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KKR Follows Ares in Converting to Corporation

U.S. tax reform was the “long-awaited catalyst” for private equity firms to adopt the corporate structure, considered a pathway to higher share prices.

  • By Amy Whyte

KKR & Co. announced Thursday that it will convert from a partnership into a corporation, becoming the second publicly-traded private equity firm to make the switch after the U.S. lowered the corporate tax rate at the end of last year.

In a statement, co-chief executives and co-chairmen Henry Kravis and George Roberts said the new structure, which takes effect July 1, is meant to “broaden our investor base, simplify our structure, and make it easier to invest in our shares.”

Although becoming a corporation will cause KKR’s performance-related income to be taxed at the corporate rate, the change could also make the firm eligible for inclusion on stock indices, which could benefit its share price.

“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,” Kravis and Roberts said.

[II Deep Dive: How Henry Kravis Raised KKR’s First Dollar]

KKR’s decision follows a similar announcement made by private equity firm Ares Management in February. In a statement at the time, Ares chief operating officer and chief financial officer Michael McFerran said converting into a corporation would “simplify our structure, broaden our investor base, improve our liquidity and trading volume, and provide a more attractive currency for strategy acquisitions.”

Following Ares’ announcement, PitchBook analyst James Gelfer published an analyst note examining the possible advantages and disadvantages of the move, as well as how likely other private equity firms were to follow in Ares’ footsteps.

“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,” Gelfer said in an updated statement Thursday. “The common hypothesis is by switching to a C-corp PE firms could become eligible for indices and therefore gain exposure to new investors by being included in retail products, potentially leading to higher valuations.”

According to Gelfer's analyst note earlier this year, the prospect has long been discussed as a possible solution to the belief that private equity firms’ shares are "perpetually undervalued,” but none dared to make the “irreversible” change until the Tax Cuts and Jobs Act reduced the U.S. federal corporate income tax rate to 21 percent from 35 percent.

Gelfer said Ares was well-suited to the corporate structure because it has a relatively low proportion of income from performance fees compared to other publicly-traded private equity firms. The move is “likely untenable" for firms like Carlyle Group and Blackstone Group, as they rely heavily on performance fees, according to his note.

“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,” Gelfer said in Thursday's statement. “Until the hypothesis is proven, it could be awhile until we see another firm become a C-Corp conversion.”

So far, Ares has not appeared to have benefited much from the change into a corporation. Its stock closed at $22.50 per share on Wednesday, down slightly since the firm announced its conversion on February 15.

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