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Morgan Stanley | RESEARCH
NORTH AMERICA INSIGHT

Exhibit 18:
HLNE Currently Trades 23.4x on FY2 P/E (an 18% premium to when the company began trading after going public in early 2017); Partners Group currently trades at a 28.2x P/E (a 21% premium to its last 3 year average P/E ratio)

C-Corp Alts FY2 P/E Multiple
—HLNE —PGHN
29.0x
27.0x
25.0x
23.0x
21.0x
19.0x
17.0x
15.0x
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
Source: Thomson Reuters, Morgan Stanley Data
Note: Hamilton FY2 EPS estimates are on the company's fiscal year basis, the twelve months ending 3/31 HLNE and PGHN P/E multiples as of 1/12/2018 based on consensus EPS

3) Bond Yield Approach

Our third approach to coming up with the appropriate multiple for fee-related earnings is to compare fee revenues to a similar to a bond with a 10-year duration given the locked-in nature of committed capital with fees paid on commitments (Par Value) as opposed to paid on NAV. Importantly, the Alts are increasingly growing permanent capital or very long duration capital that has attractive life-time value of the contract. APO has the largest amount of permanent capital, representing about 43% of AUM, followed by ARES at 16%. This results in a stable stream of revenues, however there could be variability on the expenses that would impact fee related earnings. Under the bond approach the "default risk" in this scenario would be counter party risk that management fees would not be paid by limited partners. These LPs include sovereign wealth funds, pensions, and other institutional investors that we view as highly unlikely to default.

Our methodology starts with the 10-year US treasury yield, given the similar duration to the life of the draw down funds management fees. We then add an appropriate credit spread on top of the 10-year yield to account for the risk that these institutions "miss" payment of their management fees. We also consider the fact that not all fee paying assets under management at the alts are subject to lock ups (such as hedge fund AUM, open ended funds). Those alts with larger amounts of permanent capital or longer duration of assets would suggest a lower credit spread given less risk of lost revenues in our view.

We look at AA and BBB credit spreads as a proxy for high and low "default risk" for LPs paying management fees. AA credit spreads are currently at 53bps and BBB are currently at 122bps. Again, the risk of "default" is likely overstated by using these yields but we show this range to account for other factors including differences in duration of assets. We then add these spreads to the current 10 yr treasury yield of 2.62% to get a yield of 3.15% and 3.84% respectively. Lastly, we capitalize these yields to back into implied FRE multiples by taking 1 divided by each of the yields. This implies a multiple of 31.7x using AA spread and 26.0x using BBB spread. Finally we take an average of the two credit spread approaches to get to 28.9x.

Exhibit 19:
Permanent capital represents 15% of AUM on average for alternatives and we see 63% on average with a contractual life of 7+ years
Alts Contractual Life of AUM
■ 7+ Years at Commitment ■ Permanent Capital
100%
90% 84% 83% 89% 78%
80%
70%
60% 43% 67% 57% 67% 86% 59% 63%
50%
40%
30%
20% 41% 16% 15% 13% 3% 1% 15%
10%
0%
APO ARES BX KKR CG OAK Avg

Source: Company Data, Morgan Stanley Research
Note: KKR permanent capital refers to capital of infinite duration. Contractual life of AUM refers to the duration at inception for KKR

Exhibit 20:
Our cap rate approach to valuing FRE implies a multiple of 26.0 to 31.7x based on a yield of 3.15% using a AA credit spread on the 10-year treasury yield and a 3.84% yield using a BBB credit spread
Walk to Assumed Yields for Cap Rates
4.50% 3.84%
4.00%
3.50% 3.15%
3.00% 2.62% 0.53% 1.22% 2.62%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
10-Yr Treasury Credit Spread (low end) Yield 10-Yr Treasury Credit Spread (high end) Yield
Source: Thomson Reuters, Morgan Stanley Research

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