Ares to complete legal C-corp switch by year-end

Ares Management will shift its legal status to a corporation by the end of the year and hand ownership control to its shareholders – a move that could open the firm up to a host of new investors.

The announcement follows its declaration in February that it would pay tax as a corporation – a change its chief financial officer Michael McFerran said at the time would “simplify our structure, broaden our potential investor base, improve our liquidity and trading volume and provide a more attractive currency for strategic acquisitions.” In March, the firm said it was reviewing whether to change its legal status.

McFerran said last week that the legal shift the firm has now decided on could open it up to a larger pool of investment that includes being part of stock indexes. The logic behind stock index inclusion is that investors who seek to mimic the performance of an index purchase the underlying stocks that are part of that measure.

“We plan to structure the company in a manner that we hope will meet the eligibility requirements for inclusion in certain stock indices to further enhance the accessibility and ownership of our shares,” he said in a conference call discussing second-quarter earnings. “However, we are still working through the details, and there’s no assurance that we will be included in any of the stock indices. We expect to complete the conversion by the end of this year.”

Los Angeles-based Ares was the first large listed private equity firm to announce the switch to a C-corporation in March this year after US tax legislation cut the corporate tax rate from 35 percent to 21 percent, making the move more attractive. KKR followed in July. Other firms are taking a wait-and-see approach on whether to convert.

Since Ares made the switch to C-corporation on March 1, its stock has fallen from its February highs.

In an interview with pfm earlier this year, McFerran said being taxed as a publicly traded partnership limited three key shareholder constituencies: foreign shareholders, retail investors and certain domestic investors. He said the elimination of the K-1 requirement had helped simplify tax reporting and could bring in new types of investors: “It was complicated to deal with the K-1 reporting, and many people struggled with determining their after-tax income. Now, it is unbelievably transparent. Absent capital gains or losses from trading in the stock, shareholders’ taxes will be based solely on the qualifying dividends they receive.”

Fitch Ratings also lauded the potential benefits of a C-corporation switch by private equity firms, saying it could “simplify tax reporting for investors as K-1 issuance would no longer be required. This could increase investor interest in the shares and result in higher valuation multiples.”