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ET or anyone else,

Two questions. First is on dilution/share buyback.

BX has stated that they would like to have zero dilution. Basically, buyback as many shares as they issue in compensation. I think BX should buyback at least that amount, and so I am happy with that approach.

I am having a bit of trouble reconciling their statements with the equity compensation costs. As I see it, BX has an equity compensation expense of about $181 million over the last 12 months. That's high (above 10% of net income), but I think that is to be expected. Also, in the range that would allow for an 85% payout ratio - 85% to distributions; 10%+ to buyback; a few percent left over.

On the call they mention 18 million shares being bought back in the LTM. That's $540 million, or about 3-times as many shares as I would have thought needed to cover the compensation expense. I'm looking to reconcile the numbers.

Looks like they reduced the share count over the LTM - about 6 million fewer DE participating units. BX buys back only common, but some partnership convert to common??

The reduced sharecount could get me a bit closer to reconciling. Perhaps management reduced the sharecount in the recent past due to a low unit price, but discusses zero-dilution as that's all they want to semi-commit to. Still leaves me a bit short though.

Any comments would be appreciated.


Second one is simpler. I believe the conversion moots any carried income tax changes for BX. That is, BX will no longer get any special treatment for carried income, and so any change to eliminate the tax treatment is irrelevant. Looking for confirmation or correction.

Thanks,
GnV
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No. of Recommendations: 1
Second one is simpler. I believe the conversion moots any carried income tax changes for BX. That is, BX will no longer get any special treatment for carried income, and so any change to eliminate the tax treatment is irrelevant. Looking for confirmation or correction.

Take it with a grain of salt (Center for American Progress) but this is an interesting read of the carried interest taxation situation from last July:

https://www.americanprogress.org/issues/economy/reports/2018...

In a weak attempt to look tough on carried interest, legislators included a small limit on the practice: The carried interest must be held for at least three years in order to qualify for capital gains treatment. However, this restriction may be meaningless. This is because many private equity managers tend to hold onto their interests for at least that long, so they will continue to enjoy the capital gains tax rate on those shares.33

Meanwhile, hedge fund managers—who tend to hold shares for shorter periods of time—have been looking for workarounds.34 For example, many managers already have created new LLCs in Delaware—a state known for its business-friendly laws—to receive managers’ carried interest payouts. They plan to have these LLCs elect to be taxed as S corporations, since an exception from the three-year rule in the law for corporations fails to specify whether it applies only to C corporations or to S corporations as well.35 Another workaround involves converting the carried interest into reinvested capital, which is also exempt from the three-year rule, or to structure the carried interest as unrestricted performance fees.36 While the Treasury Department or Congress may strike down some of these workarounds, it seems reasonable to assume that at least one of these approaches will work for individuals seeking to game the tax law.

4. Wall Street firms and wealthy families turning themselves into C corporations
If the pass-through business deduction workarounds fail, wealthy individuals from Wall Street to Fifth Avenue may be able to shelter income from taxes by setting up their affairs as a traditional C corporation.


There are a number of articles noting that the IRS has closed the S-Corporation loophole. Arguably if higher capital gains taxation is coming (PE Game of Thrones) then even APO may find it worthwhile to convert sooner rather than later.

ET
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