1. Outlook for 2014
January Henry H. McVey

2. Important Information
The views expressed in this presentation are the personal views of Henry McVey of Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, "KKR") and do not necessarily reflect the views of KKR itself. This presentation is not research and should not be treated as research. This presentation does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of KKR. This presentation is not intended to, and does not, relate specifically to any investment strategy or product that KKR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own views on the topic discussed herein.
The views expressed reflect the current views of Mr. McVey as of the date hereof and neither Mr. McVey nor KKR undertakes to advise you of any changes in the views expressed herein. In addition, the views expressed do not necessarily reflect the opinions of any investment professional at KKR, and may not be reflected in the strategies and products that KKR offers, including strategies and products to which Mr. McVey provides investment advice on behalf of KKR. It should not be assumed that Mr. McVey will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. KKR and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation.
This presentation has been prepared solely for informational purposes. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither KKR nor Mr. McVey guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.
The information in this presentation may contain projections or other forward‐looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested. The indices do not include any expenses, fees or charges and are unmanaged and should not be considered investments.
The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely.
Neither KKR nor Mr. McVey assumes any duty to, nor undertakes to update forward looking statements. No representation or warranty, express or implied, is made or given by or on behalf of KKR, Mr. McVey or any other person as to the accuracy and completeness or fairness of the information contained in this presentation, and no responsibility or liability is accepted for any such information. By accepting this presentation in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing statement.
The MSCI sourced information in this presentation is the exclusive property of MSCI Inc. (MSCI). MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

3. I. Key Macro Conclusions & Economic Outlook

4. Outlook 2014: “Stay the Course” As a Global Recovery Unfolds
What Does “Stay the Course” Mean?
Retain key overweight positions in global equities and alternatives, including private credit, special situations and real assets.
To fund these risk buckets, we continue to target a massive underweight to government bonds and investment grade debt.
However, 2014 will not be a repeat of In particular, we believe 1) the “drag” from government austerity should decline in 2014; 2) equity trading multiples for stocks are now ahead of schedule.

5. KKR GMAA 2014 Target Asset Allocation
Asset Class
KKR GMAA January 2014 Target (%)
Strategy Benchmark (%)
KKR GMAA September 2013 Target (%)
Public Equities 55 53
U.S. 20
Europe 16 15
All Asia 13 12 14
Latin America 6
Total Fixed Income 30
Global Government 3
Mezzanine 5
High Yield
Bank Loans 2
High Grade
Emerging Market Debt
Actively Managed Opportunistic Credit ―
Fixed Income Hedge Funds
Direct Lending
Real Assets 8 10
Real Estate
Energy / Infrastructure
Gold/Corn/Other -2 1
Other Alternatives 17
Traditional PE
Distressed / Special Situation 7
Growth Capital/EM PE/Other
Cash
Source: *KKR Global Macro & Asset Allocation (GMAA) as at December 31, Strategy benchmark is the typical allocation of a large U.S. pension plan. Please visit to review our Outlook for 2013: A Changing Playbook note, which further reviews these ideas.

6. 2014 Growth & Inflation Base Case Estimates
Overall, We Believe the Backdrop For the Global Economy Is Favorable in 2014
Our GDP and Inflation Outlook by Region Seems to Suggest Stronger Growth in 2014, Aided by Less Fiscal Drag
Even a Decelerating China Still Makes Up Almost a Third of Global Growth in 2014
2014 Growth & Inflation Base Case Estimates
KKR GMAA Target Real GDP Growth
Bloomberg Consensus Real GDP Growth
KKR GMAA Target Inflation
Bloomberg Consensus Inflation
U.S.
2.8%
2.6%
1.7%
Euro Area
1.1%
1.0%
1.2%
China
7.4% to 7.6%
7.5%
3.0 to 3.5%
3.1%
Brazil
2.1%
2.3%
6.0%
5.8%
2013 (bps)
2014 (bps)
U.S. Government Drag on Growth
-125
-30
Europe Government Drag on Growth
-100 to
-50 to -75
GDP = Gross Domestic Product. Bloomberg consensus estimates as at December 31, Source: Bloomberg, FOMC, ECB, Haver Analytics, KKR Global Macro & Asset Allocation analysis.
Data as at October 8, Source: IMF, Haver Analytics.

7. …And We Expect Less Fiscal Drag From Austerity
Significantly Less U.S. Austerity in 2014 vs. 2013
European Austerity Is Also Slowing in 2014
Measured as change in general government underlying primary balance, adjusted for cycle and one-offs. Data as at December 31, Source: OECD Economic Outlook 94 Database, with 2014e adjusted by KKR GMAA to account for U.S. Budget Deal announced December 10th.
Measured as change in general government underlying primary balance, adjusted for cycle and one-offs. Data as at December 31, Source: OECD Economic Outlook 94 Database.

8. We Think the Current Economic Cycle Still Has Room to Run
We Are Now in the 54th Month of Economic Expansion
If Past Relationships Hold True, This Economic Cycle Has More Room to Run
Data as at December 31, Source: National Bureau of Economic Research (NBER), KKR Global Macro & Asset Allocation analysis.
Economic expansions from 1919 to Data as at December 31, Source: Federal Reserve Bank of St. Louis, National Bureau of Economic Research, Bureau of Economic Analysis, U.S. Treasury, KKR Global Macro & Asset Allocation analysis.

9. II. Macro Themes

10. Similar to Past Cycles, Real Rates Are Now Rising
Multiple Expansion Is Now A Little Ahead of Schedule; We Expect More Bumpiness in 2014
Using Past Cycles as a Guide, Multiple Expansion Now Appears Ahead of Schedule
Similar to Past Cycles, Real Rates Are Now Rising
Past U.S. economic cycles analyzed: i) 3Q38-1Q45, ii) 2Q61-4Q69, iii) 2Q75-1Q80, iv) 1Q83-3Q90 [excluded here], v) 2Q91-1Q01, vi) 1Q02-4Q07. Data as at October 31, Source: KKR Global Macro & Asset Allocation analysis of S&P data.
Past U.S. economic cycles analyzed: i) 3Q38-1Q45, ii) 2Q61-4Q69, iii) 2Q75-1Q80, iv) 1Q83-3Q90 [excluded here], v) 2Q91-1Q01, vi) 1Q02-4Q07. Data as at October 31, Source: KKR Global Macro & Asset Allocation analysis of S&P data.

11. Emerging Market Currencies Are No Longer a Tailwind
We Believe DM Likely to Outperform EM Again. Within EM, Look for Differentiation in 2014
Emerging Market Currencies Are No Longer a Tailwind
The Cycle Has Turned: Developed Markets Tend to Outperform When Rates are Rising
Valuation calculated as the difference between spot and the IMF implied purchasing power parity (PPP) conversion rate. Data as at December 31, 2013.Source: IMFWEO, Haver Analytics, Bloomberg.
Data as at December 31, Source: Bloomberg, KKR Global Macro & Asset Allocation analysis.

12. Yield Comparisons – Originated vs. Traded Leveraged Loans
We Believe the Illiquidity Premium Is Still Sizeable Enough to Generate Attractive Returns
Yield Comparisons – Originated vs. Traded Leveraged Loans
Our Analysis Suggests That Both the Illiquidity Premium and the Default Premium Appear Outsized
Weighted average yields of senior term debt and senior subordinated debt. Data as at September 30, Source: S&P LSTA, public company filings of Ares Capital Corporation.
*KKR Asset Management estimate. Data as at December 18, Source: Barclays US Agg Government Yield to Worst, Bloomberg, KKR Global Macro & Asset Allocation analysis.

13. European Bank Leverage Is Double That of the U.S.
We Believe There May Be a Chance to Unlock “Trapped” Liquidity Pools in Europe
Spread Between SME Loans In Spain and Germany Remain at an All-Time High
European Bank Leverage Is Double That of the U.S.
Data as at October 31, Source: European Central Bank, Haver Analytics.
Data as at 3Q2013. Bottom up aggregates for Banks and Diversified Financials within the MSCI Europe and S&P 500 respectively. Source: MSCI, S&P, Factset, Bloomberg.

14. III. Equities

15. Unlike Last Year, We Look for EPS Growth to Be Biased Upward
Our Quantitative Earnings Model Suggests Faster Growth in 2014
A Key Input to 2014e Growth Is Recovering Home Prices
EGLI Suggests Strong Growth in 2014
The Earnings Growth Leading Indicator (EGLI) is a statistical synthesis of seven important leading indicators to S&P 500 Earnings Per Share. Henry McVey and team developed the model in early A = Actual; E = Estimated. Data as at December 31, Source: KKR Global Macro & Asset Allocation analysis, Bloomberg.
The Earnings Growth Leading Indicator (EGLI) is a statistical synthesis of seven important leading indicators to S&P 500 Earnings Per Share. Henry McVey and team developed the model in early A = Actual; E = Estimated. Data as at December 31, Source: KKR Global Macro & Asset Allocation analysis, Bloomberg.

16. Investors Tend To Place A Significantly Higher Multiple On Stocks When Real Rates Turn Positive
Multiples Tend to Expand in a Positive Real Rate Environment
Similarly, Real GDP Growth of 2-3% Implies a Higher P/E Multiple
Data as at December 31, Source: Thomson Financial, S&P, Federal Reserve Board, Factset..
Normalized Price-to-Earnings valuation ratio = Price divided by average of past 5 years EPS. Study from 1900 to 3Q13. Source: BEA, Historical Statistics of the United States, Factset, S&P, Bloomberg, stock market data Used in "Irrational Exuberance" by Robert J. Shiller.

17. We Expect Market Momentum to Be Choppy But Exceed 2013 Levels
Pulling All the Pieces Together: 2014 S&P 500 Price Target Suggests a 2000 Trading Range
&P
S&P 500 Trailing P/E
15.0
15.5
16.0
16.5
17.0
17.5
18.0
108
1,620
1,674
1,728
1,782
1,836
1,890
1,944
109
1,635
1,690
1,744
1,799
1,853
1,908
1,962
Approximate YE 2013 Range
110
1,650
1,705
1,760
1,815
1,870
1,925
1,980
111
1,665
1,721
1,776
1,832
1,887
1,943
1,998
112
1,680
1,736
1,792
1,848
1,904
1,960
2,016
113
1,695
1,752
1,808
1,865
1,921
1,978
2,034
114
1,710
1,767
1,824
1,881
1,938
1,995
2,052
115
1,725
1,783
1,840
1,898
1,955
2,013
2,070
116
1,740
1,798
1,856
1,914
1,972
2,030
2,088
117
1,755
1,814
1,872
1,931
1,989
2,048
2,106
118
1,770
1,829
1,888
1,947
2,006
2,065
2,124
YE 2014, Assuming 9% EPS
119
1,785
1,845
1,964
2,023
2,083
2,142
Growth and No P/E Expansion
120
1,800
1,860
1,920
2,040
2,100
2,160
121
1,876
1,936
1,997
2,057
2,118
2,178
122
1,830
1,891
1,952
2,074
2,135
2,196
123
1,907
1,968
2,091
2,153
2,214
124
1,922
1,984
2,046
2,108
2,170
2,232
S&P 500 Earnings Per Share ($)
Data as at December 31, Source: KKR Global Macro & Asset Allocation analysis.

18. Dividends and Buybacks Are Still Accelerating
We Believe Aggressive Capital Management By Corporate America Is Now Acting As A Major Driver Of Growth And Returns
Dividends and Buybacks Are Still Accelerating
S&P 500 Dividend and Buyback Yield Combined Now Offers Much More Yield Than 10-Year Treasury
Data as at December 31, Source: Factset, ISI, Barclays.
Data as at September 30, Source: Goldman Sachs Research.

19. IV. Fixed Income

20. KKR GMAA Fed Forecast vs. Market Expectations
Market Rates Are Now Much Closer To Our Estimates Across Most Maturities
Interest Rates: Current Market Expectations Are Now Closer to Our Forecasted Outlook
KKR GMAA Fed Forecast vs. Market Expectations
Current Market
GMAA
Dec
’14e
Market
Delta
Dec’16e
10yr Yield
2.9%
3.1%
3.3%
-0.2%
3.8%
3.9%
-0.1%
Memo: Prior Forecast
3.2%
3.7%
5yr Yield
1.7%
2.2%
2.4%
-0.3%
3.4%
2.7%
3.5%
Real 10yr Yield
0.7%
1.0%
0.0%
1.4%
0.3%
0.8%
-1.3%
Real 5yr Yield
-0.4%
0.1%
1.3%
1.1%
Market forecasts as per U.S. Treasury actives curve for nominal yields and U.S. TIPS curve for real yields. Data as at December 18, Source: Bloomberg, KKR Global Macro & Asset Allocation (“GMAA”) analysis.
Old GMAA forecast as at September 18, New as at December 20, Source: Federal Reserve, Bloomberg, KKR Global Macro & Asset Allocation Forecast.

21. Rate of Change (bps/yr)
We Expect Rate Hikes To Be At An Unusually Slow Rate Relative to the Historical Average
We Believe Next Interest Rate Hike Cycle Will Be Historically Mild Relative to History
Trough Month
Peak Month
Months
Trough Rate
Peak Rate
Change (bps)
Rate of Change (bps/yr)
CPI y/y at Peak
Real Fed Rate at Peak
Feb-83
Aug-84 18
8.50%
11.50%
300
200
4.3%
7.2%
Dec-86
May-89 29
5.88%
9.81%
394
163
5.4%
4.4%
Jan-94
Feb-95 13
3.00%
6.00%
279
2.9%
3.1%
May-99
May-00 12
4.75%
6.50%
175
3.2%
3.3%
May-04
Jun-06 25
1.00%
5.25%
425
205
1.0%
Average 19
4.6%
7.8%
319
204
4.0%
3.8%
KKR GMAA '15-'17 Est.
~20-24
0.25%
275
150
2.50%
0.5%
Data as of December 20, Source: Federal Reserve, Bloomberg, KKR Global Macro & Asset Allocation Forecast.

22. We Think We Are at an Important Inflection Point in the Fixed Income Cycle. As Such, We Suggest Retaining Ultimate Flexibility
If We Are Right Rates Are Rising, This Has Implications for All Asset Allocation Decisions, Particularly in Fixed Income
Asset Class Selection Matters More Today, So the Flexibility to Again Toggle Between Fixed Income Asset Classes Is Important
Data as at November 30, Source: Bloomberg.
Data as at December 31, Source: JPMorgan Research, Bloomberg.

23. Rising Rate Environments Have Historically Been Opportunity Rich Periods For Fixed Income Hedge Funds
In 2014 We Again Expect Leveraged Loans and High Yield to Outperform Versus Many Other Parts of Fixed Income
Fixed Income Hedge Funds Have Shown Strongest Absolute and Relative Performance in Rising Rate Environments
Data as at December 18, Source: JP Morgan, Barclays, Bloomberg.
* Equal-weighted average of HFRI RV Corporate, Convertible Arbitrage, and Asset Backed Indexes. TD = to date, as of November 30. Source: Bloomberg, KKR Global Macro & Asset Allocation analysis.

24. V. Real Assets

25. Gold Faces Significant Challenges in a Rising Real Rate Environment
We Continue To Eschew Traditional Real Assets With No Yield, Including Standard Commodity Swaps/Notes
GSCI Total Return Swap Has Not Created Much Value for Investors Since 2004
Gold Faces Significant Challenges in a Rising Real Rate Environment
The GSCI total return index measures the returns accrued from investing in fully collateralized nearby commodity futures, while the GSCI spot index measures the level of nearby commodity prices. Data as at December 31, Source: Goldman Sachs, Bloomberg.
Data as at November 30, Source: Bloomberg, Global Macro & Asset Allocation analysis.

26. Our Strong View Is That Central Bank Policy Is Directed Towards Lifting Long-term Inflation Expectations
History Shows That Pinning Fed Funds Below GDP Growth Leads to Rising Inflation Rates
We Believe Inflation Is Running Too Low Today and Will Increase As the Economy Accelerates
e = KKR Global Macro & Asset Allocation estimate. Our estimate assumes the Fed does not tighten until mid-2015 and that nominal GDP growth averages 4.5% annually between 2012 and Data as at May 31, 2013.
Source: KKR Global Macro & Asset Allocation Forecast as of December 31, 2013.

27. VI. Alternatives

28. There Have Been Benefits To Adding Alternatives, Private Equity In Particular, To An Overall Portfolio, A Trend We Expect To Continue
Our Work Shows Most Pensions Are Still Not Efficiently Positioned in Terms of Allocations
Pension Funds With Higher Non-Liquid Alternative Asset Classes Have Delivered Higher Returns
Constraints: Minimum allocation to equities 20%, minimum bonds 20%, maximum real estate 20%, maximum private equity 20%. Data as at December 31, Source: Cambridge Associates, MSCI, S&P, Barclays, BAML, HFRI, NCREIF, Bloomberg, and Antolin, P. (2008), "Pension Fund Performance", OECD Working Papers on Insurance and Private Pensions, No. 20, OECD publishing, © OECD. doi: /
Source: Pensions and Investments Research Center, as of November 21, Reflects asset allocation for defined benefit assets as of 9/30/2012 and Cliffwater 2013 Report on State Pension Performance and Trends, July 22, Data as at June 30, 2012; based on 97 state pension systems, including those whose fiscal 2012 end is not June 30.

29. Alternatives Remain An Elegant Way To Gain Cyclical Exposure To Beneficiaries Of Ongoing Deleveraging in Europe
European Banks Are Finally Beginning to
De-leverage…
…But There Is Still Much Work to Be Done
Data as at 3Q2013. Bottom up aggregates for Banks and Diversified Financials within the MSCI Europe and S&P 500 respectively. Source: MSCI, S&P, Factset, Bloomberg.
Data as at December 31, Source: Statistical Office of the European Communities, European Central Bank, Bureau of Economic Analysis, Federal Reserve Board, Cabinet Office of Japan, Bank of Japan.

30. VI. Currencies

31. In The Currency Arena, We Believe Pressure On Fiscal And Current Deficits Makes Currencies A Logical “Release Valve”
We Think a Dollar Bull Market Has Begun
Within Latin America, We Think Mexico is More Attractive than Brazil
Data as at December 4, Source: Bloomberg.
Data as at December 31, Source: Bloomberg.

32. VII. Asset Allocation Summary/Q&A

33. Outlook 2014: “Stay the Course” As a Global Recovery Unfolds
What Does “Stay the Course” Mean?
Retain key overweight positions in global equities and alternatives, including private credit, special situations and real assets.
To fund these risk buckets, we continue to target a massive underweight to government bonds and investment grade debt.
However, 2014 will not be a repeat of In particular, we believe 1) the “drag” from government austerity should decline in 2014; 2) equity trading multiples for stocks are now ahead of schedule.

34. KKR GMAA 2014 Target Asset Allocation
Asset Class
KKR GMAA January 2014 Target (%)
Strategy Benchmark (%)
KKR GMAA September 2013 Target (%)
Public Equities 55 53
U.S. 20
Europe 16 15
All Asia 13 12 14
Latin America 6
Total Fixed Income 30
Global Government 3
Mezzanine 5
High Yield
Bank Loans 2
High Grade
Emerging Market Debt
Actively Managed Opportunistic Credit ―
Fixed Income Hedge Funds
Direct Lending
Real Assets 8 10
Real Estate
Energy / Infrastructure
Gold/Corn/Other -2 1
Other Alternatives 17
Traditional PE
Distressed / Special Situation 7
Growth Capital/EM PE/Other
Cash
Source: *KKR Global Macro & Asset Allocation (GMAA) as at December 31, Strategy benchmark is the typical allocation of a large U.S. pension plan. Please visit to review our Outlook for 2013: A Changing Playbook note, which further reviews these ideas.