File 023564

Images

Text

Date: Wednesday, December 27 2017 05:02 PM
Subject: (BN) Leon Black's Tax-Overhaul Dilemma Could Alter Wall Street M
From: Glenn Dubin (DUBIN & COMPANY LP)
To: undisclosed-recipients:;
BCC: jeevacation@gmail.com;
>
(BN) Leon Black's Tax-Overhaul Dilemma Could Alter Wall Street M
odel
Leon Black's Tax-Overhaul Dilemma Could Alter Wall Street Model
2017-12-27 11:00:00.2 GMT
By Simone Foxman and David Carey
(Bloomberg) -- Leon Black recently posed a question whose
answer will determine how profitable the new U.S. tax regime
could make Wall Street firms like his Apollo Global Management
LLC.
Publicly traded partnerships, such as Apollo, are taxed
differently than corporations. So should Apollo take advantage
of the overhauled tax rules to pay less in taxes? Or should it
use this chance to change to an Inc. from an LLC, which would
increase its tax bill but allow it to attract investments from
mutual funds that have previously been out of reach?
"We're still analyzing," Black told the Goldman Sachs U.S.
Financial Services Conference Dec. 6. "It's an uncertain
outcome."
Either way, it's most likely a money-making outcome. The
tax changes are a boon for private equity firms such as Apollo,
where Black is chief executive officer. The new lower corporate
rate has made it possible for bigger publicly traded
partnerships to consider the change. As it is, management fees,
which typically account for 30 percent or more of their
earnings, are already taxed at the corporate rate. That will
drop. The legislation scarcely touched the 23.8 percent rate
paid on incentive fees, also called carried interest, which
incur no additional levy when paid out to shareholders.
Double Tax
If the partnerships converted to corporations, the
incentive fees would be hit with a second layer of tax when
they're paid out. That would push the combined tax rate on
incentive income paid out as dividends to nearly 40 percent,
according to Peter Furci, co-chair of Debevoise & Plimpton's
global tax practice.
But it would also allow the newly minted corporations
access to indexes, and therefore the mutual-fund and ETF
markets. About $2.2 trillion follows the S&P 500 Index,
according to its website. As of June, $122.6 billion in assets
tracked the Russell 2000 Index, the best-known small-cap U.S.
HOUSE OVERSIGHT 023564
stock index, and there was $1.1 trillion bet on Russell U.S.
indexes overall, according to the company.
The bigger universe of investors would likely boost the
trading multiples of the firms' stocks. It's unclear how big the
economic benefit of increased ownership would be, so the
question is whether it would make up for the higher taxes.
"There's no way to say how much multiple expansion you
could get by converting," said Gerald O'Hara, who follows
private equity firms for Jefferies Group. "That's the question
here that I think these firms are wrestling with."
Tax Complexity
One of the main reasons the funds have stayed away from
private equity managers is tax complexity. Investors in typical
stocks receive a Form 1099, a straightforward document that
shows interest and dividends on investments at the end of each
year. Owners of publicly traded private equity firms' stock get
the Schedule K-1 instead. The K-1 shows their share of the
partnership's interest, which determines how much the income is
taxed. It's a headache, O'Hara said. Plus, firms can be
inconsistent on the time of year they send out the forms, and
the process of plugging in the numbers on a Schedule K-1 isn't
as simple as it is for other kinds of income.
So asset managers, which offer options for many 401(k)
investors, avoid buying shares of private equity firms.
On the campaign trail last year, President Donald Trump
said he wasn't a fan of Wall Street "paper pushers" like hedge
fund managers. He pledged to raise the tax rate on carried
interest. The new tax law keeps it unchanged for investments
held at least three years.
Hamilton Lane
Proponents of conversion to corporations point to Hamilton
Lane Inc., an alternative-investment manager and pension-fund
consultant that's a corporation and not a publicly traded
partnership. The $1.9 billion company, which went public earlier
this year, is now included in dozens of S&P, Russell and
WisdomTree Investments Inc. indexes. Hamilton Lane shares have
about doubled since the initial public offering.
Ares Management LP, created by former Apollo executives, is
the most likely of its peers to make the jump, according to
analysts at Keefe Bruyette & Woods Inc. Much of its revenue
comes from management fees, so becoming a corporation would hurt
its after-tax earnings relatively little.
Bill Mendel of Mendel Communications, a spokesman for Ares,
said the firm is studying the situation. Apollo spokesman
Charles Zehren of Rubenstein Associates declined to comment.
When Black spoke to the Goldman Sachs conference, he said
he was certain of one thing: None of the big publicly traded
partnerships wanted to be first to undergo conversion.
"If somebody does go first and their stock doesn't move up,
HOUSE OVERSIGHT 023565
then you'll know that was a pretty dumb decision," he said. If,
on the other hand, the "stock does great, then all of us may
have converted" in two or three years.
--With assistance from Ben Steverman and Carolina Wilson.
To contact the reporters on this story:
Simone Foxman in New York at sfoxman4@bloomberg.net;
David Carey in New York at dcarey13@bloomberg.net
To contact the editors responsible for this story:
Margaret Collins at mcollins45@bloomberg.net;
Elizabeth Fournier at efournier5@bloomberg.net
Bob Ivry
HOUSE OVERSIGHT 023566