Market MovesMay 6, 2019

Apollo Is Converting to C Corp Structure

By moving from a partnership setup, the PE firm expects its stock will be bought by indexes and mutual funds.

Reported by Larry Light

Apollo is the latest publicly traded private equity firm to convert to a C corporation structure from partnerships, owing to the new tax law, which lowers corporate income tax rates to 21% from 35%.

The chief benefit is to boost the PE firm’s stock price, because C corps can be included in indexes and mutual funds, where partnerships can’t. “Private equity firms have long complained that their shares were undervalued,” said a research note from Pitchbook.

The switch, expected in the third quarter if Apollo Global management’s board approves, follows Blackstone Group’s announcement last month that it would become a C corp. The first PE outfit to convert was Ares Management last year, followed by KKR. Blackstone has contended that, as a partnership, it trades at a 30% discount to other financial companies.

Blackstone Chairman Steve Schwarzman told CNBC last month that he thinks the move will double “the number of people able to own the stock.”

At a $50 billion market value, Blackstone is larger than more than 70% of S&P 500 members, Pitchbook reports. Apollo is at $13.5 billion and Ares $5 billion.

How that translates to investors’ taxation remains to be seen. Becoming a C corp means another layer of taxation. Partnership income goes directly to limited partners. Income derived from performance—that is, the proceeds from selling portfolio companies—has been taxed at the capital gains rate, which for individuals is 15% or, for high-income types, 20%.

Blackstone said the conversion will bring a “modest tax cost,” but it expects fatter earnings to eclipse that.

Pitchbook predicts that the Carlyle Group will convert to a C corp next.