KKR & Co. is morphing from a partnership to a corporation, a shift that will allow the investment firm to capitalize on the lower corporate tax rate from the recent GOP-led tax law and attract a broader investment base.
Under the partnership model, the firm was treated as a pass-through entity and owners were taxed on net income at a maximum rate of 37 percent, the top individual tax rate. Experts say the actual rate paid on those funds was closer to 30 percent, lower than the old 35 percent corporate tax rate.
But after the law reduced the corporate tax rate to 21 percent, the category became more attractive for firms still operating as a partnership. Once the shift takes effect on July 1, KKR will be taxed on all revenue the firm reports at the new, lower rate.
The firm will lose some benefits it enjoyed as a partnership. Investors, for example, could face a higher tax bill as a result of the shift because they would now have to pay an additional tax on dividends. But the change will allow a broader swath of shareholders to invest in the company, according to the owners.
“KKR’s conversion from a partnership to a corporation is designed to broaden our investor base, simplify our structure and make it easier to invest in our shares,” co-chief executive officers Henry Kravis and George Roberts said in a statement.
Legal experts say the change will allow KKR access to new capital because the partnership model deterred some investors.
“There are certain types of investors, including many institutional and foreign investors, that just don’t want to be in a U.S. partnership/flow-through model,” David Strong, a tax partner with Morrison & Foerster LLP, said in an interview. “Once you convert to a corporate model and you’re just holding public shares like any other corporation, you’re going to attract a broad range of potential new investors.”
KKR reported economic net income – which reflects changes in the value of assets that may not yet have been sold – of $465.3 million for the quarter that ended on March 31, a 30 percent decrease over the same period in 2017. The firm increased its assets to $190 billion, a 38 percent year-over-year increase.
Ares Management LP, another asset management firm, announced earlier this year it would change its tax category from a partnership to a corporation.
