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Ares execs say corporation conversion makes M&A easier

Converting to a C-corporation will allow Ares Management LP to retain some of its earnings to use for M&A and for organic growth, executives said during an earnings conference call.

The limited partnership model required earnings to be passed through to unit holders, who would face heavier tax burdens and more complicated tax filing processes for their investments in Ares units. As a corporation, the company could use its earnings in several other ways, including for deals, a consistent cash dividend and a share repurchase program, President and CEO Michael Arougheti and CFO and COO Michael McFerran told analysts.

Aside from providing a more flexible capital position, the corporate conversion would let the company trade common shares rather than units. That change would make the company's publicly traded currency more liquid and facilitate M&A, executives said. Sellers are more willing to consider a transaction when the buyer has common stock, rather than units, for the same reasons that the change benefits existing holders: the shares are more tax-friendly and less complicated to own.

As the asset management environment becomes more competitive, with smaller companies merging and larger firms snatching up deals to gain scale, making M&A easier is strategically important, Arougheti said.

"This move to scale is very real," he said.

Ares will also replace its unit holders' distribution, which varies significantly based on the way the company recognizes management fees and other fees as revenue, with a more consistent common stock dividend. It is aiming for a quarterly payout of 28 cents per share in 2018, McFerran said. The company will also begin developing a share repurchase program once the conversion is official March 1.

The dividend and simplified ownership structure should attract more investors in the company's public float, both executives said. During intraday trading Feb. 15, the trading session following the company's announcement of the conversion, Ares' publicly traded units shot up more than 10%. The units were trading at $25.08 each, up 10.46%, as of 2:04 p.m. ET.

The company will leave behind a partnership structure used by most large publicly traded alternative asset managers. Several of its peers, including KKR & Co. LP, Apollo Global Management LLC and Carlyle Group LP, have said in recent days that they are considering making the switch but have yet to decide. The recent U.S. tax reform package led many analysts and observers of the alternatives space to expect several firms to restructure in 2018.