COMPANY

2008 Business Highlights

Two thousand eight was a year of severe dislocation and extraordinary challenge. It began with many predicting an economic slowdown and ended, as far fewer anticipated, with the economy mired in the worst financial contraction since the 1930s.

There were many ramifications of the year’s turmoil, including a sharp increase in unemployment, a widespread decline in asset prices, a fall in global industrial activity and the dismantling of institutions once thought to be indispensable to capital formation. Even more traumatic was the erosion of trust in financial institutions, in business and in capitalism itself. Capitalism relies on confidence: confidence that markets are efficient, that economic behavior is rational, that risk can be assessed and managed and, most importantly, that measures of value accurately represent actual underlying value. The events of 2008 undermined this confidence and, with it, many of the investment community’s deepest convictions. It will take the collective efforts of many organizations to restore the trust necessary for capitalism to flourish once again.

As of early 2009, the financial and economic outlook remains sobering. Industrial activity, consumer spending, the housing market and unemploy¬ment figures, together, indicate a long and protracted global slowdown. Global debt and equity markets con¬tinue to experience turbulence. While progress has been made by governments to stabilize markets, significant work remains to be done. Although the challenges are daunting, we remain confident that they will be overcome through the efforts of the public and private sectors working together. KKR is committed to helping craft solutions to the problems facing global markets in close cooperation with other institutions.

Unique, Integrated and Multifaceted Approach to Value Creation
As we have run and grown KKR since its founding in 1976, we have invested through many cycles. Some of these have been very challenging. Others have been less grueling. All of them have taught us that for our firm to create lasting value, we must be rigid enough to stick to what we know while being flexible enough to adapt to a changing future.

Our breadth of experience in successfully returning value to investors in all economic cycles is one of KKR’s important differentiators. Many of our professionals who achieved strong returns during challenging periods in the late 1970s, early 1980s, early 1990s and in 2001 remain at KKR today. Collectively, we have deployed capital through recessions, credit curtailments, banking crises and bear markets, helping KKR to consistently outperform the S&P 500 Index and other leading benchmarks. These experiences provide important lessons about when to invest, how best to help our companies and optimal times for exit that are indispensable to our investors and companies today. Over 33 years, KKR has created value for investors by having a deep understanding of the companies and industries in which we invest, selecting the right assets for long-term outperformance, focusing meticulously on operational improvement initiatives for our current invest¬ments, adhering to strict processes and procedures for monitoring our investments, working with our clients and partners to help them achieve their investment goals and being a trustworthy, dependable partner.

Throughout KKR’s existence, we have learned that challenging times yield interesting investment opportuni¬ties up and down companies’ capital structures. We are capitalizing on these opportunities to create value by carefully evolving our business to encompass asset classes and strategies contiguous to and synergistic with private equity, including infrastructure, fixed income, mezzanine and capital markets. We have also created value by consistently bringing the knowledge of our entire firm to bear on every investment decision that we make. Our executives possess tremendous insight into compa¬nies, industries, sectors, economies and business processes due to their experiences at KKR, as well as their experi¬ences prior to joining the firm. We share this insight with each other and it is a key part of our decision making.

Because we believe so firmly that any investment that we make benefits from the collective knowledge, insight and experience of all of our professionals across asset classes and around the world, we have built businesses that are completely integrated and have access to profes¬sionals across the entire firm. There are no silos at KKR. Our private equity and infrastructure professionals, our capital markets professionals and our credit and mezza¬nine professionals work seamlessly together, subject to appropriate information-sharing processes, to make the most informed investment decisions that we can. The world has changed over the past year and it is changing as we write. It will no longer be possible to invest success¬fully without this integration. Ours is a unique approach but we are confident that as we evolve our business, it will allow us to invest in a smarter and more nimble way that will benefit our clients and partners over the long term.

2008: A Year of Focus and Evolution
Our most urgent and focused priority in 2008 was active oversight and management of our current private equity portfolio. After 33 years, we understand that value creation is heavily dependent on the hard work that is done every day to make our portfolio companies successful. We are helping our companies to weather the current economic storm by managing cost structures, controlling cash flows, deleveraging, and, with the help of our capital markets team, opportunistically accessing the capital markets. As always, we are focused on growing EBITDA, generating cash and paying down debt across our portfolio. Many of our companies also took advantage of the market disloca-tion of 2008 to consolidate and grow market share, in many cases solidifying competitive advantages and leadership positions and making acquisitions.

Our KKR Capstone operational teams, credit team, capital markets team, global public affairs team, Senior Advisors and talent management team are critical to these efforts, and we significantly enhanced the resources available through all of these groups during 2008. We are now among the very few firms worldwide with the ability to have dedicated experts in strategy, financial manage¬ment, information technology, procurement, human resources, debt and equity capital markets, regulatory analysis and stakeholder engagement and Lean Sigma, to name several capabilities, available to our portfolio companies. All of these capabilities strengthen our private equity efforts by deepening our ability to both find and execute transactions in the current environment and to add value to our companies once we invest in them. They also yield unparalleled insight into current market dynamics, enabling us to better understand and capitalize on market dislocations. We continue, as we have for decades, to be grateful to the leaders and employees of our private equity portfolio companies, who understand what it means to think and act as owners and who accept the responsibilities that accompany ownership.

The intense focus on the portfolio was not at the expense of pursuing investment opportunities during 2008, and we are prepared in 2009 to take advantage of opportunities created by the market dislocation. Across asset classes, we remain well-positioned to act on transactions that meet our strict investment criteria, no matter the size. We added a number of world-class companies to our private equity portfolio in 2008, making traditional private equity control transactions as well as growth equity transactions, ranging in size from $100.0 million to well over $1.0 billion. As we always have, we focused on companies with leading market positions, high and sustainable barriers to entry, stable and predictable cash flows, proven management teams and prudently-designed capital structures.

Global equity market valuations have become more attractive, and we expect companies to welcome the option of becoming private as a shield from the current volatility. We also continue to see that the turbulence in the financing markets causes companies to look for non-traditional sources of capital to grow and, in many cases, survive. In a world where anxiety reigns and capital is no longer a commodity, we believe that there will be very attractive investments to make, and we have positioned our team accordingly.In addition to continuing to strengthen our industry knowledge, our operational capabilities and our global relationships, we are also building new stren gths in how we access capital through our capital markets efforts and how we create differentiation through a focus on manag¬ing regulatory and stakeholder issues.

Our capital markets business represents a natural outgrowth of our experience in helping our portfolio companies manage their balance sheets. We understand intricately that global equity and debt market knowledge and differentiated access to capital will be critical drivers of success for investment management firms in the future. Given the broken architecture of global finance, expertise in structuring and directly accessing debt capital, raising incremental equity capital and serving as a source of market expertise are of paramount importance. We are pursuing an integrated effort to help our investors and our companies access both new opportunities and capital.

While it has always been relevant, attention to stake¬holders is no longer optional. Within the current climate, the ability of our portfolio companies and investors to understand and manage increased levels of government regulation and public scrutiny around the world can materially impact our return on investment. At the same time, there will be significant opportunities for private investors to partner with government authorities in strengthening financial institutions and building infra¬structure. Recognizing both these new challenges and opportunities, we established an in-house global public affairs capability to ensure that our firm as a whole, including current investments in our portfolio and our future investments across asset classes, employs best practices in managing environmental, social and regulatory issues. Paying attention to these issues will also, in many circumstances, allow us to differentiate ourselves at the front end of a transaction.

Enhancing Our Credit and Infrastructure Investment Platforms
In addition to further developing our private equity efforts, we have prudently and deliberately sought to leverage our core aptitudes over the last several years into asset classes adjacent to private equity, thereby enhancing the natural synergies of these asset classes and maximizing our potential for value creation. We believe that this will serve us well in the current environment by providing us with new opportunities to build relationships, new opportunities to find direct sources of capital and new opportunities to build businesses. We made significant progress on this long-term strategic goal in 2008. The formalization of our KKR Asset Management business represents a recognition that investors are looking for new and tailored solutions across the capital structure. Thirty three years of investing in industries we know have provided us with an understanding of where industries are heading and what companies need. Investing up and down the capital structure, in companies we know well, makes sense in all environments, but particularly today. Given the dislocation in the markets, patient investors are in a unique position to achieve attractive returns in an ever-expanding group of asset classes, many of which offer less risk and greater structural protection than have historically been available to private equity investors.

In credit, we have been pursuing initiatives to expand our assets under management and deploy capital in senior secured term loans and high yield debt since 2004. These assets are trading near all-time lows in the second¬ary market and new issues are being structured and priced with better risk/return characteristics than have been available to debt investors in several years. Our develop¬ment of a separately managed account platform acknowledges that many of our investors have unique needs which necessitate customized debt investment portfolios. We have made mezzanine investments since the inception of our credit platform and continue to see mezzanine finance positioned to become an increasingly attractive form of financing for companies given the constrained credit environment and resulting corporate deleveraging.

In a similar vein, our dedicated infrastructure effort represents our response to an area where we see a great need which can benefit from our approach and experience. This initiative recognizes the fact that the global demand for infrastructure investment is enormous, with studies estimating a need for more than $3.0 trillion in annual infrastructure projects. We have been investing in infra¬structure assets for many years through our private equity energy team, but the current need for capital has risen so significantly that we have designated a separate initiative to target these opportunities. We are a global firm and we firmly believe that our geographic reach gives us a com-petitive advantage across our businesses. Understanding the compelling demographics and economic growth of China, India, the Middle East and Australia, we deepened our presence in these regions during 2008 by growing our teams and expanding our capabilities. Within the past 18 months we have opened offices in Beijing, Mumbai, Sydney and Dubai. We believe that these regions will provide superior long-term investment opportunities to us in many asset classes.

Conclusion
So much has changed in the past year. What has not changed is our culture and who we are. We continue to adhere to our core competencies and to the proper align¬ment of interests with our investors. Ours will always be a skill-based asset class. Yet in the face of fundamental change to investment management as it has been prac¬ticed – and to capitalism itself – KKR is evolving and extending our aptitudes with new strategic initiatives. We have every confidence that this evolution will benefit our clients and partners, and that it will allow KKR to remain a leader in value creation for years to come.

*This report presents information with respect to our fiscal year ended December 31, 2008, and such information has not been updated to reflect facts, events, or figures after that date.