KKR to switch to corporate structure from partnership

  • New structure to broaden KKR’s network of public shareholders
  • Tax benefits of partnership mitigated by tax reform
  • KKR to complete conversion to C-Corp on July 1

Kohlberg Kravis Roberts & Co is converting into a corporation, making it the second major private equity firm to switch from a publicly traded partnership to a corporation following the passage of U.S. tax reform.

KKR announced the plan on Thursday, prior to its first-quarter earnings call. Evercore was financial adviser to KKR’s board on the decision.

The move “is designed to broaden our investor base, simplify our structure and make it easier to invest in our shares,” Co-Founders Henry Kravis and George Roberts said in a statement. The change, “together with continued strong performance, will increase our ability to generate significant long-term equity value for all of our shareholders.”

KKR’s decision follows that of Ares Management, which in February said it would convert to a C-Corp, citing the opportunity to expand its base of public shareholders.

Partnerships are often viewed less favorably by public-market investors because of their complicated tax structures. Accordingly, the stocks of partnerships aren’t included in major indexes, limiting the pool of eligible investors.

“Our stock has been too challenging to buy and too challenging to own, so many investors go elsewhere,” said Scott Nuttall, the firm’s co-president and co-chief operating officer, during the earnings call. “We want to be easier to buy and easier to own.”

The firm’s partnership structure did offer significant tax benefits to the partners themselves, particularly in regard to revenue generated by its funds’ carried interest, which is subject to a lower capital-gains rate. Those benefits were partly offset by the reduction of the corporate tax rate to 21 percent from 35 percent.

KKR already pays the corporate rate on revenue generated by its funds’ management fees. The firm’s entire revenue stream will be subject to the corporate rate after the firm completes its conversion on July 1.

Nuttall said the decision had little to do with tax planning.

“It kind of became clear to us that we’d been efficient in a small pond,” he added, later in the call. “There’s a big ocean nearby that has a lot of fish that might like our bait.”

The partnership structure is one of many reasons share prices of publicly traded PE firms languished despite significant growth in AUM. The returns private-market funds generate are generally considered to be difficult to predict, limiting the firms’ appeal to public-market investors.

Both KKR and Ares, along with publicly traded peers like Blackstone Group and Carlyle Group, in recent years expanded their offerings to include funds investing real estate, infrastructure and private credit in addition to their private equity platforms.

The formation of new investment platforms bolstered management fee revenues, which are more consistent than proceeds generated by realized investments and viewed favorably by shareholders.

In its earnings call, KKR said it had held an interim close on around $6 billion for its newest infrastructure fund. The firm’s assets under management grew 28 percent year-over-year to more than $176 billion as of the end of Q1.

“It has been a very busy 12 months for us. That new capital raised figure is over $40 billion,” Craig Larson, head of investor relations, said on the call.

KKR expects the C-Corp conversion to result in a spike in demand for the firm’s shares. Shares on the New York Stock Exchange rose between 9 percent and 10 percent on the news of the conversion.

KKR expects to fully convert to a C-Corp on July 1. The firm will also begin to simplify its quarterly reports, moving away from measuring economic net income — the profitability of the firm’s business segments — to after-tax distributable earnings.

“Our intention with all of the changes we’re announcing today is to make it easier for us to understand, buy and own,” Nuttall said on the call.

Action Item: For more on KKR, visit http://www.kkr.com/

Henry Kravis of Kohlberg Kravis Roberts speaks in an interview in New York on April 3, 2012. REUTERS/Shannon Stapleton