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Themes from Q4 2017 PE earnings calls

PE firms are considering insurance as the next big bet.

Evaluating a C-corp. structure

  • A change to corporate status means PE firms would be subject to the lower corporate tax on all income, and shareholders would only pay tax on dividends when paid (at qualified dividend rates). Ares Management LP converted into a corporation in March 2018.
  • Upon conversion to corporate status, shareholders would no longer receive Forms K-1 and would not be subject to filing of non-resident tax returns in multiple states. Post-conversion, shareholders would receive a Form 1099-Dividend to extend dividends are paid.

We have already seen one firm announce a conversion to corporate status in the first quarter. The decision to convert or not convert will vary based on each firm’s investment profile and longer-term view 

Scott Walters,
Transaction Tax Partner, Ernst & Young LLP.

Looking to commit more infrastructure investment

  • The U.S. Administration is seeking US$1.5 trillion in infrastructure spending over 10 years, with the bulk of financing coming from state and local governments, as well as the private sector. Several listed PE firms are active in the space and anticipate a lot of investment opportunities in infrastructure.
  • Federal funding for civil infrastructure is often provided on a block grant basis (so it can be controlled locally) and has represented a declining share of overall domestic infrastructure spending (in the US).

Will a new federal spending program attract and reward or displace investment from states, cities and/or the private sector? 

Considering insurance as the next big bet for PE

  • PE has been actively buying insurance assets, particularly variable annuities books of business. Insurers are rationalizing their portfolios to constitute low-capital intensive products and services.
  • PE may be better positioned than insurers to invest premiums collected from annuity sales to generate higher ROIs because insurers continue to face an investment environment constrained by low interest rates.
  • Technology is allowing the insurance industry to revisit their business models, acquire customers through new channels, and create essential user experiences. Insurers must rethink who they are, what they offer and how they differentiate.

Expanding executive leadership as PE looks to next generation

  • Several listed PE firms have looked internally for their succession planning and some of the changes took place at the start of 2018. Firms want to assure their LP’s that the value of their brand will continue to grow under new leadership.
  • Apollo Global Management LLC, Ares Management LP, Carlyle Group LP and Och-Ziff Capital Management Group LLC are making changes in leadership roles during Q1 2018.

Pursuing retail investors

  • Lower investment returns are driving a new breed of alternative asset classes, according to an EY survey of 50 private sector stakeholders, corporate pension and retirement organizations, and asset managers.
  • Social security, pension and retirement providers are searching for additional sources of income and uncorrelated returns that extend much more to private equity, private debt, alternative credit real estate and infrastructure.
  • Increasing alterative asset exposure may act as a catalyst for many providers to fundamentally transform their governance and organization, as well as increase transparency within communications.