Edgar Filing: KKR Income Opportunities Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number			(811-22543)

KKR Income Opportunities Fund
(Exact name of registrant as specified in charter)

555 California Street, 50th Floor San Francisco, CA					94104
(Address of principal executive offices)					(Zip code)

Nicole J. Macarchuk, Esq. KKR Asset Management LLC 555 California Street, 50th Floor San Francisco, CA 94104
(Name and address of agent for service)

Registrant’s telephone number, including area code:				(415) 315-3620

Date of fiscal year end:	October 31, 2016

Date of reporting period:		October 31, 2016

Item 1. Reports to Stockholders.

KKR

KKR Income Opportunities Fund

Annual Report

October 31, 2016

Income Opportunities Fund

October 31, 2016

Table of Contents

Management Discussion of Fund Performance	1
Performance Information	6
Schedule of Investments	7
Statement of Assets and Liabilities	14
Statement of Operations	15
Statements of Changes in Net Assets	16
Statement of Cash Flows	17
Financial Highlights	18
Notes to Financial Statements	19
Report of Independent Registered Public Accounting Firm	30
Trustees and Officers	31
Dividend Reinvestment Plan	33
Additional Information	35
Approval of Investment Advisory Agreement	36
Privacy Notice	38

The KKR Income Opportunities Fund (the “Fund”) files its complete schedule of portfolio holdings with the Securities and Exchange Commission (the “Commission”) for the first and third quarters of each fiscal year on Form N-Q within sixty days after the end of the period. The Fund’s Form N-Q is available on the Commission’s website at http://www.sec.gov, and may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities, as well as information relating to how a Fund voted proxies relating to portfolio securities during the most recent period ended June 30 will be available (i) without charge, upon request, by calling 855-330-3927; and (ii) on the Commission’s website at http://www.sec.gov.

INFORMATION ABOUT THE FUND’S TRUSTEES

The Statement of Additional Information (“SAI”) includes additional information about the Fund’s Trustees and is available without charge, upon request, by calling 855-330-3927 Furthermore, you can obtain the SAI on the SEC’s web site at www.sec.gov or the Fund’s website at www.kkrfunds.com.

Management Discussion of Fund Performance

Looking Back on the Markets — November 1, 2015 to October 31, 2016

Key Investing Themes

Through 2016, we have witnessed various themes such as the following:

a. Contrarian View on Retail: Year-to-date (YTD), market return for retail in the Bank of America Merrill Lynch High Yield Master II Index has fallen behind the index average (11.5% YTD vs. 15% average)(1) due to the fact that retail significantly underperformed earlier this year and the market was concerned about the “Amazon Effect”. However, we believed that not all retail names would be impacted by this transformation and have picked a number of retail names that have been driving performance this year.

b. Thematic Residential Building Investment: The market was slow to embrace credits exposed to residential development post-financial crisis. We have leveraged some of the work done by our Global Macro Asset & Allocation team who has commented on good household formation and supportive credit easing.

c. A Short Word on Energy: We continue to be underweight on energy. We don’t believe significant research can provide us with the comfort needed to take a conviction position. So despite the fact that the Energy sector alone has provided ~400bps of the ~1,500bps index performance this year we have not chased this return (and do not expect to in the near term).

In 2016, we believe the reasons for our outperformance relative to the index average were the following:(1)

a. Quality of Focus: We focus on where we believe there is a clear differential between price and value;

b. Focus on Quality: We focused on lending to companies with strong market positions, strong management teams, or good risk reward;

c. This focus is well suited to our skill set: Our team of ~30 leveraged credit analysts are sector specialists. They are cashflow volatility assessors and we believe KKR has the resources necessary to form differentiated views on valuations of companies; and

d. Our differentiation is executable: Key to enjoyment is the ability to execute. We believe the sub-investment grade credit market is highly inefficient and creates fertile ground for our investment ideas.

We believe KIO is well positioned for the current credit market conditions (characterized by volatility price movements and significant spreads dispersion). Given this volatility and loss aversion, it’s not surprising to us that many credit investors now focus on the credits where the expectation of loss from default is lowest.

(1) Source: BAML HY Master II as of September 30, 2016.

Leveraged Loans Commentary(2)

Leveraged loan new-issue volume decreased to $73.5 billion in Q4 2015, down from $112.3 billion in Q3 2015. Similar to Q3 2015, the decrease was attributable to not only volatility in the broader market, but also to an eroding technical environment. For FY 2015, leveraged loan new-issue volume totaled $420.7 billion, marking a four-year low and down over 20% from the $528.1 billion that was issued in 2014. Notably, the year-over-year decrease in leveraged loan new-issue volume was observed across all types of financings, including LBOs, refinancings, dividend financings and other opportunistic issuance.

Leveraged loan new-issue volume increased to $85.9 billion in Q1 2016, up from $74.2 billion in Q4 2015. Although up quarter over quarter, leveraged loan new-issue activity was still relatively light as market conditions kept opportunistic deal flow to a minimum. Notably, leveraged loan new-issue volume was heavily weighted towards acquisition financing, which accounted for an eight-year high of 75% of new issuance in the first quarter of 2016.

Leveraged loan new-issue volume increased to $118.7 billion in Q2 2016, up from $90.0 billion in Q1 2016. From a use of proceeds perspective, opportunistic new-issue activity (i.e. refinancings, dividend recapitalizations) increased significantly, driven primarily by the M&A heavy first quarter. Notably, leveraged loan new-issue volume rose to $209.6 million in the first half of 2016, down 10% from the $233.7 million that was issued in the first half of 2015 and down 36% from the first half of 2014.

Leveraged loan new issuance was muted at the beginning of Q3 2016 on the heels of the Brexit vote in late June. However, the pace of issuance increased in August and September amidst a technical shift in the favor of corporates. Specifically, leveraged loan new-issue volume increased to $135.3 billion in Q3 2016, up slightly from $127.8 billion in Q2 2016. From a use of proceeds perspective, refinancings and M&A accounted for approximately 70.0% of leveraged loan new issuance in Q3 2016. Year to date, leverage loan new-issue volume is $354.0 billion, which is in line with the $346.9 billion of leveraged loan new-issue volume in the first nine months of 2015.

High Yield Bonds Commentary(3)

High yield issuance in Q4 2015 was $42.3 billion, down from $59.7 billion in Q3 2015. For FY 2015, high yield issuance totaled $293.0 billion, down approximately 18% from the $356.0 billion that was issued in 2014. We believe this decline in year over year issuance can be attributed to global growth concerns, muddled Fed messaging and volatile oil prices which ultimately led to substantial outflows from high yield mutual funds and a significant decline in issuance. Furthermore, high-yield bond mutual funds experienced a $3.5 billion outflow in Q4 2015, bringing YTD 2015 outflows to $13.4 billion. (4)

Despite the rally in March, new issuance in the high yield market remained muted. High yield issuance was $35.1 billion in Q1 2016, down from $36.3 billion in Q4 2015 and a 3.5 year low. From a use of proceeds perspective, the majority of high yield bonds issued in Q1 2016 were for either refinancings or acquisition financings. Furthermore, high-yield bond mutual funds experienced an $8.0 billion inflow in Q1 2016 versus an outflow of $13.4 billion Q4 2015.(5)

(2) Source: S&P LCD Quarterly Review as of December 2015, March 2016, June 2016 and September 2016.

(3) Source: S&P LCD Quarterly Review as of December 2015, March 2016, June 2016 and September 2016.

(4) Source: JP Morgan High Yield Market Monitor as of January 4, 2016.

(5) Source: JP Morgan High Yield Market Monitor as of April 1, 2016.

High yield issuance was $82.8 billion in Q2 2016, up from $36.1 billion in Q1 2016 and marking the highest quarterly total since Q2 2015. From a use of proceeds perspective, the majority of high yield bonds issued in the first half of 2016 were for either refinancings or acquisition financings. Furthermore, high-yield bond mutual funds experienced a $6.3 billion outflow in Q2 2016 versus an inflow of $10.0 billion Q1 2016.(6)

High yield issuance was $62.0 billion in Q3 2016, down from $82.8 billion in Q2 2016 and up from $36.1 billion in Q1 2016. From a use of proceeds perspective, the majority of high yield bonds issued in Q3 2016 were for refinancings as corporates and sponsors looked to address maturity concerns. Year to date, high yield issuance totals $180.9 billion, down approximately 20.0% from the $225.4 billion that was issued in the first nine months of 2015. (7)

The Market in Numbers

For the period of November 1, 2015 — October 31, 2016

· Returns: Over the 12 month period ending October 31, 2016, the high yield and leveraged loan markets returned 10.17%(8) and 6.53%(9) (as measured by the Bank of America Merrill Lynch High Yield Index and the S&P LSTA Leveraged Loan Index), respectively.

· Spreads: The option adjusted spread on the Bank of America Merrill Lynch High Yield Index averaged approximately 625bp for the twelve month period ending October 31, 2016.(8) The spread on the S&P LSTA Leveraged Loan Index averaged approximately 552bp for the twelve month period ending October 31, 2016.(9)

· Volatility: As measured by the VIX index, volatility was sitting at 15.1 as of November 1, 2015.(10) Over the last twelve months, the VIX increased to as high as 20.2 in January 2016, before settling at 17.1 as of October 31, 2016.(10)

Fund Performance

KKR Income Opportunities Fund (“KIO” or, the “Fund”) is a diversified closed-end fund that trades on the New York Stock Exchange under the symbol “KIO”. The Fund’s primary investment objective is to seek a high level of current income with a secondary objective of capital appreciation. The Fund seeks to achieve its investment objectives by employing a dynamic strategy of investing in a targeted portfolio of loans and fixed-income instruments (including derivatives) of U.S. and non-U.S. issuers and implementing hedging strategies in order to seek to achieve attractive risk-adjusted returns. Under normal market conditions, KIO will invest at least 80% of its Managed Assets in loans and fixed-income instruments or other instruments, including derivative instruments, with similar economic characteristics. The Fund expects to invest primarily in first- and second lien secured loans, unsecured loans and high-yield corporate debt instruments of varying maturities.

As of October 31, 2016, the Fund held 67.6% of its net assets in high-yield corporate debt, 55.6% of its net assets in first and second-lien leveraged loans, 0.6% of its net assets in collateralized debt obligations, 5.8% of its net assets in common stock and 1.4% of its net assets in preferred stock. KIO’s investments represented obligations and equity interests in 78 companies diversified across 35 distinct industries. The top ten issuers represented 42.6% of the Fund’s net assets while the top five industry groups represented 49.4% of the Fund’s net assets. The Fund’s Securities and Exchange Commission 30-day yield was 9.32%.

(6) Source: JP Morgan High Yield Market Monitor as of July 1, 2016.

(7) Source: JP Morgan High Yield Market Monitor as of October 1, 2016.

(8) Source: Bank of America Merrill Markets Online as of October 31, 2016.

(9) Source: S&P LCD Discounted Spreads as of October 31, 2016.

(10) Source: Bloomberg as of October 31, 2016.

For the period from July 25, 2013 (commencement of operations) to October 31, 2016, KIO outperformed the Bank of America Merrill Lynch High Yield Master II Index on a gross net asset value (“NAV”) and a net NAV basis and underperformed it on a market price basis. Over that period, the Fund had returns of 8.94% on a gross NAV basis, 6.30% on a net NAV basis and 1.89% on a market price basis. Over the same period, the Bank of America Merrill Lynch High Yield Master II Index returned 5.01%. For the year ended October 31, 2016, the Fund had returns of 16.19% on a gross NAV basis, 13.15% on a net NAV basis, and 17.10% on a market price basis, and the Bank of America Merrill Lynch High Yield Master II Index returned 10.16% over the same time period. Since inception through October 31, 2016, the Fund traded at an average discount to NAV of (9.41%).(11) The Fund employed leverage during the period covered by this report.(12)

Business Updates

We thank you for your partnership and continued investment in KIO. We look forward to continued communications and will keep you apprised of the progress of KIO specifically and the leveraged finance market place generally. Fund information is available on our website at kkrfunds.com/kio.

(11) Source: Bloomberg as of October 31, 2016.

(12) For a discussion of the risks associated with the use of leverage and other risks, please see Risk Considerations, Note 3 to the financial statements.

Disclosures

The Bank of America Merrill Lynch US Corporate Index is an unmanaged index comprised of U.S. dollar denomination investment grade corporate debt securities publicly issued in the U.S. domestic market with at least one year remaining term to final maturity.

The Bank of America Merrill Lynch High Yield Master II Index is a market-value weighted index of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. “Yankee” bonds (debt of foreign issuers issued in the U.S. domestic market) are included in the Bank of America Merrill Lynch High Yield Master II Index provided that the issuer is domiciled in a country having investment grade foreign currency long-term debt rating. Qualifying bonds must have maturities of one year or more, a fixed coupon schedule and minimum outstanding of US$100 million. In addition, issues having a credit rating lower than BBB3, but not in default, are also included.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) reflects the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. The VIX reflects the market’s estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. The first and second month expirations are used until 8 days from expiration, then the second and third are used.

It is not possible to invest directly in an index.

Past performance is not an indication of future results. Returns represent past performance and reflect changes in share prices, the reinvestment of all dividends and capital gains, expense limitations and the effects of compounding. The prospectus contains more complete information on the investment objectives, risks, charges and expenses of the investment company, which investors should read and consider carefully before investing. The returns shown do not reflect taxes a shareholder would pay on distributions or redemptions. Total investment return and principal value of your investment will fluctuate, and your shares, when sold, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. An investment in the Fund involves risk, including the risk of loss of principal. For a discussion of the Fund’s risks, see Risk Considerations, Note 3 to the financial statements. Call 855-330-3927 or visit www.kkrfunds.com/kio for performance results current to the most recent calendar quarter-end.

Must be preceded or accompanied by a prospectus.

An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. Borrowing to increase investments (leverage) will exaggerate the effect of any increase or decrease in the value of Fund investments. Investments rated below investment grade (typically referred to as “junk”) are generally subject to greater price volatility and illiquidity than higher rated investments. As interest rates rise, the value of certain income investments is likely to decline. Senior loans are subject to prepayment risk. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market economic, political, regulatory, geopolitical or other conditions. Changes in the value of investments entered for hedging purposes may not match those of the position being hedged. The Fund may engage in other investment practices that may involve additional risks.

Performance Information

							Value of
Average Annual Total Returns					Since Inception		$10,000
Period Ended October 31, 2016	One Year		Three Year		(7/25/2013)		10/31/2016
KKR Income Opportunities Fund - Market Price Return	17.10	%	5.73	%	1.89	%	$	10,630
KKR Income Opportunities Fund - NAV Return	13.15	%	5.73	%	6.30	%	$	12,210
BofA Merrill Lynch High Yield Master II Index®	10.16	%	4.53	%	5.01	%	$	11,731

Schedule of Investments

	Par†		Value
HIGH YIELD SECURITIES - 67.7%

Banks - 0.4%
Novo Banco SA
N/A, 02/19/2049 (a) (f) (g) (i)	EUR	8,520,000	$	865,141
N/A, 02/27/2051 (a) (f) (g) (i) (j)	EUR	3,601,000	316,241
N/A, 04/09/2052 (f) (g) (i)	EUR	246,000	21,604
			1,202,986
Building Products - 4.8%
Builders FirstSource, Inc.
10.750%, 08/15/2023 (a)	8,289,000		9,532,350
Foundation Building Materials LLC
8.250%, 08/15/2021 (a) (f)	3,146,000		3,287,570
			12,819,920
Chemicals - 3.1%
Platform Specialty Products Corp.
10.375%, 05/01/2021 (a)	7,611,000		8,219,880

Commercial Services & Supplies - 0.1%
Atento Luxco 1 SA
7.375%, 01/29/2020 (a) (g)	350,000		357,000

Communications Equipment - 1.4%
Riverbed Technology, Inc.	3,616,000		3,851,040
8.875%, 03/01/2023 (a)

Computers & Peripherals - 0.4%
Dell, Inc.
8.350%, 07/15/2046 (a) (f)	865,000		1,048,930

Construction & Engineering - 2.5%
Maxim Crane Works LP / Maxim Finance Corp.
10.125%, 08/01/2024 (a) (f)	6,520,000		6,797,100

Construction Materials - 5.4%
Cemex Materials LLC
7.700%, 07/21/2025 (a)	13,760,000		14,585,600

Diversified Financial Services - 0.4%
iPayment Investors LP
9.500%, 12/15/2019 (a) (e)	1,110,147		999,132

Electronic Equipment, Instruments & Components - 5.4%
Artesyn Technologies, Inc.
9.750%, 10/15/2020 (a)	9,594,000		8,490,690
Vertiv Co.
9.250%, 10/15/2024 (a) (f)	5,816,000		6,092,260
			14,582,950
Energy Equipment & Services - 2.9%
Brand Energy & Infrastructure Services, Inc.
8.500%, 12/01/2021 (a) (f)	7,686,000		7,705,215

See notes to financial statements.

	Par†		Value
HIGH YIELD SECURITIES - 67.7% (continued)

Health Care Providers & Services - 3.2%
Surgery Partners Holdings LLC.
8.875%, 04/15/2021 (a)	8,210,000		$	8,743,650

Hotels, Restaurants & Leisure - 1.6%
ClubCorp Club Operations, Inc.
8.250%, 12/15/2023 (a)	3,984,000		4,242,960

Household Durables - 0.1%
The Hillman Group, Inc.
6.375%, 07/15/2022 (a)	251,000		232,802

Insurance - 4.0%
Hub International Ltd.
7.875%, 10/01/2021 (a)	6,943,000		7,116,575
Towergate
8.750%, 04/02/2020 (a) (d) (e) (g)	GBP	3,310,813	3,677,600
			10,794,175
Internet & Catalog Retail - 1.4%
Netflix, Inc.
4.375%, 11/15/2026 (a) (f)	3,879,000		3,811,118

Internet Software & Services - 1.3%
RedPrairie Corp.
7.375%, 10/15/2024 (a) (f)	3,385,000		3,495,013

Machinery - 1.4%
Manitowoc Foodservice, Inc.
9.500%, 02/15/2024 (f)	1,420,000		1,629,450
Nesco
6.875%, 02/15/2021 (a)	2,797,000		2,223,615
			3,853,065
Media - 2.3%
Clear Channel International BV
8.750%, 12/15/2020 (a)	1,704,000		1,789,200
Clear Channel Outdoor, Inc.
6.500%, 11/15/2022	73,000		74,387
Intelsat Jackson Holdings SA
7.250%, 04/01/2019 (g)	2,746,000		2,189,935
5.500%, 08/01/2023 (g)	3,034,000		2,010,025
			6,063,547
Metals & Mining - 0.7%
Allegheny Technologies, Inc.
7.875%, 08/15/2023	1,936,000		1,848,880

Multiline Retail - 4.5%
J.C. Penney Corp., Inc.
5.750%, 02/15/2018	28,000		28,805
8.125%, 10/01/2019	8,927,000		9,719,271
5.650%, 06/01/2020	2,490,000		2,465,100
			12,213,176

See notes to financial statements.

	Par†	Value
HIGH YIELD SECURITIES - 67.7% (continued)

Oil, Gas & Consumable Fuels - 2.3%
Calumet Specialty Products
11.500%, 01/15/2021 (a)	4,210,000	$	4,746,775
Genesis Energy LP/ Genesis Energy Financial Corp.
5.625%, 06/15/2024	1,336,000	1,322,640
		6,069,415
Road & Rail - 3.7%
The Kenan Advantage Group, Inc.
7.875%, 07/31/2023 (a)	10,647,000	10,061,415

Software - 4.8%
Solera Holdings, Inc.
10.500%, 03/01/2024 (a)	4,900,000	5,477,318
TIBCO Software, Inc.
11.375%, 12/01/2021 (a)	7,858,000	7,582,970
		13,060,288
Specialty Retail - 4.9%
Guitar Center, Inc.
6.500%, 04/15/2019 (a)	6,490,000	5,824,775
Jo-Ann Stores, Inc.
8.125%, 03/15/2019 (a)	1,635,000	1,630,913
PIK Rate: 10.500%; Cash Rate: 9.750%, 10/15/2019 (a) (c) (f)	2,941,000	2,860,122
The Mens Wearhouse, Inc.
7.000%, 07/01/2022	3,010,000	2,769,200
		13,085,010
Thrifts & Mortgage Finance - 0.6%
MGIC Investment Corp.
9.000%, 04/01/2063 (a)	1,386,000	1,720,373

Transportation Infrastructure - 1.5%
Direct ChassisLink, Inc.
10.000%, 06/15/2023 (a) (f)	3,758,000	3,908,320

Wireless Telecommunication Services - 2.6%
GCI, Inc.
6.750%, 06/01/2021	5,100,000	5,265,750
Sprint Corp.
7.875%, 09/15/2023	1,642,000	1,621,475
		6,887,225

TOTAL HIGH YIELD SECURITIES (amortized cost $180,614,333)		182,260,185

LEVERAGED LOANS - 55.6%

Aerospace & Defense - 5.8%
PAE Holding Corp., TL 1L 09/16
6.500%, 10/20/2022 (b) (f)	3,764,810	3,764,810
Sequa Corp., TL 1L 12/12
5.250%, 06/19/2017 (b)	12,933,778	11,950,294
		15,715,104

See notes to financial statements.

	Par†		Value
LEVERAGED LOANS - 55.6% (continued)

Building Products - 1.5%
SRS Distribution, Inc., TL 2L 06/16
9.750%, 02/25/2023 (b)	3,943,740		$	4,002,896

Chemicals - 0.1%
Emerald Performance Materials LLC, TL 2L 07/14
7.750%, 08/01/2022 (b)	268,490		268,043

Commercial Services & Supplies - 2.1%
Koosharem LLC, TL 1L 05/14
7.500%, 05/16/2020 (b)	6,315,444		5,636,534

Construction & Engineering - 0.0%
Safway Group Holding LLC, TL 1L 10/16
0.000%, 08/19/2023 (b) (f)	5,635		5,607

Distributors - 2.6%
Distribution International, Inc., TL 1L 12/14
6.000%, 12/12/2021 (b)	7,959,886		7,044,500

Diversified Financial Services - 3.9%
iPayment Investors LP, TL 1L B 05/11
6.750%, 05/08/2017 (b)	5,973,239		5,640,977
Square Two Financial Corp., TL 1.5L 05/16
PIK Rate: 11.000%; Cash Rate: 10.000%,
05/24/2019 (b) (c) (d) (e) (f)	9,836,967		4,790,800
			10,431,777
Diversified Telecommunication Services - 4.3%
Lightower Fiber LLC, TL 2L 04/13
8.000%, 04/12/2021 (b)	11,523,828		11,581,505

Electronic Equipment, Instruments & Components - 0.6%
Vertiv Co., TL 1L 09/16
6.000%, 09/30/2023 (b) (f)	1,697,000		1,689,576

Energy Equipment & Services - 0.4%
Proserv Acquisition LLC, TL 1L B1 12/14 (US Tranche)
6.375%, 12/22/2021 (b) (e) (g)	GBP	1,172,655	736,052
Proserv Acquisition LLC, TL 1L B2 12/14 (UK Tranche)
6.375%, 12/22/2021 (b) (e) (g)	GBP	688,297	432,030
			1,168,082
Food & Staples Retailing - 3.5%
BJ’s Wholesale Club, Inc., TL 2L 09/11
8.500%, 03/31/2020 (b)	7,605,590		7,657,878
Grocery Outlet, Inc., TL 2L 09/14
9.250%, 10/21/2022 (b)	1,647,651		1,648,343
			9,306,221
Food Products - 3.0%
CSM Bakery Products, TL 2L 07/13
8.750%, 05/23/2021 (b) (e)	5,300,000		4,783,250

See notes to financial statements.

	Par†	Value
LEVERAGED LOANS - 55.6% (continued)

Food Products - 3.0% (continued)
CTI Foods Holding Co. LLC, TL 2L 06/13
8.250%, 06/28/2021 (b)	3,800,000	$	3,420,000
		8,203,250
Health Care Providers & Services - 2.0%
Genoa (QoL), TL 2L 10/16
9.000%, 10/28/2024 (b) (f)	3,581,170	3,581,170
Press Ganey Holdings, Inc., TL 2L 09/16
8.250%, 10/21/2024 (b) (f)	1,659,280	1,688,317
		5,269,487
Health Care Technology - 0.1%
Greenway Medical Technologies, TL 2L 10/13
9.250%, 11/04/2021 (b)	279,822	260,234

Hotels, Restaurants & Leisure - 1.9%
The Bay Club Co., TL 1L 08/16
7.500%, 08/31/2022 (b) (f)	5,179,968	5,205,867

Household Durables - 0.0%
Algeco Scotsman Global Sarl, TL PIK 04/13
PIK Rate: 15.750%; Cash Rate: 15.000%,
05/01/2018 (c) (d) (e) (f) (g) (j)	423,747	53,396

Machinery - 2.4%
WireCo WorldGroup, Inc., TL 1L 07/16
6.500%, 09/30/2023 (b) (f) (g)	2,662,800	2,682,771
WireCo WorldGroup, Inc., TL 2L 07/16
10.000%, 09/30/2024 (b) (f) (g)	3,803,220	3,822,236
		6,505,007
Media - 0.3%
NEP Broadcasting LLC, TL 2L 01/13
10.000%, 07/22/2020 (b)	711,260	715,705

Multiline Retail - 0.9%
Belk, Inc., TL 1L 08/15
5.750%, 12/12/2022 (b) (d) (e)	2,755,832	2,487,138

Software - 12.5%
Applied Systems, Inc., TL 2L 01/14
7.500%, 01/24/2022 (b)	11,377,473	11,494,832
Deltek, Inc., TL 2L 06/15
9.500%, 06/25/2023 (b)	7,346,780	7,463,080
iParadigms Holdings LLC, TL 2L 07/14
8.250%, 07/29/2022 (b)	5,719,710	5,548,119
Misys Ltd., TL 2L 06/12
12.000%, 06/12/2019	1,640,020	1,719,561
TIBCO Software, Inc., TL 1L 10/14
6.500%, 12/04/2020 (b)	5,267,312	5,279,164
Triple Point Technology, Inc., TL 1L 07/13
5.250%, 07/10/2020 (b)	2,488,139	2,235,444
		33,740,200

See notes to financial statements.

	Par†	Value
LEVERAGED LOANS - 55.6% (continued)

Specialty Retail - 5.3%
Charlotte Russe, Inc., TL 1L 04/13
6.750%, 05/22/2019 (b)	3,285,813	$	1,670,294
Charlotte Russe, Inc., TL 1L Add On 02/14
6.750%, 05/22/2019 (b)	394,226	200,399
David’s Bridal, Inc., TL 1L B 10/12
5.000%, 10/11/2019 (b)	4,032,128	3,764,999
Gymboree Corp., TL 1L 02/11
5.000%, 02/23/2018 (b)	2,800,004	1,792,885
Savers, Inc., TL 1L C 07/12
5.000%, 07/09/2019 (b)	7,362,776	6,838,215
		14,266,792
Trading Companies & Distributors - 0.0%
FleetPride Corp., TL 1L 11/12
5.250%, 11/19/2019 (b) (f)	9,126	8,259

Transportation Infrastructure - 2.4%
Commercial Barge Line Co., TL 1L 11/15
9.750%, 11/12/2020 (b)	6,522,786	6,359,716

TOTAL LEVERAGED LOANS (amortized cost $154,567,139)		149,924,896

COLLATERALIZED DEBT OBLIGATION - 0.6%

Diversified Financial Services - 0.6%
OHA Credit Partners XII, OHA E Notes
7.732%, 01/23/2027 (a) (b) (e)	1,799,210	1,740,146

TOTAL COLLATERALIZED DEBT OBLIGATION (amortized cost $1,703,002)		1,740,146

	Shares
COMMON STOCKS - 5.8%

Diversified Financial Services - 1.2%
Invesco Dynamic Credit Opportunities Fund	63,600		742,848
iPayment Investors LP (e) (f)	160,426		337,697
Nuveen Credit Strategies Income Fund	84,784		713,881
Prudential Global Short Duration High Yield Fund, Inc.	63,468		934,249
Wells Fargo Advantage Income Opportunities Fund	64,184		524,383
			3,253,058
Health Care Providers & Services - 4.4%
Amedisys, Inc. (d) (e) (f)	271,040		11,725,190

Insurance - 0.2%
Towergate, Sun NewCo Common Shares A (d) (f) (g)	GBP	8,597	—
Towergate, TopCo Common (d) (e) (f) (g)	GBP	540,649	619,405
			619,405
TOTAL COMMON STOCKS (cost $7,966,464)			15,597,653

See notes to financial statements.

	Shares		Value
PREFERRED STOCKS - 1.4%

Diversified Financial Services - 0.0%
Square Two Financial Corp. (d) (e) (f) (k)	14,720		$	—

Insurance - 1.4%
Towergate, Sun NewCo Preference B, (d) (e) (f) (g) (k)	GBP	3,194,971	3,660,379

TOTAL PREFERRED STOCKS (cost $10,420,281)			3,660,379

TOTAL INVESTMENTS (amortized cost $355,271,219) (h) - 131.1%			353,183,259
LIABILITIES EXCEEDING OTHER ASSETS, NET - (31.1)%			(83,691,419		)
NET ASSETS - 100.0%			$	269,491,840

†	In U.S. Dollars unless otherwise indicated.
EUR	Euro
GBP	Great British Pound
TL	Term Loan
(a)	Securities exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. These securities may only be resold to qualified institutional buyers in transactions exempt from registration. The total value of these securities as of October 31, 2016 was $153,033,809, which represent 56.8% of net assets.
(b)	Variable rate security, the coupon rate shown is the effective rate as of October 31, 2016.
(c)	Represents a payment-in-kind (“PIK”) security which may pay interest/dividend in additional par/shares.
(d)	Security considered restricted due to the Adviser’s knowledge of material non-public information. The total value of these securities as of October 31, 2016 was $27,013,908 and represented 10.0% of net assets.
(e)	Security considered illiquid, as defined by the Securities and Exchange Commission. The total value of these securities as of October 31, 2016 was $36,042,215 and represented 13.4% of net assets.
(f)	Non-income producing security.
(g)	Non-U.S. security.
(h)	All investments are held as collateral for the Fund’s credit facility.
(i)	Zero coupon security
(j)	Security in default
(k)	No applicable coupon rate

The following table represents the Fund’s investments categorized by country of risk as of October 31, 2016:

Country	% of Net Assets
United States	123.1	%
United Kingdom	3.4	%
Cayman Islands	2.4	%
Luxembourg	1.7	%
Portugal	0.5	%
	131.1	%
Liabilities Exceeding Other Assets, Net	(31.1	)%
	100.0	%

See notes to financial statements.

Statement of Assets and Liabilities

Assets
Investments, at value (amortized cost $355,271,219)	$	353,183,259
Cash equivalents	8,003,888
Receivable for investments sold	27,289,866
Dividends and interest receivable	4,881,120
Prepaid expenses	6,537
Total assets	393,364,670

Liabilities
Credit facility	103,015,444
Payable for investments purchased	19,974,927
Credit facility interest payable	30,061
Investment advisory fees	345,534
Trustees’ fees	973
Administration fees	21,385
Investor support services fees	31,412
Other accrued expenses	453,094
Total liabilities	123,872,830
Net assets	$	269,491,840

Net Assets
Paid-in capital — (unlimited shares authorized — $0.001 par value)	$	290,121,726
Accumulated net investment income	995,864
Accumulated net realized loss on investments, foreign currency contracts, and foreign currency transactions	(21,375,545		)
Net unrealized depreciation on investments, foreign currency transactions and deferred Trustees’ fees	(250,205		)
Net assets	$	269,491,840
Net asset value, price per share ($269,491,840 ÷ 15,255,236 shares)	$	17.67

See notes to financial statements.

Statement of Operations

	Year Ended
	October 31, 2016

Investment income
Interest income	$	30,347,211
Term loan income	773,440
Dividend income	220,973
Total investment income	31,341,624

Expenses
Investment advisory fees	3,971,089
Credit facility interest expense	1,316,047
Investor support services fees	361,061
Legal fees	351,046
Trustees’ fees	143,574
Administration fees	111,552
Shareholder reporting expense	66,833
Audit and tax fees	51,753
Custodian fees	45,626
Transfer agency fees	19,876
Other expenses	295,850
Total expenses	6,734,307

Net investment income	24,607,317
Net realized and unrealized gain (loss) on investments, forward foreign currency contracts, foreign currency transactions and deferred Trustees’ fees
Net realized loss on
Investments	(3,046,615		)
Forward foreign currency contracts and foreign currency transactions	(726,352		)
Net realized loss	(3,772,967		)
Net change in unrealized appreciation on
Investments	9,638,411
Forward foreign currency contracts and foreign currency transactions	921,539
Deferred Trustee’s fees	(23,405		)
Net change in unrealized appreciation	10,536,545
Net realized and unrealized gain on investments, forward foreign currency contracts, foreign currency transactions and deferred Trustees’ fees	6,763,578
Net increase in net assets resulting from operations	$	31,370,895

See notes to financial statements.

Statements of Changes in Net Assets

	Year Ended			Year Ended
	October 31, 2016			October 31, 2015
Increase (decrease) in net assets resulting from operations
Net investment income	$	24,607,317		$	22,407,051
Net realized loss on investments, forward foreign currency contracts and foreign currency transactions	(3,772,967		)	(17,934,883		)
Net change in unrealized appreciation (depreciation) on investments, forward foreign currency contracts, foreign currency transactions and deferred Trustees’ fees	10,536,545			(7,787,274		)
Net increase (decrease) in net assets resulting from operations	31,370,895			(3,315,106		)
Dividends to shareholders from
Net investment income	(22,882,853		)	(23,025,672		)
Net realized gains	—			(1,495,013		)
Return of capital	—			(635,198		)
Total dividends	(22,882,853		)	(25,155,883		)
Net increase (decrease) in net assets	8,488,042			(28,470,989		)
Net assets
Beginning of year	261,003,798			289,474,787
End of year	$	269,491,840		$	261,003,798
Undistributed (accumulated) net investment income	$	995,864		$	—

See notes to financial statements.

Statement of Cash Flows

	Year Ended
	October 31, 2016

Cash Flows from Operating Activities
Net increase in net assets resulting from operations
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided in operating activities:	$	31,370,895
Purchases of investments	(282,868,399		)
Proceeds from sales of investments	294,994,819
Net amortization (accretion) of premiums/discounts	(2,946,105		)
Net change in unrealized appreciation on investments	(9,638,411		)
Net change in unrealized depreciation on forward foreign currency contracts and foreign currency transactions	942,700
Net realized loss on investments	3,046,615
Net realized loss on foreign currency transactions	1,991,428
Changes in assets and liabilities:
Decrease in investment advisory fee payable	(5,523		)
Decrease in Trustees’ fees payable	(8,612		)
Decrease in receivable for investments sold	(23,543,467		)
Increase in payable for investments purchased	17,524,413
Increase in other assets and liabilities	2,360,227
Net cash used in operating activities	33,220,580

Cash Flows from Financing Activities
Cash dividends paid to shareholders	(22,882,853		)
Proceeds from credit facility	36,755,200
Payments on borrowing of credit facility	(47,347,588		)
Foreign currency translation on credit facility	(1,892,168		)
Net cash used in financing activities	(35,367,409		)

Net decrease in cash and cash equivalents	(2,146,829		)

Cash and Cash Equivalents
Beginning Balance	10,150,717
Ending Balance	$	8,003,888

Supplemental Disclosure
Cash paid for interest expense	$	1,298,037

Non-cash operating activities:
Interest payments in kind	$	648,452

See notes to financial statements.

Financial Highlights

	Year Ended			Year Ended			Year Ended			Period Ended
	October 31, 2016			October 31, 2015			October 31, 2014			October 31, 2013*
Per share operating performance(1)
Net asset value, beginning of year/period	$	17.11		$	18.98		$	19.56		$	19.06
Income from operations
Net investment income	1.61			1.47			1.48			0.27
Net realized and unrealized gain (loss) on investments, forward foreign currency contracts, foreign currency transactions, and deferred Trustees’ fees	0.45			(1.69		)	(0.40		)	0.36
Total income (loss) from operations	2.06			(0.22		)	1.08			0.63
Dividends from
Net investment income	(1.50		)	(1.51		)	(1.62		)	(0.13		)
Net realized gains	—			(0.10		)	(0.04		)	—
Return of capital	—			(0.04		)	—			—
Total dividends	(1.50		)	(1.65		)	(1.66		)	(0.13		)
Net asset value, end of year/period	$	17.67		$	17.11		$	18.98		$	19.56
Total return#	17.10		%	(6.50		)%	7.95		%	(10.07		)%†

Ratios to average net assets
Expenses	2.68		%	2.46		%	2.29		%	2.32		%**
Net investment income	9.79		%	8.23		%	7.57		%	5.36		%**

Supplemental data
Market value/price	$	15.68		$	14.82		$	17.58		$	17.86
Price discount	(11.26		)%	(13.38		)%	(7.38		)%	(8.69		)%
Net assets, end of year/period (000’s)	$	269,492		$	261,004		$	289,474		$	298,425
Portfolio turnover rate	82.48		%	73.33		%	65.35		%	11.75		%†

(1) Per share calculations were performed using average shares.

* Commenced operations on July 25, 2013.

** Annualized.

† Total return and Portfolio turnover rate are for the period indicated and have not been annualized.

# Total return is computed based on New York Stock Exchange market price of the Fund’s shares and excludes the effect of brokerage commissions. Dividends and distributions are assumed to be reinvested at the prices obtained under the Fund’s dividend reinvestment plan.

See notes to financial statements.

Notes to Financial Statements

1. Organization

KKR Income Opportunities Fund (the “Fund”) was organized on March 17, 2011 as a statutory trust under the laws of the state of Delaware. The Fund is a closed-end registered management investment company. The Fund commenced operations on July 25, 2013. The Fund seeks to generate a high level of current income, with a secondary objective of capital appreciation. The Fund is diversified for purposes of the Investment Company Act of 1940, as amended (the “1940 Act”). Pursuant to guidance from the Securities and Exchange Commission, the Fund’s classification changed from a non-diversified fund to a diversified fund. As a result of this classification change, the Fund is limited in the proportion of its assets that may be invested in the securities of a single issuer. Further, the classification change to a diversified fund may cause the Fund to benefit less from appreciation in a single issuer than if it had greater exposure to that issuer. KKR Credit Advisors (US) LLC serves as the Fund’s investment adviser (the “Adviser”).

2. Summary of Significant Accounting Policies

Basis of Presentation — The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are stated in United States (“U.S.”) dollars. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in these financial statements. Actual results could differ from those estimates.

Valuation of Investments — The Board of Trustees (the “Board”) of the Fund has adopted valuation policies and procedures to ensure investments are valued in a manner consistent with GAAP as required by the 1940 Act. The Board has delegated primary responsibility in ensuring these valuation policies and procedures are followed, including those relating to fair valuation, to the Adviser.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes.

Assets and liabilities recorded at fair value on the Statement of Assets and Liabilities are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets generally included in this category are common stock listed in active markets.

Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

The types of assets and liabilities generally included in this category are high yield securities, certain leveraged loans, and certain common stock not actively traded.

Level 3 — Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The types of assets generally included in this category are certain leveraged loans, collateralized debt obligations, and certain common stock and preferred stock not actively traded. A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market condition. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Fund’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2 and/or 3, which the Fund recognizes at the beginning of the period the inputs change.

Many financial assets and liabilities have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that the Fund and others are willing to pay for an asset. Ask prices represent the lowest price that the Fund and others are willing to accept for an asset. For financial assets and liabilities whose inputs are based on bid-ask prices, the Fund does not require that fair value always be a predetermined point in the bid-ask range. The Fund’s policy is to allow for mid-market pricing and adjust to the point within the bid-ask range that meets the Fund’s best estimate of fair value.

Depending on the relative liquidity in the markets for certain assets, the Fund may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available.

Valuation Process

The Adviser utilizes a valuation committee (“Valuation Committee”), whose members consist of the Head of Credit-US, Head of Credit-Europe, General Counsel, Chief Financial Officer and certain other employees of the Adviser. The Valuation Committee is responsible for approving pricing sources and procedures and for oversight of the Adviser’s pricing practices, including determining the valuation of investments in circumstances where no external pricing data for an investment is available.

Investments are generally valued based on quotations from third party pricing services, unless such a quotation is unavailable or is determined to be unreliable or inadequately representing the fair value of the particular assets. In that case, valuations are based on either valuation data obtained from one or more other third party pricing sources, including broker dealers selected by the Adviser, or will reflect the Valuation Committee’s good faith determination of fair value based on other factors considered relevant. The valuation process involved in Level 3 measurements for assets and liabilities is completed daily based on the methodology and assumptions that are used in estimating the value of the investment that are approved by the Valuation Committee on at least a monthly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight, and review. For assets classified as Level 3, the investment professionals of the Adviser are responsible for preliminary valuations based on various factors including their evaluation of financial and operating data, company specific developments, market valuations of comparable companies and model projections discussed above. All valuations are approved by the Valuation Committee.

For the year ended October 31, 2016, there have been no significant changes to the Fund’s fair value methodologies.

Investment Transactions — Investment transactions are accounted for on the trade date, the date the order to buy or sell is executed. Amortization and accretion is calculated using the effective interest method over the holding period of the investment. Realized gains and losses are calculated on the specific identified cost basis.

Cash and Cash Equivalents — Cash and cash equivalents includes cash on hand, cash held in banks and highly liquid investments with original maturities of three or fewer months. Cash equivalents consist solely of money market funds with financial institutions. As of October 31, 2016, the Fund invested in the Morgan Stanley Institutional Liquidity Government Portfolio - Institutional Class.

Restricted Cash — Restricted cash represents amounts that are held by third parties under certain of the Fund’s derivative transactions. Such cash is excluded from cash and cash equivalents in the Statement of Assets and Liabilities and Statement of Cash Flows. Interest income earned on restricted cash is recorded in other income on the Statement of Operations. On the Statement of Cash Flows, net additions or reductions to restricted cash are classified as an operating activity.

Foreign Currency Transactions — The books and records of the Fund are maintained in U.S. dollars. All investments denominated in foreign currency are converted to the U.S. dollar using prevailing exchange rates at the end of the reporting period. Income, expenses, gains and losses on investments denominated in foreign currency are converted to the U.S. dollar using the prevailing exchange rates on the dates when the transactions occurred.

The Fund bifurcates that portion of the results of operations resulting from changes in foreign exchange rates on investments and interest from the fluctuations arising from changes in market prices of securities held.

Forward Foreign Currency Exchange Contracts — The Fund enters into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized gains/losses until such time as the contracts have been closed or offset by another contract with the same broker for the same settlement date and currency.

Dividends to Shareholders — Dividends from net investment income are declared and paid monthly and distributable net realized capital gains, if any, are declared and distributed at least annually. Dividends to shareholders are recorded on the ex-dividend date.

Income Taxes — The Fund intends to qualify as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended, and in conformity with the Regulated Investment Company Modernization Act of 2010. The Fund will not be subject to federal income tax to the extent the Fund satisfies the requirements under Section 851 of the Internal Revenue Code, including distributing substantially all of its gross investment company taxable income and capital gains to its shareholders based on the Fund’s fiscal year end of October 31.

Term Loan Income — “Term Loan Income” consists of transaction fees including, but not limited to, delayed compensation, assignment, transfer, administration and amendment fees. Fee and other income is recorded when earned

In order to avoid imposition of the excise tax on undistributed income applicable to regulated investment companies, the Fund intends to declare each year as dividends in each calendar year at least 98.0% of its net investment income (earned during the calendar year) and 98.2% of its net realized capital gains (earned during the twelve months ended October 31) plus undistributed amounts, if any, from prior years.

The Fund evaluates tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether it is “more-likely than-not” (i.e., greater than 50-percent) that each tax position will be sustained upon examination by a taxing authority based on the technical merits of the position. Tax positions not

deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management has analyzed the Fund’s tax positions and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions for the open tax years (2014-2016). However, management’s conclusions regarding tax positions taken may be subject to review and adjustment at a later date based on factors including, but not limited to, examination by tax authorities, on-going analysis of and changes to tax laws, regulations and interpretations thereof.

As of October 31, 2016 the Fund did not have a liability for any unrecognized tax benefits. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year ended October 31, 2016, the Fund did not incur any interest or penalties.

3. Risk Considerations

The Fund invests mainly in high yield securities, leveraged loans, preferred and common stock and forward foreign currency contracts. These investments may involve certain risks, as discussed in the Fund’s prospectus, including, but not limited to, those described below:

Market Risk — Bond markets rise and fall daily. As with any investment with performance tied to these markets, the value of an investment in the Fund will fluctuate, which means that the shareholder could lose money.

Interest Rate Risk — Interest rates will rise and fall over time. During periods when interest rates are low, the Fund’s yield and total return also may be low. Changes in interest rates also may affect the Fund’s share price: a sharp rise in interest rates could cause the Fund’s share price to fall. The longer the Fund’s duration, the more sensitive to interest rate movements its share price is likely to be.

Credit Risk — The Fund is subject to the risk that a decline in the credit quality of an investment could cause the Fund to lose money or underperform. The Fund could lose money if the issuer or guarantor of an investment fails to make timely principal or interest payments or otherwise honor its obligations. The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts (whether a clearing corporation in the case of exchange-traded instruments or another third party in the case of over-the-counter instruments) and other instruments entered into directly by the Fund.

Liquidity Risk — A particular investment may be difficult to purchase or sell. The Fund may be unable to sell illiquid securities at an advantageous time or price.

Prepayment and Extension Risk — The Fund’s investments are subject to the risk that the investments may be paid off earlier or later than expected. Either situation could cause the Fund to hold investments paying lower than-market rates of interest, which could hurt the Fund’s yield or share price.

High Yield Risk — High yield securities and unrated securities of similar credit quality (sometimes called junk bonds) that the Fund may invest in are subject to greater levels of credit and liquidity risks. High yield securities are considered primarily speculative with respect to the issuer’s continuing ability to make principal and interest payments.

Foreign Investment Risk — The Fund’s investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates (the currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, the U.S. dollar will decline in value relative to the currency being hedged) or exchange control regulations (including limitations on currency movements and exchanges); differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in connection with investments in emerging markets.

Issuer Risk — The value of securities may decline for a number of reasons that directly relate to the issuer, such as its financial strength, management performance, financial leverage and reduced demand for the issuer’s goods and services, as well as the historical and prospective earnings of the issuer and the value of its assets.

Market Discount Risk — The price of the Fund’s common shares of beneficial interest will fluctuate with market conditions and other factors. Shares of closed-end management investment companies frequently trade at a discount from their net asset value, which may increase the risk of loss.

Leverage Risk — Leverage is a speculative technique that may expose the Fund to greater risk and increased costs. When leverage is used, the net asset value and market price of the Fund’s shares and the Fund’s investment return will likely be more volatile.

Please refer to the Fund’s prospectus for a more complete description of the principal risks of investing in the Fund.

4. Agreements

Investment Advisory Agreement — The Adviser provides day-to-day portfolio management services to the Fund and has discretion to purchase and sell investments in accordance with the Fund’s objectives, policies, and restrictions. For the services it provides to the Fund, the Adviser receives an annual fee, payable monthly by the Fund, in an amount equal to 1.10% of the Fund’s average daily Managed Assets (the “Management Fee”). “Managed Assets” is defined as the total assets of the Fund (including any assets attributable to any borrowings (except borrowings solely for short-term cash management purposes), reverse repurchase agreements, dollar rolls, any issuance of preferred shares or notes, and including any assets in respect of shares that will be repurchased as of the end of the month) minus the sum of the Fund’s accrued liabilities (other than any borrowings).

During periods when the Fund is using leverage, the Management Fee paid to the Adviser will be higher than if the Fund did not use leverage because the Management Fee paid is calculated on the basis of the Fund’s Managed Assets, which includes the assets purchased through leverage.

During the year ended October 31, 2016, the Adviser earned a Management Fee of $3,971,089.

Administrator, Custodian and Transfer Agent — U.S. Bancorp Fund Services, LLC (“USBFS”) (the “Administrator”) serves as the Fund’s Administrator pursuant to an administration agreement under which the Administrator provides administrative and accounting services.

U.S. Bank, N.A. (“Custodian”) serves as the Fund’s custodian pursuant to a custody agreement. The Custodian is an affiliate of USBFS.

USBFS serves as the Fund’s transfer agent pursuant to a transfer agency agreement.

Investor Support Services Agreement — The Fund has retained Four Wood Capital Partners LLC to provide investor support services in connection with the on-going operation of the Fund. Such services include providing ongoing contact with respect to the Fund and its performance with financial advisors that are representatives of broker-dealers and other financial intermediaries and communicating with the New York Stock Exchange (“NYSE”) specialist for the Fund’s common shares, and with the closed-end fund analyst community regarding the Fund on a regular basis.

Deferred Trustees’ Compensation — The Fund has a Deferred Trustees’ Compensation plan (the “Plan”) that allows the Independent Trustees to defer compensation to a future payment period. The compensation is invested in notional shares of the Fund. The value of a participating Independent Trustee’s deferral account is based on the notional shares of deferred amounts as designated by the participating Independent Trustees. Changes in the value of the Independent Trustees’ deferral account are included in the Statement of Operations. The accrued obligations under the Plan, including unrealized appreciation/(depreciation), are included on the Statement of Assets and Liabilities.

Other — Certain officers of the Fund are also officers of the Adviser. Such officers are paid no fees by the Fund for serving as officers of the Fund.

5. Fair Valuation

The following table presents information about the Fund’s assets and liabilities measured on a recurring basis as of October 31, 2016, and indicates the fair value hierarchy of the inputs utilized by the Fund to determine such fair value:

	Level 1		Level 2		Level 3		Total
Investments in securities
High yield securities	$	—	$	181,261,053	$	999,132	$	182,260,185
Leveraged loans	—		143,912,618		6,012,278		149,924,896
Collateralized debt obligation	—		—		1,740,146		1,740,146
Common stocks	14,640,551		—		957,102		15,597,653
Preferred stock	—		—		3,660,379		3,660,379
Cash equivalents	8,003,888		—		—		8,003,888
Total investments in securities and cash equivalents	$	22,644,439	$	325,173,671	$	13,369,037	$	361,187,147

The following table details the restricted securities held by the Fund as of October 31, 2016:

							% of
		Acquisition	Amortized				Net
	Par/Shares	date(s)	Cost		Value		Assets
Algeco Scotsman Global Sarl, TL PIK 04/13, PIK Rate: 15.750%; Cash Rate: 15.000%, 05/01/2018	423,747	09/17/2013	$	352,286	$	53,396	0.0	%
Amedisys, Inc., Common Stock	271,040	08/05/2013-08/08/2013	3,799,455		11,725,190		4.4	%
Belk, Inc., TL 1L 08/15, 5.750%, 12/12/2022	2,755,832	04/12/2016-04/25/2016	2,468,204		2,487,138		0.9	%
Square Two Financial Corp., TL 1.5L 05/16, 11.000%, 05/24/2019	9,836,967	05/24/2016	9,836,967		4,790,800		1.8	%
Square Two Financial Corp., Preferred Stock	14,720	05/24/2016	5,683,411		—		0.0	%
Towergate, 8.750%, 04/02/2020	3,310,813	04/02/2015	5,038,670		3,677,600		1.4	%
Towergate, Sun NewCo Common Shares A	8,597	04/02/2015	15		—		0.0	%
Towergate, Sun NewCo Preference B	3,194,971	04/02/2015	4,736,869		3,660,379		1.4	%
Towergate, TopCo Common	540,649	04/02/2015	815,841		619,405		0.2	%

The following table presents additional information about investments that are measured at fair value on a recurring basis for which the Fund has utilized Level 3 inputs to determine fair value as of October 31, 2016:

	High Yield			Leveraged			Collateralized		Common			Preferred
	Security			Loans			Debt Obligation		Stocks			Stocks
Balance at October 31, 2015	$	—		$	80,638		$	—	$	1,928,936		$	5,339,071
Purchases	—			9,836,967			1,695,755		—			5,683,411
Sales and paydowns	(955,184		)	(14,206		)	—		—			—
Transfers in and/or out of Level 3(1)	2,135,362			1,450,648			—		—			—
Settlements	—			17,905			7,525		—			—
Net Change in appreciation/(depreciation)	(178,229		)	(5,362,660		)	36,866		(971,834		)	(7,362,103		)
Net realized gain/(loss)	(2,817		)	2,986			—		—			—
Balance at October 31, 2016	$	999,132		$	6,012,278		$	1,740,146	$	957,102		$	3,660,379

Net Change in appreciation/(depreciation) on investments held at October 31, 2016	$	(178,229	)	$	(5,362,660	)	$	36,866	$	(971,834	)	$	(7,362,103	)

(1) During the year ended October 31, 2016, there were transfers into Level 3. The Fund’s policy is to recognize transfers into and out of Level 3 at the beginning of each reporting period.

The following table presents additional information about valuation techniques and inputs used for investments that are measured at fair value and categorized within Level 3 as of October 31, 2016:

	Fair Value				Range
Financial	as of		Valuation	Unobservable	(Weighted
Asset	October 31, 2016		Technique (1)	Inputs (2)	Average)(3)
Leveraged Loan (5)	$	6,012,278	Yield Analysis	Yield	21%-21% (21%)
				EBITDA Multiple	8.7x-15.5x (15.2x)
				Net Leverage	9.1x-34.1x (33.0x)
			Liquidation Analysis	EBITDA Multiple	0.5x-15.5x (3.4x)
			Broker Quotes	Offered Quotes	5.0-7.3
			Option Pricing Model	Risk Free Rate	1%
				Implied Volatility	24%
				Term	1.6 years

Collateralized Debt Obligation	1,740,146		Yield Analysis	Discount Margin	7%
Collateralized Debt Obligation			Discounted Cash Flow	Probability of Default	2%
				Loss Severity	30%

High Yield Security	999,132		Yield Analysis	Yield	14%
				EBITDA Multiple	8.4x
				Net Leverage	7.7x

Common Stocks (4)	957,102		Market Comparables	LTM EBIDTA Multiple	2.5x-8.4x (4.6x)
				Fwd EBIDTA Multiple	2.4x-8.0x (4.4x)
				Illiquidity Discount	10%-10% (10%)
			Discounted Cash Flow	Weight average cost of capital	11%
				Fwd EBIDTA exit multiple	7.5x
				Illiquidity Discount	10%

Preferred Stocks	3,660,379		Market Comparables	LTM EBIDTA Multiple	0.5x-2.5x (2.5x)
				Fwd EBIDTA Multiple	2.4x
				Illiquidity Discount	5%-10% (10%)

(1) For the assets that have more than one valuation technique, the Partnership may rely on the techniques individually or in aggregate based on a weight ascribed to each one ranging from 0-100%. When determining the weighting ascribed to each valuation methodology, the Partnership considers, among other factors, the availability of direct market comparables, the applicability of a discounted cash flow analysis and the expected hold period and manner of realization for the investment. These factors can result in different weightings among the investments and in certain instances, may result in up to a 100% weighting to a single methodology.

(2) The significant unobservable inputs used in the fair value measurement of the Partnership’s assets and liabilities may include the last twelve months (“LTM”) EBITDA multiple, weighted average cost of capital, discount margin, probability of default, loss severity and constant prepayment rate. In determining certain of these inputs, management evaluates a variety of factors including economic, industry and market trends and developments; market valuations of comparable companies; and company specific developments including potential exit strategies and realization opportunities. Significant increases or decreases in any of these inputs in isolation could result in significantly lower or higher fair value measurement.

(3) Weighted average amounts are based on the estimated fair values.

(4) Of the $957,102, $619,405 was valued solely using a market comparables technique.

(5) Of the $6,012,278, $4,790,800 was valued solely using a liquidation analysis technique.

6. Derivatives

In pursuing its investment objectives or for hedging purposes, the Fund may invest in various types of derivatives, including structured products, swaps, forward contracts, futures contracts and options. As of and for the year ended October 31, 2016, the Fund had the following transactions in derivatives, grouped in the following risk categories:

			Net Change in
Statement of Operations	Net Realized		Unrealized
Location	Gain		Appreciation
Forward foreign currency contracts	$	483,693	$	199,353
	$	483,693	$	199,353

The Fund held forward foreign currency contracts from November 1, 2015 to November 6, 2015. During this time, the average notional value of forward foreign currency contracts was $26,760,449

7. Shares of Beneficial Interest

Since July 25, 2013 (commencement of operations), there has been no subscriptions, redemptions, or newly issued common shares due to dividends reinvestment.

8. Investment Transactions

The cost of investments purchased and the proceeds from the sale of investments, other than short-term investments, for the year ended October 31, 2016 were as follows:

Purchases		$	282,868,399
Sales		294,994,819

There were no purchases or sales of U.S. Government securities.

9. Commitments and Contingencies

As of October 31, 2016, the Fund did not have unfunded financing commitments, including financial guarantees, related to other assets, including investments. In instances when the Fund enters into unfunded financing commitments, the Fund will maintain sufficient liquidity to fund such commitments.

Under the Fund’s organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In the normal course of business, the Fund enters into contracts that contain a variety of representations and that provide general indemnifications. The Fund’s maximum liability exposure under these arrangements is unknown, as future claims that have not yet occurred may be made against the Fund. However, based on experience, management expects the risk of loss to be remote.

10. Federal Income Taxes

The timing and characterization of certain income, capital gains, and return of capital distributions are determined annually in accordance with federal tax regulations, which may differ from GAAP. As a result, the net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. These book/tax differences may be temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in capital, accumulated net investment income/loss or accumulated net realized gain/loss, as appropriate, in the period in which the differences arise.

The following permanent differences have been reclassified (to)/from the following accounts:

Undistributed Net			Accumulated
Investment			Net Realized
Income/(Loss)			Gain/(Loss)		Paid-in Capital
$	(728,600	)	$	736,676	$	(8,076	)

These reclassifications have no effect on net assets or net assets per share and are related to foreign currency, dividends. and income and return of capital distributions.

The tax character of dividends declared for the years ended October 31, 2016 and 2015, respectively, is as follows:

	Ordinary		Return of
	Income		Capital		Total
October 31, 2016	$	22,882,853	$	—	$	22,882,853
October 31, 2015	$	24,520,685	$	635,198	$	25,155,883

As of October 31, 2016, the components of accumulated gains on a tax basis for the Fund are as follows:

Undistributed		Net			Other
Ordinary		Unrealized			Temporary			Total
Income		Depreciation			Differences			Accumulated Losses
$	995,864	$	(250,306	)	$	(21,375,444	)	$	(20,629,886	)

Net capital losses earned may be carried forward indefinitely and must retain the character of the original loss.

As of October 31, 2016, the total cost of securities for federal income tax purposes and the aggregate gross unrealized appreciation and depreciation for securities held by the Fund are as follows:

		Aggregate		Aggregate
		Gross		Gross			Net Unrealized
Federal Tax		Unrealized		Unrealized			Appreciation/
Cost		Appreciation		Depreciation			(Depreciation)
$	355,271,320	$	19,896,370	$	(20,146,676	)	$	(250,306	)

At October 31, 2016, the Fund had non-expiring capital loss carry-forwards of $21,375,444.

11. Credit Facility

In July 2013, the Fund entered into a $145.0 million credit agreement that was reduced on July 25, 2016 to $120.0 million (the “Maximum Facility Amount”) with The Bank of Nova Scotia expiring on July 24, 2017 (the “Credit Facility”). The Credit Facility bears an unused commitment fee on the unused portion of the credit facility (the “Unused Facility Amount”) equal to (a) 0.15% on the total Unused Facility Amount if the Unused Facility Amount is lower or equal to 75% of the Maximum Facility Amount or (b) 0.25% on the total Unused Facility Amount if the Unused Facility Amount is in excess of 75% of the Maximum Facility Amount. The per annum rate of interest for borrowing under the Credit Facility is equal to (a) London Interbank Offered Rate (“LIBOR”) plus 0.80% per annum or (b) the greatest of (i) the Prime Rate, (ii) the Fed Funds rate plus 0.50% per annum, and (iii) the Eurodollar rate plus 1.00% per annum.

As of October 31, 2016, there were the USD equivalent of $103,015,444 of borrowings outstanding under the Credit Facility and the Fund is in compliance with the terms of the Credit Facility. During the year ended October 31, 2016, the Fund had an average amount of borrowing of $109,827,338 at an average interest rate of 1.19%.

12. Offsetting Agreements

Certain derivative contracts are executed under standardized netting agreements. A derivative netting arrangement creates an enforceable right of set-off that becomes effective, and affects the realization of settlement on individual assets, liabilities and collateral amounts, only following a specified event of default or early termination. Default events may include the failure to make payments or deliver securities timely, material adverse changes in financial condition or insolvency, the breach of minimum regulatory capital requirements, or loss of license, charter or other legal authorization necessary to perform under the contract. The Fund may manage counterparty risk by entering into enforceable collateral arrangements with counterparties to securities lending agreements. These agreements mitigate counterparty credit risk by providing for a single net settlement with a counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.

13. Subsequent Events

In preparing these financial statements, the Fund has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. The Fund evaluated subsequent events through the date the financial statements were issued and determined no additional disclosures were necessary.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of

KKR Income Opportunities Fund

We have audited the accompanying statement of assets and liabilities of KKR Income Opportunities Fund (the “Fund”), including the schedule of investments, as of October 31, 2016, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2016, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of KKR Income Opportunities Fund as of October 31, 2016, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.

San Francisco, CA

December 22, 2016

Trustees and Officers of KKR Income Opportunities Fund

					Other
				Number of	Directorships
				Portfolios	Held by
	Position(s)	Term of		in Fund	Trustee
	Held	Office and		Complex	During the
Name, Age and	with the	Length of	Principal Occupation(s) During Past Five	Overseen	Last Five
Address	Fund	Service	Years and Other Relevant Experience	by Trustee	Years
*Interested Trustees(1)*

Suzanne Donohoe (45) KKR Credit Advisors (US) LLC 555 California Street 50th Floor San Francisco, CA 94104	President	Since July 2013	Global head of KKR’s Client and Partner Group and Member of KKR (Since 2009); Head of Goldman Sachs Asset Management International (2008-2009); Head of Goldman Sachs Asset Management client business in North America (2006-2008).	1	None.

*Independent Trustees(1)*

Tobin V. Levy (72) KKR Credit Advisors (US) LLC 555 California Street 50th Floor San Francisco, CA 94104	Trustee	Since July 2013	Executive Vice President & Chief Financial Officer, Local Initiatives Support Corporation (non-profit support and resources) (2011-2014); Managing Director and Chief Financial Officer of Hedge Fund Strategies Group, Goldman Sachs (financial services firm) (1995 - 2008).	1	AloStar Bank of Commerce.

Jeffrey L. Zlot (45) KKR Credit Advisors (US) LLC 555 California Street 50th Floor San Francisco, CA 94104	Trustee	Since July 2013	Managing Director, Tiedemann Wealth Management (formerly, The Presidio Group LLC) (investment consultant and investment banking) (since 1997).	1	None.

Michael E. Cahill (65) KKR Credit Advisors (US) LLC 555 California Street 50th Floor San Francisco, CA 94104	Trustee	Since July 2013	Executive Vice President (2008-2013) and Managing Director and General Counsel (1991-2013), The TCW Group, Inc. and Trust Company of the West (financial services firm).	1	None.

(1) “Independent Trustees” are those trustees who are not “interested persons” (as defined in Section 2(a)(19) of the 1940 Act) of the Fund, and “Interested Trustees” are those trustees who are interested persons of the Fund. Ms. Donohoe is an Interested Trustee because she is a Member of KKR, the parent company.

			Principal Occupation(s) During
		Term of Office and	Past Five Years and Other Relevant
Name and Age	Position(s) Held with Fund	Length of Service	Experience
*Principal Officers who are not Trustees*

Roshan Chagan (41)	Treasurer and Chief Financial Officer	Since December 2013	Treasurer, KKR Credit Advisors (US) LLC (2006 - present)

Shannon Horton (40)	Chief Compliance Officer	Since December 2014	Deputy Chief Compliance Officer, KKR Credit Advisors (US) LLC (2011- present); Chief Compliance Officer, Senior Compliance Officer, Wells Fargo Wealth Management Group (2006-2010), Nelson Capital Management (2010-2011)

Nicole J. Macarchuk (46)	Secretary and Vice President	Since July 2013	General Counsel, KKR Credit Advisors (US) LLC (2010-present); General Counsel and Secretary, KKR Financial Holdings LLC (2010-present); Co-General Counsel, Och-Ziff Capital Management Group LLC (2005 - 2010).

Susan R. Eisenberg (34)	Assistant Secretary	Since September 2015	Counsel, KKR Credit Advisors (US) LLC (2015-present); Associate, Ropes & Gray LLP (2007-2015)

Dividend Reinvestment Plan (Unaudited)

Pursuant to the Dividend Reinvestment Plan (the “DRIP”), income dividends and/or capital gain distributions to Common Shareholders will automatically be reinvested in additional Common Shares of the Fund by the Plan Administrator. A Common Shareholder may terminate participation in the DRIP at any time by notifying the DRIP Administrator before the record date of the next distribution through the Internet, by telephone or in writing.

1. The Plan Administrator will open an account for each holder of Common Shares under the Plan in the same name in which such holder of Common Shares is registered. Whenever the Fund declares a dividend or other distribution (together, a “Dividend”) payable in cash, non-participants in the Plan will receive cash and Participants will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Administrator for the Participants’ accounts, depending upon the circumstances described below, either through (i) receipt of additional unissued but authorized Common Shares from the Fund (“Newly Issued Common Shares”) or (ii) by purchase of outstanding Common Shares on the open market (“Open-Market Purchases”) on the New York Stock Exchange or elsewhere.

2. If, on the payment date for any Dividend, the closing market price plus estimated per share fees (which include any brokerage commissions the Plan Administrator is required to pay) is equal to or greater than the net asset value (“NAV”) per Common Share, the Plan Administrator will invest the Dividend amount in Newly Issued Common Shares on behalf of the Participants. The number of Newly Issued Common Shares to be credited to each Participant’s account will be determined by dividing the dollar amount of the Dividend by the NAV per Common Share on the payment date; provided that, if the NAV is less than or equal to 95% of the closing market value on the payment date, the dollar amount of the Dividend will be divided by 95% of the closing market price per Common Share on the payment date. If, on the payment date for any Dividend, the NAV per Common Share is greater than the closing market value plus per share fees, the Plan Administrator will invest the Dividend amount in Common Shares acquired on behalf of the Participants in Open-Market Purchases. In the event of a market discount on the payment date for any Dividend, the Plan Administrator will have until the last business day before the next date on which the Common Shares trade on an “ex-dividend” basis or 30 days after the payment date for such Dividend, whichever is sooner (the “Last Purchase Date”), to invest the Dividend amount in Common Shares acquired in Open-Market Purchases. It is contemplated that the Fund will pay monthly income Dividends. Therefore, the period during which Open-Market Purchases can be made will exist only from the payment date of each Dividend through the date before the next “ex-dividend” date which typically will be approximately ten days. If, before the Plan Administrator has completed its Open-Market Purchases, the market price per Common Share exceeds the NAV per Common Share, the average per Common Share purchase price paid by the Plan Administrator may exceed the NAV of the Common Shares, resulting in the acquisition of fewer Common Shares than if the Dividend had been paid in Newly Issued Common Shares on the Dividend payment date. Because of the foregoing difficulty with respect to Open-Market Purchases, the Plan provides that if the Plan Administrator is unable to invest the full Dividend amount in Open-Market Purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Administrator may cease making Open-Market Purchases and may invest the uninvested portion of the Dividend amount in Newly Issued Common Shares at the NAV per Common Share at the close of business on the Last Purchase Date provided that, if the NAV is less than or equal to 95% of the then current market price per Common Share; the dollar amount of the Dividend will be divided by 95% of the market price on the payment date.

3. The Plan Administrator maintains all Participants’ accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by Participants for tax records. Common Shares in the account of each Participant will be held by the Plan Administrator on behalf of the Participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Administrator will forward all proxy solicitation materials to Participants and vote proxies for Common Shares held under the Plan in accordance with the instructions of the Participants.

4. In the case of shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Administrator will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholder’s name and held for the account of beneficial owners who participate in the Plan.

5. There will be no charges with respect to Common Shares issued directly by the Fund. However, each Participant will pay a per Common Share fee incurred in connection with Open Market Purchases. The automatic reinvestment of Dividends will not relieve Participants of any Federal, state or local income tax that may be payable (or required to be withheld) on such dividend. Participants that request a sale of Common Shares through the Plan Administrator will be subject to a sales fee for Common Share sold. All per Common Share fees include any applicable brokerage commissions the Plan Administrator is required to pay.

6. The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to Participants with regard to purchases in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the Participants.

7. All correspondence or questions concerning the Plan should be directed to the Plan Administrator, U.S. Bancorp Fund Services, LLC, in writing to 615 East Michigan Street, Milwaukee, Wisconsin 53202.

Additional Information

FEDERAL TAX INFORMATION (Unaudited)

For the fiscal year ended October 31, 2016, certain dividends paid by the Fund may be subject to a maximum rate of 20%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 0.00%.

For corporate shareholders, the percent of ordinary income distributions qualifying for corporate dividends received deduction for the fiscal year ended October 31, 2016 was 0.00%.

The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871 (k)(2)(C) for fiscal year ended October 31, 2016 was 0.00%.

The percentage of taxable ordinary income distributions that are designated as interest related dividends under Internal Revenue Section 871 (k)(1)(C) for fiscal year ended October 31, 2016 was 97.22%.

Pursuant to Section 853 of the Internal Revenue Code, the Fund did not designate any amounts as foreign taxes paid for the period ended October 31, 2016. Foreign taxes paid for purposes of Section 853 may be less than actual foreign taxes paid for financial statement purposes.

Approval of Investment Advisory Agreement

Background

At a meeting of the Board of KKR Income Opportunities Fund (the “Fund”) held on June 16, 2016 (the “Meeting”), the members of the Board, including the Trustees who are not “interested persons” of the Fund (the “Independent Trustees”), as defined in the Investment Company Act of 1940, as amended, considered and unanimously approved the continuance of the investment advisory agreement (the “Investment Advisory Agreement”) between KKR Credit Advisors (US) LLC (the “Adviser”) and the Fund.

Prior to the Meeting, the Independent Trustees received a memorandum from their independent legal counsel concerning the duties and responsibilities of board members in considering approval of the Investment Advisory Agreement. The Board had also received and considered materials it deemed reasonably necessary for its review of the Investment Advisory Agreement, including materials prepared by the Adviser and reports prepared by the Adviser and a third party service provider comparing fee, expense and performance information to a collection of registered closed-end funds believed by the Adviser to have comparable investment objectives and strategies as well as to registered closed-end funds in the same or similar Morningstar peer group as the Fund (the “Peer Funds”).

The Independent Trustees discussed with management and separately with their independent legal counsel the materials provided by management prior to the scheduled board meeting.

In its consideration of the approval of the Investment Advisory Agreement, the Board considered various factors, including the following:

Nature, Extent and Quality of Services

In considering the nature, extent and quality of services provided by the Adviser, the Board relied on their ongoing experience as Trustees of the Fund as well as on the materials provided at and prior to the Meeting. The Board reviewed and considered the nature and extent of the investment advisory services provided by the Adviser under the Investment Advisory Agreement, including portfolio management, investment research and overseeing portfolio transactions. The Board noted that the Adviser provides the Fund with necessary offices, facilities and equipment. It was further noted that the Adviser coordinates and oversees the provision of services provided to the Fund by other service providers.

The Board reviewed and considered the qualifications, background and experience of the portfolio managers and other key personnel of the Adviser who provide advisory and non-advisory services to the Fund. They also considered the resources, operations and practices of the Adviser both generally and in managing the Fund’s portfolio. The Board noted the Adviser’s extensive experience in managing portfolios of loans and fixed income securities, knowledge of loan and fixed income markets, and analytical and risk management capabilities. The Board determined that the nature and extent of services provided by the Adviser to the Fund were appropriate and that the Fund should continue to benefit from the nature, extent and quality of these services as a result of the Adviser’s experience, personnel, operations and resources.

Performance, Fees and Expenses of the Fund

The Board noted that the Fund had been in operation for approximately three years and considered the performance of the Fund under the management of the Adviser on an absolute basis and in comparison to the Peer Funds. The Board also considered the Adviser’s rationale for including certain funds among the Peer Funds for purposes of comparison, as well as the reasons why the Adviser believes its Morningstar peer group is an imprecise comparison. The Adviser also discussed with the Board the key contributors and detractors to the Fund’s performance during the period. The Board then discussed with the Adviser the Fund’s fees and expenses relative to comparable Peer Funds and other accounts advised by the Adviser. The Board noted that the Fund’s advisory fee is generally comparable to the fees charged by the Adviser or its affiliates to other clients for which it provides comparable services or uses overlapping portfolio management team members. The Board further noted that the Fund’s advisory fee was higher than the average of its peer

groups, but was generally in line with the advisory fees charged by funds with similar investment characteristics that commenced operations around the same time as the Fund. The Board also took into account the impact of leverage on the advisory fee paid by the Fund. In addition to the advisory fee, the Board also reviewed the Fund’s total expense ratio. Following its review, in light of the extent and high quality of services that the Fund receives, the Board determined that the Fund’s performance under the management of the Adviser was satisfactory and that the Fund’s fees and expenses were reasonable.

Economies of Scale

The Board considered the size and growth prospects of the Fund and how it relates to the structure of the Fund’s advisory fee schedule, which does not include breakpoints. The Board considered that the Fund is a closed-end fund and thus not expected to have regular inflows of capital and that growth would only be achieved through market appreciation or new issuances (e.g., rights offerings). The Board concluded that economies of scale for the Fund were not a factor that needed to be considered at this time.

Profitability of the Adviser and Affiliates

The Board considered the profitability to the Adviser of its relationship with the Fund. The Board had been provided information concerning costs incurred and profits realized by the Adviser under the Investment Advisory Agreement. The Adviser discussed its cost allocation methodology and the reasons why the Adviser believed it to be reasonable. The Board also examined the level of profits that could be expected to accrue to the Adviser from the fees payable under the Investment Advisory Agreement. After discussion and analysis, the Board concluded that the profitability was in no case such as to render the advisory fee excessive.

Other Benefits of the Relationship

The Board considered other benefits to the Adviser and its affiliates derived from their relationship with the Fund. Based on information provided by and discussions with the Adviser, the Board concluded that these benefits did not appear to be material at the present time.

Resources of the Adviser and Relationship with the Fund

The Board considered the financial circumstances of the Adviser and whether the Adviser has the resources necessary to perform its obligations under the Investment Advisory Agreement. The Board also reviewed and considered the relationship between the Fund and the Adviser, including the policies and procedures formulated and adopted by the Adviser for managing the Fund’s operations and the Board’s confidence in the competence and integrity of senior managers and key personnel of the Adviser. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Investment Advisory Agreement and that it is beneficial for the Fund to continue its relationship with the Adviser.

Other Factors

The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund’s Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund’s business.

General Conclusion

After considering and weighing all of the above factors, the Board concluded that the advisory fee was reasonable in light of the services provided by the Adviser and it would be in the best interests of the Fund and its shareholders to approve renewal of the Investment Advisory Agreement for another year. In reaching this conclusion the Board did not give particular weight to any single factor referenced above. The Board considered these factors over the course of numerous meetings, some of which were in executive session with only the Independent Trustees and their counsel present. It is possible that individual Board members may have weighed these factors differently in reaching their individual decisions to approve the Investment Advisory Agreement.

Privacy Notice

Protection and Security of Your Personal Information

KKR Credit Advisors US LLC (“KKR Credit Advisors (US)”) respects our investors’ right to privacy. All financial companies choose how they share personal information. Consumers have the right under U.S. federal law to limit some, but not all, sharing of personal information. U.S. federal law also requires us to inform you how we collect, share and protect your personal information. Investors may also have additional limiting rights under their respective State’s law. This notice is provided by KKR Credit Advisors (US), and it affiliates. Please read this notice carefully to understand what we do, and call us at (415) 315-3620 if you have any questions.

The Personal Information We Collect and How We Collect It

We collect the following types of personal information about individuals who are our investors:

· Information we receive from investors in subscription agreements, questionnaires and in other forms, such as name, address, account information, social security number, the types and amounts of investments, statements of net worth, telephone number, and other contact information;

· Information we receive from investors, affiliates and other companies about investors’ transactions with us, our affiliates, or other financial institutions with which we have relationships; and

· Information we receive from third parties such as demographic information and information collected to comply with law and regulation.

When you are no longer an investor with us, we continue to share your information as described in this notice.

How and Why We Share Personal Information

This section lists reasons why financial companies can share their customers’ personal information. With respect to each reason, we explain whether KKR Credit Advisors (US) chooses to share for this reason and, if we do share, whether you can limit this sharing.

· For everyday business purposes: KKR Credit Advisors (US) shares personal information for everyday business purposes, such as to

· process your transactions;

· provide financial products or services to you;

· maintain your investment(s);

· secure business services, including printing, mailing, and processing or analyzing data;

· secure professional services, including accounting and legal services; or

· respond to court orders and legal investigations.

· You cannot limit sharing by KKR Credit Advisors (US) for everyday business purposes.

· For our marketing purposes: KKR Credit Advisors (US) shares personal information for our marketing purposes so that we can offer products and services to you. You cannot limit sharing by KKR Credit Advisors (US) for this reason.

· For joint marketing with other financial companies: KKR Credit Advisors (US) does not share personal information for joint marketing with other financial companies.

· For use by affiliates in providing products and services to you: KKR Credit Advisors (US) shares personal information for our affiliates’ use in providing you with products and services that meet your financial services needs. You cannot limit sharing by KKR Credit Advisors (US) for this reason.

· For the everyday business purposes of affiliates: KKR Credit Advisors (US) does not share personal information, including information about your credit worthiness, with our affiliates for their everyday business purposes.

· For use by affiliates to market to you: KKR Credit Advisors (US) does not share personal information with affiliates so that they can market to you.

· For use by non-affiliates to market to you: KKR Credit Advisors (US) does not share personal information with non-affiliates so that they can market to you.

U.S. Federal law gives you the right to limit sharing of your personal information only for use (i) by affiliates everyday business purposes (information about your creditworthiness), (ii) by affiliates to market to you, and (iii) by non-affiliates to market to you. U.S. State laws and individual companies may give you additional rights to limit sharing.

How We Protect Your Personal Information

To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.

Definitions

Affiliates: Companies related by common ownership or control. They can be financial and nonfinancial companies. KKR Credit Advisors (US) does not share with our affiliates, except to provide you products and services that meet your financial needs.

Non-affiliates: Companies not related by common ownership or control. They can be financial and nonfinancial companies. KKR Credit Advisors (US) does not share with non-affiliates so they can market to you.

Joint Marketing: A formal agreement between nonaffiliated financial companies that together market financial products and services to you. KKR Credit Advisors (US) does not jointly market.

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Item 2. Code of Ethics.

(a) The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer and principal accounting officer.

Item 3. Audit Committee Financial Expert.

(a)(1) The registrant’s board of trustees has determined that there is at least one audit committee financial expert serving on its audit committee.

(a)(2) Tobin V. Levy is the “audit committee financial expert” and is considered to be “independent” as each term is defined in Item 3 of Form N-CSR.

Item 4. Principal Accountant Fees and Services.

Deloitte & Touche LLP billed the Fund aggregate fees for services rendered to the Fund for the fiscal years as follows:

	FYE 10/31/2016		FYE 10/31/2015
(a)Audit Fees	$	47,500	$	47,500
(b)Audit-Related Fees	N/A		N/A
(c)Tax Fees	$	10,317	$	10,317
(d)All Other Fees	N/A		N/A

(e)(1) The Audit Committee pre-approves, to the extent required by applicable regulations (including paragraph (c)(7) of Rule 2-01 of Regulation S-X), (i) all audit and permitted non-audit services rendered by the independent accountants to the registrant and (ii) all non-audit services rendered by the independent accountants to the registrant’s investment adviser and to certain affiliates of the investment adviser.

(e)(2) The percentage of fees billed by Deloitte & Touche LLP applicable to non-audit services pursuant to waiver of pre-approval requirement were as follows:

	FYE 10/31/2016		FYE 10/31/2015
Audit-Related Fees	N/A		N/A
Tax Fees	0	%	0	%
All Other Fees	N/A		N/A

(f) Not applicable.

(g) The aggregate non-audit fees and services billed by Deloitte & Touche LLP for the fiscal periods were $10,317 and $10,317, respectively.

(h) Not applicable.

Item 5. Audit Committee of Listed Registrants.

(a) The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. This standing audit committee is comprised of Mr. Tobin V. Levy, Mr. Jeffrey L. Zlot and Mr. Michael E. Cahill.

Item 6. Investments.

(a) Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.

(b) Not applicable.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

The registrant’s proxy voting and corporate actions policy and procedures are as follows:

PROXY VOTING AND CORPORATE ACTIONS POLICY AND PROCEDURES

A. General

This policy is designed to ensure that the fund registered under the Investment Company Act of 1940, as amended (the “1940 Act”), (the “Fund” ) advised by KKR Credit Advisors (US) LLC (the “Adviser”) fulfills the Fund’s obligations and complies with the requirements under the 1940 Act, the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to proxy voting, disclosure, and recordkeeping. This policy is also designed to ensure that all corporate actions are voted in the best interest of the Fund, to provide disclosure of the Fund’s corporate action voting record and to ensure that certain documentation is retained.

Pursuant to delegation by each, the Adviser has authority to make proxy and corporate action decisions on behalf of the Fund. The Adviser’s objective is to ensure that its proxy voting and corporate action activities on behalf of the Fund are conducted in a manner consistent, under all circumstances, with the best interest of the Fund.

B. Proxy Voting Policies

The Adviser’s Proxy Voting Policies are contained in the Adviser’s “Proxy Voting Policies and Procedures as of August 2012” (the “Proxy Voting Policies”)

C. Proxy and Corporate Action Voting Procedures

The Adviser will have the responsibility of voting proxies and corporate actions that it receives on behalf of the Funds. Proxy proposals received by the Adviser and designated in the Proxy Voting Policies as “For” or “Against” will be voted by the Adviser in accordance with the Proxy Voting Policies. Proxy proposals received by the Adviser and designated in the Proxy Voting Policies as “Case by Case” (or not

addressed in the Proxy Voting Policies) and all corporate actions will be reviewed by the Adviser, and voted in the best interests of the Fund. In accordance with Rule 204-2 of the Investment Advisers Act of 1940, as amended, with respect to “Case by Case” issues, the Adviser will document the basis for the Adviser’s voting decisions with the assistance of the analyst who is in charge of the issuer.

Notwithstanding the foregoing, the Adviser may vote a proxy contrary to the Proxy Voting Policies if the Adviser with the assistance of the analyst who is in charge of the issuer determines that such action is in the best interest of the Fund. In the event that the Adviser votes contrary to the Proxy Voting Policies, the Adviser with the assistance of the analyst who is in charge of the issuer will document the basis for the Adviser’s contrary voting decision.

In addition, the Adviser may choose not to vote proxies or corporate actions in certain situations, such as (i) where the Fund have informed the Adviser that it wishes to retain the right to vote the proxy or corporate action, (ii) where the Adviser deems the cost of voting would exceed any anticipated benefit to the Fund or (iii) where a proxy or corporate action is received by the Adviser for a security it no longer manages on behalf of the Fund. The Adviser with the assistance of the analyst who is in charge of the issuer will document the basis for the Adviser’s decision not to vote.

The Adviser has developed procedures for handling the receipt and voting of the Fund’s proxies and corporate actions.

D. Conflicts of Interest

The Adviser may occasionally be subject to conflicts of interest in the voting of proxies due to business or personal relationships it maintains with persons having an interest in the outcome of certain votes. The Adviser, its affiliates and/or its employees may also occasionally have business or personal relationships with the proponents of proxy proposals, participants in proxy contests, corporate directors and officers or candidates for directorships.

If at any time, the Adviser becomes aware of an existing or potential conflict of interest relating to a particular proxy proposal, the Adviser’s Conflicts Committee (“Conflicts Committee”), or its designee, must be notified. Provided the Conflicts Committee has determined that a conflict or potential for a conflict exists, the proxy must be voted in alignment with the recommendation set forth by ISS. Appropriate documentation will be maintained by the Conflicts Committee.

E. Proxy and Corporate Action Voting Records

In accordance with Rule 204-2, the Adviser will maintain the following records in connection with the Adviser’s proxy voting policies and procedures:

· a copy of the proxy voting policies and procedures;

· a copy of all proxy statements received regarding securities of the Fund;

· a record of each vote the Adviser casts on behalf of the Fund;

· records of shareholders of the Fund requests for proxy voting information, including a copy of each written request for information on how the Adviser voted proxies on behalf of the Fund, and a copy of any written response by the

Adviser to any Fund shareholder request for information on how the Adviser voted proxies on behalf of the Fund; and

· any documentation prepared by the Adviser that was material to making a decision on how to vote, or that memorialized the basis for the voting decision.

The Adviser will also maintain similar records in connection with corporate actions.

The foregoing records will be maintained and preserved for a total of seven (7) years, the first two (2) years in the Adviser’s office.

F. Changes to the Proxy Voting Rules

Changes may be made by the Adviser to the proxy rules as long as such changes are not expected to materially adversely affect the Fund. Upon a material change, the Fund will be made aware of such material change to the proxy rules and the reasons for the change.

G. Disclosure

The Adviser will provide all the information necessary for the Fund to make the required disclosures regarding proxy voting in its Statement of Additional Information, as well as on SEC Forms N-CSR and N-PX. In addition, information regarding how the Fund’s proxies and corporate actions were voted by the Adviser will be provided to shareholders of the Fund upon their written request.

The proxy voting and corporate actions policy and procedures used by the registrant’s investment adviser, which are incorporated by reference into the registrant’s proxy voting and corporate actions policy and procedures, are as follows:

PROXY VOTING AND CORPORATE ACTIONS POLICY AND PROCEDURES

A. General

KKR Credit Advisors (US) LLC (“KKR Credit Advisors (US)” or the “Firm”) provides investment advisory services to its Client, and invests the assets of these Clients in securities issued by public and private issuers. The Firm has authority to vote proxies relating to such securities on behalf of its Clients. The Securities and Exchange Commission (the “SEC”) has adopted Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Under this rule, registered investment advisers that exercise voting authority over securities held in client portfolios are required to implement proxy voting policies and describe those policies to their clients.

This policy is designed to ensure that all proxies are voted in the best interest of KKR Credit Advisors (US) Clients, to provide disclosure of the Firm’s proxy voting records and to ensure that certain documentation is retained.

B. Proxy Voting Procedures

To assist it in its proxy-voting responsibilities, the Firm currently subscribes to proxy-related services offered by Institutional Shareholder Services, Inc. (“ISS”). ISS provides the Firm with its independent analysis and recommendation with respect to generally all proxy proposals that the Firm votes on behalf of its clients, with respect to both U.S. and non-U.S. securities of publicly traded companies.

KKR Credit Advisors (US) will have the responsibility of voting proxies that it receives on behalf of its Clients. The Firm has engaged ISS to assist with its proxy voting, however, the Firm retains ultimate voting discretion with respect to its Clients. KKR Credit Advisors (US) may depart from an ISS recommendation in order to avoid voting decisions believed to be contrary to the best interests of its Clients. In each instance where the Firm votes contrary to the ISS recommendation, KKR Credit Advisors (US) Legal/Compliance, in conjunction with the Firm’s investment analyst who provides coverage for the relevant issuer, will document the basis for its contrary voting decision.

In addition, KKR Credit Advisors (US) may choose not to vote proxies in certain situations, such as where the Firm has deemed the cost of voting would exceed any anticipated benefit to KKR Credit Advisors (US) Clients or where a proxy is received by the Firm for a security it no longer manages on behalf of its Clients. KKR Credit Advisors (US) Legal/Compliance, in conjunction with the Firm’s investment analyst who provides coverage for the relevant issuer, will document the basis for the Firm’s decision not to vote.

C. Conflicts of Interest

KKR Credit Advisors (US) may occasionally be subject to conflicts of interest in the voting of proxies due to business or personal relationships it maintains with persons having an interest in the outcome of certain votes. KKR Credit Advisors (US), its affiliates and/or its employees may also occasionally have business or personal relationships with the proponents of proxy proposals, participants in proxy contests, corporate directors and officers or candidates for directorships.

If at any time, the Firm becomes aware of an existing or potential conflict of interest relating to a particular proxy proposal, the KKR Credit Advisors (US) Conflicts Committee (“Conflicts Committee”), or its designee, must be notified. Provided the Conflicts Committee has determined that a conflict or potential for a conflict exists, the proxy must be voted in alignment with the recommendation set forth by ISS. Appropriate documentation will be maintained by the Conflicts Committee.

D. Proxy Voting Records

In accordance with Rule 204-2 of the Advisers Act, the Firm will maintain the following records in connection with KKR Credit Advisors (US)’s proxy voting policies and procedures:

· a copy of the proxy voting policies and procedures;

· a copy of all proxy statements received regarding securities of its Clients;

· a record of each vote KKR Credit Advisors (US) casts on behalf of Firm Clients;

· records of KKR Credit Advisors (US) Client requests for proxy voting information, including a copy of each written request for information on how the Firm voted proxies on behalf of the Client, and a copy of any written response by KKR Credit Advisors (US) to any Client request for information on how the Firm voted proxies on its behalf; and

· any documentation prepared by KKR Credit Advisors (US) that was material to making a decision on how to vote, or that memorialized the basis for the voting decision.

The foregoing records will be maintained and preserved in accordance with KKR Credit Advisors (US)’s Maintenance of Books and Records Policy.

E. Disclosure

KKR Credit Advisors (US) discloses in its Form ADV Part 2A that Clients and Investors may contact the Firm in order to obtain information on how the Firm voted Client proxies and to request a copy of the Proxy Voting Policies and Procedures. Any such request will be forwarded to KKR Credit Advisors (US) Legal/Compliance. Questions relating to proxy voting should be directed to KKR Credit Advisors (US)’s CCO, or designee.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Information presented is as of October 31, 2016

(a)(1) Investment Team

The Fund is positioned, under the management of the Adviser, to take advantage of the full resources of KKR’s global network. With approximately 220 employees in its business, including approximately 95 dedicated investment professionals located in San Francisco, New York, London, Dublin, Singapore and Sydney, the Adviser’s investment teams seek to leverage KKR’s private equity experience and extensive industry relationships in making strong investment choices on behalf of its clients. The investment professionals of the Adviser who have primary responsibility for day-to-day management and oversight of the Fund are:

Erik A. Falk (New York) joined KKR in 2008 and is the Global Head of Private Credit. Mr. Falk is a member of the US’s Leveraged Credit and Global Private Credit Investment Committees as well as KKR Credit’s Portfolio Management Committee. Mr. Falk is currently on the boards of director of the LSTA, Corporate Capital Trust, Inc., Corporate Capital Trust II and Home Partners of America. Prior to joining KKR, Mr. Falk was a Managing Director at Deutsche Bank Securities Inc. where he was most recently the Global Co-Head of the Securitized Products Group. In addition to leadership positions in recruiting and sitting on the boards of several of the bank’s companies, Mr. Falk was a member of the global markets North American management committee and a member of the complex transactions underwriting committee for the bank. Mr. Falk also co-ran a global group focused on principal investing, bond underwriting, direct lending and advisory business in credit and structured credit products. He was also the global head of the special situations group where he launched a global principal finance business focused on value trading and investing based on financial and asset valuation in both distressed and performing situations. Prior to that, Mr. Falk worked for Credit Suisse First Boston where he was a Director in the Asset Backed Securities department. Mr. Falk holds a B.S. and an M.S. from Stanford University.

Christopher A. Sheldon (San Francisco) joined KKR in 2004 and is the Head of U.S. Leveraged Credit. Mr. Sheldon is a member of the U.S. Leveraged Credit and Global Private Credit Investment Committees as well as KKR Credit’s Portfolio Management Committee. Prior to his current role at KKR Credit, Mr. Sheldon was responsible for opening KKR Credit’s London office in 2007 and investing across a number of sectors within its credit businesses. Prior to joining KKR, Mr. Sheldon was a Vice

President and Senior Investment Analyst with Wells Fargo’s High Yield Securities Group, and previously worked at Young & Rubicam Advertising and at SFM Media Corporation in their media-planning department. Mr. Sheldon received a B.A. from Denison University. Mr. Sheldon currently serves as a member of the board of directors of SquashDrive, a member of the National Urban Squash and Education Association.

Jamie M. Weinstein (San Francisco) joined KKR in 2005 and is the Global Co-Head of Special Situations. Mr. Weinstein is a member of the Special Situations Investment Committee as well as KKR Credit’s Portfolio Management Committee. Previously, he was a portfolio manager with responsibility across KKR Credit strategies. He also has extensive experience as a research analyst managing the Financial Services, Healthcare and Commercial Real Estate Sectors. Prior to joining KKR, Mr. Weinstein was with Tishman Speyer Properties as Director of Acquisitions for Northern California and The Boston Consulting Group as a strategy consultant. Mr. Weinstein received a B.S.E. degree cum laude in Civil Engineering and Operations Research from Princeton University and an M.B.A. from the Stanford University Graduate School of Business, where he was an Arjay Miller Scholar. Mr. Weinstein serves as a Trustee of the Contemporary Jewish Museum in San Francisco and is actively involved in the Jewish Community Federation of San Francisco on its Endowment Investment Committee and Capital Planning Committee.

Nathaniel M. Zilkha (London) joined KKR in 2007 and serves as the Co-Head of KKR Credit and the Global Co-Head of Special Situations. As the Co-Head of KKR Credit, Mr. Zilkha works closely with the credit portfolio teams to help drive investment performance, strategy, business development and coordination across the platform. He is also a member of the Global Private Credit and Special Situations Investment Committees as well as KKR Credit’s Portfolio Management Committee. Mr. Zilkha also spent time as a member of the Healthcare private equity team in KKR’s Menlo Park office. Prior to joining KKR, Mr. Zilkha was a member of the Principal Investment Area of Goldman, Sachs & Co., where he invested in private equity and principal debt transactions. He is currently on the board of directors of Harden Healthcare and QMH Limited. He was formerly on the boards of Oriental Brewery and Jazz Pharmaceuticals. Mr. Zilkha graduated cum laude from Princeton University.

(a)(2) Other Accounts Managed by the Portfolio Managers

The portfolio managers primarily responsible for the day-to-day management of the Fund also manage other registered investment companies, other pooled investment vehicles and other accounts, as indicated below. The following table identifies, as of October 31, 2016: (i) the number of registered investment companies, pooled investment vehicles and other accounts managed by each portfolio manager; and (ii) the total assets of such companies, vehicles and accounts, and the number and total assets of such companies, vehicles and accounts with respect to which the advisory fee is based on performance.

Erik A. Falk

	Number of Accounts	Assets of Accounts		Number of Accounts Subject to a Performance Fee	Assets Subject to a Performance Fee
Registered Investment Companies	1	$	372,507,284	0	$	0
Pooled Investment Vehicles Other Than Registered Investment Companies *	0	$	0	3	$	1,475,300,000
Other Accounts *	24	$	8,722,100,000	1	$	55,500,000

Christopher A. Sheldon

	Number of Accounts	Assets of Accounts		Number of Accounts Subject to a Performance Fee	Assets Subject to a Performance Fee
Registered Investment Companies	1	$	372,507,284	0	$	0
Pooled Investment Vehicles Other Than Registered Investment Companies *	0	$	0	3	$	1,475,300,000
Other Accounts *	24	$	8,722,100,000	1	$	55,500,000

Jamie M. Weinstein

	Number of Accounts	Assets of Accounts		Number of Accounts Subject to a Performance Fee	Assets Subject to a Performance Fee
Registered Investment Companies	0	$	0	0	$	0
Pooled Investment Vehicles Other Than Registered Investment Companies *	4	$	4,810,300,000	0	$	0
Other Accounts *	10	$	2,114,000,000	2	$	168,600,000

Nathaniel M. Zilkha

	Number of Accounts	Assets of Accounts		Number of Accounts Subject to a Performance Fee	Assets Subject to a Performance Fee
Registered Investment Companies	0	$	0	0	$	0
Pooled Investment Vehicles Other Than Registered Investment Companies *	4	$	4,810,300,000	0	$	0
Other Accounts *	10	$	2,114,000,000	2	$	168,600,000

*Information is as of October 31, 2016.

(a)(2)(iv) Conflicts Of Interest

The Adviser will experience conflicts of interest in connection with the management of the Fund, including, but not limited to, the following:

· The members, officers and other personnel of the Adviser allocate their time, resources and other services between the Fund and other investment and business activities in which they may be involved. The Adviser intends to devote such time as shall be necessary to conduct the Fund’s business affairs in an appropriate manner. However, the Adviser will continue to devote the time, resources and other services necessary to managing its other investment and business activities and the Adviser is not precluded from conducting activities unrelated to the Fund.

· The Adviser may compete with certain of its affiliates, including other entities it manages, for investments for the Fund, subjecting the Adviser to certain conflicts of interest in evaluating the suitability of investment opportunities and making or recommending acquisitions on the Fund’s behalf. The Adviser will receive advisory and other fees from the other entities it manages, and due to differences in types of fees, rates of fees and fee-offset provisions contained in the governing agreements for such entities, the fees may not be proportionate to such entities’ investment accounts for any given transaction and the Adviser may have an incentive to favor entities from which it receives higher fees. The Adviser intends to allocate such investment opportunities in a manner that it deems appropriate in accordance with its investment allocation policies taking into account factors such as, without limitation, investment objectives, available capital, applicable concentration limits, minimum investment rights and other investment restrictions, portfolio diversification, the potential dilutive effect of a new investment on an existing investment, the overall risk profile of a portfolio and other considerations deemed relevant by the Adviser. The outcome of this determination may result in the allocation of all, some or none of an investment opportunity to the Fund. In addition, subject to applicable law, affiliates of the Adviser may invest in one of the Fund’s portfolio companies and hold a different class of securities than the Fund. To the extent that an affiliate of the Adviser holds a different class of securities than the Fund, its interests may not be aligned with the Fund’s. Notwithstanding the foregoing, the Adviser will act in the best interest of the Fund in accordance with its fiduciary duty to the Fund.

· The compensation payable by the Fund to the Adviser will be approved by the Board consistent with the exercise of the requisite standard of care applicable to trustees under state law. Such

compensation is payable, in most cases, regardless of the quality of the assets acquired, the services provided to the Fund or whether the Fund makes distributions to Shareholders.

· The Adviser and its affiliates may provide a broad range of financial services to companies in which the Fund invests, in compliance with applicable law, and will generally be paid fees for such services. In addition, affiliates of the Adviser may act as an underwriter, arranger or placement agent or in another manner in connection with an offering of securities by one of the companies in the Fund’s portfolio. Any compensation received by the Adviser and its affiliates for providing these services will not be shared with the Fund and may be received before the Fund realizes a return on its investment. The Adviser may face conflicts of interest with respect to services performed for these companies, on the one hand, and investments recommended to the Fund, on the other hand.

· From time to time, to the extent consistent with the 1940 Act and the rules and regulations promulgated thereunder, or with exemptive relief the Fund may receive from the SEC, if any, the Fund and other clients for which the Adviser provides investment management services or carries on investment activities (including, among others, clients that are employee benefit plans subject to ERISA and related regulations) may make investments at different levels of an investment entity’s capital structure or otherwise in different classes of an issuer’s securities. These investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by the Fund and such other clients, including in the case of financial distress of the investment entity.

· KKR and the Adviser sponsor and advise, and may in the future sponsor and advise, a broad range of investment funds, vehicles, and other accounts, including proprietary vehicles, that make investments worldwide. KKR may also make investments for its own account, including, for example, through investment and co-investment vehicles established for KKR personnel and associates. The Adviser and its affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships (including, among others, relationships with clients that are employee benefit plans subject to ERISA and related regulations), or from engaging in other business activities, even though such activities may be in competition with the Fund and/or may involve substantial time and resources of the Adviser. For example, the Adviser may invest, on behalf of an affiliated fund, in a company that is a competitor of one of the Fund’s portfolio companies or that is a service provider, supplier, customer or other counterparty with respect to one of the Fund’s portfolio companies. The Adviser will provide advice and recommendations to any such companies without regard to the Fund’s interests. In addition, the Adviser’s ability to effectively implement the Fund’s investment strategies may be limited to the extent that contractual obligations relating to these permitted activities restrict the Adviser’s ability to engage in transactions that they may otherwise be interested in pursuing. Affiliates of the Adviser, whose primary business includes the origination of investments, engage in investment advisory business with accounts that compete with the Fund.

· The Adviser and its affiliates may give advice and recommend securities to other clients which may differ from, or be contrary to, advice given to, or securities recommended or bought for, the Fund even though their investment objectives may be similar to the Fund’s.

· To the extent not restricted by confidentiality requirements or applicable law, the Adviser may apply experience and information gained in providing services to the Fund’s portfolio companies in providing services to competing companies invested in by affiliates’ other clients.

· As a registered investment company, the Fund may be limited in its ability to invest in any investment in which the Adviser or its affiliates’ other clients have an investment. The Fund may also be limited in its ability to co-invest with the Adviser or one or more of its affiliates. Some of these co-investments would only be permitted pursuant to an exemptive order from the SEC.

· The nature of the Adviser’s businesses and the participation by its employees in creditors’ committees, steering committees, or boards of directors of portfolio companies, may result in the Adviser receiving material non-public information from time to time with respect to publicly held companies or otherwise becoming an “insider” with respect to such companies. The possession of “inside information” or “insider” status with respect to an investment or potential investment by the Adviser or its personnel may restrict the Adviser’s ability to enter into or exit from potentially profitable investments for the Fund which could have an adverse effect on the Fund’s results of operations.

· The Fund depends to a significant extent on the Adviser’s access to the investment professionals and senior management of KKR and the information and deal flow generated by the KKR investment professionals and senior management during the normal course of their investment and portfolio management activities. The senior management and the investment professionals of the Adviser source, evaluate, analyze and monitor the Fund’s investments. The Fund’s future success will depend on the continued service of the senior management team and investment professionals of the Adviser.

· The Adviser’s relationship with other advisory clients and with KKR could create a conflict of interest to the extent the Adviser becomes aware of inside information concerning investments or potential investment targets. The Fund and the Adviser have implemented compliance procedures and practices, including information-sharing policies and procedures, that are designed to ensure that inside information is not used for making investment decisions on the Fund’s behalf. The Fund cannot assure its investors, however, that these procedures and practices will be effective. Although the Fund plans to leverage KKR’s firm-wide resources to help source, conduct due diligence on, structure, syndicate and create value for the Fund’s investments, KKR’s information-sharing policies and procedures, as well as certain legal and contractual constraints, could significantly limit the Fund’s ability to do so. For example, from time to time KKR’s personnel may be in possession of material non-public information with respect to the Fund’s investments, and as a result, such personnel will be restricted by KKR’s information-sharing policies and procedures or by law or contract from sharing such information with the management team of the Fund, even where the disclosure of such information would be in the best interests of the Fund or would otherwise influence decisions taken by the members of the management team with respect to that investment. In addition, this conflict and these procedures and practices may limit the freedom of the Adviser to enter into or exit from potentially profitable investments for the Fund which could have an adverse effect on the Fund’s results of operations. Conversely, the Adviser may pursue investments for the Fund without obtaining access to confidential information otherwise in its or KKR’s possession, which information, if reviewed, might otherwise impact the Adviser’s judgment with respect to such investments. Accordingly, the investment activities of KKR’s other businesses may differ from, or be inconsistent with, the activities that are undertaken for the Fund, and there can be no assurance that the Fund will be able to fully leverage the resources and industry expertise of KKR’s other businesses. Additionally, there may be circumstances in which one or more individuals associated with KKR will be precluded from providing services to the Fund because of certain confidential information available to those individuals or to other parts of KKR.

· The Adviser may in the future develop new businesses such as providing investment banking, advisory and other services to corporations, financial sponsors, management or other persons. Such services may relate to transactions that could give rise to investment opportunities that are suitable for the Fund. In such case, the Adviser’s client would typically require the Adviser to act exclusively on its behalf, thereby precluding the Fund from participating in such investment opportunities. The Adviser would not be obligated to decline any such engagements in order to make an investment opportunity available to the Fund. In addition, the Adviser may come into the possession of information through these new businesses that limits the Fund’s ability to engage in potential transactions.

· The 1940 Act limits the Fund’s ability to invest in, or hold securities of, companies that are controlled by funds managed by KKR. Any such investments could create conflicts of interest between the Fund, the Adviser and KKR. The Adviser may also have, or enter into, advisory relationships with other advisory clients (including, among others, employee benefit plans subject to ERISA and related regulations) that could lead to circumstances in which a conflict of interest between the Adviser’s advisory clients could exist or develop. In addition, to the extent that another client of the Adviser or KKR holds a different class of securities than the Fund, the interest of such client and the Fund may not be aligned. As a result of these conflicts and restrictions, the Adviser may be unable to implement the Fund’s investment strategies as effectively as it could have in the absence of such conflicts or restrictions. In order to avoid these conflicts and restrictions, the Adviser may choose to exit these investments prematurely and, as a result, the Fund would forgo any future positive returns associated with such investments.

· Certain other KKR client accounts or proprietary accounts may have investment objectives, programs, strategies and positions that are similar to, or may conflict with, those of the Fund, or may compete with, or have interests adverse to, the Fund. This type of conflict could affect the prices and availability of the securities or interests in which the Fund invests. KKR may give advice or take action or inaction with respect to the investments held by, and transactions of, other KKR client accounts or proprietary accounts that may be different from or otherwise inconsistent with the advice given or timing or nature of any action or inaction taken with respect to the investments held by, and transactions of, the Fund. Such different advice and/or inconsistent actions may be due to a variety of reasons, including, without limitation, the differences between the investment objective, program, strategy and tax treatment of the other KKR client accounts or proprietary accounts and the Fund or the regulatory status of other KKR client accounts and any related restrictions or obligations imposed on KKR as a fiduciary thereof. Such advice and actions or inactions may adversely impact the Fund.

· KKR, for its own account, may enter into real-estate related transactions with Fund portfolio companies. Such transactions may include, for example, buying or selling real estate assets, acquiring or entering into leasing arrangements or amending such arrangements, or transferring options or rights of first refusal to acquire real estate assets. Such transactions, which do not involve securities, are not governed by restrictions on principal transactions and cross transactions but are subject to specific policies and procedures established by KKR to manage related conflicts.

· The 1940 Act prohibits the Fund from participating in certain transactions with certain of its affiliates including an Adviser-affiliated broker-dealer. The Fund generally will be prohibited, for example, from buying or selling any securities from or to another client of the Adviser or of KKR. The 1940 Act also prohibits certain “joint” transactions with certain of the Fund’s affiliates, which in certain circumstances could include investments in the same portfolio company (whether at the same or different times to the extent the transaction involves jointness)

or transactions in which a broker-dealer affiliated with the Adviser participates as principal with the Fund. If a person acquires more than 25% of the Fund’s voting securities, the Fund will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons without the Fund’s prior consent. Similar restrictions limit the Fund’s ability to transact business with its officers or trustees or their affiliates. The SEC has interpreted the 1940 Act rules governing transactions with affiliates to prohibit certain “joint transactions” involving entities that share a common investment adviser. As a result of these restrictions, the scope of investment opportunities that would otherwise be available to the Fund may be limited.

· The 1940 Act imposes significant limits on co-investment with affiliates of the Fund, and the Fund generally will not be permitted to co-invest alongside its affiliates in privately negotiated transactions unless the Fund obtains an exemptive order from the SEC or the transaction is otherwise permitted under existing regulatory guidance, such as transactions where price is the only negotiated term, and will not participate in transactions where other terms are negotiable. This reduces the amount of transactions in which the Fund can participate and makes it more difficult for the Fund to implement its investment objectives.

· The Fund will rely on the Adviser and its affiliates for valuation of its assets and liabilities. The Fund may hold securities and other assets that will not have readily assessable market values. In such instances, the Adviser will determine the fair value of such securities and assets in its reasonable judgment based on various factors and may rely on internal pricing models, all in accordance with the Adviser’s valuation policies and procedures. Such valuations may vary from similar valuations performed by independent third parties for similar types of securities or assets. The valuation of illiquid securities and other assets is inherently subjective and subject to increased risk that the information utilized to value such assets or to create the price models may be inaccurate or subject to other error. The value of the Fund’s portfolio may also be affected by changes in accounting standards, policies or practices as well as general economic, political, regulatory and market conditions and the actual operations of the issuers of portfolio investments, which are not predictable and can have a material impact on the reliability and accuracy of such valuations. Due to a wide variety of factors and the nature of certain securities and assets to be held by the Fund, there is no guarantee that the value determined by the Adviser will represent the value that will be realized by the Fund on the eventual realization of the investment or that would, in fact, be realized upon an immediate disposition of the investments. The amount of management fees received by the Adviser with respect to the Fund may depend in part on the value of the Fund’s assets and liabilities. If the valuations made by the Adviser are incorrect, the amount of management fees received by the Adviser could also be incorrect. In addition, the Adviser regularly reports to investors and prospective investors certain metrics of the Fund’s performance, whose calculation depends on the value of the Fund’s investments, including unrealized investments, and involves uncertainties and judgmental determinations.

The Adviser and the portfolio managers may also face other potential conflicts of interest in managing the Fund, and the descriptions above are not a complete description of every conflict of interest that could be deemed to exist in managing the Fund and other funds and accounts advised or controlled by KKR.

(a)(3) Portfolio Manager Compensation

Consistent with KKR’s global, integrated culture, KKR has one firm-wide compensation and incentive structure based on a global profit and loss statement, which covers each of the portfolio managers. KKR’s compensation structure is designed to align the interests of the investment personnel

serving the Fund with those of the Fund’s shareholders and to give everyone a direct financial incentive to ensure that all of KKR’s resources, knowledge and relationships around the world are utilized to maximize risk-adjusted returns for each strategy.

Each of KKR’s senior executives, including each of the portfolio managers responsible for the day-to-day management of the Fund, receives a base salary and is eligible for a cash bonus and equity compensation, as well as additional incentives including “dollars at work” in certain KKR fund investments (other than the Fund) and equity compensation. The cash bonus, equity compensation and “dollars at work” are discretionary, and “dollars at work” and equity awards are typically subject to a vesting period of several years.

All final compensation and other longer-term incentive award decisions are made by the KKR Management Committee based on input from managers. Compensation and other incentives are not formulaic, but rather are judgment and merit driven, and are determined based on a combination of overall firm performance, individual contribution and performance, business unit performance, and relevant market and competitive compensation practices for other businesses and the individual roles/responsibilities within each of the businesses.

(a)(4) Securities Ownership of Portfolio Managers

As of the fiscal year ended October 31, 2016, the portfolio managers beneficially owned the following shares of the Fund:

		Dollar Range of
Portfolio Manager		Equity Securities Owned**
Erik A. Falk		$100,001-$500,000
Christopher A. Sheldon		$50,001-$100,000
Jamie M. Weinstein		$50,001-$100,000
Nathaniel M. Zilkha		None

** Ranges (None, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or over $1,000,000). Actual shares amounts owned were as follows: 7,000 shares for Mr. Falk; 5,000 shares for Mr. Sheldon; and 4,000 shares for Mr. Weinstein.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

None.

Item 10. Submission of Matters to a Vote of Security Holders.

None.

Item 11. Controls and Procedures.

(a) The registrant’s principal executive officer and principal financial officer have concluded, based on their evaluation of the registrant’s disclosure controls and procedures as of a date within 90 days of the filing date of this report on Form N-CSR, that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the investment company on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

(b) There have been no changes in the registrant’s internal control over financial reporting during the year ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 12. Exhibits.

(a)(1) Code of Ethics attached hereto.

(a)(2) A separate certification for the principal executive officer and the principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended (17 CFR 270.30a-2(a)), are filed herewith.

(b) Officer certifications as required by Rule 30a-2(b) under the Investment Company Act of 1940, as amended (17 CFR 270.30a-2(b)) also accompany this filing as an Exhibit.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KKR Income Opportunities Fund

By	/s/ Suzanne Donohoe
Suzanne Donohoe, President

Date		January 5, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By	/s/ Suzanne Donohoe
Suzanne Donohoe, President

Date		January 5, 2017


By	/s/ Roshan Chagan
Roshan Chagan, Treasurer & Chief Financial Officer

Date		January 5, 2017