Morgan Stanley | RESEARCH
NORTH AMERICA INSIGHT ~~
Impact to Current Valuations in Upside and Downside Case
In the sections following we explain in greater detail our approach to potential Upside/Downside scenarios and the impact to valuation under potential conversion. The actual impact is very difficult to quantify given the variety of moving pieces and the reliance on investors to drive the a re-rating. We have pre- sented it as a scenario analysis to evaluate conversion on a risk reward spectrum. Upside/downside scenarios show a positive skew for companies that have higher earnings contribution from manage- ment fees vs. more downside skew for companies with more per-
formance fees (less certain re-rating of performance fees).
As the examples herein illustrate, we see significant value in the re-rating of fee-related earnings that could unlock share value and result in higher stock prices. We believe these stable and
growing fee earnings can support higher multiples and broader own-
Exhibit 6:
ership of the Alts and be the catalyst for the re-rating (explained in greater detail in the sections that follow). In both our upside and downside approaches we look at a Sum-of-the-Parts that values at) fee-related earnings, 2) balance sheet investments and net cash, 3) the net accrued carry balance, and&) future value of carry. In both the current and upside case we use a fully taxed fee-related earnings at a 24% tax rate and our value for the balance sheet remains
unchanged in both scenarios as well.
However, we make several adjustments to our upside and downside case to reflect a C-corp structure with full tax rate on all earnings: 1) Tax the net accrued carry receivable balance at a24%.2) Tax our esti- mate for average net carry earnings at a full 24% rate. Further, in the upside case we also adjust the multiple upwards for fee related earn-
ings driven by broader ownership of the stocks, and we conserva-
Potential Upside Scenario SOTP Valuation for APO. We see potentially significant value from a re-rating of fee-related earnings driving higher valua-
tion Apollo Global Management (APO)
Downside Case
Upside Case C-
Sum-of-the-Parts Components Cortent APO) Price ( SOTP 2018e Pre-Tax Core FRE / Sh $1.66 Tax Rate 24% Fee Rel eo) 6 Poesancerr Gere oh $1.26 Earnings FRE Multiple 1510x Core FRE Value $18.94 + Balance Balance Sheet Net Cash and $2.72 Sheet Investments / Sh (as of 3Q17) . Accrued Net Accrued Carry / Sh (as of $2.16 Carry 3Q17) . a Avg Net Carried interest / Sh $2.45 Market (2018e-2020e) ‘ Implied Carry ; Market Implied Carry Value I $12.61! Total Value $36.42 Valuation 2018e EPS $3.68 P/E 9.9x
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
C-Corp Corp Conversion Conversion
$1.66 0% $1.66 0%
24% 0% 24% 0%
$1.26 0% $1.26 0%
15.0x 0.0x 22.5Xx 15x $18.94 0% $28.40 $2.72 0% $2.72 0%
$1.64 -24% $1.64 -24%
$1.86 -24% $1.86 -24%
4.2x -0.9x 7.1x 2.0x
$7.91 -37% $13.30 6% $31.20 14% $46.07 (26% $3.15 -14% $3.15 -14%
9.9x 0.0x 14.6x 4.7x
HOUSE_OVERSIGHT_025558