Ares becomes first listed alts manager to convert to a C-corporation

Ares Management has elected to become a C-corporation, abandoning its partnership status, in a move that the Los Angeles-based alternative asset manager says presents a chance to expand its investor base.

The financial behemoth – which invests in private equity, credit and real estate – expects its capital structure to be more liquid as a result. Its shares may be a more attractive currency of consideration for strategic transactions, the firm said in its investor presentation released alongside it fourth-quarter earnings.

The lead Ares analyst at Fitch Ratings, Jared Kirsch, said in a statement: “Ares’ decision to convert to a C-corp from a partnership following tax reform may be the first domino to fall across the alternative [investment management] industry as other firms are expected to more strongly consider converting.”

Ares also adopted a new dividend policy, in which Ares will aim to provide a “steady” quarterly dividend based on after-tax fee-related earnings. The distribution would be open to adjustment depending on the level and increases in after-tax fee-related earnings. The firm may also consider a special dividend in during “periods of heightened performance fees”, the investor presentation said.

A dividend of 9 cents a share will be paid for the month of March, while a quarterly dividend of 28 cents a share will be paid for the second, third and fourth quarters of this year. Existing shareholders, as of 26 February, will receive a five-month 40-cents-a-share distribution.

“This type of conversion could mean higher taxes but it also expands the potential pool of equity investors which could improve stock valuations,” Kirsch added.

Across the alternative asset management industry, conversion to a C-corporation would result in a 16 percent decreased in earnings per share, according to a Morgan Stanley note to clients. For Ares in particular, the change would be a slightly larger decrease of 17.7 percent.

The market has also largely priced in potential upside from the conversion into the firm’s stock price, the note also said. So far, Ares has outperformed other similar firms by 10 percent this year.

Ares also said it now anticipated to retain earnings to fund the future growth of the firm and the potential for share buybacks.

Apollo Global Management and KKR, which have already reported fourth-quarter earnings, have a wait-and-see approach.

Apollo’s co-founder Josh Harris said his firm is “continuing to assess the best path forward for Apollo including how investors value different structures on a sustainable basis”, while KKR’s chief financial officer William Janetschek said the firm would “report back certainly next quarter”.

For its part, Carlyle also said it will be closely examine the effects of a C-corporation conversion. “Converting to a C-corp is a no-going-back kind of decision,” firm co-chief executive Glenn Youngkin said, adding the firm “will revisit this topic when appropriate”, and as the upsides and downsides of such a move become more apparent.

At the Credit Suisse 19^th Annual Financial Services Forum in Florida this week, KKR CFO William Janetschek said the firm has been “wrestling” with the question of C-corp conversion for the last three years. KKR has engaged the board of directors as it is “seriously considering whether or not going C-corp and opening ourselves to a whole new universe of investors is worth the trade”.

He said the firm had been told that thanks to its publicly-traded partnership status, the number of investors it doesn’t reach could be as high as 70 percent.

“One thing is for certain, if we do go C-corp, as sure as I’m sitting here we will pay more in cash taxes. The uncertainty is if we do go C-corp, how big is that universe going to get and how much interest are we going to get from those investors that would drive the multiple expansion?”

Janetschek said the firm could announce a decision as soon as its first-quarter earnings call, but that the firm is in “no particular hurry” because “this is a once-in-a-lifetime decision that you’re going to make from a corporate structure point of view”.

Janetschek added that once the decision is made, the mechanics of converting would take one to two months to complete.