Analysis: Giving up control pays big for private equity executives

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October 13 (Businesshala) – Changes to the share structure of KKR & Company Inc (KKRN), Apollo Global Management Inc (APON) and Carlyle Group Inc (CGO) that would have stripped founders of private equity firms from voting Huh. Control is making him and his employees rich, according to a Businesshala review of regulatory filings.

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The founders and executives of KKR, Apollo and Carlyle were awarded payments of $560 million, $584 million and $346 million, respectively, as part of relinquishing special voting shares, the filings show.

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KKR said on Monday it would end the dual-class share structure giving voting control to its executives – including founders Henry Kravis and George Roberts – in order to “align the interests” of its leadership with those of shareholders.

The new “one share, one vote” regime will make the voting rights of officials proportional to the shares they own, which collectively represent a 31.7% stake in KKR.

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Yet as part of a complex web of mergers of corporate entities seeking to eliminate the dual-class share structure by 2026, KKR is offering 8.5 million newly issued shares to its executives, currently worth about $560 million, according to regulatory filings. Will give

KKR is obliged to pay under the Tax Receivable Agreement (TRA) it entered into with its founders more than a decade ago, the filings show. The agreement, separately adopted by all major private equity firms, when it goes public, compels KKR to pay 85% of the value of tax benefits availed by way of goodwill, amortization, depreciation and related tax credits to its executives.

The New York-based firm said in a filing that the exchange of special voting shares for common stock of KKR executives triggers payments under the TRA.

This will be the final payment to KKR officials made under the TRA, which will be abolished as part of the reorganization of the filing states. According to a filing, the $560 million payment equates to a 1% decline in KKR’s first half of KKR’s after-tax distributable earnings per adjusted share and represents a 4% decline in its book value per adjusted share as of June 30. Is.

Private equity firms have often turned to TRAs because, as part of making their deals, they often engage in initial public offerings, which allow private equity firms to make public the value of the tax benefits of the companies they own. permits that are made public. .

Private equity firms differ in how most firms end up with a dual-class stock arrangement. Food delivery provider Blue Apron Holdings Inc. (APRN.N), for example, last month transitioned to a class of common stock with no windfall gains for its executives. Asset manager Victory Capital Holdings Inc (VCTR.O) similarly ended its dual-category structure last month.

Robert Willens, a tax expert and professor of finance at Columbia Business School, said KKR officials had the discretion to forfeit the outstanding payments under the TRA.

Nevertheless, he added that some investors of KKR may be happy as the authorities did not exercise their right to ask for future payments to be received from KKR under the TRA before agreeing to terminate it.

“(KKR officials) undoubtedly left some money on the table,” Villans said.

A KKR spokesperson pointed to a filing showing that a committee of KKR’s independent board of directors unanimously approved the transaction to dissolve the dual-class share structure, which would “enhance the rights of our common shareholders”. ” and to “enhance corporate governance in KKR”. He declined to comment further.

Apollo, Carly

Apollo’s founders and executives similarly received payouts of at least $584 million under their TRA over four years, when the firm announced in March that it would be ending its dual-category structure, regulatory filings show. . The executives chose to receive payment in cash rather than Apollo stock.

A source familiar with the matter said the payment was worth only half of the accrued tax benefits for the founders, who agreed to forgo the other half in the interest of Apollo shareholders.

Carlyle was the first of the major publicly listed private equity firms to be rid of exclusive voting rights for its executives in 2019. The change triggered a cash payment of $346 million over five years for Carlyle’s executives under its TRA, filings show.

A Carlyle spokesperson declined to comment.

The use of the TRA by private equity firms attracted scrutiny from US lawmakers in 2007, when Blackstone Group Inc. (BX.N) disclosed in its initial public offering that it would have taxed a total of $863.7 million over the next 15 years under the official arrangement. can get benefits.

However, Congress never passed a proposed legislation that would tax TRA payments as ordinary income. The use of TRAs expanded in popularity, and some private equity firms use them to extract value from the portfolio companies they take public.

Blackstone maintains its dual-class stock structure, with CEO Stephen Schwarzman in control.

Reporting by Chibuike Oguh and Jessica Dinapoli in New York Editing by Greg Rumeliotis and Leslie Adler


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