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Morgan Stanley | RESEARCH
NORTH AMERICA INSIGHT

tively adjust upward our multiple on future carried interest earnings by 2 turns. For Apollo, we see that nearly the entire the increase in value in the upside case is driven by the expansion of the FRE multiple from 15x to 22.5x.

2018 Impact: Upside case impact is +13% vs. current price on average and 3.8x multiple expansion to a fully taxed EPS. In our upside case scenario, we assume a 22.5x multiple on fee-related earnings in our SOTP. We see favorable risk/reward skew APO.

Downside case impact assumes no multiple expansion of any kind, and that the stocks trade at their same current P/E, however on lower, fully taxed EPS. This represents -18% average downside from current prices. While this is likely an unreasonable outcome this is the concern among some investors, given that the only certainty in the analysis is a higher tax drag and lower earnings. We see less favorable upside/downside skew for BX and KKR.

Exhibit 7:
We see the greatest contribution of fee-related earnings at ARES and APO as a percentage of pre-tax earnings
2018e Pre-Tax Earnings Contribution
[Chart Legend: Investment Income, Performance Fees, Core Fee Related Earnings]
[Chart Data Visualized for ARES, APO, BX, OAK, KKR, CG, Avg.]
Source: Company Documents, Morgan Stanley Research estimates
Note; Fee Related earnings are on MSe Core methodology, ARES Core FRE include BDC Part 1 Management fees that are typically excluded from MSe Core FRE definition

Exhibit 8:
On average we see potential for 3.7x turns of multiple expansion on in our upside case with fully taxed EPS at a 24% effective rate. This could drive +12% upside on average to current share prices
P/E Multiples for Alts: Potential Expansion
[Chart Legend: Total Multiple Expansion in C-Corp Upside Scenario (on fuly taxed EPS @ 24%), Current Multiple on 2018e EPS]
[Chart Data Visualized: ARES 14.3x/4.7x/19.0x, APO 11.3x/4.7x/15.4x, BX 8.9x/4.1x/12.5x, OAK 12.7x/4.0x/16.7x, KKR 9.9x/3.6x/14.6x, CG 8.5x/1.4x/9.8x, Avg 10.9x/3.7x/14.7x]
% Upside to Stock: ARES 9.2%, APO 26.5%, BX 9.3%, OAK 11.3%, KKR 10.7%, CG 7.5%, Avg 12.4%
Source: Company Data, Morgan Stanley Research estimates

Exhibit 9:
Summary Scenario Analysis: Potential upside/downside valuation and multiples impact if Alts convert to C-corp structure and pay a full 24% tax rate

[Table Header 1: Upside Case Assumptions: 1) Fully taxed earnings and carry receivable balance 2) 22.5x Multiple on core FRE 3) Multiple expansion on carry of two turns to an average of 9.5x 2018-20 avg. performance fee earnings]

[Table Header 2: Downside Case Assumptions: 1) Fully taxed earnings and carry receivable balance 2) 15.0x Multiple on Core FRE 3) No P/E multiple expansion on fully taxed EPS 4) Back into implied multiple on future carry of 5.6x on avg.]

Ticker | Current Price | Valuation (C-Corp Conversion) | Valuation Price/Fully Taxed EPS | Δ Current P/E vs. w/ 24% Taxed EPS | % Upside Price Change From Current | Valuation (C-Corp Conversion) | Valuation Price/Fully Taxed EPS | Δ Current P/E vs. w/ 24% Taxed EPS | % Downside Price Change From Current

APO | $36.42 | $46.07 | 14.6x | 4.7x | 26.5% | $31.20 | 9.9x | 0.0x | -14.3%
ARES | $24.70 | $27.18 | 19.1x | 4.8x | 10.0% | $17.95 | 12.6x | -1.7x | -27.3%
BX | $36.78 | $40.18 | 15.4x | 4.1x | 9.3% | $29.51 | 11.3x | 0.0x | -19.8%
CG | $25.60 | $27.52 | 9.8x | 1.4x | 7.5% | $23.62 | 8.5x | 0.0x | -7.7%
KKR | $24.40 | $27.01 | 12.5x | 3.6x | 10.7% | $19.21 | 8.9x | 0.0x | -21.3%
OAK | $45.20 | $50.31 | 16.7x | 4.0x | 11.3% | $38.39 | 12.7x | 0.0x | -15.1%
Average | | | 14.7x | 3.8x | 12.6% | | 10.7x | -0.3x | -17.6%
Median | | | 15.0x | 4.0x | 10.4% | | 10.6x | 0.0x | -17.4%

Source: Company Data, Thomson Reuters, Morgan Stanley Research estimates. Note: Price as of 1/26/2017

MORGAN STANLEY RESEARCH
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