1386926--3/1/2010--KKR_Financial_Holdings

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Our business and the businesses in which we invest have been and may continue to be adversely affected by conditions in the global financial markets and economic conditions generally. The current dislocations in the corporate credit sector and the current weakness in the broader financial market could adversely affect us and one or more of our lenders, which could result in increases in our borrowing costs, reductions in our liquidity and reductions in the value of the investments in our portfolio. Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations. We rely on external sources to finance a significant portion of our operations. If we are unable to raise funding from these external sources, we may be forced to liquidate certain of our assets and our results of operations may be adversely affected. Periods of adverse market volatility may require us to post additional collateral, which could adversely affect our financial condition and liquidity. We leverage our portfolio investments, which may adversely affect our return on our investments and may reduce cash available for distribution. If we are unable to continue to utilize CLOs successfully, we may be unable to grow or fully execute our business strategy and our results of operations may be adversely affected. We may enter into derivative contracts that could expose us to contingent liabilities in the future. Hedging against interest rate exposure may adversely affect our results of operations, which could adversely affect our ability to make payments due on our indebtedness and cash available for distribution to holders of our shares. Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any United States or foreign governmental authorities and involve risks and costs. We make non-United States dollar denominated investments, which subject us to currency rate exposure and the uncertainty of foreign laws and markets. We may not realize gains or income from our investments. The terms of our indebtedness may restrict our ability to make future distributions, make cash payments in respect of any conversion or repurchases of the notes and impose limitations on our current and future operations. We currently have significant indebtedness, some of which mature in the near term. We may not be able to generate sufficient cash to service or make required repayments of our indebtedness and we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. There can be no assurances that our operations will generate sufficient cash flows or that credit facilities will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund other liquidity needs. Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly. Declines in the fair values of our investments may adversely affect our results of operations and credit availability, which may adversely affect, in turn, our ability to make payments due on our indebtedness and our cash available for distribution to holders of our shares. If credit spreads on our borrowings increase and the credit spreads on our investments do not also increase, we are unlikely to achieve our projected leveraged risk-adjusted returns. Also, if credit spreads on investments increase in the future, our existing investments will likely experience a material reduction in value. The terms of our settlement agreement with certain holders of securities issued by one of our CLOs restricts our ability to restructure certain CLO debt obligations in the future, which may reduce our financial flexibility in the event of future adverse market or credit conditions. In addition, certain noteholders of one of our other CLOs recently notified us of a similar dispute and we may become a party to similar disputes with other noteholders of our CLOs in the future. The ongoing crisis in the global credit markets has the potential to adversely affect our CLO investments. Our investment portfolio is and may continue to be concentrated in a limited number of companies and industries, which will subject us to a risk of significant loss if any of these companies defaults on its obligations to us or if there is a downturn in a particular industry. Certain of our investments are illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions. Some of our portfolio investments are recorded at fair value as determined by our Manager and, as a result, there is uncertainty as to the value of these investments. Our assets include leveraged loans, high yield securities and common and preferred equity securities, each of which has greater risks of loss than secured senior loans and, if those losses are realized, it could adversely affect our results of operations, our ability to service our indebtedness and our cash available for distribution to holders of our shares. The mortgage loans underlying the mortgage-backed securities we invest in are subject to delinquency, foreclosure and loss, which could result in losses to us. Our rights under corporate leveraged loans we invest in may be more restricted than investments in other loans. The high yield bonds that we invest in have greater credit and liquidity risk than more highly rated bonds. Total rate of return swaps are subject to risks related to changes in interest rates, credit spreads, credit quality and expected recovery rates of the underlying credit instrument as well as renewal risks. Credit default swaps are subject to risks related to changes in credit spreads, credit quality and expected recovery rates of the underlying credit instrument. Our dependence on the management of other entities may adversely affect our business. Due diligence conducted by our Manager may not reveal all of the risks of the businesses in which we invest. Maintenance of our Investment Company Act exemption imposes limits on our operations, which may adversely affect our results of operations. Certain provisions of our operating agreement will make it difficult for third parties to acquire control of us and could deprive holders of our shares of the opportunity to obtain a takeover premium for their shares. We may issue additional debt and equity securities which are senior to our common shares as to distributions and upon our dissolution, which could materially adversely affect the market price of our shares. Our board of directors has broad authority to change many of the terms of our shares without the approval of holders of our shares. Our board of directors has full authority and discretion over distributions on our shares and it may decide to reduce or eliminate distributions at any time, which may adversely affect the market price for our shares and any other securities we may issue. Our failure to pay quarterly distributions to holders of our common shares could cause the market price of our common shares to decline significantly. We are highly dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management Agreement. The departure of any of the senior management and investment professionals of our Manager or the loss of our access to KKR's senior management and investment professionals may adversely affect our ability to achieve our investment objectives. If our Manager ceases to be our manager pursuant to the Management Agreement, financial institutions providing our credit facilities may not provide future financing to us. Our board of directors has approved very broad Investment Guidelines for our Manager and does not approve individual investment decisions made by our Manager except in limited circumstances. Certain of our investments may create a conflict of interest with KKR and other affiliates and may expose us to additional certain legal risks. The incentive fee provided for under the Management Agreement may induce our Manager to make certain investments, including speculative investments. There are various potential conflicts of interest in our relationship with our Manager and its affiliates, including KKR, which could result in decisions that are not in the best interests of holders of our shares. Affiliates of our Manager and KKR compete with us and there may be conflicts arising from allocation of investment opportunities. We compete with other investment entities affiliated with KKR for access to KKR's investment professionals. Termination by us of the management agreement with our Manager is difficult and costly. Our access to confidential information may restrict our ability to take action with respect to some investments, which, in turn, may negatively affect our results of operations. Our Manager's liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities. Holders of our common shares will be subject to United States federal income tax and generally other taxes, such as state, local and foreign income tax, on their share of our taxable income, regardless of whether or when they receive any cash distributions from us, and may recognize income in excess of our cash distributions. If we fail to satisfy the "qualifying income exception," all of our income will be subject to an entity-level tax, which could result in a material reduction in cash flow and after-tax return for holders of our common shares and thus could result in a substantial reduction in the value of our common shares and any other securities we may issue. Complying with certain tax-related requirements may cause us to forego otherwise attractive business or investment opportunities. Holders of our common shares may recognize gain for United States federal income tax purposes when we sell assets that cause us to recognize a loss for financial reporting purposes. The ability of holders of our common shares to deduct certain expenses incurred by us may be limited. Holders of our common shares may recognize a greater taxable gain (or a smaller tax loss) on a disposition of our common shares than expected because of the treatment of debt under the partnership tax accounting rules. We could incur a significant tax liability if the IRS successfully asserts that the "anti-stapling" rules apply to certain of our subsidiaries, which could result in a reduction in cash flow and after-tax return for holders of common shares and thus could result in a reduction of the value of those common shares. Tax-exempt holders of our common shares will likely recognize significant amounts of "unrelated business taxable income." There can be no assurance that we will not enter into additional lines of business that would generate income that is treated as effectively connected income or that the IRS will not assert successfully that some portion of our income is properly treated as effectively connected income with respect to non-United States holders of our common shares. Although we anticipate that our foreign corporate subsidiaries will not be subject to United States federal income tax on a net basis, no assurance can be given that such subsidiaries will not be subject to United States federal income tax on a net basis in any given taxable year. Certain of our investments may subject us to United States federal income tax and could have negative tax consequences for our shareholders. Dividends paid by, and certain income inclusions derived with respect to our ownership of, KFH II and foreign corporate subsidiaries will not qualify for the reduced tax rates generally applicable to corporate dividends paid to taxpayers taxed at individual rates. Ownership limitations in the operating agreement that apply so long as we own an interest in a REIT, such as KFH II, may restrict a change of control in which our holders might receive a premium for their shares. The failure of KFH II to qualify as a REIT would generally cause it to be subject to United States federal income tax on its taxable income, which could result in a material reduction in cash flow and after-tax return for holders of our shares and thus could result in a reduction of the value of those shares and any other securities we may issue. Holders of our common shares may be required to file tax returns or withholding of tax may be required in state, local and foreign jurisdictions in which we do business or own property. The IRS Schedules K-1 we will provide will be significantly more complicated than the IRS Forms 1099 provided by REITs and regular corporations, and holders of our common shares may be required to request an extension of the time to file their tax returns. Our structure involves complex provisions of United States federal income tax law for which no clear precedent or authority may be available, and which is subject to potential change, possibly on a retroactive basis. Any such change could result in adverse consequences to the holders of our common shares and any other securities we may issue. We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our shares.

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1386926--3/1/2010--KKR_Financial_Holdings_LLC