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Morgan Stanley | RESEARCH
NORTH AMERICA INSIGHT

What Is the Impact of Higher FRE Multiples in a SOTP approach?

If we take an average of the three approaches described above of 1) traditionals at a historical 15.4x, 2) publicly traded C-corp alts at an average 26.0x, and 3) our capitalized bond yield approach at an average 28.9x, we arrive at a 23.4x multiple for fee related earnings.

Exhibit 21:
The average of our three approaches to FRE multiples suggests and FRE multiple of 23.4x
FRE Multiples Across Three Approaches
35.0x
30.0x
25.0x
20.0x
15.0x
10.0x
5.0x
0.0x
Traditionals Method 15.4x
C-Corp Alts 26.0x
Bond Yield Cap Rate Average 28.9x
Average 23.4x
MSe Upside Case 22.5x
Source: Company Data, Morgan Stanley Research estimates

Exhibit 22:
Using a 22.5x FRE multiple implies an average 6.1x multiple on fully taxed future performance fee earnings
Implied Future Carry (Fully Taxed) Multiples using 22.5x FRE Multiple
0.0x 2.0x 4.0x 6.0x 8.0x 10.0x
ARES 8.4x
BX 9.3x
CG 7.1x
KKR 5.4x
OAK 4.5x
APO 2.0x
Avg 6.1x
Med 6.2x
Source: Company Data, Morgan Stanley Research estimates

If the market re-rates FRE multiple to 22.5x, then we see the current share price valuing performance fees at 6.1x. This is based on our SOTP framework. (See Deconstructing Our Implied Carry Valuation: What Is the Market Paying? for more details on methodology.)

Exhibit 23:
SOTP analysis using a 22.5x FRE multiple and current share price implies future carry is being valued at 6.1x future performance earnings on average

[Table Columns]
A: Ticker
Current Price
2018E Core FRE
B: FRE Multiple
C: Core FRE Value Per Share @ 24% tax Rate
D: After-Tax BDC Value Per Share
E: BS Value Per Share
= B+C+D: SOTP Value Ex-Carry Per Share
F: After-Tax Net Carry Receivable Per Share @24% Rate
= A-E-F: Market Implied Value of Future Carry [Highlighted Box G]
= E+F+G: Total Value Per Share [Column H]
I: After Tax Avg. Net Carry Per Share (2018-2020)
= G/I: Implied Future Carry Multiple [Highlighted Box J]

[Table Data]
APO | $36.42 | 669 | 22.5x | $28.40 | $0.00 | $2.72 | $31.13 | $1.64 | $3.66 | $36.42 | $1.86 | 2.0x
ARES | $24.70 | 185 | 22.5x | $14.71 | $4.52 | $0.69 | $19.92 | $0.78 | $3.99 | $24.70 | $0.48 | 8.4x
BX | $36.78 | 1,196 | 22.5x | $17.03 | $0.00 | $2.83 | $19.86 | $2.29 | $14.63 | $36.78 | $1.57 | 9.3x
CG | $25.60 | 100 | 22.5x | $5.01 | $0.00 | $0.85 | $5.86 | $4.40 | $15.34 | $25.60 | $2.17 | 7.1x
KKR | $24.40 | 475 | 22.5x | $9.57 | $0.00 | $9.71 | $19.28 | $1.32 | $3.80 | $24.40 | $0.71 | 5.4x
OAK | $45.20 | 166 | 22.5x | $18.17 | $0.00 | $15.19 | $33.36 | $4.38 | $7.47 | $45.20 | $1.68 | 4.5x
Average | | | | | | | | | | | | 6.1x
Median | | | | | | | | | | | | 6.2x

Source: Company Data, Morgan Stanley Research estimates

MORGAN STANLEY RESEARCH
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