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January 30, 2018 05:01 AM GMT
Alternative Asset Managers
Can Alts Unlock Value with
C-Corp Conversions?
We think APO could unlock the most value by converting to a C-corp with 26%
in our upside case vs. -14% in our downside case. ARES could be the first to
convert, but this is largely priced in. These firms have more sticky management
fee-related earnings vs. BX/CG/KKR that may see less benefit.
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
MM
Contributors
MORGAN STANLEY & CO. LLC
Michael J. Cyprys, CFA, CPA
Equity Analyst
+1212 761-7619
Michael.Cyprys@morganstanley.com
MORGAN STANLEY & CO. LLC
Alex D Combs, CFA
Research Associate
+1212 296-5221
Alex.Combs@morganstanley.com
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Contents
5 Executive Summary
6 C-corp Conversion Could Be the Catalyst to
Unlock Value and Drive Multiple Expansion
8 Impact to Current Valuations in Upside and
Downside Case
10 ARES Conversion Largely Priced In
11 Why Should Fee-Related Earnings Re-Rate
Higher?
11 1) Premium to Traditionals Asset Managers
13 2) Publicly Traded Alts Comps
13 3) Bond Yield Approach
14 What Is the Impact of Higher FRE Multiples
in a SOTP approach?
16 What Is the Appropriate Multiple for
Performance Fees?
22 Apollo Global Management SOTP and Sensitivity
Analysis
23 Ares Management SOTP and Sensitivity Analysis
24 Blackstone SOTP and Sensitivity Analysis
25 The Carlyle Group Management SOTP and
Sensitivity Analysis
26 KKR & Co. SOTP and Sensitivity Analysis
27 Oaktree Capital Group SOTP and Sensitivity
Analysis
28 Appendix B: Valuation of Alternative Managers -
What's in the Price?
29 Appendix C: Notable Alt Reports: In Case You
Missed Them…
30 Brokers & Asset Managers Comps Sheet
31 Valuation and Risks
18 Deconstructing Our Implied Carry Valuation:
What Is the Market Paying?
19 Upside Scenario
20 Downside Scenario
21 Appendix A: Company Scenario Analysis
MORGAN STANLEY RESEARCH 3
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Alternative Asset Managers
Can Alts Unlock Value with
C-Corp Conversions?
We think APO could unlock the most value by converting to a C-corp
with 26% in our upside case vs. -14% in our downside case. ARES
could be the first to convert, but this is largely priced in. These
firms have more sticky management fee-related earnings
vs. BX/CG/KKR that may see less benefit.
We believe ARES could be the first Alt stock to convert; we
would view that as a positive catalyst for the group that, if successful,
could lead others to follow. ARES reports 4Q earnings on
February 15, and we expect a potential announcement or indications
of mgmt's intentions and/or timing. C-corp conversion has dominated
our conversations with investors of late with increased
inbound questions including interest from some new to the Alts. As
a result, in this report we expand on prior work here, and here, creating
a C-corp conversion scorecard with qualitative pros/cons for
each company. We also evaluate the potential valuation impact if
Alts convert, and we take a deep dive into how the market might
value two earnings components in a C-corp structure: 1) sticky, recurring
management fee-related earnings and 2) performance fees.
We see an opportunity for Alts to unlock value by shedding the
partnership structure and converting to C-corps. Changing from
a partnership structure could help alleviate the complexities of current
K-1 tax reporting and expand the universe of eligible investors in
the Alts. Some investors today are restricted from investing in limited
partnerships, while others don't want the operational and tax
complexities of investing in a partnership structure.
Management fee-related earnings could re-rate higher toward
22.5x in our upside case, as we look at three different approaches
for valuing this sticky earnings stream: 1) traditional asset manager
comps vs. organic growth, 2) publicly traded C-corp Alts comps,
and 3) an approach looking at FRE as bond yield proxy with a credit
spread, to determinate an appropriate cap rate.
Performance fees appear cheap (at 6.1x) if management fees
re-rate to 22.5x in the context of Alts converting to C-corps and a
24% overall tax rate. This suggests the market is misvaluing performance
fees, and we could also see Alts performance fee earnings
re-rate higher if C-corp conversion expanded the investor base.
We see companies that have a greater skew to management fees
as best positioned for conversion, as we see the greatest potential
for multiple expansion on for this portion of the earnings. For stocks
under coverage, we see APO as potentially being able to unlock
the most value, with near-term upside to current prices of 26%,
if the shares re-rate. We see ARES as another winner from conversion
but the we belive this is priced with shares up 23.5% YTD. Our
analysis suggests a less favorable upside/downside scenario for conversion
for companies under coverage with lower taxes and/or
greater exposure to performance fees (KKR, CG, BX).
Exhibit 1:
Upside/Downside Scenario Impact to Alts' Share Price if They Convert
to C-Corps from Current Partnership Structure
Estimated Change to Curent Share Price
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
30%
20%
10%
0%
-10%
-20%
-30%
-40%
26%
-14% -15%
Downside
11% 11% 9% 10%
-21% -20%
-27%
Upside
8%
-8%
13%
-18%
APO OAK KKR BX ARES CG Avg.
Source: Company Data, Morgan Stanley Research estimates
Brokers & Asset Managers
North America Industry View
In-Line
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Executive Summary
Will the Alts simplify their structure and convert to
C-corporations from partnerships? What would this
mean for valuations? We think the Tax Cuts and Jobs Act
could accelerate cost-benefit analyses and decisionmaking
by management teams as a 21% federal tax rate vs.
35% previously implies less tax leakage and less expense in
moving from single-layer taxation to a double taxation
structure. While investors would give up economics in the
process, the new business structure would, we think, command
a higher valuation multiple.
For context, investor questions on the topic have picked up
recently, including from a number of long-only accounts,which
have historically avoided the Alts. Some investors have said they
currently cannot invest in Alts given the partnership structure but
would be interested and able to do work on them if they were to convert
to C-corps. We had conversations around conversion a year ago
as President Trump took office amid promises of tax reform, and the
subject came up on nearly every 4Q16 earnings call. Management
teams seemed to table the idea because of too many moving parts
that needed to be clarified before they conduct a proper cost/benefit
analysis. Post tax reform, conversion is at the top of investors' minds
and becomes a key debate/catalyst for the sector.
We believe Ares Management L.P. (ARES, Equal-weight) could be
the first Alt to convert to a C-corp, potentially sparking other
conversions within our coverage. We believe this prospect has
likely driven much of the stock's 24% return year-to-date and +16%
outperformance vs. the S&P 500 and +10% its Alts peers. Over the
past few months, ARES management has stated clearly that they
have been actively considered conversion. CFO Mike McFerran
recently told investors, "This topic has become clearly very elevated
in light of possible tax reform. Absent that and even before this
became so topical, this is the thing we've been thinking about. And
the overarching question is, can public traded partnerships attract
the breadth of shareholder base to support an appropriate valuation
notwithstanding some other obstacles." Even without tax reform,
the company was considering the structure change, and with a 21%
corporate statutory rate (vs. 35%), we believe cost-benefit analysis
may make sense for ARES. The company reports earnings on
Thursday, February 15, and we expect an update or additional
color on conversion. We think all Alts shares could benefit as
investors see a higher probability of others following in their
footsteps and/or investors re-rate Alts' FRE higher.
Against this backdrop, we've created a conversion scorecard
with qualitative pros/cons for each company. To be clear, these are
our views on where conversion makes the most sense and not calls on
which companies will commit or the timing of potential conversions.
We focus selectively on the factors we view as most important in
deciding whether to convert.
l FRE % of Earnings — We believe the higher fee related earnings
as a % of total earnings, the more likely for a re-rating of
the shares and therefore more likely to consider C-corp conversion.
l Effective Tax Rate — The lower the current tax rate, the
more tax slippage if companies convert and are subject to a
higher corporate tax rate, and lower EPS. Conversely, companies
with a higher tax rate today already have more tax
leakage, and thus could make sense to pay a little more tax in
a corporate structure for a broader investor base.
l Current P/E Ratio — The lower the current P/E multiple, the
more management may be inclined to take action to drive a
re-rating.
l Management Commentary — Lastly we look at management
commentary from earnings calls/conferences to assess
the extent that companies are evaluating conversion and seriously
considering it as a strategic option.
Exhibit 2:
Based on our qualitative scorecard, our work suggests APO and ARES
may be most likely to convert
Company
Rating
Core FRE % of
Earnings
ENI Effective Tax
Rate
Current P/E ratio
(2018e)
Management
Commentary
Average Overall
Score
ARES (ARES) Equal-weight 100% 25% 25% 100% 63%
0 0.75 0.75 0 38%
Apollo (APO) Overweight 75% 50% 50% 50% 56%
0.25 0.5 0.5 0.5 44%
Oaktree (OAK) Overweight 50% 50% 25% 50% 44%
0.5 0.5 0.75 0.5 56%
KKR (KKR) Equal-weight 25% 0% 75% 75% 44%
0.75 1 0.25 0.25 56%
Carlyle (CG) Overweight 0% 75% 75%
0
38%
1 0.25 0.25 1 63%
Blackstone (BX) Overweight 50% 0% 50% 50% 38%
Source: Company Data, Morgan Stanley Research estimates
0.5 1 0.5 0.5 63%
MORGAN STANLEY RESEARCH 5
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For Ares, we believe conversion makes sense, given the company
is largely a play on fee related earnings from draw down funds,
separately managed accounts, and their relationship with ARCC, the
publicly traded business development company. Earnings from performance
fees at ARES are a smaller portion of overall profitability,
which is furthered by relatively higher compensation payout on performance
fee revenues, which in turn approach 80% in strategies
such as private equity vs. peers typically in the 45-55% range. The
company could benefit as a first mover and if the stock price reacts
favorably, we could see other alternative peers follow suit.
Apollo in our view may stand to benefit the most from conversion
with the best risk reward skew in our analysis using a SOTP
framework. Why? Similar to ARES, the company has meaningful
fee-related earnings as a percentage of overall operating income.
This is largely driven by their advisory relationship with Athene,
where APO earns a fee on ~$74b of assets and should benefit from
additional management fees from the company's most recent $24b
flagship private equity fund.
Our deep dive suggests Apollo has relatively longer-duration
stickier assets under management vs. peers, which gives us
greater confidence in APO's fee-related earnings stability,
growth, and potential for a re-rating. Apollo's AUM has a 12-year
duration on average (measured as outflows and realizations as a percentage
of beginning of period AUM). This is noticeably better than
HLNE's at 9.1 years, which trades at 23.4x P/E, and below Partners
Group of 16.7 years, which trades at 28x P/E.
We see Blackstone as potentially less likely to convert, but see
a more nuanced story at KKR given their token dividend policy;
for both we do not see as much valuation upside from a re-rating
of FRE multiples. BX and KKR have larger concentration to performance
fees and as a result we see less of an impact to potential upside
should fee related earnings multiples re-rate. Our estimated tax rates
for KKR and BX are also significantly lower than the group given the
earnings mix and other offsets. We see a greater downside to current
share prices if there was a conversion that had a higher tax drag and
multiples did not expand. That said, KKR has a history of making
major changes, such as its payout policy change in 2015 that
sharply reduced the dividend with a shift in strategy to grow book
value. At the time we thought such a change by KKR was a prelude
to converting to a C-corp, as we wrote here. However, the stock has
lagged and KKR's limited/token dividend means investors do not
receive the full benefit of a flow through partnership structure
with single-layer taxation. So we again raise the question, Why not
convert to a C-corp with a token dividend that is effectively single
layer taxation?
C-corp Conversion Could Be the Catalyst
to Unlock Value and Drive Multiple
Expansion
The alternative asset managers trade at a steep discount to
broader financial peers. We believe this is largely due to 4 factors:
1) volatility of the earnings (particulary performance fees) and questions
as to alpha persistency going forward by public market investors,
2) complicated business models, 3) corporate governance
concerns, and 4) corporate structure as a partnership. We do not
expect to see the first three factors change, but conversion could
make a meaningful difference by:
1) Expanding the universe of eligible investors in the Alts,
2) Alleviating the tax complexities of current K-1 tax reporting,
3) Unlocking value via multiple re-rating, particularly for management
fee-related earnings in the widely used sum-of-the-parts valuation
for Alts. We could also see incremental upside to current
valuations if multiples on performance fee earnings adjust upward
(more details below).
Exhibit 3:
Alts trade on average FY2 of 10.5x, a 28% discount on average to other
financials subsectors
Alts vs. Financial Subsectors P/E
30.0x
25.0x
20.0x
15.0x
10.0x
5.0x
0.0x
1%
24.1x
-4%
22.1x
-10%
-13%
-15%
18.5x 17.7x -28% -21%
16.0x -27% 15.4x 14.9x 14.7x
13.6x 12.7x
-33% 12.4x 12.0x -26.0%
11.2x 10.6x 10.8x
-42% -39%
-51%
-55%
2018 P/E Alts % Discount/Premium (RHS)
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
Source: Company Documents, Morgan Stanley Data
Note: P/E multiples for other financials subsectors aside from brokers and asset managers are based on
Morgan Stanley Estimates as of 1/18/2017
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On average the group currently
trades at 10.8x on 2018e EPS with
an average effective tax rate for
economic net income (the metric
used for EPS calculations) of
9.6%. The low tax rate is a result of
favorable treatment of passthrough
performance fees and tax
offsets. This is well below broader
financials peers and on average, a
26% discount to P/E multiples.
Exhibit 4:
Breakeven P/E multiple expansion of 2.1x required to offset 16% lower earnings in a C-corp on average.
Ticker Current 2018E 2018E
Price Tax Rate EPS P/E Tax Rate Pro-Forma EPS EPS % P/E ∆P/E
@ 24% Tax Rate
Change
APO $36.42 11.5% 3.68 9.9x 24% 3.15 -14.3% 11.5x 1.7x
ARES $24.70 8.7% 1.73 14.3x 24% 1.42 -17.7% 17.4x 3.1x
BX $36.78 5.3% 3.26 11.3x 24% 2.62 -19.8% 14.1x 2.8x
CG $25.60 17.8% 3.03 8.5x 24% 2.80 -7.7% 9.2x 0.7x
KKR $24.40 3.8% 2.74 8.9x 24% 2.16 -21.3% 11.3x 2.4x
OAK $45.20 10.5% 3.55 12.7x 24% 3.01 -15.1% 15.0x 2.3x
Average 9.6% 3.00 10.9x 2.53 -16% 13.1x 2.1x
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
If the Alts converted to C-corps,
there would be tax leakage as a result no pass-through of earnings for
carried interest and investment income. We estimate an effective tax
rate of 24% (21% federal + 3% state and local). The companies may
be able to keep some of the tax offsets in place; however, we conservatively
use a full 24% to evaluate the earnings impact. As a result of
higher taxes and -16% lower earnings on average in a C-corp, the
stocks would need to re-rate upward by 2.1x turns to maintain
their current valuations.
Exhibit 5:
On average we estimate a -16% hit to EPS using a 24% tax rate in a
C-corp structure. This would require 2018e multiples to expand 2.1x on
average in order for shares to hold the current price
P/E Multiples for Alts: Current vs 24% taxed EPS
20.0x
18.0x
16.0x
14.0x
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
% EPS
Change
P/E Multiple Expansion required to Maintain Current Valuiton @ 24% Taxed EPS
Current Multiple on 2018e EPS
17.4x
3.1x
14.3x
14.1x
2.8x
11.3x
11.3x
2.4x
8.9x
15.0x
2.3x
12.7x
11.5x
1.7x
9.9x
9.2x
0.7x
8.5x
13.1x
2.1x
10.9x
ARES BX KKR OAK APO CG Avg
@24% Rate -17.7% -19.8% -21.3% -15.1% -14.3% -7.7% -16.0%
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
MORGAN STANLEY RESEARCH 7
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Impact to Current Valuations in Upside and Downside Case
In the sections following we explain in greater detail our
approach to potential Upside/Downside scenarios and the
impact to valuation under potential conversion. The actual
impact is very difficult to quantify given the variety of moving pieces
and the reliance on investors to drive the a re-rating. We have presented
it as a scenario analysis to evaluate conversion on a risk
reward spectrum. Upside/downside scenarios show a positive skew
for companies that have higher earnings contribution from management
fees vs. more downside skew for companies with more performance
fees (less certain re-rating of performance fees).
As the examples herein illustrate, we see significant value in the
re-rating of fee-related earnings that could unlock share value
and result in higher stock prices. We believe these stable and
growing fee earnings can support higher multiples and broader own-
ership of the Alts and be the catalyst for the re-rating (explained in
greater detail in the sections that follow). In both our upside and
downside approaches we look at a Sum-of-the-Parts that values at 1)
fee-related earnings, 2) balance sheet investments and net cash, 3)
the net accrued carry balance, and 4) future value of carry. In both the
current and upside case we use a fully taxed fee-related earnings at
a 24% tax rate and our value for the balance sheet remains
unchanged in both scenarios as well.
However, we make several adjustments to our upside and downside
case to reflect a C-corp structure with full tax rate on all earnings: 1)
Tax the net accrued carry receivable balance at a 24%. 2) Tax our estimate
for average net carry earnings at a full 24% rate. Further, in the
upside case we also adjust the multiple upwards for fee related earnings
driven by broader ownership of the stocks, and we conserva-
Exhibit 6:
Potential Upside Scenario SOTP Valuation for APO. We see potentially significant value from a re-rating of fee-related earnings driving higher valuation
Apollo Global Management (APO)
Fee Related
Earnings
+
Balance
Sheet
+
Accrued
Carry
+
Market
Implied Carry
Value
=
Valuation
Sum-of-the-Parts Components
(APO)
Current
Price
SOTP
Downside Case
C-Corp
Conversion
Change
Upside Case C-
Corp
Conversion
Change
2018e Pre-Tax Core FRE / Sh $1.66 $1.66 0% $1.66 0%
Tax Rate 24% 24% 0% 24% 0%
2018e After-Tax Core FRE / Sh $1.26 $1.26 0% $1.26 0%
FRE Multiple 15.0x 15.0x 0.0x 22.5x 7.5x
Core FRE Value $18.94 $18.94 0% $28.40 50%
Balance Sheet Net Cash and
Investments / Sh (as of 3Q17)
Net Accrued Carry / Sh (as of
3Q17)
Avg Net Carried interest / Sh
(2018e-2020e)
$2.72 $2.72 0% $2.72 0%
$2.16 $1.64 -24% $1.64 -24%
$2.45 $1.86 -24% $1.86 -24%
Multiple 5.1x 4.2x -0.9x 7.1x 2.0x
Market Implied Carry Value $12.61 $7.91 -37% $13.30 6%
Total Value $36.42 $31.20 -14% $46.07 26%
2018e EPS $3.68 $3.15 -14% $3.15 -14%
P/E 9.9x 9.9x 0.0x 14.6x 4.7x
Source: Thomson Reuters Company Data, Morgan Stanley Research estimates
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tively adjust upward our multiple on future carried interest earnings
by 2 turns. For Apollo, we see that nearly the entire the increase
in value in the upside case is driven by the expansion of the FRE
multiple from 15x to 22.5x.
2018 Impact: Upside case impact is +13% vs. current price on
average and 3.8x multiple expansion to a fully taxed EPS. In our
upside case scenario, we assume a 22.5x multiple on fee-related earnings
in our SOTP. We see favorable risk/reward skew APO.
Downside case impact assumes no multiple expansion of any kind,
and that the stocks trade at their same current P/E, however on
lower, fully taxed EPS. This represents -18% average downside from
current prices. While this is likely an unreasonable outcome this is
the concern among some investors, given that the only certainty in
the analysis is a higher tax drag and lower earnings. We see less favorable
upside/downside skew for BX and KKR.
Exhibit 7:
We see the greatest contribution of fee-related earnings at ARES and
APO as a percentage of pre-tax earnings
2018e Pre-Tax Earnings Contribution
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Investment Income Performance Fees Core Fee Related Earnings
22% 19%
26%
51%
43% 64%
39%
7%
36%
37%
29% 27%
51%
30%
19%
7%
85% 48%
8%
24%
29%
ARES APO BX OAK KKR CG Avg.
Source: Company Documents, Morgan Stanley Research estimates
Note; Fee Related earnings are on MSe Core methodology, ARES Core FRE include BDC Part 1 Management
fees that are typically excluded from MSe Core FRE definition
Exhibit 8:
On average we see potential for 3.7x turns of multiple expansion on in
our upside case with fully taxed EPS at a 24% effective rate. This could
drive +12% upside on average to current share prices
P/E Multiples for Alts: Potential Expansion
22.0x
17.0x
12.0x
7.0x
2.0x
-3.0x
% Upside
to Stock
Total Multiple Expansion in C-Corp Upside Scenario (on fully taxed EPS @ 24%)
Current Multiple on 2018e EPS
19.0x
4.7x
14.3x
15.4x
4.7x
11.3x
12.5x
4.1x
8.9x
16.7x
4.0x
12.7x
14.6x
3.6x
9.8x
1.4x
9.9x 8.5x
14.7x
3.7x
10.9x
ARES APO BX OAK KKR CG Avg
9.2% 26.5% 9.3% 11.3% 10.7% 7.5% 12.4%
Source: Company Data, Morgan Stanley Research estimates
Exhibit 9:
Summary Scenario Analysis: Potential upside/downside valuation and multiples impact if Alts convert to C-corp structure and pay a full 24% tax
rate
Upside Case Assumptions: 1) Fully taxed earnings and carry receivable
balance 2) 22.5x Multiple on core FRE 3) Multiple expansion on carry of two
turns to an average of 9.5x 2018-20 avg. performance fee earnings
Downside Case Assumptions: 1) Fully taxed earnings and carry receivable
balance 2) 15.0x Multiple on Core FRE 3) No P/E multiple expansion on fully
taxed EPS 4) Back into implied multiple on future carry of 5.6x on avg.
Ticker
Current
Price
Valuation (C-
Corp
Conversion)
Valuation Price/Fully
Taxed EPS
∆ Current P/E vs.
w/ 24% Taxed
EPS
% Upside Price
Change From
Current
Valuation (C-
Corp
Conversion)
Valuation
Price/Fully Taxed
EPS
∆ Current P/E vs.
w/ 24% Taxed EPS
% Downside Price
Change From
Current
APO $36.42 $46.07 14.6x 4.7x 26.5% $31.20 9.9x 0.0x -14.3%
ARES $24.70 $27.18 19.1x 4.8x 10.0% $17.95 12.6x -1.7x -27.3%
BX $36.78 $40.18 15.4x 4.1x 9.3% $29.51 11.3x 0.0x -19.8%
CG $25.60 $27.52 9.8x 1.4x 7.5% $23.62 8.5x 0.0x -7.7%
KKR $24.40 $27.01 12.5x 3.6x 10.7% $19.21 8.9x 0.0x -21.3%
OAK $45.20 $50.31 16.7x 4.0x 11.3% $38.39 12.7x 0.0x -15.1%
Average 14.7x 3.8x 12.6% 10.7x -0.3x -17.6%
Median 15.0x 4.0x 10.4% 10.6x 0.0x -17.4%
Source: Company Data, Thomson Reuters, Morgan Stanley Research estimates. Note: Price as of 1/26/2017
MORGAN STANLEY RESEARCH 9
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Exhibit 10:
We see more favorable risk-reward skew at APO given greater concentration
of fee related earnings vs. performance fees
Estimated Change to Curent Share Price
30%
20%
10%
0%
-10%
-20%
-30%
-40%
26%
-14% -15%
Downside
11% 11% 9% 10%
-21% -20%
-27%
Upside
8%
-8%
13%
-18%
APO OAK KKR BX ARES CG Avg.
Source: Company Data, Morgan Stanley Research estimates
ARES Conversion Largely Priced In
With the recent run up of ARES stock price, the market seems to
have already priced in a good portion of the upside from conversion.
Year to date, ARES has out performed peers by ~10% likely on
the back of this expected conversion. As a result we have looked at
the share price of ARES at several time periods to assess what is
embedded in the price already.
How do we arrive as such an estimate? We start with the 12/31/2017
share price of $20.00. We then gross up this starting point for the
broader performance of peers to isolate just the outperformance of
ARES vs the group. The alts group ex ARES YTD is up +10% so we use
a starting price for ARES of $21.90.
l We first estimate the implied multiple on future carry for
ARES at the pro forma stock price before C-corp conversoin
began to be priced in. (we explain this in process in greater
detail in the section on Deconstructing Our Implied Carry Valuation).
l We then take the current share price today and assume that
the run up in price was a result purely from multiple expansion
on fee related earnings. In doing this we hold the performance
fee multiple and value of future performance fees
constant.
l We then back into an implied value of FRE using the various
components of the SOTP and the current share price. We
divide that value by our 2018e FRE to determine our estimate
for baked in multiple expansion at ARES. (Please see Ares
Management SOTP and Sensitivity Analysis for more
details.)
We see the market valuing ARES's FRE at 18.3x, with about 3.4x turns
of multiple expansion YTD and pricing in a large degree of the potential
benefit from C-corp conversion. This is just under half of the total
7.5x turns of FRE multiple expansion that we expect to see in our
upside scenario for the Alts. As a result, our upside/downside from
for ARES has a less favorable risk reward skew, as much of the upside
is already baked in.
10
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Why Should Fee-Related Earnings
Re-Rate Higher?
We point to three approaches to thinking about how to
value fee-related earnings and what the right multiple
should be on this earnings stream. We believe that under
a C-corporation structure with a broader potential investor
base and ownership, this portion of the Alts earnings are
most likely to re-rate significantly higher while there could
be more variability in the multiple investors ascribe to performance
fees. We currently believe the market is pricing in
fee related earnings around 15x times, a discount to where
these earnings could trade up to. As we explain in greater
detail in the Appendix, we see ARES as a stock that is likely
to convert, and as we take a look at the SOTP, we believe
FRE for ARES has already seen significant expansion. We
estimate the multiple on ARES FRE has already gone up
from 15.0x to 18.4x.
Below we look at where multiples could trade for the broader
group as a whole, but acknowledge that investors likely use different
FRE multiples for companies to account for duration of assets,
growth in AUM, franchise value etc. On average, our three
approaches suggest a 23.4x multiple for fee related earnings. In our
upside case we use a 22.5x multiple. These multiples are on 2018e fee
related earnings as we are trying to evaluate where the stocks trade
today, and where they could potentially trade to in the near term.
1) Premium to Traditionals Asset Managers
Exhibit 11:
The average of our three approaches to FRE multiples suggests and
FRE multiple of 23.4x
FRE Multiples Across Three Approaches
35.0x
30.0x
25.0x
20.0x
15.0x
10.0x
5.0x
0.0x
15.4x
Traditionals
Method
26.0x
C-Corp Alts
28.9x
Bond Yield
Cap Rate
Average
Source: Company Data, Morgan Stanley Research estimates
23.4x 22.5x
Average
MSe Upside
Case
Exhibit 12:
Traditional managers trade at a 15.4x FY2 P/E multiple with average
net flows of just +1% during that time period
25.0x
20.0x
15.0x
10.0x
5.0x
0.0x
Covered Trad. AMs' FY2 P/E, and Annualized Flows
Covered Trad. FY2 Avg. P/E Historical Multiple 05'-17' Median Ann. - Quarterly LT Net Flows/BoP LT AuM (%)
Trailing 10Y: ~2.3% Avg. Annualized
Organic Net Flows/BoP LT AuM
2Q15: Average FY2 P/E 13.8x below
historical avg of 15.8x
15.4x
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17E
1Q18E
2Q18E
3Q18E
4Q18E
Source: Thomson Reuters, Company Data, Morgan Stanley Research
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
We see the historical average P/E multiple for traditional asset
managers of 15.4x as a starting point for FRE multiples. The traditional
asset manager business model earns management fees with a
significantly smaller portion of revenues from performance fees relative
to alternative asset managers.
We believe the Alts' management fee earnings, however, command
a premium multiple given several factors: A) faster organic
growth, B) stickier long-term committed assets, C) fees paid on committed
capital which limits downside risk to revenues, and D) more
insulation from fee pressure.
A) Faster net organic growth in fee-paying assets under management
for Alts vs. slower growth rates at traditional asset managers.
The Alts have outpaced organic growth rate of traditional
asset mgrs over the past 4 years by nearly 700 bps, and we estimate
900bps of continued outperformance on average from 2018
through 2019. Organic growth has averaged 5% for the alts from the
period 2014-17e, while the traditionals have seen net outflows and
organic decay of -2%. Looking two years out, we see traditionals net
inflows of 1% vs. alts on average at 10% driven by continued fundraising
strength and fees turning on for existing funds that have
already been raised.
MORGAN STANLEY RESEARCH 11
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Exhibit 13:
Alts organic growth has outpaced traditionals by 7% over the past 4 years, and we expect average Alts growth over the next to years to be 10x that
of Traditionals
Organic Asset Growth: Traditionals vs. Alts
Avg. 2014 - 2017E Growth Rate
20%
15%
10%
5%
0%
-5%
-10%
-15%
7%
5%
BLK
-6%
3%
2% 2% 1%
0%
1% 1% 0% 1%
VRTS
LM
IVZ
Source: Company Data, Morgan Stanley Research estimates
Note: We look at fee paying AUM for the alts to calculate organic growth
TROW
OMAM
-4%
-3%
BEN
-7%
-13%
WDR
Avg. 2018 - 2019 Growth Rate
4%
18%
APO
-2%
11%
10%
8% 9% 8% 8%
6% 6%
CG
KKR
BX
ARES
0%
OAK
-2%
1%
Trads Avg
5%
10%
Alts Avg
Despite the more favorable view on asset growth, the alternative
asset mangers continue to trade at a significant P/E discount
to traditionals. The group currently trades at 10.8x MSe 2018 EPS,
a 3.0x turn discount to traditionals peers. This however is on total
earnings per share, and is inclusive of performance fees which investors
use a lower multiple on given volatility. However, we believe a
re-rating of the management fee portion of earnings in a SOTP valuation
alone could help close the overall P/E gap vs. traditionals.
Exhibit 14:
Organic Growth for Traditional Asset Managers (2018e avg) vs. Current
2018e P/E Multiple
2018 P/E Ratio
25x
HLNE
23x
21x
BLK
19x
17x
TROW
15x
BEN
LM
13x
IVZ
11x
WDR
VRTS
OMAM
9x
-15% -10% -5% 0% 5% 10%
2018 Organic Growth Rate (%)
Source: Company Data, Morgan Stanley Research estimates
Exhibit 15:
Organic Growth for Traditional Asset Managers (9m17 Annualized) vs.
Current 2018e P/E Multiple
2018 P/E Ratio
27x
25x
23x
21x
19x
BLK
HLNE
17x
15x
BEN
FII
TROW
LM
CNS
EV
13x WDR
AMG
IVZ
11x
APAM VRTS
OMAM
AB
9x
-15% -10% -5% 0% 5% 10% 15%
Source: Company Data, Morgan Stanley Research estimates
9m17 Organic Growth Rate (% annualized)
B) Longer-term capital that is committed for a defined period of
time and pays fees with an average duration of 12 years in a typical
drawdown fund. As you can see in the following exhibit based on fullyear
2016 data, we see larger redemption rates from traditional asset
managers (those that disclose redemption rates) relative to alts. For
traditionals we look at total redemption rates. For the alternatives
we look at realizations/harvesting of investments along with
redemptions of open ended products from fee paying AUM as it is
more comparable to traditional asset managers. If we take 1 divided
by the redemption rate, we can back into an average duration of
assets under management. For traditionals below (both covered and
non covered), this equates to 4.3 years duration and for the alterna-
12
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tives 6.8 years. Said differently, the alternatives have nearly 55%
longer duration of the asset base.
2) Publicly Traded Alts Comps
Exhibit 16:
Redemption Rates by Company for 2016: Alts see less redemption
money as a % of AuM relative to traditionals and duration of assets
~55% longer and C-corp alts with the longest duration.
Annual Redemption Rates by Company: 2016
35%
30%
25%
20%
15%
10%
5%
0%
33%
29%
25% 24% 23% 22%
Alts have ~55% longer duration of AUM
compared to traditionals. Based on 2016
redemptions and outflows we see alts
avg. duration of 6.8 years vs. trads at
4.3. C-Corp alts have the longest
implied duration of assets at 11.8 years
18% 18% 17% 17%
16%
13% 12% 11%
8%
6%
Source: We use Fee Paying AUM for the Alts; Soure: Company Data, Morgan Stanley Research
Note: HLNE outflows are for an average of FY2016 and FY2017
C) Management fees that are paid on committed money rather
than net asset value. This provides much more stability and downside
protection, but limits upside to management fees as investments
appreciate in value do not automatically translate into higher
mgmt fees. The Alts then participate in investment performance
through performance fees or carried interest, whereas the traditionals
participate in performance via greater management fees on a
higher value of invested assets.
D) Relatively more insulation from fee pressure in private markets
given limited low cost competitors (indexed funds and ETFs for
traditionals) and higher demand for products driven by the search for
higher return and diversification from investors. In fact, recent
demand for some PE funds has actually led to supply constraints and
allowed Alts to give less fee concessions. Apollo, for example, closed
fundraising for their flagship Fund IX last year at $24b, but the
demand was 25% higher at $30b. As a result, the company said "economics
to Apollo for Fund IX are considerably better since we did not
need to provide as many management fee discounts." This supports
the forward look on growth in management fee revenues; however,
we could see some mix shift into lower return profile (and lower fee)
products that could begin to pressure fee rates over time.
23%
15%
9%
We see Hamilton Lane (HLNE, Equal-weight) and Partners Group
(PGHN, Equal-weight, covered by Anil Sharma) as offering an
upside scenario for Alts' fee-related earnings multiples.
Hamilton Lane is ~90% fee earnings and currently trades at 23.4x
multiple on our CY2018e EPS. Similar to alternative asset manager
peers, the company gets paid management fees on drawdown funds
and customized separately managed accounts with stable fees paid
on committed capital. PGHN is a publicly traded alternative asset
manager in Switzerland, and as a C-corporation it is the closest true
comp for HLNE.
While we see the publicly traded C-corps as good comps, there
are several factors that could be elevating the multiples. HLNE is
a small cap stock with $2b market cap and may not be the best comp
for the large cap PE firms. The company has limited float (currently
at ~25%) and scarcity value as the only US based publicly traded alt
in a C-corp structure. PGHN is a trades in Europe and may not be a
great comp because of that. Lastly, while not drastically different,
HLNE and PGHN have had higher organic growth historically and
looking out over the next 2 years we expect their growth to outpace
most of the alts. As a result of the high multiples at the public C-corp
alts, we have heard partnership alts increasingly use HLNE as a peer
comp.
Exhibit 17:
We expect Alts to deliver similar organic growth profile over the next
few years as C-Corp Alts Hamilton Lane and Partners Group
Organic Asset Growth:C-Corp Alts vs. Partnership Alts
20%
Avg. 2014 - 2017E Growth Rate Avg. 2018 - 2019 Growth Rate
15%
10%
5%
0%
-5%
4%
APO
18%
-2%
11%
9% 10%
8% 8%
CG
KKR
BX
8%
6%
ARES
0%
OAK
6%
14%
11% 11% 11%
Source: Company Data, Morgan Stanley Research
Note: HLNE average organic growth includes years 2015 - 2017e where we have data; The alts average
uses 2014 - 2017e for consistency with the traditionals organic growth chart above
HLNE
PGHN
5%
Alts Average
10%
MORGAN STANLEY RESEARCH 13
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Exhibit 18:
HLNE Currently Trades 23.4x on FY2 P/E (an 18% premium to when the
company began trading after going public in early 2017); Partners
Group currently trades at a 28.2x P/E (a 21% premium to its last 3 year
average P/E ratio)
C-Corp Alts FY2 P/E Multiple
29.0x
27.0x
25.0x
23.0x
21.0x
19.0x
17.0x
HLNE
PGHN
28.2x
15.0x
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
23.4x
Source: Thomson Reuters, Morgan Stanley Data
Note: Hamilton FY2 EPS estimates are on the company's fiscal year basis, the twelve months ending 3/31
HLNE and PGHN P/E multiples as of 1/12/2018 based on consensus EPS
3) Bond Yield Approach
Our third approach to coming up with the appropriate multiple
for fee-related earnings is to compare fee revenues to a similar
to a bond with a 10-year duration given the locked-in nature of
committed capital with fees paid on commitments (Par Value) as
opposed to paid on NAV. Importantly, the Alts are increasingly
growing permanent capital or very long duration capital that has
attractive life-time value of the contract. APO has the largest
amount of permanent capital, representing about 43% of AUM,
followed by ARES at 16%. This results in a stable stream of revenues,
however there could be variability on the expenses that would
impact fee related earnings. Under the bond approach the "default
risk" in this scenario would be counter party risk that management
fees would not be paid by limited partners. These LPs include sovereign
wealth funds, pensions, and other institutional investors that we
view as highly unlikely to default.
Our methodology starts with the 10-year US treasury yield, given
the similar duration to the life of the draw down funds management
fees. We then add an appropriate credit spread on top of the 10-year
yield to account for the risk that these institutions "miss" payment of
their management fees. We also consider the fact that not all fee
paying assets under management at the alts are subject to lock ups
(such as hedge fund AUM, open ended funds). Those alts with larger
amounts of permanent capital or longer duration of assets would
suggest a lower credit spread given less risk of lost revenues in our
view.
We look at AA and BBB credit spreads as a proxy for high and low
"default risk" for LPs paying management fees. AA credit spreads
are currently at 53bps and BBB are currently at 122bps. Again, the risk
of "default" is likely overstated by using these yields but we show this
range to account for other factors including differences in duration
of assets. We then add these spreads to the current 10 yr treasury
yield of 2.62% to get a yield of 3.15% and 3.84% respectively. Lastly,
we capitalize these yields to back into implied FRE multiples by
taking 1 divided by each of the yields. This implies a multiple of 31.7x
using AA spread and 26.0x using BBB spread. Finally we take an
average of the two credit spread approaches to get to 28.9x.
Exhibit 19:
Permanent capital represents 15% of AUM on average for alternatives
and we see 63% on average with a contractual life of 7+ years
Alts Contractual Life of AUM
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
7+ Years at Commitment Permanent Capital
89%
84% 83%
80%
78%
72%
43%
41%
67%
57%
67% 86%
59%
58%
63%
16% 15% 13%
3% 1%
15%
APO ARES BX KKR CG OAK Avg
Source: Company Data, Morgan Stanley Research
Note: KKR permanent capital refers to capital of infinite duration. Contractual life of AUM refers to the
duration at inception for KKR
Exhibit 20:
Our cap rate approach to valuing FRE implies a multiple of 26.0 to 31.7x
based on a yield of 3.15% using a AA credit spread on the 10-year treasury
yield and a 3.84% yield using a BBB credit spread
Walk to Assumed Yields for Cap Rates
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2.62%
10-Yr
Treasury
0.53%
Credit
Spread
(low end)
3.15%
Yield
Source: Thomson Reuters, Morgan Stanley Research
2.62%
10-Yr
Treasury
1.22%
Credit
Spread
(high end)
3.84%
Yield
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What Is the Impact of Higher FRE
Multiples in a SOTP approach?
If we take an average of the three approaches described above of 1)
traditionals at a historical 15.4x, 2) publicly traded C-corp alts at an
average 26.0x, and 3) our capitalized bond yield approach at an
average 28.9x, we arrive at a 23.4x multiple for fee related earnings.
Exhibit 21:
The average of our three approaches to FRE multiples suggests and
FRE multiple of 23.4x
FRE Multiples Across Three Approaches
35.0x
30.0x
25.0x
20.0x
15.0x
10.0x
5.0x
0.0x
15.4x
Traditionals
Method
26.0x
C-Corp Alts
28.9x
Bond Yield
Cap Rate
Average
Source: Company Data, Morgan Stanley Research estimates
23.4x 22.5x
Average
MSe Upside
Case
Exhibit 22:
Using a 22.5x FRE multiple implies an average 6.1x multiple on fully
taxed future performance fee earnings
Implied Future Carry (Fully Taxed) Multiples using 22.5x
FRE Multiple
0.0x 2.0x 4.0x 6.0x 8.0x 10.0x
ARES
8.4x
BX
9.3x
CG
7.1x
KKR
5.4x
OAK
4.5x
APO
2.0x
Avg
Med
6.1x
6.2x
Source: Company Data, Morgan Stanley Research estimates
If the market re-rates FRE multiple to 22.5x, then we see the current
share price valuing performance fees at 6.1x. This is based on
our SOTP framework. (See Deconstructing Our Implied Carry Valuation:
What Is the Market Paying? for more details on methodology.)
Exhibit 23:
SOTP analysis using a 22.5x FRE multiple and current share price implies future carry is being valued at 6.1x future performance earnings on average
= B+C+D = A-E-F = E+F+G = G/I
A B C D E F G H I J
Ticker
Current
Price
2018E
Core FRE
FRE
Multiple
Core FRE
Value Per
Share @
24% tax
Rate
After-Tax
BDC
Value Per
Share
BS Value
Per Share
SOTP
Value Ex-
Carry Per
Share
After-Tax
Net Carry
Receivable
Per Share
@24% Rate
Market
Implied
Value of
Future
Carry
Total
Value Per
Share
After Tax Avg.
Net Carry Per
Share (2018-
2020)
Implied
Future
Carry
Multiple
APO $36.42 669 22.5x $28.40 $0.00 $2.72 $31.13 $1.64 $3.66 $36.42 $1.86 2.0x
ARES $24.70 185 22.5x $14.71 $4.52 $0.69 $19.92 $0.78 $3.99 $24.70 $0.48 8.4x
BX $36.78 1,196 22.5x $17.03 $0.00 $2.83 $19.86 $2.29 $14.63 $36.78 $1.57 9.3x
CG $25.60 100 22.5x $5.01 $0.00 $0.85 $5.86 $4.40 $15.34 $25.60 $2.17 7.1x
KKR $24.40 475 22.5x $9.57 $0.00 $9.71 $19.28 $1.32 $3.80 $24.40 $0.71 5.4x
OAK $45.20 166 22.5x $18.17 $0.00 $15.19 $33.36 $4.38 $7.47 $45.20 $1.68 4.5x
Average 6.1x
Median 6.2x
Source: Company Data, Morgan Stanley Research estimates
MORGAN STANLEY RESEARCH 15
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What Is the Appropriate Multiple for
Performance Fees?
Investors have a wide dispersion of responses on what is the
appropriate multiple for performance fees. We believe that at current
share prices, the market is valuing fee-related earnings 15.0x.
This represents an 1.8x turn premium or +13% premium to current
traditional multiples on 2018e EPS of 13.2x. Using this as a starting
point, we see the market valuing performance fees at 7.5x on
average using a sum of the parts framework. If we assume C-corp
conversion with a higher 24% tax rate, and believe alts' fee related
earnings can re-rate from 15x to 22.5x, then we see the market valuing
performance fees at just 6.1x on average today.
Where should performance fee-related earnings trade? Given
that carry earnings (performance fees) are cyclical and historically
volatile, we look to Goldman Sachs as a comp for this earnings
stream. On average since 2010 (post crisis) the FY2 price to earnings
multiple at GS has been 9.5x, with a standard deviation of 1.4x.
We see a range of multiples of +6.7x to +12.3x using two standard
deviations above and below the average. We see this as reasonable
starting point for valuing performance fees. The group average
implied future carry multiple of 7.5x is 1.4 standard deviations away
from GS FY2 P/E multiple. If alts convert, we believe this multiple
should be able to move upward but will likely remain at a steep discount
to the FRE multiple given the volatile nature of the performance
fees. In our upside case scenario, we bake in two turns of
multiple expansion from current implied rate for each company. This
results in median performance fee multiple across the group of 8.5x,
about slightly less than one standard deviation from GS FY2 multiple
since dating back to 2010.
On a cash basis, the volatility of performance fee earnings (net
cash carry) for the alts on a TTM basis has been fairly similar to
the volatility of Goldman Sachs's operating earnings. For
Goldman, we look at operating earnings both with and without
investment management revenues to isolate the more volatile businesses.
The following bar graph looks at the standard deviation of
the year over year % change of the trailing twelve months earnings.
The alts average is 1.2 about double the volatility of GS (ex investment
management) of 0.6. This suggests even further upside and
greater conviction in our multiples for performance fee multiples,
especially for those companies with less volatility (Carlyle and KKR).
Exhibit 24:
With a 24% tax rate on all earnings and a 22.5x FRE multiple, we
see future performance fees valued at and implied 6.1x multiple
on average.
Implied Future
Carry Multiple
using a 15.0x
FRE multiple
Implied Future
Carry Multiple
using a 22.5x
FRE multiple
APO 5.1x 2.0x
ARES 11.6x 8.4x
BX 9.5x 9.3x
CG 6.0x 7.1x
KKR 7.0x 5.4x
OAK 5.5x 4.5x
Avg. 7.5x 6.1x
Med. 6.5x 6.2x
Source: Company Data, Morgan Stanley Research
Note: We use a 18.4x multiple for ARES as the stock has already priced in much of the potential
value of C-corp conversion Note 2: Scenario using 15x FRE does not use fully taxed net accrued
carry and future carry while the scenario using a 22.5x FRE multiple assumes C-corp conversion
and full 24% effective tax rate on both net accrued carry and future carry earnings.
Exhibit 25:
Goldman sachs has historically traded at an average FY2 P/E of 9.5x
and a standard deviation of 1.4x
GS FY2 P/E Multiple
14.0x
13.0x
12.0x
11.0x
10.0x
9.0x
8.0x
7.0x
6.0x
5.0x
Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
Source: Thomson Reuters, Company Data , Morgan Stanley research
+2 St. Dev 12.3x
-1 St. Dev 10.9x
Avg 9.5x
-1 St. Dev 8.1x
-2 St. Dev 6.7x
Note.: Data includes daily FY2 P/E ratios to calculate standard deviation of P/E ratios using data beginning
January 2010
16
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Exhibit 26:
Alts Net Cash Carry Volatility vs. GS earnings volatility on a TTM basis
Y/Y TTM Historical Earnings Volatility (St. Dev)
3.0
2.4
2.5
2.0
1.5
1.0
0.5
1.6
1.5
1.2
0.9
0.4
0.3
0.5
0.6
0.0
BX OAK APO Alts
Average
ARES KKR CG GS GS Ex-
IM
Source: Company Data, Morgan Stanley Research
MORGAN STANLEY RESEARCH 17
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Deconstructing Our Implied Carry Valuation:
What Is the Market Paying?
We deconstruct the various pieces of a SOTP for the alts
in order to determine our best guess on how much the
market is valuing future performance fees. We then
divide that implied value by future performance fee earnings,
to determine the implied multiple that the market is
paying for this earings stream. This is the groundwork for
our upside and downside scenarios if the alts were to
convert to C-corps.
We simplify our the SOTP and standardize it across the group to
look at 4 main components. 1) after-tax core fee-related earnings,
2) balance sheet value of investments plus net cash/debt, 3) net
accrued carry balance, and 4) future value of performance fees. The
values of the balance sheet and net accrued carry receivable are
static items with balances as of 3Q17. We then adjust the multiple on
our core FRE to determine a value for what we believe the street is
using. To be conservative, we use 15x as a starting point for what we
believe is currently priced in. We then take the current share price
and subtract out the value of the FRE, net accrued carry performance
fees and the balance sheet and we are left with an implied value of
what the market is pricing in for future carry. Once we have the future
carry value, we divide by the net performance fee earnings per share
for each company and get an implied multiple on the future performance
fees. Using this approach and a 15x multiple on FRE, we see the
market is valuing future performance fees at 7.5x on average and a
median 6.5x.
We make several key adjustments in the SOTP valuations: First,
we use our own Morgan Stanley definition of "core fee-related earnings"
in our calculation. We use our core approach as we attempt to
normalize the various definitions of FRE across the companies. The
main difference vs. company-reported FRE is that we fully burden all
expenses, including equity-based compensation. KKR differs the
most on company-reported vs. MS Core FRE. For more information
on our core FRE methodology, please see our note Alternative Asset
Managers: Who's Got Swimsuits? (19 May 2016).
We also make adjustments for ARES an OAK. For Ares: a significant
portion of the fee related earnings come from Part 1 BDC fees.
These are investment income sharing fees from their management
agreement with ARCC. In the MS approach, we value these separately
from more traditional management fees. However, we do not
believe that the market looks at the fees this way, and so we include
them in the total FRE by using the same multiple as we are using for
FRE (15x). For presentation purposes in the table below, we break out
the BDC Part 1 fees separately for ARES to show the value. OAK: We
adjust the balance of OAK's investments on balance sheet to account
for OAK's 20% ownership stake in DoubleLine which it currently
holds at cost of $21m as adjusted under the equity method of
accounting. With the benefit of lower corporate taxes we currently
value OAK's ownership stake at $1B. We do not believe the market
gives full value for this 20% ownership and haircut our MSe value by
50% to $500m. We then add this value to the balance of investments
and net cash for OAK's total balance sheet value.
Exhibit 27:
Market Implied Value of Future Carry at current share price and 15x FRE multiple
= B+C+D = A-E-F = E + F + G = G/H
A B C D E F G H I J
Ticker
Current
Price
2018E
Core FRE
FRE
Multiple
Core FRE
Value Per
Share @
24% tax
Rate
After-Tax
BDC
Value Per
Share
BS Value
Per Share
SOTP
Value Ex-
Carry Per
Share
Pre-Tax Net
Carry
Receivable
Per Share
Market
Implied
Value of
Future
Carry
Total
Value Per
Share
Pre-Tax Avg.
Net Carry Per
Share (2018-
2019)
Implied
Future
Carry
Multiple
18
APO $36.42 669 15.0x $18.94 $0.00 $2.72 $21.66 $2.16 $12.61 $36.42 $2.45 5.1x
ARES $24.70 185 18.4x $12.02 $3.70 $0.69 $16.41 $1.03 $7.26 $24.70 $0.63 11.6x
BX $36.78 1,196 15.0x $11.36 $0.00 $2.83 $14.19 $3.01 $19.59 $36.78 $2.07 9.5x
CG $25.60 100 15.0x $3.34 $0.00 $0.85 $4.19 $4.40 $17.01 $25.60 $2.85 6.0x
KKR $24.40 475 15.0x $6.38 $0.00 $9.71 $16.09 $1.74 $6.57 $24.40 $0.93 7.0x
OAK $45.20 166 15.0x $12.11 $0.00 $15.19 $27.30 $5.76 $12.14 $45.20 $2.20 5.5x
Average 7.5x
Median 6.5x
Source: Company Data, Morgan Stanley Research estimates
M
M
Upside Scenario
Starting with the framework laid out above, we make several key
adjustments in our upside scenario to illustrate where we think multiples
go and where the stocks can trade over the near term if the alts
convert. Our upside scenario implies an average share price increase
of 13% across the group.
l First we fully tax effect the performance fee earnings.
Under a C-corp structure these would not get the passthrough
benefit and would be subject to full taxes. We use a
full 24% tax drag on the net accrued carry receivable balance
and the future net carry per share.
l Second we adjust the FRE multiples upward. As we discussed
previously with our three approaches for FRE multiples,
we believe there is significant upside to the value of
these earnings if alts were to convert. This drives nearly all of
the upside from current prices in our upside scenario. We use
a 22.5x multiple on FRE in our upside case, which represents
50% increase from the 15x multiple that we believe is priced
in today.
l Last we assume 2x of multiple expansion for performance
fees. As a starting point, we look at the implied multiples
using current share prices and a 15x multiple for FRE as
described above. We then add 2x turns of multiple expansion
to each of the companies' current implied multiples. We look
to the Goldman Sachs example earlier in the note as a comp
for cyclical financials earnings. Our group median for implied
future carry multiples of 8.5x is just under one standard deviation
away from GS's historical P/E average of 9.5x. Although
we use the higher multiple, this is on a lower value of fully
taxed future performance fee earnings. The impact to valuation
of future performance fees are mixed from company and
can be seen in greater detail in the following appendix with
company specific SOTP and scenario analysis. While we
expect some multiple expansion for performance fees in a
C-corp, the structure will not change the inherent volatility
of the performance fee portion of earnings that is
marked to market.
Exhibit 28:
Upside Scenario SOTP Valuation
= B+C+D = G x H = E + F + I
A B C D E F G H I J
Ticker
Current
Price
2018E
Core FRE
FRE
Multiple
Core FRE
Value Per
Share @
24% tax
Rate
After-Tax
BDC
Value Per
Share
BS NAV
Per Share
SOTP
Value Ex-
Carry Per
Share
After-Tax
Net Carry
Receivable
Per Share
@24% Rate
Net Carry Per
Share After 24%
Tax (Avg. 2018e-
2020e)
Future
Carry
Multiple
Value of
Future
Carry
Total
Value Per
Share
%
Increase
from
Current
Price
APO $36.42 669 22.5x $28.40 $0.00 $2.72 $31.13 $1.64 $1.86 7.1x $13.30 $46.07 26%
ARES $24.70 185 22.5x $14.71 $4.52 $0.69 $19.92 $0.78 $0.48 13.6x $6.47 $27.18 10%
BX $36.78 1,196 22.5x $17.03 $0.00 $2.83 $19.86 $2.29 $1.57 11.5x $18.04 $40.18 9%
CG $25.60 100 22.5x $5.01 $0.00 $0.85 $5.86 $4.40 $2.17 8.0x $17.26 $27.52 8%
KKR $24.40 475 22.5x $9.57 $0.00 $9.71 $19.28 $1.32 $0.71 9.0x $6.42 $27.01 11%
OAK $45.20 166 22.5x $18.17 $0.00 $15.19 $33.36 $4.38 $1.68 7.5x $12.58 $50.31 11%
Source: Company data, Morgan Stanley Research estimates
Average 9.5x 13%
Median 8.5x 10%
MORGAN STANLEY RESEARCH 19
M
M
Downside Scenario
Our downside scenario is fairly straightforward: We assume that
alts convert to C-corps and pay full taxes on earnings but the current
p/e multiple does not re-rate upward at all. We assume the
stocks trade at their current P/E, but on lower, fully taxed earnings.
Therefore, our downside case for share prices is the same percentage
downside to EPS if alts earnings are fully taxed. While we do not
believe there is a high probability of this happening, this does
represent a worst case scenario for the names, in our view. On
average we see 18% potential downside for the group if this were to
happen. We then use a similar approach to deconstruct the SOTP and
see what the value for performance fees would be.
l First, we determine the downside case share price by taking
fully taxed 2018e EPS (at 24%) and multiplying by the current
2018e P/E (the current P/E using our published EPS and current
partnership tax structure).
l In the SOTP, we assume that fee-related earnings multiples
do not re-rate at all in the downside scenario and that the
market continues to pay 15x. We believe there is a floor here
in FRE will maintain current value.
l Similar to the upside case, we then fully tax effect the performance
fee earnings and use a full 24% tax drag on the net
accrued carry receivable balance and the future net carry per
share.
l We then subtract out the value of the FRE, net accrued carry
performance fees (tax adjusted) and the balance sheet value
from our downside case derived share price. This gives us our
downside case implied value of future carry.
l Finally, we divide that implied future carry value by our
fully taxed performance fee earnings (@24%) to arrive at
our downside case implied value of future carry. On
average, our downside case implied future value of carry multiple
is 5.6x, nearly 3 standard deviations away Goldman
Sachs FY2 P/E.
Exhibit 29:
Downside Scenario SOTP Valuation
= B+C+D H I
A B C D E F G = I / G = J-F-E J
Ticker
Current
Price
2018E
Core FRE
FRE
Multiple
Core FRE
Value Per
Share @
24% tax
Rate
After-Tax
BDC
Value Per
Share
BS NAV
Per Share
SOTP
Value Ex-
Carry Per
Share
After-Tax
Net Carry
Receivable
Per Share
@24% Rate
Net Carry Per
Share After 24%
Tax (Avg.
2018e-2020e)
Implied
Future
Carry
Multiple
Value of
Future
Carry
Implied
Total
Value Per
Share
%
Increase
from
Current
Price
APO $36.42 669 15.0x $18.94 $0.00 $2.72 $21.66 $1.64 $1.86 4.2x $7.91 $31.20 -14%
ARES $24.70 185 15.0x $9.81 $3.01 $0.69 $13.51 $0.78 $0.48 7.7x $3.65 $17.95 -27%
BX $36.78 1,196 15.0x $11.36 $0.00 $2.83 $14.19 $2.29 $1.57 8.3x $13.04 $29.51 -20%
CG $25.60 100 15.0x $3.34 $0.00 $0.85 $4.19 $4.40 $2.17 6.9x $15.03 $23.62 -8%
KKR $24.40 475 15.0x $6.38 $0.00 $9.71 $16.09 $1.32 $0.71 2.5x $1.80 $19.21 -21%
OAK $45.20 166 15.0x $12.11 $0.00 $15.19 $27.30 $4.38 $1.68 4.0x $6.71 $38.39 -15%
Source: Company Data, Morgan Stanley Research estimates
Average 5.6x -18%
Median 5.6x -17%
20
M
M
Appendix A: Company Scenario Analysis
In the following tables, we flex the inputs in our SOTP
valuation methodology to take a look at the potential
impact at varying fee related earnings multiples and
multiples on future carry. We use the same assumptions
that we used in our upside scenario above, including a fully
taxed (@24%) net carry receivable value as well as using a
multiple on after tax net carry per share for future performance
fees.
For fee-related earnings, we use constant multiples for all companies.
We begin with 12.5x, a slight discount to where the traditional
asset managers trade today, and end at 30x, or closer to our bond
yield cap rate multiple approach.
On performance fees, we set the mid point at our estimate for the
current market implied multiple on performance fees (using a 15x
FRE as our starting point), as explained in our valuation methodology
above.
MORGAN STANLEY RESEARCH 21
M
Apollo Global Management SOTP and
Sensitivity Analysis
Exhibit 30:
SOTP for APO
Apollo Global Management (APO)
Fee Related
Earnings
+
Balance
Sheet
+
Accrued
Carry
+
Market
Implied Carry
Value
=
Valuation
Sum-of-the-Parts Components
(APO)
Current
Price
SOTP
Downside Case
C-Corp
Conversion
Change
Upside Case C-
Corp
Conversion
Change
2018e Pre-Tax Core FRE / Sh $1.66 $1.66 0% $1.66 0%
Tax Rate 24% 24% 0% 24% 0%
2018e After-Tax Core FRE / Sh $1.26 $1.26 0% $1.26 0%
FRE Multiple 15.0x 15.0x 0.0x 22.5x 7.5x
Core FRE Value $18.94 $18.94 0% $28.40 50%
Balance Sheet Net Cash and
Investments / Sh (as of 3Q17)
Net Accrued Carry / Sh (as of
3Q17)
Avg Net Carried interest / Sh
(2018e-2020e)
$2.72 $2.72 0% $2.72 0%
$2.16 $1.64 -24% $1.64 -24%
$2.45 $1.86 -24% $1.86 -24%
Multiple 5.1x 4.2x -0.9x 7.1x 2.0x
Market Implied Carry Value $12.61 $7.91 -37% $13.30 6%
Total Value $36.42 $31.20 -14% $46.07 26%
2018e EPS $3.68 $3.15 -14% $3.15 -14%
P/E 9.9x 9.9x 0.0x 14.6x 4.7x
Source: Company Data, Morgan Stanley Research estimates
Exhibit 31:
APO Estimated Potential Share Price in C-corp Conversion
Fee Related Earnings Multiple
Multiple on Future Performance Fees
$44.65 2.2x 3.2x 4.2x 5.2x 6.2x 7.1x 8.2x
12.5x 24 26 28 30 32 33 35
15.0x 27 29 31 33 35 37 39
17.5x 31 32 34 36 38 40 42
20.0x 34 36 37 39 41 43 45
22.5x 37 39 41 42 44 46 48
25.0x 40 42 44 46 47 49 51
27.5x 43 45 47 49 51 52 54
30.0x 46 48 50 52 54 55 57
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
Exhibit 32:
APO Estimated % Change From Current Share Price
Fee Related Earnings Multiple
Multiple on Future Performance Fees
23% 2.2x 3.2x 4.2x 5.2x 6.2x 7.1x 8.2x
12.5x -33% -28% -23% -18% -13% -8% -3%
15.0x -25% -20% -14% -9% -4% 0% 6%
17.5x -16% -11% -6% -1% 4% 9% 15%
20.0x -7% -2% 3% 8% 13% 18% 23%
22.5x 1% 6% 12% 17% 22% 26% 32%
25.0x 10% 15% 20% 25% 30% 35% 41%
27.5x 19% 24% 29% 34% 39% 44% 49%
30.0x 27% 32% 38% 43% 48% 52% 58%
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
22
M
Ares Management SOTP and Sensitivity Analysis
Exhibit 33:
SOTP for ARES
Ares Management (ARES)
Fee Related
Earnings
+
Balance
Sheet
+
Accrued
Carry
+
Market
Implied Carry
Value
=
Valuation
Sum-of-the-Parts Components
(ARES)
Pro Forma
Price
Current
Price
SOTP
Downside Case
C-Corp
Conversion
Change
Upside Case C-
Corp
Conversion
Change
2018e Pre-Tax Core FRE / Sh $1.12 $1.12 $1.12 0% $1.12 0%
Tax Rate 24% 24% 24% 0% 24% 0%
2018e After-Tax Core FRE / Sh $0.85 $0.85 $0.85 0% $0.85 0%
FRE Multiple 15.0x 18.4x 15.0x -3.4x 22.5x 4.1x
Core FRE Value $12.82 $15.72 $12.82 -18% $19.23 22%
Balance Sheet Net Cash and
Investments / Sh (as of 3Q17)
Net Accrued Carry / Sh (as of
3Q17)
Avg Net Carried interest / Sh
(2018e-2020e)
$0.69 $0.69 $0.69 0% $0.69 0%
$1.03 $1.03 $0.78 -24% $0.78 -24%
$0.63 $0.63 $0.48 -24% $0.48 -24%
Multiple 11.6x 11.6x 7.7x -3.9x 13.6x 2.0x
Market Implied Carry Value $7.26 $7.26 $3.65 -50% $6.47 -11%
Total Value $21.80 $24.70 $17.95 -27% $27.17 10%
2018e EPS $1.73 $1.73 $1.42 -18% $1.42 -18%
P/E 12.6x 14.3x 12.6x -1.7x 19.1x 4.8x
Source: Company Data, Morgan Stanley Research estimates
Exhibit 34:
ARES Estimated Potential Share Price in C-corp Conversion
Fee Related Earnings Multiple
Multiple on Future Performance Fees
$26.74 7.7x 9.6x 10.6x 11.6x 12.6x 13.6x 14.6x
12.5x 16 17 17 18 18 19 19
15.0x 18 19 19 20 20 21 21
18.7x 21 22 22 23 23 24 24
20.0x 22 23 24 24 25 25 26
22.5x 24 25 26 26 27 27 28
25.0x 26 27 28 28 29 29 30
27.5x 29 30 30 30 31 31 32
30.0x 31 32 32 33 33 34 34
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
Exhibit 35:
ARES Estimated % Change in Current Share Price
Fee Related Earnings Multiple
Multiple on Future Performance Fees
8% 7.7x 9.6x 10.6x 11.6x 12.6x 13.6x 14.6x
12.5x -36% -32% -30% -28% -27% -25% -23%
15.0x -27% -24% -22% -20% -18% -16% -14%
18.7x -15% -11% -9% -7% -5% -3% -1%
20.0x -10% -6% -4% -3% -1% 1% 3%
22.5x -1% 2% 4% 6% 8% 10% 12%
25.0x 7% 11% 13% 15% 17% 19% 21%
27.5x 16% 20% 22% 23% 25% 27% 29%
30.0x 25% 28% 30% 32% 34% 36% 38%
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
MORGAN STANLEY RESEARCH 23
M
Blackstone SOTP and Sensitivity Analysis
Exhibit 36:
SOTP for BX
Blackstone (BX)
Fee Related
Earnings
+
Balance
Sheet
+
Accrued
Carry
+
Market
Implied Carry
Value
=
Valuation
Sum-of-the-Parts Components
(BX)
Current
Price
SOTP
Downside Case
C-Corp
Conversion
Change
Upside Case C-
Corp
Conversion
Change
2018e Pre-Tax Core FRE / Sh $1.00 $1.00 0% $1.00 0%
Tax Rate 24% 24% 0% 24% 0%
2018e After-Tax Core FRE / Sh $0.76 $0.76 0% $0.76 0%
FRE Multiple 15.0x 15.0x 0.0x 22.5x 7.5x
Core FRE Value $11.36 $11.36 0% $17.03 50%
Balance Sheet Net Cash and
Investments / Sh (as of 3Q17)
Net Accrued Carry / Sh (as of
3Q17)
Avg Net Carried interest / Sh
(2018e-2020e)
$2.83 $2.83 0% $2.83 0%
$3.01 $2.29 -24% $2.29 -24%
$2.07 $1.57 -24% $1.57 -24%
Multiple 9.5x 8.3x -1.2x 11.5x 2.0x
Market Implied Carry Value $19.59 $13.04 -33% $18.04 -8%
Total Value $36.78 $29.51 -20% $40.18 9%
2018e EPS $3.26 $2.62 -20% $2.62 -20%
P/E 11.3x 11.3x 0.0x 15.4x 4.1x
Source: Company Data, Morgan Stanley Research estimates
Exhibit 37:
BX Estimated Potential Share Price in C-corp Conversion
Fee Related Earnings Multiple
Multiple on Future Performance Fees
$39.08 6.3x 7.3x 8.3x 9.3x 10.3x 11.5x 12.3x
12.5x 24 26 28 29 31 33 34
15.0x 26 28 30 31 33 35 36
17.5x 28 30 31 33 35 36 38
20.0x 30 32 33 35 36 38 40
22.5x 32 34 35 37 38 40 42
25.0x 34 36 37 39 40 42 43
27.5x 36 37 39 41 42 44 45
30.0x 38 39 41 42 44 46 47
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
Exhibit 38:
BX Estimated % Change in Current Share Price
Fee Related Earnings Multiple
Multiple on Future Performance Fees
6% 6.3x 7.3x 8.3x 9.3x 10.3x 11.5x 12.3x
12.5x -33% -29% -25% -21% -16% -11% -8%
15.0x -28% -24% -20% -15% -11% -6% -3%
17.5x -23% -19% -15% -10% -6% -1% 3%
20.0x -18% -14% -9% -5% -1% 4% 8%
22.5x -13% -9% -4% 0% 4% 9% 13%
25.0x -8% -3% 1% 5% 9% 15% 18%
27.5x -3% 2% 6% 10% 15% 20% 23%
30.0x 3% 7% 11% 15% 20% 25% 28%
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
24
M
The Carlyle Group Management SOTP and
Sensitivity Analysis
Exhibit 39:
SOTP for CG
The Carlyle Group (CG)
Fee Related
Earnings
+
Balance
Sheet
+
Accrued
Carry
+
Market
Implied Carry
Value
=
Valuation
Sum-of-the-Parts Components
(CG)
Current
Price
SOTP
Downside Case
C-Corp
Conversion
Change
Upside Case C-
Corp
Conversion
Change
2018e Pre-Tax Core FRE / Sh $0.29 $0.29 0% $0.29 0%
Tax Rate 24% 24% 0% 24% 0%
2018e After-Tax Core FRE / Sh $0.22 $0.22 0% $0.22 0%
FRE Multiple 15.0x 15.0x 0.0x 22.5x 7.5x
Core FRE Value $3.34 $3.34 0% $5.01 50%
Balance Sheet Net Cash and
Investments / Sh (as of 3Q17)
Net Accrued Carry / Sh (as of
3Q17)
Avg Net Carried interest / Sh
(2018e-2020e)
$0.85 $0.85 0% $0.85 0%
$4.40 $4.40 0% $4.40 0%
$2.85 $2.17 -24% $2.17 -24%
Multiple 6.0x 6.9x 1.0x 8.0x 2.0x
Market Implied Carry Value $17.01 $15.03 -12% $17.26 1%
Total Value $25.60 $23.62 -8% $27.52 8%
2018e EPS $3.03 $2.80 -8% $2.80 -8%
P/E 8.5x 8.5x 0.0x 9.8x 1.4x
Source: Company Data, Morgan Stanley Research estimates
Exhibit 40:
CG Estimated Potential Share Price in C-corp Conversion
Fee Related Earnings Multiple
Multiple on Future Performance Fees
$26.58 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 11.0x
12.5x 19 21 23 25 28 30 32
15.0x 19 22 24 26 28 30 32
17.5x 20 22 24 26 29 31 33
20.0x 21 23 25 27 29 31 34
22.5x 21 23 25 28 30 32 34
25.0x 22 24 26 28 30 32 35
27.5x 22 24 27 29 31 33 35
30.0x 23 25 27 29 31 34 36
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
Exhibit 41:
CG Estimated % Change in Current Share Price
Fee Related Earnings Multiple
Multiple on Future Performance Fees
4% 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 11.0x
12.5x -26% -18% -9% -1% 8% 16% 24%
15.0x -24% -16% -7% 1% 10% 18% 27%
17.5x -22% -13% -5% 3% 12% 20% 29%
20.0x -20% -11% -3% 6% 14% 23% 31%
22.5x -18% -9% -1% 8% 16% 25% 33%
25.0x -15% -7% 2% 10% 18% 27% 35%
27.5x -13% -5% 4% 12% 21% 29% 38%
30.0x -11% -3% 6% 14% 23% 31% 40%
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
MORGAN STANLEY RESEARCH 25
M
KKR & Co. SOTP and Sensitivity Analysis
Exhibit 42:
SOTP for KKR
KKR & Co. (KKR)
Fee Related
Earnings
+
Balance
Sheet
+
Accrued
Carry
+
Market
Implied Carry
Value
=
Valuation
Sum-of-the-Parts Components
(KKR)
Current
Price
SOTP
Downside Case
C-Corp
Conversion
Change
Upside Case C-
Corp
Conversion
Change
2018e Pre-Tax Core FRE / Sh $0.56 $0.56 0% $0.56 0%
Tax Rate 24% 24% 0% 24% 0%
2018e After-Tax Core FRE / Sh $0.43 $0.43 0% $0.43 0%
FRE Multiple 15.0x 15.0x 0.0x 22.5x 7.5x
Core FRE Value $6.38 $6.38 0% $9.57 50%
Balance Sheet Net Cash and
Investments / Sh (as of 3Q17)
Net Accrued Carry / Sh (as of
3Q17)
Avg Net Carried interest / Sh
(2018e-2020e)
$9.71 $9.71 0% $9.71 0%
$1.74 $1.32 -24% $1.32 -24%
$0.93 $0.71 -24% $0.71 -24%
Multiple 7.0x 2.5x -4.5x 9.0x 2.0x
Market Implied Carry Value $6.57 $1.80 -73% $6.42 -2%
Total Value $24.40 $19.21 -21% $27.01 11%
2018e EPS $2.74 $2.16 -21% $2.16 -21%
P/E 8.9x 8.9x 0.0x 12.5x 3.6x
3Q17 Book Value / Sh $13.80 $13.80 $13.80
Price-to-Book 1.77x 1.39x -0.4x 1.96x 0.2x
2018e ROE 19.1% 19.1% 0.0% 15.3% 3.8%
Source: Company Data, Morgan Stanley Research estimates
Exhibit 43:
KKR Estimated Potential Share Price in C-corp Conversion
Fee Related Earnings Multiple
Multiple on Future Performance Fees
$26.32 2.5x 3.5x 4.5x 5.5x 6.5x 7.5x 9.0x
12.5x 18 19 20 20 21 22 23
15.0x 19 20 21 21 22 23 24
17.5x 20 21 22 22 23 24 25
20.0x 21 22 23 23 24 25 26
22.5x 22 23 24 25 25 26 27
25.0x 23 24 25 26 26 27 28
27.5x 25 25 26 27 27 28 29
30.0x 26 26 27 28 28 29 30
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
Exhibit 44:
KKR Estimated % Change in Current Share Price
Fee Related Earnings Multiple
Multiple on Future Performance Fees
8% 2.5x 3.5x 4.5x 5.5x 6.5x 7.5x 9.0x
12.5x -26% -23% -20% -17% -14% -11% -7%
15.0x -21% -18% -16% -13% -10% -7% -2%
17.5x -17% -14% -11% -8% -5% -2% 2%
20.0x -13% -10% -7% -4% -1% 2% 6%
22.5x -8% -5% -2% 0% 3% 6% 11%
25.0x -4% -1% 2% 5% 8% 11% 15%
27.5x 0% 3% 6% 9% 12% 15% 19%
30.0x 5% 8% 11% 13% 16% 19% 24%
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
26
M
Oaktree Capital Group SOTP and Sensitivity
Analysis
Exhibit 45:
SOTP for OAK
Oaktree Capital Group (OAK)
Fee Related
Earnings
+
Balance
Sheet
+
Accrued
Carry
+
Market
Implied Carry
Value
=
Valuation
Sum-of-the-Parts Components
(OAK)
Current
Price
SOTP
Downside Case
C-Corp
Conversion
Change
Upside Case C-
Corp
Conversion
Change
2018e Pre-Tax Core FRE / Sh $1.06 $1.06 0% $1.06 0%
Tax Rate 24% 24% 0% 24% 0%
2018e After-Tax Core FRE / Sh $0.81 $0.81 0% $0.81 0%
FRE Multiple 15.0x 15.0x 0.0x 22.5x 7.5x
Core FRE Value $12.11 $12.11 0% $18.17 50%
Balance Sheet Net Cash and
Investments / Sh (as of 3Q17)
Net Accrued Carry / Sh (as of
3Q17)
Avg Net Carried interest / Sh
(2018e-2020e)
$15.19 $15.19 0% $15.19 0%
$5.76 $4.38 -24% $4.38 -24%
$2.20 $1.68 -24% $1.68 -24%
Multiple 5.5x 4.0x -1.5x 7.5x 2.0x
Market Implied Carry Value $12.14 $6.71 -45% $12.58 4%
Total Value $45.20 $38.39 -15% $50.31 11%
2018e EPS $3.55 $3.01 -15% $3.01 -15%
P/E 12.7x 12.7x 0.0x 16.7x 4.0x
Source: Company Data, Morgan Stanley Research estimates
Exhibit 46:
OAK Estimated Potential Share Price in C-corp Conversion
Fee Related Earnings Multiple
Multiple on Future Performance Fees
$49.79 2.0x 3.0x 4.0x 5.0x 6.0x 7.5x 8.0x
12.5x 33 35 36 38 40 42 43
15.0x 35 37 38 40 42 44 45
17.5x 37 39 40 42 44 46 47
20.0x 39 41 42 44 46 48 49
22.5x 41 43 44 46 48 50 51
25.0x 43 45 46 48 50 52 53
27.5x 45 47 48 50 52 54 55
30.0x 47 49 50 52 54 56 57
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
Exhibit 47:
OAK Estimated % Change in Current Share Price
Fee Related Earnings Multiple
Multiple on Future Performance Fees
10% 2.0x 3.0x 4.0x 5.0x 6.0x 7.5x 8.0x
12.5x -27% -23% -20% -16% -12% -7% -5%
15.0x -23% -19% -15% -11% -8% -2% 0%
17.5x -18% -14% -11% -7% -3% 2% 4%
20.0x -14% -10% -6% -2% 1% 7% 9%
22.5x -9% -5% -2% 2% 6% 11% 13%
25.0x -5% -1% 3% 6% 10% 16% 18%
27.5x 0% 4% 7% 11% 15% 20% 22%
30.0x 4% 8% 12% 15% 19% 25% 27%
Source: Thomson Reuters, Company Data, Morgan Stanley Research estimates
MORGAN STANLEY RESEARCH 27
M
Appendix B: Valuation of Alternative
Managers - What's in the Price?
Exhibit 48:
Covered Alternative Asset managers NTM Relative P/E
Alts NTM P/E Ratios Relative to Trad. AMs and S&P
500
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
-60.0%
Nov-10
May-11
Alts NTM P/E Relative to Trad. Alts NTM P/E Relative to S&P 500
Nov-11
May-12
Nov-12
May-13
Source: Company Data, Thomson Reuters, Morgan Stanley Research estimates
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
Relative to
Trad. ,- 27%
Relative to
S&P,- 45%
Exhibit 49:
Covered Alternative Asset managers NTM Absolute P/E
Alts P/E Ratios
25x
20x
15x
10x
5x
0x
Nov-10
May-11
Alts Avg. FY1 P/E Alts Avg. FY2 P/E Alts Avg. NTM P/E
Nov-11
May-12
Nov-12
May-13
Source: Company Data, Thomson Reuters, Morgan Stanley Research estimates
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
FY1 P/E,
10.0x
NTM P/E,
10.1x
FY2 P/E,
10.1x
28
M
M
Appendix C: Notable Alt Reports: In Case You
Missed Them…
Asset Managers & Brokers: 4Q17 Preview: Buy CG and ETFC into the Print (12 Jan 2018)
Raising Est on Tax Cuts & Strong Mkts, Upgrading APO and ETFC to Overweight (3 Jan 2018)
Asset Managers & Brokers: 2018 Outlook: Key Debates in a Year of Change (3 Jan 2018)
The Carlyle Group L.P.: Fundraising Ahead of Expectations; Buy the Dip (4 Dec 2017)
Alternative Asset Managers and Credit Strategy: Interest Deductibility at Risk: Game Changer for High Yield and Private Equity? (9 Nov 2017)
Alternative Asset Managers: C-Corp Conversion: To convert or not to convert, that is the question (6 Nov 2017)
Asset Managers & Brokers: Uncovering Long-Term Value with ESG (20 Sep 2017)
Global Asset Management: Building the Money Manager of Tomorrow (13 Sep 2017)
The Blackstone Group L.P.: Management Meeting Takeaways: Significant Runway for Growth (10 Aug 2017)
The Blackstone Group L.P.: Why Blackstone’s "Innovation Machine" Suggests Upside to $60 Bull Case (24 Jul 2017)
The Carlyle Group L.P.: Inflection Point for Carlyle Supports $40 Bull Case (12 Jul 2017)
Hamilton Lane Incorporated: Unique Play on Private Markets; Initiating at Overweight (27 Mar 2017)
Asset Managers & Wholesale Banks: The World Turned Upside Down (16 Mar 2017)
The Blackstone Group L.P.: $100 Billion Reasons to Thrive in Uncertainty: Mgmt Meeting Takeaways (10 Nov 2016)
Alternative Asset Managers: Who's Got Swimsuits? (19 May 2016)
Asset Managers: Convergence of Alts/Traditionals Multiple: Put This Chart on Your Wall (21 Jul 2015)
US Asset Managers: Benchmark Inclusion of Alts: What If...? (22 Jan 2015)
US Asset Managers: Introducing “Core” Fee-Related Earnings (FRE) Metric (15 Jan 2015)
US Asset Managers: Cash In On the Harvesting Super-Cycle: Initiating on Alts: OW BX, KKR, OAK (19 Dec 2014)
MORGAN STANLEY RESEARCH 29
MM
Brokers & Asset Managers Comps Sheet
Exhibit 50:
Brokers & Asset Managers Comps Sheet
Brokers & Asset Managers
26/Jan/18 EPS As % Dividend
Company Ticker Rating
Covered Brokers & Asset Managers
Traditionals
Price
26/Jan/18
Price
Market Cap
Target Upside (%) Shares (M) ($B) AUM ($B)
LTM Net
Flows/ BoP
AuM (%)
Earnings Per Share (EPS) CAGR (%) Price/Earnings (P/E) EV/ EBITDA of AuM Yield (%)
YTD Stock
Perf. (%) 2017E 2018E 2019E 17-'19 2017E 2018E 2019E 2018E 2019E 2017E 2018E 2019E Mkt Cap 2018E
Franklin Resources (5) BEN UW $45.86 $42 (8.4) 555 25.4 753 (5.3) 5.8 2.99 3.02 2.97 (0.3) 15.4x 15.2x 15.4x 13.9x 14.1x 6.9x 7.3x 7.9x 3.4 2.1
BlackRock Inc BLK OW $586.80 $660 12.5 162 94.8 5,977 7.1 14.2 n/a 28.79 31.34 n/a n/a 20.4x 18.7x 22.9x 21.1x n/a 14.5x 13.4x 1.6 2.0
Hamilton Lane HLNE EW $38.85 $38 (2.2) 53 2.1 29 11.6 9.8 1.16 1.57 1.90 27.8 33.4x 24.8x 20.4x 24.2x 20.0x 21.9x 19.2x 15.5x 7.1 2.0
Invesco Ltd IVZ EW $38.40 $39 1.6 407 15.6 917 1.2 5.1 2.68 2.94 3.15 8.4 14.3x 13.0x 12.2x 13.2x 12.4x 9.8x 9.1x 8.6x 1.7 3.3
Janus Henderson Group JHG OW $41.43 $50 21.4 198 8.2 361 (2.9) 8.3 1.69 2.69 3.10 35.5 24.5x 15.4x 13.4x 18.7x 16.2x 12.5x 10.0x 9.0x 2.3 3.4
Legg Mason (5) LM UW $45.75 $43 (6.0) 92 4.2 754 (3.0) 9.0 3.11 3.62 3.66 8.5 14.7x 12.6x 12.5x 11.9x 11.7x 8.7x 9.5x 9.8x 0.6 2.4
OM Asset Mgmt. (4) OMAM EW $18.31 $19 3.8 110 2.0 236 (0.3) 9.3 1.58 1.91 2.03 13.2 11.6x 9.6x 9.0x 9.9x 9.4x 8.4x 7.6x 7.2x 0.9 2.2
T. Rowe Price TROW EW $119.99 $115 (4.2) 244 29.3 948 0.7 14.4 6.03 7.33 7.16 8.9 19.9x 16.4x 16.8x 15.7x 16.1x 10.8x 10.7x 10.9x 3.1 1.9
Virtus Investment Partners VRTS EW $131.00 $127 (3.1) 7 0.9 91 0.4 13.9 7.42 11.02 11.81 26.2 17.7x 11.9x 11.1x 11.5x 10.8x 9.2x 7.1x 6.6x 1.0 1.5
Waddell & Reed Financial WDR UW $22.98 $20 (13.0) 83 1.9 81 (15.3) 2.9 1.68 1.98 1.86 5.2 13.7x 11.6x 12.4x 10.1x 10.8x 6.7x 7.0x 7.9x 2.4 4.4
WisdomTree Investments WETF EW $12.33 $14 13.5 137 1.7 46 2.2 (1.8) 0.23 0.50 0.72 76.2 53.1x 24.4x 17.1x 27.7x 19.4x 24.8x 16.2x 9.7x 3.6 1.0
Mean (Excl. HLNE, JHG, WETF), (Market Cap, EV and AuM equals Total) (2.1) 176.0 9,804 (1.8) 9.3 10.0 15.3x 13.8x 13.5x 13.7x 13.3x 8.6x 9.1x 9.0x 1.8 2.5
Median (Excl. HLNE, JHG, WETF) (3.6) 0.0 9.1 8.5 14.7x 12.8x 12.4x 12.6x 12.1x 8.7x 8.3x 8.2x 1.6 2.1
Alternatives
Brokers
Apollo Global Mgmt APO OW $36.42 $42 15.3 403 14.7 242 9.9 8.8 2.97 3.68 3.72 11.9 12.3x 9.9x 9.8x 11.4x 11.3x 15.4x 10.3x 9.9x 6.1 7.4
Ares Mgmt. ARES EW $24.70 $20 (19.0) 216 5.3 106 15.9 23.5 1.90 1.73 1.87 (0.8) 13.0x 14.3x 13.2x 11.6x 10.7x 16.6x 15.2x 15.2x 5.0 4.9
Blackstone Group BX OW $36.78 $40 8.8 1,199 44.1 387 3.4 14.9 2.66 3.26 3.07 7.5 13.8x 11.3x 12.0x 12.3x 13.0x 10.9x 10.7x 9.9x 11.4 7.0
Carlyle Group CG OW $25.60 $33 28.9 343 8.8 174 (0.4) 11.8 3.09 3.03 2.52 (9.6) 8.3x 8.5x 10.1x 10.9x 13.1x 12.4x 7.5x 6.6x 5.0 8.5
KKR & Co KKR EW $24.40 $24 (1.6) 848 20.7 153 25.3 15.9 2.38 2.74 2.96 11.6 10.3x 8.9x 8.3x 8.8x 8.1x 10.6x 9.4x 9.4x 13.5 3.0
Oaktree Capital Group (2) OAK OW $45.20 $60 32.7 156 7.1 100 (3.7) 7.4 3.80 3.55 4.72 11.5 11.9x 12.7x 9.6x 16.9x 12.7x 10.4x 11.5x 8.7x 7.1 5.6
Mean (Covered Alts), (Market Cap, EV and AuM equals Total) 10.8 100.6 1,162 8.4 13.7 5.3 11.6x 10.9x 10.5x 12.0x 11.5x 12.7x 10.8x 9.9x 8.0 6.1
Median (Covered Alts) 12.0 6.6 13.3 9.5 12.1x 10.6x 10.0x 11.5x 12.0x 11.6x 10.5x 9.7x 6.6 6.3
TD Ameritrade Holding Corp AMTD EW $54.97 $61 11.0 567 31.2 1,119 10.4 7.5 2.08 3.02 3.65 32.4 26.4x 18.2x 15.1x 20.2x 16.7x 18.8x 13.0x 10.5x 2.8 1.6
E*TRADE Financial Corp ETFC OW $53.49 $66 23.4 271 14.5 365 3.9 7.9 2.27 3.26 3.87 30.7 23.6x 16.4x 13.8x 20.3x 17.0x 11.6x 10.6x 9.5x 4.0 0.0
LPL Financial Holdings Inc LPLA EW $60.76 $62 2.0 90 5.5 560 3.3 6.3 2.27 3.99 4.27 37.0 26.7x 15.2x 14.2x 15.5x 14.5x 11.6x 8.6x 8.3x 1.0 1.6
Charles Schwab Corp SCHW OW $54.27 $63 16.1 1,340 72.7 3,181 7.0 5.6 n/a 2.47 2.85 n/a n/a 21.9x 19.1x 25.5x 22.1x n/a 13.0x 11.4x 2.3 0.8
Mean (Market Cap, EV and AuM equals Total) 13.1 123.8 5,225 6.1 6.8 33.4 25.6x 17.9x 15.5x 20.4x 17.6x 14.0x 11.3x 9.9x 2.5 1.0
Median 13.5 5.5 6.9 32.4 26.4x 17.3x 14.7x 20.2x 16.9x 11.6x 11.8x 10.0x 2.5 1.2
Covered Brokers & Asset Managers
30
Mean (Excl. WETF and HLNE), (Market Cap, EV and AuM equals Total) 5.6 398.8 16,144 3.4 10.2 12.6 15.8x 13.8x 13.0x 14.6x 13.6x 11.2x 10.2x 9.5x 4.0 3.3
Median (Excl. WETF and HLNE) 2.9 2.2 8.9 10.2 14.1x 12.9x 12.4x 12.8x 12.9x 10.7x 9.9x 9.4x 2.9 2.3
Non-Covered Brokers & Asset Managers
Non Covered
AllianceBernstein AB NC $27.85 NC NC 94 2.6 535 1.8 11.2 2.11 2.38 2.64 12.0 13.2x 11.7x 10.5x n/a n/a 3.7x 3.3x 3.1x 0.5 8.5
Affiliated Managers Group AMG NC $215.76 NC NC 56 12.0 804 (0.1) 5.1 14.49 17.39 18.81 13.9 14.9x 12.4x 11.5x n/a n/a 14.4x 13.0x 11.9x 1.5 0.5
Eaton Vance (5) EV NC $60.87 NC NC 118 7.2 422 11.2 7.9 2.61 3.36 3.79 20.6 23.3x 18.1x 16.1x n/a n/a 14.4x 12.3x n/a 1.7 2.2
Fortress Investment Group FIG NC N/A NC NC 240 n/a 0 (0.9) n/a 0.06 0.07 0.08 20.7 n/a n/a n/a n/a n/a 4.5x 3.7x 3.0x n/a n/a
Och-Ziff Capital Mgmt. OZM NC $2.38 NC NC 185 0.4 33 (23.9) (4.8) 0.50 0.36 0.40 (11.1) 4.7x 6.5x 6.0x n/a n/a 5.7x 7.3x 6.1x 1.3 7.6
Stifel Financial Corp SF NC $66.36 NC NC 68 4.5 265 n/a 11.4 3.21 4.61 5.40 29.6 20.7x 14.4x 12.3x n/a n/a 13.7x 12.6x 10.3x 1.7 0.3
Raymond James Financial, Inc. RJF NC $98.26 NC NC 145 14.3 664 n/a 10.0 5.47 6.90 7.74 18.9 18.0x 14.2x 12.7x n/a n/a 28.2x 25.1x n/a 2.2 1.1
Interactive Brokers Group, Inc. IBKR NC $64.20 NC NC 71 4.6 97 n/a 8.4 1.22 2.04 2.34 38.4 52.6x 31.4x 27.5x n/a n/a 6.4x 4.7x 4.0x 4.7 0.6
S&P 500 (3) 2,872.9 2,750 (4.3) 7.5 131.60 145.00 150.00 6.8 21.8x 19.8x 19.2x 19.0x 18.3x 2.2
Source: Company data, Thomson Reuters, Morgan Stanley Research estimates, except for NC (not covered), which are Thomson Reuters estimates
(1) Alternative asset manager net flows include fee-paying fundraising and inflows net of redemptions and distributions.
(2) OAK estimates reflect Adjusted Net Income (ANI), given that is the primary metric reported by the company.
(3) S&P500 EPS based off of MS Equity Strategy Team's estimates
(4) ENI/Unit represents EPS and P/ENI represents P/E
(5) BEN, LM and EV have fiscal years not ending in December, so for these companies CY estimates were used in order to have temporal consistency. BEN and LM reflect MS estimates; EV reflects consensus Thomson estimates.
Source: Company Data, Thompson Reuters, Morgan Stanley Research estimates, except for non-covered companies (NC), which are consensus estimates
M
Valuation and Risks
Alternative Asset Managers: We value the stocks using a sum of the parts valuation and discounted cash flow as well
as price/earnings and price/cash earnings multiples. Our DCF (COE of 12–15%, free cash flow = distributable earnings and
terminal growth rate = 4%) captures the long-term value of the business model, while the sum of the parts captures some
of the shorter-term volatility. For our SOTP, we use 2019 “Core” FRE and apply a 18x-21x multiple; apply 12x multiple on
BDC income share; use NPV to estimate future carry and apply discount rate to represent volatile nature of carry; 10%
haircut on accrued carry; 10% haircut on B/S assets.
APO.N
Apollo Global Management: We value APO using a sum-of-theparts,
supported by a DCF, and back into an implied target multiple
on next 3 years DE, and ENI. Our price target implies a 11.5x multiple
on 2019 EPS, reflecting a 25% premium to historical valuation of 9.2x
that’s warranted due accelerating growth in and mix shift toward
sticky fee related earnings for which investors ascribe a higher multiple,
and APO is entering their harvesting stage that will see portfolio
monetizations accelerate driving stronger cash earnings
generation. Upside risks: Better FPAuM growth, capital deployment
accelerates, better returns. Downside risks: Declining valuations
reduce cash earnings (fewer exits or lower multiples); slower deployment;
Funds V, VI and VII and ANRP remain in escrow, pressuring near
term cash earnings.
ARES.N
Ares: We value ARES using a sum-of-the-parts, supported by a DCF,
and back into an implied target multiple on next 3 years DE, and ENI.
Our PT represents a 10.8x PE multiple, slightly above the 3 year
average of 9.3x on improving cash earnings trajectory. Upside risk
includes better asset gathering, stronger investment performance
and faster monetization of portfolio investments. Downside risk that
strong AUM baked into our model over the next several years will not
materialize. ARCC concentration risk (a BDC which contributes 40%
of mgmt fees / 29% of revenue), and harvesting delays if there’s an
extended financial & capital markets pullback.
BX.N
Blackstone: We value BX using a sum-of-the-parts, supported by a
DCF, and back into an implied target multiple on next 3 years DE and
ENI. Our PT represents a 12.6x PE multiple, above the 3 year average
of 9.4x on expectations for accelerated growth in fee-related earnings
growth, cash earnings growth and fundraising. Upside risks:
Stronger investment performance, faster monetization of portfolio
companies, better asset growth through new initiatives. Downside
risks: Weakness in public markets and commercial real estate markets
pressure investment performance. Harvesting delays—An
extended pull-back in financial and capital markets that delays harvesting
of investments and dampens returns which lower cash earnings.
CG.O
Carlyle: We value CG using a blended sum-of-the-parts, supported
by a DCF, and back into an implied target multiple on next 3 years DE
and ENI. Our PT implies a 13.5x multiple on 2019 EPS, reflecting a 55%
premium to historical valuation of 8.8x given resolution of legacy
issues and accelerating fee related earnings and asset gathering
momentum that will support the multiple. We expect less volatile
financial performance across all segments in our forward look, vs.
greater volatility in historicals driven legacy challenges. Upside risks
include: Better investment performance, strong asset gathering and
faster monetization of portfolio companies. Downside risks include
an extended pull-back in financial and capital mkts that delays harvesting
of investments and dampens returns which lower cash earnings,
and poor investment performance.
KKR.N
KKR: We value KKR using a 1.3x multiple on 2019 estimated book
value and back into an implied target multiple on next 3 years DE and
ENI. Our price target is also supported by a sum-of-the-parts valuation.
Our PT implies a 8.2x multiple on 2019 EPS, reflecting a 9% premium
to historical valuation of 7.5x given improving fee related
earnings trajectory. Upside risks include better investment performance,
compounding book value growth and faster asset gathering
from newer initiatives. Downside risks include an extended pull-back
in financial and capital markets that delays harvesting of investments
and dampens returns which lower cash earnings and impairs significant
investments held on balance.
MORGAN STANLEY RESEARCH 31
M
M
OAK.N
Oaktree: We value OAK using a sum-of-the-parts, supported by a
DCF, and back into an implied target multiple on next 3 years DE and
ENI. Our PT implies a 12.6x multiple on 2019 EPS, reflecting a 7% premium
to historical valuation of 11.8x given expectations for their
Opps Xb fund to turn fees on during 2019 and sharply boost fee
related earnings. Upside risks include better investment performance,
faster monetization of portfolio investments, strong asset
gathering from newer initiatives and inflection higher in fee related
earnings. Risks include poor investment performance, an extended
pull-back in financial and capital markets that delays harvesting of
investments and dampens returns which lower cash earnings.
Morgan Stanley & Co. International plc (“Morgan Stanley”) is currently
acting as financial advisor to Banco Popular Español, S.A.
(“Banco Popular”) in relation to its agreements with Balsam Investment
S.à r.l., (“Blackstone”) for the acquisition by Blackstone of
51% of, and hence the assignment of control over, Banco Popular's
real estate business, as announced on August 8, 2017. Closing of
the transaction is subject to relevant regulatory authorisations and
other customary conditions. Banco Popular has agreed to pay fees
to Morgan Stanley for its financial services. Please refer to the
notes at the end of the report.
Morgan Stanley & Co. International plc (“Morgan Stanley”) is acting
as financial advisor to Unilever plc and Unilever N.V. (together “Unilever”)
in relation to an offer received from KKR & Co. to acquire Unilever’s
global spreads business, as announced on 15 December
2017. Unilever has agreed to pay fees to Morgan Stanley for its
financial services. Please refer to the notes at the end of the report.
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(“Jack”) with respect to a definitive agreement to sell its wholly
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end of this report.
32
M
Disclosure Section
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Important US Regulatory Disclosures on Subject Companies
As of December 29, 2017, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Apollo Global
Management LLC, Ares Management, L.P., BlackRock Inc., Franklin Resources Inc., Goldman Sachs Group Inc, Invesco, KKR & CO. L.P., Oaktree Capital Group, LLC, The Blackstone Group L.P.,
The Carlyle Group L.P., WisdomTree Investments, Inc..
Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Apollo Global Management LLC, Ares Management, L.P., BlackRock Inc.,
Charles Schwab Corp, E*Trade Financial Corp, Goldman Sachs Group Inc, Hamilton Lane Incorporated, LPL Financial Holdings Inc., OM Asset Management Plc, The Carlyle Group L.P., Virtus
Investment Partners.
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Apollo Global Management LLC, Ares Management, L.P., BlackRock Inc., Charles
Schwab Corp, E*Trade Financial Corp, Franklin Resources Inc., Goldman Sachs Group Inc, Hamilton Lane Incorporated, Invesco, Janus Henderson Group, LPL Financial Holdings Inc., OM Asset
Management Plc, T. Rowe Price Group, Inc., The Blackstone Group L.P., The Carlyle Group L.P., Virtus Investment Partners.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Apollo Global Management LLC, Ares Management, L.P.,
BlackRock Inc., Charles Schwab Corp, E*Trade Financial Corp, Franklin Resources Inc., Goldman Sachs Group Inc, Hamilton Lane Incorporated, Invesco, Janus Henderson Group, KKR & CO. L.P.,
Legg Mason Inc., LPL Financial Holdings Inc., Oaktree Capital Group, LLC, OM Asset Management Plc, Partners Group, T. Rowe Price Group, Inc., TD Ameritrade Holding Corp., The Blackstone
Group L.P., The Carlyle Group L.P., Virtus Investment Partners, Waddell & Reed Financial Inc, WisdomTree Investments, Inc..
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Apollo Global Management LLC, Ares Management,
L.P., BlackRock Inc., Charles Schwab Corp, E*Trade Financial Corp, Franklin Resources Inc., Goldman Sachs Group Inc, Invesco, Janus Henderson Group, KKR & CO. L.P., Legg Mason Inc.,
LPL Financial Holdings Inc., Oaktree Capital Group, LLC, OM Asset Management Plc, Partners Group, T. Rowe Price Group, Inc., TD Ameritrade Holding Corp., The Blackstone Group L.P., The
Carlyle Group L.P., Virtus Investment Partners, Waddell & Reed Financial Inc, WisdomTree Investments, Inc..
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Apollo
Global Management LLC, Ares Management, L.P., BlackRock Inc., Charles Schwab Corp, E*Trade Financial Corp, Franklin Resources Inc., Goldman Sachs Group Inc, Hamilton Lane Incorporated,
Invesco, Janus Henderson Group, KKR & CO. L.P., Legg Mason Inc., LPL Financial Holdings Inc., Oaktree Capital Group, LLC, OM Asset Management Plc, Partners Group, T. Rowe Price Group,
Inc., TD Ameritrade Holding Corp., The Blackstone Group L.P., The Carlyle Group L.P., Virtus Investment Partners, Waddell & Reed Financial Inc, WisdomTree Investments, Inc..
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide
services or has a client relationship with the following company: Apollo Global Management LLC, Ares Management, L.P., BlackRock Inc., Charles Schwab Corp, E*Trade Financial Corp, Franklin
Resources Inc., Goldman Sachs Group Inc, Invesco, Janus Henderson Group, KKR & CO. L.P., Legg Mason Inc., LPL Financial Holdings Inc., Oaktree Capital Group, LLC, OM Asset Management
Plc, Partners Group, T. Rowe Price Group, Inc., TD Ameritrade Holding Corp., The Blackstone Group L.P., The Carlyle Group L.P., Virtus Investment Partners, Waddell & Reed Financial Inc,
WisdomTree Investments, Inc..
Morgan Stanley & Co. LLC makes a market in the securities of Apollo Global Management LLC, BlackRock Inc., Charles Schwab Corp, E*Trade Financial Corp, Franklin Resources Inc., Goldman
Sachs Group Inc, Invesco, KKR & CO. L.P., Legg Mason Inc., LPL Financial Holdings Inc., Oaktree Capital Group, LLC, OM Asset Management Plc, T. Rowe Price Group, Inc., TD Ameritrade Holding
Corp., The Blackstone Group L.P., The Carlyle Group L.P., Virtus Investment Partners, Waddell & Reed Financial Inc, WisdomTree Investments, Inc..
The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality
of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Equity Research analysts' or strategists' compensation is not
linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks.
MORGAN STANLEY RESEARCH 33
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Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management,
commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in
Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Morgan Stanley trades or may trade
as principal in the debt securities (or in related derivatives) that are the subject of the debt research report.
Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy,
Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all
ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan
Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision
to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
Global Stock Ratings Distribution
(as of December 31, 2017)
The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm.
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight,
Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent
of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating,
with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
Coverage Universe
Investment Banking Clients (IBC)
Other Material Investment Services Clients
(MISC)
Stock Rating Category
Count % of Total Count % of Total IBC % of Rating Category Count % of Total Other MISC
Overweight/Buy 1142 36% 320 40% 28% 560 38%
Equal-weight/Hold 1424 44% 371 47% 26% 674 46%
Not-Rated/Hold 55 2% 6 1% 11% 9 1%
Underweight/Sell 583 18% 95 12% 16% 237 16%
Total 3,204 792 1480
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the
last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next
12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over
the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next
12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated
below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia -
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relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.
Important Disclosures for Morgan Stanley Smith Barney LLC Customers
Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any
of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures,
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Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews
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Other Important Disclosures
Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of BlackRock Inc., Charles Schwab Corp, E*Trade Financial Corp, Franklin
Resources Inc., Goldman Sachs Group Inc, Legg Mason Inc., OM Asset Management Plc, Virtus Investment Partners.
As of January 29, 2018, BlackRock Inc., T. Rowe Price Group, Inc. beneficially owned 5% or more of a class of common equity securities of Morgan Stanley.
Morgan Stanley Research policy is to update research reports as and when the Research Analyst and Research Management deem appropriate, based on developments with the issuer, the
sector, or the market that may have a material impact on the research views or opinions stated therein. In addition, certain Research publications are intended to be updated on a regular periodic
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MORGAN STANLEY RESEARCH 35
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known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
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Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.
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INDUSTRY COVERAGE: Brokers & Asset Managers
COMPANY (TICKER) RATING (AS OF) PRICE* (01/29/2018)
Michael J. Cyprys, CFA, CPA
Apollo Global Management LLC (APO.N) O (01/03/2018) $35.60
Ares Management, L.P. (ARES.N) E (12/15/2014) $24.50
BlackRock Inc. (BLK.N) O (09/18/2015) $574.42
Charles Schwab Corp (SCHW.N) O (09/26/2016) $54.05
E*Trade Financial Corp (ETFC.O) O (01/03/2018) $52.62
Franklin Resources Inc. (BEN.N) U (03/16/2017) $45.12
Hamilton Lane Incorporated (HLNE.O) E (10/05/2017) $38.31
Invesco (IVZ.N) E (01/03/2018) $37.48
KKR & CO. L.P. (KKR.N) E (02/17/2016) $24.25
Legg Mason Inc. (LM.N) U (10/05/2017) $44.27
LPL Financial Holdings Inc. (LPLA.O) E (01/03/2018) $60.11
Oaktree Capital Group, LLC (OAK.N) O (12/15/2014) $45.30
OM Asset Management Plc (OMAM.N) E (01/26/2016) $18.19
T. Rowe Price Group, Inc. (TROW.O) E (10/05/2017) $117.55
TD Ameritrade Holding Corp. (AMTD.O) E (09/26/2016) $55.59
The Blackstone Group L.P. (BX.N) O (12/15/2014) $36.56
The Carlyle Group L.P. (CG.O) O (02/17/2016) $25.50
Virtus Investment Partners (VRTS.O) E (06/01/2017) $129.80
Waddell & Reed Financial Inc (WDR.N) U (09/18/2015) $23.18
WisdomTree Investments, Inc. (WETF.O) E (09/18/2015) $12.13
Stock Ratings are subject to change. Please see latest
research for each company.
* Historical prices are not split adjusted.
MORGAN STANLEY RESEARCH 37
© Morgan Stanley 2018
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