Carlyle Group LP, among the world’s largest private equity firms, is expected to announce it conversion to a C-corporation from a publicly trade partnership during its second-quarter earnings call on July 31. It is the latest alternative asset manager to make the conversion following peers that include Apollo Global Management LLC, Blackstone Group LP, Ares Management Corp. and KKR & Co.
Why now?
Some of the reasons why private equity managers are making this conversion, per Bloomberg LP:
- As assets under management continue to increase, fees on managing those assets are taxed at a lower rate as a C-corporation under the Tax Cuts and Jobs Act of 2017
- Tax compliance for investors is simplified as the need for a Schedule K-1 is no longer required and could lead to a larger investor base
- Conversion allows these managers to potentially be added to mutual funds or indexes
Downside factors
There are two reasons why conversion may not make sense:
- C-corporations are subject to double taxation, which means their earning are taxed at the entity level and any dividends to shareholders are also subject to tax
- Performance fees will likely fall into higher tax rates
Middle market expectations
Alternative asset managers operating in the private equity space will need to do a comprehensive review of their business to see whether a conversion to a C-corporation makes sense. The firms listed above were already publicly traded, while middle-market managers all operate privately. Taxation of performance fees, capital distributions and the lack of public scrutiny are some factors that weigh against the conversion for middle market alternative asset managers.
