KKR shares surge after ditching partnership structure
Private equity group’s conversion to a corporation is being closely watched by rivals
KKR’s gamble in ditching its tax-advantaged partnership structure in the hope of attracting new investors is showing signs of paying off, with its shares hitting an all-time high late last week.
The investment group converted to a corporation at the beginning of this month after the new lower corporate tax rate introduced by President Donald Trump changed the industry’s financial calculations.
KKR decided to forgo the tax breaks the partnership used to enjoy when it earned performance fees on its investments. It said it expected that access to a wider pool of potential investors would increase demand for its shares and push up its share price.
KKR shares jumped 8.5 per cent last week following its conversion, as investors took advantage of their first opportunity to buy the stock without having to wrestle with onerous tax filings.
The rally marked the first time that the shares had traded above $26, surpassing a previous high set more than four years ago. At Friday’s close they were at $27.04. It was also the busiest trading week on record for transactions in KKR shares.
The plan to convert was announced in May, months after the US slashed the corporate tax rate from 35 to 21 per cent. KKR estimates that, under the new law, it will initially pay 7 per cent tax on its income before the rate gradually increases over five years.
The investment group’s shares had previous failed to surpass 2014 levels even as a rebounding economy pushed the S&P 500 financials index 50 per cent higher.
Executives at KKR blamed the underperformance on the company’s former tax structure, which they say was off-putting to investors and unduly complex.
Before last week, each shareholder had to account for the firm’s income as if they had earned it themselves, filling in lengthy forms that covered everything in the KKR portfolio from foreign currency gains to drilling costs in North Dakota.
That effectively locked out index trackers and exchange traded funds, which prize administrative simplicity and account for a rapidly growing share of US assets as investors shun more expensive actively managed funds.
Mutual funds own fewer than one-third of KKR’s shares, compared with an average of 60 per cent for other financial stocks.
Private equity rivals such as Apollo, Blackstone and Carlyle have been watching the experiment closely and KKR’s share price rally could prompt copycat moves. Many other private equity firms are also structured as partnerships and face the same impediments to attracting mutual fund investors.
It is a costly gambit that involves paying extra taxes with no guarantees that the hoped-for stock market gains will materialise.
Shares in Ares Management, the first major private equity group to ditch its partnership tax structure, are 14 per cent lower than when its decision took effect on March 1.
“There are one or two adventurers out there,” Blackstone founder Stephen Schwarzman said, when asked in May about his firm’s plans. “Once you convert you cannot convert back. Let’s see what happens.”