Alternative asset managers Apollo Global Management LLC (APO.N) and Blackstone Group LP (BX.N) reported better-than-expected quarterly earnings on Thursday, as a U.S. stock market rally buoyed the value of their private equity holdings.
With the S&P 500 rising 6.1 percent in the final three months of 2017, the index’s best quarter in two years, corporate valuations rose, helping Apollo and Blackstone book hefty gains on the companies owned by their buyout divisions.
The bull market came in a year in which investors poured more cash into private equity, boosting asset-based fee revenues. Investment gains through the end of 2017 and the U.S. tax overhaul signed into law in December have been cheered on by many private equity investors.
“Most of our CEOs believe that tax cut will be a further positive for their results, though this is not universally true,” Blackstone President Tony James said in a call with reporters.
Although the private equity industry attracted a record $453 billion from investors in 2017, firms like Apollo and Blackstone are keeping cash in reserve due to high prices, with so-called dry powder at $47.6 billion and $95 billion respectively.
“If there is a market correction, our cache of dry powder means we will be very well positioned to capitalize on it,” James said.
Blackstone reported earnings fresh off its $20 billion deal this week to acquire a majority stake in the Financial and Risk (F&R) business of Thomson Reuters Corp (TRI.TO) (TRI.N), the parent of Reuters News, in its biggest leveraged buyout since the 2007-2009 financial crisis.
The deal pits Blackstone CEO Stephen Schwarzman against fellow billionaire and former New York Mayor Michael Bloomberg. Bloomberg’s eponymous terminals are the market leader in providing news, data and analytics to financial customers.
Blackstone’s James told investors on Thursday that the future of the Thomson Reuters’ F&R business is in data, not in selling terminal desktop products to traders, bankers and investors.
He added that the deal’s eye-catching size will not be a regular occurrence.
“I think there will be some other big deals, but I don’t think it will be a wave of them,” James said.
CORPORATE CONVERSION
Apollo shares in were up 3.1 percent while Blackstone’s stock had risen 1.3 percent in afternoon trading in New York on Thursday.
Apollo and Blackstone also signaled they are exploring the option of converting from publicly traded partnerships into corporations, or C-Corps. Such a move would be the biggest structural shake-up for the private equity industry since some of the biggest buyout firms went public a decade ago.
“Given the very recent changes to the tax code and the complexities involved, we are continuing to assess the best path forward for Apollo, including how investors value different structures on a sustainable basis,” Joshua Harris, Apollo co-founder and senior managing director, said in an investor call.
The conversion would be practically irreversible in the near term and mean firms would pay corporation tax in addition to the capital gains tax they already pay on the longer-term returns they generate for investors.
However, becoming a C-Corp would allow them to be included in certain indexes and be bought by index-tracking funds.
The tax hit would be less severe than in the past after the U.S. tax overhaul slashed the corporate rate to 21 percent from 35 percent.
The calculation for converting to a C-Corp will come down to whether any resulting share price increase outweighs the increased tax burden.
JMP Securities analyst Devin Ryan, who rates both stocks “market outperform,” said the pair would likely hold off on making a final decision until there is more certainty.
“The economic dilution is measurable, but the (higher) valuation is more theoretical,” he said.
