KKR & Co Inc (KKR) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the KKR Private Equity Investors, L.P.

fourth quarter 2007 financial results on the 29, February, 2008.

(OPERATOR INSTRUCTIONS)

I will now hand the conference over to Ms.

Kate Becher.

Please go ahead, madam.

Thank you, Operator.

Welcome, everyone, to KKR Private Equity Investors fourth quarter conference call to discuss the results for the period ended December 31, 2007.

I am Kate Becher, the Investor Relations Manager for KPE.

Before we begin we would like to remind everyone that the prepared remarks contain forward-looking statements regarding future events and the future performance of the Company and its representatives may make additional forward-looking statements in response to your questions.

These statements do not guarantee future events or performance.

Therefore, undue reliance should not be placed upon them.

We refer all of you to the KKR Private Equity Investors website, which can be found at www.kkrprivateequityinvestors.com for important information including, when available, KPE's financial report for the fourth quarter.

KPE assumes no obligation to revise any forward-looking remarks that may be made in today's release or call.

Due to the annual unitholder meeting, today's call is scheduled to conclude within one hour.

With that, I would like to turn the call over to Henry Kravis.

Thank you, Kate.

Good morning.

Good afternoon.

Depends where you are in the world.

Welcome to KKR Private Equity Investors' fourth quarter conference call for the period ended December 31, 2007.

I'm Henry Kravis and I'm co-founder of KKR and co-chairman of the Board of Directors of KPE's general partner.

I'm joined today by the Chief Financial Officer of KPE's general partner, Kendra Decious, KKR members Paul Raether, Scott Nuttall and Craig Farr, KKR's CFO, Bill Janetschek, and KKR principal, Nat Zilkha.

On today's call I'll give you my thoughts on the current investment climate for private equity and a sense of how we approach investment decision making for our private equity portfolio and I'll also discuss KPE's market price.

Following my section, Nat Zilkha, who's a principal on our healthcare investing team, will discuss the team's industry thesis as well as the investment rationale behind the recent Biomet transaction.

Paul Raether will then update you on the status of several of KPE's investments.

Paul will then hand the call over to Kendra, who will review KPE's fourth quarter and full year performance and following Kendra's review we're happy to answer your questions.

Last year at this time we were beginning to hear about the defaults on subprime loans caused by an overly aggressive residential real estate lending to borrowers with poor credit histories.

As the number of losses on these loans rose, securitization and collateralization vehicles into which they were packaged and repackaged experienced losses.

The losses in subprime residential loans were just the beginning.

There are now increasing delinquencies across other forms of consumer credit.

In addition, there are signs that the commercial market may be next.

The actual losses incurred on some of the underlying collateral and much more significantly, the feared losses on many underlying asset classes have led to a chain reaction of downgrades across the credit market.

There've been two primary consequences of this.

First, the banks and the investment banks globally have seen the value of assets on their balance sheets decline by well over $100 billion.

Where they partially fill the hole created by these losses by raising over $90 billion from the market and sovereign well funds, they have little to no excess capital to invest in their businesses.

In addition, most lending institutions have seen their funding cost increase by hundreds of basis points.

In short, they are short of capital and their ability to fund their business models in the capital markets is significantly impaired.

This is all causing banks behaviors to change and liquidity to dry up.

The most recent survey of senior loan officers at banks conducted by the U.S.

Federal Reserve found significant tightening across all lending types, including corporate loans, consumer loans and commercial real estate loans.

Even prime borrowers are having difficulty obtaining credit.

The markets for many borrowers, both individuals and corporates, are all but shut, due primarily to fear and uncertainty as to what comes next.

Our business is impacted most significantly by how all this is affecting the markets for leveraged loans and high yield bonds.

While our companies are benefiting significantly by the reduction in LIBOR, we've seen the broad-based illiquidity in the markets impact our historical sources of funding for new transactions.

Given continued investor aversion to virtually all areas of securitized products, the CLO market is practically closed.

As you may know, CLOs represented more than 50% of the buying power in the leveraged loan market over the last several years.

In addition, there is by our calculations over $200 billion of paper from 2007 deal activity that has been either funded by the banks or yet to be brought to market.

So there remains a significant supply and little demand.

This has caused the prices for levered loans to drop to their lowest level in ten years and spreads to climb close to all-time highs.

In addition, the high yield bond market is trading at levels that would imply defaults never seen before.

What is interesting is that this phenomenon is almost entirely liquidity driven, not credit driven.

Even companies performing well and ahead of expectations have banked at trading in the 80s and high yield debt trading with unlevered yields of 15% or higher.

As a result of the disruption of these markets and their own capital constraints and funding costs, most lending institutions are hesitant to make any large capital commitments to new transactions today.

We have seen, however, there are some hedge funds, mutual funds and other parties expressing interest in financing new private equity transactions.

In addition, we believe new sources of capital are being formed to take advantage of this dislocation.

However, given the current supply/demand imbalance, we believe the market will take some months to stabilize.

However, there's some reasons to be somewhat optimistic.

U.S.

policymakers have begun to take measures to ameliorate the credit situation, including lowering the fed funds rate, passing a stimulus package and increasing federally mandated loan size limits.

Equity market volatility has started to subside and weaker U.S.

dollar is helping export the export portion of the U.S.

economy.

U.S.

money markets, including the commercial paper market, have stabilized and interest rates have declined, increasing free cash flow for leveraged LIBOR index borrowers.

Banks and other financial firms are slowly rebuilding their damaged capital bases via fresh equity infusion as well as cost and dividend reductions.

Unlike the U.S., the European Central Bank is maintaining a tight monetary policy.

Strength of the euro relative to the U.S.

dollar is creating challenges for European manufacturers and service providers who compete with U.S.

firms.

In Asia, meanwhile, although growth rates have slowed, most Asian countries, with the exception of Japan, continue to exhibit strong GDP growth.

Recently we've been asked if we're still able to finance transactions in this type of environment.

The answer is, in some situations yes and in other situations no.

While our track record and the longstanding relationships with lenders gives us unique access to capital in the current market, the capital is not nearly as plentiful as it was a year ago and the cost is much higher.

Having said that, KKR has been in business for 32 years across many economic cycles and market disruptions and we have steadily invested capital and generated strong returns for our investors throughout all periods.

In the most recent environment, there's several examples.

In October 2007, KKR announced $6.9 billion in total enterprise value of new private equity activity, including a $1.4 billion purchase of UN Ro-Ro in Turkey, the $2.3 billion purchase of Northgate Information Solutions PLC, a $1.25 billion convertible note investment in Legg Mason, $250 million and a $1.25 billion total financing in Bharti Airtel in India, an additional $800 million financing for ProSieben, an existing KKR portfolio.

KPE participated in all these transactions through its fund commitments.

These investments join our world-class national and global franchises we added to our portfolio in 2007, including Alliance Boots, Dollar General, Energy Future Holdings, First Data and U.S.

Foodservice, to name several.

These new transactions required some creativity given the current environment.

UN Ro-Ro is a Turkey shipping company.

We financed the deal with local Turkish and Greek banks, thereby avoiding the issues in the U.S.

and European capital markets.

Northgate is a UK public to private transaction where we directly placed the mezzanine portion of the capital structure ourselves with a group of private investors.

Legg Mason and Bharti Infortel are both highly structured minority investments.

So it's possible to get deals done in this environment.

It just takes more work and a lot of creativity.

I want to spend a few minutes talking about how we think about investing.

The decision to add a company to our portfolio is an important yet frequently overlooked aspect of the private equity investing process.

Every year we evaluate hundreds of potential controlled transactions.

In 2007 for the hundreds of companies we evaluated, we purchased 15.

When looked at in reverse, this means that we passed on investing in over 95% of the companies we examined.

Why would we pass on such a large number of private equity deals, particularly in an environment such as that of early 2007 when liquidity and credit were amply available and interest rates were stable?

Well, let me tell you.

I think there are two main reasons.

First, we have to have a conviction that a business has a relatively stable revenue base despite fluctuations in the economic cycle.

While we have many operational levers to pull once we have full ownership of a business, such as increases in productivity, shortening the supply chain and so forth, all of which improve EBITDA and expand margins, we nonetheless want strong revenue growth to ensure healthy free cash flow generation.

We tend to focus on the larger end of the buyout market, not just because we have the financial ability to do so, but because purchasing large global franchises tends to mitigate top line volatility.

For business with operations throughout the world, there is less of a chance that the business will experience a significant downturn if one region of the world experiences deteriorating economic conditions.

If the industry in which the business operates is growing, especially if this growth is a global phenomenon and if regulatory oversight is not an impediment to growth, these are obviously very positive signs.

Second, we have to understand and quantify the potential for operational improvement of the business.

Based on internal studies, we believe that the majority of value we derive from the business upon exit comes from operational improvement and deleveraging.

With increased competition and more efficient capital markets, the days of relying solely on deriving an appropriate capital structure are a sign to the past.

We're still focused on implementing the right capital structures of the businesses we acquire and we spent a significant amount of our time in due diligence, assessing the risk facing a business and matching these risks with the appropriate financial instruments and terms.

If the financial framework out of which a business operates is not appropriate, the operation is hindered from the outset.

However, financial structuring alone does not give rise to success.

We have to understand how a company can be made to run more efficiently and compete more effectively for a transaction to become interesting to us and a reality.

We continue to evaluate potential transactions in today's market and believe that there are opportunities to be found in the midst of turmoil.

We keep close tabs on the companies that we own and the data we collect from our portfolio in turn influences what we purchase and how we structure transactions.

This feedback loop allows us to operate a smart, disciplined and comprehensive private equity practice that responds as soon as possible to shifts in the business cycle.

We've created value in our portfolio companies by using debt and disciplined yet innovative ways, by partnering with talented managers, by implementing operational change in a vigilant and consistent manner and by being flexible enough to adapt to changing circumstances.

We believe that our investments in 2007 in conjunction with our investments made in prior years should perform well.

KPE investors will be direct -- a direct beneficiary of our private equity investing activity on a global basis.

I feel it's important to address what I think are some misunderstanding in perceptions about KKR and KPE.

For example, I understand that many investors think we overpaid for assets in 2006 and 2007.

I also understand that many investors believe that KPE has too much vintage concentration in those years.

And I also understand that there's skepticism about the value at which KPE holds its investments.

And further I understand that some of you would like KPE to buy back its common units.

We at KKR have been making private equity investments for 32 years.

We've seen many recessions, an energy crisis, over 20% interest rates in the 1979 to 1981 period and severely disrupted capital markets many times in the history of KKR.

A few facts that I want you to understand.

In 32 years of investing in 14 private equity funds, our funds have always generated positive returns.

Our best returning fund generated a 48% gross return and our worst fund produced a 12% gross return.

Over the 32 years we've generated 20% net returns.

All of our 14 private equity funds have outperformed the stock market over the same period by a fairly large margin.

In 32 years of investing, we've only had one vintage year that did not generate positive returns and that was 1989, when we invested in RJR Nabisco.

Parenthetically on that, that particular fund, the 1987 fund which RJR was part of, ended up returning over two times invested capital, including our RJR investment.

We've been able to generate strong returns investing in prosperous economic times and recessions and in capital markets with ample liquidity and in times of limited liquidity.

Our valuation process is in accordance with applicable fair value accounting principals and our valuations are reviewed by our independent valuation firm, Duff & Phelps.

KPE's financial statements are also audited by KPE's outside auditor, Deloitte & Touche.

We stand by our valuation process and the resulting valuations of our companies.

Before I turn the call over to Nat for his remarks, I'd like to discuss KPE's trading discount to net asset value.

Obviously, all of us at KKR are extremely displeased with this discount.

Although peer listed private equity vehicles trade at discounts to net asset value and peer financial sector stocks have also suffered as the credit situation has continued, it is not expected to have the disparity between the market and our net asset value margin be so wide.

We hope that the common unit price will strengthen in 2008 and end the year more in line with the valuation of our underlying portfolio.

We remain reluctant for KPE to buy back its units.

We do not think that any financial institution to be using excess liquidity in a market like this.

At this point we're committed to future capital draws on certain private equity funds which provide the benefits of potentially more diversification and exposure to new deals.

We're also working to raise investor awareness of the vehicle, including dissemination of more information, expanded analyst coverage and participation in conferences.

Simply purchasing units to remove the impact of a small number of unspecified sellers will not guarantee that the discount will narrow.

We do have another KKR vehicle which we previously announced that has the ability to buy up to $100 million of KPE's units.

This vehicle has been buying units in the market and will continue to do so.

KPE is now trading at more than a 30% discount to net asset value.

This implies we at KKR have seriously lost our way.

Well, the people have not changed, the process has not changed and we believe that the results will speak for themselves, just as they have for the past 32 years.

And with that, I'd like to turn it over to my associate, Nat Zilkha.

Thank you, Henry.

It's great to be here to give an overview of our healthcare strategy in more detail on one of our healthcare investments.

In the U.S.

we have a dedicated team of investment professionals who spend 100% of their time focused on evaluating investment opportunities in healthcare and on operating the healthcare investments that we own.

The team is led by Mike Michelson, who's been at KKR since 1981.

I joined KKR last year from Goldman Sachs' private equity arm, where I led the investing effort in healthcare.

I think it's helpful to start with an overview of the macroeconomic thesis in healthcare.

Healthcare is the largest sector of the U.S.

economy, representing over $2 trillion of annual expenditure, which is approximately 16% of GDP.

As of January 31, 2008, healthcare was the largest -- the fourth largest sector in the S&P 500, with 12.1% of the market's total capitalization, behind financial, information technology and energy.

Healthcare is also a growing industry.

By 2016 the U.S.

government projects that both direct and indirect healthcare spending will almost double to over $4 trillion, or 20% of GDP.

Healthcare has also exhibited stability.

I think this is especially salient in the context of the current environment.

Since 1960, U.S.

healthcare spending has never increased at an annual rate lower than 5% on a nominal basis and has increased less than 2% on a real basis only once, in 1980, when it was 1.6%.

In the last three recessions, healthcare spending has exhibited countercyclical characteristics, averaging real annual growth of 5.5%.

U.S.

healthcare system is not only vast, but highly complex.

Healthcare comprises multiple subsectors, including services, medical devices and pharmaceuticals.

KPE has investments in each of these subsectors.

I'd like to spend a few minutes presenting our investment thesis for Biomet, which KPE holds through the KKR 2006 fund and as a co-investment.

Biomet was purchased in July of 2007.

Biomet is a global leader in the orthopedic device sector, with a long track record of product innovation and a broad offering of hip, knee, dental and spinal implants.

We believe the orthopedics sector is especially attractive, going to strong and predictable unit growth, historically stable market share, robust margins and free cash flows and certain barriers to entry.

Based on our research, we developed a thesis that Demographic trends will drive significant volume increases for an extended period of time as an aging population leads to more cases of osteoporosis and arthritis.

In addition to this secular growth trend, we believe the technological improvements will continue to facilitate penetration into younger patient cohorts, as well as increasing prevalence within existing high utilizing cohorts, resulting in further acceleration of volume.

Historically, this sector has benefited from robust pricing trends but we have not assumed any meaningful pricing benefits going forward, recognizing that the various government and commercial payers for healthcare are under increasing financial pressure.

Finally, we believe there's a significant opportunity to improve Biomet's operations and drive cost savings and efficiency improvements in manufacturing, procurement and working capital management.

We further recognized an opportunity to strengthen the senior management team as well as to provide the existing management with more resources.

As part of this effort, KKR, along with our consortium partners, brought in Jeff Binder, a former senior executive at [Avid], as the new CEO of the Company.

Together with Jeff we have also recruited numerous other senior executives, including a new CFO, head of HR, head of IT, individual presidents for the spine and trauma business, all with substantial experience in the medical device and healthcare sectors.

On January 10, 2008, Biomet reported second quarter fiscal 2008 results for the quarter ended November 30th, 2007.

Net sales grew 11% to $578.1 million versus $520.3 million in the second quarter of fiscal 2007.

Sales growth was largely attributable to high demand for products in the reconstructive business, namely knee and hip products, as well as strong foreign demand, particularly in Europe.

EBITDA was also strong.

EBITDA was $194.4 million in the second quarter of fiscal 2008 versus $182.5 million in the same quarter last year, for year-over-year EBITDA growth of 6.5%.

In closing, Biomet is performing well.

We are pleased with the contributions of Jeff and his entire management team and we continue to forecast favorable results for the business.

Our investment in Biomet validates our investment thesis on the healthcare sector.

It's also a great example of the way in which we approach making a decision to add a company to our private equity portfolio.

Before I hand the call over to Paul, I'd like to touch briefly on HCA, which is the largest investor owned operator of hospitals in the U.S.

KPE holds HCA though both a fund investment and a co-investment.

HCA was acquired in November of 2006.

As is the case with Biomet, the secular trends underlying HCA's business model are attractive.

Hospital expenditures in the U.S.

have grown consistently at rates above GDP due to rising demand for services and higher acuity of services provided.

HCA's broad geographic footprint and diverse revenue base limit its exposure to any single local market or payer plus diverse array of services limits its exposure to changes in reimbursement policies targeting specific services or care settings.

HCA has a well capitalized portfolio of high quality assets, which represents a competitive advantage in attracting physicians and in addressing the needs of local communities.

It also has a high caliber management team.

We marked HCA up to 1.2 times cost at September 30, 2007.

The business experienced an uplift in earnings due to strong top line growth as well as expanding margins due to benefits from overhead cost savings initiatives.

Two asset sales were also accretive to earnings.

Thank you for having me on the call.

Now I'll turn it back over to Paul.

Thank you, Nat.

I'll discuss the investments that KPE holds which experienced changing marks during the fourth quarter, including Capmark, NXP, ProSieben and ATU.

KPE holds an investment in ATU through the KKR European and Millennium funds.

The other companies are held both as investments -- as fund investments and co-investments.

I will also discuss energy future holdings which KPE added to its portfolio during the fourth quarter as both a fund investment and as a co-investment.

As a reminder, KPE invests its capital as the sole limited partner of KKR PEI Investments, LP, which we refer to as the investment partnership.

When I site financial metrics, I'll be referring to the most recently available publicly disclosed results for each company.

First, let me start with Capmark.

Capmark was acquired by KKR in February 2006.

At the end of the second quarter of 2007, we wrote Capmark up from cost to 1.46 times cost, as the company recorded significant financial success compared to the prior year and budget.

At December 31, 2007, we marked Capmark down from 1.46 times cost to 1.2 times -- 1.28 times cost due to the turmoil in the credit markets in the second half of 2007 that Henry discussed earlier.

The aggregate fair value of the investment partnership's investment in Capmark at December 31, 2007 was $199.7 million.

Management focused on liquidity in the second half of 2007 to the detriment of earnings.

Third quarter earnings, which were reported on November 28th, were weaker than the first two quarters of the year and the trend continued throughout the fourth quarter.

NXP.

At December 31, 2007 we marked NXP down to 0.86 times cost on a U.S.

dollar basis, which represents 0.75 times cost on a euro dollar basis.

The aggregate fair value of the investment partnership's investment in NXP at December 31 was $243.3 million.

NXP has underperformed versus our expectations due to overall softness in the semiconductor business and specifically due to disappointing results in our home business unit.

We have replaced the presidents of both the home and the mobile and personal business units with seasoned semiconductor veterans from outside of NXP.

We hope to see positive results from these managerial changes as well as from the cost cutting measures that we have implemented at the company, which totaled approximately EUR150 million in 2007, which was significantly ahead of plan.

ProSieben.

At December 31, 2007, we marked our investment in ProSieben to 0.8 times cost on a U.S.

dollar basis, which represents 0.73 times cost on a euro basis.

The aggregate fair value of the investment partnership's investment in ProSieben was $176.7 million at December 31.

ProSieben acquired SBS Broadcasting in July 2007.

The SDS business is performing well and synergies are in line with expectations.

The decrease in the fair value of ProSieben was primarily due to eroding valuations of free-to-air broadcasters in Europe, giving broad based investor concern over the potential decrease of the television advertising market in 2008, which would be expected to adversely affect top line growth.

ATU.

At December 31, 2007, we marked ATU down to 0.17 times cost on a U.S.

dollar basis.

The company was acquired in August 2004.

The aggregate fair value of the investment partnership's investment in ATU was $9.1 million at December 31, 2007.

Performance at ATU, Germany's leading operator of automotive retail stores and repair shops, began to decline in 2006 and 2007 was a very difficult year.

Increased competition, warm weather, which led to much lower sales of winter tires and poor execution at retail by management led to very disappointing results in 2007.

In late 2007 we decided to make a management change.

We have now hired a new CEO, Michael Kern, formerly the head of sales at Volkswagen, who will start at the Company on March 1, 2008.

He has significant experience in the automotive aftermarket and also has restructuring experience.

We are currently working on a restructuring plan for ATU with our bank lenders.

Specifically, we've offered to inject new equity into ATU in return for covenant relief under our bank debt agreements.

Energy Future Holdings.

At December 31, 2007, the aggregate fair value of the investment partnership's investment in EFH was equal to cost, which is $413.6 million.

We closed the acquisition of Energy Future Holdings, which was formerly known as TXU, in October 2007.

EFH reported third quarter 2007 earnings for the period ended September 30, 2007 on November 16.

Through the first nine months of 2007, the company is essentially on track with its operating plan.

Fourth quarter earnings will be reported sometime in March.

At EFH we have implemented our 100-day plan and are focusing on stakeholder relations, cost saving opportunities, pricing opportunities, plant construction and activities associated with the power transmission and distribution businesses.

We hired John Young to be the new CEO of EFH and he started at the company in January.

John has more than 20 years of utility experience and prior to joining EFH was the number two executive and chief financial officer at Excelon.

We continue to see tremendous value in EFH's competitive electricity assets as well as its attractive set of regulated utility assets, all of which are located in the state of Texas, a growing state with a constructive regulatory environment.

I'd like to mention one more thing before I close my part of the presentation.

In response to numerous requests from KPE investors for more detail on the underlying co-investments, we have created fact sheets for all 13 of KPE's co-investment companies, giving information on the companies' backgrounds, presenting our investment thesis and the terms of the buyout transactions.

You can now find these fact sheets on KPE's website under Co-investments.

The fact sheet also provides a link to the portfolio of companies' websites for the most recently publicly disclosed financial information as well as other information and data on that particular portfolio company.

With that, I'd like to conclude my remarks and turn it over to Kendra who will take you through KPE's 2007 financial performance.

Thank you, Paul.

As of December 31, 2007, KPE's net asset value was $4.98 billion.

Our NAV per share was $24.36 versus $25.77 on September 30, 2007.

This was a 5.5% decline for the quarter.

During the quarter ended December 31, KPE realized losses on sales of investments of $8 million.

This primarily resulted from a loss of $19 million from the sale of opportunistic investments within our public equity portfolio which we undertook in response to equity market volatility.

Balancing this loss were gains from the private equity fund sales of FL Selenia and the partial sale of Rockwood Holdings in the amount of $7 million, as well as a gain of $4 million form the sale of investments held by the Strategic Capital fund.

Net unrealized depreciation on investments and foreign currency transactions was $259 million for the fourth quarter.

This included the private company valuation changes in ProSiebenSat 1 Media, Capmark Financial Group, NXP and ATU for the reasons Paul discussed.

In addition, we experienced valuation declines with respect to PagesJaunes, our Sun convertible notes and our opportunistic portfolio, while our convertible preferred security in Orico increased during the same period.

Net investment loss for the fourth quarter was $22 million, which consisted of management fees, interest and operating expenses, offset by interest and dividend income.

KPE's net decrease in net assets resulting from operations for the quarter ended December 31st was $290 million.

KPE's total return for the quarter on an annualized basis was negative 21.7%.

Over the 12 months ended December 31st, KPE's net assets from operations decreased by $4 million and the total return was negative 0.1%.

As was the case with the Q4 total return, this return was also primarily due to private equity portfolio write-downs.

For the 12 months ended December 31st, KPE's net realized gain on investments was $113 million.

This resulted from $88 million gained through the sale and partial sale of KKR private equity fund portfolio company investments, including Demag Holdings, FL Selenia, ITC Holdings, KSL Recreation Holdings, LaCosta Resort and Spa, Rockwood Holdings and SDS Broadcasting, as well as the recapitalization of Maxita.

It also included $25 million from the sale of certain investments in our opportunistic portfolio.

Net unrealized depreciation on investments in foreign currency transactions for the 12 months ended December 31st was $136 million and includes valuation changes in specific companies and portfolios already discussed on this call.

Net investment income for the 12 months ended December 31st was $19 million.

The investment partnership's $4.8 billion portfolio of private equity and opportunistic investments net of related financing included the following as of December 31st, 2007.

Our investments through five KKR private equity funds were $1.8 billion.

Since December 31st we contributed a further $106 million of capital to KKR's Private Equity funds related to the funding of investments in Bharti Infortel, Legg Mason, Northgate Information Solutions and ProSiebenSat 1.

Our co-investments in 13 portfolio companies of KKR's private equity funds totaled $2.7 billion at the end of the year.

As of December 31st we also held negotiated equity investments valued at $636 million net of long term financing of $350 million.

These consisted of our convertible security investments in Sun Microsystems and Orient Corporation and our buyout of ACTS.

As of December 31, 2007, opportunistic investments were valued at $648 million and consisted of $330 million of publicly traded securities and related derivative transactions, $189 million in the KKR Strategic Capital Institutional Fund, Limited, or SCF, a KKR sponsored opportunistic credit fund and consisting predominantly of senior secured debt as well as $129 million of a fixed income investment which is comprised of a senior bank loan.

Subsequent to December 31st and through February 22nd, there had been $97 million of net sales out of this portfolio.

We undertook these measures principally to reduce our exposure to volatility in the market.

At the close of the fourth quarter, investments held by the investment partnership, excluding temporary investments, continued to be well diversified by both geography and industry.

Geographically, 64% of dollars invested were in North America, 29% in Europe and 7% in Asia-Pacific.

In terms of industry, our investments spanned nine distinct industry groups, with the largest positioned in financial services, retail and media.

After taking into account the subsequent investment activity described above, the investment partnership would have remaining undrawn capital commitments to KKR's investment funds of approximately $878 million as of February 22nd.

We expect to fund these commitments over a three to four-year time horizon.

As of February 22, 2008, we had a pro forma cash balance of approximately $244 million, representing the cash balance as of December 31st, minus the subsequent net investment activity that occurred from January 1st to February 22nd.

We have also drawn on the full current availability of our senior secured credit facility established in June 2007 in the amount of $1 billion.

As communicated previously, we follow an over-commitment strategy to dynamically manage investment levels so as to maximize the capital at work at any given time.

We believe that our liquidity is currently sufficient to honor our commitments as and when they become due.

Again, many of these commitments, such as the commitment to the KKR Asian fund, are expected to unfold over a multiyear time horizon that does not necessitate the immediate drawdown of capital in full.

As of today, we have no commitments to fund a material amount to any announced transaction beyond those already mentioned.

We believe that we have access to additional liquidity through the targeted sale of selected assets, increased use of leverage and possible capital raising activities.

Thank you all very much for your attention and participation.

Now I would like to open up the call to questions.

Raquel, if you could please do that?

Thank you, madam.

(OPERATOR INSTRUCTIONS)

Thank you.

The first question come from Mr.

Arnaud Giblat.

Please state your company name followed by your question.

Good morning.

It's Arnaud Giblat from Merrill Lynch.

Just one question.

Could you indicate what sort of impact we can expect from FAS157 and how this impact will affect each of your investment categories and if FAS157 is going to be put in place from Q1 '08?

Good afternoon, Arnaud.

This is Kendra.

With respect to FAS 157 and FAS 159, that was in effect for KPE in the investment partnership as of January 1, 2008, so it will be reflected in our first quarter financial statement.

As you know, we do value our current investments in accordance with fair value as they are reflected in our December 31st financial statement and we will be including the incremental disclosure required by FAS 157 and FAS 159, again in those first quarter financial statements, which will break out the distinction between the three levels of valuations.

And we do believe that the majority of our assets will fall into that level 3, which will comprise the private equity portfolio companies.

We haven't completed our analysis of what the impact of FAS 157 and FAS 159 will be to the valuations themselves.

However, again, I would just emphasize that we already do have a very robust valuation process that includes the participation of Duff & Phelps, independent third party firm, as well as our audit by Deloitte & Touche.

And while we probably will make some internal adjustments to our procedures based on the new FASBs, I think that our procedures are very fulsome currently.

Thank you.

Thank you.

The next question comes from Ms.

Louisa Symington.

Please state your company name followed by your questions.

Hi.

It's Louisa Symington calling from ABN Amro.

Just a couple of questions, one about opportunistic investments.

Can you give a little more color about the kinds of opportunities you've been allocating to within the strategy and also the kinds of opportunities you've been selling out of?

Scott, would you like to address that?

Sure.

This is Scott Nuttall.

As you can see, Louisa, the preponderance of the activity, especially subsequent to the end of the year, has actually been selling as opposed to buying.

So I'd say it's been more on the liquidation side than in the accumulation side.

The only positions that have been accumulated, there've been some small ones where situations that we'd identified as interesting long term prospects where we'd started to build a position late last year and we're just continuing in that endeavor.

But think of them as opportunities that have been identified out of the private equity work and our work on industry themes that we thought were interesting over the next several years.

And when you say long term, what kid of time horizon are we looking at?

Next one to two years.

Okay.

And my second question, you mentioned another KKR vehicle buying up shares in KPE and can you just disclose which vehicle that is?

Sure.

Again, as we mentioned, there is actually a set of vehicles that have been created to be able to buy into KPE by KKR as an investment manager.

It is not a traditional private equity fund because those funds are not able to acquire this type of investment in the public market.

However, it is a vehicle that does have a combination of investments within it, predominantly in the public market.

And we did disclose within our December 31st -- or we will be disclosing in our December 31st financial statements that that vehicle has acquired as of February 22nd $4.7 million -- I'm sorry, 4.7 million units of KPE.

But, okay, is that a vehicle that KPE has actually invested in itself?

No, it's not.

No, okay.

Thank you.

Thank you.

Thank you.

The next question comes from Mr.

Ian Scouller.

Please state your company name followed by your question.

Good afternoon.

It's Ian Scouller at UBS.

You talked about the $880 million outstanding commitment that'll be drawn down on a three to four year view.

What's the policy on making new commitments, particularly given how difficult it is at the moment to get cash back in from [unaccrued] realizations?

Well, I think a couple of things and then I'll open it up to my colleagues.

Ian, this is Kendra, obviously.

With respect to new commitments, again, the thesis behind KPE initially was always that it would invest in all of KKR's private equity portfolio companies, as well as have exposure to other companies that benefited from KKR's expertise.

So I do expect that we will make new commitments to any KKR private equity fund.

With respect to, again though, our current liquidity, I do think that in terms of how long it will take to draw these commitments down that we are in a comfortable position and continuing to invest in the new private equity funds will just continue to diversify and give us exposure to -- again to a more balanced portfolio.

And I'm sorry, Ian, what was the second part of your question again?

Well, it's just, particularly given how difficult realization markets are at the moment and if that goes on for a long time in --

Oh, yes.

Thank you.

Well, one thing I would point out, though, is that our portfolio, the majority of our portfolio is relatively immature.

We do have a large portion of our investment in the '06 and '07 years but we do have some secondary fund interest that we bought in the European and Millennium fund.

And in fact, between dividends and the sales that I mentioned, actually during 2007 we had $175 million of capital returned from our private equity fund investments into KPE.

So obviously there is still activity going on and I do think as the portfolio continues to mature you will obviously see that increase.

This is Henry Kravis.

I just would add one thing there to keep in mind that even though the market for private equity purchases is obviously much more restricted than it had been in the last several years, there are still a number of corporate buyers that are quite interested in making strategic acquisitions.

And so that also becomes a source of potential liquidity down the road for some of our portfolio companies.

And, Ian, it's Paul Raether.

The other -- I mean it's publicly disclosed that KKR is out raising its third European fund and we will be making our first investment out of that new fund when we close the Northgate transaction in the next several weeks.

So we will be making a commitment on behalf of KPE to become a limited partner in the European 3 fund.

Okay.

Could you give us any indication as to what sort of magnitude that might be?

No.

We haven't really decided that yet.

I think it will be -- in answer to that question, before we've said we haven't made the decision at this point.

We'll make it in the next -- in the next several weeks and we'll disclose it in the -- when we disclose our first quarter results.

Yes.

And it will obviously be based on the liquidity and diversification requirements of KPE at the point in time the commitment is made.

Thank you.

Thank you.

The next question comes from [Mr.

Paul Tunison].

Please go ahead, sir, with your question.

Hi.

Thank you.

Paul Tunison from Alliance Capital.

I have a twofold question.

First, as you -- I think you mentioned that the fund has made an investment in a senior bank loan.

I'm curious if you can comment about that investment and also tell us if that's a loan issued by one of your portfolio companies?

And the second part of the question is if you could comment on your co-investment in Dollar General and how that's progressing?

Sure.

This is Kendra.

I will take the first part and then turn it over with respect to Dollar General.

Our fixed income investment is actually a $140 million investment at cost, which was valued at $129 million as of December 31st.

As you noted, it is a senior bank loan.

And in this case it is not an investment in one of KKR's portfolio companies.

But it is an investment and an example of how we're able to leverage again the information and expertise we have internally because it is a bank loan in a company that we did look at in the private equity process.

We did not end up becoming the sponsor for that particular buyout but we did like the bank debt and decided to participate on the credit side.

And with that I'll turn it over for Dollar General.

Yes, Paul, this is Paul Raether.

On Dollar General, actually the company is doing very nicely.

When we agreed to buy the company in March of 2007, latest 12 months EBITDA was $640 million.

And two years prior to that, the company had actually earned $750 million in EBITDA but they sort of lost their way from a retail operational point of view.

As soon as we agreed to buy the business and take it private, the board allowed us to put three people from our Capstone unit, which is our in-house operating group, into Dollar General so that when we closed the transaction in July of 2007 we'd already had the KKR deal team and some of our Capstone people inside the company working with management to find ways to improve the operations.

So we closed in early July.

We had a little over $300 million borrowed on the revolver as part of the financing to close the transaction.

When we reported -- when the company reported its October 31 quarter financials, we had already paid off the $300 million that had been borrowed under the revolver and had over $100 million of cash on the balance sheet.

And basically that came from liquidating $700 million plus of inventory that was really stuffed in the back rooms of the over 8,000 stores that we have at the company.

So we were able to get that out of the back rooms, convert it into cash and use the cash to pay down debt.

Also, when we reported those earnings in October 31, latest 12 months EBITDA was up to $680 million.

We obviously just finished -- no, a month ago we finished the fiscal year, which ends January 31.

We have not -- we have not reported the fourth quarter earnings for Dollar General yet, but the trend of strong performance and improving performance continued in the fourth quarter.

So operationally, the company's doing very well.

We've paid down a significant amount of debt.

In January we announced that we hired a new CEO who is actually someone we've known for a long time.

This gentleman spent 30 years of his career at Safeway, ended up as the chief merchandising and marketing officer at Safeway, became the COO of Long's Drugstore in California and then chairman and CEO at Duane Reade.

So we've got a lot of confidence in him and his abilities.

He's now been at the company for roughly 45 days and his first impressions are that not only are we on the right track and doing a lot of the right things, that there are still significant operational opportunities to improve the business in front of us.

Great.

Thank you very much.

Thank you.

The next question comes from Mr.

Chris Brown.

Please state your company name followed by your question.

Yes, it's Chris Brown from Cazenove here.

Just a quick reminder, if you could, on the valuation policy with respect to the holdings that are currently prepared to be held at cost.

Looking at the co-investments, about half of them are still [held at] cost.

And I just wondered whether you could remind us how long they're going to stay on that basis or whether you've looked at the valuations at the Q4 with respect to market comparables?

Good afternoon, Chris.

This is Kendra.

And we definitely do not have a policy whereby we hold things at cost for a specified period of time.

All of the investments are valued at fair value every reporting period.

However, some of these transactions are very recent and so we still happen to believe that the cost we paid for them is still the appropriate valuation for those companies.

Paul, did you want to add anything to that?

Well, the only thing I was going to add, Chris, is what Henry said earlier in his remarks.

All of the company valuations are reviewed by Dull & Phelps and then they're also reviewed by Deloitte & Touche, our auditors.

So there's two levels of scrutiny of those valuations, which are originally done by KKR.

But it is a lengthy iterative process between the KKR deal teams and Duff & Phelps and then the Deloitte people in terms of their special valuations unit.

Okay, so the bottom line is you're very comfortable with those valuations on those ones still held at cost.

Yes.

Okay.

And just a secondary question.

For how many of the companies that you value do you have full '07 financials?

Obviously taking into account sort of EBITDA growth, how recently is that?

I don't know the exact number.

We have several companies that have a January 31 fiscal year, we have several that have a March 31 fiscal year, so there are some that we do not have financials for a complete most recent fiscal year.

And then there are several companies that have December 31 year-end information but they have not provided that to the public market yet.

So while we would have that internally at KKR and would share it with our colleagues at KPE, we have not made that financial information available yet because the companies, the underlying companies have not reported it.

As I said earlier, Capmark, as an example, has not reported its earnings nor has EFH.

So we have several -- we have a number of companies that will be reporting in the next several weeks.

Just to be --

Excuse me.

This is Bill Janetschek.

Just to give you a little clarification on that question, with regard to the valuation process that we have here, all the information that was used as of December 31st is based on the last 12-month activity of each one of these private portfolio companies.

So although they might have different fiscal year-ends, the information that we have is based upon 2007 activity for each one of the companies.

I see.

So effectively the most recent four quarters for each company.

Correct.

Correct.

Okay, thanks.

Raquel, this is Kate jumping back in.

By my watch we have about seven minutes left.

That's correct, madam.

Would you like me to remind all participants have to poll for a question?

Sure.

(OPERATOR INSTRUCTIONS)

Thank you, madam.

We seem to have no further questions.

Please continue.

All right.

Thank you very much, Operator, and thank you, everyone, for your questions and your participation.

We appreciate your support for KPE and we look forward to continuing our dialog with you in the weeks and months ahead.

Thank you all again.

Thank you.

Ladies and gentlemen, this concludes today's KKR Private Equity Investors, L.P.

fourth quarter 2007 financial results.

Thank you for participating.

You may now disconnect.

Company Disclaimer - This transcript has not been verified for accuracy or completeness by the applicable company.