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Financial research report
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This document is page 7 of a Morgan Stanley research report titled 'North America Insight' bearing the Bates stamp HOUSE_OVERSIGHT_025557. It analyzes the financial impact of Alternative Asset Managers (including Apollo Global Management, Blackstone, and KKR) converting from partnerships to C-corporations, specifically looking at tax rates and P/E multiples. While no specific individuals are named, the document is likely part of the House Oversight Committee's investigation into financial ties involving entities like Apollo (APO) and their executives' connections to Epstein.
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Key Quotes (4)
"If the Alts converted to C-corps, there would be tax leakage as a result no pass-through of earnings for carried interest and investment income."Source
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"As a result of higher taxes and -16% lower earnings on average in a C-corp, the stocks would need to re-rate upward by 2.1x turns to maintain their current valuations."Source
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"Breakeven P/E multiple expansion of 2.1x required to offset 16% lower earnings in a C-corp on average."Source
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"On average we estimate a -16% hit to EPS using a 24% tax rate in a C-corp structure."Source
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Morgan Stanley | RESEARCH
NORTH AMERICA INSIGHT
NORTH AMERICA INSIGHT
On average the group currently trades at 10.8x on 2018e EPS with an average effective tax rate for economic net income (the metric used for EPS calculations) of 9.6%. The low tax rate is a result of favorable treatment of pass-through performance fees and tax offsets. This is well below broader financials peers and on average, a 26% discount to P/E multiples.
If the Alts converted to C-corps, there would be tax leakage as a result no pass-through of earnings for carried interest and investment income. We estimate an effective tax rate of 24% (21% federal + 3% state and local). The companies may be able to keep some of the tax offsets in place; however, we conservatively use a full 24% to evaluate the earnings impact. As a result of higher taxes and -16% lower earnings on average in a C-corp, the stocks would need to re-rate upward by 2.1x turns to maintain their current valuations.
Exhibit 4:
Breakeven P/E multiple expansion of 2.1x required to offset 16% lower earnings in a C-corp on average.
Breakeven P/E multiple expansion of 2.1x required to offset 16% lower earnings in a C-corp on average.
Ticker Current Price Tax Rate 2018E EPS P/E Tax Rate 2018E Pro-Forma EPS @ 24% Tax Rate EPS % Change P/E ΔP/E
APO $36.42 11.5% 3.68 9.9x 24% 3.15 -14.3% 11.5x 1.7x
ARES $24.70 8.7% 1.73 14.3x 24% 1.42 -17.7% 17.4x 3.1x
BX $36.78 5.3% 3.26 11.3x 24% 2.62 -19.8% 14.1x 2.8x
CG $25.60 17.8% 3.03 8.5x 24% 2.80 -7.7% 9.2x 0.7x
KKR $24.40 3.8% 2.74 8.9x 24% 2.16 -21.3% 11.3x 2.4x
OAK $45.20 10.5% 3.55 12.7x 24% 3.01 -15.1% 15.0x 2.3x
Average 9.6% 3.00 10.9x 2.53 -16% 13.1x 2.1x
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
APO $36.42 11.5% 3.68 9.9x 24% 3.15 -14.3% 11.5x 1.7x
ARES $24.70 8.7% 1.73 14.3x 24% 1.42 -17.7% 17.4x 3.1x
BX $36.78 5.3% 3.26 11.3x 24% 2.62 -19.8% 14.1x 2.8x
CG $25.60 17.8% 3.03 8.5x 24% 2.80 -7.7% 9.2x 0.7x
KKR $24.40 3.8% 2.74 8.9x 24% 2.16 -21.3% 11.3x 2.4x
OAK $45.20 10.5% 3.55 12.7x 24% 3.01 -15.1% 15.0x 2.3x
Average 9.6% 3.00 10.9x 2.53 -16% 13.1x 2.1x
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
Exhibit 5:
On average we estimate a -16% hit to EPS using a 24% tax rate in a C-corp structure. This would require 2018e multiples to expand 2.1x on average in order for shares to hold the current price
P/E Multiples for Alts: Current vs 24% taxed EPS
■ P/E Multiple Expansion required to Maintain CurrentValuiton @ 24% Taxed EPS
■ Current Multiple on 2018e EPS
On average we estimate a -16% hit to EPS using a 24% tax rate in a C-corp structure. This would require 2018e multiples to expand 2.1x on average in order for shares to hold the current price
P/E Multiples for Alts: Current vs 24% taxed EPS
■ P/E Multiple Expansion required to Maintain CurrentValuiton @ 24% Taxed EPS
■ Current Multiple on 2018e EPS
20.0x
18.0x
16.0x
14.0x
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
18.0x
16.0x
14.0x
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
17.4x [Bar for ARES]
15.0x [Bar for OAK]
14.1x [Bar for BX]
13.1x [Bar for Avg]
11.3x [Bar for KKR]
11.5x [Bar for APO]
9.2x [Bar for CG]
15.0x [Bar for OAK]
14.1x [Bar for BX]
13.1x [Bar for Avg]
11.3x [Bar for KKR]
11.5x [Bar for APO]
9.2x [Bar for CG]
[Blue Bars - Current Multiple]
14.3x [ARES]
11.3x [BX]
8.9x [KKR]
12.7x [OAK]
9.9x [APO]
8.5x [CG]
10.9x [Avg]
14.3x [ARES]
11.3x [BX]
8.9x [KKR]
12.7x [OAK]
9.9x [APO]
8.5x [CG]
10.9x [Avg]
[Gold Bars - Expansion required]
3.1x [ARES]
2.8x [BX]
2.4x [KKR]
2.3x [OAK]
1.7x [APO]
0.7x [CG]
2.1x [Avg]
3.1x [ARES]
2.8x [BX]
2.4x [KKR]
2.3x [OAK]
1.7x [APO]
0.7x [CG]
2.1x [Avg]
% EPS Change @24% Rate
ARES -17.7%
BX -19.8%
KKR -21.3%
OAK -15.1%
APO -14.3%
CG -7.7%
Avg -16.0%
ARES -17.7%
BX -19.8%
KKR -21.3%
OAK -15.1%
APO -14.3%
CG -7.7%
Avg -16.0%
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
MORGAN STANLEY RESEARCH 7
HOUSE_OVERSIGHT_025557
HOUSE_OVERSIGHT_025557
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