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Morgan Stanley | RESEARCH
NORTH AMERICA INSIGHT

Upside Scenario

Starting with the framework laid out above, we make several key adjustments in our upside scenario to illustrate where we think multiples go and where the stocks can trade over the near term if the alts convert. Our upside scenario implies an average share price increase of 13% across the group.

• First we fully tax effect the performance fee earnings. Under a C-corp structure these would not get the pass-through benefit and would be subject to full taxes. We use a full 24% tax drag on the net accrued carry receivable balance and the future net carry per share.

• Second we adjust the FRE multiples upward. As we discussed previously with our three approaches for FRE multiples, we believe there is significant upside to the value of these earnings if alts were to convert. This drives nearly all of the upside from current prices in our upside scenario. We use a 22.5x multiple on FRE in our upside case, which represents 50% increase from the 15x multiple that we believe is priced in today.

• Last we assume 2x of multiple expansion for performance fees. As a starting point, we look at the implied multiples using current share prices and a 15x multiple for FRE as described above. We then add 2x turns of multiple expansion to each of the companies current implied multiples. We look to the Goldman Sachs example earlier in the note as a comp for cyclical financials earnings. Our group median for implied future carry multiples of 8.5x is just under one standard deviation away from GS historical P/E average of 9.5x. Although we use the higher multiple, this is on a lower value of fully taxed future performance fee earnings. The impact to valuation of future performance fees are mixed from company and can be seen in greater detail in the following appendix with company specific SOTP and scenario analysis. While we expect some multiple expansion for performance fees in a C-corp, the structure will not change the inherent volatility of the performance fee portion of earnings that is marked to market.

Exhibit 28:
Upside Scenario SOTP Valuation

[Table Columns: A, B, C, D, E (=B+C+D), F, G, H, I (=G x H), J (=E+F+I)]

Ticker | Current Price | 2018E Core FRE | FRE Multiple | Core FRE Value Per Share @ 24% tax Rate | After-Tax BDC Value Per Share | BS NAV Per Share | SOTP Value Ex-Carry Per Share | After-Tax Net Carry Receivable Per Share @24% Rate | Net Carry Per Share After 24% Tax (Avg. 2018e-2020e) | Future Carry Multiple | Value of Future Carry | Total Value Per Share | % Increase from Current Price

APO | $36.42 | 669 | 22.5x | $28.40 | $0.00 | $2.72 | $31.13 | $1.64 | $1.86 | 7.1x | $13.30 | $46.07 | 26%
ARES | $24.70 | 185 | 22.5x | $14.71 | $4.52 | $0.69 | $19.92 | $0.78 | $0.48 | 13.6x | $6.47 | $27.18 | 10%
BX | $36.78 | 1,196 | 22.5x | $17.03 | $0.00 | $2.83 | $19.86 | $2.29 | $1.57 | 11.5x | $18.04 | $40.18 | 9%
CG | $25.60 | 100 | 22.5x | $5.01 | $0.00 | $0.85 | $5.86 | $4.40 | $2.17 | 8.0x | $17.26 | $27.52 | 8%
KKR | $24.40 | 475 | 22.5x | $9.57 | $0.00 | $9.71 | $19.28 | $1.32 | $0.71 | 9.0x | $6.42 | $27.01 | 11%
OAK | $45.20 | 166 | 22.5x | $18.17 | $0.00 | $15.19 | $33.36 | $4.38 | $1.68 | 7.5x | $12.58 | $50.31 | 11%

Average | 9.5x | | | 13%
Median | 8.5x | | | 10%

Source: Company data, Morgan Stanley Research estimates

MORGAN STANLEY RESEARCH
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