As expected, the Washington, DC-based firm announced during its 2Q earnings call that it will join peers including KKR, Blackstone and Apollo Global Management and flip from a partnership to a corporate tax structure. But in a first for publicly traded PE firms, Carlyle will adopt a "one share, one vote" model that will give shareholders some input into the firm's affairs through votes commonly used by more traditional corporations.
The conversion is expected to be completed on January 1.
"The path we've chosen is differentiated and positions us in the best way to drive long-term value," said Carlyle co-CEOs Kewsong Lee and Glenn Youngkin in a press release. "It improves our trading liquidity, makes us more attractive to new investors, provides a fixed dividend that enables improved capital allocation and offers an attractive yield, and enhances shareholder alignment under a new one-share/one-vote governance model."
Changing to a C-Corp became more feasible for PE firms after the corporate tax rate dropped from 35% to 21% through the Tax Cuts and Jobs Act of 2017. In addition, firms wanted to make their stock more accessible through indices and mutual funds as well as eliminate the burdensome K-1 tax forms that partnership shareholders are required to fill out during tax season. Unlike its peers, Carlyle will be eligible for the S&P 500 and Russell because it's abandoning the dual-class share structure that Blackstone and others still use. However, Carlyle will still be 66% controlled by insiders that have voting rights for the next five years, per Reuters.
Traders seemingly weren't impressed with Carlyle's decision. The firm's stock dipped more than 3% on Wednesday, pushing shares to $23.85 apiece. By comparison, the S&P 500 dropped around 1.1%, while the NASDAQ fell about 1.2%. By contrast, Blackstone and Apollo both saw their stock rise following C-Corp announcements this spring, but Wednesday's slide came after Federal Reserve Chairman Jerome Powell slashed interest rates by 25 basis points in the central bank's first cut since 2008, though he cautioned that the move wasn't necessarily the beginning of a series of cuts.
Carlyle itself had a decent 2Q, posting distributable earnings of $213.4 million, or 57 cents per share, a massive increase from the $114.5 million, or 29 cents per share, it posted in 2Q 2018. Net income jumped to $154.1 million, or $1.23 per share, compared to $69.4 million, or 56 cents per share, in the same period a year earlier. In addition, the firm's AUM ticked up to $222.7 billion, a 6% YoY increase.
Apollo stock tumbles after so-so earnings, Epstein questionsApollo also announced its 2Q earnings on Wednesday, posting a profit of $164.8 million, a sizable increase from $63.6 million in 2Q 2018. Its distributable earnings jumped to 56 cents per share, up from 52 cents a year earlier, while AUM ticked up to $311.9 billion, a 16% YoY jump.
During the conference call, Apollo co-founder Leon Black denied allegations that jailed financial tycoon Jeffrey Epstein was involved with the firm, per The Wall Street Journal, while claiming reports of their relationship hasn't affected Apollo's relationship with potential investors. Black had previously received professional financial services from Epstein, who was arrested in early July on a range of sex-trafficking charges; Black has maintained that he was unaware of the allegations at the time.
Apollo's stock dipped nearly 5.9% on Wednesday, to $33 per share.
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