U.S. Markets

Private equity firm Ares to be corporation following U.S. tax reform

NEW YORK (Reuters) - Ares Management LP ARES.N said on Thursday it would convert its structure from a publicly listed partnership into a corporation, the first private equity firm to decide such a move following the enactment of U.S. tax reform.

The switch will expand the potential shareholder base of Ares, because it will allow index funds that were previously restricted from owning its stock because of tax considerations to now do so. Ares is hoping this will boost its valuation.

Ares’ shares rose the most since it went public in 2014 following the announcement, trading up 12 percent at $25.50 in afternoon trading and giving the firm a market capitalization of $5.5 billion.

“We would expect other alternative investment managers to more strongly consider following suit, particularly if Ares is successful in improving its equity valuation as a result,” Fitch Ratings analysts wrote in a note.

Most of Ares' major publicly listed peers, including Apollo Global Management LP APO.N, Blackstone Group LP BX.N and KKR & Co LP KKR.N, have said they are considering making a similar switch after the headline U.S. corporate tax rate was lowered last month from 35 percent to 21 percent.

Under the partnership structure, Ares paid corporate taxes on the management fees it charged investors, but was mostly shielded from paying these taxes on its performance fees. Under the corporation structure, it will have to pay corporate taxes on all of its revenue.

However, the tax hit that Ares will suffer will be limited, because management fees have generated four times more revenue for the firm than performance fees since its initial public offering.

Ares said that if 2018 earnings were to be identical to 2017, its after-tax realized income would be $246.1 million, slightly higher than the $243.5 million it was under the previous structure last year, because the lower tax payout on management fees would more than offset the higher tax bill on performance fees.

These considerations may differ for firms such as Blackstone and Apollo, which rely more on performance fees for their earnings.

“Ares will begin paying a steady, quarterly dividend for each calendar year based on the growth in our after-tax core fee related earnings. This dividend policy should reduce the historical volatility of our distributions, and allow us to retain a greater portion of our earnings for growth and potential share repurchases,” Ares Chief Operating Officer and Chief Financial Officer Michael McFerran said in a statement.

Ares, which runs private equity, credit investment and real estate funds, also reported fourth-quarter earnings on Thursday, posting economic net income of $132.5 million, up 16 percent year-on-year. Its assets under management were $106.4 billion as of the end of December, up 11.8 percent year-on-year.

Reporting by Joshua Franklin; Editing by Susan Thomas