U.S. Markets

Buyout firm KKR looking at becoming a corporation

NEW YORK (Reuters) - KKR & Co LP KKR.N said on Thursday its top executives were evaluating whether to structure the company as a corporation instead of a partnership, the most definitive statement so far by a private equity firm seriously considering the move.

Switching to a so-called C-Corp could expand the shareholder base by enabling investors such as index funds to buy the stock. Still, tax concerns have made publicly listed alternative asset managers including KKR reluctant.

However, the recent U.S. tax overhaul slashed the corporate rate to 21 percent from 35 percent, making the potential switch more appealing.

“We’ve heard for some time that there are investors that find publicly traded partnerships difficult to own,” KKR Chief Financial Officer William Janetschek said on the firm’s fourth-quarter earnings call with analysts.

“Our institutional ownership is lower than most traditional corporations. So we think there’s an opportunity to appeal to a broader audience. Offsetting this are lower reported after-tax earnings.”

KKR said it will report on any possible conversion next quarter. Its calculations showed its bottom line would have taken an approximately 17 percent hit in 2017 had it been a C-Corp under the revised tax code, Janetschek said.

The valuation increase that the market applies to KKR’s earnings would need at least to match the increased tax burden in order to justify the conversion, added Janetschek.

Peers Apollo Global Management LLC APO.N, Blackstone Group LP BX.N and Carlyle Group CG.O have also flagged that they are evaluating such a change, but in terms that suggested the considerations were less advanced.

Credit Suisse analysts said last month KKR and Ares ARES.N could be the first to convert into C-Corps, as the tax hit might be less severe because the pair's earnings mix relies less on performance fees.

KKR also said its economic net income rose 22 percent year-on-year to $414.9 million. Quarterly economic net income per share came in at 48 cents, missing analysts’ expectations for 52 cents, according to Thomson Reuters I/B/E/S.

Economic net income reflects the mark-to-market valuation gains or losses on KKR’s portfolio and is a key earnings metric for U.S. private equity firms.

KKR’s assets under management totaled $168 billion at the end of 2017, up 30 percent from end-2016. Distributable earnings, or cash available for paying dividends, rose to $427.1 million from $389.9 million a year ago.

KKR shares were down 3.6 percent at 11:41am EST (1641 GMT), a steeper drop than the Dow Jones U.S. Financials index .DJUSFN.

(This version of the story corrects the year to 2017 instead of 2016 in paragraph 12)

Reporting by Joshua Franklin in New York; Editing by Edwina Gibbs and David Gregorio