SEC Company Response from KKR & Co. (KKR) — Jan 15, 2013
KKR & Co. Inc.
Date: Jan. 15, 2013 · CIK: 0001404912 · Accession: 0001104659-13-002673
AI Filing Summary & Sentiment
File numbers found in text: 001-34820
Referenced dates: December 31, 2012
Letter
VIA EDGAR Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Mailstop 4631 Washington, D.C. 20549-4631
Re:
Dear Ms. Hayes:
On behalf of KKR & Co. L.P. (the “Company” or “KKR”), we are responding to the comment letter of the Staff of the Securities and Exchange Commission, dated December 31, 2012, regarding the Company’s financial statements and related disclosures in its Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”) and Form 10-Q for the fiscal quarter ended September 30, 2012 (the “September Form 10-Q”).
To assist your review, we have retyped the text of the Staff’s comments in italics below. Please note that references to page numbers in our responses refer to the page numbers of our 2011 Form 10-K and September Form 10-Q, as filed on EDGAR.
Form 10-K for Fiscal Year Ended December 31, 2011
General
1. Throughout your filing you use the defined term “Transactions.” Please explain the meaning of the term the first time you use it.
We respectfully advise the Staff that the term “Transactions” is defined when first used on page ii.
2. You use the term “investors” to refer to investors in KKR & Co. L.P. and to refer to investors in your funds. For example, refer to the risk factors “The ‘clawback’ or ‘net loss sharing’ provisions in our governing agreements may give rise to a contingent obligation that may require us to return or contribute amounts to our funds and investors” on page 28 and “A decline in the pace or size of the investments by our funds or an increase in the amount of transaction fees we share with our investors would result in our receiving less revenue from transaction fees.” In future filings, please clarify when you are referring to investors in your funds.
In response to the Staff’s comment, we will clarify instances where we are referring to unitholders, which are investors in the common units of KKR & Co. L.P., versus investors in our funds. For example, in the above-referenced risk factors, we will use the term “fund investors” or “investors in our funds” rather than simply “investors.”
Performance, page 4
3. Please tell us why you believe disclosures of past performance dating back to 1976 are material and relevant.
We believe our past performance provides insight on the Company’s investment approach with respect to private equity, which our founders have developed and applied since they started the firm in 1976. In particular, we believe that disclosure of past performance is relevant because private equity is a long-dated investment class, where returns are achieved over a period of multiple years rather than months and through various economic cycles. Our private equity funds invest capital over an investment period that generally may last up to six years, and investments may be held for a much longer period of time, up to a decade or more. Throughout this period, as the fund is investing and developing its investments, economic cycles may have a short-term impact on the value of the fund that diminishes as the fund matures. Therefore, limiting performance metrics to a period of several years may result in a focus on funds that have not completed their investment periods or have not begun or have only recently begun realizing investments yielding a less complete illustration of how a fund performs through its entire term and placing disproportionate emphasis on short-term current economic cycles.
Item 1A. Risk Factors, page 25
4. We note your disclosure that “the risks described below are not the only risks [you] face.” Please revise to clarify that this section discusses all material risks.
We confirm that this section discusses what we believe are the most significant risks in compliance with Item 503 of Regulation S-K, and in future filings, we will delete the sentence noted above.
Risks Related to Our Business, page 26
We depend on our founders and other key personnel, the loss of whose services …, page 36
5. If accurate, please specifically state that your founders and other key personnel are not subject to non-compete agreements. The discussion should clarify that the founders would not be prohibited from soliciting current fund investors.
We respectfully advise the Staff that our founders as well as other senior employees whom we refer to as senior principals are subject to confidentiality and restrictive covenant agreements, the forms of which are incorporated in the 2011 Form 10-K by reference to Exhibit 10.9 and 10.10, respectively, of the registration statement on Form S-1 (File No. 133-165414) filed on March 12, 2010. Such agreements provide, among other things, that those individuals will not solicit any client or prospective client of the Company, which would include the solicitation of current fund investors. Accordingly, we do not intend at present to amend the disclosure in question in response to the Staff’s comment.
The time and attention that our principles and other employees devote…, page 38
6. To the extent that your principals devote a significant amount of time to managing funds that were not contributed to the KKR Group Partnerships, please estimate the percentage of their time they devote to managing these other funds.
Although certain principals and other employees of the Company previously devoted time to managing certain residual investments held in the 1987 Fund, 1993 Fund and 1996 Fund, which were not contributed to the KKR Group Partnerships, investments related to these funds have been disposed of in all material respects by December 31, 2012, and therefore we advise the Staff that we intend to remove the referenced risk factor from future filings.
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 82
7. We note that the KKR Funds have made significant investments in European companies, primarily through the European Fund, European II Fund, European III Fund and the Annex Fund. To the extent that the KKR Funds hold material investments in companies domiciled in European countries that are currently experiencing significant economic, fiscal and/or political strains, please tell us what consideration you gave to the disclosure guidance set forth in the Division of Corporation Finance’s Disclosure Topic 4: European Sovereign Debt Exposures. In this regard, we note that the disclosure guidance applies to both sovereign and non-sovereign direct and indirect exposures.
We respectfully advise the Staff that no specific disclosure with respect to European sovereign debt exposure was warranted in our 2011 Form 10-K. As of December 31, 2011, neither the Company nor its funds directly held any sovereign debt of Greece, Ireland, Italy, Portugal or Spain, which were the European countries we believed were then experiencing significant economic, fiscal and/or political strains. As of December
31, 2011, our total private equity portfolio had a fair value of $34.6 billion of which approximately 1% was attributed to portfolio companies headquartered in Greece, Ireland, Italy, Portugal or Spain. In addition based on an analysis of where our European private equity portfolio companies had underlying revenue, expenditures, and cash and debt exposures, we believe the equity at risk related to Eurozone countries, which we believed were then experiencing significant economic, fiscal and/or political strains, was not material relative to our total invested capital. In our portfolio of leveraged loans, high yield bonds, other credit instruments, and certain equity securities less than 1% of the market value of these instruments was issued by companies headquartered in Greece, Ireland, Italy, Portugal or Spain as of December 31, 2011.
Basis of Financial Presentation — Segment Operating and Performance Measures, page 88
8. We note that your reportable segments are presented prior to giving effect to the allocation of income (loss) between KKR and KKR Holdings and as such represent the business in total. Given the manner in which certain segment measures are calculated (namely, fee related earnings, economic net income and segment book value) it appears that your segments are also presented without giving effect to the consolidation of the KKR Funds. In future filings, please revise your disclosure here as well as within your segment footnote to clearly state this fact.
In our 2012 Form 10-K and in other future filings we will revise the disclosure to state that our segments are presented without giving effect to the consolidation of funds that we manage in both Management’s Discussion and Analysis of Financial Condition and Results of Operation (Basis of Financial Presentation — Segment Operating and Performance Measures) and the segment reporting footnote in the consolidated financial statements. Specifically, the revised disclosure would be substantially similar to the following draft language:
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 that KKR manages.
Consolidated and Combined Results of Operations, page 91
Year ended December 31, 2011 compared to year ended December 31, 2010
Net Gains (Losses) from Investment Activities, page 92
9. We note based on your tabular disclosure on page 93 that the decrease in net unrealized gains (losses) from changes in fair value was the most significant driver of the decrease
in net gains (losses) from investment activities during 2011 compared to 2010. In future filings when significant changes in the fair values of your investments occur and have a material impact on your investment gains (losses), please revise your disclosure to discuss the key market factors that positively or negatively impacted the fair values of your investments and explain whether fair values generally increased (decreased) across your portfolio or whether it varied by fund and/or industry and if so, why.
In our 2012 Form 10-K and in other future filings, we will include additional disclosures relating to significant changes in investment gains (losses) that were positively or negatively impacted by changes in the fair values of our investments. These additional disclosures may include: (i) discussion on whether the material changes were driven primarily by changes in share prices of publicly held investments or whether the changes were driven primarily by our privately held portfolio companies, (ii) the individual portfolio companies, and their respective industries, that materially contributed to the changes in value, (iii) the funds that materially contributed to the changes in value and/or (iv) discussion of the key market factors that materially contributed to the changes in value.
Contractual Obligations, Commitments and Contingencies on an Unconsolidated Basis and Consolidated Basis, page 120 and 121
10. Please include disclosure of your tax receivable agreement obligations as part of your contractual obligations table. To the extent that you are unable to estimate the payments and/or timing of the payments, please disclose these obligations as a footnote to the contractual obligations table.
In our 2012 Form 10-K and in future filings, we will include additional disclosures relating to the tax receivable agreement as a footnote to the contractual obligations table. Specifically, the additional disclosure would be substantially similar to the following draft language:
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, 2012, a payable of $XXX 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, 2012, approximately $XXX million of cumulative cash payments have been made under the tax receivable agreement. (See “— Liquidity Needs — Tax Receivable Agreement”.)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk, page 129
11. Please add disclosure that addresses the material components of your risk management philosophy and structure, including the following information:
· Please explain what individuals, groups, or committees are responsible for risk oversight and indicate whether KKR & Co. L.P. or the Managing Partner has an overall risk tolerance policy.
· Please explain how you measure and manage risks related to your investment funds and vehicles.
· Please indicate how risk-related information is communicated among the various individuals and entities responsible for risk management, and under what circumstances such information is communicated to senior level executives, or to the Board of Directors.
· Please describe your policies in the event of risk limit breaches, including to whom such breaches are reported.
KKR has a risk committee comprised of senior employees from across our business segments and across business operations, and includes our Chief Administrative Officer, our Chief Financial Officer, and our General Counsel. The risk committee prioritizes KKR’s risks and maintains focus on significant and emerging risks. Our Chief Administrative Officer, as the chairman of the risk committee, regularly reports to our Co-Chief Executive Officers and quarterly to the Audit Committee, which is the chief committee to monitor risk on behalf of the Board of Directors.
When we commit capital of a certain amount from our balance sheet to investments or transactions, a committee of senior employees, including our two Co-Chief Executive Officers, the Chief Financial Officer and Chief Administrative Officer, must approve the transaction before it may be made. In addition, this committee supervises activities governing the Company’s capital structure, liquidity, and other strategies for the composition of our balance sheet.
Certain securities transactions by our Capital Markets business of our Capital Markets and Principal Activities segment are subject to risk tolerance limits, regulatory capital requirements and the review and approval of one or more committees in compliance with rules applicable to broker-deals pursuant to the Securities Exchange Act of 1934. When our capital is committed to capital markets transactions, after diligence is conducted, such transactions are subject to the review and approval of a committee within the Capital Markets business. These transactions are also subject to risk tolerance limits. The risk tolerance limits establish the level of investment we may make in a single company or type of transaction, for example and are designed to avoid undue concentration and risk expo
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CORRESP 1 filename1.htm January 15, 2013 VIA EDGAR Re: KKR & Co. L.P. Form 10-K for the Fiscal Year Ended December 31, 2011 Filed February 27, 2012 Form 10-Q for Fiscal Quarter Ended September 30, 2012 Filed November 2, 2012 File No. 001-34820 Ms. Suzanne Hayes Assistant Director Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Mailstop 4631 Washington, D.C. 20549-4631 Dear Ms. Hayes: On behalf of KKR & Co. L.P. (the “Company” or “KKR”), we are responding to the comment letter of the Staff of the Securities and Exchange Commission, dated December 31, 2012, regarding the Company’s financial statements and related disclosures in its Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”) and Form 10-Q for the fiscal quarter ended September 30, 2012 (the “September Form 10-Q”). To assist your review, we have retyped the text of the Staff’s comments in italics below. Please note that references to page numbers in our responses refer to the page numbers of our 2011 Form 10-K and September Form 10-Q, as filed on EDGAR. Form 10-K for Fiscal Year Ended December 31, 2011 General 1. Throughout your filing you use the defined term “Transactions.” Please explain the meaning of the term the first time you use it. We respectfully advise the Staff that the term “Transactions” is defined when first used on page ii. 2. You use the term “investors” to refer to investors in KKR & Co. L.P. and to refer to investors in your funds. For example, refer to the risk factors “The ‘clawback’ or ‘net loss sharing’ provisions in our governing agreements may give rise to a contingent obligation that may require us to return or contribute amounts to our funds and investors” on page 28 and “A decline in the pace or size of the investments by our funds or an increase in the amount of transaction fees we share with our investors would result in our receiving less revenue from transaction fees.” In future filings, please clarify when you are referring to investors in your funds. In response to the Staff’s comment, we will clarify instances where we are referring to unitholders, which are investors in the common units of KKR & Co. L.P., versus investors in our funds. For example, in the above-referenced risk factors, we will use the term “fund investors” or “investors in our funds” rather than simply “investors.” Performance, page 4 3. Please tell us why you believe disclosures of past performance dating back to 1976 are material and relevant. We believe our past performance provides insight on the Company’s investment approach with respect to private equity, which our founders have developed and applied since they started the firm in 1976. In particular, we believe that disclosure of past performance is relevant because private equity is a long-dated investment class, where returns are achieved over a period of multiple years rather than months and through various economic cycles. Our private equity funds invest capital over an investment period that generally may last up to six years, and investments may be held for a much longer period of time, up to a decade or more. Throughout this period, as the fund is investing and developing its investments, economic cycles may have a short-term impact on the value of the fund that diminishes as the fund matures. Therefore, limiting performance metrics to a period of several years may result in a focus on funds that have not completed their investment periods or have not begun or have only recently begun realizing investments yielding a less complete illustration of how a fund performs through its entire term and placing disproportionate emphasis on short-term current economic cycles. Item 1A. Risk Factors, page 25 4. We note your disclosure that “the risks described below are not the only risks [you] face.” Please revise to clarify that this section discusses all material risks. We confirm that this section discusses what we believe are the most significant risks in compliance with Item 503 of Regulation S-K, and in future filings, we will delete the sentence noted above. 2 Risks Related to Our Business, page 26 We depend on our founders and other key personnel, the loss of whose services …, page 36 5. If accurate, please specifically state that your founders and other key personnel are not subject to non-compete agreements. The discussion should clarify that the founders would not be prohibited from soliciting current fund investors. We respectfully advise the Staff that our founders as well as other senior employees whom we refer to as senior principals are subject to confidentiality and restrictive covenant agreements, the forms of which are incorporated in the 2011 Form 10-K by reference to Exhibit 10.9 and 10.10, respectively, of the registration statement on Form S-1 (File No. 133-165414) filed on March 12, 2010. Such agreements provide, among other things, that those individuals will not solicit any client or prospective client of the Company, which would include the solicitation of current fund investors. Accordingly, we do not intend at present to amend the disclosure in question in response to the Staff’s comment. The time and attention that our principles and other employees devote…, page 38 6. To the extent that your principals devote a significant amount of time to managing funds that were not contributed to the KKR Group Partnerships, please estimate the percentage of their time they devote to managing these other funds. Although certain principals and other employees of the Company previously devoted time to managing certain residual investments held in the 1987 Fund, 1993 Fund and 1996 Fund, which were not contributed to the KKR Group Partnerships, investments related to these funds have been disposed of in all material respects by December 31, 2012, and therefore we advise the Staff that we intend to remove the referenced risk factor from future filings. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 82 7. We note that the KKR Funds have made significant investments in European companies, primarily through the European Fund, European II Fund, European III Fund and the Annex Fund. To the extent that the KKR Funds hold material investments in companies domiciled in European countries that are currently experiencing significant economic, fiscal and/or political strains, please tell us what consideration you gave to the disclosure guidance set forth in the Division of Corporation Finance’s Disclosure Topic 4: European Sovereign Debt Exposures. In this regard, we note that the disclosure guidance applies to both sovereign and non-sovereign direct and indirect exposures. We respectfully advise the Staff that no specific disclosure with respect to European sovereign debt exposure was warranted in our 2011 Form 10-K. As of December 31, 2011, neither the Company nor its funds directly held any sovereign debt of Greece, Ireland, Italy, Portugal or Spain, which were the European countries we believed were then experiencing significant economic, fiscal and/or political strains. As of December 3 31, 2011, our total private equity portfolio had a fair value of $34.6 billion of which approximately 1% was attributed to portfolio companies headquartered in Greece, Ireland, Italy, Portugal or Spain. In addition based on an analysis of where our European private equity portfolio companies had underlying revenue, expenditures, and cash and debt exposures, we believe the equity at risk related to Eurozone countries, which we believed were then experiencing significant economic, fiscal and/or political strains, was not material relative to our total invested capital. In our portfolio of leveraged loans, high yield bonds, other credit instruments, and certain equity securities less than 1% of the market value of these instruments was issued by companies headquartered in Greece, Ireland, Italy, Portugal or Spain as of December 31, 2011. Basis of Financial Presentation — Segment Operating and Performance Measures, page 88 8. We note that your reportable segments are presented prior to giving effect to the allocation of income (loss) between KKR and KKR Holdings and as such represent the business in total. Given the manner in which certain segment measures are calculated (namely, fee related earnings, economic net income and segment book value) it appears that your segments are also presented without giving effect to the consolidation of the KKR Funds. In future filings, please revise your disclosure here as well as within your segment footnote to clearly state this fact. In our 2012 Form 10-K and in other future filings we will revise the disclosure to state that our segments are presented without giving effect to the consolidation of funds that we manage in both Management’s Discussion and Analysis of Financial Condition and Results of Operation (Basis of Financial Presentation — Segment Operating and Performance Measures) and the segment reporting footnote in the consolidated financial statements. Specifically, the revised disclosure would be substantially similar to the following draft language: 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 that KKR manages. Consolidated and Combined Results of Operations, page 91 Year ended December 31, 2011 compared to year ended December 31, 2010 Net Gains (Losses) from Investment Activities, page 92 9. We note based on your tabular disclosure on page 93 that the decrease in net unrealized gains (losses) from changes in fair value was the most significant driver of the decrease 4 in net gains (losses) from investment activities during 2011 compared to 2010. In future filings when significant changes in the fair values of your investments occur and have a material impact on your investment gains (losses), please revise your disclosure to discuss the key market factors that positively or negatively impacted the fair values of your investments and explain whether fair values generally increased (decreased) across your portfolio or whether it varied by fund and/or industry and if so, why. In our 2012 Form 10-K and in other future filings, we will include additional disclosures relating to significant changes in investment gains (losses) that were positively or negatively impacted by changes in the fair values of our investments. These additional disclosures may include: (i) discussion on whether the material changes were driven primarily by changes in share prices of publicly held investments or whether the changes were driven primarily by our privately held portfolio companies, (ii) the individual portfolio companies, and their respective industries, that materially contributed to the changes in value, (iii) the funds that materially contributed to the changes in value and/or (iv) discussion of the key market factors that materially contributed to the changes in value. Contractual Obligations, Commitments and Contingencies on an Unconsolidated Basis and Consolidated Basis, page 120 and 121 10. Please include disclosure of your tax receivable agreement obligations as part of your contractual obligations table. To the extent that you are unable to estimate the payments and/or timing of the payments, please disclose these obligations as a footnote to the contractual obligations table. In our 2012 Form 10-K and in future filings, we will include additional disclosures relating to the tax receivable agreement as a footnote to the contractual obligations table. Specifically, the additional disclosure would be substantially similar to the following draft language: 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, 2012, a payable of $XXX 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, 2012, approximately $XXX million of cumulative cash payments have been made under the tax receivable agreement. (See “— Liquidity Needs — Tax Receivable Agreement”.) Item 7A. Quantitative and Qualitative Disclosures About Market Risk, page 129 11. Please add disclosure that addresses the material components of your risk management philosophy and structure, including the following information: 5 · Please explain what individuals, groups, or committees are responsible for risk oversight and indicate whether KKR & Co. L.P. or the Managing Partner has an overall risk tolerance policy. · Please explain how you measure and manage risks related to your investment funds and vehicles. · Please indicate how risk-related information is communicated among the various individuals and entities responsible for risk management, and under what circumstances such information is communicated to senior level executives, or to the Board of Directors. · Please describe your policies in the event of risk limit breaches, including to whom such breaches are reported. KKR has a risk committee comprised of senior employees from across our business segments and across business operations, and includes our Chief Administrative Officer, our Chief Financial Officer, and our General Counsel. The risk committee prioritizes KKR’s risks and maintains focus on significant and emerging risks. Our Chief Administrative Officer, as the chairman of the risk committee, regularly reports to our Co-Chief Executive Officers and quarterly to the Audit Committee, which is the chief committee to monitor risk on behalf of the Board of Directors. When we commit capital of a certain amount from our balance sheet to investments or transactions, a committee of senior employees, including our two Co-Chief Executive Officers, the Chief Financial Officer and Chief Administrative Officer, must approve the transaction before it may be made. In addition, this committee supervises activities governing the Company’s capital structure, liquidity, and other strategies for the composition of our balance sheet. Certain securities transactions by our Capital Markets business of our Capital Markets and Principal Activities segment are subject to risk tolerance limits, regulatory capital requirements and the review and approval of one or more committees in compliance with rules applicable to broker-deals pursuant to the Securities Exchange Act of 1934. When our capital is committed to capital markets transactions, after diligence is conducted, such transactions are subject to the review and approval of a committee within the Capital Markets business. These transactions are also subject to risk tolerance limits. The risk tolerance limits establish the level of investment we may make in a single company or type of transaction, for example and are designed to avoid undue concentration and risk expo