Back to top

Image: Bigstock

Reasons Driving Conversion of Private Equities Into C-Corp

Read MoreHide Full Article

President Trump’s tax overhaul, which included the corporate tax-rate cut from 35% to 21% in December 2017, gave rise to a trend among large private equity firms of converting into C-corp structures. Currently, a few number of alternatives asset managers are trying to exploit the opportunity created.

Notably, Ares Management (ARES - Free Report) was the first to announce conversion in March 2018, followed by KKR & Co (KKR - Free Report) . Another large alternatives asset manager, The Blackstone Group (BX - Free Report) , completed its conversion this July.

Having gauged all the benefits from conversion, Apollo Global Management (APO - Free Report) followed suit, and recently announced its successful conversion to a corporation by Sep 5, 2019. The Carlyle Group (CG - Free Report) is the last one in the pipeline till date, but is making speedy progress toward its completion.

Why the Sudden Switch?

Previously, these private equity firms had gone public under the partnership format, in order to steer clear of high taxes which corporates had been paying. However, the tax overhaul left little gap between the tax benefits that come with publicly-traded partnerships relative to corporations.

Though these private equity firms will be required to pay slightly higher taxes being corporates, they are attracting a larger group of investors. Therefore, these firms’ performances are likely to escalate through improved liquidity, lower stock price volatility and eligibility to be included in major stock indexes, like FTSE Russell’s and the S&P 500. Leon Black CEO at Apollo Global said, “We believe (the conversion) will simplify our structure and enable a much broader set of shareholders to participate in the exceptional long-term growth and profitability that we have been delivering to our investors.”

These alternative asset managers will also be key picks for several mutual funds and other institutional investors who had been avoiding investments in publicly-traded partnerships, so far, partly due to their mandates.

Conclusion

Markets have remained favorable for asset managers so far in 2019, despite the lingering U.S.-China trade-war related uncertainty and other geopolitical concerns. Though some asset managers witnessed outflows, growth in assets under management is expected to continue in the near term, driven by expectations of speedy resolution of the above-mentioned concerns and low level of volatility.

Notably, investors have taken these conversions as good news, as suggested by the impressive performance of all the aforementioned stocks so far this year, when compared with the S&P 500 and the Zacks Investment Management industry.

Shares of Ares Management and Blackstone have surged more than 60%, while Carlyle Group rose 40.1%. Also, Apollo Global and KKR & Co have appreciated 37.2% and 26%, respectively. All these stocks have outperformed the 13.8% and 8.2% rally of the S&P 500 and the Zacks subindustry, respectively. 

Year-to-Date Price Performance

Legalizing THIS Could Be Even Bigger than Marijuana

Americans spend an estimated $150 billion in this industry every year… more than twice as much as they spend on marijuana.

Now that 8 states have fully-legalized it (with several more states following close behind), Zacks has
identified 5 stocks that could soar in response to the powerful demand. One industry insider described the future as “mind-blowing” – and early investors can still get in ahead of the surge.

See these 5 “sin stocks” now >>

Published in