The firm made the decision public Thursday when it announced its 1Q financial results, with founder and CEO Stephen Schwarzman explaining why the buyout juggernaut opted to join peers such as KKR that have already made the switch.
"This change will make it vastly easier to buy and own Blackstone stock," Schwarzman said in a video posted on the firm's website. "It eliminates the burdensome K-1 tax forms. Blackstone will also become eligible for inclusion in several market indices. And these benefits come at what we expect to be a modest tax cost."
The possibility of Blackstone and other publicly traded PE firms shifting to corporate status has long been debated, for reasons Schwarzman outlined as well as the belief it would solve the problem of the firms' shares being consistently undervalued. But as publicly traded partnerships, Blackstone and its peers were taxed at the lower capital gains rate, which typically maxes out around 20%, and there was no catalyst strong enough to force the change—until the 2017 tax cuts dropped corporate rates from 35% to 21%. KKR made the switch last July, joining Los Angeles-based Ares Management.
Among the major public firms still operating as partnerships, Blackstone has seemed the most receptive to making the transition—somewhat surprisingly, given the firm's skew toward performance fees over carried interest, per a recent Pitchbook analyst note. In Thursday's conference call, Blackstone CFO Michael Chae estimated that the firm would have an effective tax rate between 11% and 13% over the next five years, with it jumping thereafter into the low 20% range (assuming Congress doesn't change the tax laws again).
The markets responded favorably to the announcement Thursday, with Blackstone stock jumping some 8% to $38.62, pushing its market cap to $46.2 billion. Following their own announcements, both KKR and Ares saw their share prices jump—gains that were quickly reversed. Still, Thursday's performance had to be music to the ears of Schwarzman, who has long complained that his firm was undervalued by public market investors that found Blackstone's complicated performance metrics difficult to grasp and its stock inaccessible for mutual and index funds.
"If you look at the ability to have people buy your stock: Double the number and we'll grow more," Schwarzman told CNBC. "That's just in the US. There are people who are ... in foreign countries; they can't buy us either."
Schwarzman, 72, hasn't sold any of his stock since the firm went public in 2007, a decision that seemed quite astute Thursday. At one point in midday trading, he had pulled in some $573 million in paper gains, per TheStreet. However, the conversion will ultimately affect the massive dividends he receives, which reportedly totaled around $568 million last year. The corporate structure removes the option to funnel performance income directly to shareholders, where it's taxed at the lower capital gains rate.
In 1Q 2019, Blackstone posted strong underlying financial metrics, including earnings of $481.3 million, or 71 cents per share, the latter of which was a 34% YoY bump. In addition, the firm posted distributable earnings to shareholder of $538 million, or 44 cents per share, the latter figure up 7% YoY. And it plans to pay out a 37-cent dividend as well.
Overall, Blackstone's AUM jumped to $512 billion, up 14% YoY and inching closer to its goal of managing $1 trillion by 2026. In the past 12 months alone, Blackstone has raised $126 billion across its platforms, which Schwarzman compared to an "out of body experience" in an interview with Bloomberg. And its private equity portfolio rebounded from a rough 4Q (2.9% decline) by jumping 4.6% as the division closes in on what could be the biggest buyout fund ever raised.
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Related read: Public PE firms and C-Corp Conversions