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2006 Annual Review

…creating value

…creating value

2006 Annual Review

Exceptional Long-Term Performance

Experienced Investment Team

Deep Industry Knowledge

Expertise in Acquiring Large, Complex Businesses

Improving Portfolio Company Operations

Best-in-Class Investment Processes

Creativity and Innovation

One-Firm Culture

Private equity has become more global,gaining acceptance in European and Asianeconomies in ways that were unimaginable

when KKR was founded in 1976.

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KKR 2006 Annual Review

Letter to Investors 3

The Year in Review 7

KKR in Europe 20

Building the Asian Franchise 27

Investment Professionals 30

Additional Resources for Value Creation 34

KKR and Its Principles 37

Investments of the KKR Funds 39

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Co-founding Members Henry R. Kravis and George R. Roberts have led KKR through three decades of economic cycles and changes in the private equity market.

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We remain positive about the environment for private equity investing. Relatively low interest rates and liquid debt markets have allowed us to lock in very cost-effective and flexible financing. The growth of collateralized loan obligations, hedge funds, and credit funds has provided additional capital and stability to the credit markets. Moreover, we have been encouraged by the prevalence of the idea of going private, which has created significant incremental transaction opportunities for KKR all over the world.

The market for large, complex buyouts has been changing recently, with a dramatic increase in the size and number of such transactions. From 2001 through 2006, the volume of private equity transactions greater than $1 billion increased from $33 billion to $695 billion, a compound annual growth rate (CAGR) of 84%. During the same period, the number of private equity transactions greater than $1 billion rose from 16 to 168, a CAGR of 60%.

Virtually all of the largest buyouts in history have been completed or announced over the last two years, including our investments in HCA Inc. ($33.0 billion), Capmark ($16.7 billion), TDC A/S (€12.4 billion), The Nielsen Company – formerly VNU Group B.V. – ($12.0 billion), SunGard ($12.0 billion), and Biomet, Inc. ($11.0 billion). We are enthusiastic about the potential of these companies, in part because large businesses present many opportunities for operational improvements, attract world-class management talent, and command attention from the capital markets and strategic buyers upon exit.

To take advantage of the opportunities we see at the large end of the buyout market, we have raised and continue to raise a significant amount of capital. Our 2006 Fund closed commitments of $16.1 billion as of December 31, 2006, and we anticipate a final close of $16.625 billion in 2007. Nearly 50% of the investors in the 2006 Fund are new KKR investors, a gratifying expression of confidence in our ability to maintain


�o �ur Investors

We are pleased to report that 2006 was an outstanding year for KKR and its investors. The Firm invested $6.7 billion of equity in 12 companies with an aggregate enterprise value of $104 billion, and we returned $4.4 billion to our limited partners. Since 2003 KKR has distributed more than $16.2 billion to its limited partners. Private equity has traditionally been cyclical, with either good buying years or good selling years. In 2006 the diversity of our investments, by industry and geography, enabled us to simultaneously buy world-class companies and realize exceptional value for our investors.

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our historic levels of performance. In 2006 we also established KKR Private Equity Investors, L.P. (Euronext Amsterdam: KPE), raising $5 billion to complement the capital in our funds. KPE, which enables certain non-U.S. public market investors and certain other qualified investors to invest in KKR-sponsored investments, allows the Firm to deploy larger sums of capital in private equity transactions while maintaining prudent levels of diversification within specific funds.

One frequently hears such comments as “too much private equity money is chasing too few good deals.” The validity of this generalization, we believe, depends on the segment of the buyout market under discussion. In the middle market, where there are hundreds of competitors, the statement above may be true. In the large buyout space, however, there are relatively few firms with the capital, experience, infrastructure, and global networks to compete effectively for the large, complex companies that KKR seeks to acquire. Moreover, the opportunity to invest significant amounts of equity has increased dramatically in recent years. In 1987 the average market capitalization for an S&P 500 company was $3.7 billion. As of December 31, 2006, it was $23.5 billion – a more than six-fold increase. During the same period, equity as a percentage of total buyout financing has risen from 7.0% to 33.3%. In other words, buying an average S&P 500 company in 1987 required $259.0 million of equity. Today, it would take $7.8 billion.

Private equity not only has been increasing in scale, but also has become more global, gaining acceptance in European and Asian economies in ways that were unimaginable when KKR was founded in 1976. The tremendous growth in international trade, the large increase in financial flows, and technology breakthroughs that “shrink” the world are among the forces of globalization that have led to higher living standards in developed and developing countries. These same forces have created opportunities for KKR to invest outside of the United States. In economies around the world, there is increasing awareness of the importance of shareholder value and growing recognition among policymakers, academics, and others of the economic and social benefits of private equity.

Throughout its 30-year history, KKR has successfully adapted to economic cycles and changes in the private equity environment. We are proud of our record of innovation and “industry firsts,” and we have expanded our franchise globally to pursue new opportunities. In the late 1990s, when private equity deal flow reached a critical mass in the U.K. and other European countries, KKR opened an office in London. In 2005 our analysis of private equity opportunities in Asia convinced us to establish a presence in the region, opening offices in Hong Kong and Tokyo.


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We believe that KKR’s culture and the way our investment professionals around the world work together are key competitive advantages. We have six offices on three continents, but we manage our business as one firm – one Investment Committee, one Portfolio Management Committee, one Operating Committee, and one compensation plan that rewards professionals based on the overall success of the Firm. Our one-firm culture encourages teamwork and enables KKR professionals in any part of the world to draw on the experience and talents of all our investment executives and on our global networks and resources.

An example of the value of KKR’s one-firm culture is coordinating due diligence across different geographies and industries. Our 2006 acquisition of NXP, the former semiconductor business of Royal Philips Electronics, headquartered in the Netherlands, benefited from the experience of our European team in large corporate carve-outs and the expertise of our Menlo Park-based Technology team in the semiconductor industry. In the acquisition of BIS Cleanaway in Australia, the waste management expertise of our team in Europe was a significant contribution to our executives in the Asia Pacific region.

KKR’s expertise in nine industries globally is complemented by our operational approach to creating value in our portfolio companies. The day is long past when leverage alone can drive adequate returns for investors. Improving the businesses we own is essential to creating value. KKR’s resources for strengthening companies include: our investment professionals, an increasing number of whom have served as senior executives in industry; Capstone Consulting, a team of seasoned operating professionals who work exclusively for KKR portfolio companies; and the Firm’s senior advisors, who have held executive roles in major corporations and public agencies in the United States, Europe, and Asia.

In 2006 we continued to invest in the infrastructure and talent to maintain our Firm’s leading position in the global market for large buyouts. We now have 90 investment professionals and over 300 total employees in the United States, Europe, and Asia. Over the past year, we have assembled a strong team of 18 private equity professionals in Asia. We are pleased to report that two KKR managing directors in Asia, David Liu and Ming Lu, were named members of the Firm at the end of 2006. David is the head of our Greater China operation, and Ming is a senior operating executive in Asia. In early 2007, we announced the appointment of Naohiko Kitsuta as a managing director based in Japan. He joins KKR from MKS Partners Limited, where he was a partner who led buyouts in the consumer services and retail sectors. Working with Joe Bae, the head of KKR Asia; Deryck Maughan, the chairman


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of KKR Asia; and Taketo Yamakawa, the head of KKR Japan; David, Ming, and Naohiko play leading roles in the development of our Asian franchise.

To assist our Asia team in sourcing deals, expanding networks, and building relationships, KKR appointed four new senior advisors for Asia in 2006:

Sir John Bond, chairman of Vodafone Group plc and former group chairman of HSBC Holdings plc.

Hisashi Hosokawa, former vice minister for International Economic Affairs of Japan’s Ministry of International Trade & Industry and non-executive advisor to the Long Term Credit Bank of Japan (now Shinsei Bank, Limited).

Liu Chuanzhi, founder of the Lenovo Group, which acquired IBM’s personal computer unit in 2004 and is the third largest PC producer in the world; president of Legend Holdings, which controls Hony Capital, a leading buyout fund in China, and Legend Capital, a leading venture capital fund in China; and vice chairman of the All China Federation of Industry and Commerce.

Edward Tian Suning, founder of China Broadband Capital Partners, the first government-sponsored private equity fund in China focused on the telecommunications, media, and technology sector; vice chairman and former CEO of China Netcom Group; and co-founder of AsiaInfo Holding Inc., the first NASDAQ-listed Chinese technology company.

In the pages that follow, we review KKR’s activities in 2006 and discuss the Firm’s approach to private equity, with a particular emphasis on KKR’s growing global presence. Our intent is to provide you with a better understanding of how we create value in our portfolio companies. We also hope to demonstrate the depth of our professionals’ engagement in acquiring, improving, and exiting KKR investments. Our executives commit their own capital to every transaction and share the risks and rewards of ownership with you and the management teams of our portfolio companies. To date, the Firm’s investment professionals have personally committed more than $1 billion to KKR buyout funds.

As always, we are grateful for your confidence, and we look forward to continuing to earn that confidence in 2007 and in the future.

Sincerely, KKR

March2007


KKR’s track record from its founding in 1976 to December 31, 2006BillionsofDollars

Realized Value

Unrealized Value

75.0

70.0

65.0

60.0

55.0

50.0

45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Amount Invested

Total Value

$30.1

$74.1

$57.1

$17.0

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Our investment professionals, who are organized by industry teams, proactively source deals globally. We also receive investment ideas from our worldwide network of relationships, which includes CEOs of the largest companies, political leaders, co-investors, and advisory institutions. Each year KKR reviews several hundred potential acquisition ideas. Only a small number become portfolio companies.

The Investment Committee, which reviews all investment proposals globally, brings discipline and organization to decision-making about new investments. The committee consists of Messrs. Kravis and Roberts and several of the Firm’s most experienced investment professionals.

KKR transactions that either closed in 2006 or were announced in late 2006 or early 2007 are listed below by industry group. The total enterprise value of each transaction is in parentheses.

Financial Services

Capmark ($16.7 billion), formerly GMAC Commercial Holding Corporation, is a market leader in real estate finance. The company has three core real estate businesses – Finance, Investments, and Services – and operates in North America, Europe, and Asia. Capmark is one of the few industry players offering clients and investors a comprehensive line of products and services that can be tailored to meet virtually any commercial real estate financing need.

The acquisition of Capmark, in partnership with Five Mile Capital and Goldman Sachs Capital Partners, created one of the largest investment-grade companies controlled by a private equity sponsor. To strengthen the company’s management, KKR recruited Dennis D. Dammerman, the retired chairman and CEO of General Electric Capital and vice chairman of General Electric, to serve as non-executive chairman; and William F. Aldinger III, the former chairman and CEO of HSBC


�he �ear in Review Acquisitions

The companies KKR acquires are typically large businesses with strong franchises, attractive growth prospects, defensible market positions, and the ability to generate high returns on investment. We seek to form strong partnerships with highly motivated senior managers who put their own capital at risk. Our general approach is to acquire a controlling stake in a company in which our involvement and operational expertise will enhance value creation.

www.capmark.com

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North America and former chairman and CEO of Household International, to serve as president and chief executive officer. In late 2006, Capmark announced the sale of a non-core subsidiary to Citigroup, freeing up equity capital to be redeployed into higher-return businesses and releasing secured funding capacity that will be utilized more efficiently.

Health Care

Biomet, Inc. ($11.0 billion) is a leading international manufacturer of orthopedic devices, focusing mainly on reconstructive products such as hip and knee implants. The company also manufactures spine, trauma, dental, biologic, sports medicine, arthroscopy, and craniomaxillofacial products in the United States and internationally.

The orthopedic implant industry is an attractive area for investment, with stable market shares, high entry barriers, robust margins, and strong volume trends driven by demographic growth and increased penetration of potential implant patients. Due to its history of product innovation and its strong relationships with surgeons, Biomet has an outstanding multi-decade track record of creating shareholder value. As a private company, Biomet will have greater latitude to improve its operations through more centralized management and other initiatives. Our partners in this investment are the Blackstone Group, Goldman Sachs Capital Partners, and TPG. The transaction is expected to close in mid to late 2007.

HCA Inc. ($33.0 billion) is the largest investor-owned provider of health care services in the United States. Its locally managed facilities include 179 hospitals and 104 outpatient surgery centers in 20 states, England, and Switzerland. HCA’s primary objective is to provide a comprehensive array of quality health care services in the most cost-effective manner possible.

Hospitals have strong industry fundamentals, with rates of revenue growth consistently exceeding GDP and relatively stable margins. HCA maintains the leading share in nearly all of its markets through its high-quality portfolio of assets. The company’s experienced senior managers, the top three of whom have been with HCA for more than 20 years, have a record of operational innovation that has added meaningful value to the business, positioning HCA to capitalize on the strong underlying growth in the hospital industry. KKR and our partners, Bain


www.hcahealthcare.com

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Capital, Merrill Lynch Global Private Equity, and HCA’s co-founder Dr. Thomas Frist, Jr., are working with management on several value-creating initiatives – for example, identifying new opportunities for revenue diversification, evaluating strategic acquisitions in high-growth markets, and divesting non-core and underperforming hospitals.

Industrial

AVR (€1.3 billion), the leading waste management company in the Netherlands, is active in every stage of the value chain: collection, recycling, treatment, processing, and disposal. The company is organized into three main business units: Waste Processing (primarily waste incineration); Environmental Services (primarily domestic and commercial waste collection and treatment); and Industry (primarily industrial cleaning and collection and treatment of hazardous and maritime waste).

AVR has a number of attractive business fundamentals, including long-term contracts, strong cash flow, and high barriers to entry in waste incineration. KKR and our partner, CVC Capital Partners, acquired AVR in an auction. Among the key factors influencing the outcome of the transaction were KKR’s experience in the waste management sector, our track record in the Netherlands with the Vendex acquisition, and our ability to improve operations with Capstone and other resources.

In January 2007, KKR and CVC announced an agreement to acquire the Van Gansewinkel Groep, a leading waste service provider in Benelux, for €870 million. The combination of AVR and Van Gansewinkel will create a leading player in European waste management with strong market positions across the value chain.


www.avr.nl

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BIS Cleanaway (A$1.9 billion) operates two divisions across two distinct markets in Australia: (1) Cleanaway is Australia’s leading waste management operator, collecting general and recyclable waste from 65,000 customers nationally and providing a broad range of waste management services to municipal councils across the country; and (2) BIS is the leading outsourced supplier of on-site and off-site materials handling and logistics services to the minerals, metals, and coal mining sectors.

Waste management is an attractive investment opportunity, with strong cash flow and stable, recurring revenue. BIS Cleanaway services a broad range of blue-chip customers, including leading Australian and global mining companies, municipal councils, and corporations throughout the country. KKR and Capstone have helped management strengthen financial and operating metrics, centralize procurement, and maximize sales force effectiveness for commercial and industrial waste management.

KION Group (€4.1 billion) is Europe’s leading supplier of forklift trucks, warehouse technology, and related services, and it is the number two supplier globally. The company offers a broad range of industrial forklift trucks, through its three well-established brands: Linde, STILL, and OM. The company’s culture of engineering excellence has fostered innovation and led to the development of proprietary technologies, including its hydrostatic drive technology, diesel-electric drives, and electric axles.

In December 2006, KKR and Goldman Sachs Capital Partners acquired KION from Linde AG, which sold the subsidiary to focus on its core gas business. The company has significant potential for improvement in costs and cash flow, in particular through increased purchasing from low-cost countries, improved manufacturing, and more efficient supply chain management. KION also has attractive growth opportunities in countries outside the company’s core markets in Western Europe and in new product areas.

Tarkett (€1.5 billion) is a leading global manufacturer of a broad range of flooring products. Headquartered in Nanterre, France, the company is organized into two business units: a residential division that sells flooring products to individual consumers through installers and retail channels; and a commercial division for office buildings, health care institutions, sports facilities, and other businesses. Tarkett enjoys leading market positions in the European resilient flooring market, a stable and highly profitable commercial business, and


www.kiongroup.com

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a high-quality and high-growth Eastern European operation. KKR took a 50% stake in Tarkett, alongside the Deconinck family, which was looking for an experienced, hands-on partner to drive value creation in the business.

KKR and Capstone executives are working closely with Tarkett’s senior management to implement operational changes. Our key areas of focus are growing the strong, profitable business units organically or through acquisitions; restructuring the underperforming businesses through cost reduction and a more focused customer approach; and strengthening core business processes, such as purchasing, working capital management, and supply chain management.

Media and Communications

The Nielsen Company ($12.0 billion) is a global information and media company. Active in more than 100 countries, The Nielsen Company (formerly known as VNU Group B.V.) is a leader in marketing information (ACNielsen), media measurement and information (Nielsen Media Research), business information, including Adweek, Billboard, TheHollywoodReporter, and Computing, and trade exhibitions.

KKR partnered with five other leading private equity firms to pursue this investment. After closing, several new members of the senior management team were recruited, most notably CEO David L. Calhoun, former vice chairman of General Electric Company. We have been working with management to develop metrics that focus on controllable drivers of performance, to review the asset portfolio, to pursue a range of cost-saving and operational-efficiency opportunities, and to invest in new products and services to support future revenue growth.

In January 2007, VNU changed its name to The Nielsen Company, emphasizing the company’s best known brand and reflecting the company’s increased focus on operating as an integrated marketing and media information services company.


www.nielsen.com

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PagesJaunes Groupe (€5.6 billion) is the leading publisher of directories in France in print, on line, and by voice. It also publishes directories of company data for professionals, develops services for direct marketing, and has operations in Spain, Belgium, Luxembourg, Morocco, and Lebanon.

KKR acquired France Telecom’s 54% stake in publicly listed PagesJaunes. Our experience in the directory industry, knowledge of the company, and relationship with the management team contributed to our ability to assure FT of certainty and speed in executing the transaction. KKR and Capstone have helped the management team in such areas as identifying strategic priorities and developing projects related to online positioning, adjacent business opportunities, and acquisitions and partnerships. Capstone has also assisted in developing initiatives to improve sales force productivity, product pricing, and organizational efficiency.

ProSiebenSat.1 (€5.9 billion), the leading commercial TV broadcaster in Germany, owns four free-to-air and one transactional channel, forming an integrated broadcasting family that accounted for a 43% share of total German net TV advertising revenues in 2006. KKR partnered with Permira to acquire German Media Partners’ 88% voting and 50.5% economic stake in publicly listed ProSiebenSat.1 Media AG.

Our investment thesis centers on three themes: structural upside in the core business through German TV advertising growth; growth potential in diversification activities such as Pay-TV, Video-on-Demand, and PC-TV; and potential synergies with KKR portfolio company SBS Broadcasting Group, which has operations in Western and Central Europe. The transaction is expected to close in March 2007.

Seven Media Group (A$4.1 billion) is a 50-50 media joint venture with Seven Network Limited in Australia. The company consists of the Seven Network, Australia’s leading free-to-air TV network (by advertising revenue); Pacific Magazines, the country’s second largest magazine business; and Yahoo!7, the second most-visited entertainment portal, held through a 50-50 joint venture with Yahoo! that was formed in February 2006.


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KKR is working with Seven Network Limited and the management of Seven Media Group to capitalize on the company’s strong momentum and to optimize profitability. In the television business, for example, KKR and Capstone have been assessing and improving the ad sales process (including go-to-market strategy, ad inventory management, results and metrics tracking, and salesperson efficiency) to continue growing advertising revenue share. In magazines, KKR is helping management to improve independent distributor incentives to expand the distribution reach of Pacific’s titles. KKR’s work with Yahoo!7 to grow the business organically and strategically includes the integration of a recently formed joint venture with Telecom New Zealand, which owns the country’s most-visited entertainment portal.

TDC A/S (€12.4 billion) is the leading provider of telecommunications solutions in Denmark and the second largest in Switzerland. TDC also has significant presence in selected markets in Northern and Central Europe – for example, Sweden, Norway, Finland, and Hungary. In Denmark, TDC’s primary geography, the company has a strong position across all segments of the telephony market (fixed-line, mobile, DSL Broadband, and cable), with an excellent brand and high market share.

KKR partnered with four other private equity firms to acquire TDC. We see opportunities for revenue growth in Denmark and international markets – for example, in mobile communications – and we are assisting senior management with a value-creation program that includes optimizing internal processes, reducing operating costs and working capital, and rationalizing capital expenditures. We are also assisting the company in the review of its non-core assets – for example, real estate and minority holdings.

In January 2007, TDC agreed to sell its mobile operator in Lithuania and Latvia to a private equity fund for €445 million, which represents nearly twice the valuation of this asset when we acquired TDC. The proceeds of the sale will be used to reduce debt.


www.tdc.com

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Technology

Aricent ($936 million), formerly the software development and solutions business of Flextronics International Ltd., is the leading pure-play provider of software solutions to the communications industry. Aricent provides sophisticated, mission-critical software services and products to telecom OEMs and service providers, as well as highly specialized branded interface and product design/consulting to Fortune 1000 companies.

Our investment in Aricent represents an opportunity to create value in a large, high-growth sector: technology outsourcing. KKR, working with the management team, led the carve-out of Aricent from Flextronics. We are helping management to develop a metrics package for better monitoring of the business, to strengthen the strategic planning process, and to deepen relationships with existing customers and target new ones in the United States and Europe.

NXP (€8.6 billion), previously the semiconductor business of Royal Philips Electronics, is a diversified, global supplier of semiconductor system solutions and components. It is one of the 10 largest semiconductor companies globally and the second largest privately held semiconductor company in the world. NXP has a diversified customer base that includes the top OEMs in communications, consumer electronics, the automotive industry, and other end markets.

The acquisition of NXP by KKR, Silver Lake Partners – our partner in the carve-out of Avago Technologies (the former Agilent Technologies Semiconductor Products Group) – Bain Capital, and Apax Partners was helped by our prior buyout experience in the semiconductor industry and our reputation for successfully completing large corporate spin-offs in Europe. KKR has been working with the other equity sponsors and management to review key strategic issues and initiatives, pursue cost-reduction opportunities, and evaluate M&A opportunities.


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Creating value takes time. Because the pace of value creation is difficult to predict with precision, we do not have a pre-determined time plan for exiting a company. Nor do we have a preferred method of sale.

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.

In 2006 and early 2007, KKR realized significant value for our investors through public market offerings and sales to strategic buyers. Notable realizations for the reporting period include:

Energy and Natural Resources

ITC Holdings Corp., the only truly independent electricity transmission company in the United States, with transmission assets serving the lower peninsula of Michigan, priced an equity offering in 2006 to fund the acquisition of its neighboring transmission system, Michigan Electric Transmission Company LLC. As part of that offering, KKR sold 4.4 million of its shares for approximately $132.9 million. In addition, KKR received dividends of $20.2 million.

When acquired in 2003, ITC had an annual capital budget of approximately $10 million, 38 employees, and a system in need of significant investment. KKR provided patient capital that enabled ITC to improve its transmission service to consumers while lowering the overall cost of electricity to customers. At the end of 2006, the subsidiaries of ITC Holdings had a capital budget in excess of $200 million, 213 direct employees, and approximately 460 employees under contract to work in the field.

In February 2007, the KKR Funds sold their remaining stake in ITC Holdings for approximately $317 million. In total, the ITC transaction has yielded 5.0x our original investment.


Realizations

www.itc-holdings.com

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Texas Genco, a wholesale power generation company, was acquired by NRG Energy, Inc. in February 2006. Including cash proceeds from this initial sale, a sale of approximately 8.2 million shares of NRG common stock, and various tax and other distributions, the total value realized from the Texas Genco investment was approximately $1.34 billion. This compares to KKR’s original investment of $109.3 million, which closed in two steps in December 2004 and April 2005.

The acquisition of Texas Genco with a consortium of private equity investors was the culmination of several years of analysis of the independent power space. This effort, combined with a partnership with an experienced management team, enabled KKR to acquire and improve a sizable business in a sector that had been out of favor with many investors. Our improvements included an innovative forward sales and hedging strategy, which helped increase revenues and make a traditionally volatile business more predictable, and greater efficiency in such areas as power plant capacity utilization, operations and maintenance, administration, procurement, and power marketing.

Industrial

Demag Holdings, an industrial holding company combining seven separate German businesses acquired from Siemens in 2002, paid a dividend of approximately $366 million to KKR in July 2006 following the divestment of three businesses. In December, the company sold all of its Demag Cranes common stock and paid a dividend of $229 million in January 2007. Including these dividends, Demag has now distributed to KKR 2.8x our original investment.

KKR facilitated Demag’s transition into a stand-alone entity, recruited new management, worked with Capstone and division management teams to develop performance-tracking metrics, implemented a restructuring, and assisted senior managers in evaluating and executing acquisitions and divestitures. After the 2006 divestments, Demag retains only one company, the small technical ceramic supplier Argillon.

�he �ear in Review Realizations

www.demagcranes.com

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MTU Aero Engines is a leading supplier of critical sub-systems and components for aircraft engines and one of the leading independent providers of repair and overhaul services for commercial jet engines. In January 2006, six months after the company’s initial public offering, KKR sold the balance of its MTU shares for $516.9 million. In total, KKR’s original investment of $326.5 million resulted in total value of $1.1 billion.

Acquired in 2003, MTU was formerly a subsidiary of DaimlerChrysler. KKR worked with management in maintaining relationships with key customers – for example, engine manufacturers and the German government. KKR also helped streamline the company’s management and organizational structure to improve accountability and efficiency, strengthen financial reporting systems, and implement MTU’s transition to a stand-alone entity.

Media and Communications

PanAmSat, a leading global provider of video, broadcasting, and network distribution and delivery services, merged with Intelsat in July 2006. KKR received sale proceeds of $779.2 million and dividend income of $38.7 million for a total of $817.9 million. These 2006 realizations, combined with prior distributions, resulted in total value of $930.3 million against a cost of $131.4 million.

KKR teamed with The Carlyle Group and Providence Equity Partners to acquire PanAmSat from DirecTV in August 2004. Capstone and KKR worked extensively with PanAmSat’s management on a number of operating initiatives, including the creation of a marketing organization, the development of a more rigorous capital expenditure review process, and the implementation of comprehensive business performance metrics. KKR assisted PanAmSat with a successful initial public offering in 2005 and negotiated the company’s merger agreement with Intelsat in 2006.

www.mtu.de

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�he �ear in Review

Other Portfolio Company Highlights

Between the close of a transaction and the exit of an investment is the hard work of making a company more valuable, generally through improving operations. Our 100-day plans for new acquisitions set forth the steps that KKR and company management have agreed are necessary to achieve immediate operational goals. Over the life cycle of our investments, KKR executives, Capstone consultants, our senior advisors, and other specialized professionals work closely with management of our portfolio companies to drive operational improvements in such areas as:

Sales growth through market share expansion or growth into new geographies or business areas.

Cost improvements in purchasing, manufacturing, discretionary spending, and overhead expenses.

Better cash management through increased attention to working capital and capital expenditures.

Asset optimization through the sale of non-core businesses and the acquisition of complementary businesses.

Implementation of stand-alone processes and systems, primarily in the development of central-headquarters functions, such as finance, human resources, information technology, and legal, particularly when the businesses we acquire are divisions or carve-outs from large corporations.

In addition to the operational improvements and value-creating activities discussed in the “Acquisitions” and “Realizations” sections of this year’s review, recent performance and operational highlights from our portfolio companies include:

Avago Technologies, a leading supplier of semiconductor solutions for advanced communications, industrial, and commercial applications, divested three non-core assets: the Storage Products Business, the Printer ASICs Business, and the Image Sensor Business. Proceeds from the sales were a significant contributor to the full repayment of term debt borrowing of $725 million. In addition, the company recruited several semiconductor industry veterans into senior leadership positions, including a new CEO and CFO.

www.avagotech.com

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Other Portfolio Company Highlights

Legrand, a global leader in products and systems for electrical installations and data networks in residential housing, office buildings, and industrial use, completed an initial public offering on the Euronext Paris exchange. KKR received $217 million from the sale of approximately 9 million shares, or about 10% of KKR’s holdings. KKR has worked with management to identify cost-saving opportunities, to evaluate acquisition opportunities, and to foster growth through enhanced efforts in R&D and in sales and marketing.

Maxeda, formerly known as Vendex KBB, and the largest non-food retailer in the Netherlands, optimized its portfolio of assets and capital in 2006 by selling its Consumer Electronics business for €104 million and issuing a €460 million PIK instrument. These transactions resulted in a distribution to KKR of €242.3 million.

Toys “R” Us, a worldwide specialty retailer of toys, baby products, and children’s apparel, and the global leader in retail toy sales, recruited several senior managers, including Chairman and CEO Gerald L. Storch, a highly experienced retail executive who previously served as vice chairman of Target Corporation. During the nine-week holiday selling season in 2006, the U.S. division of Toys “R” Us had one of its best seasons in many years, increasing same-store sales by 4.1%. Over the same period, the Babies “R” Us division increased comparable store sales by 6.0%.

Visant Corp., a leading North American enterprise for school-related marketing and affinity products and services, recapitalized the company based on its strong deleveraging and a favorable financing environment. Issuing senior notes at an attractive rate allowed Visant to pay a $341 million dividend to shareholders. In January 2007, the company agreed to sell its Von Hoffman textbook printing unit to R.R. Donnelley & Sons for $412.5 million. The proceeds from the sale will repay existing debt, and the transaction will significantly enhance Visant’s strategic opportunities going forward.

www.toysrus.com

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KKR’s record in Europe tells a different story. Since its first investment there, the Firm has committed more than $9.3 billion of equity in 25 European private equity transactions with an aggregate enterprise value of $69.3 billion. These investments include taking large publicly listed companies private, acquiring family-owned businesses, completing secondary buyouts from other private equity firms, and acquiring large divisions of major European business groups such as Bosch, DaimlerChrysler, Schneider, and Siemens.

Today, KKR is part of the fabric of European private equity, with a reputation for completing large, complex transactions. The 2002 acquisition of Legrand was, at the time, Europe’s largest private equity transaction. The 2005 TDC transaction is currently Europe’s largest. KKR is leading the private equity market in Germany and the Netherlands, and has established a solid presence in France. As of December 31, 2006, the total value of KKR’s European investments was approximately $17.0 billion, a multiple of 2.1x invested capital.

The factors contributing to KKR’s success in Europe include:

Building a strong team of senior European executives with varied transactional and operational experience across the continent.

Integrating these professionals into KKR’s culture and its one-firm philosophy.

Developing expertise in complex industries where in-depth knowledge of the sector provides a competitive advantage.

Emphasizing operational improvements in businesses to create value.

Demonstrating high standards of integrity and business ethics.

KKR in Europe

When KKR opened its London office in 1998, some people in the private equity industry were skeptical about the Firm’s ability to succeed in Europe. There were predictions that in a market with strong local competitors, a U.S. firm would be unable to source good investments. European management teams, it was said, would be unwilling to partner with a firm so closely identified with the U.S. private equity industry.

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KKR executives in Europe include:

(seated, left to right) Roger M. Carr,

Dominic P. Murphy, Johannes P. Huth,

Todd A. Fisher, Josselin de Roquemaurel,

Nicolas Cattelain, (standing, left to right)

Mattia Caprioli, Torbjorn Midsem,

Oliver Haarmann, Jakob Kjellberg,

Nicolas Gheysens, Henrik Kraft,

Clive R. Hollick, John L. Pfeffer,

Sergio D’Angelo, Christina A. Pamberg,

Jacques Garaïalde, Edouard Pillot,

Reinhard Gorenflos, Silke C. Scheiber,

Philipp Freise, Christoph Seeger,

and Ahmet Faralyali.

A New Environment

Before establishing a London office, KKR spent years analyzing and monitoring the European buyout market. The Firm reviewed hundreds of potential acquisitions and made two investments in the U.K. (Newsquest plc and Willis) and one in Switzerland (Alea Group). The 1998 acquisition of Willis, a global insurance broker headquartered in London, required an in-depth understanding of not only the regulatory and accounting challenges of any investment in the financial services sector, but also the complexity of the U.K. laws and rules governing going-private transactions. In addition to being a profitable investment, the Willis deal demonstrated KKR’s ability to operate successfully in a new and different regulatory environment.

In 1998 the strength of the deal flow in Europe convinced KKR to make a long-term commitment to building a presence and becoming an industry leader in the region. Two senior KKR executives moved to London to open the Firm’s first overseas office, source deals in Europe, and recruit local professionals. Building the European team was a thorough and patient process, combining the culture and private equity experience of KKR with the transactional, operational, and consulting skills of a diverse group of senior European executives. The European professionals have their own networks of relationships in particular countries and

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a deep familiarity with local cultures, business practices, and legal arrangements. Today, KKR’s European team of 22 investment professionals, representing 12 nationalities, has the ability to transact business in all of the major European languages and has been accepted as truly local in many markets.

An important part of KKR’s market-entry strategy was establishing the $3.1 billion European Fund in 1999. In addition to providing equity for investments, this fund sent a signal to local market participants that KKR was in Europe for the long haul, and it helped the Firm win deals and recruit top people. It also differentiated KKR from other U.S. firms investing in Europe, which at that time did not have dedicated European funds. In 2005 KKR raised €4.5 billion for its European Fund II.

During KKR’s initial years in Europe, many of the continent’s larger corporations were focused on rebuilding balance sheets, realigning their business portfolios, and divesting non-core assets. In the late 1990s, divestitures were a key source of private equity assets, accounting for about two-thirds of European buyouts. In 1999 KKR acquired from Siemens a 71% stake in Wincor Nixdorf, a German manufacturer of ATM machines for banks and electronic point-of-sales systems for retailers. This transaction was the first of many corporate carve-outs that established KKR as a leader in large, complex divestitures in Europe.

The late 1990s was also a period of self-assessment at KKR. The Firm’s founders and other senior executives concluded that a key factor in taking the Firm to a higher level of performance was developing a deeper knowledge of specific industries. Moreover, the only durable way to create value in portfolio companies was through operational improvements, rather than financial engineering. One of the institutional changes KKR made was organizing its investment professionals into industry teams. The Firm’s executives were charged with developing a network of industry experts and an in-depth understanding of their industry’s economic drivers, inherent risks, and opportunities for value creation. In Europe today, KKR executives proactively source transactions in the following industries: chemicals, consumer products, financial services, health care, industrials, media, retail, technology, and telecommunications.

A related institutional development was the creation of Capstone Consulting in the United States in 2000 and Capstone Europe the following year. Experienced operating professionals who work exclusively with KKR portfolio companies, Capstone executives focus primarily on the implementation of operational-improvement and strategic-development initiatives. In many cases, Capstone’s

KKR in Europe

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work includes developing actionable metrics for tracking progress and identifying problems early. In other cases, Capstone executives have served as interim senior managers. The operational capabilities of Capstone have helped KKR differentiate itself from local competitors in Europe.

Industrial Value Creation

Utilizing the operating experience of KKR’s professionals, Capstone executives, and other specialized consultants, the Firm’s approach to owning businesses includes a strong emphasis on cash flow and rigorous cost management. There are, however, other levers for value creation – for example, growing sales and expanding into new geographies or product segments, optimizing cash management by focusing on working capital and capital expenditures, and rationalizing a company’s portfolio of businesses through acquisitions and divestitures.

European examples of KKR’s operational approach to value creation include:

Demag Holdings (Germany). The carve-out of seven separate businesses from Siemens, which were renamed Demag Holdings, was Europe’s largest and most complicated divestiture. KKR facilitated Demag’s transition into a stand-alone entity, recruited new management, implemented a complex restructuring, assisted senior managers in evaluating acquisitions and divestitures, and together with Capstone developed business performance metrics.

Legrand (France). After the 2002 acquisition of this global leader in products and systems for electrical installations and data networks, KKR began to work with management on a range of operational improvement initiatives. They included centralizing purchasing to reduce costs, specializing and relocating manufacturing facilities, and restructuring the North American operations. Enhanced investment in R&D, sales, and new product introductions have led to gains in market share and strong organic growth.

A.T.U. - Auto-Teile-Unger (Germany). Under KKR’s ownership, Germany’s leading auto center has continued to expand its store network by adding 40 to 50 stores per year in Germany and other Western and Central European countries. KKR’s work with ATU management includes initiatives to improve same-store sales, introduce new services, increase customer traffic and spend per visit, raise employee productivity, renovate older stores, and optimize working capital management. A Capstone executive served as an interim head of category

www.legrandelectric.com

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management, implementing a new pricing strategy for spare parts that helped boost sales and gross profits in the second half of 2006.

Maxeda (the Netherlands). Since acquiring the Netherlands’ largest non-food retailer (formerly known as Vendex KBB), KKR has strengthened the company’s management team, recruiting a new CEO, CFO, and other senior managers, and encouraged a performance-driven culture that emphasizes teamwork and the transfer of best practice across the organization’s department, variety, and specialty stores. Capstone’s work for Maxeda’s DIY business includes improving category management and buying processes across different DIY formats. In the ongoing turnaround of V&D, Maxeda’s national chain of mid-market department stores, Capstone has been active in such areas as introducing new brands and improving purchasing, merchandising, and other key business processes.

One Global Firm

A key strength of our European franchise – and the Firm’s offices around the world – is the one-firm approach to KKR’s global operations. One Investment Committee reviews all opportunities globally. One Portfolio Management Committee monitors the progress of our investments. One compensation program, based on the overall success of the Firm, encourages teamwork among investment executives and the sharing of expertise, resources, and networks.

This approach to private equity investing enhances KKR’s ability to source deals, conduct due diligence, and oversee its portfolio companies. When KKR acquired MTU Aero Engines from DaimlerChrysler, the European team’s relationships with the German government and the U.S. team’s contacts with Pratt & Whitney helped to increase the comfort of these key MTU partners with the transaction and to position KKR as the most credible buyer of the company. And the knowledge of the directory industry that KKR gained from its investment in the Yellow Pages Group in Canada contributed significantly to the successful acquisition of France Telecom’s majority stake in PagesJaunes.

KKR in Europe

www.maxeda.com

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The benefits of KKR’s one-firm approach are exemplified by Rockwood Holdings, Inc. and its subsequent acquisition of the German specialty chemicals business Dynamit Nobel. KKR’s European team sourced the initial purchase of Rockwood, then a largely U.S. subsidiary of a U.K. chemical conglomerate. When a German conglomerate sought to divest Dynamit Nobel, KKR and Capstone teams in the United States and Europe conducted cross-border due diligence. Rockwood’s financing of the acquisition in the U.S. markets provided more attractive terms and conditions than stand-alone competitors could obtain in Europe. Moreover, KKR took the combined company public in the United States, where multiples for specialty chemical companies were higher.

Access to specialized industry experience and expertise is another advantage of KKR’s global platform. The Firm’s investment in ATU has been enhanced by its earlier ownership of AutoZone, a chain of auto parts stores in the United States. The former chief operating officer of AutoZone worked with KKR during the due diligence for ATU and after the deal closed, visited many of the company’s stores, and provided expert advice in such areas as purchasing, inventory management, and marketing.

European Private Equity Today

Today, KKR Europe is operating in a fundamentally healthy environment for private equity transactions, with relatively strong economic growth, good stock market performance, historically low interest rates, and high liquidity. Over the past five years, the volume of buyout transactions in Europe has grown at a compound annual rate of 43%. Moreover, the European share of buyouts globally has been increasing.

Although an increasingly mainstream form of investing, private equity has been misunderstood in some parts of Europe. In Germany, for example, the blanket characterization of U.S. and U.K. private equity firms as “locusts” reflects a belief that foreign investment is generally unwelcome and responsible for high levels of domestic unemployment. There have been similar misunderstandings in the Netherlands and France.

The record of private equity in Europe contradicts such assertions. According to a 2005 study conducted by researchers at the Munich Technical University, employment in European companies financed by buyouts rose by an average of 2.4% annually between 1997 and 2004. This rate of growth is almost four times

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the annual growth rate of total employment in the European Union. Moreover, these researchers found that two-thirds of the buyout-financed companies surveyed either kept a stable headcount or increased the number of employees.

A 2006 A.T. Kearney study concluded that private equity capital can significantly accelerate employment and value generation. Over the last three to five years, according to the study, private equity has contributed to the creation of more than one million new jobs in Europe and has enabled companies to increase sales, profitability, investment capital, and market share.

Similar economic and social benefits are found in KKR’s portfolio of companies. Under KKR’s ownership, employment at Wincor Nixdorf almost doubled. Other examples of employment growth include ATU, the Demag subsidiary Gottwald, and Legrand. It is true, on the other hand, that some private equity investments require restructuring, particularly when there is over-capacity in a business and often in the first year of ownership. A fact often overlooked is that without such restructuring, a company’s weak financial position could threaten even more workers’ jobs and prevent future employment growth.

There has been at least one beneficial consequence of the “locust” debate in Europe, where private equity firms have sometimes been confused with hedge funds. The public discussion of private equity has helped local decision-makers do a better job of identifying high-quality firms with long-term investment horizons and a commitment to improving their portfolio companies. This development can only help KKR in Europe and, for that matter, around the world.

We believe that there will be growing recognition of the economic and social benefits of private equity and that this form of investing will play an increasingly important role in the European and global capital markets. Liquid financing markets and increasingly large private equity funds will create opportunities for larger deals. Such transactions should play to the historic strengths of KKR and enable the Firm to utilize its experience, industry knowledge, operational expertise, best-in-class processes, and global resources for the benefit of investors.

KKR in Europe

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Building the Asian Franchise

After completing an extensive market study in 2005, KKR concluded that Asia was a compelling opportunity for private equity investing. It is the fastest growing region in the global economy, with attractive fundamentals for sustained economic growth. The environment for private equity investing in Asia is improving, driven by market dynamics that include pro-foreign direct investment policies and relaxation of foreign ownership restrictions; the restructuring of conglomerates and divestiture of non-core assets; and the rapid development of capital markets. Although still in its infancy, the private equity market in Asia is growing rapidly, with significant growth in M&A activity, buyout fundraising, and the size of transactions.

KKR’s market-entry strategy included moving two senior executives, MemberJoseph Y. Bae from the New York office and Director Justin C. Reizes from the London office, to Hong Kong in late 2005 to establish operations in Asia and to recruit a world-class team of investment and operating professionals. As in Europe, the goal was to combine KKR’s culture, investment discipline, and portfolio management techniques with the experience of local investors with proven track records.

Over the past year, KKR has assembled a strong team of 18 private equity professionals in Asia, including:

Sir Deryck Maughan, chairman of KKR Asia and managing director of KKR. He was previously vice chairman of Citigroup and CEO of Citigroup International and before that CEO of Salomon Brothers.

David Liu, head of Greater China operations and member of KKR. He was previously a managing director and co-head of Morgan Stanley Private Equity Asia.

Ming Lu, senior operating executive and member of KKR. He was previously a partner at CCMP Capital Asia (formerly JP Morgan Partners Asia).

Taketo Yamakawa, head of Japan operations and managing director of KKR. He was previously CEO of GE Consumer Finance North Asia (Japan and Korea).

Naohiko Kitsuta, managing director, based in Japan. He was previously a partner at MKS Partners Limited, where he led buyouts in the consumer services and retail sectors.

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KKR’s franchise in Asia has several competitive advantages, including the Firm’s global industry expertise and 30 years of investment experience; a one-firm culture, with fully integrated investment teams in the United States, Europe, and Asia and a single compensation system to encourage teamwork globally; and investment professionals with operating backgrounds and Capstone executives who can drive operational improvements in portfolio companies.

KKR’s initial investment focus in the Asia Pacific region is North Asia, primarily Japan and Greater China (The People’s Republic of China, Taiwan, and Hong Kong) as well as Australia and New Zealand. KKR will opportunistically pursue investments in other parts of Asia, including South Korea, Southeast Asia, and India.

In Asia, KKR’s private equity investments will take a variety of forms. The Firm will focus primarily on investing substantial capital for control of large, industry-leading businesses. In markets where executing control transactions may be difficult, we will also consider, on a selective basis, smaller minority positions, though only if we have substantial governance rights and can partner with a strong management team.

Since December 2005, KKR has completed four transactions in Asia, investing approximately $1.5 billion in equity:

Avago Technologies ($2.8 billion), the third largest privately held independent semiconductor company in the world, is the largest buyout completed in Singapore.

The Hong Kong team, left to right, includes: Lane Zhao, Robert H. Lewin, Sean Fan, Ming Lu, Deryck C. Maughan, Joseph Y. Bae, David H. Liu, Julian Wolhardt, and Charlie Gao.

Building the Asian Franchise

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Aricent ($936 million), formerly the software development and solutions business of Flextronics International Ltd., is a leading provider of software solutions to the global communications industry.

BIS Cleanaway (A$1.9 billion) is Australia’s leading waste management operator and provider of outsourced on-site and off-site materials handling and logistics services to the minerals, metals, and coal mining sectors.

Seven Media Group (A$4.1 billion), a 50-50 media joint venture with Seven Network Limited, includes Australia’s leading free-to-air TV group, the country’s number two magazine portfolio, and the number two Internet portal through a joint venture with Yahoo!.

Although KKR is relatively new to Asia, the Firm has significant experience in the region working with our portfolio companies. Currently, our companies have more than 50 manufacturing plants in Asia, participate in more than 20 joint ventures in the region, employ over 65,000 people in Asia, and have annual sales in the region of more than $10 billion. In addition to Aricent, Avago Technologies, BIS Cleanaway, and Seven Media Group, portfolio companies with a significant Asian presence include Capmark, KION, Legrand, NXP, Toys “R” Us, and The Nielsen Company.

KKR’s strengths as a global private equity firm are well suited to the Asian market. Although our deal flow in the region does not yet match that of the U.S. and European markets, we believe that several Asian economies are ripe for a breakthrough in the size and number of private equity transactions. We believe that our investment experience, team-oriented culture, industry knowledge, global resources, and long-term operational focus will provide a sustainable advantage in sourcing new investments and improving portfolio companies.

Tokyo-based investment professionals, left to right, include: Daisuke Nozaki, Willard C. Butcher, Jr., Taketo Yamakawa, Ryo Fujii, and Justin C. Reizes.

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Ninety KKR investment professionals source transactions globally and work to increase the value of our portfolio companies. Led by Co-founding Members Henry R. Kravis and George R. Roberts, the Firm’s investment executives are among the most experienced and successful private equity investors in the world. The 14 most senior members average 17 years at KKR. The Firm’s 25 members are supported by an experienced team of managing directors, directors, principals, and associates.

Investment Professionals

KKR’s Technology industry team includes: (seated, left to right) Adam H. Clammer, David M. Kerko, Nathaniel Taylor, Michael E. Marks, James H. Greene, Jr., (standing, left to right) Pavel Chernyshov, Francisco Alvarez-Demalde, and Jeff Parks.

KKR’s investment professionals come from a broad spectrum of backgrounds in private equity, operations, strategic consulting, and finance. Over the past six years, we have focused our senior-level recruiting efforts on executives with significant operating experience, including former CEOs and CFOs of companies in a wide range of industries.

The professionals in each group have developed a network of industry experts and an in-depth understanding of their industry’s economic drivers, inherent

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The Firm’s Energy and Natural Resources industry team includes: (seated, left to right) Frederick M. Goltz, Marc S. Lipschultz, Raj K. Agrawal, (standing, left to right) Jay Schneider, Brian Dillard, Robert W. Antablin, Jonathan D. Smidt, and Francisco Alvarez-Demalde.

risks, and opportunities for value creation. We believe that our in-depth industry knowledge has been critical to our ability to invest successfully in some of the more complex, regulated industries, such as banking, insurance, and power generation and transmission.

Our investment professionals are organized into nine primary industry groups globally:

Chemicals Consumer Products Energy and Natural Resources Financial Services Health Care Industrial Media and Communications Retail Technology

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In addition to sourcing investments and creating value for our limited partners, KKR’s investment professionals commit their own capital to every transaction. The Firm’s executives have personally committed more than $1 billion to KKR buyout funds.

Investment Professionals

The KKR Financial Services industry team: (seated, le to right) Jonathan R. Levin, Ahmet Faralyali, Carlos de Barros, (standing, le to right) Webster Chua, Perry Golkin, Deryck C. Maughan, Todd A. Fisher, Scott C. Nuttall, Tagar C. Olson, and Craig J. Farr.

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Senior Executives New York Menlo Park Henry R. Kravis, co-founding member George R. Roberts, co-founding memberPaul E. Raether, member Michael W. Michelson, memberPerry Golkin, member James H. Greene, Jr., memberAlexander Navab, member Michael M. Calbert, memberMarc S. Lipschultz, member Adam H. Clammer, memberScott C. Nuttall, member Frederick M. Goltz, memberBrian F. Carroll, member James C. Momtazee, directorJohn K. Saer, Jr., member Dominique Y. Hansen, directorKenneth W. Freeman, managing director David M. Kerko, directorSir Deryck Maughan, managing director Craig J. Farr, managing directorAnthony C. Hass, directorWilliam J. Janetschek, directorSimon E. Brown, directorAnnette Guarnaccio, directorThomas C. Uger, director London Paris Johannes P. Huth, member Jacques Garaïalde, member Todd A. Fisher, member Reinhard Gorenflos, member Oliver Haarmann, member Dominic P. Murphy, memberJohn L. Pfeffer, memberLord (Clive) Hollick, memberChristina A. Pamberg, director

Hong Kong TokyoJoseph Y. Bae, member Taketo Yamakawa, managing directorDavid H. Liu, member Naohiko Kitsuta, managing director Ming Lu, member Justin C. Reizes, director

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Additional Resources for Value Creation

Capstone. A key global resource for strengthening operations in our portfolio companies is Capstone Consulting. With a team of 24 executives based in New York, Menlo Park, and London, Capstone works exclusively for KKR and specializes in multiple industries, including chemicals, consumer products, industrial, health care, media, retail, and technology. Over the next 18 months, Capstone intends to establish a presence in Asia. Our portfolio companies in the region are currently served by Capstone executives based in Menlo Park.

The U.S. Capstone team includes: (seated, left to right) Vikas Parekh, Scott W. Wagner, Eric Daliere, Scott Bookmyer, Anand Nathan, (standing, left to right) Rushi Patel, Ravi Gupta, Ernesto Perez-Carrillo, Dean Nelson, Samuel Allen, William Cornog, Matthew King, Chad Fargason, and Nicholas Zeitlin.

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Capstone Europe executives: (seated, left to right) Alain Vourch, Roger M. Carr, Steffen Pauls, Henrik Poulsen, (standing, left to right) Paolo Notarnicola, Paul Douek, Jerome Losson, and Johan van de Steen.


During the early stages of a KKR investment, Capstone’s work with portfolio companies reflects our initial thesis for value creation, and its executives may address issues related to top-line growth, cost optimization, and capital allocation efficiency. In most cases, this work also involves developing operating and financial metrics for tracking progress and identifying problems early. Over time, Capstone’s work with portfolio companies shifts to challenges and opportunities that arise during the life of an investment.

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Additional Resources for Value Creation

Senior Advisors. Complementing the expertise of KKR’s investment professionals and Capstone’s executives is our team of senior advisors, who have held leading positions in major corporations and public agencies in the United States, Europe, and Asia. The responsibilities of senior advisors include serving on the boards of portfolio companies, evaluating individual investment opportunities, and assisting with operations when we acquire a company. Five senior advisors also participate on our Portfolio Management Committee, which monitors the performance of all our investments. KKR’s senior advisors are:

Edwin L. Artzt, former chairman and CEO of Procter & Gamble Sir John Bond, former group chairman of HSBC Holdings plc Roger M. Carr, former CEO of Williams plc George M. C. Fisher, former chairman and CEO of Eastman Kodak Company

and Motorola Corporation Joe W. Forehand, former CEO and chairman of Accenture Paul Hazen, former CEO of Wells Fargo Hisashi Hosokawa, former vice minister for International Economic Affairs

at Japan’s Ministry of International Trade and Industry 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 Michael E. Marks, chairman and former CEO of Flextronics Jan L. Murley, former CEO of the Boyds Collection, Ltd. Paul Norris, non-executive chairman and former CEO of W.R. Grace & Co. Edward Tian Suning, founder 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.

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Track Record of Value Creation

KKR seeks to make equity investments in attractive businesses for long-term appreciation, either through controlling ownership of a company or strategic minority positions.

Since the Firm’s founding in 1976, KKR has invested more than $30 billion of equity in more than 145 transactions involving $274 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. Our business is not selling securities to the public or generating fees by providing merger and acquisition advice. Rather, we have a significant portion of our personal assets committed to our Funds’ investments, and we share the risks of ownership.


KKR 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. Today, we are a global institution with offices in New York, Menlo Park, London, Paris, Hong Kong, and Tokyo.

KKR and Its Principles

* Completed transactions as of February 2007.

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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 because we believe strongly 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, not traders. We take a long-term view of a company’s performance. We are never concerned with quarter-to-quarter results, but rather focus on cash flow and look at 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.

KKR and Its Principles

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Accellent Headquarters: Wilmington, Massachusetts 2006 Revenue: $474 million Employees: 3,289 Executive Chairman: Kenneth W. Freeman Privately held Investment by KKR: 2005 Business: The largest provider of fully integrated outsourced manufacturing and engineering services to the medical device industry. Website: www.accellent.com

Accuride Corporation Headquarters: Evansville, Indiana 2006 Revenue: $1.39 billion Employees: 4,774 Chairman and CEO: Terrence J. Keating NYSE: ACW Investment by KKR: 1998 Business: One of the largest and most diversified manufacturers of commercial vehicle components in North America. Website: www.accuridecorp.com

Alea Group Headquarters: Hamilton, Bermuda 2006 Revenue: £159 million Employees: 138 Chairman: John Reeve CEO: Mark Cloutier London Stock Exchange: ALEA Initial Investment by KKR: 1997 Business: A global specialty insurer and reinsurer focused primarily on property and casualty products. Website: www.aleagroup.com

Alliance Imaging Headquarters: Anaheim, California 2006 Revenue: $456 million Employees: 2,043 Chairman and CEO: Paul S. Viviano NYSE: AIQ Investment by KKR: 1999 Business: Leading provider of shared-service and fixed-site diagnostic imaging services in the United States. Website: www.allianceimaging.com


Investments of the KKR Funds As of February 2007

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Argillon Headquarters: Redwitz, Germany 2006 Revenue: €114 million Employees: 1,434 Chairman: Horst Heidsieck CEO: Dr. Georg Weyer Privately held Investment by KKR: 2002 Business: Manufacturer of technical ceramics used in power generation and machine building, and system supplier for catalysts that reduce emissions of power plants and truck engines. Argillon is the sole remaining business of Demag Holdings. Website: www.argillon.com

Aricent Headquarters: Palo Alto, California 2006 Revenue: $289 million Employees: 7,102 Chairman: Michael E. Marks CEO: Ashish (Ash) Bhardwaj Privately held Investment by KKR: 2006 Business: The leading provider of high-impact, innovative software solutions to the global communications industry. Aricent has substantial operations in India. Website: www.aricent.com

A.T.U. – Auto-Teile-Unger Headquarters: Weiden, Germany 2006 Revenue: €1.38 billion Employees: 12,500 Chairman: Johannes P. Huth CEO: Karsten Engel Privately held Investment by KKR: 2004 Business: Germany’s leading operator of automotive retail stores and repair shops, with an expanding international footprint. Website: www.atu.de

Avago Technologies Headquarters: San Jose, California and Singapore 2006 Revenue: $1.56 billion Employees: 6,224 Chairman: Dick Chang CEO: Hock E. Tan Privately held Investment by KKR: 2005 Business: A leading supplier of innovative semiconductor solutions for advanced communications and industrial and commercial applications. Website: www.avagotech.com

Investments of the KKR Funds

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AVR Headquarters: Rotterdam, the Netherlands 2006 Revenue: €524 million Employees: 2,422 Chairman: Reinhard Gorenflos CEO: Daan den Ouden Privately held Investment by KKR: 2006 Business: The largest waste management company in the Netherlands. Website: www.avr.nl

BIS Cleanaway Headquarters: Sydney, Australia 2006 Revenue: A$860 million Employees: 3,200 Chairman: Mark Luby CEO: Chris Berkefeld Privately held Investment by KKR: 2006 Business: BIS is a leading outsourced supplier of on-site and off-site materials handling and logistics services to the minerals, metals, and coal mining sectors. Cleanaway is Australia’s leading waste management operator, providing services including collection, materials recovery, recycling, and disposal. Website: www.biscleanaway.com

Bristol West Headquarters: Davie, Florida 2006 Revenue: $661 million Employees: 1,154 Chairman: James R. Fisher CEO: Jeffrey J. Dailey NYSE: BRW Investment by KKR: 1998 Business: One of the larger private passenger automobile insurance writers in the U.S., offering insurance in 22 states. Website: www.bristolwest.com


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Capmark Headquarters: San Mateo, California 2006 Revenue: $1.49 billion Employees: 2,490 Chairman: Dennis D. Dammerman CEO: William F. Aldinger III Privately held Investment by KKR: 2006 Business: A leader in real estate finance, investments, and services. Website: www.capmark.com

“Der Grüne Punkt” – Duales System Deutschland GmbH Headquarters: Cologne, Germany 2006 Revenue: €1.21 billion Employees: 306 Chairman: Erich Greipl CEO: Stefan Schreiter Privately held Investment by KKR: 2005 Business: Organizes the collection, sorting, and recycling of packaging waste in Germany with the support of a network of local waste management partners. Website: www.gruener-punkt.de

FL Selenia Headquarters: Turin, Italy 2006 Revenue: €696 million Employees: 1,170 Chairman: Johannes P. Huth CEO: Aldino Bellazzini Privately held Investment by KKR: 2005 Business: Largest independent producer of branded automotive lubricants and other functional fluids in Europe. Website: www.flselenia.it

HCA Inc. Headquarters: Nashville, Tennessee 2006 Revenue: $25.48 billion Employees: 186,291 Chairman and CEO: Jack O. Bovender, Jr. Privately held Investment by KKR: 2006 Business: The largest and most diversified investor-owned provider of health care services in the United States, with hospitals and freestanding surgery centers in 20 states, England, and Switzerland. Website: www.hcahealthcare.com

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Jazz Pharmaceuticals, Inc. Headquarters: Palo Alto, California 2006 Revenue: $45 million Employees: 189 Chairman: Bruce C. Cozadd CEO: Samuel Saks, M.D. Privately held Investment by KKR: 2004 Business: A U.S. pharmaceutical company focusing on improving the lives of patients through the development and commercialization of neurological and psychiatric products. Website: www.jazzpharmaceuticals.com

KION Group Headquarters: Wiesbaden, Germany 2006 Revenue: €4.03 billion Employees: 20,000 Chairman: Johannes P. Huth CEO: Hubertus Krossa Privately held Investment by KKR: 2006 Business: A leading European manufacturer of forklift trucks and related services. Website: www.kiongroup.com

KSL Holdings Headquarters: San Diego, California 2006 Revenue: $224 million Employees: 1,750 Chairman and CEO: Michael S. Shannon Privately held Investment by KKR: 2003 Business: Owner and operator of luxury resort hotels, spas, and membership clubs in the U.S., including La Costa Resort and Spa and the Hotel del Coronado. Website: www.kslrec.com

Legrand Headquarters: Limoges, France 2006 Revenue: €3.60 billion Employees: 29,600 Chairman and CEO: Gilles Schnepp Euronext Paris: LR Investment by KKR: 2002 Business: A global leader in products and systems for electrical installations and data networks in residential housing, office buildings, and industrial use. Website: www.legrandelectric.com


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Masonite Headquarters: Tampa, Florida and Toronto, Canada 2006 Revenue: $2.45 billion Employees: 13,200 Chairman and CEO: Kenneth W. Freeman Privately held Investment by KKR: 2005 Business: Leading global manufacturer of doors and door components, with 82 facilities in 18 countries in North America, Europe, South America, Asia, and Africa. Website: www.masonite.com

Maxeda Headquarters: Amsterdam, the Netherlands 2006 Revenue: €3.90 billion Employees: 37,408 Chairman and CEO: Tony DeNunzio Privately held Investment by KKR: 2004 Business: A leading non-food retailer in Europe, with approximately 1,700 stores in seven countries. Website: www.maxeda.com

MedCath Corporation Headquarters: Charlotte, North Carolina 2006 Revenue: $706 million Employees: 3,805 Chairman: John T. Casey CEO: O. Edwin French NASDAQ: MDTH Investment by KKR: 1998 Business: A provider of cardiovascular services through the development, operation, and management of hospitals and other specialized facilities that focus on the needs of patients suffering from heart disease. Website: www.medcath.com

The Nielsen Company Headquarters: Haarlem, the Netherlands and New York, New York 2006 Revenue: €3.67 billion Employees: 42,000 Chairman and CEO: David L. Calhoun Privately held Investment by KKR: 2006 Business: A global information and media company that is a leader in marketing information, media measurement, business publications, and trade shows. Website: www.nielsen.com

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NuVox Communications Headquarters: Greenville, South Carolina 2006 Revenue: $342 million Employees: 1,173 Chairman: David L. Solomon CEO: James W. Akerhielm Privately held Investment by KKR: 2000 Business: An Integrated Communications Provider offering voice, data, and security services to business customers in 16 states in the Southeast and Midwest. Website: www.nuvox.com

NXP Headquarters: Eindhoven, the Netherlands 2006 Revenue: €5.12 billion* Employees: 37,000 Chairman: Sir Peter Bonfield CEO: Frans van Houten Privately held Investment by KKR: 2006 Business: A diversified, global supplier of semiconductor system solutions and components. Website: www.nxp.com * Represents LTM Revenue for the period ending September 30, 2006.

PagesJaunes Groupe Headquarters: Sèvres, France 2006 Revenue: €1.12 billion Employees: 5,177 Chairman: Jacques Garaïalde CEO: Michel Datchary Euronext Paris: PAJ Investment by KKR: 2006 Business: The leading publisher of printed and online directories in France. Website: www.pagesjaunesgroupe.com


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PRIMEDIA Headquarters: New York, New York 2006 Revenue: $849 million Employees: 2,891 Chairman and CEO: Dean B. Nelson NYSE: PRM Initial Investment by KKR: 1989 Business: The leading targeted media company in the U.S., with over 135 brands that connect buyers and sellers through print publications, websites, events, newsletters, and video programs in the enthusiast, consumer guide, and education markets. Website: www.primedia.com

Rockwood Holdings, Inc. Headquarters: Princeton, New Jersey 2006 Revenue: $3.33 billion Employees: 9,525 Chairman and CEO: Seifi Ghasemi NYSE: ROC Investment by KKR: 2000 Business: Global specialty chemicals and advanced materials company focused on high-value-added niche markets in three primary segments: specialty chemicals, pigments and additives, and advanced materials. Website: www.rocksp.com

SBS Broadcasting Headquarters: Amsterdam, the Netherlands 2006 Revenue: €1.00 billion Employees: 2,782 Chairman: Lord (Clive) Hollick CEO: Markus Tellenbach Privately held Investment by KKR: 2005 Business: A commercial television and radio broadcasting company with operations in Western and Central Europe. Website: www.sbsbroadcasting.com

Sealy Headquarters: Trinity, North Carolina 2006 Revenue: $1.58 billion Employees: 6,281 Chairman and CEO: David J. McIlquham NYSE: ZZ Investment by KKR: 2004 Business: The largest bedding manufacturer in the world. Website: www.sealy.com

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Seven Media Group Headquarters: Sydney, Australia 2006 Revenue: A$1.20 billion Employees: 1,800 Chairman: Kerry Stokes CEO: David Leckie Privately held Investment by KKR: 2006 Business: A 50-50 media joint venture with Seven Network Limited in Australia, which includes television, magazine, and online properties. Website: http://au.tv.yahoo.com/tv/

SunGard Headquarters: Wayne, Pennsylvania 2006 Revenue: $4.33 billion Employees: 18,281 Chairman: Glenn Hutchins CEO: Cristóbal Conde Privately held Investment by KKR: 2005 Business: A global leader in integrated software and processing solutions. Website: www.sungard.com

Tarkett Headquarters: Nanterre, France 2006 Revenue: €2.01 billion Employees: 8,833 Chairman: Didier Deconinck CEO: Marc Assa Privately held Investment by KKR: 2007 Business: A leading global manufacturer of a broad range of flooring products. Website: www.tarkett.com

TDC A/S Headquarters: Copenhagen, Denmark 2006 Revenue: DKK47.42 billion Employees: 19,011 Chairman: Kurt Björklund CEO: Jens Alder Privately held Investment by KKR: 2006 Business: The leading provider of telecommunications solutions in Denmark and the second largest in Switzerland, with a significant presence in Northern and Central Europe. Website: www.tdc.com


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Toys “R” Us, Inc. Headquarters: Wayne, New Jersey 2006 Revenue: $11.35 billion Employees: 55,643 Chairman and CEO: Gerald L. Storch Privately held Investment by KKR: 2005 Business: A leading worldwide specialty retailer of toys, baby products, and children’s apparel. Website: www.toysrus.com

Visant Corporation Headquarters: Armonk, New York 2006 Revenue: $1.19 billion Employees: 6,500 Chairman and CEO: Marc L. Reisch Privately held Investment by KKR: 2004 Business: A leading North American enterprise for school- related marketing and affinity products and services. Website: www.visant.net

Zhone Technologies Headquarters: Oakland, California 2006 Revenue: $194 million Employees: 514 Chairman and CEO: Mory Ejabat NASDAQ: ZHNE Initial Investment by KKR: 1999 Business: Designs and manufactures network equipment for telephone companies and cable operators worldwide. Website: www.zhone.com

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