KKR & Co Inc (KKR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to today's KKR Private Equity Investment LP first quarter 2009 financial results conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question and answer session.

Instructions will be provided at that time for you to queue up for questions.

As a reminder, today's conference is being recorded.

And now I'd like to turn the conference over to Kate de Mul, Investor Relations Manager for KKR.

Please go ahead.

Thank you, Sarah.

Welcome, everyone, to KKR Private Equity Investors first quarter conference call to discuss the results for the period ended March 31st, 2009.

I am Kate de Mul, the Investor Relations Manager for KPE.

Before we begin, we would like to remind everyone that the following prepared remarks contain forward-looking statements regarding future events and the future performance of KPE.

And representatives from KPE 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 you to the KPE website, www.kkrprivateequityinvestors.com, for important information, including a press release and financial reports detailing KPE's financial results for the quarter ended March 31st, 2009.

KPE does not assume any obligation to revise any forward-looking remarks that may be made in today's release or call.

Today's call is scheduled to conclude within an hour.

On today's call, George Roberts will discuss KPE in light of market conditions.

Following George's remarks, Dean Nelson will review KPE's investments that had changing marks for the first quarter.

Dean is a member of the Portfolio Management Committee and works closely with Paul Raether, who has given the investment update on past calls.

He is also the head of KKR Capstone.

Following Dean's remarks, KPE's CFO Kendra Decious will review KPE's financial performance for the quarter ended March 31st, 2009.

After Kendra's remarks, we will answer your questions.

Scott Nuttall, KKR member, KKR's CFO Bill Janetschek, and General Counsel David Sorkin are also here to answer your questions.

With that, I will turn the call over to George Roberts.

Thank you, Kate.

Good morning, good afternoon, and good evening.

Thank you all for joining us.

I'm George Roberts, Co-Chairman of KPE, General Partner, and Co-Founder of KKR.

Global equity markets continue to struggle in the first quarter '09.

The MSCI World Index fell 12.5% during the quarter, while the S&P Index fell 11.7%.

The S&P 500 Financials Sector fell 29.5%, which was the weakest performance of all ten S&P 500 sectors.

KPE's NAV in contrast to all those benchmark results rose 0.3% during the first quarter to $12.82 per unit at March 31st, 2009, versus $12.78 per unit at December 31st, 2008.

We believe that given the macroeconomic and financial market challenges, our performance relative to leading market benchmarks during the first quarter is attributable to the defensive position of many of the companies in our portfolio, our relentless focus on operational improvement, cost reduction, and efficiency initiatives, which we expanded both last year and during the first quarter.

In addition, our progress in ensuring that all of our companies have appropriate capital structures, our adherence to strict procedures for actively monitoring our investments, and our work in helping our companies adapt to the changing global regulatory environment.

Importantly, we maintained our rigorous approach to valuations and estimating the value of our portfolio companies during the first quarter.

Dean will discuss this at greater length.

But we believe that the areas of focus I just mentioned contributed to the solid performance of our portfolio relative to the market benchmarks.

We value our portfolio using FASB 157, which addresses fair value measurements and utilizes methodologies to value private companies which are directly tied to market performance and market volatility.

Our approach to owning and running private companies has been developed over 33 years of investing across all cycles.

Many of the professionals overseeing our portfolio today have been at KKR for decades, successfully returning value to investors during challenging periods in the early '80s, early '90s, and in 2001.

We've deployed capital and performed above leading benchmarks through recessions, credit curtailments, banking crisis, and bear markets.

These experiences provide important lessons about when to invest, how best to help our companies, and optimal times for exit that are indispensable to us today.

Our time-tested approach was especially critical during the first quarter in light of global macroeconomics and capital market conditions, which will remain and still remain very challenging.

As all of you are aware, the fourth quarter of 2008 and the first quarter of 2009 were two of the worst quarters of the last 100 years for both the US and the global economy.

We are prepared for conditions that could be rougher going forward before they become easier with declines in measures of unemployment, global trade, retail sales, capital expenditures, and industrial production supporting our cautious stance.

However, while we're preparing for the worst, we are seeing some signs of improvement.

Since the close of the first quarter, equity markets have rallied from the March lows.

And interbank funding markets appear to have stabilized.

Volatility has fallen.

Housing in some US markets is showing some signs of improvement.

New equity issuances have risen, both for follow-ons and for initial public offerings.

Although global credit markets remain largely dysfunctional, new debt issuances are picking up in selected markets.

And high-yield issuance is rising.

But the fourth quarter of 2008 and the first quarter of 2009 saw significant inventory de-stocking, which should create a backdrop for more vigorous recovery when demand returns.

Slowly, it appears that investors are reemerging to take risks, despite the extremely challenging economic financial market environment.

Seems to us the rate of decline in the economy has declined.

In other words, while we do not see growth yet, we are seeing some positive signs that we're beginning the troughing process.

Despite this, we remain prudently on guard in terms of the operations of our current portfolio companies, given the difficult environment.

As was the case throughout 2008, the work of our Company management teams, industry teams, KKR Capstone team, and capital markets team to improve Company operations, address potential refinancing risk, and proactively optimize capital structures were especially critical during the first quarter of 2009 and through the present day.

This work allows us to lower debt-to-earnings ratios and our companies to cut costs, control cash flows, and opportunistically access the capital markets.

Because of this, our valuations in aggregate during the first quarter were down less than the market was down.

And KPE's NAV ended the first quarter above the prior quarter.

I'd like to walk you through some examples of work we have done in this regard year to date at our portfolio companies to bring some of these areas in focus.

The first example concerns HCA and getting ahead of refinancing needs.

In mid April, HCA priced a ten-year $1.5 billion first lien note yielding 9%.

The offering had been $500 million, but due to demand was upsized to $1.5 billion.

Proceeds from the offering will be used to repay term loans.

The transaction was part of an ongoing refinancing plan that the KKR Industry team and KKR capital markets team developed with HCA management to extend HCA's maturities and diversify its financing sources.

Another example of our focus on balance sheet management concerns Nielson.

On January 21st, 2009, Nielson launched and priced a bond offering, representing a $330 million senior unsecured note with a five-year maturity and a 14.5% effective yield.

On April 24th, 2009, Nielson launched and priced another bond offering, representing a $500 million senior unsecured note with a seven-year maturity and a 13.25% effective yield.

As was the case with the HCA offering, the Nielson offering was upsized from initial $300 million and faced a strong demand.

Nielson will use the proceeds from these offerings to retire portions of its euro and sterling notes due in 2010 as well as general corporate purposes.

NXP--the global semiconductor market remains extremely challenging to say the least.

Because of this, top line performance has been weak for NXP and its peer group.

Last year, anticipating more deteriorating conditions on the horizon and well before any other competitor, NXP began to take steps to ensure that its cost base was in line with market reality and took steps to improve the organization and become more customer focused.

On September 12th, 2008, the Company announced a global redesign program, including a reduction in the manufacturing base, central resource and development, and support functions.

Program was targeted to result annualized savings of $550 million.

As part of the first quarter 2009 financial report on April 29th, 2009, NXP announced that significant progress has been made on the execution of the redesign program such that it was forecast to achieve cost savings higher than the $550 million initially projected with significantly lower restructuring costs and implemented at a quicker speed.

In other words, we're going to get more savings and it's going to cost us less cash to get those savings.

Another example, Biomet -- we closed the transaction in September 2007.

Since the closing of the transaction through the third quarter of Biomet's fiscal 2009, we have delevered materially at Biomet.

Performance at Biomet continues to be strong.

On its April 14th conference call, Biomet reported solid growth of both revenue and EBITDA.

Biomet continues to perform in line with our investment thesis and expectations.

There are more examples of this type of activity throughout our portfolio.

And we look forward to sharing them with you in the months ahead.

Our companies are also taking advantage of the dislocation to increase market share.

Laureate, which we hold on the 2006 fund, is a great example of the power of partnering with a world-class and proven management team to address real needs and issues, in this case the rapidly growing global demand for quality education.

Since we closed the Laureate transaction in August of 2007, adjusted EBITDA has increased over that time period through both organic and acquisition-based enrollment growth.

And the Company is in an even stronger position to provide post secondary education to nearly 500,000 students around the world.

We're also seeing attractive opportunities to invest in new transactions.

On May 7th, we announced the $1.8 billion purchase of Oriental Brewery, the second largest brewery in South Korea and our first South Korean investment.

We believe South Korea is a dynamic market with untapped potential and we look forward to contributing to growth of the economy there.

Oriental Brewery possesses traits which we look for in a successful private equity transaction, including solid base business with high margins and strong free cash flow, strong management with the significant experience at multinational firms, and appealing growth prospects.

We will hold Oriental Brewery in our Asian fund, which KPE is invested in.

Evaluating and executing the Oriental Brewery transaction involved many in-house KKR constituencies around the world, including our US and European consumer products private equity industry teams.

Our KKR Capstone team, which was involved from an early stage with due diligence, our KKR capital markets, which raised committed financing from a consortium of international banks and coordinated equity and debt syndication to Korean institutions, as well as our global public affairs team, which assisted in stakeholder and regulatory management and communications, and our legal team, which advised with the structuring of the transaction and governance issues.

From the outset of this transaction, KKR's approach was to focus on offering differentiated certainty and speed of execution to the seller rather than competing solely on valuation.

We were able to leverage our strong local and global relationships with international banks and were the only bidder to obtain certain funds debt financing.

Let me repeat that.

We were the only bidder to obtain certain funds debt financing.

Ultimately, we won the limited auction for Oriental Brewery, with the lowest price of the final three bids on a cash-consideration basis.

Based on KKR's credibility and the certainty of KKR's financing, the seller strongly preferred KKR as a counterparty despite the meaningful discount to other bidders.

We continue to carefully monitor the global investment opportunities for new investments.

In a world where anxiety reigns and capital is no longer a commodity, we believe there will be attractive investments to make across asset classes and that we're in a good position to utilize the full resources of our firm to make them.

We bring many capabilities to bear on our investing process with dedicated in-house experts and strategy, financial management, information technology, procurement, human resources, debt and equity capital markets, stakeholder engagement, and lean sigma available to our portfolio companies.

All of these capabilities strengthen our private equity efforts by deepening our ability to execute transactions and to add value to our companies once we invest in them.

We also yield unparalleled insight in the current market dynamics, enabling us to better understand and capitalize on market conditions.

Before I turn the call over to Dean, I will give you an update on the proposed transaction with KKR.

Last year in July, KKR and KPE announced their agreement for KKR to acquire all of the assets and liabilities of KPE.

The financial world markets have, as you are well aware, changed dramatically since last July.

On April 24th, 2009, KKR and KPE announced the date by which the transaction is to be completed before either party may terminate subject to certain conditions will be August 31st, 2009.

KKR and the independent directors of KPE continue to evaluate the advisability of the transaction.

And we have no further comment on the transaction at this time.

Thank you all for your attention.

I will now turn this over to our partner Dean Nelson, who is also the head of KKR Capstone.

Thanks, George.

I'll discuss the investments that KPE owns as co-investments that experienced changing marks during the first quarter ended March 31st, 2009.

Co-investments which were marked up include Dollar General and HCA.

Co-investments which were marked down include Capmark, Energy Future Holdings, KION, and ProSieben.

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

Before I discuss each company, I'd like to remind everyone on the call that our valuation methodology hasn't changed.

Our companies undergo a quarterly valuation process which we believe is rigorous and realistic.

We take great care at arriving at our valuations.

And a third-party firm is involved with our valuation process.

We value our portfolio companies under US generally accepted accounting principles.

And we adhere to Financial Accounting Standard 157, which addresses fair market fair value measurements.

FAS 157 mandates the use of comparable company valuation analysis, discounted cash flow valuation methodologies, and other methodologies to value private companies on a quarterly basis.

Because these methodologies are tied to the market, FAS 157 contributes to greater quarterly swings and valuations and stronger ties to market volatility than have historically been the case.

We believe that the areas of focus George mentioned, including the defensive position of many of the companies in our portfolio, our operational improvement, cost reduction, and efficiency initiatives, our work in ensuring that our companies have appropriate capital structures, our active monitoring of our investments, and our work in helping our companies adapt to the changing global regulatory environment greatly mitigated the negative effects of FAS 157 during the quarter.

Here are the details of the changing marks by company.

First, Dollar General -- we marked our investment in Dollar General up from 1.1 times cost as of December 31st, 2008, to 1.3 times cost as of March 31st.

The aggregate fair value of the investment partnership's investment in Dollar General as of March 31st was $398 million, or 15.1% of the investment partnership's net assets.

The increase in the Dollar General valuation was primarily due to strong performance in terms of revenue and EBITDA growth, which was driven by strong same-store sales growth and traction on key operating initiatives along with an increase in comparable company valuations due to the greater interest in value retailers in this macroeconomic environment.

On March 24th, Dollar General reported its complete fiscal 2008 results.

For the 2008 fiscal year, Dollar General reported total sales of $10.46 billion, an increase of 10.1% compared to the 2007 fiscal year.

Same-store sales for the 2008 fiscal year increased 9%.

And EBITDA grew approximately 33.7% to $914 million.

Year to date in fiscal 2009, the trends continue to be strong, led by strong sales and margin rate improvements, as well as continued progress on shrink and other cost reduction initiatives.

Dollar General's private label penetration continues to rise.

And its refreshed, better-organized stores are achieving higher store standard ratings.

In early April, Dollar General announced plans to create up to 4,000 new jobs in 2009 to support the Company's plan to open 450 new stores.

The new jobs should include both corporate and retail positions in 35 states.

Next, HCA--we marked our investment in HCA up from 0.8 times cost as of December 31st, 2008, to original cost as of March 31st.

The aggregate fair value of the investment partnership's investment in HCA as of March 31st was $261 million, or 9.9% of the investment partnership's net assets.

The increase in the HCA valuation is due primarily to continued top line growth and solid performance driven by tight overhead expense management as well as slight increases in the trading valuations of comparable companies.

On April 27th, HCA reported first quarter 2009 fiscal results for the period ended March 31st, 2009.

Revenues increased 4.3% to $7.4 billion.

And adjusted EBITDA increased 23.4% to $1.5 billion.

Same-facility adjusted equivalent admissions increased 1.9% during the quarter.

The provision for doubtful accounts remains an ongoing issue for the Company due to continued high levels of uninsured patients and collection challenges in a weak economy.

We continue to remain focused on sharpening working capital management and reducing overhead expenses at HCA.

Moving onto Capmark, we marked our investment in Capmark down from 0.1 times cost as of December 31st, 2008, to zero as of March 31st.

Continued negative developments in the financial and capital markets and general weakness in commercial real estate markets have constrained Capmark's liquidity and caused the Company to incur significant losses.

These losses have put pressure on the Company's ability to maintain compliance with its leverage ratio covenant in its senior credit facilities.

Over the past several months, we have worked with Capmark's management team and its lenders to extend its bridge loan and to waive certain covenants on its bank debt.

Although Capmark received an extension, we believe it is likely that the current sponsor equity ownership could be completely eliminated.

Moving onto Energy Future Holdings, we marked our investment in Energy Future Holdings down from 0.7 times cost as of December 31st, 2008, to 0.5 times cost as of March 31st.

The aggregate fair value of the investment partnership's investment in Energy Future Holdings as of March 31st was $183 million, or 7% of the investment partnership's net assets.

The decrease in the Energy Future Holdings valuation is due primarily to a decrease in the long-term outlook for power prices in Texas driven in part by a reduction in natural gas prices along with lower expected demand for power as a result of new generation additions and slower economic growth.

In addition, the trading multiples of comparable companies have come down.

On May 1st, 2009, EFH reported consolidate financial results for the first quarter ending March 31st.

First quarter adjusted EBITDA was slightly behind the prior year with Texas Competitive Electric Holdings Company being on plan, while volume-related weaknesses led to an EBITDA decrease at Encore.

EFH remains on track with its new plant construction program at Luminant, which continues to be on time and on budget.

KION -- we marked our investment in KION down from 0.2 times cost as of December 31st, 2008, to 0.1 times cost as of March 31st.

The aggregate fair value of the investment partnership's investment in KION as of March 31st was $13.4 million, or 0.5% of the investment partnership's net assets.

The decrease in the KION valuation is due primarily to continued pressure on the Company's midterm outlook as a result of the deteriorating macroeconomic environment and resulting global industrial slowdown.

KION announced 2008 results on April 28th, 2009.

Despite significant weakening in the market in the second half of 2008, KION maintained its share of the global industrial truck and material handling technology and equipment market at 17%.

While new orders fell 4.2% for the year, net revenue increased by 5.6% to EUR4.6 billion.

And EBIT increased by 5.9% to EUR358 million.

During 2008, KION also reduced net debt moderately to EUR2.303 billion from EUR2.369 billion in 2007.

On April 29th, 2009, KION announced the reorganization of its senior management team.

The aim of this reorganization was to create totally separate focused management teams for a holding company and the brand companies to fully align the group's management bodies with its corporate strategy and also to significantly reinforce customer orientation.

At the same time, this move ensured that we can focus fully on reaping synergies throughout KION and exploiting the strategic opportunities available during the current crisis.

As part of the reorganization, Gordon Riske, previously CEO of both KION Group and Linde Material Handling announced that he would focus on running the KION Group, while Theodore Maurer, formerly Sales Director for the Linde brand, would become CEO of Linde Material Handling on May 1st.

We believe that these changes will benefit KION and continue to position it well to adapt to the market downturn.

Finally, ProSieben--we marked our investment on ProSieben down on both the euro and US dollar basis from 0.1 times cost as of December 31st, 2008, to less than 0.1 times cost as of March 31st.

The aggregate fair value of our investment partnership's investment in ProSieben as of March 31st was $9 million, or 0.3% of the investment partnership's net asset.

The decrease in ProSieben's valuation is primarily due to continued decline in the German international advertising markets caused by the current financial and economic crisis as well as being due to the continued multiple compression across the European free-to-air broadcasting sector.

ProSieben announced its first quarter 2009 results yesterday.

While sales continue to be weak due to the advertising recession, EBITDA rose slightly due to substantial cost saving measures and regained net advertising market share in Germany, which was lost in 2008 as a result of a failed sales model.

Thank you to all.

Now I'll turn the call over to Kendra to review KPE's financial results.

Thank you, Dean.

I will review KPE's performance for the quarter ended March 31st, 2009.

Then we will open the line for questions.

As of March 31st, 2009, KPE's net asset value was $2.626 billion.

And our NAV per unit was $12.82.

This represented a slight or 0.3 of a percentage point increase from the NAV per unit of $12.78 as of March 31st, 2008.

While there were certain specific individual company valuation changes during the quarter, the significant ones of which Dean has discussed, on an overall basis, the net impact to NAV from the first quarter valuation process for the private equity portfolio was an increase of approximately $5 million.

During the quarter, there were two asset sale transactions of note.

First, certain interests in five co-investments representing $211 million in fair value as of March 31st were sold for an aggregate purchase price of $200 million in cash, representing a 5% weighted average discount to net asset value.

And second, KPE's remaining opportunistic public equity and fixed income positions were completely liquidated, which raised our liquidity levels as well as reduced our risk profile by lowering our direct exposure to public market dynamics and boosting the percentage of our assets invested in KKR Private Equity transactions.

KPE may continue to participate in these kinds of investments from time to time going forward.

Please also refer to the financial information in KPE's first quarter 2009 earnings press release and 2009 interim financial report, both available on KPE's website, for further descriptions of the changes to NAV during the quarter.

Now I'll discuss the general composition of our investment portfolio held by the investment partnership, which totaled $2.760 billion net of related financing as of March 31st, 2009.

These investments consisted of private equity fund investments of $1.163 billion in six KKR private equity funds, co-investments of $1.220 billion in 13 companies within these funds, negotiated equity investments of $318 million, which included $175 million net of related financing of Sun Microsystems notes, and an investment in the KKR Strategic Capital Institutional Fund, which totaled $59 million.

With respect to the negotiated equity investments in Sun Microsystems, on April 20th, 2009, Sun and Oracle Corporate announced that they entered into a definitive agreement where Oracle will acquire Sun common stock for $9.50 per share in cash.

The terms of the investment partnership's senior convertible notes investment in Sun provides that the investment partnership has the right to require Sun to purchase the notes at par upon the consummation of a fundamental change of Sun, which the investment partnership believes includes the acquisition of Sun by Oracle.

As of March 31st, we had marked the value of the Sun investment to $175 million net of $350 million of financing using fair value inputs at quarter end.

If the transaction as contemplated closes, from an NAV perspective, we would recover our original cost, resulting in NAV accretion of approximately $0.85 per unit.

On a cash basis, we would net approximately $300 million in proceeds after settling the related financing plus accrued interest.

There can be no assurance whether or when the pending acquisition of Sun will be consummated or whether or when the notes will actually be repurchased.

Please note that we are not able to have any further comment on the pending transaction between Sun and Oracle.

As of March 31st, 2009, the investment partnership had a cash balance of $638 million and had drawn $926 million of its $1 billion five-year senior secured credit facility established on June 11th, 2007.

Subsequent to March 31st, the investment partnership received $200 million from the previously mentioned co-investment sale.

Therefore, on a pro forma basis, the investment partnership's cash balance increased to $838 million.

The investment partnership's availability for further borrowings under the credit facility as of May 14th was $24 million.

We expect to maintain most of this cash in the near term in bank accounts and money market funds to maintain the highest level of liquidity possible during these uncertain times.

Absent a change in the financial and economic markets, we expect to apply most of our cash to fund our capital commitments to the KKR Private Equity Fund and for operating expenses and other short-term working capital needs.

As of May 14th, the investment partnership has remaining undrawn capital commitments to KKR's Private Equity Fund of approximately $958 million.

These undrawn capital commitments are typically drawn over a multi-year time horizon because the largest use of capital commitments by dollar amount is to fund KKR's acquisitions and equity investments.

Therefore, we do not believe that the KKR funds will call the entire remaining undrawn capital commitments immediately.

Taking into account our portfolio and estimates of future cash needs, we believe that our sources of liquidity are currently sufficient to honor our commitments for at least the next year.

On May 6th, 2009, the investment partnership submitted subscription documents for a limited partner interest in the KKR Annex Fund representing a capital commitment of $17 million, which if accepted would reduce its commitment to the KKR European Fund III by the same amount.

Therefore, there would be no net increase to KPE's total commitments as a result of subscribing to the annex fund.

There can be no assurance whether or when the annex fund will be closed and therefore whether or when our subscription will be accepted.

Please remember that our remarks have included forecasts and estimates that definitely constitute forward-looking statements.

And actual results may be different due to changing circumstances.

Thank you all very much for your attention.

Sarah, we can now open the line for questions.

Thank you.

(Operator Instructions) And our first question will come from Michael Kim with Sandler O'Neill.

Hey, guys.

Good afternoon, everyone.

Just a few questions if I may--first, I know you touched on this a bit earlier.

But I'm just wondering how you're thinking about the environment for private equity firms more generally.

And the broader markets have obviously rebounded here.

And we've seen a competitor of yours recently announcing plans for a follow-on offering.

So just wondering if you think the market is maybe more open to deals involving private equity firms today versus where we stood a few months ago.

Well, this is George.

And thanks for your question.

Look, this is a very cyclical form of investing.

I've been doing this now for 40 years and been through about six different periods.

There's always some good times and some bad times.

And I think we've just come through and are still probably in a very, very tough period of time.

The real question to ask is when people feel the economy is going to improve because so much of the evaluations that we have and how we go about them depends upon just the fundamentals of how the businesses that we have investments in perform.

And as long as the performance is there and continues to get better, which we hope that will be the case, eventually the markets are going to recognize where the values are.

And people will start taking a little bit more risk and looking for a little bit higher rates of return.

So this will evolve I believe over some period of time.

Again, I think it's going to be tied to how the economy really responds to everything that's taken place and when it does.

There's a massive pent-up demand of capital out there to find good places to invest, not just private equity transactions but banks and many other different kind of companies, whether it be MGM or Ford Motor or you name it, are able to go to the markets today and get capital and especially if they can show investors that the capital that's going into the business is going to make the company even safer during these periods of time.

So I think we've got a ways to go.

And again, the deciding factor at the end of the day is going to be the economy and how businesses perform.

Okay.

And then maybe just a follow up on your comments on valuations--can you just give us any color, either qualitatively or quantitatively, on how much of your quarterly marks are based on public comps versus your own DCF work?

Tom, are you there?

I am.

In most cases, we use a 50-50 weighting between the valuations implied by a comparables analysis and that implied by the DCF.

We do deviate from that to a limited extent in certain situations.

But 50-50 is a good rule of thumb.

Okay.

And then finally, just maybe a question for Kendra, I know you talked a bit about this earlier.

But can you just give us a little bit more color on how you're currently thinking about liquidity now that it looks like you've got in excess of $1 billion of cash pro forma the Sun deal?

So are you saying you're comfortable with where you stand today, even if we see a step up in the pace of capital calls going forward?

Yes, actually, that is what I'm saying, Michael.

As you pointed out, we currently have I think I said about $838 million pro forma with the co-investment sales of cash.

And you're right, we'd add another $300 million, maybe a little bit more, if the Sun and Oracle deal closes and we are repaid on those notes.

And I think that in terms of our revolver, that matures out in year 2012.

So it's a combination of the amount of cash that we have currently plus the period of time that we think that our capital might be called.

I do feel very comfortable definitely in the short to midterm around our liquidity.

I would point out that of the funds that we're invested in, this year so far, the Oriental Brewery will be the first capital call that we're subject to for a new investment.

So again, I feel pretty comfortable with that.

Okay.

Thanks for taking all my questions.

Thanks, Michael.

(Operator Instructions) And our next question will come from Pierre van Mierlo with Independent Minds.

Good afternoon, gentlemen.

I have a question regarding the statement in the press release about the subscription to the KKR Annex Fund, $17.6 million.

What was exactly your plan so-called [particular] companies?

Pierre, we're having a little bit of trouble hearing you.

But I believe your question was around just sort of what a general description for the purpose of the annex fund is.

That's correct.

Okay.

George, would you like to --?

Well, do we have Bill or Scott?

Why don't you guys take that?

Sure.

Hi, Pierre.

It's Scott Nuttall speaking.

Hi.

The Annex Fund is basically a follow-on fund to our European II fund, which KPE had subscribed to.

So in effect, what we did is we're doing a rights offering in effect for an existing European KKR Private Equity Fund that KPE is an investor in.

And so the annex fund commitment is in effect KPE taking up its share of that rights offering, which will basically be used to invest further capital into companies that have already been invested in the European II fund.

So think of it as if there is a follow-on investment made into some of those companies, this is KPE protecting itself against dilution were those investments to be made by others.

It's relatively small amount of the capital, as we noted.

Yes.

Are there any plans for further annex funds or for increasing the size of this annex fund?

Is this money already earmarked for specific companies, portfolio companies that need to be recapitalized?

Are there other portfolio companies on the rise that need further recapitalization?

I think in terms of incremental plans for other annex funds, there are no current plans for additional annex funds.

In terms of upsizing this annex fund, not likely.

KPE's taken up its pro rata share.

We think this is likely to be the outcome.

If it moves, it'll move a relatively small amount.

And in terms of follow-on investment in other KKR companies, look, over time, that's entirely possible as we think about how best to position the companies for the future, given that the debt of some of the companies is trading at meaningful discounts.

Some of these companies may be making acquisitions.

And an additional equity investment may be appropriate to help fund those acquisitions, given how much valuations have come down.

So it's entirely possible there'll be additional investments made.

But as of now, there are no plans for additional annex funds in order to do that.

Okay.

And then my last question is regarding the Oriental Brewery transaction.

Has it already been determined what part of the equity financing for the year will be coming from KPE?

Yes, it has.

And we'll get those results finally when we get the deal done.

But it'll be the pro rata share of KPE's investment through our Asian fund.

And, Scott, you have that number, what KPE committed to the --.

Yes.

We committed a total of [$285 million] (corrected by company after the call) to the Asian fund.

And I believe that, as you mentioned, our commitment would only be our pro rata piece, which I think is going to be in the range of call it $20 million to $30 million, George.

It'll probably be between $30 million and $40 million would be my guess.

Okay.

Sorry, I have another question regarding two portfolio companies, PagesJaunes and Legrand.

This is the question I had asked earlier, but your representative was unable to tell me.

I'm looking for the debt levels in the intermediate holding company for PagesJaunes and as well for Legrand.

Is that something you would be able to disclose maybe in the conference call?

No, I think that's--I think if you look in the public filings you'll find that information.

We don't have it at the tip of our tongue here.

Okay.

Well, it's not in the (inaudible) later.

Sorry, Pierre, we're having a hard time hearing you.

Okay.

Thanks.

Thank you.

(Operator Instructions) We'll hear from Mark Sunderhuse with Red Rocks Capital.

Hi.

First of all, thank you for the more granular detail on a company basis.

And then can you give a little bit of color generically about how many banks were in the syndicate on Oriental Brewery and kind of what the rate in the ballpark might be relative to LIBOR?

Well, there're probably about six or seven international banks in that range.

And the range to LIBOR was probably in the range of 400 to 500 over.

All right.

Thank you.

And then two other quick questions--last quarter, you were kind enough to deliver a rough metric on how many companies were performing in line with your internal expectations as a percentage.

Is there any insight that you could give us if you're still in that range of performance as it relates to metrics of companies at plan, below plan, or above plan?

I would tell you that I think we're still within that range.

Great.

Thank you.

And then the last question--actually, two more quick ones, which would be--as you answered a question earlier on call it roughly 50-50 on DCF to public comp, when you look at that and call it days gone by before the application of FASB 157 or 115 [and on impaired side], do you see yourselves looking at some of the new FASB applications that have recently been preliminary applied and actively applied by particularly banks and financial institutions and rethinking your valuation outlook going forward so people don't get caught in the trap of too much point in time on your valuations going forward?

Mark, this is Bill Janetschek.

With regard to how we've been valuing our private portfolio companies, we haven't changed our methodology since we started reporting KPE results three years ago.

So even though FAS 157 came online in the first quarter of 2008, we were actually ahead of the curve and had actually started valuing our portfolio companies both using a market approach and an income approach some six quarters before.

Okay.

With regard to all the noise that's going on with regard to the change in how FASB's going to be making big swings with regard to valuations or giving people the liberties to change the values, that really affects when you think about level 1, 2, and 3 --.

Right.

Investments in FAS 157.

That really gives you some liberties in level 2.

Okay.

Because most of our investments are level 3 investments, the impact to us on what FASB just passed this past quarter really has no effect on our valuation process.

All right.

Thank you.

And then the last question would be -- having a great appreciation with the work you've done with your existing portfolio companies and understanding being ahead of the curve in the value add there, when you assess the environment we're in right now, could you speak a little bit to deal flow, specifically in the larger buyout space what you're seeing in terms of rational pricing on an EBITDA basis or whatever metric you're applying and how much noise there really is there through deal processing versus a quality backdrop of opportunity?

This is George.

And thanks for the question.

Look, no Board of Directors today is going to raise their hand and say, boy, we think this is the optimum time to sell our company and maximum value, right?

They're just not going to do that.

So the opportunities that you have today are in one of two categories.

They're large companies, like InBev that have to sell because they have a $7 billion bridge loan.

And they're selling a number of assets, not just this.

Or they're people like Verizon which had to sell some Alltel assets, which they finally sold to AT&T because the Justice Department told them to do it.

That's category one.

The second category are companies that are good companies.

But they just have the wrong balance sheet or more importantly liquidity issues where they have to refinance things.

And that would be--an example of that would be the Springer company that Candover and I think 3i own that they're trying to raise some money to do.

So those are really the two categories that you have out there of good businesses that you want to own.

It's very, very hard today at today's depressed prices for boards to want to sell a business.

And on top of that, the financing markets are such that people are limited to the size of transaction you could really do in today's world as well.

So there's a lot of noise out there.

There's all these wonderful opportunities that are in the marketplace today.

But you've yet to see a consensual deal between a public company board that has no pressure to sell to anybody.

And I think that will continue for some time.

So we're focusing our energy and effort on companies that need some capital that we know these businesses and we can go in and making meaningful investment or maybe buy the whole company.

And there's several large businesses around the world that have to sell assets.

Great.

Appreciate all of your effort and answers to the questions.

Okay.

And that does conclude our question and answer session.

I'll turn the conference back over to George Roberts for any additional or closing remarks.

Okay.

Thank you, operator.

And thank you, everyone, for your participation.

We encourage you to reach out to us with any questions you might have regarding KPE's portfolio.

And thank you all for your attention.

Thank you.

That does conclude today's conference.

We thank you for your participation.