Blackstone to Switch From a Public Partnership to a Corporation

April 18, 2019 Updated: April 18, 2019

NEW YORK—Blackstone Group, the world’s largest manager of alternative assets such as private equity and real estate, said on April 18 that it would convert from a partnership to a corporation, in a bid to get more investors into its stock.

Blackstone is hoping the move, which will take effect July 1, will boost its share price, which has traded at a discount to traditional asset managers such as BlackRock Inc for more than a decade.

Under the so-called C-Corp structure, Blackstone 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 percent from 35 percent.

Two other private equity firms, KKR & Co Inc and Ares Management Corp, announced last year they would also make the switch.

Removing Restrictions

Passive investors such as mutual funds, which are becoming more important as they manage more money, are restricted by their mandates from acquiring the stock of publicly listed partnerships.

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.

Blackstone said the expanded investor base was worth what it called a “modest” tax hit.

“We believe the decision to convert will make it significantly easier for both domestic and international investors to own our stock and should drive greater value for all of our shareholders over time,” Blackstone Chief Executive Stephen Schwarzman said in a statement.

Schwarzman said on twitter, “Since our IPO, our assets under management have increased 6-fold to more than half-a-trillion dollars, driven by exceptional investment performance.”

Blackstone also announced first-quarter earnings on April 18, reporting distributable earnings—the actual cash available for paying dividends—of $538 million in the first quarter, up from $502 million a year earlier.

This translated to distributable earnings per share of 41 cents, lower than the 51 cents analysts had predicted on average based on Refinitiv data.

Nevertheless, the announcement of the switch to a corporation sent Blackstone shares surging about 10 percent in premarket trading to $39.20.

Steve Schwarzman, CEO of Blackstone
Steve Schwarzman, CEO and co-founder of the Blackstone Group, at a Business Roundtable discussion on “Transitioning Innovations from Labor-to Market”, during a CEO Innovation Summit in Washington on Dec. 6, 2018. (Mark Wilson/Getty Images)

Adding Value

Blackstone Chief Operating Officer, Jon Gray said in a video announcing Blackstone’s conversion to a corporation, “Blackstone stock has delivered essentially the same return as the S&P since our 2007 IPO, and significantly outperformed over the last 10 years. However, despite our rapid growth and powerful business model, the stock has traded at a meaningful multiple discount. So we’ve recently been focused on making changes to drive greater value to shareholders.”

“We believe this will unlock value, as the partnership structure made it too difficult for many of our long-only clients, and major indexes, to own,” Credit Suisse analysts wrote in a research note.

CEO of Blackstone Stephen A. Schwarzman
Chairman and CEO and Founder of Blackstone Stephen A. Schwarzman during the Heavenly Bodies: Fashion & The Catholic Imagination Costume Institute Gala Press Preview at The Metropolitan Museum of Art in N.Y. on May 7, 2018. (Jemal Countess/Getty Images)

Fee-related earnings, the amount Blackstone earns from management fees, were up 11 percent year-on-year at $374 million.

Blackstone said its assets under management reached $512 billion at the end of March, up 14 percent from a year ago.

Blackstone declared a first-quarter dividend of 37 cents per share.

At market close on April 18, Blackstone shares finished up 7.49 percent at $38.62.

By Greg Roumeliotis

NTD News reporter Jeremy Sandberg contributed to this report.