Carlyle Group LP emulated its peers on Wednesday with plans to convert from a publicly traded partnership into a corporation, and went one step further by announcing it will become the first U.S. private equity firm to hold shareholder votes.
The corporate governance changes will have limited impact on how the Washington, D.C.-based firm runs its affairs, given that it will continue to be controlled by its founders and employees for the foreseeable future. Insiders own 66% of Carlyle, and the vast majority of them have committed to voting their shares as a block for up to five years, the firm said.
Nonetheless, holding annual meetings for shareholders to cast votes represents a significant milestone in the evolution of the secretive, tightly-knit private equity industry.
The move could end up boosting Carlyle's valuation, because it will allow its inclusion in indices that exclude publicly traded partnerships. Carlyle may also be included in more indices than its peers, such as the Russell and the S&P, because it will be the first publicly traded private equity firm to abolish its dual-class shares.
Earlier this month, Blackstone President Jonathan Gray said his firm does not plan to convert its dual-class share structure into one common class stock.
"We are going to stick with our governance strategy and work hopefully to convince these indices it makes sense to include us," Gray told analysts on a conference call on July 18.
Private equity firms pay corporate taxes under the partnership structure on the management fees charged to investors, but are mostly shielded from paying these taxes on performance fees.
Under the so-called C-Corp structure, Carlyle will pay corporate taxes on all its revenue, in exchange for enabling investors such as mutual funds and index trackers to buy the stock.
The additional tax burden has become less severe after the headline U.S. corporate tax rate was lowered effective last year to 21% from 35%. Carlyle's peers Blackstone Group Inc, KKR & Co Inc and Apollo Global Management LLC have already opted to switch to a C-Corp.
"(The change) improves our trading liquidity, makes us more attractive to new investors, provides a fixed dividend that enables improved capital allocation and offers an attractive yield, and enhances shareholder alignment under a new one-share/one vote governance model," Carlyle Co-CEOs Kewsong Lee and Glenn Youngkin said in a statement.
Carlyle said its effective cash tax rate on its distributable earnings was expected to be in the single-digit percentage range in 2020, and then increase to the mid-to-high teens before reaching the low 20s in five years.
Under the new structure, Carlyle's founders, David Rubenstein, Bill Conway and Dan D'Aniello, will each have the right to nominate a subset of the firm's directors, subject to approval by a full shareholder vote.
Earnings beat estimates
Carlyle also said its second-quarter pretax distributable earnings – the cash available for paying dividends – totaled $213.4 million, up from $114.5 million a year earlier.
The buyout firm said post-tax distributable earnings per share rose to 57 cents, from 29 cents posted a year earlier, beating the average analyst forecast of 37 cents, according to data compiled by Refinitiv.
Part of the gains were driven by the reversal of a legal setback. In February 2018, the Paris administrative court of appeals overturned a lower court ruling that forced a Carlyle subsidiary into paying $130 million in taxes on the 2007 sale of the "Imprimerie Nationale," the official headquarters of the French printing works, back to the French state for $466 million (375 million euros).
Carlyle said on Wednesday it received a $72 million gain because of the "final resolution" of the tax dispute.
Carlyle said its private equity funds appreciated 1% in the quarter, compared with a 0.7% appreciation for Blackstone's private equity portfolio and 6.4% appreciation for KKR's private equity portfolio.
Under generally accepted accounting principles, Carlyle reported net income per share on a diluted basis of $1.23 for the quarter, up 120% from a year earlier. That outperformed Blackstone and KKR, which recorded a 59% and 25% drop respectively.
Carlyle declared a quarterly dividend of 43 cents per share. It said it would introduce a fixed annual dividend of $1 per share, paid quarterly.
