investment income and increase in expenses, partially offset by an increase in fees.
Income Taxes
The increase was primarily due to an increase in the amount of income in the KKR Group Partnerships that is subject to either corporate or local taxes, or both, as well as an increase in KKR & Co. L.P.’s ownership percentage in the KKR Group Partnerships from approximately 39.9% for the year ended December 31, 2013 to approximately 49.5% for the year ended December 31, 2014. This increase in ownership subjects a greater level of income to corporate taxes.
Net Income (Loss) Attributable to Redeemable Noncontrolling Interests
The decrease was primarily driven by the termination of our KKR Equity Strategies fund and to a lesser extent decreased investment income for funds and vehicles where noncontrolling interests are redeemable.
Net Income (Loss) Attributable to Noncontrolling Interests and Appropriated Capital
The decrease was primarily attributable to the overall decrease in investment income described above as well as a decrease in KKR Holdings’ ownership percentage in the KKR Group Partnerships from approximately 60.1% for the year ended December 31, 2013 to approximately 50.5% for the year ended December 31, 2014.
Net Income (Loss) Attributable to KKR & Co. L.P.
The decrease was primarily attributable to the decrease in income before taxes as described above, partially offset by an increase in KKR & Co. L.P.’s ownership percentage in the KKR Group Partnerships from approximately 39.9% for the year ended December 31, 2013 to approximately 49.5% for the year ended December 31, 2014. This increase in ownership percentage was principally the result of the issuance of KKR common units in connection with the acquisition of KFN.
Segment Analysis
The following is a discussion of the results of our four reportable business segments for years ended December 31, 2015, 2014 and 2013. You should read this discussion in conjunction with the information included under “—Basis of Financial Presentation—Segment Operating and Performance Measures” and the consolidated financial statements and related notes included elsewhere in this report.
KKR’s management has reevaluated the manner in which it makes operational and resource deployment decisions and assesses the overall performance of each of KKR’s operating segments. As a result, KKR has modified the presentation of its segment financial information. In addition, since becoming a public company, our principal assets have grown in significance and are a meaningful contributor to our financial results.
Certain of the more significant changes between KKR’s current segment presentation and its previously reported segment presentation are described in the following commentary.
Inclusion of a Fourth Segment
All income (loss) on investments is attributed to a new fourth segment called Principal Activities. Previously, income on investments held directly by KKR was reported in the Private Markets segment, Public Markets segment or Capital Markets segment based on the character of the income generated. For example, income from private equity investments was previously included in the Private Markets segment. However, the financial results of acquired businesses and strategic partnerships have been reported in our other segments.
Expense Allocations
We have changed the manner in which expenses are allocated among our operating segments. Specifically, as described below, (i) a portion of expenses, except for broken deal expenses, previously reflected in our Private Markets, Public Markets or Capital Markets segments are now reflected in the Principal Activities segment and (ii) corporate expenses are allocated across all segments.
Expenses Allocated to Principal Activities
A portion of our cash compensation and benefits, occupancy and related charges and other operating expenses previously included in the Private Markets, Public Markets and Capital Markets segments is now allocated to the Principal Activities segment. The Principal Activities segments incurs its own direct costs, and an allocation from the other segments is also made to reflect the estimated amount of costs that are necessary to operate our Principal Activities segment, which are incremental to those costs incurred directly by the Principal Activities segment. The total amount of expenses (other than its direct costs) that is allocated to Principal Activities is based on the proportion of revenue earned by Principal Activities, relative to other operating segments, over the preceding four annual periods. This allocation percentage is updated annually or more frequently if there are material changes to our business. Below is a summary of the allocation to Principal Activities, relative to other operating segments, for the years ended December 31, 2015, 2014 and 2013:
| • | 2015 Allocation: 25.4%, based on revenues earned in 2014, 2013, 2012 and 2011 |
| • | 2014 Allocation: 31.7%, based on revenues earned in 2013, 2012, 2011 and 2010 |
| • | 2013 Allocation: 37.8%, based on revenues earned in 2012, 2011, 2010 and 2009 |
The expense allocation expected to be used in 2016 to allocate expense to the Principal Activities segment, based on revenues earned in 2015, 2014, 2013 and 2012 is approximately 23%, subject to adjustments if there are material changes to our business.
Once the total amount of expense to be allocated to the Principal Activities segment is estimated for each reporting period, the amount of this expense will be allocated from the Private Markets, Public Markets and Capital Markets segments based on the proportion of headcount in each of these three segments.
Allocations of Corporate Overhead
Corporate expenses are allocated to each of the Private Markets, Public Markets, Capital Markets and Principal Activities segments based on the proportion of revenues earned by each segment over the preceding four calendar years. In our previously reported segment presentation, all corporate expenses were allocated to the Private Markets segment. Below is a summary of the allocations to each of our operating segments for the years ended December 31, 2015, 2014 and 2013.
| Expense Allocation | |||||||||
| Segment | 2015 | 2014 | 2013 | ||||||
| Private Markets | 58.7 | % | 56.2 | % | 53.0 | % | |||
| Public Markets | 9.8 | % | 7.1 | % | 4.8 | % | |||
| Capital Markets | 6.1 | % | 5.0 | % | 4.4 | % | |||
| Principal Activities | 25.4 | % | 31.7 | % | 37.8 | % | |||
| Total Reportable Segments | 100.0 | % | 100.0 | % | 100.0 | % | |||
| Based on revenue earned in | 2014, 2013, 2012 & 2011 | 2013, 2012, 2011 & 2010 | 2012, 2011, 2010 & 2009 | ||||||
Based on the proportion of revenues earned by each segment in 2015, 2014, 2013 and 2012, the corporate expense allocation expected to be used in 2016 to allocate expense to the Private Markets, Public Markets, Capital Markets and Principal Activities segments is approximately 61%, 10%, 6% and 23%, respectively, subject to adjustments if there are material changes to our business.
In connection with these modifications, segment information for the years ended December 31, 2014 and 2013 has been presented in this Annual Report on Form 10-K in conformity with KKR’s current segment presentation. Consequently, this information will not be consistent with historical segment financial results previously reported. While the modified segment presentation impacted the amount of economic net income reported by each operating segment, it had no impact on KKR’s economic net income on a total reportable segment basis.
Private Markets Segment
The following tables set forth information regarding the results of operations and certain key operating metrics for our Private Markets segment for the years ended December 31, 2015 and 2014.
Year ended December 31, 2015 compared to year ended December 31, 2014
| Year Ended | |||||||||||
| December 31, 2015 | December 31, 2014 | Change | |||||||||
| ($ in thousands) | |||||||||||
| Segment Revenues | |||||||||||
| Management, Monitoring and Transaction Fees, Net | |||||||||||
| Management Fees | $ | 465,575 | $ | 453,210 | $ | 12,365 | |||||
| Monitoring Fees | 264,643 | 135,160 | 129,483 | ||||||||
| Transaction Fees | 144,652 | 214,612 | (69,960 | ) | |||||||
| Fee Credits | (195,025 | ) | (198,680 | ) | 3,655 | ||||||
| Total Management, Monitoring and Transaction Fees, Net | 679,845 | 604,302 | 75,543 | ||||||||
| Performance Income | |||||||||||
| Realized Incentive Fees | — | — | — | ||||||||
| Realized Carried Interest | 1,018,201 | 1,159,011 | (140,810 | ) | |||||||
| Unrealized Carried Interest | 182,628 | 70,058 | 112,570 | ||||||||
| Total Performance Income | 1,200,829 | 1,229,069 | (28,240 | ) | |||||||
| Investment Income (Loss) | |||||||||||
| Net Realized Gains (Losses) | — | — | — | ||||||||
| Net Unrealized Gains (Losses) | — | — | — | ||||||||
| Total Realized and Unrealized | — | — | — | ||||||||
| Interest Income and Dividends | — | — | — | ||||||||
| Interest Expense | — | — | — | ||||||||
| Net Interest and Dividends | — | — | — | ||||||||
| Total Investment Income (Loss) | — | — | — | ||||||||
| Total Segment Revenues | 1,880,674 | 1,833,371 | 47,303 | ||||||||
| Segment Expenses | |||||||||||
| Compensation and Benefits | |||||||||||
| Cash Compensation and Benefits | 193,995 | 153,339 | 40,656 | ||||||||
| Realized Performance Income Compensation | 407,280 | 463,605 | (56,325 | ) | |||||||
| Unrealized Performance Income Compensation | 74,560 | 33,430 | 41,130 | ||||||||
| Total Compensation and Benefits | 675,835 | 650,374 | 25,461 | ||||||||
| Occupancy and related charges | 33,640 | 30,946 | 2,694 | ||||||||
| Other operating expenses | 127,836 | 125,398 | 2,438 | ||||||||
| Total Segment Expenses | 837,311 | 806,718 | 30,593 | ||||||||
| Income (Loss) attributable to noncontrolling interests | 1,645 | 1,424 | 221 | ||||||||
| Economic Net Income (Loss) | $ | 1,041,718 | $ | 1,025,229 | $ | 16,489 | |||||
| Assets Under Management | $ | 66,028,600 | $ | 64,611,300 | $ | 1,417,300 | |||||
| Fee Paying Assets Under Management | $ | 45,307,400 | $ | 47,262,500 | $ | (1,955,100 | ) | ||||
| Equity Invested | $ | 5,527,900 | $ | 7,223,400 | $ | (1,695,500 | ) | ||||
| Uncalled Commitments | $ | 22,766,300 | $ | 18,272,400 | $ | 4,493,900 |
Segment Revenues
Management, Monitoring and Transaction Fees, Net
The net increase was primarily due to an increase in monitoring fees of $129.5 million and an increase in management fees of $12.4 million, partially offset by a decrease in transaction fees of $70.0 million. The increase in monitoring fees was primarily the result of $198.8 million of monitoring fees received during 2015 from the termination of monitoring fee arrangements in connection with the initial public offering (IPO) or partial exits of First Data Corporation (NYSE: FDC), Walgreens Boots Alliance, Inc. (NASDAQ: WBA), J.M. Smucker Company (NYSE: SJM), Zimmer Biomet Holdings, Inc. (NYSE: ZBH) and GoDaddy, Inc. (NYSE: GDDY) compared to approximately $23.2 million of such fees received during the year ended December 31, 2014. These types of termination payments may occur in the future; however, they are infrequent in nature and are generally correlated with IPO and other realization activity in our private equity portfolio. This increase in monitoring fees from termination payments was partially offset by a decrease in recurring monitoring fees of $46.1 million. The decrease in recurring monitoring fees was primarily the result of a decrease in the number of portfolio companies paying a monitoring fee and a decrease in the average size of the fee. For the year ended December 31, 2015, we had 43 portfolio companies that were paying an average monitoring fee of $1.5 million compared with 50 portfolio companies that were paying an average monitoring fee of $2.2 million for the year ended December 31, 2014. In future periods, we anticipate that recurring monitoring fees will continue to decrease as a result of realizations and other transactions such as initial public offerings, if not offset by additional portfolio companies paying recurring monitoring fees. The increase in management fees was primarily due to new capital raised in European Fund IV and Global Infrastructure Investors II offset by a decrease in management fees attributable to lower invested capital in our European Fund II, 2006 Fund and European Fund III as a result of realizations. See also discussion under “- Assets Under Management” and “- Fee-Paying Assets Under Management”. The decrease in transaction fees was primarily attributable to a decrease in the average fee earned on completed investments during the year ended December 31, 2015. During the year ended December 31, 2015, there were 37 transaction fee-generating investments paying an average fee of $3.9 million compared to 33 transaction fee-generating investments paying an average fee of $6.5 million during the year ended December 31, 2014. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular discussions as to the amount of the fees, the complexity of the transaction and KKR’s role in the transaction.
Performance Income
The net decrease is attributable to lower net carried interest losses primarily resulting from a lower level of investment gains at carry earning funds during the current period.
Realized carried interest for the year ended December 31, 2015 consisted primarily of realized gains from the sales or partial sale of Walgreens Boots Alliance, Inc., Capital Safety Group and Zimmer Biomet Holdings, Inc.
Realized carried interest for the year ended December 31, 2014 consisted primarily of realized gains from the sales of Oriental Brewery (consumer products sector), WILD Flavors GmbH and Versatel GmbH (telecom sector).
The following table presents net unrealized carried interest by investment vehicle for the years ended December 31, 2015 and 2014:
| Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| ($ in thousands) | |||||||
| North America Fund XI | $ | 209,361 | $ | 189,063 | |||
| Asian Fund II | 163,645 | 58,967 | |||||
| European Fund III | 42,923 | (34,914 | ) | ||||
| China Growth Fund | 31,730 | (6,346 | ) | ||||
| European Fund II | 30,797 | (112,091 | ) | ||||
| Real Estate Partners Americas | 14,669 | (662 | ) | ||||
| Global Infrastructure Investors | 6,678 | — | |||||
| European Fund IV | 3,813 | — | |||||
| European Fund | (3,705 | ) | (826 | ) | |||
| E2 Investors | (20,564 | ) | (20,253 | ) | |||
| Millennium Fund | (26,714 | ) | (40,489 | ) | |||
| Co-Investment Vehicles and Other | (39,248 | ) | 99,026 | ||||
| 2006 Fund | (111,965 | ) | 128,970 | ||||
| Asian Fund | (116,185 | ) | (176,456 | ) | |||
| Management Fee Refunds | (2,607 | ) | (13,931 | ) | |||
| Total (a) | $ | 182,628 | $ | 70,058 |
| (a) | The above table excludes any funds for which there was no unrealized carried interest during either of the periods presented. |
For the year ended December 31, 2015, the net unrealized carried interest income of $182.6 million included $1,021.5 million representing net increases in the value of various portfolio companies, which were partially offset by unrealized losses of $838.9 million primarily representing reversals of previously recognized net unrealized gains in connection with the occurrence of realization events such as partial or full sales and management fee refunds.
For the year ended December 31, 2015, the value of our private equity investment portfolio increased 14.2%. This was comprised of a 19.5% increase in the share prices of various publicly held or publicly indexed investments and a 9.3% increase in value of our privately held investments. The most significant increases in share prices of various publicly held or publicly indexed investments were gains in Walgreens Boots Alliance, Inc., PRA Health Sciences, Inc. (NASDAQ: PRAH) and GoDaddy, Inc. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were RigNet (NASDAQ: RNET), HCA Holdings, Inc. (NYSE: HCA) and CITIC Envirotech Ltd. (SES: U19.SI). Subsequent to December 31, 2015, world equity markets declined sharply with both the S&P 500 and the MSCI World Index down on a total return basis, including dividends, as of February 22, 2016. See "--Business Environment". Our privately held investments contributed the remainder of the change in value, the most significant of which were gains relating to Panasonic Healthcare Co. Ltd (healthcare sector), Capital Safety Group (industrial sector) and Alliant Insurance Services (financial services sector). The unrealized gains on our privately held investments were partially offset by unrealized losses relating primarily to BIS Industries Ltd. (industrial sector), Acteon Group Ltd (energy sector) and Aceco TI S.A (technology sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) in the case of Capital Safety Group and Alliant Insurance Services, valuations that reflect agreements to sell these investments in whole or in part, (ii) an increase in the value of market comparables and (iii) individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance or, in certain cases, an unfavorable business outlook and (ii) a decrease in the value of market comparables.
The reversals of previously recognized net unrealized gains for the year ended December 31, 2015 resulted primarily from the sale or partial sales of Walgreens Boots Alliance, Inc., Capital Safety Group and Zimmer Biomet Holdings, Inc. During the year ended December 31, 2015, we wrote off Energy Future Holdings (energy sector) and recognized realized losses. This write-off did not have a significant impact on our 2015 net carried interest because this investment had already been written down to zero value in prior periods. See "--Segment Analysis--Principal Activities Segment" and "--Liquidity--Liquidity
Needs--Cash Earnings" for a discussion of how the Energy Future Holdings write-off impacted Principal Activities and our cash earnings. Subsequent to December 31, 2015, we expect to write-off our investment in Samson Resources once our losses are realized. Since this investment has already been written down to zero value in periods prior to December 31, 2015, this write-off is not expected to have a significant impact on our net carried interest in future periods.
For the year ended December 31, 2014, the net unrealized carried interest income of $70.1 million include $1,098.2 million representing net increases in the value of various portfolio companies, which were partially offset by unrealized losses of $1,028.1 million primarily representing reversals of previously recognized net unrealized gains in connection with the occurrence of realization events such as partial or full sales and management fee refunds.
For the year ended December 31, 2014, the value of our private equity investment portfolio increased 12.8%. Increased share prices of various publicly held investments comprised approximately 23% of the net increase in value for the year ended December 31, 2014, the most significant of which were gains on PRA Health Sciences, Inc., HCA, Inc., NXP Semiconductors N.V. and Yageo Corporation. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were Tarkett S.A., ProSiebenSat.1 Media AG and Rundong Automobile Group. Our privately‑held investments contributed the remainder of the change in value, the most significant of which were gains relating to Alliance Boots GmbH, Biomet, Inc. and WILD Flavors GmbH. The unrealized gains on our privately‑held investments were partially offset by unrealized losses relating primarily to Northgate Information Solutions, Samson Resources and Toys R Us. The increased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to (i) an increase in the value of market comparables and individual company performance, (ii) in the case of WILD Flavors GmbH and Biomet, Inc., an increase that primarily reflected agreements to sell these investments, with the sale of WILD Flavors GmbH completed in October 2014, and (iii) in the case of Alliance Boots GmbH, primarily due to an agreement to exit the investment and to a lesser extent an increase in the value of a publicly traded stock that was expected to be delivered pursuant to this agreement, which was completed on December 31, 2014. The decreased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook.
The reversals of previously recognized net unrealized gains for the year ended December 31, 2014 resulted primarily from the sale of Oriental Brewery, the sale of WILD Flavors GmbH, the partial sale of HCA, Inc. and the sale of Jazz Pharmaceuticals, Inc. (NASDAQ: JAZZ). During the year ended December 31, 2014, we wrote off A.T.U Auto‑Teile‑Unger (retail sector) and U.N RO‑RO Isletmeleri A.S. (transportation sector) and recognized realized losses. These 2014 write‑offs did not have a significant impact on our 2014 net carried interest because these interests had already been substantially written down in prior periods.
Segment Expenses
Compensation and Benefits
The net increase was due primarily to (i) higher cash compensation and benefits consistent with a higher level of fee income in the current period and (ii) a decrease in the amount of compensation expenses allocated from Private Markets to Principal Activities as result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2015. These increases were partially offset by lower allocations to carry pool driven by the lower levels of net carried interest as discussed in "Performance Income" above.
Occupancy and Other Operating Expenses
The net increase was primarily driven by (i) higher allocations of corporate operating expenses to Private Markets due to an increase in both the amount of corporate operating expenses incurred by the firm and an increase in the proportion of revenue earned by Private Markets relative to other operating segments in 2015, (ii) a decrease in the amount of operating expenses allocated from Private Markets to Principal Activities as a result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2015 and (iii) an increase in professional fees and other expenses. These increases were partially offset by a decrease in expenses for unconsummated transactions, also known as broken deal expenses.
Economic Net Income (Loss)
The increase was primarily due to higher fee income, partially offset by an increase in segment expenses and a decrease in performance income as described above.
Assets Under Management
The following table reflects the changes in our Private Markets AUM from December 31, 2014 to December 31, 2015:
| ($ in thousands) | |||
| December 31, 2014 - As Adjusted | $ | 64,611,300 | |
| New Capital Raised | 6,950,200 | ||
| Distributions | (11,832,500 | ) | |
| Change in Value | 6,299,600 | ||
| December 31, 2015 | $ | 66,028,600 |
As of December 31, 2014, AUM has been adjusted to include capital commitments for which we are eligible to receive fees or carried interest upon deployment of capital. Our reported AUM for periods prior to December 31, 2014 does not include this item.
AUM for the Private Markets segment was $66.0 billion at December 31, 2015, an increase of $1.4 billion, compared to $64.6 billion at December 31, 2014, on an as adjusted basis. The increase was primarily attributable to new capital raised primarily in European Fund IV and Global Infrastructure Investors II and to a lesser extent an increase in value of our Private Markets portfolio. These increases were partially offset by distributions to private equity fund investors of $11.8 billion comprised of $6.9 billion of realized gains and $4.9 billion of return of original cost.
The increase in the value of our Private Markets portfolio was driven primarily by net unrealized gains of $1.8 billion, $1.5 billion and $0.9 billion in our 2006 Fund, North America Fund XI and Asian Fund II, respectively. This was comprised of a 19.5% increase in the share prices of various publicly held or publicly indexed investments and a 9.3% increase in value of our privately held investments. The most significant increases in share prices of various publicly held or publicly indexed investments were gains in Walgreens Boots Alliance, Inc., PRA Health Sciences, Inc. (NASDAQ: PRAH) and GoDaddy, Inc. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were RigNet (NASDAQ: RNET), HCA Holdings, Inc. (NYSE: HCA) and CITIC Envirotech Ltd. (SES: U19.SI). Subsequent to December 31, 2015, world equity markets declined sharply with both the S&P 500 and the MSCI World Index down on a total return basis, including dividends, as of February 22, 2016. See "--Business Environment". Our privately held investments contributed the remainder of the change in value, the most significant of which were gains relating to Panasonic Healthcare Co. Ltd (healthcare sector), Capital Safety Group (industrial sector) and Alliant Insurance Services (financial services sector). The unrealized gains on our privately held investments were partially offset by unrealized losses relating primarily to BIS Industries Ltd. (industrial sector), Acteon Group Ltd (energy sector) and Aceco TI S.A (technology sector). The increased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) in the case of Capital Safety Group and Alliant Insurance Services, valuations that reflect agreements to sell these investments in whole or in part, (ii) an increase in the value of market comparables and (iii) individual company performance. The decreased valuations of individual companies in our privately held investments, in the aggregate, generally related to (i) individual company performance or, in certain cases, an unfavorable business outlook and (ii) a decrease in the value of market comparables.
Fee-Paying Assets Under Management
The following table reflects the changes in our Private Markets FPAUM from December 31, 2014 to December 31, 2015:
| ($ in thousands) | |||
| December 31, 2014 | $ | 47,262,500 | |
| New Capital Raised | 3,896,100 | ||
| Distributions and Other | (5,545,200 | ) | |
| Change in Value | (306,000 | ) | |
| December 31, 2015 | $ | 45,307,400 |
FPAUM in our Private Markets segment was $45.3 billion at December 31, 2015, a decrease of $2.0 billion, compared to $47.3 billion at December 31, 2014. The decrease was primarily attributable to distributions to private equity fund investors and a reduction in FPAUM attributable to the invested capital of Samson Resources due to its bankruptcy proceedings which is included within distributions and other in the table above. These decreases were partially offset by new capital raised of $3.9 billion primarily in our European Fund IV and Global Infrastructure Investors II funds.
Equity Invested
The decrease was due to a decrease in the amount of equity invested in our private equity platform, which was partially offset by an increase in equity invested in our real assets platforms (real estate, energy and infrastructure). For the years ended December 31, 2015 and 2014, equity invested in our private equity platform was $4.1 billion and $5.9 billion, respectively, and equity invested in our real assets platforms was $1.4 billion and $1.3 billion, respectively. Generally, the operating companies acquired through our private equity business have higher transaction values and result in higher equity invested relative to transactions in our real assets businesses. The number of large private equity investments made in any quarter is volatile and consequently, a significant amount of equity invested in one quarter or a few quarters may not be indicative of a similar level of capital deployment in future quarters.
Uncalled Commitments
As of December 31, 2015, our Private Markets segment had $22.8 billion of remaining uncalled capital commitments that could be called for investments in new transactions.
The following tables set forth information regarding the results of operations and certain key operating metrics for our Private Markets segment for the years ended December 31, 2014 and 2013.
Year ended December 31, 2014 compared to year ended December 31, 2013
| Year Ended | |||||||||||
| December 31, 2014 | December 31, 2013 | Change | |||||||||
| ($ in thousands) | |||||||||||
| Segment Revenues | |||||||||||
| Management, Monitoring and Transaction Fees, Net | |||||||||||
| Management Fees | $ | 453,210 | $ | 459,496 | $ | (6,286 | ) | ||||
| Monitoring Fees | 135,160 | 120,267 | 14,893 | ||||||||
| Transaction Fees | 214,612 | 150,118 | 64,494 | ||||||||
| Fee Credits | (198,680 | ) | (136,662 | ) | (62,018 | ) | |||||
| Total Management, Monitoring and Transaction Fees, Net | 604,302 | 593,219 | 11,083 | ||||||||
| Performance Income | |||||||||||
| Realized Incentive Fees | — | — | — | ||||||||
| Realized Carried Interest | 1,159,011 | 690,027 | 468,984 | ||||||||
| Unrealized Carried Interest | 70,058 | 661,803 | (591,745 | ) | |||||||
| Total Performance Income | 1,229,069 | 1,351,830 | (122,761 | ) | |||||||
| Investment Income (Loss) | |||||||||||
| Net Realized Gains (Losses) | — | — | — | ||||||||
| Net Unrealized Gains (Losses) | — | — | — | ||||||||
| Total Realized and Unrealized | — | — | — | ||||||||
| Interest Income and Dividends | — | — | — | ||||||||
| Interest Expense | — | — | — | ||||||||
| Net Interest and Dividends | — | — | — | ||||||||
| Total Investment Income (Loss) | — | — | — | ||||||||
| Total Segment Revenues | 1,833,371 | 1,945,049 | (111,678 | ) | |||||||
| Segment Expenses | |||||||||||
| Compensation and Benefits | |||||||||||
| Cash Compensation and Benefits | 153,339 | 148,557 | 4,782 | ||||||||
| Realized Performance Income Compensation | 463,605 | 276,011 | 187,594 | ||||||||
| Unrealized Performance Income Compensation | 33,430 | 282,003 | (248,573 | ) | |||||||
| Total Compensation and Benefits | 650,374 | 706,571 | (56,197 | ) | |||||||
| Occupancy and related charges | 30,946 | 31,769 | (823 | ) | |||||||
| Other operating expenses | 125,398 | 106,917 | 18,481 | ||||||||
| Total Segment Expenses | 806,718 | 845,257 | (38,539 | ) | |||||||
| Income (Loss) attributable to noncontrolling interests | 1,424 | 1,498 | (74 | ) | |||||||
| Economic Net Income (Loss) | $ | 1,025,229 | $ | 1,098,294 | $ | (73,065 | ) | ||||
| Assets Under Management | $ | 64,611,300 | $ | 61,242,900 | $ | 3,368,400 | |||||
| Fee Paying Assets Under Management | $ | 47,262,500 | $ | 50,156,300 | $ | (2,893,800 | ) | ||||
| Equity Invested | $ | 7,223,400 | $ | 5,840,900 | $ | 1,382,500 | |||||
| Uncalled Commitments | $ | 18,272,400 | $ | 20,101,600 | $ | (1,829,200 | ) |
Segment Revenues
Management, Monitoring and Transaction Fees, Net
The net increase was primarily due to an increase in transaction fees of $64.5 million, partially offset by an increase in fee credits of $62.0 million. The increase in transaction fees was attributable to an increase in the size of fee‑generating investments completed. During the year ended December 31, 2014, there were 33 transaction fee‑generating investments with a total combined transaction value of approximately $15.4 billion compared to 33 transaction fee‑generating investments with a total combined transaction value of approximately $15.0 billion during the year ended December 31, 2013. Transaction fees vary by investment based upon a number of factors, the most significant of which are transaction size, the particular discussions as to the amount of the fees, the complexity of the transaction and KKR’s role in the transaction. The increase in fee credits is primarily attributable to the increase in transaction fees, as described above. See also discussion under “-Assets Under Management” and “-Fee‑Paying Assets Under Management”.
Performance Income
The net decrease primarily reflects a lower level of unrealized appreciation in our private equity portfolio in the 2014 period than in the 2013 period. While the value of our private equity portfolio increased in the 2014 period, the amount of appreciation was less than that in the prior period.
Realized carried interest for the year ended December 31, 2014 increased compared to the year ended December 31, 2013 and consisted primarily of realized gains from the sales of Oriental Brewery, WILD Flavors GmbH and Versatel GmbH.
Realized carried interest for the year ended December 31, 2013 consisted primarily of realized gains from the partial sale and final sale of Dollar General Corporation (NYSE: DG), the partial sale of HCA, Inc. and sale of Intelligence, Ltd. (services sector).
The following table presents net unrealized carried interest by investment vehicle for the year ended December 31, 2014 and 2013:
| Year Ended December 31, | |||||||
| 2014 | 2013 | ||||||
| ($ in thousands) | |||||||
| North America Fund XI | $ | 189,063 | $ | 34,389 | |||
| 2006 Fund | 128,970 | 294,883 | |||||
| Co-Investment Vehicles and Other | 99,026 | 22,009 | |||||
| Asian Fund II | 58,967 | — | |||||
| Real Estate Partners Americas | (662 | ) | 12,516 | ||||
| European Fund | (826 | ) | 19 | ||||
| China Growth Fund | (6,346 | ) | 6,937 | ||||
| E2 Investors | (20,253 | ) | 14,774 | ||||
| European Fund III | (34,914 | ) | 124,463 | ||||
| Millennium Fund | (40,489 | ) | 12,128 | ||||
| European Fund II | (112,091 | ) | 169,819 | ||||
| Asian Fund | (176,456 | ) | 148 | ||||
| Management Fee Refunds | (13,931 | ) | (30,282 | ) | |||
| Total (a) | $ | 70,058 | $ | 661,803 |
| (a) | The above table excludes any funds for which there was no unrealized carried interest during either of the periods presented. |
For the year ended December 31, 2014, the net unrealized carried interest income of $70.1 million included $1,098.2 million representing net increases in the value of various portfolio companies, which were partially offset by unrealized losses of $1,028.1 million primarily representing reversals of previously recognized net unrealized gains in connection with the occurrence of realization events such as partial or full sales and management fee refunds.
For the year ended December 31, 2014, the value of our private equity investment portfolio increased 12.8%. Increased share prices of various publicly held investments comprised approximately 23% of the net increase in value for the year ended December 31, 2014, the most significant of which were gains on PRA Health Sciences, Inc., HCA, Inc., NXP Semiconductors N.V. and Yageo Corporation. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were Tarkett S.A., ProSiebenSat.1 Media AG and Rundong Automobile Group. Our privately‑held investments contributed the remainder of the change in value, the most significant of which were gains relating to Alliance Boots GmbH, Biomet, Inc. and WILD Flavors GmbH. The unrealized gains on our privately‑held investments were partially offset by unrealized losses relating primarily to Northgate Information Solutions, Samson Resources and Toys R Us. The increased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to (i) an increase in the value of market comparables and individual company performance, (ii) in the case of WILD Flavors GmbH and Biomet, Inc., an increase that primarily reflected agreements to sell these investments, with the sale of WILD Flavors GmbH completed in October 2014, and (iii) in the case of Alliance Boots GmbH, primarily due to an agreement to exit the investment and to a lesser extent an increase in the value of a publicly traded stock that is expected to be delivered pursuant to this agreement, which was completed on December 31, 2014. The decreased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook.
The reversals of previously recognized net unrealized gains for the year ended December 31, 2014 resulted primarily from the sale of Oriental Brewery, the sale of WILD Flavors GmbH, the partial sale of HCA, Inc. and the sale of Jazz Pharmaceuticals, Inc. During the year ended December 31, 2014, we wrote off A.T.U Auto‑Teile‑Unger and U.N RO‑RO Isletmeleri A.S. and recognized realized losses. These 2014 write‑offs did not have a significant impact on our 2014 net carried interest because these interests had already been substantially written down in prior periods.
For the year ended December 31, 2013, the unrealized carried interest gain of $661.8 million included $1,174.6 million reflecting net increases in the value of various portfolio companies, which were partially offset by $512.8 million primarily representing reversals of previously recognized net unrealized gains in connection with the occurrence of realization events such as partial or full sales and management fee refunds.
For the year ended December 31, 2013, the value of our private equity investment portfolio increased 20.2%. Increased share prices of various publicly held investments comprised approximately 46% of the net increase in value for the year ended December 31, 2013, the most significant of which were gains on HCA, Inc., ProSiebenSat.1 Media AG and NXP Semiconductors N.V. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were Bharti Infratel Ltd. (NS: INFRATEL) and China Outfitters Holdings Ltd (HK: 1146). Our private portfolio contributed the remainder of the change in value, the most significant of which were gains relating to Alliance Boots GmbH, Academy Sports and Outdoors and Oriental Brewery. The unrealized gains on our private portfolio were partially offset by unrealized losses relating primarily to Toys R Us, Samson Resources, and U.N RO‑RO Isletmeleri A.S. The increased valuations of our private portfolio, in the aggregate, generally related to (i) an increase in the value of market comparables and individual company performance and (ii) in the case of Alliance Boots GmbH, in part due to the increase in the value of a publicly traded stock that was delivered pursuant to a previously announced transaction, which was completed on December 31, 2014. The decreased valuations of our private portfolio, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook.
The reversals of previously recognized net unrealized gains for the year ended December 31, 2013 resulted primarily from the partial sales and final sale of Dollar General Corporation, the partial sales of HCA, Inc. and sale of Intelligence, Ltd. During the year ended December 31, 2013, we wrote off PagesJaunes Group (media sector) (currently known as Solocal Group SA (PA: LOCAL) and our remaining warrants in Eastman Kodak (NYSE: KODK) and sold our remaining investment in Seven West Media Ltd. (AX: SWM) realizing a modest loss. None of these write‑offs had a material impact on our 2013 net carried interest because these interests had already been substantially written down in prior periods.
Segment Expenses
Compensation and Benefits
The net decrease was due primarily to lower allocations to carry pool driven by the lower levels of unrealized carried interest, partially offset by an increase in realized carried interest and higher cash compensation and benefits primarily reflecting (i) increased headcount, (ii) higher allocations of corporate compensation to Private Markets due to an increase in both the amount of corporate compensation incurred by the firm primarily as a result of an increase in headcount and an increase in the proportion of revenue earned by Private Markets relative to other operating segments in 2014 and (iii) a higher level of fees, which generally results in higher compensation expenses.
Occupancy and Other Operating Expenses
The net increase was primarily driven by (i) an increase in expenses for unconsummated transactions, also known as broken deal expenses, (ii) an increase in professional fee expenses reflecting the overall growth of this segment and (iii) a decrease in the amount of operating expenses allocated from Private Markets to Principal Activities primarily as result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2014. These increases were partially offset by lower allocations of corporate operating expenses to Private Markets due primarily to a decrease in the amount of corporate operating expenses incurred by the firm.
Economic Net Income (Loss)
The decrease was primarily due to the decrease in performance income, partially offset by increases in management, monitoring and transaction fees, net and a decrease in segment expenses as described above.
Assets Under Management
The following table reflects the changes in our Private Markets AUM from December 31, 2013 to December 31, 2014:
| ($ in thousands) | |||
| December 31, 2013 | $ | 61,242,900 | |
| New Capital Raised | 6,056,000 | ||
| Distributions | (10,724,800 | ) | |
| Net Changes in Fee Base of Certain Funds | (933,800 | ) | |
| Change in Value | 5,865,500 | ||
| December 31, 2014 - As Reported | 61,505,800 | ||
| Capital Commitments Where Fees or Carry are Payable Upon Deployment | 3,105,500 | ||
| December 31, 2014 - As Adjusted | $ | 64,611,300 |
AUM for the Private Markets segment was $64.6 billion at December 31, 2014, on an as adjusted basis, an increase of $3.4 billion, compared to $61.2 billion at December 31, 2013. The increase was primarily attributable to new capital raised of $6.1 billion and appreciation in the market value of our private equity portfolio of $5.9 billion. These increases were partially offset by distributions to private equity fund investors of $10.7 billion comprised of $7.3 billion of realized gains and $3.4 billion of return of original cost. In addition, AUM as of December 31, 2014 has been adjusted to include capital commitments for which we are eligible to receive fees or carried interest upon deployment of capital. This item increased our AUM by approximately $3.1 billion as of December 31, 2014 but is excluded from AUM as of December 31, 2013.
The appreciation in the market value of our private equity portfolio was driven primarily by net unrealized gains of $2.2 billion, $1.2 billion and $1.1 billion in our 2006 Fund, European Fund III and North America Fund XI, respectively. Approximately 23% of the net change in value for the year ended December 31, 2014 was attributable to changes in share prices of various publicly‑listed investments, the most significant of which were gains on PRA Health Sciences, Inc., HCA, Inc., NXP Semiconductors N.V. and Yageo Corporation. These increases were partially offset by decreased share prices of various publicly held investments, the most significant of which were Tarkett S.A., ProSiebenSat.1 Media AG and Rundong Automobile Group. Our privately‑held investments contributed the remainder of the change in value, the most significant of which were gains relating to Alliance Boots GmbH, Biomet, Inc. and WILD Flavors GmbH. The unrealized gains on our privately‑held investments were partially offset by unrealized losses relating primarily to Northgate Information Solutions, Samson Resources and Toys R Us. The unrealized gains were also offset by unrealized losses in our energy assets from our Natural Resources Fund and Energy Income and Growth Fund of approximately $352 million. The increased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to (i) an increase in the value of market comparables and individual company performance, (ii) in the case of WILD Flavors GmbH and Biomet, Inc., an increase that primarily reflected agreements to sell these investments, with the sale of WILD Flavors GmbH completed in October 2014, and (iii) in the case of Alliance Boots GmbH, primarily due to an agreement to exit the investment and to a lesser extent an increase in the value of a publicly traded stock that is expected to be delivered pursuant to this agreement, which was completed on December 31, 2014. The decreased valuations of individual companies in our privately‑held investments, in the aggregate, generally related to individual company performance or, in certain cases, an unfavorable business outlook. The decreased valuation of energy assets are generally related to decreases in commodity prices.
Fee-Paying Assets Under Management
The following table reflects the changes in our Private Markets FPAUM from December 31, 2013 to December 31, 2014:
| ($ in thousands) | |||
| December 31, 2013 | $ | 50,156,300 | |
| New Capital Raised | 5,298,500 | ||
| Distributions | (6,833,800 | ) | |
| Net Changes in Fee Base of Certain Funds | (964,700 | ) | |
| Change in Value | (393,800 | ) | |
| December 31, 2014 | $ | 47,262,500 |
FPAUM in our Private Markets segment was $47.3 billion at December 31, 2014, a decrease of $2.9 billion, compared to $50.2 billion at December 31, 2013. The decrease was primarily attributable to (i) distributions to private equity fund investors, (ii) a reduction in FPAUM attributable to the invested capital of Energy Future Holdings due to its bankruptcy and (iii) a reduction reflecting the impact of our European Fund III entering its post‑investment period. This decrease was partially offset by new capital raised of $5.3 billion relating primarily to additional capital raised in our Infrastructure Investors Fund II, European Fund IV and capital deployed in our 2006 Fund which earns fees on invested capital in its post‑investment period.
Equity Invested
The increase was due to an increase in the number and size of private equity investments closed during the year ended December 31, 2014 as compared with the year ended December 31, 2013. Generally, the operating companies acquired through our private equity business have higher transaction values and result in higher equity invested, relative to transactions in our real assets businesses. The number of large private equity investments made in any quarter is volatile and consequently, a significant amount of equity invested in one quarter or a few quarters may not be indicative of a similar level of capital deployment in future quarters. For the year ended December 31, 2014, there were 96 transactions with a total combined transaction value of approximately $21.8 billion compared to 70 transactions with a total combined transaction value of approximately $17.0 billion for the year ended December 31, 2013.
Uncalled Commitments
As of December 31, 2014, our Private Markets Segment had $18.3 billion of remaining uncalled capital commitments that could be called for investments in new transactions.
Public Markets Segment
The following tables set forth information regarding the results of operations and certain key operating metrics for our Public Markets segment for the years ended December 31, 2015 and 2014.
Year ended December 31, 2015 compared to year ended December 31, 2014
| Year Ended | ||||||||||||
| December 31, 2015 | December 31, 2014 | Change | ||||||||||
| ($ in thousands) | ||||||||||||
| Segment Revenues | ||||||||||||
| Management, Monitoring and Transaction Fees, Net | ||||||||||||
| Management Fees | $ | 266,458 | $ | 272,833 | $ | (6,375 | ) | |||||
| Monitoring Fees | — | — | — | |||||||||
| Transaction Fees | 28,872 | 27,145 | 1,727 | |||||||||
| Fee Credits | (24,595 | ) | (23,357 | ) | (1,238 | ) | ||||||
| Total Management, Monitoring and Transaction Fees, Net | 270,735 | 276,621 | (5,886 | ) | ||||||||
| Performance Income | ||||||||||||
| Realized Incentive Fees | 19,647 | 47,807 | (28,160 | ) | ||||||||
| Realized Carried Interest | 8,953 | 34,650 | (25,697 | ) | ||||||||
| Unrealized Carried Interest | (19,083 | ) | 40,075 | (59,158 | ) | |||||||
| Total Performance Income | 9,517 | 122,532 | (113,015 | ) | ||||||||
| Investment Income (Loss) | ||||||||||||
| Net Realized Gains (Losses) | — | — | — | |||||||||
| Net Unrealized Gains (Losses) | — | — | — | |||||||||
| Total Realized and Unrealized | — | — | — | |||||||||
| Interest Income and Dividends | — | — | — | |||||||||
| Interest Expense | — | — | — | |||||||||
| Net Interest and Dividends | — | — | — | |||||||||
| Total Investment Income (Loss) | — | — | — | |||||||||
| Total Segment Revenues | 280,252 | 399,153 | (118,901 | ) | ||||||||
| Segment Expenses | ||||||||||||
| Compensation and Benefits | ||||||||||||
| Cash Compensation and Benefits | 73,863 | 64,530 | 9,333 | |||||||||
| Realized Performance Income Compensation | 11,438 | 32,984 | (21,546 | ) | ||||||||
| Unrealized Performance Income Compensation | (7,633 | ) | 16,029 | (23,662 | ) | |||||||
| Total Compensation and Benefits | 77,668 | 113,543 | (35,875 | ) | ||||||||
| Occupancy and related charges | 9,808 | 7,214 | 2,594 | |||||||||
| Other operating expenses | 40,591 | 31,501 | 9,090 | |||||||||
| Total Segment Expenses | 128,067 | 152,258 | (24,191 | ) | ||||||||
| Income (Loss) attributable to noncontrolling interests | 1,259 | 1,636 | (377 | ) | ||||||||
| Economic Net Income (Loss) | $ | 150,926 | $ | 245,259 | $ | (94,333 | ) | |||||
| Assets Under Management | $ | 53,515,700 | $ | 42,508,000 | $ | 11,007,700 | ||||||
| Fee Paying Assets Under Management | $ | 46,413,100 | $ | 38,594,700 | $ | 7,818,400 | ||||||
| Equity Invested | $ | 2,214,700 | $ | 3,027,400 | $ | (812,700 | ) | |||||
| Uncalled Commitments | $ | 6,690,800 | $ | 2,841,300 | $ | 3,849,500 | ||||||
| Gross Dollars Invested | $ | 5,244,900 | $ | 4,425,600 | $ | 819,300 |
Segment Revenues
Management, Monitoring and Transaction Fees, Net
The net decrease was primarily due to a decrease in management fees of $6.4 million. The decrease in management fees was due primarily to (i) a decrease in management fees received from KFN as a result of our acquisition of it on April 30, 2014, as management fees from KFN after that date were eliminated from segment results, (ii) redemptions in our hedge funds business and (iii) our mezzanine fund entering its post-investment period where it earns fees at a lower rate and on invested rather than committed capital. These decreases were partially offset by management fees earned from new capital raised primarily in Corporate Capital Trust (a BDC sub‑advised by KKR) as well as management fees earned relating to our investment in Marshall Wace LLP ("Marshall Wace") which was completed in the fourth quarter of 2015.
Performance Income
The net decrease was primarily attributable to net carried interest losses in 2015 and a lower level of incentive fees. The net carried interest losses were primarily due to losses in our special situations strategy accounts and funds as well as lower overall appreciation in our mezzanine and direct lending strategies during 2015. The decrease in incentive fees is due primarily to a decrease in incentive fees received from KFN as a result of our acquisition of it on April 30, 2014, as incentive fees from KFN after that date were eliminated from segment results, as well as lower incentive fees in our hedge fund-of-funds platform and European credit platform driven primarily by less favorable financial performance in the current year. Incentive fees are typically determined for the twelve-month periods ending in either the second or fourth quarters of the calendar year, however, such fees may also be determined quarterly or at other points during the year. Whether an incentive fee from KKR vehicles is payable in any given period, and the amount of an incentive fee payment, if any, depends on the investment performance of the vehicle and as a result are expected to vary significantly from period to period.
Segment Expenses
Compensation and Benefits
The decrease was primarily due to (i) reversals of unrealized performance income compensation in connection with net carried interest losses in 2015 in certain carry earning funds, (ii) lower appreciation in certain carry earning funds in 2015 and (iii) a decrease in realized performance income compensation reflecting the decrease in incentive fees, each of which are described above.
Occupancy and Other Operating Expenses
The increase was primarily driven by (i) higher occupancy costs reflecting the cost of an exit of office space during the year, (ii) higher allocations of corporate other operating expenses to Public Markets due to an increase in both the amount of corporate other operating expenses incurred by the firm and an increase in the proportion of revenue earned by Public Markets relative to other operating segments in 2015 and (iii) a decrease in the amount of operating expenses allocated from Public Markets to Principal Activities as result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2015.
Economic Net Income (Loss)
The decrease is primarily attributable to the decrease in performance income and fees partially offset by lower expenses as described above.
Assets Under Management
The following table reflects the changes in our Public Markets AUM from December 31, 2014 to December 31, 2015:
| ($ in thousands) | |||
| December 31, 2014 - As Adjusted | $ | 42,508,000 | |
| New Capital Raised | 12,926,300 | ||
| Acquisitions | 6,010,800 | ||
| Distributions | (4,087,900 | ) | |
| Redemptions | (2,873,500 | ) | |
| Net Changes in Fee Base of Certain Funds | (238,600 | ) | |
| Change in Value | (729,400 | ) | |
| December 31, 2015 | $ | 53,515,700 |
As of December 31, 2014, AUM has been adjusted to include (i) capital commitments for which we are eligible to receive fees or carried interest upon deployment of capital and (ii) KKR's pro-rata portion of AUM managed by other asset managers in which KKR holds a minority stake. Our reported AUM for periods prior to December 31, 2014 does not include these items.
AUM in our Public Markets segment totaled $53.5 billion at December 31, 2015, an increase of $11.0 billion compared to AUM of $42.5 billion at December 31, 2014, on an as adjusted basis. The increase for the period was primarily due to new capital raised across multiple strategies primarily in our CLOs, special situations strategy, hedge funds business and Corporate Capital Trust. In addition, in the fourth quarter of 2015, KKR acquired 24.9% of Marshall Wace, resulting in the inclusion of KKR's pro-rata portion of the AUM managed by Marshall Wace. Partially offsetting these increases were (i) redemptions and distributions of $7.0 billion from certain investment vehicles across multiple strategies including our hedge funds business, strategic partnerships and CLOs, (ii) decreases in value of $0.7 billion primarily in our European credit platform related to foreign currency fluctuations and (iii) a net change in fee base of $0.2 billion reflecting our Mezzanine Fund entering its post-investment period.
Fee-Paying Assets Under Management
The following table reflects the changes in our Public Markets FPAUM from December 31, 2014 to December 31, 2015:
| ($ in thousands) | |||
| December 31, 2014 - As Adjusted | $ | 38,594,700 | |
| New Capital Raised | 9,212,400 | ||
| Acquisitions | 6,010,800 | ||
| Distributions | (3,455,800 | ) | |
| Redemptions | (2,873,500 | ) | |
| Net Changes in Fee Base of Certain Funds | (325,200 | ) | |
| Change in Value | (750,300 | ) | |
| December 31, 2015 | $ | 46,413,100 |
As of December 31, 2014, FPAUM has been adjusted to include KKR's pro-rata portion of AUM managed by other asset managers in which KKR holds a minority stake. Our reported AUM for periods prior to December 31, 2014 does not include this item.
FPAUM in our Public Markets segment was $46.4 billion at December 31, 2015, an increase of $7.8 billion compared to FPAUM of $38.6 billion at December 31, 2014, on an as adjusted basis. The increase was primarily due to new capital raised of $9.2 billion across multiple strategies primarily in our CLOs, special situations strategy, hedge funds business and Corporate Capital Trust. In addition, in the fourth quarter of 2015, KKR acquired 24.9% of Marshall Wace, resulting in the inclusion of KKR's pro-rata portion of the FPAUM managed by Marshall Wace. Partially offsetting these increases were (i) decreases of $6.3 billion relating to redemptions and distributions from certain investment vehicles across multiple strategies primarily in CLOs, our hedge funds platform and strategic partnerships, (ii) decreases in value primarily in our European credit and hedge fund platforms related to foreign currency fluctuations and (iii) a net change in fee base of $0.3 billion reflecting our Mezzanine Fund entering its post-investment period.
Equity Invested
The increase is primarily due to a higher level of net capital deployed in our direct lending, special situations and mezzanine strategies.
Uncalled Commitments
As of December 31, 2015, our Public Markets segment had $6.7 billion of uncalled capital commitments that could be called for investments in new transactions.
Gross Dollars Invested
The increase is primarily due to a higher level of investment activity in our direct lending, special situations and mezzanine strategies.
The following tables set forth information regarding the results of operations and certain key operating metrics for our Public Markets segment for the years ended December 31, 2014 and 2013.
Year ended December 31, 2014 compared to year ended December 31, 2013
| Year Ended | ||||||||||||
| December 31, 2014 | December 31, 2013 | Change | ||||||||||
| ($ in thousands) | ||||||||||||
| Segment Revenues | ||||||||||||
| Management, Monitoring and Transaction Fees, Net | ||||||||||||
| Management Fees | $ | 272,833 | $ | 206,134 | $ | 66,699 | ||||||
| Monitoring Fees | — | — | — | |||||||||
| Transaction Fees | 27,145 | 40,314 | (13,169 | ) | ||||||||
| Fee Credits | (23,357 | ) | (29,950 | ) | 6,593 | |||||||
| Total Management, Monitoring and Transaction Fees, Net | 276,621 | 216,498 | 60,123 | |||||||||
| Performance Income | ||||||||||||
| Realized Incentive Fees | 47,807 | 72,359 | (24,552 | ) | ||||||||
| Realized Carried Interest | 34,650 | — | 34,650 | |||||||||
| Unrealized Carried Interest | 40,075 | 62,338 | (22,263 | ) | ||||||||
| Total Performance Income | 122,532 | 134,697 | (12,165 | ) | ||||||||
| Investment Income (Loss) | ||||||||||||
| Net Realized Gains (Losses) | — | — | — | |||||||||
| Net Unrealized Gains (Losses) | — | — | — | |||||||||
| Total Realized and Unrealized | — | — | — | |||||||||
| Interest Income and Dividends | — | — | — | |||||||||
| Interest Expense | — | — | — | |||||||||
| Net Interest and Dividends | — | — | — | |||||||||
| Total Investment Income (Loss) | — | — | — | |||||||||
| Total Segment Revenues | 399,153 | 351,195 | 47,958 | |||||||||
| Segment Expenses | ||||||||||||
| Compensation and Benefits | ||||||||||||
| Cash Compensation and Benefits | 64,530 | 24,696 | 39,834 | |||||||||
| Realized Performance Income Compensation | 32,984 | 28,944 | 4,040 | |||||||||
| Unrealized Performance Income Compensation | 16,029 | 24,935 | (8,906 | ) | ||||||||
| Total Compensation and Benefits | 113,543 | 78,575 | 34,968 | |||||||||
| Occupancy and related charges | 7,214 | 2,837 | 4,377 | |||||||||
| Other operating expenses | 31,501 | 36,006 | (4,505 | ) | ||||||||
| Total Segment Expenses | 152,258 | 117,418 | 34,840 | |||||||||
| Income (Loss) attributable to noncontrolling interests | 1,636 | 1,560 | 76 | |||||||||
| Economic Net Income (Loss) | $ | 245,259 | $ | 232,217 | $ | 13,042 | ||||||
| Assets Under Management | $ | 42,508,000 | $ | 33,077,400 | $ | 9,430,600 | ||||||
| Fee Paying Assets Under Management | $ | 38,594,700 | $ | 27,241,200 | $ | 11,353,500 | ||||||
| Equity Invested | $ | 3,027,400 | $ | 1,553,000 | $ | 1,474,400 | ||||||
| Uncalled Commitments | $ | 2,841,300 | $ | 2,362,300 | $ | 479,000 | ||||||
| Gross Dollars Invested | $ | 4,425,600 | $ | 4,213,300 | $ | 212,300 |
Segment Revenues
Management, Monitoring and Transaction Fees, Net
The net increase was primarily due to an increase in management fees of $66.7 million and a decrease in fee credits of $6.6 million, partially offset by a decrease in transaction fees of $13.2 million. The increase in management fees is due primarily to our acquisition of Avoca on February 19, 2014 and new capital raised, primarily in our special situations strategies, Corporate Capital Trust and our hedge fund of funds platform. These increases were partially offset by a decrease in management fees received from KFN as a result of our acquisition of it on April 30, 2014 as management fees from KFN after that date are eliminated from segment results. The decrease in transaction fees is due primarily to a decrease in the size of fee earning transactions in the current period. The decrease in fee credits is due primarily to the decrease in transaction fees as described above.
Performance Income
This decrease was primarily driven by a decrease in incentive fees of $24.6 million and a lower level of unrealized carried interest of $22.3 million, partially offset by a higher level of realized carried interest of $34.7 million. During the year ended December 31, 2014, we realized $34.7 million of carried interest from two alternative credit accounts. The decrease in incentive fees is due to a decrease in investment income in our hedge funds business and loss of incentive fees received from KFN as a result of our acquisition of it on April 30, 2014, partially offset by an increase in incentive fees received from Avoca following our acquisition of Avoca on February 19, 2014, and Corporate Capital Trust resulting from favorable performance. Incentive fees are typically determined for the twelve‑ month periods ending in either the second or fourth quarters of the calendar year, however, such fees may be determined at other points during the year for certain strategies. Whether an incentive fee from KKR vehicles is payable in any given period, and the amount of an incentive fee payment, if any, depends on the investment performance of the vehicle and as a result are expected to vary significantly from period to period. The decrease in unrealized carried interest was primarily driven by the reversals of previously recognized net unrealized gains for the year ended December 31, 2014, partially offset by an increase in unrealized carried interest across our carry‑earning funds, the most significant of which were in our special situations strategy.
Segment Expenses
Compensation and Benefits
The increase was primarily due to (i) higher compensation expenses relating to Avoca, which was acquired on February 19, 2014, (ii) higher allocations to carry pool driven by the higher levels of net carried interest, as described above and (iii) an increase in compensation and benefits in connection with the increase in fees, which generally results in higher compensation expense. These increases were partially offset by a decrease in compensation associated with incentive fees as a result of the overall decrease in incentive fees of as described above.
Occupancy and Other Operating Expenses
This decrease was due to the net effect of a $9.7 million one‑time expense incurred in connection with the launch of a closed end fund in the 2013 period which was partially offset in the 2014 period by the operating expenses of Avoca, which we acquired on February 19, 2014.
Economic Net Income (Loss)
The increase is primarily attributable to the increase in management fees, which was partially offset by the decrease in performance income and the increase in segment expenses.
Assets Under Management
The following table reflects the changes in our Public Markets AUM from December 31, 2013 to December 31, 2014:
| ($ in thousands) | |||
| December 31, 2013 | $ | 33,077,400 | |
| New Capital Raised | 7,253,000 | ||
| Acquisitions | 8,423,000 | ||
| KFN Acquisition | (4,511,900 | ) | |
| Distributions | (3,967,300 | ) | |
| Redemptions | (3,303,900 | ) | |
| Change in Value | 136,400 | ||
| December 31, 2014 - As Reported | $ | 37,106,700 | |
| Net AUM of Strategic Partnerships (pro-rata based on ownership interest) | 2,810,800 | ||
| Capital Commitments Where Fees or Carry are Payable Upon Deployment | 2,590,500 | ||
| December 31, 2014 - As Adjusted | 42,508,000 |
AUM in our Public Markets segment totaled $42.5 billion at December 31, 2014, on an as adjusted basis, an increase of $9.4 billion compared to AUM of $33.1 billion at December 31, 2013. The increase was primarily due to the acquisition of Avoca, which contributed $8.4 billion of AUM, as well as $7.3 billion of new capital raised. These increases were partially offset by the acquisition of KFN, which reduced AUM by $4.5 billion, and $7.3 billion of distributions and redemptions from certain investment vehicles, the most significant of which were from our hedge fund of funds platform and CLOs. In addition, AUM as of December 31, 2014 has been adjusted to include (i) KKR's pro-rata portion of AUM managed by other asset managers in which KKR holds a minority stake and (ii) capital commitments for which we are eligible to receive fees or carried interest upon deployment of capital. These two items increased our AUM by approximately $5.4 billion as of December 31, 2014 but are excluded from AUM as of December 31, 2013.
Fee-Paying Assets Under Management
The following table reflects the changes in our Public Markets FPAUM from December 31, 2013 to December 31, 2014:
| ($ in thousands) | |||
| December 31, 2013 | $ | 27,241,200 | |
| New Capital Raised | 6,304,600 | ||
| Acquisitions | 7,971,000 | ||
| KFN Acquisition | (2,684,700 | ) | |
| Distributions | (1,929,500 | ) | |
| Redemptions | (3,303,900 | ) | |
| Change in Value | (424,000 | ) | |
| Other | 2,609,200 | ||
| December 31, 2014 - As Reported | $ | 35,783,900 | |
| Net FPAUM of Strategic Partnerships (pro-rata based on ownership interest) | 2,810,800 | ||
| December 31, 2014 - As Adjusted | 38,594,700 |
FPAUM in our Public Markets segment was $35.8 billion at December 31, 2014, on an as adjusted basis, an increase of $8.6 billion compared to FPAUM of $27.2 billion at December 31, 2013. The increase was primarily due to the acquisition of Avoca, which contributed $8.0 billion of FPAUM, $6.3 billion of new capital raised and $2.6 billion of CLOs partially owned by KKR that were not previously included in FPAUM and was not new capital raised during the period (included in Other above). These increases were partially offset by the acquisition of KFN, which reduced FPAUM by $2.7 billion, and $5.2 billion of redemptions and distributions from certain investment vehicles, the most significant of which were from our CLOs and hedge fund of funds platform. In addition, FPAUM has been adjusted to include KKR's pro-rata portion of FPAUM managed by other asset managers in which KKR holds a minority stake. This item increased our AUM by approximately $2.8 billion as of December 31, 2014 but is excluded from FPAUM as of as of December 31, 2013.
Equity Invested
The increase is primarily due to a higher level of net capital deployed, primarily in our special situations and direct lending strategies partially offset by a lower level of capital deployed in our mezzanine strategy.
Uncalled Commitments
As of December 31, 2014, our Public Markets segment had $2.8 billion of uncalled capital commitments that could be called for investments in new transactions.
Gross Dollars Invested
The increase is primarily due to a higher level of investment activity in our special situations and direct lending strategies, partially offset by a decrease in investment activity in our mezzanine strategies.
Capital Markets Segment
The following tables set forth information regarding the results of operations and certain key operating metrics for our Capital Markets segment for the years ended December 31, 2015 and 2014.
Year ended December 31, 2015 compared to year ended December 31, 2014
| Year Ended | ||||||||||||
| December 31, 2015 | December 31, 2014 | Change | ||||||||||
| ($ in thousands) | ||||||||||||
| Segment Revenues | ||||||||||||
| Management, Monitoring and Transaction Fees, Net | ||||||||||||
| Management Fees | $ | — | $ | — | $ | — | ||||||
| Monitoring Fees | — | — | — | |||||||||
| Transaction Fees | 191,470 | 217,920 | (26,450 | ) | ||||||||
| Fee Credits | — | — | — | |||||||||
| Total Management, Monitoring and Transaction Fees, Net | 191,470 | 217,920 | (26,450 | ) | ||||||||
| Performance Income | ||||||||||||
| Realized Incentive Fees | — | — | — | |||||||||
| Realized Carried Interest | — | — | — | |||||||||
| Unrealized Carried Interest | — | — | — | |||||||||
| Total Performance Income | — | — | — | |||||||||
| Investment Income (Loss) | ||||||||||||
| Net Realized Gains (Losses) | — | — | — | |||||||||
| Net Unrealized Gains (Losses) | — | — | — | |||||||||
| Total Realized and Unrealized | — | — | — | |||||||||
| Interest Income and Dividends | — | — | — | |||||||||
| Interest Expense | — | — | — | |||||||||
| Net Interest and Dividends | — | — | — | |||||||||
| Total Investment Income (Loss) | — | — | — | |||||||||
| Total Segment Revenues | 191,470 | 217,920 | (26,450 | ) | ||||||||
| Segment Expenses | ||||||||||||
| Compensation and Benefits | ||||||||||||
| Cash Compensation and Benefits | 34,562 | 41,551 | (6,989 | ) | ||||||||
| Realized Performance Income Compensation | — | — | — | |||||||||
| Unrealized Performance Income Compensation | — | — | — | |||||||||
| Total Compensation and Benefits | 34,562 | 41,551 | (6,989 | ) | ||||||||
| Occupancy and related charges | 2,641 | 1,523 | 1,118 | |||||||||
| Other operating expenses | 14,618 | 11,497 | 3,121 | |||||||||
| Total Segment Expenses | 51,821 | 54,571 | (2,750 | ) | ||||||||
| Income (Loss) attributable to noncontrolling interests | 13,103 | 11,886 | 1,217 | |||||||||
| Economic Net Income (Loss) | $ | 126,546 | $ | 151,463 | $ | (24,917 | ) | |||||
| Syndicated Capital | $ | 868,900 | $ | 2,567,300 | $ | (1,698,400 | ) |
Segment Revenues
Management, Monitoring and Transaction Fees, Net
Transaction fees decreased due to a decrease in the number and size of capital markets transactions for the year ended December 31, 2015 compared to the year ended December 31, 2014. Our capital markets business does not generate management or monitoring fees. Overall, we completed 116 capital markets transactions for the year ended December 31, 2015
of which 16 represented equity offerings and 100 represented debt offerings, as compared to 139 transactions for the year ended December 31, 2014 of which 15 represented equity offerings and 124 represented debt offerings. We earned fees in connection with underwriting, syndication and other capital markets services. While each of the capital markets transactions that we undertake in this segment is separately negotiated, our fee rates are generally higher with respect to underwriting or syndicating equity offerings than with respect to debt offerings, and the amount of fees that we collect for like transactions generally correlates with overall transaction sizes. Our capital markets fees are sourced from our Private Markets and Public Markets platforms as well as third party companies. For the year ended December 31, 2015 approximately 24% of our transaction fees were earned from third parties as compared to 31% for the year ended December 31, 2014. Our transaction fees are comprised of fees from various geographic regions. For the year ended December 31, 2015 approximately 44% of our transaction fees were sourced outside the United States as compared to approximately 38% for the year ended December 31, 2014. Our capital markets business is dependent on the overall capital markets environment, which is influenced by, among other things, equity prices, credit spreads and volatility.
Segment Expenses
Compensation and Benefits
The decrease was primarily due to a decrease in cash compensation and benefits related to lower transaction fees, which generally results in lower compensation expense.
Occupancy and Other Operating Expenses
The increase was primarily driven by higher allocations of corporate other operating expenses to Capital Markets due to an increase in both the amount of corporate other operating expenses incurred by the firm and to a lesser extent an increase in the proportion of revenue earned by Capital Markets relative to other operating segments in 2015. Additionally, there was a decrease in the amount of operating expenses allocated from Capital Markets to Principal Activities as result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2015.
Economic Net Income (Loss)
The decrease is primarily attributable to the decrease in transaction fees as described above
Syndicated Capital
The decrease is primarily due to a decrease in the size of syndication transactions in the year ended December 31, 2015 as compared to the year ended December 31, 2014. The 2014 amounts included the syndication of equity in First Data Corporation of approximately $1.8 billion. Overall, we completed 10 syndication transactions for the year ended December 31, 2015 as compared to 8 syndication transactions for the year ended December 31, 2014.
The following tables set forth information regarding the results of operations and certain key operating metrics for our Capital Markets segment for the years ended December 31, 2014 and 2013.
Year ended December 31, 2014 compared to year ended December 31, 2013
| Year Ended | ||||||||||||
| December 31, 2014 | December 31, 2013 | Change | ||||||||||
| ($ in thousands) | ||||||||||||
| Segment Revenues | ||||||||||||
| Management, Monitoring and Transaction Fees, Net | ||||||||||||
| Management Fees | $ | — | $ | — | $ | — | ||||||
| Monitoring Fees | — | — | — | |||||||||
| Transaction Fees | 217,920 | 146,254 | 71,666 | |||||||||
| Fee Credits | — | — | — | |||||||||
| Total Management, Monitoring and Transaction Fees, Net | 217,920 | 146,254 | 71,666 | |||||||||
| Performance Income | ||||||||||||
| Realized Incentive Fees | — | — | — | |||||||||
| Realized Carried Interest | — | — | — | |||||||||
| Unrealized Carried Interest | — | — | — | |||||||||
| Total Performance Income | — | — | — | |||||||||
| Investment Income (Loss) | ||||||||||||
| Net Realized Gains (Losses) | — | — | — | |||||||||
| Net Unrealized Gains (Losses) | — | — | — | |||||||||
| Total Realized and Unrealized | — | — | — | |||||||||
| Interest Income and Dividends | — | — | — | |||||||||
| Interest Expense | — | — | — | |||||||||
| Net Interest and Dividends | — | — | — | |||||||||
| Total Investment Income (Loss) | — | — | — | |||||||||
| Total Segment Revenues | 217,920 | 146,254 | 71,666 | |||||||||
| Segment Expenses | ||||||||||||
| Compensation and Benefits | ||||||||||||
| Cash Compensation and Benefits | 41,551 | 31,118 | 10,433 | |||||||||
| Realized Performance Income Compensation | — | — | — | |||||||||
| Unrealized Performance Income Compensation | — | — | — | |||||||||
| Total Compensation and Benefits | 41,551 | 31,118 | 10,433 | |||||||||
| Occupancy and related charges | 1,523 | 877 | 646 | |||||||||
| Other operating expenses | 11,497 | 9,698 | 1,799 | |||||||||
| Total Segment Expenses | 54,571 | 41,693 | 12,878 | |||||||||
| Income (Loss) attributable to noncontrolling interests | 11,886 | 3,329 | 8,557 | |||||||||
| Economic Net Income (Loss) | $ | 151,463 | $ | 101,232 | $ | 50,231 | ||||||
| Syndicated Capital | $ | 2,567,300 | $ | 1,112,100 | $ | 1,455,200 |
Segment Revenues
Management, Monitoring and Transaction Fees, Net
Transaction fees increased primarily due to an increase in the size of capital markets transactions in the year ended December 31, 2014 compared to the year ended December 31, 2013, including syndication fees received from First Data Corporation of approximately $43 million in the third quarter of 2014. Our capital markets business does not generate management or monitoring fees. Overall, we completed 139 capital markets transactions for the year ended December 31, 2014 of which 15 represented equity offerings and 124 represented debt offerings, as compared to 128 transactions for the year ended
December 31, 2013 of which 16 represented equity offerings and 112 represented debt offerings. We earned fees in connection with underwriting, syndication and other capital markets services. While each of the capital markets transactions that we undertake in this segment is separately negotiated, our fee rates are generally higher with respect to underwriting or syndicating equity offerings than with respect to debt offerings, and the amount of fees that we collect for like transactions generally correlates with overall transaction sizes. Our capital markets fees are sourced from our Private Markets and Public Markets platforms as well as third party companies. For the years ended December 31, 2014 approximately 31% of our transaction fees were earned from third parties, as compared to 29% for the year ended December 31, 2013. Our transaction fees are comprised of fees from various global regions. For the year ended December 31, 2014 approximately 38% of our transaction fees were sourced internationally as compared to approximately 30% for the year ended December 31, 2013. Our capital markets business is dependent on the overall capital markets environment, which is influenced by equity prices, credit spreads and volatility.
Segment Expenses
Compensation and Benefits
The increase was primarily due to an increase in cash compensation and benefits related to higher fees, which generally results in higher compensation expense, and to a lesser extent increased headcount.
Occupancy and Other Operating Expenses
This increase was primarily driven by an increase in professional fees in connection with the higher overall level of capital markets transaction activity.
Economic Net Income (Loss)
The increase is primarily attributable to the increase in transaction fees, partially offset by the increase in compensation and benefits, described above.
Syndicated Capital
The increase is primarily due to an increase in the size of syndication transactions when compared to year ended December 31, 2013, which included the syndication of equity in First Data Corporation of approximately $1.8 billion in the third quarter of 2014. Overall, we completed 8 syndication transactions for the year ended December 31, 2014 as compared to 10 syndication transactions for the year ended December 31, 2013.
Principal Activities Segment
The following tables set forth information regarding the results of operations for our Principal Activities segment for the years ended December 31, 2015 and 2014.
Year ended December 31, 2015 compared to year ended December 31, 2014
| Year Ended | ||||||||||||
| December 31, 2015 | December 31, 2014 | Change | ||||||||||
| ($ in thousands) | ||||||||||||
| Segment Revenues | ||||||||||||
| Management, Monitoring and Transaction Fees, Net | ||||||||||||
| Management Fees | $ | — | $ | — | $ | — | ||||||
| Monitoring Fees | — | — | — | |||||||||
| Transaction Fees | — | — | — | |||||||||
| Fee Credits | — | — | — | |||||||||
| Total Management, Monitoring and Transaction Fees, Net | — | — | — | |||||||||
| Performance Income | ||||||||||||
| Realized Incentive Fees | — | — | — | |||||||||
| Realized Carried Interest | — | — | — | |||||||||
| Unrealized Carried Interest | — | — | — | |||||||||
| Total Performance Income | — | — | — | |||||||||
| Investment Income (Loss) | ||||||||||||
| Net Realized Gains (Losses) | 337,023 | 628,403 | (291,380 | ) | ||||||||
| Net Unrealized Gains (Losses) | (391,962 | ) | (396,425 | ) | 4,463 | |||||||
| Total Realized and Unrealized | (54,939 | ) | 231,978 | (286,917 | ) | |||||||
| Interest Income and Dividends | 411,536 | 408,084 | 3,452 | |||||||||
| Interest Expense | (203,085 | ) | (134,909 | ) | (68,176 | ) | ||||||
| Net Interest and Dividends | 208,451 | 273,175 | (64,724 | ) | ||||||||
| Total Investment Income (Loss) | 153,512 | 505,153 | (351,641 | ) | ||||||||
| Total Segment Revenues | 153,512 | 505,153 | (351,641 | ) | ||||||||
| Segment Expenses | ||||||||||||
| Compensation and Benefits | ||||||||||||
| Cash Compensation and Benefits | 107,572 | 121,161 | (13,589 | ) | ||||||||
| Realized Performance Income Compensation | — | — | — | |||||||||
| Unrealized Performance Income Compensation | — | — | — | |||||||||
| Total Compensation and Benefits | 107,572 | 121,161 | (13,589 | ) | ||||||||
| Occupancy and related charges | 16,568 | 18,104 | (1,536 | ) | ||||||||
| Other operating expenses | 50,573 | 60,673 | (10,100 | ) | ||||||||
| Total Segment Expenses | 174,713 | 199,938 | (25,225 | ) | ||||||||
| Income (Loss) attributable to noncontrolling interests | — | — | — | |||||||||
| Economic Net Income (Loss) | $ | (21,201 | ) | $ | 305,215 | $ | (326,416 | ) | ||||
Segment Revenues
Investment Income
The net decrease is primarily due to a decrease in total realized and unrealized gains of $286.9 million, as well as a decrease in net interest and dividends of $64.7 million.
For the year ended December 31, 2015, net realized gains were comprised primarily of gains from the sale of private equity investments, generally held through or alongside our funds, including the sales or partial sales of Walgreens Boots Alliance, Inc., The Nielsen Company B.V. (NYSE: NLSN), Zimmer Biomet Holdings, Inc. and Kion GmbH (XETRA: KGX). These realized gains were partially offset by realized losses on the sale or write off of other private equity investments, generally held through or alongside our funds, including the write-off of Energy Future Holdings. Realized investment losses from balance sheet investments that were already written down as of October 1, 2009 that have been excluded from net realized gains (losses) above related to Energy Future Holdings and amounted to approximately $100 million for the year ended December 31, 2015. Net unrealized losses were primarily attributable to (i) the reversal of gains on sales of private equity investments noted in the realized gains commentary above and (ii) overall reductions in value of our investments in CLOs, energy investments in working interests in oil and gas producing properties and special situations investments. A decrease in the value of our CLO portfolio was experienced in each quarter of 2015 and was due primarily to a decrease in the market value of underlying collateral as well as a reduction in overall market prices for these securities. With respect to our energy portfolio, a decrease in value was experienced in three of four quarters during 2015 and is due primarily to a drop in long‑term oil, condensate, natural gas liquids, and natural gas prices during the year ended December 31, 2015. Offsetting these unrealized losses were unrealized gains resulting from increases in value of various investments, most notably First Data Corporation, Walgreens Boots Alliance, Inc. and WMI Holdings Corp. (NASDAQ: WMIH), as well as the reversal of unrealized losses related to the write-off of Energy Future Holdings, Corp. Subsequent to December 31, 2015, the value of First Data Corporation has declined sharply. See "--Business Environment". Additionally, subsequent to December 31, 2015, we expect to write-off our investment in Samson Resources once our losses become realized. Since this investment has already been written down to zero value in periods prior to December 31, 2015, this write-off is not expected to have a significant impact on our economic net income in future periods. However, this write-off could reduce our cash earnings by approximately $250 million.
As of December 31, 2015, we held $96.6 million of investments in CLOs that are not held for investment purposes and are carried at cost. For the year ended December 31, 2015, the unrealized loss relating to changes in fair value for these investments in CLOs was $7.6 million. Prior to the quarter ended September 30, 2015, all CLOs were carried at fair value.
For the year ended December 31, 2014, net realized gains were comprised primarily of gains from the sale of private equity investments, generally held through or alongside our funds, including the sales or partial sales of HCA, Inc., NXP Semiconductors N.V. and The Nielsen Company B.V. Net unrealized losses are primarily related to (i) the reversal of gains on sales of private equity investments noted in the realized gains commentary above, (ii) declines in value of various investments in working interests in oil and gas producing properties, (iii) a decline in value for Samson Resources, (iv) overall reductions in value of our investments in CLOs, driven primarily by a decrease in the market value of underlying collateral and (v) a decline in value of investments in specialty finance companies. For the year ended December 31, 2014, mark-to-market unrealized losses reflected in net unrealized losses relating to our energy investments in working interests in oil and gas producing properties were approximately $149 million, the majority of which occurred in the fourth quarter of 2014 primarily as a result of a decline in oil and gas prices. These unrealized losses and reversals of gains upon realization events were partially offset by unrealized gains resulting from increases in value of various private equity investments including First Data Corporation, Alliance Boots GmbH and Biomet, Inc.
For the year ended December 31, 2015, interest income and dividends were comprised of (i) $316.5 million of interest income which consists primarily of interest that is received from interest yielding CLOs and credit investments and, to a lesser extent, from our cash balances and other assets and (ii) $95.0 million of dividend income received primarily from distributions received through our investment funds and other assets. For the year ended December 31, 2014, interest income and dividends were comprised of (i) $241.7 million of interest income which consists primarily of interest that is received from interest yielding CLOs and credit investments and, to a lesser extent, from our cash balances and other assets and (ii) $166.4 million of dividend income received primarily from distributions received through our investment funds and other assets, including approximately $84 million received from our energy investments in working interests in oil and gas producing properties. The increase from the prior period is primarily due to more significant levels of investments in interest yielding CLOs and credit investments, which were largely offset by a decrease in dividend income from our private equity and energy investments portfolio.
The increase in interest expense is primarily due to our 2044 Senior Notes issued on May 29, 2014 and an additional issuance of such notes on March 18, 2015, as well as the debt obligations of KFN acquired on April 30, 2014 which did not contribute to our interest expense for the first four months of 2014.
Segment Expenses
Compensation and Benefits
The decrease was primarily due to a decrease in the amount of compensation and benefits expenses allocated from the other operating segments to Principal Activities, as well as a lower amount of corporate compensation allocated to Principal Activities, in each case as a result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2015. Partially offsetting these decreases was an increase in the aggregate compensation and benefits expense in our other operating segments that are allocable to the Principal Activities segment. See “-Segment Analysis-Private Markets”, “-Segment Analysis-Public Markets” and “-Segment Analysis-Capital Markets” for additional information regarding the compensation and benefit expenses of these other segments, and “-Segment Analysis" for a discussion of expense allocations among segments.
Occupancy and Other Operating Expenses
The decrease was primarily driven by a decrease in the amount of occupancy and other operating expenses allocated from the other operating segments as a result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2015.
Economic Net Income (Loss)
The decrease is primarily attributable to the decrease in investment income as described above.
The following tables set forth information regarding the results of operations for our Principal Activities segment for the years ended December 31, 2014 and 2013.
Year ended December 31, 2014 compared to year ended December 31, 2013
| Year Ended | ||||||||||||
| December 31, 2014 | December 31, 2013 | Change | ||||||||||
| ($ in thousands) | ||||||||||||
| Segment Revenues | ||||||||||||
| Management, Monitoring and Transaction Fees, Net | ||||||||||||
| Management Fees | $ | — | $ | — | $ | — | ||||||
| Monitoring Fees | — | — | — | |||||||||
| Transaction Fees | — | — | — | |||||||||
| Fee Credits | — | — | — | |||||||||
| Total Management, Monitoring and Transaction Fees, Net | — | — | — | |||||||||
| Performance Income | ||||||||||||
| Realized Incentive Fees | — | — | — | |||||||||
| Realized Carried Interest | — | — | — | |||||||||
| Unrealized Carried Interest | — | — | — | |||||||||
| Total Performance Income | — | — | — | |||||||||
| Investment Income (Loss) | ||||||||||||
| Net Realized Gains (Losses) | 628,403 | 635,633 | (7,230 | ) | ||||||||
| Net Unrealized Gains (Losses) | (396,425 | ) | 301,262 | (697,687 | ) | |||||||
| Total Realized and Unrealized | 231,978 | 936,895 | (704,917 | ) | ||||||||
| Interest Income and Dividends | 408,084 | 87,168 | 320,916 | |||||||||
| Interest Expense | (134,909 | ) | (65,662 | ) | (69,247 | ) | ||||||
| Net Interest and Dividends | 273,175 | 21,506 | 251,669 | |||||||||
| Total Investment Income (Loss) | 505,153 | 958,401 | (453,248 | ) | ||||||||
| Total Segment Revenues | 505,153 | 958,401 | (453,248 | ) | ||||||||
| Segment Expenses | ||||||||||||
| Compensation and Benefits | ||||||||||||
| Cash Compensation and Benefits | 121,161 | 110,457 | 10,704 | |||||||||
| Realized Performance Income Compensation | — | — | — | |||||||||
| Unrealized Performance Income Compensation | — | — | — | |||||||||
| Total Compensation and Benefits | 121,161 | 110,457 | 10,704 | |||||||||
| Occupancy and related charges | 18,104 | 20,844 | (2,740 | ) | ||||||||
| Other operating expenses | 60,673 | 63,262 | (2,589 | ) | ||||||||
| Total Segment Expenses | 199,938 | 194,563 | 5,375 | |||||||||
| Income (Loss) attributable to noncontrolling interests | — | — | — | |||||||||
| Economic Net Income (Loss) | $ | 305,215 | $ | 763,838 | $ | (458,623 | ) | |||||
Segment Revenues
Investment Income
The net decrease is primarily due to a decrease in total realized and unrealized gains of $704.9 million, which were partially offset by an increase in net interest and dividends of $251.7 million.
For the year ended December 31, 2014, net realized gains were comprised primarily of gains from the sale of private equity investments, generally held through or alongside our funds, including the sales or partial sales of HCA, Inc., NXP Semiconductors N.V. and The Nielsen Company B.V. Net unrealized losses are primarily related to (i) the reversal of gains on sales of private equity investments noted in the realized gains commentary above, (ii) declines in value of various investments in working interests in oil and gas producing properties, (iii) a decline in value for Samson Resources, (iv) overall reductions in value of our investments in CLOs, driven primarily by a decrease in the market value of underlying collateral and (v) a decline in value of investments in specialty finance companies. For the year ended December 31, 2014, mark-to-market unrealized losses reflected in net unrealized losses relating to our energy investments in working interests in oil and gas producing properties were approximately $149 million, the majority of which occurred in the fourth quarter of 2014 primarily as a result of a decline in oil prices. These unrealized losses and reversals of gains upon realization events were partially offset by unrealized gains resulting from increases in value of various private equity investments including First Data Corporation, Alliance Boots GmbH and Biomet, Inc.
For the year ended December 31, 2013, net realized gains were comprised primarily of realized gains from the sales or partial sales of private equity investments, generally held through or alongside our funds, the most significant of which were HCA, Inc., Dollar General Corporation, NXP Semiconductors N.V. and Intelligence, Ltd. These realized gains were partially offset by realized losses primarily related to the sale or write-off of private equity investments, generally held through or alongside our funds, including the write-off of PagesJaunes Group. Realized investment losses from balance sheet investments that were already written down as of October 1, 2009 that have been excluded from net realized gains (losses) above amounted to approximately $205 million for the year ended December 31, 2013. The net unrealized gains related primarily to increases in the value of various private equity investments, most notably HCA, Inc., ProSiebenSat.1 Media AG and Alliance Boots GmbH, partially offset by unrealized losses relating to our investment in Samson Resources, as well as reversals of unrealized gains primarily in connection with the sales of the investments noted in the realized gains commentary above.
For the year ended December 31, 2014, interest income and dividends were comprised of (i) $241.7 million of interest income which consisted primarily of interest that was received from interest yielding CLOs and credit investments and, to a lesser extent, from our cash balances and other assets and (ii) $166.4 million of dividend income received primarily from distributions received through our investment funds and other assets, including approximately $84 million received from our energy investments in working interests in oil and gas producing properties. For the year ended December 31, 2013, interest income and dividends were comprised of (i) $41.2 million of interest income which consists primarily of interest received on our cash balances and (ii) $46.0 million of dividend income received primarily from distributions received through our investment funds and other assets. The increase from the prior period is primarily due to an increase in dividend income in our private equity and energy investments portfolio as well as more significant levels of investments in interest yielding CLOs and credit investments as a result of our acquisition of KFN on April 30, 2014 and to a lesser extent our acquisition of Avoca on February 19, 2014.
The increase in interest expense is primarily due to our 2044 Senior Notes issued on May 29, 2014 as well as interest expense relating to debt obligations at KFN subsequent to KKR’s acquisition of it on April 30, 2014.
Segment Expenses
Compensation and Benefits
The increase was primarily due to (i) an increase in cash compensation and benefits incurred directly by the Principal Activities segment and (ii) an increase in the aggregate compensation and benefits expense in our other operating segments that are allocable to the Principal Activities segment. See commentary for these operating segments in “-Segment Analysis-Private Markets”, “-Segment Analysis-Public Markets” and “-Segment Analysis-Capital Markets”. These increases were partially offset by a decrease in the amount of compensation and benefits expenses allocated from the other operating segments as a result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2014.
Occupancy and Other Operating Expenses
The decrease was primarily driven by a decrease in the amount of occupancy and other operating expenses allocated from the other operating segments as a result of a decrease in the proportion of revenue earned by Principal Activities relative to other operating segments during 2014. This decrease was partially offset by an increase in occupancy and other operating expenses incurred directly by the Principal Activities segment.
Economic Net Income (Loss)
The decrease is primarily attributable to the decrease in investment income, described above.
Segment Balance Sheet
Our segment balance sheet is the balance sheet of KKR & Co. L.P. and its subsidiaries on a segment basis which include, but are not limited to, our investment management companies, broker-dealer companies, general partners of our investment funds and KFN. Our segment balance sheet excludes the assets and liabilities of our investment funds and CFEs.
Investments
Investments is a term used solely for purposes of financial presentation of a portion of KKR's balance sheet and includes majority investments in subsidiaries that operate KKR's asset management and other businesses, including the general partner interests of KKR's investment funds.
Cash and Short-Term Investments
Cash and short-term investments represent cash and liquid short-term investments in high-grade, short-duration cash management strategies used by KKR to generate additional yield on our excess liquidity and is used by management in evaluating KKR's liquidity position. We believe this measure is useful to unitholders as it provides additional insight into KKR's available liquidity. Cash and short-term investments differ from cash and cash equivalents on a GAAP basis as a result of the inclusion of liquid short-term investments in cash and short-term investments. The impact that these liquid short-term investments have on cash and cash equivalents on a GAAP basis is reflected in the consolidated statements of cash flows within cash flows from operating activities. Accordingly, the exclusion of these investments from cash and cash equivalents on a GAAP basis has no impact on cash provided (used) by operating activities, investing activities or financing activities. As of December 31, 2015, we had cash and short-term investments on a segment basis of approximately $1.3 billion. Excluding approximately $0.2 billion of liquid short-term investments, cash and short-term investments may be reconciled to cash and cash equivalents of approximately $1.0 billion as of December 31, 2015.
The following tables present our segment balance sheet as of December 31, 2015 and December 31, 2014:
| As of | As of | |||||||
| December 31, 2015 | December 31, 2014 | |||||||
| ($ in thousands, except per unit amounts) | ||||||||
| Cash and short-term investments | $ | 1,287,650 | $ | 1,121,385 | ||||
| Investments | 8,958,089 | 9,807,606 | ||||||
| Unrealized carry (a) | 1,415,478 | 1,283,022 | ||||||
| Other assets | 1,613,139 | 999,654 | ||||||
| Corporate Real Estate | 154,942 | — | ||||||
| Total assets | $ | 13,429,298 | $ | 13,211,667 | ||||
| Debt obligations - KKR (ex-KFN) | $ | 2,000,000 | $ | 1,527,000 | ||||
| Debt obligations - KFN | 657,310 | 657,310 | ||||||
| Preferred shares - KFN | 373,750 | 373,750 | ||||||
| Other liabilities | 291,537 | 413,808 | ||||||
| Total liabilities | 3,322,597 | 2,971,868 | ||||||
| Noncontrolling interests | 127,472 | 121,574 | ||||||
| Book Value | $ | 9,979,229 | $ | 10,118,225 | ||||
| Book Value Per Outstanding Adjusted Unit | $ | 12.18 | $ | 12.48 | ||||
| Book Value Per Adjusted Unit | $ | 11.78 | $ | 12.07 | ||||
| (a) Unrealized Carry | ||||||||
| Private Markets | $ | 1,340,556 | $ | 1,196,633 | ||||
| Public Markets | 74,922 | 86,389 | ||||||
| Total | $ | 1,415,478 | $ | 1,283,022 |
The following table presents our most significant investments based on their fair market value as of December 31, 2015.
| As of December 31, 2015 | |||||||
| ($ in thousands) | |||||||
| Significant Investments: | Fair Value | Fair Value as a Percentage of Total Investments | |||||
| First Data Corporation (NYSE: FDC) | $ | 1,266,196 | 14.1 | % | |||
| Walgreens Boots Alliance (NASDAQ: WBA) | 748,688 | 8.4 | % | ||||
| WMI Holdings Corp. (NASDAQ: WMIH) | 311,270 | 3.5 | % | ||||
| Oil & Gas Royalties Investment | 173,800 | 1.9 | % | ||||
| HCA Holdings, Inc. (NYSE: HCA) | 169,332 | 1.9 | % | ||||
| Total Significant Investments | 2,669,286 | 29.8 | % | ||||
| Other Investments | 6,288,803 | 70.2 | % | ||||
| Total Investments | $ | 8,958,089 | 100.0 | % |
The following tables provide reconciliations of KKR’s GAAP Common Units Outstanding - Basic to Adjusted Units and KKR & Co. L.P. Partners’ Capital to Book Value:
| As of | ||
| December 31, 2015 | ||
| GAAP Common Units Outstanding - Basic | 457,834,875 | |
| Adjustments: | ||
| Unvested Common Units (a) | 23,212,300 | |
| Other Exchangeable Securities (b) | 4,689,610 | |
| GAAP Common Units Outstanding - Diluted | 485,736,785 | |
| Adjustments: | ||
| KKR Holdings Units (c) | 361,346,588 | |
| Adjusted Units | 847,083,373 | |
| Adjustments: | ||
| Unvested Common Units and Unvested Other Exchangeable Securities | (24,060,289 | ) |
| Adjusted Units Eligible for Distribution | 823,023,084 | |
| Adjustments: | ||
| Vested Other Exchangeable Securities (b) | (3,841,621 | ) |
| Outstanding Adjusted Units | 819,181,463 | |
| (a) | Represents equity awards granted under the Equity Incentive Plan. The issuance of common units of KKR & Co. L.P. pursuant to awards under the Equity Incentive Plan dilutes KKR common unitholders and KKR Holdings pro rata in accordance with their respective percentage interests in the KKR business. |
| (b) | Represents securities in a subsidiary of a KKR Group Partnership and of KKR & Co. L.P. that are exchangeable into KKR & Co. L.P. common units issued in connection with the acquisition of Avoca. |
| (c) | Common units that may be issued by KKR & Co. L.P. upon exchange of units in KKR Holdings L.P. for KKR common units. |
| As of | |||
| ($ in thousands, except per unit amounts) | December 31, 2015 | ||
| KKR & Co. L.P. Partners’ Capital | $ | 5,547,182 | |
| Noncontrolling interests held by KKR Holdings L.P. | 4,347,153 | ||
| Equity impact of KKR Management Holdings Corp. and other | 84,894 | ||
| Book Value | $ | 9,979,229 |
Liquidity
We manage our liquidity and capital requirements by focusing on our cash flows before the consolidation of our funds and CFEs and the effect of changes in short term assets and liabilities, which we anticipate will be settled for cash within one year. Our primary cash flow activities on a segment basis typically involve: (i) generating cash flow from operations; (ii) generating income from investment activities, by investing in investments that generate yield (namely interest and dividends) as well as the sale of investments and other assets; (iii) funding capital commitments that we have made to our funds and CLOs, (iv) developing and funding new investment strategies, investment products and other growth initiatives, including acquisitions; (v) underwriting and funding commitments in our capital markets business; (vi) distributing cash flow to our fund investors, unitholders and certain holders of certain exchangeable securities; and (vii) borrowings, interest payments and repayments under credit agreements, our senior notes and other borrowing arrangements. As of December 31, 2015, we had cash and short-term investments on a segment basis of $1.3 billion. See "-Liquidity - Liquidity Needs - Distributions."
Sources of Liquidity
Our primary sources of liquidity consist of amounts received from: (i) our operating activities, including the fees earned from our funds, managed accounts, portfolio companies, and capital markets transactions; (ii) realizations on carried interest from our investment funds; (iii) interest and dividends from investments that generate yield, including our investments in CLOs; (iv) realizations on and sales of investments and other assets; and (v) borrowings under our credit facilities, debt offerings and other borrowing arrangements. In addition, we may generate cash proceeds from sales of equity securities.
With respect to our private equity funds, carried interest is distributed to the general partner of a private equity fund with a clawback or net loss sharing provision only after all of the following are met: (i) a realization event has occurred (e.g., sale of a portfolio company, dividend, etc.); (ii) the vehicle has achieved positive overall investment returns since its inception, in excess of performance hurdles where applicable; and (iii) with respect to investments with a fair value below cost, cost has been returned to fund investors in an amount sufficient to reduce remaining cost to the investments' fair value. As of December 31, 2015, certain of our funds had met the first and second criteria, as described above, but did not meet the third criteria. In these cases, carried interest accrues on the consolidated statement of operations, but will not be distributed in cash to us as the general partner of an investment fund upon a realization event. For a fund that has a fair value above cost, overall, but has one or more investments where fair value is below cost, the shortfall between cost and fair value for such investments is referred to as a "netting hole." When netting holes are present, realized gains on individual investments that would otherwise allow the general partner to receive carried interest distributions are instead used to return invested capital to our funds' limited partners in an amount equal to the netting hole. Once netting holes have been filled with either (a) return of capital equal to the netting hole for those investments where fair value is below cost, or (b) increases in the fair value of those investments where fair value is below cost, then realized carried interest will be distributed to the general partner upon a realization event. A fund that is in a position to pay cash carry refers to a fund for which carried interest is expected to be paid to the general partner upon the next material realization event, which includes funds with no netting holes as well as funds with a netting hole that is sufficiently small in size such that the next material realization event would be expected to result in the payment of carried interest.
As of December 31, 2015, netting holes in excess of $50 million existed at four of our private equity funds, the most significant of which were our North America Fund XI, European Fund II and European Fund III which had netting holes of approximately $232 million, $213 million and $87 million, respectively. In accordance with the criteria set forth above, funds may develop netting holes in the future and netting holes for those and other funds may otherwise increase or decrease in the future.
We have access to funding under various credit facilities and other borrowing arrangements that we have entered into with major financial institutions or which we receive from the capital markets. For a full discussion of the principal terms of these sources of funding, see Note 9 “Debt Obligations” of our financial statements included elsewhere in this report. The following describes other sources of liquidity.
KFN Securities
In addition to the sources of funding described in Note 9 “Debt Obligations” of our financial statements included elsewhere in this report, KFN has the following issuance of preferred stock.
| • | On January 17, 2013, KFN issued 14.95 million of Series A LLC Preferred Shares (the "KFN Preferred Shares") at a price of $25 per share. The KFN Preferred Shares trade on the NYSE under the ticker symbol "KFN.PR" and began trading on January 28, 2013. Distributions on the KFN Preferred Shares are cumulative and are payable by KFN, when, as, and if declared by KFN's board of directors, quarterly on January 15, April 15, July 15 and October 15 of each year at a rate per annum equal to 7.375%. Unless distributions have been declared and paid or declared and set apart for payment on the KFN Preferred Shares for the then-current quarterly distribution period and all past quarterly distribution periods, subject to certain exceptions, KFN may not declare or pay or set apart payment for distributions on KFN's common shares or other junior shares, including payments to KKR. If KFN experiences a dissolution event, then the holders of the KFN Preferred Shares outstanding at such time will be entitled to receive a payment out of KFN's assets available for distribution to such holders equal to the sum of the $25 liquidation preference per KFN Preferred Share and accumulated and unpaid distributions (whether or not declared), if any, to, but excluding, the date of the dissolution event (the "Series A Liquidation Value"), to the extent that KFN has sufficient gross income (excluding any gross income attributable to the sale or exchange of capital assets) in the year of the dissolution event and in the prior years in which the KFN Preferred Shares have been outstanding to ensure that each holder of KFN Preferred Shares will have a capital account balance equal to the Series A Liquidation Value. The KFN Preferred Shares are not convertible into shares of any other class or series of the KFN's shares. Except under limited circumstances relating to an event of default in the payment of distributions, holders of the KFN Preferred Shares have no voting rights. At any time or from time to time on or after January 15, 2018, KFN may, at its option, redeem the KFN Preferred Shares, in whole or in part, upon not less than 30 nor more than 60 days' notice, at a price of $25 per KFN Preferred Share plus accumulated and unpaid distributions (whether or not declared), if any, to, but excluding, the redemption date, if any. Holders of the KFN Preferred Shares have no right to require the redemption of the KFN Preferred Shares. |
Common Units
| • | On May 16, 2014, KKR & Co. L.P. filed a registration statement with the Securities and Exchange Commission for the sale by us from time to time of up to 5,000,000 common units of KKR & Co. L.P. to generate cash proceeds (a) up to (1) the amount of withholding taxes, social benefit payments or similar payments payable by us in respect of awards granted pursuant to the Equity Incentive Plan, the KKR Financial Holdings LLC 2007 Share Incentive Plan (the "KFN Share Incentive Plan") and the KKR Asset Management LLC 2011 Share Incentive Plan (the "KAM Share Incentive Plan"), and together with the Equity Incentive Plan and the KFN Share Incentive Plan, the "Plans", and (2) the amount of cash delivered in respect of awards granted pursuant to the Plans that are settled in cash instead of common units; and (b) to the extent the net proceeds from the sale of common units exceeds the amounts due under clause (a), for general corporate purposes. The administrator of the Equity Incentive Plan is expected to reduce the maximum number of common units eligible to be issued under the Equity Incentive Plan by the number of common units issued and sold pursuant to this Registration Statement, as applicable, unless such reduction is already provided for with respect to such awards under the terms of the Equity Incentive Plan. The KFN Share Incentive Plan terminated in May 2015, but continues to govern unexpired awards. No additional equity awards will be issued under the KFN Share Incentive Plan or the KAM Share Incentive Plan. The Securities and Exchange Commission declared the registration statement effective on June 4, 2014. As of December 31, 2015, 4,173,039 common units have been issued and sold under the registration statement and are included in our basic common units outstanding as of December 31, 2015. In the quarter ended December 31, 2015, we canceled 1.7 million granted equity awards for approximately $27 million to satisfy tax obligations in connection with their vesting. As of February 22, 2015, there are no equity awards withheld for tax obligations. |
Liquidity Needs
We expect that our primary liquidity needs will consist of cash required to:
| • | continue to grow our business, including seeding new strategies and funding our capital commitments made to existing and future funds, co-investments and any net capital requirements of our capital markets companies; |
| • | warehouse investments in portfolio companies or other investments for the benefit of one or more of our funds, vehicles, accounts or CLOs pending the contribution of committed capital by the investors in such vehicles; |
| • | service debt obligations, as well as any contingent liabilities that may give rise to future cash payments; |
| • | fund cash operating expenses and amounts recorded for litigation matters; |
| • | pay amounts that may become due under our tax receivable agreement with KKR Holdings; |
| • | make cash distributions in accordance with our distribution policy; |
| • | underwrite commitments within our capital markets business; |
| • | fund our equity commitment to joint ventures such as Merchant Capital Solutions LLC; |
| • | make future purchase price payments in connection with our proprietary acquisitions or investments, such as our acquisition of Prisma and strategic partnerships with Nephila and Marshall Wace; |
| • | acquire additional principal assets, including other businesses and corporate real estate; and |
| • | repurchase KKR & Co. L.P. common units pursuant to the unit repurchase program announced on October 27, 2015. |
KKR & Co. L.P. Unit Repurchase Program
On October 27, 2015, KKR announced the authorization of a program providing for the repurchase by KKR of up to $500 million in the aggregate of its outstanding common units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing, manner, price and amount of any unit repurchases will be determined by KKR in its discretion and will depend on a variety of factors, including legal requirements, price and economic and market conditions. KKR expects that the program, which has no expiration date, will be in effect until the maximum approved dollar amount has been used to repurchase common units. The program does not require KKR to repurchase any specific number of common units, and the program may be suspended, extended, modified or discontinued at any time. Since inception of the unit repurchase program through December 31, 2015, KKR has repurchased and canceled approximately 9.9 million of outstanding common units for approximately $161.9 million. From December 31, 2015 through February 11, 2016, KKR has repurchased and canceled approximately 7.6 million of outstanding common units for approximately $108.1 million. For additional information regarding units repurchased since the inception of this program see "Item 5--Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Capital Commitments
The agreements governing our active investment funds generally require the general partners of the funds to make minimum capital commitments to such funds, which usually range from 2% to 5% of a fund's total capital commitments at final closing, but may be greater for certain funds pursuing newer strategies. In addition, we are responsible for certain limited partner interests in some of our private equity funds. The following table presents our uncalled commitments to our active investment funds as of December 31, 2015:
| Uncalled Commitments | |||
| Private Markets | ($ in thousands) | ||
| European Fund IV | $ | 184,700 | |
| Energy Income and Growth Fund | 147,100 | ||
| Global Infrastructure Investors II | 110,900 | ||
| North America Fund XI | 100,500 | ||
| Real Estate Partners Americas | 97,300 | ||
| European Fund III | 66,300 | ||
| Real Estate Partners Europe | 64,700 | ||
| Asian Fund II | 50,900 | ||
| 2006 Fund | 22,700 | ||
| Co-Investment Vehicles | 69,600 | ||
| Other Private Markets Funds | 10,600 | ||
| Total Private Markets Commitments | 925,300 | ||
| Public Markets | |||
| Special Situations Fund | 14,900 | ||
| Special Situations Fund II | 195,100 | ||
| Mezzanine Fund | 6,500 | ||
| Lending Partners | 13,900 | ||
| Lending Partners II | 33,300 | ||
| Lending Partners Europe | 39,600 | ||
| Other Alternative Credit Vehicles | 125,200 | ||
| Total Public Markets Commitments | 428,500 | ||
| Total Uncalled Commitments | $ | 1,353,800 |
As of December 31, 2015, KKR had unfunded commitments consisting of (i) $1,353.8 million, as shown above, to its active private equity and other investment vehicles, (ii) $191.1 million in connection with commitments by KKR's capital markets business, (iii) $128.6 million relating to Merchant Capital Solutions as described below and (iv) other investment
commitments of $171.6 million. Whether these amounts are actually funded, in whole or in part depends on the terms of such commitments, including the satisfaction or waiver of any conditions to funding.
Prisma Capital Partners
On October 1, 2012, KKR acquired all of the equity interests of Prisma subject to potential purchase price payments in 2014 and 2017. KKR may become obligated to make future purchase price payments in 2017 based on whether the Prisma business grows to achieve certain operating performance metrics when measured in such year. KKR has the right in its sole discretion to pay a portion of such future purchase price payment, if any, in KKR & Co. L.P. common units rather than in cash. See "—Liquidity—Contractual Obligations, Commitments and Contingencies on an Unconsolidated Basis."
Merchant Capital Solutions
Merchant Capital Solutions LLC (MCS, formerly known as MerchCap Solutions LLC) is a joint venture partnership with Stone Point Capital. MCS seeks to provide capital markets services to mid-market and sponsor-backed companies as well as make certain balance sheet investments to support client needs. As of December 31, 2015 each of KKR and Stone Point have committed $150 million of equity to MCS to support its business for total equity commitments of $300 million. KKR's remaining unfunded commitment is approximately $128.6 million as of December 31, 2015. KKR expects that certain capital markets activities for third parties (other than KKR and its portfolio companies) will be principally conducted by MCS.
Investment in Marshall Wace LLP
On November 2, 2015, KKR entered into a long-term strategic relationship with Marshall Wace LLP and its affiliates ("Marshall Wace") and acquired a 24.9% interest in Marshall Wace through a combination of cash and common units. KKR and Marshall Wace have the option to grow KKR's ownership interest over time to 39.9%, which would require the use of cash and/or KKR common units. KKR's investment in Marshall Wace is accounted for using the equity method of accounting.
Tax Receivable Agreement
We and certain intermediate holding companies that are taxable corporations for U.S. federal, state and local income tax purposes, may be required to acquire KKR Group Partnership Units from time to time pursuant to our exchange agreement with KKR Holdings. KKR Management Holdings L.P. made an election under Section 754 of the Internal Revenue Code that will remain in effect for each taxable year in which an exchange of KKR Group Partnership Units for common units occurs, which may result in an increase in our intermediate holding companies' share of the tax basis of the assets of the KKR Group Partnerships at the time of an exchange of KKR Group Partnership Units. Certain of these exchanges are expected to result in an increase in our intermediate holding companies' share of the tax basis of the tangible and intangible assets of the KKR Group Partnerships, primarily attributable to a portion of the goodwill inherent in our business that would not otherwise have been available. This increase in tax basis may increase depreciation and amortization deductions for tax purposes and therefore reduce the amount of income tax our intermediate holding companies would otherwise be required to pay in the future. This increase in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
We have entered into a tax receivable agreement with KKR Holdings, which requires our intermediate holding companies to pay to KKR Holdings, or to current and former principals who have exchanged KKR Holdings units for KKR common units as transferees of KKR Group Partnership Units, 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the intermediate holding companies realize as a result of the increase in tax basis described above, as well as 85% of the amount of any such savings the intermediate holding companies realize as a result of increases in tax basis that arise due to future payments under the agreement. We expect our intermediate holding companies to benefit from the remaining 15% of cash savings, if any, in income tax that they realize. A termination of the agreement or a change of control could give rise to similar payments based on tax savings that we would be deemed to realize in connection with such events. In the event that other of our current or future subsidiaries become taxable as corporations and acquire KKR Group Partnership Units in the future, or if we become taxable as a corporation for U.S. federal income tax purposes, we expect that each will become subject to a tax receivable agreement with substantially similar terms.
These payment obligations are obligations of our intermediate holding companies and not the KKR Group Partnerships. As such, cash payments received by common unitholders may vary from those received by holders of KKR Group Partnership Units held by KKR Holdings and its current and former principals to the extent payments are made to those parties under the tax receivable agreement. Payments made under the tax receivable agreement are required to be made within 90 days of the
filing of the tax returns of our intermediate holding companies, which may result in a timing difference between the tax savings received by KKR's intermediate holdings companies and the cash payments made to the selling holders of KKR Group Partnership Units.
For the years ended December 31, 2015, 2014 and 2013, cash payments that have been made under the tax receivable agreement were $5.7 million, $5.7 million and $4.7 million, respectively. We expect our intermediate holding companies to benefit from the remaining 15% of cash savings, if any, in income tax that they realize. As of December 31, 2015, $3.4 million of cumulative income tax savings have been realized. See "-Liquidity-Other Liquidity Needs- Contractual Obligations, Commitments and Contingencies" for a discussion of amounts payable and cumulative cash payments made under this agreement.
Distributions
On October 27, 2015, KKR announced a change to its distribution policy effective beginning with the distribution declared on February 11, 2016 with respect to the quarter ending December 31, 2015. Under the new distribution policy, KKR intends to make equal quarterly distributions to holders of its common units in an amount of $0.16 per common unit per quarter. KKR's regular distribution per common unit of $0.16 was declared on February 11, 2016 for the quarter ended December 31, 2015.
The declaration and payment of any distributions are subject to the discretion of the board of directors of the general partner of KKR & Co. L.P., which may change the distribution policy at any time, and the terms of its limited partnership agreement. There can be no assurance that distributions will be made as intended or at all, that unitholders will receive sufficient distributions to satisfy payment of their tax liabilities as limited partners of KKR & Co. L.P. or that any particular distribution policy will be maintained. When KKR & Co. L.P. receives distributions from the KKR Group Partnerships (the holding companies of the KKR business), KKR Holdings receives its pro rata share of such distributions from the KKR Group Partnerships. Furthermore, the declaration and payment of distributions is subject to legal, contractual and regulatory restrictions on the payment of distributions by us or our subsidiaries, including restrictions contained in our debt agreements, and such other factors as the board of directors of our Managing Partner considers relevant.
Cash Earnings
The following table presents our cash earnings and distributions for the year ended December 31, 2015, 2014 and 2013 as described above. For a discussion of the components that drove the changes in our cash earnings, see “—Segment Analysis.”
| Year Ended | ||||||||||||
| ($ in thousands except per unit data) | December 31, 2015 | December 31, 2014 | December 31, 2013 | |||||||||
| Cash Revenues | ||||||||||||
| Fees | $ | 1,142,050 | $ | 1,098,843 | $ | 955,971 | ||||||
| Realized performance income (loss) | 1,046,801 | 1,241,468 | 762,386 | |||||||||
| Net realized investment income (loss) | 545,474 | (1) | 901,578 | 657,139 | ||||||||
| Total Cash Revenues | 2,734,325 | 3,241,889 | 2,375,496 | |||||||||
| Cash Expenses | ||||||||||||
| Cash compensation and benefits | 409,992 | 380,581 | 314,828 | |||||||||
| Realized performance income compensation | 418,718 | 496,589 | 304,955 | |||||||||
| Occupancy and related charges | 62,657 | 57,787 | 56,327 | |||||||||
| Other operating expenses | 233,618 | 229,069 | 215,883 | |||||||||
| Total Cash Expenses | 1,124,985 | 1,164,026 | 891,993 | |||||||||
| Cash Earnings Before Noncontrolling Interests and Local Taxes | 1,609,340 | 2,077,863 | 1,483,503 | |||||||||
| Less: Corporate and local income taxes paid | (140,677 | ) | (131,081 | ) | (120,052 | ) | ||||||
| Less: Noncontrolling interests | (16,007 | ) | (14,946 | ) | (6,387 | ) | ||||||
| Cash Earnings | $ | 1,452,656 | $ | 1,931,836 | $ | 1,357,064 | ||||||
| Cash Earnings Per Adjusted Units Eligible for Distribution | $ | 1.78 | $ | 2.47 | $ | 1.97 | ||||||
| Distribution Per KKR & Co LP common unit | $ | 1.39 | $ | 1.90 | $ | 1.40 | ||||||
| (1) Amount includes a $100.0 million realized loss on a segment basis relating to the write off of Energy Future Holdings which had previously been marked at zero on an unrealized basis. Accordingly, this write off had no impact on our Economic Net Income during the year ended December 31, 2015. |
Fee Related Earnings (“FRE”)
Fee related earnings is comprised of (i) total management, monitoring and transaction fees, net, less (ii) cash compensation and benefits, occupancy and related charges and other operating expenses that have not been allocated to our Principal Activities segment. Fee related earnings is a measure of the operating earnings of KKR and its business segments before performance income, related performance income compensation and investment income. KKR believes this measure is useful to unitholders as it provides additional insight into the operating profitability of KKR's fee generating management companies and capital markets businesses. Our calculation of FRE as described above differs from our calculation of FRE for periods prior to September 30, 2015 in that the above calculation (a) excludes incentive fees and related compensation and (b) excludes expenses that have been allocated to our Principal Activities segment. For a discussion of the changes in the components of FRE, see "--Segment Analysis."
A reconciliation of Net Income (Loss) Attributable to KKR & Co. L.P. on a GAAP basis to ENI and FRE is provided below.
| Year Ended | ||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||
| ($ in thousands) | ||||||||||||
| Net income (loss) attributable to KKR & Co. L.P. | $ | 488,482 | $ | 477,611 | $ | 691,226 | ||||||
| Plus: Net income (loss) attributable to noncontrolling interests held by KKR Holdings L.P. | 433,693 | 585,135 | 1,056,126 | |||||||||
| Plus: Non-cash equity-based charges | 261,579 | 310,403 | 307,514 | |||||||||
| Plus: Amortization of intangibles and other, net | 47,599 | 290,348 | 102,789 | |||||||||
| Plus: Income tax (benefit) | 66,636 | 63,669 | 37,926 | |||||||||
| Economic Net Income (Loss) | 1,297,989 | 1,727,166 | 2,195,581 | |||||||||
| Plus: Income attributable to segment noncontrolling interests | 16,007 | 14,946 | 6,387 | |||||||||
| Less: Total investment income (loss) | 153,512 | 505,153 | 958,401 | |||||||||
| Less: Net performance income (loss) | 724,701 | 805,553 | 874,634 | |||||||||
| Plus: Expenses of Principal Activities Segment | 174,713 | 199,938 | 194,563 | |||||||||
| Fee Related Earnings | 610,496 | 631,344 | 563,496 | |||||||||
Other Liquidity Needs
We may also be required to fund various underwriting commitments in our capital markets business in connection with the underwriting of loans, securities or other financial instruments. We generally expect that these commitments will be syndicated to third parties or otherwise fulfilled or terminated, although we may in some instances elect to retain a portion of the commitments for our own investment.
Contractual Obligations, Commitments and Contingencies on an Unconsolidated Basis
In the ordinary course of business, we enter into contractual arrangements that may require future cash payments. The following table sets forth information relating to anticipated future cash payments as of December 31, 2015 on an unconsolidated basis before the consolidation of funds and CFEs:
| Payments due by Period | ||||||||||||||||||||
| Types of Contractual Obligations | <1 Year | 1-3 Years | 3-5 Years | >5 Years | Total | |||||||||||||||
| ($ in millions) | ||||||||||||||||||||
| Uncalled commitments to investment funds (1) | $ | 1,353.8 | $ | — | $ | — | $ | — | $ | 1,353.8 | ||||||||||
| Debt payment obligations (2) | — | — | 500.0 | 2,157.3 | 2,657.3 | |||||||||||||||
| Interest obligations on debt (3) | 155.3 | 298.4 | 298.4 | 2,592.8 | 3,344.9 | |||||||||||||||
| Underwriting commitments (4) | 126.2 | — | — | — | 126.2 | |||||||||||||||
| Lending commitments (5) | 64.9 | — | — | — | 64.9 | |||||||||||||||
| Other commitments (6) | 252.6 | 45.1 | — | 2.5 | 300.2 | |||||||||||||||
| Lease obligations | 53.0 | 91.5 | 77.7 | 23.6 | 245.8 | |||||||||||||||
| Corporate real estate (7) | — | — | 292.5 | — | 292.5 | |||||||||||||||
| Total | $ | 2,005.8 | $ | 435.0 | $ | 1,168.6 | $ | 4,776.2 | $ | 8,385.6 |
| (1) | These uncalled commitments represent amounts committed by us to fund a portion of the purchase price paid for each investment made by our investment funds which are actively investing. Because capital contributions are due on demand, the above commitments have been presented as falling due within one year. However, given the size of such commitments and the rates at which our investment funds make investments, we expect that the capital commitments presented above will be called over a period of several years. See "—Liquidity—Liquidity Needs." |
| (2) | Represents the 2020 Senior Notes, 2043 Senior Notes, 2044 Senior Notes, KFN 2041 Senior Notes, KFN 2042 Senior Notes, KFN Junior Subordinated Notes and any borrowings outstanding on the Corporate Credit Agreement and KCM Credit Agreement which are presented gross of unamortized discounts and net of unamortized premiums. KFN's debt obligations are non-recourse to KKR beyond the assets of KFN. |
| (3) | These interest obligations on debt represent estimated interest to be paid over the maturity of the related debt obligation, which has been calculated assuming the debt outstanding at December 31, 2015 is not repaid until its maturity. Future |
interest rates are assumed to be those in effect as of December 31, 2015, including both variable and fixed rates, as applicable, provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness.
| (4) | Represents various commitments in our capital markets business in connection with the underwriting of loans, securities and other financial instruments. These commitments are shown net of amounts syndicated. |
| (5) | Represents obligations in our capital markets business to lend under various revolving credit facilities. |
| (6) | Represents our commitment to MCS and investment commitments of KFN. See "—Liquidity—Liquidity Needs—Merchant Capital Solutions." |
| (7) | Represents the purchase price due upon delivery of a new KKR office being constructed, all or a portion of which represents construction financing obtained by the developer and may be refinanced upon delivery of the completed office. |
The commitment table above excludes contractual amounts owed under the tax receivable agreement, because the ultimate amount and timing of the amounts due are not presently known. As of December 31, 2015, a payable of $128.0 million has been recorded in due to affiliates in the consolidated financial statements representing management's best estimate of the amounts currently expected to be owed under the tax receivable agreement. As of December 31, 2015, approximately $19.0 million of cumulative cash payments have been made under the tax receivable agreement. See "—Liquidity Needs—Tax Receivable Agreement."
The commitment table above excludes certain contingent consideration payments that may be owed in connection with acquisitions and other investments because the ultimate amounts due are not presently known. As of December 31, 2015, the recorded amount of contingent consideration obligations where the amounts are not currently known was approximately $46.6 million.
In the normal course of business, we enter into contracts that contain a variety of representations and warranties that provide general indemnifications. In addition, certain of our consolidated funds and KFN have provided certain indemnities relating to environmental and other matters and have provided nonrecourse carve-out guarantees for fraud, willful misconduct and other customary wrongful acts, each in connection with the financing of certain real estate investments that we have made. Our maximum exposure under these arrangements is unknown as this would involve future claims that may be made against us that have not yet occurred. However, based on prior experience, we expect the risk of material loss to be low.
The partnership documents governing our carry-paying funds, including funds and vehicles relating to private equity, mezzanine, infrastructure, energy, direct lending and special situations investments, generally include a "clawback" provision that, if triggered, may give rise to a contingent obligation requiring the general partner to return amounts to the fund for distribution to the fund investors at the end of the life of the fund. Under a clawback obligation, upon the liquidation of a fund, the general partner is required to return, typically on an after-tax basis, previously distributed carry to the extent that, due to the diminished performance of later investments, the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled, including the effects of any performance thresholds. Excluding carried interest received by the general partners of funds that were not contributed to us in the KPE Transaction, as of December 31, 2015, no carried interest was subject to this clawback obligation, assuming that all applicable carry paying funds were liquidated at their December 31, 2015 fair values. Had the investments in such funds been liquidated at zero value, the clawback obligation would have been $2,423.4 million. Carried interest is recognized in the statement of operations based on the contractual conditions set forth in the agreements governing the fund as if the fund were terminated and liquidated at the reporting date and the fund's investments were realized at the then estimated fair values. Amounts earned pursuant to carried interest are earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment amounts earned decrease or turn negative in subsequent periods, recognized carried interest will be reversed and to the extent that the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled, a clawback obligation would be recorded. For funds that are consolidated, this clawback obligation, if any, is reflected as an increase in noncontrolling interests in the consolidated statements of financial condition. For funds that are not consolidated, this clawback obligation, if any, is reflected as a reduction of our investment balance as this is where carried interest is initially recorded.
Certain private equity funds that were contributed to us in the KPE Transaction in 2009 also include a "net loss sharing provision." Upon the liquidation of an investment vehicle to which a net loss sharing obligation applies, the general partner is
required to contribute capital to the vehicle, to fund 20% of the net losses on investments. In these vehicles, such losses would be required to be paid by us to the fund investors in those vehicles in the event of a liquidation of the fund regardless of whether any carried interest had previously been distributed, and a greater share of investment losses would be allocable to us relative to the capital that we contributed to it as general partner. Based on the fair market values as of December 31, 2015, there would have been no net loss sharing obligation. If the vehicles were liquidated at zero value, the net loss sharing obligation would have been zero as of December 31, 2015.
Prior to the KPE Transaction in 2009, certain principals who received carried interest distributions with respect to certain private equity funds contributed to us had personally guaranteed, on a several basis and subject to a cap, the contingent obligations of the general partners of such private equity funds to repay amounts to fund investors pursuant to the general partners' clawback obligations. The terms of the KPE Transaction require that principals remain responsible for any clawback obligations relating to carry distributions received prior to the KPE Transaction, up to a maximum of $223.6 million. Through investment realizations, KKR's potential exposure has been reduced to $159.7 million as of December 31, 2015. Using valuations as of December 31, 2015, no amounts are due with respect to the clawback obligation required to be funded by principals. Carry distributions arising subsequent to the KPE Transaction may give rise to clawback obligations that may be allocated generally to us and to persons who participate in the carry pool. Unlike the clawback obligation, we will be responsible for amounts due under a net loss sharing obligation and will indemnify principals for any personal guarantees that they have provided with respect to such amounts. In addition, guarantees of or similar arrangements relating to clawback or net loss sharing obligations in favor of third party investors in an individual investment partnership by entities we own may limit distributions of carried interest more generally.
Contractual Obligations, Commitments and Contingencies on a Consolidated Basis
In the ordinary course of business, we and our consolidated funds and CFEs enter into contractual arrangements that may require future cash payments. The following table sets forth information relating to anticipated future cash payments as of December 31, 2015. This table differs from the table presented above which sets forth contractual commitments on an unconsolidated basis principally because this table includes the obligations of our consolidated funds and CFEs.
| Payments due by Period | ||||||||||||||||||||
| Types of Contractual Obligations | <1 Year | 1-3 Years | 3-5 Years | >5 Years | Total | |||||||||||||||
| ($ in millions) | ||||||||||||||||||||
| Uncalled commitments to investment funds (1) | $ | 25,142.0 | $ | — | $ | — | $ | — | $ | 25,142.0 | ||||||||||
| Debt payment obligations (2) | 1,512.1 | 1,594.9 | 1,392.8 | 14,314.0 | 18,813.8 | |||||||||||||||
| Interest obligations on debt (3) | 614.8 | 1,091.3 | 1,044.8 | 4,168.7 | 6,919.6 | |||||||||||||||
| Underwriting commitments (4) | 126.2 | — | — | — | 126.2 | |||||||||||||||
| Lending commitments (5) | 64.9 | — | — | — | 64.9 | |||||||||||||||
| Other commitments (6) | 252.6 | 45.1 | — | 2.5 | 300.2 | |||||||||||||||
| Lease obligations | 53.0 | 91.5 | 77.7 | 23.6 | 245.8 | |||||||||||||||
| Corporate real estate (7) | — | — | 292.5 | — | 292.5 | |||||||||||||||
| Total | $ | 27,765.6 | $ | 2,822.8 | $ | 2,807.8 | $ | 18,508.8 | $ | 51,905.0 |
| (1) | These uncalled commitments represent amounts committed by our consolidated investment funds, which include amounts committed by KKR and our fund investors, to fund the purchase price paid for each investment made by our investment funds which are actively investing. Because capital contributions are due on demand, the above commitments have been presented as falling due within one year. However, given the size of such commitments and the rates at which our investment funds make investments, we expect that the capital commitments presented above will be called over a period of several years. See "—Liquidity—Liquidity Needs." |
| (2) | Amounts include (i) the 2020 Senior Notes, 2043 Senior Notes and 2044 Senior Notes of $2.0 billion gross of unamortized discount, (ii) KFN 2041 Senior Notes and KFN 2042 Senior Notes of $0.4 billion, net of unamortized premium, (iii) KFN Junior Subordinated Notes of $0.3 billion, gross of unamortized discount, (iv) financing arrangements entered into by our consolidated funds with the objective of providing liquidity to the funds of $3.6 billion, (v) debt securities issued by our consolidated CLOs of $8.2 billion, (vi) debt securities issued by our consolidated CMBS entities of $4.3 billion and any borrowings outstanding on the Corporate Credit Agreement and KCM Credit Agreement. KFN's debt obligations are non-recourse to KKR beyond the assets of KFN. Debt securities issued by consolidated CLOs and CMBS entities are supported solely by the investments held at the CLO and CMBS vehicles and are not collateralized by assets of any other KKR entity. Obligations under financing arrangements entered into by our consolidated funds are generally limited to our pro-rata equity interest in such funds. Our management companies bear no obligations to repay any financing arrangements at our consolidated funds. |
| (3) | These interest obligations on debt represent estimated interest to be paid over the maturity of the related debt obligation, which has been calculated assuming the debt outstanding at December 31, 2015 is not repaid until its maturity. Future interest rates are assumed to be those in effect as of December 31, 2015, including both variable and fixed rates, as applicable, provided for by the relevant debt agreements. The amounts presented above include accrued interest on outstanding indebtedness. |
| (4) | Represents various commitments in our capital markets business in connection with the underwriting of loans, securities and other financial instruments. These commitments are shown net of amounts syndicated. |
| (5) | Represents obligations in our capital markets business to lend under various revolving credit facilities. |
| (6) | Represents our commitment to MCS and investment commitments of KFN. See "—Liquidity—Liquidity Needs—Merchant Capital Solutions." |
| (7) | Represents the purchase price due upon delivery of a new KKR office being constructed, all or a portion of which represents construction financing obtained by the developer and may be refinanced upon delivery of the completed office. |
The commitment table above excludes contractual amounts owed under the tax receivable agreement because the ultimate amount and timing of the amounts due are not presently known. As of December 31, 2015, a payable of $128.0 million has been recorded in due to affiliates in the consolidated financial statements representing management's best estimate of the amounts currently expected to be owed under the tax receivable agreement. As of December 31, 2015, approximately $19.0 million of cumulative cash payments have been made under the tax receivable agreement. See "—Liquidity Needs—Tax Receivable Agreement."
The commitment table above excludes certain contingent consideration payments that may be owed in connection with acquisitions and other investments because the ultimate amounts due are not presently known. As of December 31, 2015, the recorded amount of contingent consideration obligations where the amounts are not currently known was approximately $46.6 million.
Off Balance Sheet Arrangements
Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.
Consolidated Statement of Cash Flows
The accompanying consolidated statements of cash flows include the cash flows of our consolidated entities which, in particular, include our consolidated funds and CFEs notwithstanding the fact that we may hold only a minority economic interest in those funds and CFEs. The assets of our consolidated funds and CFEs, on a gross basis, are substantially larger than the assets of our business and, accordingly, have a substantial effect on the cash flows reflected in our consolidated statements of cash flows. The primary cash flow activities of our consolidated funds and CFEs involve: (i) capital contributions from fund investors; (ii) using the capital of fund investors to make investments; (iii) financing certain investments with indebtedness; (iv) generating cash flows through the realization of investments; and (v) distributing cash flows from the realization of investments to fund investors. Because our consolidated funds and CFEs are treated as investment companies for accounting purposes, certain of these cash flow amounts are included in our cash flows from operations.
Net Cash Provided by (Used in) Operating Activities
Our net cash provided by (used in) operating activities was $0.4 billion, $1.5 billion and $2.6 billion during the years ended December 31, 2015, 2014 and 2013, respectively. These amounts primarily included: (i) proceeds from sales of investments and principal payments net of purchases of investments by our funds and CFEs of $(0.7) billion, $1.0 billion and $1.4 billion during the years ended December 31, 2015, 2014 and 2013, respectively; (ii) net realized gains (losses) on investments of $3.0 billion, $5.4 billion and $3.9 billion during the years ended December 31, 2015, 2014 and 2013, respectively; and (iii) change in unrealized gains (losses) on investments of $1.7 billion, $(0.7) billion and $3.9 billion during the years ended December 31, 2015, 2014 and 2013, respectively. Certain KKR funds and CFEs are, for GAAP purposes, investment companies and reflect their investments and other financial instruments at fair value.
Net Cash Provided by (Used in) Investing Activities
Our net cash provided by (used in) investing activities was $(425.2) million, $(22.9) million and $15.5 million during the years ended December 31, 2015, 2014 and 2013, respectively. Our investing activities included: (i) a change in restricted cash and cash equivalents (that primarily funds collateral requirements) of $(164.6) million, $(10.8) million and $29.9 million during the years ended December 31, 2015, 2014 and 2013, respectively; (ii) the purchases of fixed assets of $(169.4) million, $(12.2) million and $(14.4) million during the years ended December 31, 2015, 2014 and 2013, respectively; (iii) proceeds from sales of oil and natural gas properties, net of development of oil and natural gas properties of $(91.1) million and $(151.4) million for the years ended December 31, 2015 and 2014, respectively; and (iv) net of cash acquired of $151.5 million for the year ended December 31, 2014.
Net Cash Provided by (Used in) Financing Activities
Our net cash provided by (used in) financing activities was $169.4 million, $(1.9) billion and $(2.5) billion during the years ended December 31, 2015, 2014 and 2013, respectively. Our financing activities primarily included: (i) distributions to, net of contributions by our noncontrolling and redeemable noncontrolling interests, of $(7.0) billion, $(2.7) billion and $(2.9) billion during the years ended December 31, 2015, 2014 and 2013, respectively; (ii) proceeds received net of repayment of debt obligations of $8.1 billion, $1.7 billion and $0.8 billion during the years ended December 31, 2015, 2014 and 2013, respectively; and (iii) distributions to our partners of $(706.6) million, $(785.0) million and $(431.6) million during the years ended December 31, 2015, 2014 and 2013, respectively.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with GAAP requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of fees, expenses and investment income. Our management bases these estimates and judgments on available information, historical experience and other assumptions that we believe are reasonable under the circumstances. However, these estimates, judgments and assumptions are often subjective and may be impacted negatively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from those estimated, judged or assumed, revisions are included in the consolidated financial statements in the period in which the actual amounts become known. We believe our critical accounting policies could potentially produce materially different results if we were to change underlying estimates, judgments or assumptions.
The following discussion details certain of our critical accounting policies. For a full discussion of all critical accounting policies, please see the notes to the consolidated financial statements "--Item 8. Financial Statements and Supplementary Data--Summary of Significant Accounting Policies."
Fair Value Measurements
Investments and other financial instruments are measured and carried at fair value. The majority of investments and other financial instruments are held by the consolidated funds and vehicles. KKR's funds are, for GAAP purposes, investment companies and reflect their investments and other financial instruments at fair value. KKR has retained the specialized accounting for the consolidated funds and vehicles in consolidation. Accordingly, the unrealized gains and losses resulting from changes in fair value of the investments held by KKR's funds are reflected as a component of Net Gains (Losses) from Investment Activities in the consolidated statements of operations.
For investments and other financial instruments that are not held in a consolidated fund or vehicle, KKR has elected the fair value option since these investments and other financial instruments are similar to those in the consolidated funds and vehicles. Such election is irrevocable and is applied on an investment by investment basis at initial recognition. Unrealized gains and losses resulting from changes in fair value are reflected as a component of Net Gains (Losses) from Investment Activities in the consolidated statements of operations. The methodology for measuring the fair value of such investments and other financial instruments is consistent with the methodologies applied to investments and other financial instruments that are held in consolidated funds and vehicles. In addition, KKR has elected the fair value option for the investments and debt obligations of consolidated CFEs.
The carrying amounts of Other Assets, Accounts Payable, Accrued Expenses and Other Liabilities recognized on the consolidated statements of financial condition (excluding fixed assets, goodwill, intangible assets, oil and gas assets, net, contingent consideration and certain debt obligations) approximate fair value due to their short term maturities. Further information on Fixed Assets is presented in Note 7, "Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities". Further information on Goodwill and Intangible Assets is presented in Note 16 "Goodwill and Intangible Assets." Further information on contingent consideration is presented in Note 14 "Acquisitions." Further information on KKR's debt obligations is presented in Note 9, "Debt Obligations".
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation techniques are applied. These valuation techniques involve varying levels of management estimation and judgment, the degree of which is dependent on a variety of factors. See Note 5, "Fair Value Measurements" for further information on KKR's valuation techniques that involve unobservable inputs. Assets and liabilities recorded at fair value in the statements of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets and liabilities. The hierarchical levels defined under GAAP are as follows:
Level I
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The type of investments and other financial instruments included in this category are publicly-listed equities and debt and securities sold short. We classified 27.1% of total investments measured and reported at fair value as Level I at December 31, 2015.
Level II
Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level II inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. The type of investments and other financial instruments included in this category are credit investments, investments and debt obligations of consolidated CMBS vehicles and consolidated CLOs (beginning on January 1, 2015), convertible debt securities indexed to publicly-listed securities, less liquid and restricted equity securities and certain over-the-counter derivatives such as foreign currency option and forward contracts. We classified 23.9% of total investments measured and reported at fair value as Level II at December 31, 2015.
Level III
Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The types of assets and liabilities generally included in this category are private portfolio companies, real assets investments and credit investments for which a sufficiently liquid trading market does not exist. We classified 49.0% of total investments measured and reported at fair value as Level III at December 31, 2015. The valuation of our Level III investments at December 31, 2015 represents management's best estimate of the amounts that we would anticipate realizing on the sale of these investments at such date.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset.
A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of instrument, whether the instrument has recently been issued, whether the instrument is traded on an active exchange or in the secondary market, and current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level III. The variability and availability of the observable inputs affected by the factors described above may cause transfers between Levels I, II, and III, which we recognize at the beginning of the reporting period.
Investments and other financial instruments that have readily observable market prices (such as those traded on a securities exchange) are stated at the last quoted sales price as of the reporting date. We do not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably affect the quoted price.
Level II Valuation Methodologies
Financial assets and liabilities categorized as Level II consist primarily of credit investments, investments and debt obligations of consolidated CFEs, convertible debt securities indexed to publicly-listed securities, less liquid and restricted equity securities and certain over-the-counter derivatives such as foreign currency option and forward contracts.
Credit investments, investments of consolidated CLOs and CMBS debt obligations: These instruments generally have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that KKR and others are willing to pay for an instrument. Ask prices represent the lowest price that KKR and others are willing to accept for an instrument. For financial assets and liabilities whose inputs are based on bid-ask prices obtained from third party pricing services, fair value may not always be a predetermined point in the bid-ask range. KKR’s policy is generally to allow for mid-market pricing and adjusting to the point within the bid-ask range that meets KKR’s best estimate of fair value.
Securities indexed to publicly listed securities: The securities are typically valued using standard convertible security pricing models. The key inputs into these models that require some amount of judgment are the credit spreads utilized and the volatility assumed. To the extent the company being valued has other outstanding debt securities that are publicly-traded, the implied credit spread on the company’s other outstanding debt securities would be utilized in the valuation. To the extent the
company being valued does not have other outstanding debt securities that are publicly-traded, the credit spread will be estimated based on the implied credit spreads observed in comparable publicly-traded debt securities. In certain cases, an additional spread will be added to reflect an illiquidity discount due to the fact that the security being valued is not publicly-traded. The volatility assumption is based upon the historically observed volatility of the underlying equity security into which the convertible debt security is convertible and/or the volatility implied by the prices of options on the underlying equity security.
Restricted Equity Securities: The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction.
Derivatives: The valuation incorporates observable inputs comprising yield curves, foreign currency rates and credit spreads.
CLO Debt Obligations: Beginning on January 1, 2015 with the adoption of ASU 2014-13, KKR measures CLO debt obligations on the basis of the fair value of the financial assets of the CLO.
Investments of consolidated CMBS entities: KKR measures the investments of CMBS vehicles on the basis of the fair value of the financial liabilities of the CMBS.
Level III Valuation Methodologies
Management’s determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are management's best estimates after consideration of a variety of internal and external factors.
Financial assets and liabilities categorized as Level III consist primarily of the following:
Private Equity Investments: We generally employ two valuation methodologies when determining the fair value of a private equity investment. The first methodology is typically a market comparables analysis that considers key financial inputs and recent public and private transactions and other available measures. The second methodology utilized is typically a discounted cash flow analysis, which incorporates significant assumptions and judgments. Estimates of key inputs used in this methodology include the weighted average cost of capital for the investment and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. Other inputs are also used in both methodologies. For valuations determined for periods other than at year end, various inputs may be estimated prior to the end of the relevant period. Also, as discussed in greater detail under "—Business Environment" and "Risk Factors—Risks Related to the Assets We Manage—Our investments are impacted by various economic conditions that are difficult to quantify or predict, but may have a significant adverse impact on the value of our investments," a change in interest rates could have a significant impact on valuations. In certain cases the results of the discounted cash flow approach can be significantly impacted by these estimates. In addition, when a definitive agreement has been executed to sell an investment, KKR generally considers a significant determinant of fair value to be the consideration to be received by KKR pursuant to the executed definitive agreement.
Upon completion of the valuations conducted using these methodologies, a weighting is ascribed to each method, and an illiquidity discount is typically applied where appropriate. The ultimate fair value recorded for a particular investment will generally be within a range suggested by the two methodologies, except that the value may be higher or lower than such range in the case of investments being sold pursuant to an executed definitive agreement.
When determining the weighting ascribed to each valuation methodology, we consider, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis, the expected hold period and manner of realization for the investment, and in the case of investments being sold pursuant to an executed definitive agreement, the probability of such sale being completed. These factors can result in different weightings among investments in the portfolio and in certain instances may result in up to a 100% weighting to a single methodology. Across the Level III private equity investment portfolio, approximately 80.0% of the fair value is derived from investments that are valued based exactly 50% on market comparables and 50% on a discounted cash flow analysis. Less than 5% of the fair value of the Level III private equity investment portfolio is derived from investments that are valued either based 100% on market comparables or 100% on a discounted cash flow analysis. As of December 31, 2015, the overall weights ascribed to the market comparables methodology, the discounted cash flow methodology and a methodology based on pending sales for our Level III private equity investments were 46% and 51% and 3%, respectively. As of December 31, 2015, we believe that the approach of using the market multiples methodology, the discounted cash flow methodology and valuations based on pending sales resulted in valuations of our aggregate Level III private equity portfolio that were 3.1% lower than if only the discounted cash flow methodology had been used and only 3.2% higher than if only the market comparables methodology had been used.
When an illiquidity discount is to be applied, we seek to take a uniform approach across our portfolio and generally apply a minimum 5% discount to all private equity investments. We then evaluate such private equity investments to determine if factors exist that could make it more challenging to monetize the investment and, therefore, justify applying a higher illiquidity discount. These factors generally include (i) whether we are unable to freely sell the portfolio company or conduct an initial public offering of the portfolio company due to the consent rights of a third party or similar factors, (ii) whether the portfolio company is undergoing significant restructuring activity or similar factors and (iii) characteristics about the portfolio company regarding its size and/or whether the portfolio company is experiencing, or expected to experience, a significant decline in earnings. These factors generally make it less likely that a portfolio company would be sold or publicly offered in the near term at a price indicated by using just a market multiples and/or discounted cash flow analysis, and these factors tend to reduce the number of opportunities to sell an investment and/or increase the time horizon over which an investment may be monetized. Depending on the applicability of these factors, we determine the amount of any incremental illiquidity discount to be applied above the 5% minimum, and during the time we hold the investment, the illiquidity discount may be increased or decreased, from time to time, based on changes to these factors. The amount of illiquidity discount applied at any time requires considerable judgment about what a market participant would consider and is based on the facts and circumstances of each individual investment. Accordingly, the illiquidity discount ultimately considered by a market participant upon the realization of any investment may be higher or lower than that estimated by us in our valuations.
Real Assets Investments: Real asset investments in infrastructure, energy and real estate are valued using one or more of the discounted cash flow analysis, market comparables analysis and direct income capitalization, which in each case incorporates significant assumptions and judgments. Infrastructure investments are generally valued using the discounted cash flow analysis. Key inputs used in this methodology include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as exit EBITDA multiples. Energy investments are generally valued using a discounted cash flow analysis. Key inputs used in this methodology that require estimates include the weighted average cost of capital. In addition, the valuations of energy investments generally incorporate both commodity prices as quoted on indices and long-term commodity price forecasts, which may be substantially different from, and are currently higher than, commodity prices on certain indices for equivalent future dates. Certain energy investments do not include an illiquidity discount. Long-term commodity price forecasts are utilized to capture the value of the investments across a range of commodity prices within the energy investment portfolio associated with future development and to reflect a range of price expectations. Real estate investments are generally valued using a combination of direct income capitalization and discounted cash flow analysis. Key inputs used in such methodologies that require estimates include an unlevered discount rate and current capitalization rate, and certain real estate investments do not include a minimum illiquidity discount. The valuations of real assets investments also use other inputs.
During the year ended December 31, 2015, the value of our energy real asset investments in oil and gas producing properties decreased meaningfully. This decrease in value was primarily attributable to a drop in long‑term oil, condensate, natural gas liquids, and natural gas prices during the year ended December 31, 2015. The long-term price of WTI crude oil declined from approximately $67 per barrel to $50 per barrel and the long-term price of natural gas declined from approximately $3.77 per mcf to $2.90 per mcf as of December 31, 2014 and December 31, 2015, respectively.
On a segment basis, our energy real asset investments in oil and gas producing properties as of December 31, 2015 had a fair value of approximately $581 million. Based on this fair value, we estimate that an immediate, hypothetical 10% decline in the fair value of these energy investments from one or more adverse movements to the investments' valuation inputs would result in a decline in investment income of $58.1 million and a decline in net income attributable to KKR & Co. L.P. of $32.5 million, after deducting amounts that are attributable to noncontrolling interests held by KKR Holdings L.P. As of December 31, 2015, if we were to value our energy investments using only the commodity prices as quoted on indices and did not use long-term commodity price forecasts, and also held all other inputs to their valuation constant, we estimate that investment income would have been approximately $53 million lower, resulting in a lower amount of net income attributable to KKR & Co. L.P. of approximately 55.9% of the overall decrease in investment income, after deducting amounts that are attributable to noncontrolling interests held by KKR Holdings L.P.
These hypothetical declines relate only to investment income. There would be no current impact on KKR's carried interest since all of the investment funds which hold these types of energy investments have investment values that are below their cost and as such are not currently accruing carried interest. Additionally, there would be no impact on fees since fees earned from investment funds which hold investments in oil and gas producing properties are based on either committed capital or capital invested.
For GAAP purposes, where KKR holds energy investments consisting of working interests in oil and gas producing properties directly and not through an investment fund, such working interests are consolidated based on the proportion of the
working interests held by us. Accordingly, we reflect the assets, liabilities, revenues, expenses, investment income and cash flows of the consolidated working interests on a gross basis and changes in the value of these energy investments are not reflected as unrealized gains and losses in the consolidated statements of operations. Accordingly, a change in fair value for these investments does not result in a decrease in net gains (losses) from investment activities, but may result in an impairment charge reflected in general, administrative and other expenses. For segment purposes, these directly held working interests are treated as investments and changes in value are reflected in our segment results as unrealized gains and losses.
Credit Investments: Credit investments are valued using values obtained from dealers or market makers, and where these values are not available, credit investments are valued by us based on ranges of values determined by an independent valuation firm. Valuation models are based on discounted cash flow analyses, for which the key inputs are determined based on market comparables, which incorporate similar instruments from similar issuers.
Other Investments: We generally employ the same valuation methodologies as described above for private equity investments when valuing these other investments.
CLO Debt Obligations: Prior to January 1, 2015 and the adoption of ASU 2014-13, collateralized loan obligation senior secured and subordinated notes were initially valued at the transaction price and were subsequently valued using a third party valuation service. The approach used to estimate the fair values was the discounted cash flow method, which includes consideration of the cash flows of the debt obligation based on projected quarterly interest payments and quarterly amortization. The debt obligations were discounted based on the appropriate yield curve given the debt obligation's respective maturity and credit rating. The most significant inputs to the valuation of these financial instruments were default and loss expectations and discount margins. Beginning on January 1, 2015, with the adoption of ASU 2014-13, KKR measures CLO debt obligations on the basis of the fair value of the financial assets of the CLO.
Key unobservable inputs that have a significant impact on our Level III investment valuations as described above are included in Note 5 "Fair Value Measurements" of the financial statements included elsewhere in this report. We utilize several unobservable pricing inputs and assumptions in determining the fair value of our Level III investments. These unobservable pricing inputs and assumptions may differ by investment and in the application of our valuation methodologies. Our reported fair value estimates could vary materially if we had chosen to incorporate different unobservable pricing inputs and other assumptions or, for applicable investments, if we only used either the discounted cash flow methodology or the market comparables methodology instead of assigning a weighting to both methodologies.
Level III Valuation Process
The valuation process involved for Level III measurements is completed on a quarterly basis and is designed to subject the valuation of Level III investments to an appropriate level of consistency, oversight, and review. As of December 31, 2015, the valuation process for Level III measurements, as described below, subjected valuations to the review and oversight of various committees. We have a Private Markets valuation committee for private equity and real assets investments and a valuation committee for credit and credit related investments. The Private Markets valuation committee is assisted by subcommittees in the valuation of real asset and growth equity investments, and is also assisted by a valuation team. The Private Markets valuation committee is comprised only of employees who are not investment professionals responsible for preparing preliminary valuations or for oversight of the investments being valued. The valuation teams and subcommittees for real asset and growth equity investments, however, include investment professionals who participate in the preparation of preliminary valuations or are responsible for oversight for those investments. The credit valuation committee is also assisted by a valuation team. The credit valuation teams include investment professionals responsible for preparing preliminary valuations or for oversight of the investments being valued. The credit valuation committee is comprised of investment professionals with no responsibility for preparing preliminary valuations, but certain committee members are responsible for oversight of the investments being valued. The valuation committees and teams are responsible for coordinating and consistently implementing our quarterly valuation policies, guidelines and processes. For Private Markets investments classified as Level III, investment professionals prepare preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and other factors. These preliminary valuations are reviewed with the investment professionals by the applicable valuation team and are also reviewed by an independent valuation firm engaged by us to perform certain procedures in order to assess the reasonableness of our valuations annually for all Level III investments in Private Markets and quarterly for investments other than investments which have values less than pre-set value thresholds and which in the aggregate comprise less than 5% of the total value of our Level III Private Markets investments. For most investments classified as Level III in credit, in general, an independent valuation firm is engaged by us to provide third party valuations, or ranges of valuations from which our investment professionals select a point in the range to determine the preliminary valuation, or an independent valuation firm is engaged by us to perform certain procedures in order to assess the reasonableness and provide positive assurance of our valuations. Approximately 8% of the total value of our Level III
credit investments are not valued with the engagement of an independent valuation firm. These preliminary valuations are reviewed by senior investment professionals for each credit strategy. All preliminary valuations in Private Markets and credit are then reviewed by the applicable valuation committee, and after reflecting any input by their respective valuation committees, the preliminary valuations are presented to the firm's management committee. When these valuations are approved by this committee after reflecting any input from it, the valuations of Level III investments, as well as the valuations of Level I and Level II investments, are presented to the audit committee of our board of directors and are then reported on to the board of directors.
As of December 31, 2015, upon completion by, where applicable, an independent valuation firm of certain limited procedures requested to be performed by them, the independent valuation firm concluded that the fair values, as determined by KKR, of Private Markets investments reviewed by them were reasonable. The limited procedures did not involve an audit, review, compilation or any other form of examination or attestation under generally accepted auditing standards and were not conducted on all Level III investments. We are responsible for determining the fair value of investments in good faith, and the limited procedures performed by an independent valuation firm are supplementary to the inquiries and procedures that we are required to undertake to determine the fair value of the commensurate investments.
As described above, Level II and Level III investments were valued using internal models with significant unobservable inputs and our determinations of the fair values of these investments may differ materially from the values that would have resulted if readily observable inputs had existed. Additional external factors may cause those values, and the values of investments for which readily observable inputs exist, to increase or decrease over time, which may create volatility in our earnings and the amounts of assets and partners' capital that we report from time to time.
Changes in the fair value of the investments of our consolidated private equity funds may impact the net gains (losses) from investment activities of our private equity funds as described under "—Key Financial Measures under GAAP—Investment Income (Loss)—Net Gains (Losses) from Investment Activities." Based on the investments of our private equity funds as of December 31, 2015, we estimate that an immediate 10% decrease in the fair value of the funds' investments generally would result in a commensurate change in the amount of net gains (losses) from investment activities (except that carried interest would likely be more significantly impacted), regardless of whether the investment was valued using observable market prices or management estimates with significant unobservable pricing inputs. The impact that the consequential decrease in investment income would have on net income attributable to KKR would generally be significantly less than the amount described above, given that a majority of the change in fair value would be attributable to noncontrolling interests and therefore we are only impacted to the extent of our carried interest and our balance sheet investments.
As of December 31, 2015, investments which represented greater than 5% of consolidated investments consisted of Walgreens Boots Alliance, Inc. and First Data Corporation valued at $5.1 billion and $4.3 billion, respectively. On a segment basis, as of December 31, 2015, investments which represented greater than 5% of total reportable segments investments consisted of First Data Corporation and Walgreens Boots Alliance, Inc. valued at $1,266.2 million and $748.7 million, respectively. Our investment income can be impacted by volatility in the public markets related to our holdings of publicly traded securities, including our sizable holdings of First Data Corporation (NYSE:FDC) and Walgreens Boots Alliance, Inc. (NASDAQ: WBA). See "--Business Environment."
Recognition of Investment Income
Investment income consists primarily of the net impact of: (i) realized and unrealized gains and losses on investments, (ii) dividends, (iii) interest income, (iv) interest expense and (v) foreign exchange gains and losses relating to mark-to-market activity on foreign exchange forward contracts, foreign currency options, foreign denominated debt and debt securities issued by consolidated CFEs. Unrealized gains or losses resulting from the aforementioned activities are included in net gains (losses) from investment activities. Upon disposition of an instrument that is marked-to-market, previously recognized unrealized gains or losses are reversed and a realized gain or loss is recognized. While this reversal generally does not significantly impact the net amounts of gains (losses) that we recognize from investment activities, it affects the manner in which we classify our gains and losses for reporting purposes.
Due to the consolidation of the majority of our funds, the portion of our funds' investment income that is allocable to our carried interests and capital investments is not shown in the consolidated financial statements. For funds that are consolidated, all investment income (loss), including the portion of a funds' investment income (loss) that is allocable to KKR's carried interest, is included in investment income (loss) on the consolidated statements of operations. The carried interest that KKR retains in net income (loss) attributable to KKR & Co. L.P. is reflected as an adjustment to net income (loss) attributable to noncontrolling interests. Because the substantial majority of our funds are consolidated and because we hold only a minority
economic interest in our funds' investments, our share of the investment income generated by our funds' investment activities is significantly less than the total amount of investment income presented in the consolidated financial statements.
Recognition of Carried Interest in the Statement of Operations
Carried interest entitles the general partner of a fund to a greater allocable share of the fund's earnings from investments relative to the capital contributed by the general partner and correspondingly reduces noncontrolling interests' attributable share of those earnings. Amounts earned pursuant to carried interest are included as investment income (loss) in net gains (losses) from investment activities and are earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment returns decrease or turn negative in subsequent periods, recognized carried interest will be reversed and reflected as investment losses in net gains (losses) from investment activities.
Carried interest is recognized in the statement of operations based on the contractual conditions set forth in the agreements governing the fund as if the fund were terminated and liquidated at the reporting date and the fund's investments were realized at the then estimated fair values. Due to the extended durations of our private equity funds, we believe that this approach results in income recognition that best reflects our periodic performance in the management of those funds. Amounts earned pursuant to carried interest are earned by the general partner of those funds to the extent that cumulative investment returns are positive and where applicable, preferred return thresholds have been met. If these investment amounts earned decrease or turn negative in subsequent periods, recognized carried interest will be reversed and to the extent that the aggregate amount of carry distributions received by the general partner during the term of the fund exceed the amount to which the general partner was ultimately entitled, a clawback obligation would be recorded. For funds that are consolidated, this clawback obligation, if any, is reflected as an increase in noncontrolling interests in the consolidated statements of financial condition. For funds that are not consolidated, this clawback obligation, if any, is reflected as a reduction of our investment balance as this is where carried interest is initially recorded.
Recently Issued Accounting Pronouncements
For a full discussion of recently issued accounting pronouncements, please see the notes to the consolidated financial statements "--Item 8. Financial Statements and Supplementary Data--Summary of Significant Accounting Policies."
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