Financial Institutions

U.S.A.
Special Report
Private Equity: An Industry Overview

Ratings Overview
Long-Term IDR
Since mid-August 2009, Fitch Ratings has assigned initial long-term issuer default
Apollo Global Management LLC NR ratings (IDRs) to The Blackstone Group, L.P. (Blackstone), Oaktree Capital Management
The Blackstone Group L.P. A+ L.P. (Oaktree), Fortress Investment Group LLC (Fortress), and KKR & Co. L.P. (KKR).
The Carlyle Group NR
Fortress Investment Group LLC BBB
Blackstone, Oaktree, and KKR have since accessed the public debt markets with term
KKR & Co. L.P. A deals to supplement bank credit facilities and better match funding duration with the
Oaktree Capital Management L.P. A use of debt proceeds, which is typically co-investments in fund vehicles that can last
12 years or more (although it is not normally that long). Fitch believes public issuance
Rating Outlook from the private equity (PE) sector may increase over time as other firms seek to
Apollo Global Management LLC NR deploy similar strategies, given positive market receptivity to the recent bond deals.
The Blackstone Group L.P. Stable
The Carlyle Group NR
Fortress Investment Group LLC Stable Many firms have also sought public stock listings in the last several years. While majority
KKR & Co. L.P. Stable ownership has remained with principals and employees, the public float has provided a
Oaktree Capital Management L.P. Stable
permanent base of capital that can be co-invested in funds and recycled into follow-on
NR  Not rated. funds as distributions allow. Blackstone, Fortress, and KKR are currently listed on the
NYSE and Apollo Global Management LLC (Apollo) filed an S1 in March 2010 with the
Analysts expectation to sell a portion of its class A shares to public investors. Fitch believes that
those firms that are already public are well prepared to meet the requirements of a
Meghan (Crowe) Neenan, CFA
+1 212 908-9121 heightened regulatory environment, as they are registered investment advisors,
meghan.neenan@fitchratings.com voluntarily regulated by the SEC, and meet all the listing requirements of the NYSE,
which generally provides comparatively high levels of transparency.
Leslie Bright
+1 212 908-0622
leslie.bright@fitchratings.com
Types of Funds that Active LPs are Seeking to Invest in During 2010/2011
Joseph Scott
(%)
+1 212 908-0624
joseph.scott@fitchratings.com Small to Mid-Market Buyout
Distressed Private Equity
Sharon Haas, CFA Fund of Funds
+1 212 908-0362 Large to Mega Buyout
sharon.haas@fitchratings.com Secondaries Funds
Venture
Related Research Other
Mezzanine
 Global Financial Institutions Cleantech
Rating Criteria, Aug. 16, 2010
0 10 20 30 40 50 60 70
 Investment Manager and Alternative
Funds Criteria, Dec. 30, 2009 Proportion of Respondents
Source: Preqin

The PE industry has not been immune to the affects of the struggling economy as 2009
results demonstrated. Fund returns were hurt by negative valuation movements and fee
earnings declined with less transaction activity. Still, results to date in 2010 have been
favorable and opportunities abound in the current environment, particularly given
reductions in bank lending. Many alternative asset managers have expanded into new
products, like PE-style credit funds to take advantage of lending gaps in the small and
middle market space and distressed credit opportunities. According to a survey by
Preqin, an independent research firm focused on alternative assets, limited partners
(LPs) are looking to invest in small to mid-market buyout funds in 2010 and 2011 to a
much greater degree than the traditional large to mega buyout fund.

www.fitchratings.com October 8, 2010

 Financial Institutions
Many of the firms covered in this report have a variety of business segments, including
real estate, credit, hedge funds, financial advisory, fund placement, and capital
markets services, but the focus of this report will be largely PE and will:

 Provide an overview of the PE industry, including trends in deal activity,

fundraising, fund performance, and valuation.
 Discuss qualitative factors Fitch considers when rating an alternative asset
manager, including legal entity structures, key man risk, reputational risk, investor
base profiles, and legislative/regulatory considerations.
 Discuss quantitative factors Fitch considers when rating an alternative asset
manager, including trends in fee-earning assets under management (FAUM),
profitability, leverage, and liquidity.
Entities covered in this report include Apollo, Blackstone, The Carlyle Group (Carlyle),
Fortress, and KKR. A profile of each is provided in the Appendix. For those entities not
publicly rated by Fitch, data provided in the report is publicly available in company
filings, annual reports, and/or the firm’s Web site.

Industry Overview
The PE industry has experienced many challenges since late 2008 as declines in bank
financing, disruptions in the capital markets, and a struggling economy yielded sizable
fund valuation hits and reductions in deal activity. In 2009, PE fund managers focused
largely on existing portfolio holdings; arranging deleveraging plans, completing debt
buybacks, and working with lenders to obtain covenant waivers and debt
refinancing/extensions. For example, at a September 2010 investor day, Blackstone
stated that in 2009 and year-to-date 2010, $52.8bn of portfolio company debt was
eliminated, refinanced, or extended. Additionally, as of Dec. 31, 2009, Apollo’s Fund VI
and its underlying portfolio companies had purchased or retired approximately $17.2bn
in face value of debt.
However, as 2009 came to a close, valuation trends began to improve, with increased
capital markets activity, and fund transactions gained momentum. The industry has
significant investment capital to put to work and fundraising in 2010 has been relatively
slow, but Fitch believes favorable trends are emerging in the space. The following
sections will provide a high level overview of PE deal activity, the fundraising
environment, and fund returns/valuation.

Deal Activity
Activity in the PE buyout space dropped dramatically across the globe in 4Q08 in the
midst of the Lehman bankruptcy and the capital markets crisis, with the number of
buyout deals falling 32.8% from the prior quarter and the aggregate deal value declining
to $16.7bn from $45.1bn in 3Q08, according to Preqin. Global activity remained sluggish
throughout most of 2009, with total PE capital called amounting to $180bn, compared
to $400bn in 2008 and a peak of $465bn in 2007. Capital distributed to LPs dropped
49.2% year over year in 2009, to $60bn, as weaker portfolio valuations yielded fewer
attractive exit opportunities.
As the market began to thaw in late 2009, Preqin reported that buyout activity
rebounded to precrisis levels with 382 deals valued at $40.4bn in 4Q09. After a dip in
1Q10, deal volume improved to $43.3bn in 2Q10, with activity including the $3.9bn
buyout of Extended Stay Hotels by Blackstone, Centerbridge Capital Partners, and
Paulson & Co. and the $3.4bn public-to-private transaction involving Interactive Data
Corporation by Silver Lake and Warburg Pincus.

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 Financial Institutions

Number and Aggregate Value of Buyout Deals Globally by Quarter

Number of Deals Aggregate Deal Value
(No. of Deals) ($bn)
550 70
500 60
450 50
400 40
350 30
300 20
250 10
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Source: Prequin Research Report: 'Q2 2010 Private Equity Global Buyout Deals Update.

Fitch believes activity should remain relatively steady over the balance of 2010, as PE
firms continue to have substantial dry powder, or uncalled capital, to put to work. At
June 30, 2010, for example, Blackstone had approximately $15.6bn of PE capital
available to invest, including its most recent buyout fund, BCP VI, while KKR had
approximately $11.9bn of uncalled capital in its private markets business. Apollo had
$13bn of uncalled PE capital at YE09.

Fundraising Environment
According to Thomson Financial, U.S. LBO and mezzanine fundraising fell precipitously
in 2009; dropping to $113bn from $365bn the prior year and a peak of $369bn in 2007.
According to Preqin, global PE fundraising has remained relatively weak in 2010, with
$41bn of aggregate capital raised in 2Q10, the lowest amount since 4Q03, and the
average time it takes for funds to achieve a final close has more than doubled over the
past six years, rising to 19.8 months in 2010 compared to 9.5 months in 2004.

U.S. LBO and Mezzanine Fundraising

Gross Funds Raised Per Period
($bn)
400
350
300
250
200
150
100
50
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Thomson Financial (Buyouts Magazine, March 2, 2009 and Jan.7, 2008).

Still, Preqin reports that in a survey of LPs, 76% plan to maintain their allocation to PE
over the next 12 months and 19% plan to increase their allocation. Longer term, 62% of
LPs surveyed plan to maintain their allocation to PE and 36% plan to increase their
allocation. Fitch believes the tougher fundraising environment at present reflects
declines in fund distributions to LPs in the last couple of years and the significant
amount of dry powder still available for managers to invest. While the longer term
survey results from Preqin are favorable, the ultimate level of LP commitments will be
dependent upon investment and realization activity over time. Still, PE funds may also
benefit from corporate and municipal entities that may be forced to reallocate pension

Private Equity: An Industry Overview October 8, 2010 3

 Financial Institutions
assets more aggressively due to deeply underfunded positions and low fixed-income
yields.

Fund Returns/Valuation
Capital moving into the PE space has increased over time because fund returns have
generally outperformed equity benchmarks on a risk-adjusted basis. However, more
recently, PE fund performance has suffered from severe valuation declines given
reductions in market valuation inputs and weaker underlying portfolio company
performance due to the tough economy. Preqin has created performance benchmarks
for buyout funds based on size, calculated using data from its database which has net
returns to LPs for 1,210 buyout partnerships. Internal rates of return (IRR) for mega
buyout funds with vintages 20002003 are between 20% and 35%, median IRRs for 2004
and 2005 vintages are 6.9% and 9.7%, respectively, and IRRs of 2006 and 2007 vintages
are negative. However, many of these later vintage funds remain in their investment
period and management has significant discretion over the timing of fund exits. While
the ultimate performance of more recent funds may not reach historical standards,
valuation trends have been improving since late 2009.

Private Equity Industry Returns by Vintage

Mean Net IRR by Vintage Percent Change in Real GDP
(%) (%)
35 6
30 5
25 4
20
3
15
2
10
5 1
0 0
(5) (1)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Note: U.S. private equity pooled mean net IRR to limited partners by vintage year as of March 31, 2010.
Source: Global Insight, Cambridge Associates LLC, and Bureau of Economic Analysis.

Additionally, data from Global Insight and Cambridge Associates LLC show that some of the
best performing PE vintage returns were made at or near the bottom of the cycle. PE
investments made in 1991, for example, generated a mean net IRR of 31% while
investments made in 2001 generated returns of 29%. PE fund managers are certainly hoping
this phenomenon is repeated in the current cycle, particularly with so much dry powder to
put to work. Real GDP annual growth was 0% in 2008 and negative 2.6% in 2009, according
to the Bureau of Economic Analysis, compared to negative 0.2% in 1991 and 1.1% in 2001.
According to Apollo’s March 2010 SEC filing, its most successful PE funds, in terms of
net IRR, were initiated during economic downturns. Funds I, II, and MIA generated a
combined net IRR of 37% on a compound annual basis from inception through the
disposition of their final investment in September 2004 and were initiated during the
downturn of 19901993. The firm’s Fund V has generated a net IRR of 46% from
inception through YE09 and was initiated during the downturn of 2001 through late
2003. Apollo’s latest fund, Fund VII, closed in December 2008 with $14.7bn of capital
and began investing in January 2008, near the beginning of the current downturn.
While certain trends are signaling the potential for improved returns, declines in fund
performance over the past couple of years, relative to historical standards, has given
LPs additional negotiating power. According to Preqin, mean management fees have

4 Private Equity: An Industry Overview October 8, 2010

 Financial Institutions
declined over the past three years for several fund types, with the most dramatic drop
happening in real estate funds greater than $1bn in size. The sharing of transaction and
monitoring fees have also been adjusted in the LPs favor in certain cases more
recently. Still, Fitch believes this trend may only be a short-term phenomenon; as
power is likely to shift back to the GP if fund returns, once again, materially exceed
those that can be achieved elsewhere, on a risk-adjusted basis.

Mean Management Fees for Selected Fund Types — 2007 vs. 2010
2007 2010
2.5

2.0

1.5

1.0
Buyout Funds Real Estate Funds (≥ $1bn) Venture Funds Distressed PE
($500m-$999m) ($100m-$249m) Funds (≥ $1bn)

Source: Preqin.

A quick note on valuation: for GAAP reporting purposes, the majority of fund holdings
are considered Level III investments, meaning that pricing inputs are unobservable as
there is little or no market activity for the asset. Therefore, interim results for
unrealized fund holdings are based largely on valuation models which require a
significant amount of management judgment. However, some asset managers engage
independent valuation firms to provide opinions on the reasonability of quarterly
valuations, which Fitch views positively. Short-term movements in valuation are not
necessarily indicative of the underlying investment value, but they do allow for the
analysis of relative performance. Fitch gains comfort with a PE manager’s valuation
process over time as realized exit proceeds are compared to prior quarter valuations.

Key Credit Considerations

The analysis of a PE firm for credit rating purposes is unique within the financial
institutions space, as legal entity structures and other qualitative factors play a key
role in the strength, sustainability, and availability of management fees needed to
support debt service. Leverage analysis differs from that of traditional financial
institutions in that Fitch takes a more corporate approach when reviewing alternative
asset managers, with a focus on cash flow coverage and debt service capacity instead
of on balance sheet capitalization.
The following sections will discuss some of Fitch’s key qualitative and quantitative
rating considerations for companies with sizable PE businesses, with actual examples
provided when available.

Qualitative Rating Considerations

Key qualitative factors considered in the rating of a PE firm include legal entity
structures, key man risk, reputational risk, accounting provisions, LP diversity, and the
legislative/regulatory environment. Each will be discussed in turn.

Legal Structure
When reviewing a PE firm’s legal entity structure, Fitch seeks to understand the flow of
fees and incentive payments from the funds to determine the level of income available

Private Equity: An Industry Overview October 8, 2010 5

 Financial Institutions
to support debt repayment. A PE firm’s structure is unique in that there are LPs at the
fund level that may have a priority claim on fund earnings, namely transaction and
monitoring fees and realized gains. The PE firms Fitch rates are generally structured
with intermediate holding entities that consolidate the management fees, transaction
and monitoring fees, and incentive income of all the underlying funds, after LP
distributions are removed, in addition to the operating and compensation expenses of
the firm. These holding entities are generally joint and several guarantors of the debt
issuing entity. Therefore, the interests of the general partner (GP) are subordinated to
that of the debt holders. If the GP had a priority claim to the income, above that of the
debt holders, Fitch believes the firms would receive a much lower rating.

Blackstone Legal Entity Structure

Blackstone Senior China Investment Public

Managing Directors Corporation Shareholders

9.7% 22.3%
68.0%

Blackstone Group L.P.

32.0%

Blackstone Blackstone Blackstone Blackstone

Holdings I L.P Holdings II L.P Holdings III L.P Holdings IV L.P

Joint and Several Guarantors

Blackstone Holdings Finance Co. LLC

Source: Company filings.

Blackstone, for example, has Blackstone Holdings I, II, III, and IV, which consolidate the
fees and incentive income of the underlying funds, after LP distributions. The entities
are then joint and several guarantors of debt issued by Blackstone Holdings Finance Co.
LLC. Fitch rates other alternative asset managers with similar structures.

Key Man Risk

Key man risk is a constraining rating factor for PE firms. Key persons are typically
identified in the various LP agreements that govern the firm’s funds and, generally
speaking, if one or more key persons leave the firm or cease to devote a significant
amount of time to the management of a specific fund, the LPs may have the ability to
replace the GP and/or terminate further investment in the fund, or in extreme cases,
may have the ability to seek liquidation of the fund. While the firm is typically provided
time to provide a suitable key person replacement for approval, the departure of a key
individual could impair the company’s ability to raise future funds as LPs may be less
confident that a strong track record will extend under new leadership. Examples of key
persons in the PE space include Stephen Schwarzman at Blackstone, Henry Kravis at KKR,

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and Leon Black at Apollo. Many PE
firms have deep bench strength, in Examples of Key Persons at PE Firms
terms of management, but the PE Firm Key Persons
departure of a key person could Apollo Leon Black, Joshua Harris, Marc Rowan
raise questions for LPs regarding the Blackstone Stephen Scharzman and Hamilton James
strategy and ultimate performance Carlyle William Conway, Jr., David Rubenstein, and
Daniel D'Aniello
of the funds. Still, Fitch believes Fortress Wesley Edens, Randal Nardone, and Robert
many alternative asset managers Kauffman
work hard to institutionalize a KKR Henry Kravis and George Roberts
corporate culture which should, to Note: Named individuals are not necessarily identified in key
person clauses in LP agreements.
some extent, reduce key man risk. Source: Company filings.

While Fitch believes the risk of a

forced liquidation given a key person event is relatively remote, the high impact
outcome should it occur makes key man risk a constraining rating factor.

Reputational Risk
Fitch believes a fund manager’s reputation is paramount regarding its ability to
successfully attract and retain investors and new investment opportunities. Historical
performance is a key driver in maintaining a firm’s reputation and its ability to
generate new funds while existing funds are in process, which provides for a laddering
of funds throughout the business, mitigating the risk of an interruption in management
fees or one fund’s poor performance unduly hampering the entire business.
Key people at the firm can also have a meaningful impact on a manager’s reputation.
The departure of a key individual or a corporate scandal can damage a firm’s profile
and impair its ability to raise future funds or deploy current capital. An asset manager’s
employees are its most valuable asset and the hiring or departure of personnel must be
managed carefully.
Additionally, Fitch believes it is imperative for PE firms to maintain good relationships
with banks, securities firms, CEOs, and industry players to generate continuous business
opportunities. Frequent hostile takeovers would not be viewed favorably by Fitch as a
strategy, as it could damage the firm’s reputation as a partner in its investments.

Accounting Provisions
Several alternative asset managers have gone public in recent years and have had to
make decisions about how to construct their financial statements to provide a fair
representation of the business for public shareholders to understand. Many firms,
including Apollo, Blackstone, and Fortress, have elected to deconsolidate managed
funds from their financial statements for GAAP purposes, as they are not the majority
holders of the fund investments and not entitled to every dollar of return. However, to
deconsolidate fund vehicles, a PE firm is required to provide LPs with the ability to
remove the GP at any time, subject to a simple majority vote. Similar to key man
provisions, Fitch believes the occurrence of a liquidation vote is relatively remote;
however, the existence of the clause is a constraining rating factor.
Other PE firms, like KKR, have decided to consolidate the majority of funds for
financial reporting purposes, thus eliminating LP “kick-out” rights and the resulting
liquidation risk.
This issue could become moot, as FASB has discussed the potential that SFAS 167 could
include firms in the investment management industry, which could require alternative
asset managers to consolidate funds for financial reporting purposes. FASB’s ultimate
decision on this matter has been deferred, but Fitch believes consolidation could have a

Private Equity: An Industry Overview October 8, 2010 7

 Financial Institutions
material impact on the appearance of financial statements and could hurt transparency,
though Fitch’s analysis would not change. Still, the requirement to consolidate would
eliminate the need for LP kick-out rights.
Regardless of the accounting option chosen at present, many PE firms provide
management reporting views of their financials that can differ significantly from GAAP
due to the exclusion of IPO-related amortization costs, noncash equity awards, noncash
taxes, among others. These management views typically focus on the generation of fee
income, incentive income, and realized and unrealized investment gains, operating
costs, and compensation expenses. Fitch generally focuses on management reporting in
its analysis, although adjustments are made as necessary.

Limited Partner Diversity

The quality and diversity of a fund manager’s investor base is another important rating
factor as it speaks to the stability of funds and the relative ease of raising new funds. In
the most recent credit crisis, high net worth individuals, in particular, faced pressures
and often sought to sell uncalled capital commitments to third parties. Fund of funds,
endowments, and foundations have also struggled as investments in fraudulent
vehicles, like the Madoff funds, have often led to a desire for more conservative
investment strategies. On the other hand, public pensions, sovereign wealth firms, and
corporate pensions, have been relatively stable investors, given their deep pockets and
longer investment horizon.

PE Investor Base
(%)
Investor Apolloa Carlyleb KKRc
Public Pension Funds 36 37 
Foreign Governmental Agency 22  
Financial Institutions 14 33 14
Family Office/High Net Worth 9 15 5
Corporation 9 3 
Financial Advisors 7  
Endowments and/or Foundations 3 4 2
Corporate Pensions  8 3
Insurance   5
Public Pension Agency/Sovereign Wealth Funds   63
Fund of Funds   8
a
Funds III to VII as of Dec. 31, 2009. bAs of Dec. 31, 2009. cAs of March 31, 2010.
Source: Company filings.

The PE managers that Fitch rates generally have attractive investor bases, with
pensions and sovereign wealth funds accounting for the largest portion of the investor
base. At Apollo, Carlyle, and KKR the largest investors are public pensions and
sovereign wealth funds, followed by financial institutions, and foreign government
agencies. Family office/high net worth individuals, endowments, foundations, and fund
of funds are much smaller, accounting for 12%19% of the firms’ total investor bases.
Fitch believes the number of investors is another important differentiating factor, as a
larger investor base makes it easier to raise new and follow-on funds and reduces the
impact should one investor cease to participate. Carlyle, for example, has an ample LP
base with over 1,300 unique investors while KKR has a much smaller investor pool with
approximately 300 unique LPs. However, presumably KKR has a great ability to expand
if investors are looking to diversify managers.

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 Financial Institutions
Legislative and Regulatory Environment
Competition in the alternative investment management space is high, and barriers to
entry in the past have been low. However, the recent market upheaval and increased
regulatory scrutiny may change the landscape for alternative asset managers, elevating
the barriers to entry with reporting and regulatory burdens that may prove too onerous
for smaller firms. Fitch believes that those firms that are already public are well
prepared to meet the heightened regulatory environment, as they are registered
investment advisors, voluntarily regulated by the SEC, and meet all the listing
requirements of the NYSE, which generally provides comparatively high levels of
transparency.
Recently, there has been some congressional debate regarding the taxing of certain asset
managers as corporations rather than as partnerships, in addition to discussions about the
treatment of carried interest as ordinary income for tax purposes rather than as a capital
gain. Should either of these proposals become law, Fitch believes PE companies’ and/or
partners’ tax liabilities could increase significantly. However, neither change would be
expected to impact the company’s ratings, as Fitch focuses on measures of pretax income
as a proxy for cash flow in debt service calculations and taxation at the partner level are
based on distributions that are subordinated to debt holders.
It should be noted that carried interest is generally earned by a GP once a fund’s
returns have surpassed a predetermined hurdle rate. Carried interest is typically equal
to 20% of excess profits in PE funds. As an example, if a $100m fund has an 8% hurdle
rate and the ultimate value of the fund is $200m, the GP may be entitled to carried
interest of $18.4m, or 20% of the $92m of excess profits. Historically, for tax purposes,
this carry has been taxed as capital gains, as it is based on changes in the realized
value of the underlying investments, which are generally held for a long time (on
average five years or more). A significant portion of carry income is distributed to
principals and employees as compensation for their investment work. Recent debates in
Congress have centered on whether this carried interest should therefore be considered
salary, and thus taxed at marginal income tax rates.

Quantitative Rating Considerations

Key quantitative factors considered in the rating of an alternative asset manager
include size and growth of fee-earning assets under management (FAUM), profitability
trends, leverage, and liquidity. Each will be discussed in turn.

Fee-Earning Assets Under Management

PE firms typically report two asset metrics; assets under management (AUM) and FAUM.
AUM makes adjustments for changes in the valuation of underlying investments, while
FAUM, in the case of PE firms, is generally based on committed capital during the
investment period and on invested capital thereafter. The typical investment period for
a PE fund is five to six years with a hold period that can extend to 12 years or more.
This is the model employed by Blackstone and KKR, which Fitch believes provides some
level of management fee predictability. PE firms generally earn management fees on
FAUM in the range of 1.0%2.0% annually.
Fortress is a notable exception to the traditional model, as it earns fees in its PE business
based on the value of underlying investments. Fitch believes this model will yield a more
volatile earnings stream for Fortress over time and has had a negative impact on
management fees earned in recent years, due to depressed valuations in the PE space.
When analyzing FAUM, Fitch looks for growth, laddering of fund maturities, and
investment concentrations to assess the stability of management fees over time.
Blackstone is one of the largest alternative asset managers in the world, with $101.4bn

Private Equity: An Industry Overview October 8, 2010 9

 Financial Institutions
of FAUM at June 30, 2010, consisting of PE, real estate, fund of hedge funds, and credit
funds. The firm’s FAUM has expanded at a compound annual pace of 19.2% since 2006,
which is particularly notable given the tough capital markets climate since 2008.
Carlyle is one of the largest PE firms in the world with $90.5bn of AUM at March 31,
2010, consisting largely of PE fund vehicles. Carlyle’s AUM has also grown significantly
over time, starting from just $5m in 1987.

Fee-Earning Assets Under Management

($m, Years Ended Dec. 31)
2006 2007 2008 2009 1Q10 2Q10
Apollo N.A. 22,541 40,943 43,225 N.A. N.A.
Blackstone 54,795 83,152 91,041 96,097 98,070 101,420
Carlylea N.A. 81,000 85,000 88,600 90,500 N.A.
Fortress 21,165 32,930 29,229 31,476 30,197 41,660
KKR N.A. N.A. N.A. 42,780 42,529 41,643
a
Assets under management. N.A.  Not available.
Source: Company filings and publications.

Blackstone’s 2006 vintage fund, BCP V, remains the largest buyout fund in history, with
approximately $21bn of investment capital. In 2Q10, the company held a close on its
follow-on fund BCP VI at $13.5bn, which exceeded analyst expectations given the
tougher fundraising environment. BCP V had $3.9bn of available capital yet to invest at
June 30, 2010, but management expects BCP VI to begin earning fees before the end of
the year. Fitch views the laddering of these funds positively, as it ensures some
sustainability and predictability of management fees.
Investment concentrations are also an important rating consideration as a fund’s
performance can be hampered by the poor performance of one large investment. An
underperforming fund can damage a PE manager’s track record and impair their ability
to raise future funds. Fitch believes Carlyle, in particular, has a significant amount of
fund diversity, having invested $60.6bn of equity in 969 transactions from 1987 to
March 31, 2010. It currently has $90.5bn of AUM in 67 funds. Fortress, on the other
hand, has fewer investments in each fund and has multiple co-investment vehicles with
few investments in each. In addition, Fortress earns management fees based on fund
valuations, so the deterioration of one investment could significantly impact fund
returns and fee earnings.
Fitch believes Blackstone’s funds are Blackstone Fee Diversity
less diverse than Carlyle’s, with $33bn (Six Months Ended June 30, 2010)
of equity capital invested in 142
transactions since December 1998,
but the company is more diverse from Real Estate
a business line perspective, in that it 22% Credit and
Marketable
has a sizable PE, real estate, fund of Alternatives
hedge funds, and credit business, in 28%
addition to financial advisory and fund
placement services. The fee
Private
contribution from each segment is Equity
material and should provide for more 23%
stability in fee income over time. The Financial
credit and marketable alternatives Advisory
segment includes fund of hedge funds 27%
and credit.
Source: Company filings.

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 Financial Institutions
Profitability and Fund Performance/Valuation
Fitch’s review of profitability focuses on the generation of fee-related earnings (FRE),
which includes management, monitoring, and transaction fees less non-incentive
compensation and operating expenses. Generally speaking, fee revenue should be on
the rise as FAUM grows and deal activity increases. Management fees have risen across
the board in recent years, as presented in the table below, but dipped a bit for
Blackstone in 2009, due to the liquidation of its proprietary hedge funds at the end of
2008, and for Fortress due to outflows in its liquid hedge fund business. However, 1H10
has been relatively solid as many firms have developed new fund offerings that have
begun to generate fees. Transaction and monitoring fees have also been on the rise in
2010 due to an increase in deal activity as alternative asset managers work to deploy a
significant amount of dry powder in the funds.
FRE is a critical performance metric as it measures the earnings capacity of each manager’s
FAUM. Blackstone’s FRE is the most significant of the company’s Fitch rates, at $410.4m in
2009, although its management fees/FAUM is a bit lower than others due to the lower fees
on its sizable fund of hedge funds business and its FRE margin is lower due to the higher
compensation structure in the financial advisory and restructuring businesses.

Private Equity Performance Metrics

($m, Years Ended Dec. 31)
2004 2005 2006 2007 2008 2009 1H10
Management Fees
Apollo N.A. 33.49 101.92 192.93 384.25 406.26 N.A.
Blackstone N.A. N.A. 533.58 804.25 1,041.72 999.83 514.89
Fortress 102.37 172.64 294.11 470.00 597.69 423.81 230.44
KKR 86.20 133.60 230.30 264.90 412.70 465.96 221.70
Fee-Related Earnings
Apolloa N.A. N.A. N.A. 64.52 126.36 90.71 N.A.
Blackstone N.A. N.A. 198.84 386.70 427.67 410.41 206.66
Fortress N.A. N.A. N.A. 147.78 271.18 173.16 92.94
KKRb 64.65 83.60 174.31 441.12 194.04 264.83 132.88
Management Fees/FAUM (%)
Apollo N.A. N.A. N.A. 0.86 0.94 0.94 N.A.
Blackstone N.A. N.A. 0.97 0.97 1.14 1.04 1.02
Fortress 1.18 1.53 1.39 1.43 2.04 1.35 1.11
KKR N.A. N.A. N.A. N.A. N.A. 1.09 1.06
FRE/Fee Revenue (%)
Apolloa N.A. N.A. N.A. 18.98 23.87 19.62 N.A.
Blackstone N.A. N.A. 17.87 23.86 28.15 27.57 26.49
Fortress N.A. N.A. N.A. 31.44 45.37 40.86 40.33
KKRb 34.25 34.75 41.56 52.87 33.36 41.24 40.49
a
Fitch estimated fee-related earnings based on management business reporting. Calculated as management, advisory, and
transaction fees, less non-incentive compensation, recurring professional fees, general and administrative expenses,
placement fees, occupancy costs, depreciation and amortization. bExcludes incentive income from KFN. 2010 results reflect
the combination transaction with KPE. N.A.  Not available.
Source: Company filings.

KKR’s FRE has generally been on an increasing trend, although comparisons are difficult
over time due to the restructuring of the company in 2009. Performance has been solid in
2010 and the firm’s FRE margin is strong, at 40.5% through the first six months of the year.
Fortress’ performance declined in 2009 due to reduced fee rates and increased
redemption requests in its liquid hedge fund business, but earnings appear to have
stabilized to some extent in early 2010. The FRE margin has remained relatively solid,
even in the tough environment, as asset managers are able to toggle compensation
expenses to match underling fund performance and business trends.

Private Equity: An Industry Overview October 8, 2010 11

 Financial Institutions
Apollo’s management fees rose significantly in 2008 as Fund VII, with $14.7bn in
capital, began to earn fees, gaining modestly in 2009 with 5.6% growth in FAUM. Fitch’s
estimate of FRE dipped in 2009 as transaction and advisory fees dipped 61.4% due, in
part, to a 57% decline in PE dollars invested and lower divestitures.
While not a part of Fitch’s leverage analysis, incentive income is another important
performance metric and is typically earned by the fund manager after surpassing a
hurdle return for LPs (often 8%9%). Interestingly, KKR does not have a stated hurdle
return in its funds, although it does provide a 20% management fee rebate as carry is
earned, which effectively equates to a lower preferred return. Still, all else equal,
KKR’s potential incentive income earned is greater given the lower implied hurdle rate.
Incentive income, or carry, has been significant in the PE industry over time, which is
why fund sizes had been on an increasing trend until the capital markets crisis of
20082009. Carry is often the lion’s share of PE earnings, although it is volatile as it is
based on the timing of investment exits and is therefore not relied upon by Fitch as a
primary source of debt repayment. However, the absence of carry would result in lower
ratings, as Fitch believes it provides a meaningful cushion for debt holders.
Incentive income and related compensation is accrued on a quarterly basis based on
movements in fund valuation. Performance accruals were negative across the board in 2008
due to significant declines in market valuation in 4Q08 following the Lehman bankruptcy,
but began to tick up in 4Q09, which has generally yielded positive performance accruals in
2010. Realizations should increase as the economy and equity markets strengthen as fund
managers will seek to monetize investments at attractive returns.
Another measure of PE firm performance is fund returns, as measured by multiple of
invested capital (MOIC) or net IRR. KKR’s first fund, its 1976 fund, had $31m of
committed capital and realized $537m, for a MOIC of 17.1x and a net IRR of 35.5%. That
kind of return has not been repeated, but Fitch believes KKR has a solid track record
over time. There are eight funds currently in KKR’s public company with vintages back
to 1999 that have yielded a MOIC of approximately 2.55x on realized investments
through June 30, 2010. The MOIC of remaining investments in the funds is 1.11x, which
compares to 0.98x at Dec. 31, 2009. Valuations have generally improved in 1H10, but
KKR’s European Fund II and III are currently being held below cost, with MOICs of 0.66x
and 0.94x, respectively.
Blackstone’s five PE funds that are through their investment period had yielded a MOIC on
realized investments of 2.5x as of June 30, 2010 and a net IRR of 25%. BCP V, which
remains in its investment period, began investing in December 2005 and took some
valuation hits throughout the most recent downturn. However, market trends have
improved in recent quarters, and the fund’s MOIC increased to approximately 1.0x at
June 30, 2010 from 0.81x at YE09. The fund has a net IRR of negative 2% on its total
investments through 2Q10, but a net IRR of 15% on realized and partially realized
investments. BCP V needs to generate an 11% increase in enterprise value to begin
generating carried interest for the firm.
Returns for Fortress are negative on most of the funds created after September 2004,
as tough market conditions have yielded significant valuation declines since 4Q08. Fund
II has the best track record through June 30, 2010, with an inception-to-date return of
36%, while one single investment vehicle, FICO, has a return of (75.1%). Fortress has
earned incentive income on certain funds, but several are well below the incentive
hurdle. For example, the immediate increase in net asset value (NAV) needed for
Fortress to begin earning incentive income on Fund IV, a 2006 vintage fund, was $1.8bn
at June 30, 2010, while the NAV increase needed on Fund V, which is still in its

12 Private Equity: An Industry Overview October 8, 2010

 Financial Institutions
investment period, was $2.3bn. Fitch believes Fortress does not have the track record
of Blackstone or KKR, as its first fund was not closed until 1999.
Apollo has generated a 39% gross IRR and a 26% net IRR on its PE funds on a compound
annual basis from inception through Dec. 31, 2009. Excluding Fund VII, which remains in
its investment period, Apollo’s PE funds have yielded a MOIC of 2.3x on realized and
unrealized investments. At YE09, Fund IV and Fund VI needed to record gains of 37.8%
and 12.3%, respectively, to cross the carried interest income threshold.
Fitch monitors fund returns relative to internal benchmarks and to peers to gauge the
firm’s ability to satisfy LPs, generate incentive income, and raise follow-on funds for
additional management fees.

Leverage
Fitch’s analysis of PE leverage and capitalization takes a corporate approach in which
the focus is on debt service and cash flow coverage rather than on balance sheet
analysis, as is typical with more traditional financial institutions. Fitch uses FRE-EBITDA
as a proxy for cash flow in its review of an alternative asset manager’s debt service,
which adds back depreciation and amortization to FRE. This measure gives no credit for
the generation of incentive income, but Fitch does not ignore carry as it provides an
additional cushion for debt service purposes and it speaks to the success of the fund
manager, which aids the company in the raising of future funds and, hence, the
generation of future management fees.

Leverage Analysis
($000, Years Ended Dec. 31)
2006 2007 2008 2009 1H10 TTM
Long-Term Debt
Apollo N.A. 1,057,761 1,026,005 933,834 N.A. N.A.
Blackstone 475,569 108,819 384,618 663,369 656,586 656,586
Fortress N.A. 535,000 729,041 397,825 355,900 335,900
KKR N.A. N.A. 1,090,214 733,697 314,051 314,051
FRE-EBITDA
Apolloa N.A. 72,393 148,454 115,011 N.A. N.A.
Blackstone N.A. N.A. 510,760 495,484 253,671 546,846
Fortress N.A. 156,235 281,176 183,941 98,951 179,000
KKR N.A. N.A 211,377 252,744 139,075 294,591
Long-Term Debt/FRE-EBITDAb
Apolloa N.A. 14.61 6.91 8.12 N.A. N.A.
Blackstone N.A. N.A. 0.75 1.34 1.29 1.20
Fortress N.A. 3.42 2.59 2.16 1.80 1.99
KKR N.A. N.A. 5.16 2.90 1.13 1.07
FRE-EBITDA/Interest Expense
Apolloa N.A. 0.70 2.37 2.29 N.A. N.A.
Blackstone N.A. N.A. 22.20 37.02 17.06 20.43
Fortress N.A. 4.55 7.00 7.58 13.20 11.19
KKR N.A. N.A. N.A. 6.44 13.04 9.51
a
FRE-EBITDA calculated as Fitch-estimated fee-related earnings plus depreciation and amortization. bAnnualized for 2010.
TTM  Trailing 12 months. N.A.  Not available.
Source: Company filings.

Until recently, the debt structures of the PE firms Fitch rates have been limited to
secured and unsecured bank facilities and private funding. However, over the past year,
some firms have been tapping the public debt markets to lengthen their maturity
structures and provide better match funding with co-investments in the funds. On Aug. 20,
2009, Blackstone issued $600m of 10-year unsecured notes at 6.625% and on Sept. 15,
2010, the company issued $400m of 10.5-year unsecured notes at 5.875%. Proceeds will

Private Equity: An Industry Overview October 8, 2010 13

 Financial Institutions
be used for general corporate purposes, to fund future co-investments in funds, and for
strategic acquisitions like the 40% stake purchased in Patria, an asset manager in Brazil,
announced on Sept. 29, 2010. The firm also retains a $1.07bn unsecured revolving bank
facility, used for working capital purposes. The facility has a three-year term and an
interest cost of LIBOR plus 175 bps. Blackstone’s leverage (debt/FRE-EBITDA) was 1.20x
on a trailing 12 month (TTM) basis at June 30, 2010, but will increase to 1.93x, pro forma,
with the September debt issuance. Fitch expects Blackstone’s FRE-EBITDA to increase
over time, which will have a positive impact on firm leverage.
In October 2009, KKR completed a combination transaction with KKR Private Equity
Investors, L.P. (KPE), a publicly traded private equity fund it created in 2006 to provide a
permanent capital base and to allow a broader range of investors to access its investment
strategy and track record. KKR’s leverage had declined in recent quarters as it has sought
to repay borrowings on its legacy KPE revolver, but on Sept. 22, 2010, the company
tapped the public debt markets for the first time with a $500m, 10-year note issuance at
6.375%. While these notes will initially bump leverage to 2.76x on a TTM basis, based on
June 30, 2010 balances, Fitch believes leverage will decline closer to 2.0x longer term as
proceeds from dividends and realizations on principal investments will be used to reduce
legacy revolver borrowings, which fell from $733.7m at YE09 to $314.1m in 2Q10.
KKR continues to have borrowing capacity on its $860m secured KPE revolver and its $1bn
management company revolver, with maturities in 2012 and 2013, respectively.
Fortress’ leverage ratio has been on a declining trend as operating cash flow and $220m of
proceeds from an equity raise have been used to reduce debt outstanding and meet
amortization requirements. Fortress amended its bank facility four times due to the
difficult capital markets environment and had $355.9m of term debt outstanding at June 30,
2010 priced at LIBOR plus 250 bps. The firm’s leverage was 1.99x at June 30, 2010, on a
TTM basis, down from 2.16x at YE09. On Oct. 7, 2010, Fortress announced the creation of a
new $340m secured bank facility, consisting of a $280m five-year term loan and a $60m
three-year revolving facility priced at LIBOR plus 400 bps. Proceeds will be used to
refinance the existing facility.
Leverage of PE firms rated by Fitch has generally been between 1.0x and 2.0x in recent
periods, although KKR’s recent public debt issuance will bump its leverage temporarily.
While Fitch believes there is tolerance for leverage increases, particularly if funds are
being deployed to generate incremental FRE-EBITDA, the maintenance of leverage above
the 2.5x level at any rated entity longer term could result in negative rating action.
Debt service coverage, as measured by FRE-EBITDA divided by interest expense, is
another metric Fitch reviews in absolute and relative terms when assessing a PE firm’s
creditworthiness. Coverage ratios are believed to be adequate for respective rating
categories across the board and have improved for Fortress and KKR in 1H10 given
reductions in debt and LIBOR, although KKR’s coverage will decline once payments
begin to be made on its recent debt issuance.
While the coverage ratios for the rated PE firms may at times be below that of
comparably rated corporate issuers, Fitch believes FRE-EBITDA will be less volatile than
corporate EBITDA over time given the contractual nature of management fees and a PE
firm’s ability to significantly alter its compensation structure in the short term.
Fitch does not rely on incentive income or balance sheet co-investments in its leverage
analysis, but both provide an added layer of cushion for debt holders. Incentive income
is volatile but can be, and has been, significant for many asset managers over time.
Balance sheet co-investments in the funds are generally illiquid in the short term, but
could provide collateral for debt holders in a liquidation event.

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 Financial Institutions

Leverage at the fund level is not included in the above analysis, as it is not typically
recourse to the management company; however, the existence of leverage at the fund
level is not generally viewed favorably by Fitch. Managers employ leverage (and/or
derivatives) to enhance fund level returns, but Fitch believes the debt yields increased
volatility and could result in reputational damage for the firm if related investments
perform poorly. While the use of fund leverage does not preclude an asset manager
from receiving an investment-grade rating, Fitch believes debt levels must be
conservatively managed.

Liquidity
An alternative asset manager’s primary use of liquidity includes the funding of capital
commitments to its investment funds, potential clawbacks, and distributions to
shareholders and partners. Sources of liquidity include balance sheet cash, revolving credit
facilities, liquid investments, and fee-generating capacity.
Co-investments in managed funds are
critical to the alignment of interests Firm Co-Investment Commitments
with LPs and are generally in the ($000, As of June 30, 2010)
range of 2%4% for funds with longer Firm Commitment
term capital commitments. Principals Apolloa 201,300
and employees will often co-invest in Blackstone 1,342,832
the funds as well, which serves to Fortress
KKR
130,500
1,070,811
further align the firm’s interest with aAs of Dec. 31, 2009.
that of LPs. For example, at June 30, Source: Company filings.
2010, KKR had $4.3bn of balance
sheet co-investments in its funds in addition to $1bn of investments from principals and
employees. Blackstone has $2.3bn of invested/committed capital in its PE business,
accounting for 7% of total capital invested, while Carlyle has committed more than
$3.7bn to its funds.
A commitment from the GP is funded on the same schedule as the LPs, with occasional
calls driven by the existence of attractive investment opportunities. Commitments are
funded with cash on hand, operating cash flow, fund distributions (i.e. return of capital
from previous investments), and/or with proceeds from debt issuances or revolver
draws. Fitch believes PE firms, as the fund manager, have significant discretion over
the timing of funding commitments, but that liquidity policies should be in place to
ensure adequate capacity exists.
The unfunded commitments listed in the table vary significantly across firms, from
$130m at Fortress to $1.3bn at Blackstone, although the amount of FAUM, number of
funds, type of funds, and stage of fund life play into the difference in relative
commitments. Apollo’s commitment is relatively low for the balance sheet, but its
employees and other funds had $963.5m of unfunded commitments at Dec. 31, 2009.
While some unfunded commitments may look significant, KKR, for example, had $508m
of balance sheet cash at June 30, 2010 in addition to $1.55bn of available revolving
capacity, while Blackstone had $506.7m of balance sheet cash, $813.2m of investments
in cash management strategies, and $1.07bn of revolver capacity. Fitch believes both
firms have a solid liquidity profile for their respective rating category.
Liquidity is also needed to fund potential clawback obligations, which arise when the
GP has received carried interest distributions in excess of their contractual rate and the
excess distribution must be repaid to the investors. The timing of the actual repayment
to investors varies by fund; in many cases payment is not until the end of the fund life

Private Equity: An Industry Overview October 8, 2010 15

 Financial Institutions
but in some cases it is on an interim basis or one year after a realized loss has been
incurred. Fund managers typically accrue clawback obligations on their balance sheet
over time based on the valuation of fund investments. Clawback obligations increased
in 2008 and early 2009 as portfolio valuations generally deteriorated given the
struggling economy and capital markets crisis. Valuations have been on an improving
trend since the end of 2009, although many funds continue to be carried below their
cost basis.
Fund managers typically reduce the likelihood of actually having to pay clawbacks by
using carry income on “winning” investments to pay down the cost basis of poorly
performing investments. If a fund dips below a preferred return, the firm will not
typically pay carry on a successful investment until the whole fund is once again above
the hurdle, which is typically around 8%9%.
At June 30, 2010, Blackstone’s clawback obligation, across the firm, was $218.1m,
assuming its fund investments were liquidated at fair value compared to $220.0m at
June 30, 2009 and $109.8m at YE08. KKR had a clawback obligation of $61.5m at June
30, 2010, compared to $84.9m at YE09. Certain of KKR’s funds are also subject to loss
sharing provisions (Millennium and 2006
funds), whereby the GP is required to Potential Clawback Obligations at Fair
fund 20% of the net losses on Value
investments upon liquidation of the ($000, As of June 30, 2010)
fund, regardless of whether any carried
Firm Clawback
interest had been distributed. Based on Blackstone 218,087
the fair market value of the funds at Fortress 55,149
June 30, 2010, the net loss-sharing KKR 61,500
obligation was approximately $21.8m, Source: Company filings.
down from $93.6m at Dec. 31, 2009.
Assuming all fund investments were liquidated at zero, which Fitch believes is a remote
possibility, Apollo’s clawback obligation at Dec. 31, 2009 was $787.8m, $679.6m of
which was attributable to PE funds. At June 30, 2010, KKR’s clawback obligation was
$689.2m if funds were liquidated at zero.
Current and former employees also retain a clawback obligation related to incentive
compensation they have received. Firms will often escrow a portion of an employees’
incentive compensation to account for potential clawback obligations. Blackstone’s
policy is to hold back 15% of employee payouts. At June 30, 2010, current and former
Blackstone personnel had clawback obligations of $259.9m. Escrows in segregated
accounts were $477.1m.
While Fitch keeps a close eye on clawback trends, liability accruals, and employee
holdbacks, the actual payment of clawbacks has been relatively rare in the industry due
to the manager’s ability to direct the timing of investment exits and their ability to pay
down the cost basis of poorly performing investments with positive return investments.
Another liquidity consideration is earning distributions. Several alternative asset
managers have gone public since 2007 and have to manage the expectations of a new
stakeholder, shareholders. Several have developed quarterly distribution policies, or
dividends, based on calculations of excess cash flow, which is generally FRE plus
realized gains. KKR’s policy is to make quarterly distributions that represent
substantially all of the cash earnings of the asset management business in excess of
amounts determined to be necessary to provide for the business, make investments in
the business and funds, and to comply with applicable law, debt instruments, or other
agreements. The company distributed $32.6m, or approximately $0.16 per share, in the

16 Private Equity: An Industry Overview October 8, 2010

 Financial Institutions
first half of 2010. Fortress and
Blackstone have similar policies, KKR Cash Distributions
although Blackstone plans to base ($000, Six Months Ended June 30, 2010)
the first three quarter distributions 1H10
on net FRE while the final quarterly Fee Related Earnings 153,725
Realized Cash Carry 16,343
payment will reflect a true-up for Less: Local Income Taxes (6,920)
realized performance fees and Less: Noncontrolling Interests (1,250)
allocations, less related compensation, Gross Distributable Earnings 161,898
Earnings Attributable to KKR Guernsey (30%) 48,569
plus realized investment gains and Less: Estimated Taxes (16,012)
losses on firm capital, less taxes and Net Cash Available for Distribution 32,557
payables under the tax receivable KKR Guernsey Units 204,902,226
Distribution/Sharea 0.16
agreement. a
Subject to a 30% U.S. tax withholding.
Source: Company filings.
Fitch believes the distribution
policies of rated entities are
prudent and allow for significant management discretion.

Private Equity: An Industry Overview October 8, 2010 17

 Financial Institutions
Appendix: Company Profiles
Apollo Global Management LLC
Founded in 1990, Apollo Global Management LLC (Apollo) is a global alternative asset
manager headquartered in New York, NY. At Dec. 31, 2009, the company had $53.6bn
of AUM, consisting of PE ($34bn), credit-oriented capital markets ($19.1bn), and real
estate ($0.5bn), with distressed expertise. In July 2007, Apollo received $1.2bn for the
sale of nonvoting class A shares to the California Public Employees’ Retirement System
(CALPERs) and an affiliate of the Abu Dhabi Investment Authority. Apollo is currently
private, but the company filed an S-1 in March 2010, with plans to sell a portion of its
class A shares to public stockholders.

The Blackstone Group L.P. (Long-term IDR: ‘A+’; Stable Outlook)

The Blackstone Group L.P. (Blackstone) is one of the largest alternative asset managers
in the world in addition to being a provider of financial advisory, restructuring, and
fund placement services. At June 30, 2010, the company had $101.4bn of FAUM,
consisting of PE, RE, FoHFs, credit-oriented funds, collateralized loan obligation (CLO)
vehicles, proprietary hedge funds, publicly traded closed-end mutual funds, and
separately managed accounts (SMAs). Blackstone was founded in 1985 and went public
in June 2007, raising $2.93bn in its initial public offering and $3.0bn from the China
Investment Corporation. The senior professionals of the firm own approximately 68% of
the Blackstone Holdings entities and Blackstone owns the other 32%. Blackstone is the
public entity that is listed on the NYSE and is owned by public investors (approximately
22.3%) and China Investment Corporation (about 9.7%).

The Carlyle Group

Formed in 1987, The Carlyle Group is a private global investment firm with $90.5bn of
AUM across 67 funds at March 31, 2010. Fund strategies include buyout, leveraged
finance, real estate, and growth capital. The firm has over 400 investment
professionals in 19 countries in North America, Europe, Asia, Australia, the Middle
East/North Africa, and Latin America. Carlyle is largely owned by firm managing
directors, although CalPERS owns approximately 5% and Mubadala Development
Company, a strategic investment and development company in Abu Dhabi, owns 7.5%.

Fortress Investment Group LLC (Long-term IDR: ‘BBB’; Stable Outlook)

Fortress is a global asset manager with $41.7bn of FAUM at June 30, 2010, consisting of
PE funds, liquid hedge funds, credit funds, and managed accounts. Fortress was
founded in June 1998 by Wesley Edens, Randal Nardone, and Robert Kauffman. Peter
Briger and Michael Novogratz joined in 2002 to start the credit and liquid businesses,
respectively. The company went public in February 2007, selling class A shares for net
proceeds of approximately $652.7m. Just prior to the IPO, Fortress sold a 15% indirect
stake in the company to Nomura for $888m. As of March 31, 2010, Nomura owned 13.2%
of Fortess’ voting shares through ownership of 40% of outstanding class A shares.
Principals and employees owned approximately 70% of the voting shares through
ownership of 8.8% of the class A shares and 100% of outstanding class B shares. The
remaining shares owned by public shareholders equal 16.8% of Fortress’ voting shares
through ownership of 51.1% of outstanding class A shares. The company’s stock is listed
on the NYSE under the ticker “FIG.”

KKR & Co. L.P. (Long-term IDR: ‘A’; Stable Outlook)

Founded in 1976 by co-CEOs Henry Kravis and George Roberts, KKR is one of the largest
alternative asset managers in the world with $54.4bn of FAUM at June 30, 2010, consisting
of PE and credit funds. Since its inception, the company has completed more than 175 PE
investments with a total transaction value in excess of $430bn. The company currently has

18 Private Equity: An Industry Overview October 8, 2010

 Financial Institutions
10 active investment vehicles in the U.S., Europe, and Asia, in addition to various co-
investment vehicles. KKR’s investment strategy is to drive value primarily through
operational improvements, which are achieved with the help of 65 operating consultants
employed at KKR Capstone. In 2006, KKR formed KKR Private Equity Investors, L.P. (KPE), a
publicly traded private equity fund, to provide a permanent capital base and allow a
broader range of investors, institutional and retail, to access the company’s investment
strategy and track record. On Oct. 1, 2009, KPE changed its name to KKR & Co.
(Guernsey) and KKR acquired all of its outstanding assets and liabilities in exchange for
limited partner interests in KKR Group Holdings L.P., which represents a 30% equity
interest in the combined business. The remaining 70% interest is beneficially owned by
KKR’s principals through KKR Holdings L.P. On July 15, 2010 the company’s listing was
moved to the NYSE.

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