NEW YORK (Reuters Breakingviews) - Some three decades after KKR’s Henry Kravis was called a barbarian, he has encountered one at his own gate. Jeff Ubben, whose ValueAct just disclosed an interest in the buyout shop, is usually friendlier in his approach with the companies in which he invests than the term might suggest. Even so, there’s a chance things could get testy.
Mason Morfit, president of Ubben’s $16 billion activist investing firm, said on Thursday that he sees plenty of upside for KKR, whose funds owns stakes in companies including First Data, GoDaddy, Toys R Us and Lyft. He reckons the firm’s traded units are undervalued by half.
Ubben also is considered politer than many of his aggressive ilk. With an interest of less than 5 percent, he isn’t required to say if he plans to make suggestions about how KKR should run its business differently or if it’s just a passive holding. And the firm’s partnership structure insulates Kravis and his colleagues from being pushed around anyway.
Bullish perspectives like Morfit’s have fallen on deaf ears for a long time, though. Blackstone boss Steve Schwarzman last week suggested that if his firm’s units were valued the same way as a typical S&P 500 Index company’s shares based on dividend yield, they would be trading at $100 each instead of $30.
One reason Blackstone, KKR and others aren’t analyzed like most other big public companies, however, is because of complex structures that are designed to help minimize taxes and keep founders and employees in control. Turning these partnerships into more typical corporations – something discussed off and on for years and possibly of interest to Ubben, according to a Bloomberg report – probably would invite new investors and higher valuations.
A sharply reduced business tax rate, as proposed by President Donald Trump, could revive the idea. A company’s income would be taxed at a far lower rate than the personal one many investors pay now on the profit “passed through” by KKR and others. Citigroup analyst William Katz last year estimated that while KKR’s earnings would fall by nearly a fifth at a 22.5 percent tax rate, the firm also should trade at a notably higher valuation.
That’s no certainty, however. And once a publicly traded partnership converts it cannot easily go back. Any discussions between Ubben and Kravis may remain cordial only for so long.
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