Morgan Stanley Upside Scenario Valuation for Alternative Asset Managers

Morgan Stanley | RESEARCH Upside Scenario Starting with the framework laid out above, we make several key adjustments in our upside scenario to illustrate where we think mul- tiples go and where the stocks can trade over the near term if the alts convert. Our upside scenario implies an average share price increase of 13% across the group. e First we fully tax effect the performance fee earnings. Under a C-corp structure these would not get the pass- through benefit and would be subject to full taxes. We use a full 24% tax drag on the net accrued carry receivable balance and the future net carry per share. e@ Second we adjust the FRE multiples upward. As we dis- cussed previously with our three approaches for FREmulti- ples, we believe there is significant upside to the value of these earnings if alts were to convert. This drives nearly all of the upside from current prices in our upside scenario. We use a 22.5x multiple on FRE in our upside case, which represents 50% increase from the 15x multiple that we believe is priced in today. Exhibit 28: Upside Scenario SOTP Valuation = B+C+D A B c D E wore ie After-Tax SOTP Ticker Current 2018E FRE Snare BDC BS NAV Value Ex- Price CoreFRE Multiple @ Value Per Per Share Carry Per 24% tax Share Share Rate APO $36.42 669 22.5x $28.40 $0.00 $2.72 $31.13 ARES $24.70 185 22.5x $14.71 $4.52 $0.69 $19.92 BX $36.78 1,196 22.5x $17.03 $0.00 $2.83 $19.86 CG $25.60 100 22.5x $5.01 $0.00 $0.85 $5.86 KKR $24.40 475 =. 22..5x $9.57 $0.00 $9.71 $19.28 OAK $45.20 166 22.5x $18.17 $0.00 $15.19 $33.36 Source: Company data, Morgan Stanley Research estimates NORTH AMERICA INSIGHT ~~ e Last we assume 2x of multiple expansion for performance fees. As a starting point, we look at the implied multiples using current share prices and a 15x multiple for FRE as described above. We then add 2x turns of multiple expansion to each of the companies@urrent implied multiples. We look to the Goldman Sachs example earlier in the note as a comp for cyclical financials earnings. Our group median for implied future carry multiples of 8.5x is just under one standard devi- ation away from GS@historical P/E average of 9.5x. Although we use the higher multiple, this is on a lower value of fully taxed future performance fee earnings. The impact to valua- tion of future performance fees are mixed from company and can be seen in greater detail in the following appendix with company specific SOTP and scenario analysis. While we expect some multiple expansion for performance fees ina C-corp, the structure will not change the inherent vola- tility of the performance fee portion of earnings that is marked to market. =GxH =E+F+I F G H I J After-Tax % Net Carry Net Carry Per Future Value of Total Increase ‘ Share After 24% Receivable Carry Future jJValuePer from Tax (Avg. 2018e- . Per Share 2020e) Multiple Carry Share Current @24% Rate Price $1.64 $1.86 7.1x $13.30 $46.07 26% $0.78 $0.48 13.6x $6.47 $27.18 10% $2.29 $1.57 11.5x $18.04 $40.18 9% $4.40 $2.17 8.0x $17.26 $27.52 8% PAesZ $0.71 9.0x $6.42 $27.01 11% $4.38 $1.68 7.5x $12.58 $50.31 11% Average 9.5x 13% Median 8.5x 10% HOUSE_OVERSIGHT_025569