Blackstone seeks compelling reason for C-corp switch

The firm will not rush to make the corporate switch, watching closely how peers KKR and Ares fare.

Blackstone Group will not be rushing to convert to a C-corporation.

“This is a big decision and we’re going to be patient in making this decision, and the reason why is this is not one you can reverse,” said Jonathan Gray, president and chief operating officer of Blackstone Group. “You can only make this choice once if you decide to convert to C-corp.”

Gray, speaking at Deutsche Bank’s eighth annual Global Financial Services Conference in New York City on Wednesday, said that while it is possible to calculate the costs to the firm that would come from switching from its current tax rate as a publicly traded partnership to a corporation, other factors, such as multiple expansion, remain unknown.

One reason to convert would be to have greater participation on its stock, namely more mutual funds, hedge funds and index funds that would buy into Blackstone.

Two other private equity firms have made the decision to switch to C-corporations and their stock price performance could serve as a guide for Blackstone in its consideration for status change, Gray said.

For Blackstone, its share price is barely higher than the initial public offering price of $31 in 2007, closing on Thursday at $31.91. Its closing high, $42.97, was set more than three years ago. A fund that mimics the Standard and Poor’s 500 Index would have done better over that three-year period, yielding about a 150 percent return.

Wider potential ownership among mutual funds was also a key factor in KKR’s decision to convert, which is effective July 1. The announcement to convert has yet to give a lasting boost to its share price; the stock reached a three-month closing high of $22.88 on May 9, less than a week after its announcement, but has changed little since then.

Ares Management was the first listed alternatives manager to convert to a C-corporation, announcing the switch in early February. Despite a brief pop in its stock price to a closing high of $24.40 on February 28, the stock has slipped, settling at $22.15 on Thursday.

However, Ares chief financial officer and chief operating officer told sister publication Private Debt Investor last month that the firm is already seeing some benefits from the switch, including a broader shareholder base.

When asked about why there’s been a ‘disconnect’ between Blackstone’s business structure and stock price performance, Gray said “our performance fees are lumpy by nature and so are harder to predict”.

“All of that has some negative impact. But I think if you step back, it is a very powerful business model,” he said, adding Blackstone is the global leader in private equity and that it will continue to stick with its business model. It raised $260 billion just in the last three years, he noted.

“At some point the light switch goes on and people will recognize value, and our job is to continue to be diligent, focused, and execute, and deliver for our LPs, our investors, and deliver for our shareholders,” Gray said.

Additional reporting by Isobel Markham.