Kkr Annual Review 2007

2007 Annual Review

Contents About KKR

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To Our Limited Partners

5

The Year in Review: Private Equity Investments 9 People

26

KKR and Its Principles

36

Investments of the KKR Funds

38

KKR’s consistent record of value creation is based both on its willingness to evolve as the investment environment changes and its steadfast commitment to principles that have guided the Firm for more than 32 years.

About KKR

Established in 1976, KKR & Co. L.P. is a leading global alternative asset manager with $53.2 billion of assets under management, as of December 31, 2007. KKR is organized into two primary business segments: private equity and credit. Our intellectual capital, our integrated global investment platform, and our experience in adapting investment strategies to market conditions allow us to invest successfully at every level of a company’s capital structure. KKR has more than 400 employees and offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong, Beijing, Tokyo, and Sydney. The Firm is led by founding partners Henry R. Kravis and George R. Roberts. KKR is a world leader in private equity, sponsoring and managing funds that make investments in attractive franchises for long-term appreciation, either through controlling ownership of a company or strategic minority positions. KKR’s private equity professionals and KKR Capstone operating executives work with the management of industry-leading businesses to create value for our investors, primarily through improvements in company operations. KKR’s Investment Committee, which consists of several of the Firm’s most experienced investment professionals, reviews all private equity proposals globally and brings discipline to decision-making about new investments. The Firm’s Portfolio Management Committee, which includes KKR executives and senior advisors with significant operating experience, monitors the performance of investments and oversees value-creation activities in portfolio companies. Our current private equity portfolio consists of 46 companies, with combined annual revenues of more than $185 billion and over 825,000 employees. In addition to sponsoring and managing traditional private equity funds, which have a finite life and investment period, KKR established in 2006 KKR Private Equity Investors, L.P. (Euronext Amsterdam: KPE), a permanent capital fund that provides selected public market investors, including institutions and individuals, the opportunity to access KKR’s private equity investment strategies in a liquid manner. KPE’s private equity investments include limited partner interests in KKR private equity funds, co-investments in certain KKR portfolio companies, and negotiated equity investments. KPE may also invest up to 25% of its adjusted assets in public securities that KKR investment professionals identify in the course of their work. As a listed fund, KPE produces its own annual report, which is available at www.kkrprivateequityinvestors.com.



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KKR 2007 Annual Review

Private Equity Credit

By acquiring and monitoring leveraged businesses in its private equity portfolio, KKR has acquired significant credit experience. In 2004 KKR actively began to pursue debt investments as a separate asset class with the establishment of KKR Financial LLC (KFL), whose credit professionals have significant experience in managing and evaluating fixed-income investments. Leveraging KKR’s deal flow and industry expertise, KFL is the manager for KKR Financial Holdings LLC (NYSE: KFN), a publicly traded fund that invests in corporate credit transactions, and the KKR Strategic Capital Fund, a private vehicle for investing in debt transactions. As of December 31, 2007, KFL has $11.0 billion of credit investments in approximately 170 companies. KFN’s annual report is available at www.kkrfinancial.com.

Assets Under Management by Asset Class, December 31, 2007 Billions of Dollars

11.0

Over its 32-year history, KKR has grown from a relatively small pioneer in the buyout industry to an integrated alternative asset manager with global capabilities and reach. Although the Firm has nine offices across four continents, it still operates as a single firm that encourages teamwork among investment executives and the sharing of expertise, resources, and networks. We are proud of our strong relationships with investors, many of whom have invested with KKR for decades across multiple funds, and we are confident that we have built a sustainable model for delivering attractive returns.

42.2

Private Equity Credit

Assets Under Management, 1992-2007 Billions of Dollars 60.0

53.2

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43.9 5.2

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19.7

38.7

42.2

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Private Equity Credit



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KKR co-founders Henry R. Kravis, right, and George R. Roberts lead a team of investment professionals who are among the most experienced and successful private equity investors in the world.



KKR 2007 Annual Review

To Our Limited Partners

Two thousand seven was a year of transition for the private equity industry, with the healthy economic environment for buyouts in the first half of the year deteriorating in the second. Concerns about the sub-prime mortgage sector, a supply-and-demand imbalance for LBO debt, and other factors led to a sudden re-pricing of risk in the summer. The severe challenges in the leveraged loan and high-yield markets sharply curtailed deal activity in the second half of the year. As we enter 2008, uncertainty about the economy, particularly in the United States, but also in Europe, poses challenges for many industries and businesses, including those financed by private equity. Despite this difficult environment, 2007 was a very good year for KKR and its limited partners, and we see many more reasons for optimism than pessimism in the years ahead. In 2007 KKR invested $15.2 billion of equity in 14 companies that have an aggregate enterprise value of $144.5 billion. In total, the KKR Funds distributed $4.3 billion in 2007, and more than $23.6 billion in the past five years. Our fundraising initiatives included closing the $17.6 billion KKR 2006 Fund L.P. and the $4.0 billion KKR Asian Fund L.P. We took advantage of the abundant liquidity in the leveraged loan and high-yield markets in early 2007 to acquire several large national and global brands, including First Data Corporation, Energy Future Holdings (formerly TXU Corp.), Alliance Boots, Dollar General, Biomet, and U.S. Foodservice. We were able to lock in flexible, low-cost, long-term financing terms that are unlikely to be replicated in the near future. Such financing will enable these companies to pay down debt while investing in future growth and competitiveness. We believe that when we have executed our value-creation strategies in the coming years, the companies KKR acquired in 2007 will produce overall returns that are significantly above those of public markets and compare favorably with private equity industry benchmarks. As with all our investments, KKR’s acquisitions in 2007 were made with an eye toward the inevitable turn in the business cycle. The Firm’s general approach to private equity has several characteristics that are designed to ameliorate the impact of an economic slowdown. Our focus on the large end of the buyout market is driven, in part, by the relative lack of volatility in global franchises. These companies tend to attract the best senior managers, whose experience generally includes successfully managing through downturns. Although the macroeconomic environment and markets impact all forms of investing, our portfolio comprises discrete investments in diverse industries and geographies. Our control positions allow us to exert more influence on the performance of our businesses than other asset classes. We decide not only what companies to buy, but also how to improve them and when to exit them.



To Our Limited Partners

KKR’s careful approach to capitalizing portfolio companies was documented in a January 2008 Moody’s research report, which singled us out as more conservative in acquisition financing than other large private equity firms. The report noted that only one KKR portfolio company had a debt-rating downgrade between 2002 and 2007 and that “KKR was the only firm to have more upgrades than downgrades.” * FridsonVision, a publisher of independent research on credit topics, built on the Moody’s study, quantifying the incidence of distressed debt in buyouts and concluding that KKR “can make a fairly strong claim to superior performance.” ** Over the past two years, KKR’s industry teams have sought out companies that not only are great franchises, but also would likely perform well in a more challenging economic environment. Examples of such investments include First Data Corporation, a global provider of electronic commerce and payment solutions for merchants, financial institutions, and card issuers. The continuing shift from cash and checks to electronic payment transactions is a secular change in commerce unlikely to be reversed. We expect that Biomet, a leading international manufacturer of orthopedic devices, will benefit from both an aging U.S. population and improvements in implant devices that can benefit younger patients. Alliance Boots has the largest portfolio of pharmacies in the U.K., where sales of prescription medicines and over-the-counter pharmaceuticals have been very stable and largely immune to the economic cycle. Economic headwinds will adversely impact some portfolio companies more than others. We have no more important priority, particularly in a tough economy, than monitoring closely our portfolio companies and taking action to address major challenges. Our Portfolio Management Committee, which includes investment professionals and senior advisors with extensive operating experience, instills discipline into the process of reviewing the financial and operating performance of our portfolio companies. This committee ensures that value-creation strategies are executed, and it focuses particular attention on investments that are underperforming. The professional capabilities we make available to our portfolio companies include the industry expertise of our investment professionals, the operational skills of KKR Capstone executives, the experience of our senior advisors, and other specialized resources. Our business has never been risk free. Yet we believe that our portfolio of private equity investments will continue to perform well relative to other asset classes. Over the past 32 years, we have invested successfully in high- and low-interest rate environments, liquid and illiquid credit markets, and periods of economic expansion and recession. Such consistent performance is not an accident. It is a consequence of experience and a disciplined approach to long-term value creation. We buy great franchises for reasonable prices, we partner with quality management teams, we develop appropriate capital structures for our portfolio companies, we create value largely through improvements in business operations and EBITDA growth, and we determine the optimum timing and method for exiting an investment.



* “Private Equity: Tracking the Largest Sponsors,” Moody’s Investors Service, January 2008. ** “LBOs Are Disproportionately Distressed,” Distressed Debt Investor, January 24, 2008, Vol. 4, No. 2, p. 5.

KKR 2007 Annual Review

It is our belief that difficult markets play to KKR’s fundamental strength – the ability to finance, acquire, and improve portfolio companies. The U.N Ro-Ro and Northgate Information Solutions acquisitions, which closed in December 2007 and March 2008, respectively, demonstrate our ability to execute transactions in tough markets. Our investment in Legg Mason, which closed in January 2008, shows how proactive deal sourcing and industry expertise lead to proprietary opportunities. With a portfolio of companies that are diverse in geography and industry sectors, and with KKR Capstone’s ability to drive operational improvement initiatives, we believe that our portfolio companies are well positioned to weather difficult economic times.

Over the past 32 years, we have invested successfully in high- and low-interest rate environments, liquid and illiquid credit markets, and periods of economic expansion and recession.

� ver the years, KKR has grown from a handful of partners, associates, and support

staff to more than 400 employees worldwide. We have also adapted our business to changes in the private equity market. In 1998, for example, we recognized that a global footprint was a requirement for continued industry leadership. Since then, the Firm has opened offices in London, Paris, Hong Kong, and Tokyo. In early 2008, we established new offices in Sydney and Beijing. What has not changed at KKR are the Firm’s values and culture, which we believe have been central to our long-term success. The fundamental value, upon which all others rest, is integrity. In practice, this means honesty with our investors, portfolio companies, financial and other service providers, and all internal and external constituencies with whom we interact. We invest in companies and work with people with whom we are proud to associate ourselves. We strive to be the best at what we do, and we are not afraid to assume prudent risks to achieve an appropriate return. We hire and promote high-intensity self-starters who are analytical, disciplined, and resultsoriented team players.

We are pleased to report that in 2007 Ken Freeman, Craig Farr, and David Sorkin were appointed Members of the Firm. Ken, the former chairman and CEO of Quest Diagnostics Incorporated, joined KKR as a managing director in 2005 and has taken an active role in managing our investments in Masonite and Accellent. Craig, a former managing director at Citigroup Global Markets and co-head of North American Equity Capital Markets, joined KKR in 2006 and is co-head of the Firm’s Capital Raising team. David, a former partner at Simpson Thacher & Bartlett LLP and a longtime advisor to KKR, joined the Firm in late 2007 as general counsel. Heinz-Joachim Neubürger, the former chief financial officer of Siemens AG, joined the London office of KKR in 2007 as a managing director. Shusaku Minoda, the former managing executive officer of the Global Investment Banking Group of Mizuho Corporate Bank, was appointed a managing director in Tokyo and the chief executive officer of KKR Japan.



To Our Limited Partners

KKR’s track record from its founding in 1976 to December 31, 2007 Billions of Dollars 90.0

$87.9 80.0 70.0

We also strengthened our team of senior advisors, all of whom have held leading positions either in major corporations or in public agencies in the United States, Europe, or Asia. Senior advisors contribute to the Firm’s success by serving on the boards of portfolio companies, helping us evaluate individual investment opportunities, and assisting our companies with operational matters. Senior advisor appointments in 2007 include: Sanjiv Ahuja, former chief executive officer of Orange SA; Thierry Breton, former French Minister of Economy, Finance, and Industry; Richard L. Clemmer, former CEO of Agere Systems; and David M. Cote, chairman and chief executive officer of Honeywell. In early 2008, KKR made the following appointments to its team of senior advisors: John F. Bookout III, former director of McKinsey & Company; Lee R. Raymond, former chairman and CEO of ExxonMobil; and Wolfgang Reitzle, president and CEO of the Executive Board of The Linde Group.

60.0 50.0 40.0

To support the Firm’s ongoing global growth, KKR made three other senior executive appointments in late 2007 and early 2008: Bob Gottlieb, who spent nearly 20 years at Goldman Sachs in senior human resource management and administrative functions, was named chief human resources officer; Peter Fasolo, former vice president of Global Talent Management at Johnson & Johnson, joined KKR as chief talent officer, North America, to help assess, recruit, train, and coach management teams at the Firm’s North American portfolio companies; and Ed Brandman, a highly experienced technology executive, joined KKR as chief information officer, responsible for global technology and information strategy.

$42.2

30.0 20.0 10.0 0.0

A s this publication goes to press in early 2008, we believe that we will continue to

Amount Invested Total Value

see good investment opportunities and that financing will be available for transactions by leading private equity firms. Some of the best investments in KKR’s history were made in periods of economic uncertainty. Valuations for potential portfolio companies are becoming increasingly attractive, and interest rates remain low when compared to historical standards. We believe that in a less robust environment for mergers and acquisitions, KKR’s strength in deal sourcing, its industry expertise and operational skill set, and its outstanding reputation with market participants will provide opportunities for the Firm to distinguish itself from competitors.

$61.4

$26.5

We are grateful for your support, and we look forward to remaining worthy of your confidence in the years ahead.

Realized Value Unrealized Value

Henry R. Kravis March 2008



George R. Roberts

KKR 2007 Annual Review

The Year in Review Private Equity Investments

Though KKR’s investments are far from formulaic, we generally seek to acquire controlling interests in large, diversified, high-quality franchises. Such companies attract world-class managers who can drive returns; provide more opportunities than smaller companies for making fundamental operational improvements; and command greater attention from capital markets and corporate buyers when exiting an investment. We believe that our experience, networks of relationships, and industry expertise provide KKR with a sourcing advantage in the large end of the buyout market. We have been investing in this segment longer than anybody else, and our executives have global networks of relationships that include CEOs of the largest companies, government officials, co-investors, advisory institutions, and financial intermediaries. The industry expertise of KKR investment professionals enables them to reach out proactively to the most attractive potential portfolio companies, demonstrate their credibility as a value-added partner to management teams, and assess quickly and thoroughly possible transactions in complex industries. KKR’s sourcing advantage means that we are less reliant on auctions and secondary buyouts than many other buyout firms. In 2007 our proprietary transactions included Energy Future Holdings, First Data Corporation, Laureate Education, Northgate Information Solutions, Tianrui, and Yageo. KKR investments that closed in 2007 or early 2008 are listed in the pages that follow.



Summary of Private Equity Investments January 1, 2007 – March 31, 2008

U.S. Foodservice Chicago, Illinois

Laureate Education, Inc. Baltimore, Maryland

Biomet, Inc. Warsaw, Indiana

Legg Mason, Inc. Baltimore, Maryland (Q1 2008)

First Data Corporation Greenwood Village, Colorado

Harman International Industries, Inc. Washington, D.C.

Energy Future Holdings (formerly TXU Corp.) Dallas, Texas

Dollar General Goodlettsville, Tennessee

$15.2 billion of equity invested in 2007

$144.5 billion

$4.3 billion

distributed in 2007

10

aggregate enterprise value in 2007

KKR 2007 Annual Review

Northgate Information Solutions plc Hemel Hempstead, England (Q1 2008)

Alliance Boots London, England

U.N Ro-Ro Istanbul, Turkey

Tarkett Nanterre, France ProSiebenSat.1 Munich, Germany

Tianrui Group Cement Co., Ltd. Henan, China

Yageo Taipei, Taiwan

MMI Holdings Ltd. Singapore Bharti Infratel Ltd. New Delhi, India (Q1 2008)

11

The Year in Review Private Equity Investments

Retail Alliance Boots (£12.4 billion) * is an international pharmacy-led health care and beauty group acquired by KKR and its partner, Executive Chairman Stefano Pessina. Headquartered in London, the company has a European retail pharmacy business with approximately 3,100 stores and a leading pharmaceutical wholesaler with a network of some 380 depots serving more than 125,000 outlets across Europe.

Alliance Boots

Alliance Boots is the market leader in the U.K. pharmacy and health and beauty market, and it is a leading player in the European pharmaceutical wholesale market. We believe that the company has opportunities for further international expansion across its primary business areas. Our investment professionals and KKR Capstone executives have been working with management on a broad range of operational improvement initiatives, which include accelerating the conversion of Alliance pharmacies into Boots-branded pharmacies and optimizing the U.K. supply chain infrastructure. Alliance Boots had strong Christmas-season retail sales in the U.K. and Republic of Ireland. Contributing to growth in the Health and Beauty segment was the company’s own No 7 brand, particularly the Protect & Perfect skin cream. Dollar General ($7.6 billion) is the largest “small box” discount retailer in the United States. With over 8,000 neighborhood stores, Dollar General stores are a convenient alternative to “big box” discounters, offering basic items that are frequently used and replenished, such as food, snacks, health and beauty aids and cleaning supplies, as well as a selection of basic apparel, housewares and seasonal items. In addition to convenience, everyday low prices are central to the company’s mission of serving its customers. KKR led a consortium of investors, including affiliates of Goldman Sachs and Citigroup, in acquiring Dollar General. The company is the market leader in a unique niche of retail that has experienced high rates of growth. We believe there is ample opportunity to continue growing the format. To take advantage of Dollar General’s local brand awareness and maximize operating efficiency, the company expects that in the near term a majority of its new stores will be opened within existing markets. In addition to the goal of opening hundreds of new stores each year, Dollar General expects to make substantial investments to remodel its existing stores. In January 2008, Richard W. Dreiling was appointed CEO of Dollar General. A retail industry veteran, he most recently served as chairman and chief executive officer of the drug store chain Duane Reade. * Figures in parentheses are the total enterprise value of an acquisition.

12

KKR 2007 Annual Review

U.S. Foodservice ($7.3 billion) is the second largest food distributor in the United States. The company’s 250,000 customers include restaurants, hospitals, schools, and government agencies. The combination of customer focus, commitment to service, and a portfolio of national and private label brands has enabled the company to deliver exceptional value to its customers. KKR and Clayton, Dubilier & Rice are equal partners in the transaction. Operating in an industry that has a 30-year record of uninterrupted growth through a variety of economic cycles, U.S. Foodservice has an experienced management team, a proven business model, and opportunities for profitable growth – for example, by expanding USF’s private label product offering and enhancing USF’s presence in geographies with high growth potential. The Firm’s investment professionals and KKR Capstone executives have been working with management on a range of initiatives to generate new sales, improve gross margins, and enhance operations productivity. Notable initiatives that contributed to USF’s success in 2007 included increasing private label penetration and improving procurement, enhancing delivery and warehouse productivity, and strengthening inbound freight and logistics.

Energy and Natural Resources Energy Future Holdings ($49.0 billion), formerly TXU Corp., is a Dallas-based energy holding company operating in one of the nation’s largest and fastest growing power markets. EFH has three principal operating subsidiaries: Luminant, a competitive power generation business with more than 18,300 MW of capacity in Texas; TXU Energy, a competitive retailer that provides electricity and related services to more than two million customers in Texas; and Oncor, a regulated electric distribution and transmission business that provides power to three million electric delivery points over more than 100,000 miles of distribution lines and 14,000 miles of transmission lines. The investment by KKR and our partners, TPG and Goldman Sachs, will enable the company to meet the growing energy needs of customers in Texas by building three new generation units that are currently under construction, by investing in new transmission and distribution facilities, and by growing its customer base with a suite of competitive retail electric plans. A flexible capital structure provides ample liquidity to fund ongoing operating activities and anticipated capital investment, as well as cope with fluctuations in underlying commodity prices. Consistent with the investor group’s philosophy, the company has hedged more than 80% of its underlying commodity exposure over the next five years through natural gas sales. The acquisition involved intensive consultation with local legislators, regulators, consumer groups, environmental organizations, organized

U.S. Foodservice

Energy Future Holdings

13

The Year in Review Private Equity Investments

labor, and government officials about the company’s strategy and operations. Our investment gained the support of a diverse set of constituencies, including Texans for Affordable & Reliable Power, the Texas Economic Development Council, the International Brotherhood of Electrical Workers, elected officials in state and local government, as well as Environmental Defense and the Natural Resources Defense Council. In January 2008, EFH appointed John F. Young as chief executive officer. Prior to joining the company, he served as chief financial officer and executive vice president of Finance and Markets at Exelon, the largest U.S. utility, where he held a range of leadership responsibilities. Mr. Young brings significant operating experience to EFH, having worked for 25 years at some of the utility sector’s top companies.

Financial Services First Data Corporation ($29.5 billion) is a leading provider of electronic commerce and payment solutions for merchants, financial institutions, and card issuers globally. The company has operations in 38 countries, serving more than five million merchant locations and 1,900 card issuers. First Data operates in three primary segments: Commercial Services, Financial Institution Services, and First Data International. The payments processing industry expects to benefit from the continuing global shift from cash and checks to electronic payment transactions. First Data, a market leader in each of its core segments, is a predictable and stable business with multi-year contracts, high renewal rates, and a diversified mix of customers, products, geographies, and distribution channels. We see many opportunities to improve operational efficiency – for example, by optimizing technology infrastructure – and to grow the core business, develop new product offerings, and expand internationally. KKR recruited Michael D. Capellas to become chairman and chief executive officer of First Data. A 30-year veteran of the IT industry, he has served as CEO of MCI, president of Hewlett-Packard Company, and chairman and CEO of Compaq Computer Corporation.

First Data Corporation

14

Legg Mason, Inc. is a global asset management firm with approximately $1 trillion in assets. It serves the institutional, mutual fund, and wealth management markets through 14 different affiliates, providing a broad array of investment management services across equity, fixed-income, and liquidity products, both in the U.S. and around the world.

KKR 2007 Annual Review

As global capital markets expand and wealth is accumulated, the asset management industry has experienced strong growth. Asset managers such as Legg Mason that have leading franchises, broad product offerings, and scale are well positioned to capitalize on continued growth in the sector. In January 2008, KKR agreed to invest $1.25 billion into a convertible debt security issued by the company. The structure of the investment minimizes the risk from a downturn in Legg Mason’s stock price, while offering significant upside from improved performance. KKR Member Scott Nuttall has joined the company’s board of directors.

Media and Communications ProSiebenSat.1 (€3.2 billion) is a leading European media conglomerate based in Germany. In February 2007, KKR partnered with Permira to acquire German Media Partners’ 88% of voting shares and 13% of non-voting shares (50.5% economic stake) in publicly listed ProSiebenSat.1 Media AG. The following June, ProSiebenSat.1 acquired KKR portfolio company SBS Broadcasting for €3.3 billion, creating the second largest European free TV group with panEuropean operations. ProSiebenSat.1 owns and operates four of Germany’s leading commercial TV stations, 22 additional commercial stations in markets across Europe, and 24 pay-TV channels branded “CMore,” the leading Nordic premium pay-TV provider. The company also owns 22 radio networks, two Dutch television and radio guides, and a range of German Internet media interests, such as MyVideo.de and lokalisten.de.

ProSiebenSat.1

In January 2008, KKR and Permira purchased the 12% stake in ProSiebenSat.1 of German publisher Axel Springer AG. With this incremental investment of €509 million, KKR and Permira increased their voting rights in the company to 100% and their economic interest to 62.7%. Bharti Infratel Ltd. is a leading Indian wireless infrastructure company providing telecom tower space to mobile operators. It is a newly formed company recently demerged from Bharti Airtel Ltd. (“Airtel”). Airtel is India’s leading mobile service provider and the core holding of Bharti Enterprises, one of India’s leading business groups. Airtel will continue to be the majority shareholder in Infratel. Infratel has the most extensive nationwide telecom infrastructure in India, owning and operating approximately 22,000 telecom towers. In addition, the company owns a 42% stake in a recently announced joint venture with Vodafone Group plc and Idea Cellular Ltd., which operates more than 70,000 cell phone towers across India. KKR Member Oliver Haarmann was elected to Bharti’s board of directors.

15

The Year in Review Private Equity Investments

In February 2008, KKR agreed to invest $250 million in common equity and convertible debentures issued by Infratel. We believe that the company is an investment opportunity with an attractive risk-return profile combining emerging market growth potential with a stable, cash-generative business that has long-term contracts.

Health Care Biomet, Inc. ($11.6 billion) is a leading international manufacturer of orthopedic devices and other products used primarily by musculoskeletal medical specialists in both surgical and non-surgical therapy. The company’s products are distributed in over 70 countries, and they include orthopedic joint replacement products, dental reconstructive implants, fixation devices, spinal products, and other applications. KKR was a lead investor in this transaction, and our partners include Blackstone, TPG, and Goldman Sachs. We expect that Biomet will benefit from favorable demographics and higher procedure penetration. For example, the market for knee and hip implants is expected to grow because of the aging U.S. population and improvements in implant devices that can benefit younger patients. Biomet is an R&D-focused company with a history of innovation and a robust new product pipeline. The company has a favorable competitive position in all of its key business units. The company appointed Jeffrey R. Binder president and chief executive officer. A 15-year veteran of the orthopedic medical device industry, most recently with Abbott Laboratories, Mr. Binder has broad management and operational experience and a record of helping companies take advantage of growth opportunities.

Industrial Tarkett (€1.6 billion) is one of the world’s largest manufacturers and marketers of hard floor products. Headquartered in Nanterre, France, the company produces and sells resilient (vinyl, linoleum, and rubber), wood, and laminate flooring as well as sports flooring and flooring accessories. KKR owns a 50% stake in Tarkett, alongside the Deconinck family, who were looking for an experienced, hands-on partner to drive value creation in the business.

Tarkett

16

Tarkett is the leading manufacturer of resilient flooring in Eastern Europe, with significant growth prospects from geographic and product expansion. Eastern Europe is the company’s largest regional profit contributor. In Western Europe,

KKR 2007 Annual Review

Tarkett is the market leader in residential flooring and commercial flooring, with a particularly strong presence in the healthcare and education sectors. In sports flooring, particularly artificial turf, the company’s Fieldturf brand is the global industry leader in its segments. In North America, the company operates in selected segments in residential and commercial flooring. In addition to initiatives to drive further growth in Eastern Europe and in sports flooring, management has been leading, with support from KKR Capstone, a series of operational improvement initiatives in such areas as product assortment and customer service, supply chain management, overhead costs, and sales force effectiveness. In September, Tarkett appointed Michel Giannuzzi chief executive officer. He joins the company from his previous position as divisional CEO at the global automotive components supplier Valeo S.A.

Tianrui Group Cement Co., Ltd.

Tianrui Group Cement Co., Ltd. ($448 million) is one of China’s leading cement producers, with the capacity to produce 14.4 million tons of cement per year. The company focuses on Henan and Liaoning provinces, the two major cement markets in the emerging economic belt in central China and northeastern China, respectively. In July 2007, KKR acquired a 43% stake in this rapidly growing company. China is the largest cement producing country in the world, accounting for more than 40% of global production. Henan, Tianrui’s home market, is the sixth largest cement producing province in the country. Expanding into Liaoning province, Tianrui is establishing a cement facility in the city of Dalian. The company has acquired strategically located reserves of limestone (one of the key raw materials in cement production) near its target markets, which cannot be replicated by competitors. Tianrui, which has attracted an impressive team of executives, is one of 12 cement companies in China that the central government expressly supports as part of its initiative to drive national consolidation of the cement market.

Technology MMI Holdings Ltd. ($757 million) is a precision engineering company that designs, manufactures, and assembles cutting edge electro-mechanical components for global technology leaders. With headquarters in Singapore, the company operates in four key segments: the hard disk drive (HDD) data storage industry, the commercial laser industry, industrials, and the semiconductor equipment industry. In July 2007, KKR acquired approximately 71% of the company.

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The Year in Review Private Equity Investments

MMI is one of the largest manufacturers of HDD components globally. The company has strong relationships with its blue chip customer base, which includes Seagate, JDS Uniphase, Sun Microsystems, and KLA-Tencor. Under the leadership of its senior management, MMI has a track record of continuous revenue growth since its inception in 1989. The outlook for the HDD industry, which has experienced significant consolidation over the past two decades, is robust, with strong anticipated growth in consumer electronics. Northgate Information Solutions plc (£1.1 billion) is a U.K.-based provider of specialist software, outsourcing, and information technology services to the human resources, local government, education, and public safety markets. Operating in 46 countries across five continents, Northgate has thousands of commercial customers and works with approximately 100 of the Fortune 500 companies, 90% of U.K. local authorities, and all of the U.K.’s regional police forces.

Northgate Information Solutions plc

The market for outsourced services will likely grow as organizations seek efficient, high-quality alternatives to in-house offerings. Northgate is No.1 in the U.K. market for human resources software and No. 2 for U.K. payroll outsourcing. The company’s recent acquisition of Arinso, a global human resources services and payroll processing business, represents a significant opportunity for value creation. KKR’s acquisition of Northgate was announced in December 2007 and closed in March 2008. Yageo Corporation is one of the world’s leading manufacturers of capacitors, resistors, and other passive components that mainly regulate, store, or alter electrical voltages or currents in a wide range of electronic devices. Passive components are found, for example, in computers, mobile phones, and consumer electronics. Yageo has its headquarters in Taipei and production facilities in Taiwan, Mainland China, and Europe. By volume, the company’s current global rank is No.1 in chip-resistors, No. 3 in MLCCs, and No. 3 in ferrite products.

Yageo

18

The market for passive components is large, and continued volume growth will likely be sustained by the proliferation of electronic devices and other factors. Yageo has a strong management team, extensive manufacturing know-how, global scale, a competitive cost structure, and a diversified customer base. Yageo shares are publically traded on the Taiwan Stock Exchange. In June 2007, KKR invested $228 million in Yageo in the form of a convertible instrument.

KKR 2007 Annual Review

Consumer Harman International Industries, Inc. manufactures a wide range of audio and entertainment products for the automotive, consumer, and professional markets. The company is the leading supplier of premium audio and infotainment systems for automotive OEMs, including Mercedes, BMW, Audi, Lexus, and other highend manufacturers. Harman also operates strong professional and consumer multimedia businesses, with products marketed under the JBL, harman/kardon, Crown, Infinity, Studer, and Mark Levinson brands, among others. In addition to its strength in developing innovative new technologies, Harman is highly regarded for its commercialization capabilities, integration expertise, and marketing appeal. Based on contracts signed with leading automotive OEMs, Harman has a high level of visibility on future revenues. In October 2007, KKR and Goldman Sachs agreed to invest $400 million in Harman through the purchase of convertible notes that provide substantial downside protection and continued equity upside. KKR Member Brian Carroll has joined the company’s board of directors.

Education Laureate Education, Inc. ($4.0 billion) is the world’s leading international provider of higher education. With a presence in 16 countries, Laureate serves more than 300,000 students, meeting the growing demand for post-secondary education in developing countries through its network of campuses around the world. In addition, the company has an online education business in the United States that specializes in post-graduate degree programs. In developing countries, prestigious post-secondary schools tend to be government-funded public institutions that cannot accommodate the demand from a growing number of eligible students with high school educations. Focused on providing their people with an education from kindergarten through twelfth grade, governments in developing countries often do not have sufficient resources available to finance additional post-secondary educational institutions. In addition, a growing middle class in many developing countries can afford to pay for postsecondary education. This creates a significant opportunity for private, for-profit

Laureate Education, Inc.

19

The Year in Review Private Equity Investments

education alternatives. One of Laureate’s greatest assets is its global network of higher education institutions, which provides benefits such as leveraging curriculum development across the schools. A proven and replicable model of enrollment growth and campus expansion allows the company to acquire more institutions and integrate them into the Laureate network. Laureate was acquired by a consortium of investors that included Douglas L. Becker, Laureate’s chairman and chief executive officer. KKR was the consortium’s largest investor and holds two of nine board seats.

Transportation U.N Ro-Ro (€933.0 million) is a Mediterranean short-sea roll-on/roll-off (“ro-ro”) ferry operator and a market leader for trucked cargo between Turkey and Western Europe. With a fleet of eight state-of-the-art vessels, the company operates a round-the-clock “highway of the sea” service, delivering efficient transport services between Istanbul and Trieste that combine maritime, air, and rail transport. KKR’s acquisition of U.N Ro-Ro is the largest buyout to date in Turkey.

U.N Ro-Ro

20

We believe that the company is positioned well to profit from anticipated trade growth between Turkey and Western Europe. U.N Ro-Ro’s service is less costly than overland routes and has environmental and regulatory advantages as well. To meet growing demand, the company plans to add four new ships over the next three years. Operational improvement initiatives include reducing turnaround time in ports to enable slower sailing and reduced fuel consumption. The company has an experienced management team and strong relationships with customers and key stakeholders such as port authorities and operators.

KKR 2007 Annual Review

The Year in Review Creating and Realizing Value

Creating value for our investors begins in earnest the day a transaction to acquire a company closes. This is when the Firm’s investment professionals and KKR Capstone operating executives work with management to execute a company’s unique 100-day plan. Prior to closing, we identify and prioritize high-impact operational initiatives that will be launched and tracked in the first 100 days. The plans assign specific responsibilities to managers, the Firm’s investment professionals, and KKR Capstone executives, and we have found them to be an effective way to hold people accountable for results. Leverage provides some level of returns, but the principal driver of the value we create is improving portfolio company operations in such areas as: • S  ales growth through market share expansion or moving into new geographies or business areas; • C  ost improvements in purchasing, manufacturing, and discretionary spending; • D  evelopment of efficient central-headquarters functions, such as finance, human resources, information technology, and legal, particularly when acquisitions are carve-outs from large corporations;  etter cash management through increased attention to working capital • B and more focused capital expenditures and investments;  sset optimization through the sale of non-core businesses and the • A acquisition of complementary businesses; and  nhanced performance metrics to monitor key value drivers, identify • E trends, and respond promptly to problems. The Portfolio Management Committee, which oversees value-creation activities in our portfolio companies, works with each deal team to determine the optimum timing and method for exiting an investment. KKR’s longstanding relationships with the investment banking community and corporate buyers enhance our ability to complete IPOs, secondary offerings, and sales to strategic buyers. Notable exits and portfolio company highlights from 2007 and early 2008 include:

21

The Year in Review Creating and Realizing Value

Argillon Group, headquartered in Redwitz, Germany, is an international developer and manufacturer of advanced ceramic materials. It is the last of seven separate businesses that KKR acquired from Siemens in 2002, renamed Demag Holding, to be exited by the Firm. In December 2007, Demag announced the sale of Argillon to Johnson Matthey, a U.K. specialty chemical company. The transaction closed in February 2008, following regulatory approval by German antitrust authorities. Including the approximately $167.1 million KKR received for Argillon, the gross multiple for the Demag investment is 3.4x our original equity investment of $409 million. AVR is the leading waste management company in the Netherlands and active in every stage of the waste management chain: collection, recycling, treatment, processing, and disposal and incineration. KKR and our partner, CVC, acquired the company in March 2006. In April 2007, AVR acquired van Gansewinkel, a leading waste service provider in the Benelux. Van Gansewinkel has an outstanding management team led by Ruud Sondag, who was appointed CEO of the combined AVR/van Gansewinkel. The integration has been successfully completed and positions the combination as the leading player in European waste management with strong market positions across the entire waste management value chain.

AVR

BIS

22

BIS is a leading Australian provider of on-site and off-site materials handling and logistics services, primarily to customers in the coal, metals and minerals, and steel industries. In July 2007, BIS sold its Cleanaway waste management division to Transpacific Industries for A$1.25 billion. The sale was a significant financial and strategic divestiture for BIS, enabling the company to realize an attractive price for Cleanaway and to focus on high-growth opportunities in the industrial logistics business. The new contract pipeline for BIS remains robust, and we expect that the business will continue to grow both organically and through regional acquisitions. Bristol West is a provider of private passenger automobile insurance, specializing in coverage for drivers who, for a variety of reasons, find it difficult to purchase policies from standard carriers. Investing in a long-term growth opportunity, KKR acquired the company in 1998 and, with the active leadership of CEO Jim Fisher, helped expand the business from two states at the time of purchase to the current 21 states and the District of Columbia. From 1999 to 2006, the company’s total revenues more than tripled from $208.4 million to $661.1 million. In March 2007, Bristol West agreed to be acquired by Farmer’s Group, Inc., a subsidiary of Zurich Financial Services Group. Including dividends received and proceeds from the secondary sale completed at the initial offering, KKR’s original $81.1 million investment has netted $450.3 million, or 5.6x invested capital.

KKR 2007 Annual Review

FL Selenia, headquartered in Turin, Italy, is Europe’s largest independent producer of lubricants and functional oils used in commercial and agricultural vehicles. Acquired by KKR in 2005, FL Selenia markets a wide range of products, including lubricants, anti-freeze, and transmission and engine fluids for automobiles, trucks, tractors, and earth-moving equipment, as well as marine and industrial applications. In November 2007, KKR completed the sale of FL Selenia to PETRONAS, the Malaysian National Oil Company, for approximately €1.1 billion. The gross multiple of the Firm’s investment in FL Selenia is 2.1x our original equity investment of $243.5 million. HCA is the largest, most diversified investor-owned health care services provider in the United States, operating 169 hospitals and 108 freestanding surgery centers in 20 states and the United Kingdom. A consortium led by KKR, Bain Capital, Merrill Lynch, and the family of Dr. Thomas Frist, Jr. acquired the company in November 2006 for $33 billion. HCA continues its focus on providing “best-inclass” health care services, which include high-quality health outcomes and a highly trained, efficient nursing staff. On all major quality composites, HCA currently operates above the average U.S. government benchmark scores, and the company continues to trend toward its goal of the 90th percentile. Other HCA performancetracking initiatives include improved credentialing and case management. ITC Holdings Corp. is an independent electricity transmission company that serves the lower peninsula of Michigan, which includes the metropolitan areas of Detroit and Ann Arbor. Under KKR’s ownership between 2002 and 2007, ITC invested more than $400 million to rebuild and upgrade the transmission grid in southeast Michigan, created new, high-quality jobs, and provided residents of Michigan with more reliable service, less congestion, and access to competitively priced power. KKR sold its remaining stake in the company in February 2007 for $316.7 million. The Firm’s initial investment of $128.7 million in ITC has generated gross proceeds of approximately $664.4 million, or 5.0x invested capital.

HCA

La Costa Resort and Spa, located in Carlsbad, California, was an innovator in 1965, when it was the first resort to offer a full-service spa. The resort, however, had suffered years of neglect until KKR portfolio company KSL Recreation Corporation acquired the property in 2001. A $140 million investment to transform the resort included upgrades of all guest rooms, construction of a new spa and fitness facility, the addition of a new ballroom, and improvement of common areas. In May 2007, La Costa was sold to a real estate affiliate of Goldman Sachs. Including previous distributions, this investment generated a gross multiple of 3.3x KKR’s original $90.3 million investment.

23

The Year in Review Creating and Realizing Value

Legrand is a global manufacturer of more than 130,000 items for electrical installations and data networks in residential, commercial, and industrial buildings. Headquartered in Limoges, France, the company was acquired in 2002 by a consortium of investors led by KKR and the French conglomerate Wendel Investissement. Legrand continues to invest in developing innovative new products, which have been well received by the market. The company is accelerating its expansion into emerging markets and growing its business through targeted addon acquisitions. Seeking to strengthen ties with customers, identify their emerging requirements, and provide them with support, Legrand continues to invest in its sales and marketing teams.

Legrand

Maxeda is the leading non-food retailer in the Benelux, operating “do-it-yourself,” department, and specialty stores in the Netherlands, Belgium, Luxembourg, Germany, France, Denmark, and Spain. Acquired in 2004 by a KKR-led consortium of investors, Maxeda sold its HEMA variety retailer in 2007 to Lion Capital, a London-based buyout firm, for approximately €1.1 billion. Together with additional proceeds from a simultaneous refinancing, KKR received €498 million, bringing the total cash returned to date to 2.3x the original equity invested. The new financing structure provides Maxeda with a competitive and flexible capital structure for its future development. In 2007, Maxeda continued to make significant progress in growing revenues, improving margins, and increasing earnings. Rockwood Holdings, headquartered in Princeton, New Jersey, is a global producer of specialty chemicals and advanced materials and serves a wide range of end-use markets, including construction, life sciences, electronics, telecommunications, and metal treatment. KKR acquired Rockwood in 2000 from the U.K. chemical conglomerate Laporte plc and made a subsequent investment in 2004, when the company acquired Dynamit Nobel specialty chemicals. Rockwood went public in 2005, and in a 2007 secondary offering KKR sold approximately 20% of its position, resulting in a gross multiple of invested capital of 2.2x.

24

KKR 2007 Annual Review

SBS Broadcasting is one of Europe’s leading broadcasting groups, operating commercial television, premium pay channels, radio stations, and related print businesses in Western, Central, and Eastern Europe. SBS currently has broadcasting operations in Belgium (Flanders), Bulgaria, Denmark, Finland, Greece, Hungary, the Netherlands, Norway, Romania, and Sweden. Acquired by KKR and Permira in October 2005, SBS was acquired by the German media company ProSiebenSat.1 in July 2007 for €3.3 billion. The gross multiple of the Firm’s investment in SBS was approximately 2.2x our original equity investment of €351.0 million. Toys “R” Us is one of the leading specialty toy and children’s products retailers in the world, selling merchandise through a worldwide network of stores, including Babies “R” Us, the world’s largest baby product specialty store chain. Acquired by KKR and its partners Bain Capital and Vornado Realty Trust in 2005, Toys “R” Us posted solid increases in same-store sales during the holiday selling season for the second year in a row. In a challenging year for the toy industry, the company repeatedly demonstrated leadership in toy safety.

Toys “R” Us

25

People

The global Media and Communications team includes (seated, left to right) Florian Waldmann, Simon E. Brown, Alexander Navab, and Kevin Galligan, (standing, left to right) Clive R. Hollick, Marcelo Hallack, Adam Levyn, Max Alper, Thomas C. Uger, Webster Chua, Matthew Pascale, Josselin de Roquemaurel, and Philipp Freise.

KKR has more than 100 private equity professionals, who are led by Henry Kravis and George Roberts, founders of KKR. As members of the Investment Committee and the Portfolio Management Committee, they work with other senior members of KKR to select and build our portfolio of investments and to guide the strategic direction of the Firm. KKR’s investment executives come from a broad range of backgrounds in private equity, operations, strategic consulting, and corporate finance. Because of the importance of making fundamental improvements in the businesses we own, KKR’s senior-level recruiting has focused on executives with significant operating experience, including former CEOs and CFOs of companies in a wide range of industries. The Firm’s private equity executives are organized globally into nine primary industry groups: • Chemicals • Consumer Products • Energy and Natural Resources • Financial Services • Health Care • Industrial • Media and Communications • Retail • Technology 26

KKR 2007 Annual Review

Our executives have developed networks of industry experts and an in-depth understanding of their industry’s economic drivers, inherent risks, and opportunities for value creation. The knowledge and insights of our industry teams allow them to reach out proactively to the most attractive potential portfolio companies, to demonstrate their credibility as a value-added partner to management teams, and to assess quickly and thoroughly possible transactions in complex industries. Teamwork among our executives has been essential to KKR’s success, as most of the investments we consider are multinational in scope, requiring coordinated diligence efforts across different markets. Our growing global presence has been rooted in the conviction that successful private equity investors have investment teams that are multilingual and multicultural. In every geography where KKR operates, strong teams of experienced, local private equity professionals have seamless access to the Firm’s global resources and network of relationships. Globally, our investment professionals represent 23 nationalities, speak 21 languages, and have a deep familiarity with local customs, business practices, and market participants. To share the risks and rewards of ownership with our limited partners, each executive personally invests in all KKR transactions. To date, our investment professionals, senior advisors, and other executives have committed approximately $1.5 billion in or alongside KKR’s private equity funds.

The Retail industry team includes (seated, left to right) Raj K. Agrawal, Michael M. Calbert, and Joseph Bubel, (standing, left to right) Ryan Miller, Denny Hou, Adam Waglay, Kenan Basha, Pavel Chernyshov, and Sanjay K. Morey.

27

People

Senior Executives New York

Menlo Park

Henry R. Kravis, co-founding member and co-CEO George R. Roberts, co-founding member and co-CEO Paul E. Raether, member Perry Golkin, member Alexander Navab, member Marc S. Lipschultz, member Scott C. Nuttall, member John K. Saer, Jr., member Brian F. Carroll, member Kenneth W. Freeman, member David J. Sorkin, member Craig Farr, member Sir Deryck Maughan, managing director

Michael W. Michelson, member James H. Greene, Jr., member Michael M. Calbert, member Adam H. Clammer, member Frederick M. Goltz, member Raj K. Agrawal, director Herald Y. Chen, director Dominique Y. Hansen, director David M. Kerko, director James C. Momtazee, director Sanjay K. Morey, director

Simon E. Brown, director Annette Guarnaccio, director Anthony C. Hass, director Stephen Ko, director Janice Cook Roberts, director Jonathan D. Smidt, director Peter M. Stavros, director Thomas C. Uger, director William J. Janetschek, chief financial officer Edward Brandman, chief information officer Peter M. Fasolo, chief talent officer, North America Robert D. Gottlieb, chief human resources officer London

Paris

Johannes P. Huth, member Todd A. Fisher, member Reinhard Gorenflos, member Oliver Haarmann, member John L. Pfeffer, member Dominic P. Murphy, member Lord (Clive) Hollick, member

Jacques Garaïalde, member

Heinz-Joachim Neubürger, managing director Nicolas Cattelain, director Mattia Caprioli, director Henrik Kraft, director Christina A. Pamberg, director Silke C. Scheiber, director 28

KKR 2007 Annual Review

(Top) Executives in Europe include (seated, left to right) Reinhard Gorenflos, John L. Pfeffer, Clive R. Hollick, Oliver Haarmann, Johannes P. Huth, Todd A. Fisher, Dominic P. Murphy, and Jacques Garaïalde, (standing, left to right) Roger M. Carr, Nicolas Gheysens, Christina A. Pamberg, Ahmet Faralyali, Torbjørn Midsem, Pontus Pettersson, Philipp Freise, Henrik Kraft, Sergio D’Angelo, Mattia Caprioli, Silke C. Scheiber, Jakob Kjellberg, Josselin de Roquemaurel, Nicolas Martin, Enrico Grasso, Nicolas Cattelain, Heinz-Joachim Neubürger, Florian Waldmann, Lucian Schoenefelder, Timotheus Osnabrug, and Edouard Muûls. (Bottom) Investment professionals in Hong Kong include (seated, left to right) David H. Liu, Joseph Y. Bae, and Ming Lu, (standing, left to right) Clifford K. Chiu, Aaron Y. Du, Weiyu Tan, Chris Z. Sun, Charlie F. Gao, Lane F. Zhao, Julian J. Wolhardt, Robert H. Lewin, and Ying Deng.

29

People

(Top) Tokyo-based executives include (seated, left to right) Naohiko Kitsuta, and Shusaku Minoda, (standing, left to right) Daisuke Nozaki, Ryo Fujii, Osamu Ogura, Eiji Yatagawa, and Andrew J. Bellas. (Middle) The Capital Raising team includes (seated, left to right) Dominique Y. Hansen, Craig Farr, Perry Golkin, and Anthony C. Hass, (standing, left to right) Greg Guest, Richard J. Kreider, Janice Cook Roberts, Clifford K. Chiu, Christina A. Pamberg, Alisa Amarosa Wood, Ryan J. Marshall, Irene Mavroyannis, and Amy C. Stuart. (Bottom) The executives of KKR Private Equity Investors include (seated, left to right) Kendra L. Decious, Katherine T. Becher, (standing, left to right) Brian W. Bull, John J. Knox, and Christopher B. Lee.

30

KKR 2007 Annual Review

Senior Executives Hong Kong

Tokyo

Joseph Y. Bae, member Ming Lu, member

Shusaku Minoda, managing director Naohiko Kitsuta, managing director

Clifford K. Chiu, director Julian J. Wolhardt, director Beijing

Sydney

David H. Liu, member

Justin Reizes, managing director

KKR Private Equity Investors LLC

KKR Financial LLC

Kendra L. Decious, chief financial officer Katherine T. Becher, investor relations manager Brian W. Bull, tax director John J. Knox, controller Christopher B. Lee, general counsel

Saturnino S. Fanlo, founding member and CEO David A. Netjes, founding member and COO Mark D. Lerdal, member Ryan J. Marshall, member



Donald D. Destino, director Jeremiah S. Lane, director Stefanie L. Rosenberg, director Nathaniel L. Yap, director

Derek M. Larson, managing director Christopher A. Sheldon, managing director Jamie M. Weinstein, managing director

Saturnino S. Fanlo, left, is the chief executive officer of KKR Financial LLC and David A. Netjes is its chief operating officer.

31

People

We believe that KKR Capstone differentiates our Firm from competitors and underscores our emphasis on creating value by improving operations.

KKR Capstone KKR Capstone is a proprietary global resource for helping the Firm’s portfolio companies define strategic priorities and implement operational changes. With a team of 32 executives based in New York, Menlo Park, and London, KKR Capstone specializes in multiple industries, including chemicals, consumer products, industrial, health care, media, retail, and technology. We believe that KKR Capstone differentiates our Firm from competitors and underscores our emphasis on creating value by improving operations. During the initial stages of an investment, KKR Capstone’s work with portfolio companies reflects our initial thesis for value creation. Its executives work with management teams to implement best-in-class operating and financial metrics, and assist them in reviewing operational improvement opportunities and in developing detailed plans to realize those opportunities. KKR Capstone executives typically address issues such as pricing and go-to-market strategies, sales force management and customer service, sourcing and purchasing, indirect costs, and capital efficiency. In 2007 the North America team worked with 14 KKR companies – approximately one-third of the Firm’s global portfolio. At Toys “R” Us, for example, KKR Capstone executives worked with company management on initiatives to reduce clutter in stores, to manage inventory more effectively, to increase the efficiency of promotional and advertising spending, and to improve the company’s forecasting capabilities. In Europe, the KKR Capstone team worked with nine portfolio companies in 2007, including Alliance Boots, AVR, KION, Maxeda, and NXP. Given the increased size, complexity, and geographic reach of our European portfolio, KKR Capstone plans to expand its team there in 2008.

32

KKR 2007 Annual Review

(Top) The U.S. KKR Capstone team includes (front row, left to right) Nicholas Zeitlin, Michael Linford, Anand Nathan, Chris Hsu, Chad Fargason, Dean Nelson, Matt King, Karr Narula, and Andrew Low Ah Kee, (back row, left to right) Dhruv Parekh, Ernesto Perez-Carrillo, Vincent Letteri, Sam Allen, Rebecca McKillican, Derick Prelle, Bill Cornog, Scott Bookmyer, Eric Daliere, Scott Wagner, Kermit Cook, Vikas Parekh, and Rushi Patel. (Bottom) The European KKR Capstone team includes (seated, left to right) Paul Douek, Roger M. Carr, and Andreas Krinninger, (standing, left to right) Paolo Notarnicola, Steffen Pauls, Johan van de Steen, Jerome Losson, Henrik Poulsen, and Alain Vourch.

33

People

Senior Advisors Complementing the expertise of the Firm’s investment professionals and KKR Capstone’s operating executives is our team of senior advisors, each of whom has held leading positions in major corporations or public agencies in the United States, Europe, or Asia. The responsibilities of senior advisors include serving on the boards of portfolio companies, helping us evaluate individual investment opportunities, and assisting our portfolio companies with operational matters. Our senior advisors include:

34

•

Sanjiv Ahuja, former chief executive officer of Orange SA

•

Sir John Bond, former group chairman of HSBC Holdings plc

•

John F. Bookout III, former director of McKinsey & Company

•

Thierry Breton, former French Minister of Economy, Finance, and Industry

•

Richard L. Clemmer, former CEO of Agere Systems

•

David M. Cote, chairman and CEO of Honeywell

•

George M.C. Fisher, former chairman and CEO of Eastman Kodak Company and Motorola Corporation

•

Joe W. Forehand, former chairman and CEO of Accenture

•

Paul M. Hazen, former chairman and CEO of Wells Fargo

•

Hisashi Hosokawa, former vice minister for International Economic Affairs at Japan’s Ministry of International Trade & Industry

KKR 2007 Annual Review

•

R. Clint Johnstone, former director and CFO of the Bechtel Group

•

Gen. John M. Keane, former vice chief of staff of the U.S. Army

•

Liu Chuanzhi, founder of the Lenovo Group and president of Legend Holdings

•

Paul J. Norris, non-executive chairman and former CEO of W.R. Grace & Co.

•

Lee R. Raymond, former chairman and CEO of ExxonMobil

•

Wolfgang Reitzle, president and CEO of the Executive Board of The Linde Group

•

Edward Tian Suning, founder and chairman of China Broadband Capital Partners, L.P., and vice chairman and former CEO of China Netcom Group

Specialized Resources Two industries requiring specialized resources are insurance and energy and natural resources. To assist our investment teams in these industries, KKR has established exclusive relationships with Fisher Capital and KD Capital. Fisher Capital is an insurance advisory firm formed by Jim Fisher after the successful sale of American Re-Insurance, a former KKR portfolio company where he was CFO. KD Capital is an advisory firm formed by Foster Duncan to support our efforts in the energy and natural resources industries. He was formerly executive vice president and CFO of Cinergy Corp., a large integrated electric and gas company.

35

KKR and Its Principles

KKR, a leading global alternative asset manager, is one of the world’s oldest and most experienced private equity firms. The core of our franchise is making equity investments in management buyouts on behalf of our firm and our investors, which include state and corporate pension funds, government agencies, banks, insurance companies, fund of funds, and university endowments. We have offices in New York, Menlo Park, San Francisco, London, Paris, Hong Kong, Beijing, Tokyo, and Sydney.

Track Record of Value Creation KKR’s private equity professionals seek to invest in attractive businesses for longterm appreciation, either through controlling ownership of a company or strategic minority positions. Since the Firm’s founding in 1976, KKR has invested more than $46 billion of equity in more than 165 transactions involving more than $422 billion of total financing. We have a well-established record of investing large pools of capital and consistently generating attractive rates of return and returning large multiples of capital to our investors. KKR operates as an investment firm, not as a conglomerate or a holding company. Each company in our portfolio is independently managed and financed. Each has its own board of directors, which generally includes KKR representatives. There are no cross-holdings. Cash flow from one company cannot be used in another company.

Commitment to Investors As the general partner of the KKR Funds, we make our money just as our investors do, by the increased value over time of our stake in the Funds’ investments. We have a significant portion of our personal assets committed to our Funds’ investments, and we share the risks of ownership.

36

KKR 2007 Annual Review

Partnering With Management Management is our partner in creating value. Our portfolio company managers have a significant amount of their personal net worth invested in their companies. We strongly believe that the best managers think like – and are – owners. We work closely with our portfolio companies to develop and implement operational strategies. In doing this, KKR brings substantial resources to bear to ensure that our companies are positioned to drive value creation. We want our portfolio companies to invest for future competitiveness. We encourage them to take a long-term perspective; to maintain their business focus; to manage the balance sheet as well as the income statement; to make strategic acquisitions; to motivate a wide range of employees by giving them a stake in the business; and to build for the future through prudent capital investment, research and development spending, and new product marketing.

Long-Term Appreciation We are involved, patient investors. We take a long-term view of a company’s performance. We are not concerned with quarter-to-quarter results, but rather focus on cash flow and measure results over a number of years. It is our objective to achieve attractive rates of return for our investors, balanced with an attractive multiple of capital returned for each dollar invested. It is not unusual for us to own companies for five years or more, and we have held some investments for more than ten years.

37

Investments of the KKR Funds

Investment Headquarters 2007 Revenue Employees 3,667 Accellent Wilmington, $472 million Massachusetts

Alliance Boots London, England £14.6 billion 100,000

Aricent Palo Alto, $297.5 million * 7,500 California * Represents FY07 Revenue for the period ending March 31, 2007. A.T.U. – Weiden, €1.4 billion 15,143 Auto-Teile-Unger Germany Avago Technologies

$1.55 billion * 3,610 San Jose, California and Singapore * Represents FY07 Revenue for the period ending October 31, 2007.

AVR/van Gansewinkel Rotterdam, €1.2 billion 6,000 the Netherlands

38

KKR 2007 Annual Review

Leadership

Year of Investment

Business

Website

The largest provider of fully integrated outsourced manufacturing and engineering services to the medical device industry.

www.accellent.com

Stefano Pessina, 2007 chairman and CEO

An international pharmacy-led health and beauty group operating in more than 15 countries (including associates) across the world.

www.allianceboots.com

Ash Bhardwaj, 2006 chief executive officer

The leading provider of high-impact, innovative software solutions to the global communications industry.

www.aricent.com

Johannes P. Huth, 2004 chairman Michael Kern, chief executive officer

Germany’s leading operator of automotive retail stores and repair shops, with an expanding international footprint.

www.atu.de

Kenneth W. Freeman, 2005 chairman Robert E. Kirby, chief executive officer

Dick Chang, 2005 A leading supplier of innovative semiconductor www.avagotech.com chairman solutions for advanced communications and Hock E. Tan, industrial and commercial applications. chief executive officer Reinhard Gorenflos, 2006 chairman Ruud Sondag, chief executive officer

The largest waste management company in the Netherlands.

www.avr.nl

39

Investments of the KKR Funds

Investment Headquarters 2007 Revenue Employees Biomet, Inc.

 arsaw, W $2.1 billion * 6,772 Indiana

* Represents FY07 Revenue for the period ending May 31, 2007.

BIS

North Sydney, $A432 million * 1,275 Australia * Represents FY07 Revenue for the period ending June 30, 2007.

Capmark San Mateo, $1.39 billion 2,134 California €947 million 274 “Der Grüne Punkt” Cologne, Duales System Germany Deutschland GmbH Dollar General

Goodlettsville, $9.5 billion 69,000 Tennessee

$8.1 billion 7,262 Energy Future Holdings Dallas, Texas (formerly TXU Corp.)

First Data Corporation Greenwood Village, $8.8 billion 29,000 Colorado

40

KKR 2007 Annual Review

Leadership

Year of Investment

Jeffrey R. Binder, 2007 chairman and CEO



Business

Website

Designs and manufactures orthopedic medical www.biomet.com devices and other products used primarily by surgeons and medical specialists, with distribution in over 70 countries.

Mark Luby, 2006 chairman Chris Berkefeld, chief executive officer

A leading outsourced supplier of on-site and off-site materials handling and logistics services to the minerals, metals, and coal mining sectors.

www.bislimited.com.au

Dennis D. Dammerman, 2006 chairman William F. Aldinger, III, chief executive officer

A leader in real estate finance, investments, and services.

www.capmark.com

Reinhard Gorenflos, 2005 chairman Stefan Schreiter, chief executive officer

Organizes the collection, sorting, and recycling of packaging waste in Germany with the support of a network of local waste management partners.

www.gruener-punkt.de

Michael M. Calbert, 2007 chairman Richard W. Dreiling, chief executive officer

A customer-driven distributor of everyday items, including basic consumable merchandise and other home, apparel and seasonal products, with more than 8,000 stores in 35 states.

www.dollargeneral.com

Donald L. Evans, 2007 chairman John F. Young, chief executive officer

Manages a portfolio of competitive and regulated energy subsidiaries consisting of TXU Energy, a competitive electricity retailer; Luminant, a competitive power generation business, including mining, wholesale marketing and trading, and construction; and Oncor, a regulated electric distribution and transmission business.

www.energyfutureholdings.com

A leading provider of electronic commerce and payment solutions for merchants, financial institutions, and card issuers globally.

www.firstdata.com

Michael D. Capellas, 2007 chairman and CEO



41

Investments of the KKR Funds

Investment Headquarters 2007 Revenue Employees Harman International Washington, D.C. $3.8 billion 11,688 Industries, Inc.

HCA Inc. Nashville, $26.9 billion 186,000 Tennessee Jazz Pharmaceuticals, Inc.

Palo Alto, California

$65 million

405

KION Group

Wiesbaden, Germany

€4.3 billion

21,000

KSL Holdings (Hotel del Coronado)

San Diego, California

$141 million

1,200

Laureate Education, Inc. Baltimore, $1.4 billion 29,900 Maryland Legg Mason, Inc.

42

Baltimore, $4.3 billion * 4,030 * Maryland *Represents FY07 figure for the period ending March 31, 2007.

KKR 2007 Annual Review

Leadership

Year of Investment

Dr. Sidney Harman, 2007 chairman Dinesh Paliwal, chief executive officer

Jack O. Bovender, Jr., 2006 chairman and CEO

Business

Website

Designs, manufactures, and markets a wide range of www.harman.com audio and infotainment products for the automotive, consumer and professional markets.

The largest, most diversified investor-owned health care services provider in the United States, operating 169 hospitals and 108 freestanding surgery centers in 20 states and the United Kingdom.

www.hcahealthcare.com

Bruce C. Cozadd, chairman Samuel Saks, M.D., chief executive officer

2004

A specialty pharmaceutical company focused on identifying, developing, and commercializing innovative products to meet unmet medical needs in neurology and psychiatry.

www.jazzpharmaceuticals.com

Johannes P. Huth, chairman Gordon Riske, chief executive officer

2006

Leading European manufacturer of forklift trucks and related services.

www.kiongroup.com

Michael S. Shannon, chairman and CEO

2003

Owner/operator of luxury resort hotels, spas, and membership clubs, including the Hotel del Coronado.

www.kslrec.com

Douglas L. Becker, 2007 chairman and CEO Raymond A. 2008 “Chip” Mason, chairman Mark R. Fetting, chief executive officer

Leading provider of for-profit post-secondary www.laureate-inc.com education in 16 countries worldwide, serving more than 300,000 students through campus-based universities located in Latin America, Europe, and Asia, and through online universities based in the U.S. A global asset management firm with nearly $1 trillion in assets under management. Through its domestic and international subsidiaries, the firm serves the institutional, mutual fund, and wealth management markets.

www.leggmason.com

43

Investments of the KKR Funds

Investment Headquarters 2007 Revenue Employees Legrand

Limoges, France

€4.1 billion

33,656

Masonite

Tampa, Florida and Toronto, Canada

$2.2 billion

10,863

Maxeda

Amsterdam, €3.1 billion 18,000 the Netherlands

MedCath Corporation

$706 million 3,805 Charlotte, North Carolina

MMI Holdings Ltd. Singapore $545 million 12,000

The Nielsen Company Haarlem, the $4.7 billion 34,577 (fka VNU) Netherlands and New York, New York

44

KKR 2007 Annual Review

Leadership

Year of Investment

Business

Website

Gilles Schnepp, chairman and CEO

2002

World-leading specialist in products and systems for electrical installations and data networks in residential housing, office buildings, and for industrial use; distributes products in more than 160 countries.

www.legrandelectric.com

Kenneth W. Freeman, chairman Frederick Lynch, chief executive officer

2005

Leading global manufacturer of doors and door www.masonite.com components, with 82 facilities in 18 countries across North America, Europe, South America, Asia, and Africa.

www.maxeda.com

Tony DeNunzio, 2004 chairman and CEO

The leading non-food retailer in Benelux, operating “do-it-yourself,” department, and specialty stores.

John T. Casey, 1998 chairman O. Edwin French, chief executive officer

Provides cardiology and cardiovascular services www.medcath.com through the development, operation, and management of hospitals and other specialized facilities focusing on the needs of patients suffering from heart disease.

Bong Lim Teh, 2007 chairman and CEO

Engaged in the manufacture of precision machining and assembly components for customers in various industries, such as data storage, photonics, communications, semiconductor equipment, automotive, oil and gas, medical, aerospace and industrial automation.

www.mmi.com.sg

David L. Calhoun, 2006 chairman and CEO

A global information and media company active in over 100 countries, with leading market positions and recognized brands in marketing information (ACNielsen), media information (Nielsen Media Research), business publications (Billboard, The Hollywood Reporter, Adweek) and trade shows.

www.nielsen.com



45

Investments of the KKR Funds

Investment Headquarters 2007 Revenue Employees

Northgate Information Hemel Hempstead, £518 million 6,490 Solutions plc England NuVox Communications

Greenville, $535 million 1,761 South Carolina

NXP Eindhoven, €4.6 billion 37,627 the Netherlands PagesJaunes Groupe

€1.2 billion 4,640 Sèvres, France

PRIMEDIA, Inc. Atlanta, Georgia $326 million 1,095 ProSiebenSat.1 Media AG

Munich, Germany

€3.2 billion

5,943

Rockwood Holdings, Inc. Princeton, $3.1 billion 9,525 New Jersey

46

KKR 2007 Annual Review

Leadership

Year of Investment

Business

Website

Todd A. Fisher 2008 chairman

A leading global provider of specialist software and outsourcing solutions to the human resources and public service sectors.

www.northgate-is.com

David L. Solomon, 2000 chairman James W. Akerhielm, chief executive officer

An Integrated Communications Provider offering a comprehensive selection of voice, data, and security services to business customers in 16 states in the Southeast and Midwest.

www.nuvox.com

Creates semiconductors, system solutions and software that deliver better sensory experiences in mobile phones, personal media players, TVs, set-top boxes, identification applications, cars and a wide range of other electronic devices.

www.nxp.com

Jacques Garaïalde, 2006 chairman Michel Datchary, chief executive officer

Leading directories and Internet local search portal in France – with smaller directory operations in Spain, Morocco and Luxembourg.

www.pagesjaunesgroupe.com

Dean B. Nelson, 1989 chairman Robert Metz, chief executive officer

The parent company of Consumer Source Inc., a national publisher and distributor of free print and online consumer guides for the apartment, auto and home industries.

www.primedia.com

Goetz Maeuser, chairman Guillaume de Posch, chief executive officer

One of the largest and most successful pan-European broadcasting groups with 26 commercial TV stations, 24 premium Pay TV channels and 22 radio networks.

http://en.prosiebensat1.com

Global specialty chemicals and advanced materials company focused on high-value-added niche markets in three primary segments: Specialty Chemicals, Pigments & Additives, and Advanced Materials.

www.rocksp.com

Peter Bonfield, 2006 chairman Frans van Houten, chief executive officer

2007

Seifi Ghasemi, 2000 chairman and CEO





47

Investments of the KKR Funds

Investment Headquarters 2007 Revenue Employees

Sealy Trinity, $1.7 billion 6,099 North Carolina

Seven Media Group Sydney, Australia A$1.1 billion * 2,880 * Represents FY07 Revenue for the period ending June 30, 2007. SunGard Wayne, $4.9 billion 19,516 Pennsylvania Tarkett

Nanterre, France

€2.1 billion

8,856

TDC A/S Copenhagen, DKK39.3 billion 17,390 Denmark

Tianrui Group Cement Co., Ltd. Henan, China 1.85 billion RMB 3,000

48

KKR 2007 Annual Review

Leadership

Year of Investment

Business

Website

Paul J. Norris, 2004 The largest bedding manufacturer in the world. www.sealy.com chairman

A 50/50 joint venture with Seven Network Limited that consists of Australia’s leading free-to-air TV network (Seven Network), second-largest magazine business (Pacific Magazines), and second most-visited entertainment portal (Yahoo!7) through a 50/50 joint venture that was formed with Yahoo in February 2006.

http://au.tv.yahoo.com/tv/

Glenn Hutchins, 2005 chairman Cristóbal Conde, chief executive officer

Global leader in integrated software and processing solutions.

www.sungard.com

Didier Deconinck, chairman Michel Giannuzzi, chief executive officer

Designs, manufactures, and sells PVC, wood, laminate, sports, and other specialty flooring products for the residential and commercial markets in Europe and North America.

www.tarkett.com

Henning Dyremose, 2006 chairman Jens Alder, chief executive officer

Leading provider of telecommunications solutions in Denmark and second-largest provider of telecommunications solutions in Switzerland, with a significant presence in selected markets in Northern and Central Europe.

www.tdc.com

Dr. Xiao Jiaxiang, 2007 chairman and CEO

One of China’s leading cement producers, Tianrui www.trcement.com Cement’s production capacity is entirely based on the dry process New Suspension Pre-heater technology, which is more energy efficient, more environment-friendly and more cost-advantageous over its competitors.

Kerry Stokes, 2006 chairman David Leckie, chief executive officer

2007

49

Investments of the KKR Funds

Investment Headquarters 2007 Revenue Employees

Toys “R” Us, Inc. Wayne, $13.7 billion 72,000 New Jersey U.N Ro-Ro Istanbul, Turkey €161 million 336

U.S. Foodservice Chicago, Illinois $20.2 billion 27,163 Visant Corporation

Armonk, New York

$1.3 billion

5,096

Yageo Taipei, Taiwan NT$22.4 billion 9,750

Zhone Oakland, $175 million 461 California

50

KKR 2007 Annual Review

Leadership

Year of Investment

Gerald L. Storch, 2005 chairman and CEO

Business

Website

One of the leading specialty toy and children’s www.toysrus.com products retailers in the world, selling merchandise through a worldwide network of stores, including Babies ‘R’ Us, the world’s largest baby product specialty store chain.

John L. Pfeffer, 2007 chairman Cüneyt Solakoğlu, chief executive officer

A Mediterranean short-sea roll-on/roll-off (“ro-ro”) ferry operator and a market leader for trucked cargo between Turkey and Western Europe.

www.unroro.com.tr

Charlie Banks, 2007 chairman Robert Aiken, chief executive officer

The second largest broadline foodservice distributor in the U.S., providing food and related products to independent restaurants, health care and hospitality customers, educational institutions, and prominent multi-unit restaurant companies.

www.usfoodservice.com

www.visant.net

Marc L. Reisch, chairman and CEO

2004

A leading North American enterprise for school- related marketing and affinity products and services.

Pierre T.M. Chen, chairman David J.L. Huang, chief executive officer

2007

A world-class provider of passive-component services www.yageo.com.tw with capabilities on a global scale, including production and sales facilities in Asia, Europe and the Americas.

Mory Ejabat, 1999 chairman and CEO

Designs and manufactures network equipment for telephone companies and cable operators worldwide to deliver a rich array of voice, data, video, and entertainment services.

www.zhone.com

51

KKR Offices New York Kohlberg Kravis Roberts & Co. L.P. 9 West 57th Street Suite 4200 New York New York 10019 +1 (212) 750 8300

Menlo Park Kohlberg Kravis Roberts & Co. L.P. 2800 Sand Hill Road Suite 200 Menlo Park California 94025 +1 (650) 233 6560

London Kohlberg Kravis Roberts & Co. Ltd. Stirling Square 7 Carlton Gardens London SW1Y 5AD +44 20 7839 9800

Paris Kohlberg Kravis Roberts & Co. SAS 24 rue Jean Goujon 75008 Paris +33 1 53 53 96 00

Hong Kong KKR Asia Limited 25/F, AIG Tower 1 Connaught Road, Central Hong Kong +852 3602 7300 Beijing KKR Investment Consultancy (Beijing) Company Limited 15/F Beijing Yintai Office Tower C No.2 Jianguomenwai Street Chaoyang District Beijing 100022, China +86 10 6563 7001 KKR Financial LLC 555 California Street 50th floor San Francisco, CA 94104 +1 (415) 315 3620

52

Tokyo KKR Japan Limited 6/F, Tokyo Ginko Kyokai Building 1-3-1 Marunouchi, 1-Chome Chiyoda-ku Tokyo 100 0005 +813 6268 6000 Sydney KKR Australia Pty Limited Level 42, Gateway Building 1 Macquarie Place Sydney NSW 2000 Australia +61 2 8298 5500

Contents About KKR

2

To Our Limited Partners

5

The Year in Review: Private Equity Investments 9 People

26

KKR and Its Principles

36

Investments of the KKR Funds

38

2007 Annual Review