US private equity giant KKR has decided to follow the lead of Ares Corp by making the switch from a partnership to a corporation following changes to US tax law.
The change, which was revealed in the firm’s Q1 financial results, comes more than a decade after KKR became one of the few private equity majors to list on the public markets.
KKR’s decision comes in the wake of US corporation tax being cut from 35 per cent to 21 per cent – reducing the cost of a change to a ‘C-Corp’, which would see it pay that tax rate on all of its revenue.
The firm hopes the move will lead to a boost in its share price, which spiked sharply following the announcement from $21.50 to $23.24 per share, before settling back to just over $22.00.
KKR’s board of directors has unanimously approves plan to convert from a partnership to a corporation, which becomes effective on July 1.
The firm said it expects to pay an annualized dividend of $0.50 per common share as a corporation and announced an increase in its available share repurchase authorization to $500m, effective immediately.
A statement from KKR co-chairman and co-CEOs Henry Kravis and George Roberts said, “KKR’s conversion from a partnership to a corporation is designed to broaden our investor base, simplify our structure and make it easier to invest in our shares.
“We believe this change, together with continued strong performance, will increase our ability to generate significant long-term equity value for all of our shareholders.
“In terms of our results, we saw solid performance across our businesses this quarter amid declining global markets.
“Our operating fundamentals remain strong as evidenced by the 28 per cent growth in our assets under management and the 14 per cent growth in our book value per unit over the last 12 months.”
PitchBook senior analyst James Gelfer said, “While Ares and KKR have both taken the plunge of converting from a partnership to a C-Corp, other firms are adopting a wait-and-see approach to gauge whether the move is actually worth it.
“The common hypothesis is that a C-corp conversion will PE firms could become eligible for inclusion in indices and therefore gain exposure to new investors by being included in retail products, potentially leading to higher valuations; however, this has yet to be proven.
“Additionally, to be successful it’s likely that firms must resemble Ares and KKR in that they have a relatively higher proportion of management fees compared to performance fees.
“Apollo is the firm that most closely matches the profile, but CEO Leon Black has recently downplayed the possibility being unimpressed with Ares’ stock performance following its conversion.
“Until the hypothesis is proven, it could be awhile until we see another firm become a C-Corp conversion.”
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