Morgan Stanley | RESEARCH
On average the group currently trades at 10.8x on 2018e EPS with an average effective tax rate for
economic net income (the metric
NORTH AMERICA INSIGHT ~~
Exhibit 4: Breakeven P/E multiple expansion of 2.1x required to offset 16% lower earnings in a C-corp on average.
Ticker 2018E 2018E
Pro-Forma EPS
Current
Tax Rate EPS % P/E AP/E
Price Tax Rate EPS P/E
used for EPS calculations) of
9.6%. The low tax rate is aresult of AF ‘cain The f ble treat t £ ARES $24.70 8.7% avorable treatment of pass- - — 589, through performance fees and tax cc $25.60 17.8% offsets. This is well below broader KKR $24.40 3.8% financials peers and on average, a OAK $45.20 10.5% 26% discount to P/E multiples. Average 9.6%
@ 24% Tax Rate
Change
3.68 9.9x 24% 3.15 -14.3% 11.5x 1.7x 1.73 14.3x 24% 1.42 “17.7% 17.4x 3.1x 3.26 11.3x 24% 2.62 -19.8% 14.1x 2.8x
3.03 8.5x 24% 2.80 -7.7% 9.2x 0.7x 2.74 8.9x 24% 2.16 -21.3% 11.3x 2.4x 3.55 12.7x 24% 3.01 -15.1% 15.0x 2.3x 3.00 10.9x 2.53 -16% 13.1x 2.1x
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
If the Alts converted to C-corps,
there would be tax leakage as aresult 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 conserv- atively 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 5:
On average we estimate a -16% hit to EPS using a 24% tax rate in a C-corp structure. This would require 201 8e multiples to expand 2.1x0n 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 —/-4%
tee 14.1% 13.1x 12.0x 2.8% 10.0x
8.0x -
6.0x :
4.0x ;
2.0x j
0.0x
% EPS ARES Avg Change
O24 RAE 47 7% 19.8% -21.3% -15.1% -14.3% -7.7% -16.0%
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
HOUSE_OVERSIGHT_025557