Ares Management Corp

NYSE:ARES

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to Ares Management L.P.'s Fourth Quarter and Full-Year 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on Thursday, February 15, 2018.

I will now turn the conference over to Carl Drake, Head of Public Investor Relations for Ares Management.

[Carl Drake, IR]

Good afternoon, and thank you for joining us today for our fourth quarter and full-year 2017 conference call. I'm joined today by Michael Arougheti, our newly appointed Chief Executive Officer; and Michael McFerran, our newly appointed Chief Operating Officer, and who continues to serve as our Chief Financial Officer. In addition, Bennett Rosenthal, Co-Head of our Private Equity Group will also be available for questions.

Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements, and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Moreover, please note that performance of an investment in our funds is discrete from performance of an investment in Ares Management, L.P.

During this conference call, we will refer to certain non-GAAP financial measures such as economic net income, fee-related earnings, performance-related earnings, and distributable earnings. We use these as measures of operating performance, not as measures of liquidity. These measures should note be considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. These measures may not be comparable to like titled measures used by other companies. In addition, please note that our management fees include ARCC Part 1 fees.

Please refer to our fourth quarter and full-year 2017 earnings presentation that we filed this morning for definitions and reconciliations of the measures to the most directly comparable GAAP measures. This presentation is also available under the Investor Resources section of our Web site at www.aresmgmt.com, and can be used as a reference for today's call. Please note that we plan to file our Form 10-K later this month.

I would like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any securities of Ares or of any other person, including any interest in any fund. This morning, we also announced that we submitted an election to the IRS to be treated as a corporation for state and federal income tax purposes effective March 1, 2018. Please see Ares' separate presentation on corporate status election, which is also available on our Web site and filed with our 8-K along with our earnings presentation this morning. Michael Arougheti and Michael McFerran will also reference this presentation during our call today.

We also declared a distribution of $0.40 common unit that represented a portion of earnings for the five-month period, beginning October 1, 2017, and ending February 28, 2018. Unitholders of record on February 26, 2018, will be paid as distribution on February 28, 2018. Starting March 1, 2018, Ares' shareholders will receive a Form 1099-DIV for any dividends received. In addition, for March 2018, the first month Ares will be taxed as a corporation, Ares has declared a $9.33 common dividend payable on April 30 to holders of record on April 16.

Now, I will turn the call over to Michael.

[Mike Arougheti, CEO]

Great. Thanks, Carl. Thanks for joining us today everybody. As Carl mentioned, we have really exciting news to share regarding our change in our tax structure as we've elected to change to corporate tax status. However, before we discuss the details behind the action, I thought it'd be helpful to first discuss our recent fourth quarter and 2017 results.

Mike McFerran will start-off with our results and then I will follow-up with the review of the growth dynamics of our business, which has contributed in part to our decision to make this election to corporate tax status. Mike McFerran and I will then walk you through the separate presentation that Carl mentioned on our election before we take your questions.

So with that, I will hand the call over to Mike McFerran.

[Mike McFerran, COO and CFO]

Thanks, Mike. The fourth quarter of 2017 concluded another strong year for Ares. We generated our highest quarterly levels of management fees, and core fee-related earnings with the year-over-year growth of 17% and 22% respectively. For the full-year, our management fees and fee-related earnings increased 13% and 26% respectively, reflecting double-digit growth in AUM and solid FRE margin improvement largely as a result of the scale efficiencies in our business.

Our economic net income growth was also notable, reflecting not just FRE growth, but also strong fund investment performance across our primary strategies. Fourth quarter in 2017 after-tax ENI net of preferred increased 23% and 37% respectively. A strong performance is also evident in our net accrued performance fees, which increased 53% year-over-year. Within credits, we generated solid performance in a wide range of strategies, including the full-year gross returns of more than 15% in European direct lending strategies, and 5% to 8% gross returns in our liquid strategies in syndicated loans and high yield.

In addition, our externally managed business development company, Ares Capital Corporation generated a total net return of approximately 10.5% for the year. 2017 gross returns in our corporate private equity strategy were approximately 26%, and our two primary real estate private equity strategies had gross returns of approximately 19% in the US and approximately 24% in Europe.

As Mike will discuss later, we believe the strong and consistent performance and client satisfaction is setting us up for additional success in our fundraising, including connection with new adjacent strategies. Overall, we finished 2017 with another good year of fundraising, 16.7 billion in gross new commitments, driven largely by a wide range of new and existing illiquid and liquid credit strategies, and to a lesser extent successor funds and our real estate private strategy.

In terms of the highlights for 2017, we raised our largest first time fund in our history, Ares Private Credit Solutions, a $3.4 billion coming [ph] with fund focused on junior capital investments and upper middle market companies. We added another $3.7 billion in U.S. and European direct lending private funds, and priced or closed five new CLO funds totaling $3.5 billion throughout the year. Collectively, this fundraising helped to drive our AUM up 12% to $106.4 billion, and our fee-paying AUM up 20% to $72.5 billion during 2017.

The growth in our incentive eligible AUM has been another noteworthy development as we reached a record-high in the fourth quarter, with more than $62 billion, up 23% year-over-year. Of that amount, approximately $22 billion is un-invested and available for future deployment, which we believe represents the potential for significant future value creation over the long-term.

Now, let me walk through our detailed results. For the fourth quarter and full-year, we reported economic net income of 132.4 million and 467.7 million respectively, which translated into $0.54 and $1.93 on an after-tax per unit basis after preferred distributions compared to $0.44 and $1.42 for 2016. The fourth quarter also represented our strongest quarter of fee-related earnings to-date with nearly 59 million, up 22%, with our full-year fee-related earnings of 217 million, 26% higher year-over-year. These numbers include the ARCC Part 1 fees conjunction with the ACAS transaction. Our fourth quarter FRE margins reached 30% compared to 28% in the fourth quarter a year-ago.

Available capital or dry powder at the end of the year stood at 25.1 billion, up 8% year-over-year. Our AUM not yet earnings fees or shadow AUM declined to 14.5 billion compared to 17.8 billion in 2016, as 7.6 billion of ACAS became fee earning upon that fund's activation in March of 2017. Of this 14.5 billion, approximately 10.8 billion was available for future deployment with corresponding management fees totaling over 118 million, and blended expected management fee rates of 1.1% consistent with our current levels.

Our deployment also reflects the growth and breadth of our global platform, particularly within direct lending. Within on dry-down funds, we deployed 12.6 billion during 2017, primarily in U.S. and European direct lending strategies fell by active deployment of flexible capital within our corporate private equity, structured credits, and real estate private equity strategies. The investing environment remains challenging, but we continue to draw upon our extensive relationships and deep sourcing capabilities along with our flexible capital strategies to find attractive investments in the road for elevated asset prices.

The strong fund performance, I cited earlier, led to significant improvements in our performance-related earnings for the fourth quarter with 73.5 million and set a new record for the full-year with 250.7 million versus 65.4 million for the fourth quarter of 2016 and 184.6 million for the full-year of 2016. Our balance sheet investment portfolio has continued to perform well. At the end of the year, we had 823 million of diversified investments, primarily in our funds, and the portfolio generated strong investment income of 33.8 million for the fourth quarter, and 86.7 million for all of 2017, representing an average annual and net investment return of over 12%. Our investment portfolio income from credit investments complemented by private equity and real estate fund advisements.

Our fourth quarter distributable earnings net of taxes were $0.26 per common units versus $0.31 per common units a year ago. Our fourth quarter distributable earnings were moderately lower due to comparably less monetization activity, but keep in mind that the underlying core level of our distributable earnings continues to be driven by higher fee-related earnings growth. For the year, our after-tax distributable earnings per common units was $1.18 versus $1.0 in 2016, both net of the preferred distributions.

Let me update you on the status of our remaining tax benefit related to the spot payment we made in connection with Ares Capital Acquisition of American Capital or ACAS. During 2017, we used about $0.16 per unit against our fee-related earnings, with about $0.30 per unit remaining to carry back or carry forward. Due to the reduction of corporate tax rates under Tax Reform, we have decided to carry back the net operating loss to 2015 and 2016 to maximize the cash benefit. We expect to receive our tax refund in early 2019.

Looking forward, we believe our business is well positioned with a high degree of management fees, which represented more than 80% of our total fees in 2017, and our fee-related earnings continue to grow and account for the majority of our cash earnings, representing approximately 80% in 2017. Our management fees are derived from loan day to capital, as more than 80% of our quota management fees were earned from funds that had remaining life of more than three years, and 39% with some publicly traded permanent capital vehicles.

Now, I will turn the call back to Mike for his thoughts on historical and future growth.

[Mike Arougheti, CEO]

Thanks, Mike. As you can see from the growth in all of our metrics, we made a lot of progress in the development of our business since our IPO nearly four years ago.

As we articulated, we decided to become a public company to improve our fundraising through greater brand awareness in the global markets, improve our access to the capital markets, enhance our already-strong culture of ownership across the firm, and to have a currency for potential acquisitions given the significant consolidation opportunities in our industry. We believe that we have achieved success in these areas, but believe that meaningful opportunity still lie ahead of us.

Over the last five years, our AUM management fees and fee-related earnings have all experienced compound annual growth rates of around 10%. In 2017, as Mike discussed, the growth rates in these metrics were even higher. FRE accelerated by 26%, and our economic net income increased by over 30%, both representing the strong momentum in our core management fee business and strong fund performance across our entire platform.

Our businesses continue to benefit from several important industry trends, namely the faster growth in demand for alternative investments as investors seek higher returns with less volatility, the consolidation opportunity as limited partners shrink the number of their GP relationships, and managers like Erie strive to achieve the economies of scale, and lastly the global trend away from traditional banking and the acceptance of private debt as an investable asset class.

To capitalize on these trends, we continue to scale our business development team. Prior to our IPO, our global business development and Investor Relations team was composed of 44 people. Today it's almost 70 people in eight offices in five regions around the globe. These investments have been bearing fruit as we systematically raise larger successor funds, launch sizable first-time funds, and penetrate new geographies and new distribution channels. As an example, looking at our fundraising pipelines going into 2018, we've launched larger successor funds in our European direct lending strategy and our European real estate private equity strategy, and we've had a significant uptake in strategic managed account opportunities in illiquid credit across the spectrum of direct lending and structured credits.

Our investors have rewarded our performance with larger AUM and broader relationships across the platform. Our client growth has also benefited from our investors giving us a greater share of their wallet. At the time of our IPO, we had about 210 investors invested in more than one Ares fund. Today that number is 305 investors, and our average client now has invested in two funds with us.

Additionally, we continue to expand and develop new direct investor channels. As an example, we were barely active in the private banking or high network channels five years ago, and in 2017, those channels constituted over 11% of our direct institutional funds raised. As another example, we continue to see a compelling opportunity in the insurance sector for customized solutions. This segment now accounts for over 10% of our total AUM versus 5% prior to our IPO.

We've also seen an increasing amount of growth from new strategies. The emergence of ancillary or step-out strategy scenarios like structured credit, European direct lending, our PCS strategy, commercial finance, and so on, they have all helped fuel the growth in our product offering. In addition, we've developed a significant private fund business where we market our U.S. direct lending products directly to institutional investors, a distribution channel that wasn't meaningful to us five years ago. If you look at that in the aggregates, since our IPO, fundraising from new strategies, or new channels has accounted for approximately 20% of our annual fundraising, compared to just 4% the year before our IPO.

The changing composition of our AUM has also made us a stronger company, as more of our new funds are in long dated closed-end or permanent capital funds in proprietary strategies like direct lending, structured credits, and corporate real estate and infrastructure private equity with a shrinking component in open-ended funds in treated liquid assets. For example, in our credit strategy, our direct lending business, which includes long dated funds and managed accounts with sticky assets, now comprises almost 60% of our total credit AUM versus 48% at the time of our IPO.

We've also invested heavily in building out our distress team, and the returns on recent deployment are promising. We hope to raise additional funds in distressed special situations and opportunistic credit as with cycle evolves, we're also building out our real estate debt platform with new leadership and important new hires and we expect to become a meaningfully larger player in that $4 trillion market segment in the coming years.

We expect to build upon our success in the private asset backed sector in the U.S. with a new team in Europe and lastly there's been a notable uptick in the number of large investors that are looking to develop significant strategic mandates across our platform. I think this speaks to both the increasing awareness of the performance and breadth of Ares' strategies as well as investors desire to forge more meaningful partnerships with selected managers of scale.

To support this growth, we recently made a very strategic hire to lead our efforts in new product development and cross-platform mandates and in expanding our consulting channel, while the vast majority of our growth is organic we do have a strong track record of acquisitions. Over the last five years, we've added to our real estate platform primarily through the acquisition of AREA Property Partners where we've grown our real estate PE AUM to $7.3 billion and total real estate AUM to over $10 billion.

As Mike stated earlier, our real estate PE fund performance has been very strong, we have two large successor funds in the market and we have a platform that has considerable opportunity for further scaling. In structured credit, we acquired a small platform Indicus Advisors in 2011 and have added to it organically with private ABS and CMBS capabilities and at 2017 year-end, our structured credit strategy had grown to approximately $5 million AUM and continues to benefit from our leading franchise in illiquid credit. These acquisitions have provided complementary add on strategies and we believe that there are significant additional opportunities to acquire proven managers at attractive levels. To that end, we now have a fully developed corporate strategy team dedicated to exploring and analyzing these opportunities and to put that in perspective over the last two years, we reviewed over 150 potential acquisitions with over $2 trillion in assets under management.

So in summary, we believe that the drivers of our business are pointing upwards and we have no shortage of ways to further expand our business. We have opportunities to grow organically by increasing our fund sizes or by expanding our products, geographic coverage channels of distribution. In addition, we're seeing significant consolidation opportunities that we believe could be accretive and strategic for our unitholders. It's for these reasons that we're firmly committed to executing on the need for scale and profitable growth which leads me then to the rationale for the change in our corporate tax status election. So folks could now maybe turn to the separate presentation on corporate status election starting on slides four and five. I'd like to explain why we've elected to move forward and the benefits that we expect from this change.

Bear in mind that this is something that we started to evaluate well before tax reform seemed imminent and we believe that our decision to elect corporate tax status is in the best interest of unitholders. We believe that there is a willing but ineligible shareholder universe for publicly traded asset managers that are taxed as partnerships. While we've been public for less than four years, we've witnessed the evolution of this model for public shareholders since the first firms in our industry began going public over 10 years ago. And while the public partnership model seemed optimal from a tax perspective, the complexities of pass through taxes and schedule K1 reporting for investors, we believe has limited our potential investor base both domestically and internationally.

Asset managers including Ares that are taxed as partnerships have historically traded at meaningful discounts to other traditional managers, they're taxed as corporations and this is the case despite the fact that alternative managers have attractive business models that are relatively insulated from mark-to-market volatility, fee pressure, the rise of passive investing and funds with daily liquidity and outflow risk. So we're making this change first and foremost to simplify our tax structure to expand our eligible investor universe and we believe that the ability to attract a broader and more diverse investor base should benefit all equity holders and enable us to be valued accordingly.

Secondly, with more liquid shares as currency, we believe that we can more efficiently pursue selective acquisitions and continue to broaden and deepen our platform. While we have a public currency, the liquidity and attractiveness of that currency is somewhat limited for M&A as issuing units from PTP creates tax challenges for sellers and third in conjunction with this election, we've adopted a dividend policy that will allow investors to better appreciate the underlying stability and growth of our core management fee business.

One of the challenges with alternative managers has been inconsistent distributions and this has been driven by the core difference between cash distributions and dividends that Mike McFerran will explain in a minute. So therefore we're electing to move to a steady quarterly dividend that will be based on our after-tax fee-related earnings and this dividend will be reassessed each year based upon the level and growth of our after-tax FRE.

We believe this has two obvious benefits. First it will provide more predictability with respect to our dividends while reducing dividend volatility and second it allows us to retain our net performance related earnings stream to fund future growth or for potential accretive share repurchases. Lastly the election also reduces the operational complexity of managing a publicly traded partnership including the requirement to send out Schedule K-1s. We expect that this alone will result in annual savings to our company and make owning our shares a little less burdensome.

And with that, I'll turn it over to Mike McFerran to walk through some of the math and financial metrics around the conversion. Mike?

[Mike McFerran, COO and CFO]

Thanks, Mike. For reference I'd ask you to turn to slide six, we're also on a few minutes on our current pass through tax status and what changes with our corporate tax status selection. As a quick reminder, the public issued by Ares represent approximately 39% of the total ownership of our firm.

Our revenue could be grouped into two categories, income that is considered good or qualifying for PTPs under the IRS roles and non-qualifying or bad income. Translating this for Ares, our management fees and a small portion of our performance fees are considered bad income. Historically management fees have represented over 80% of our total fee income.

Our qualify income or good income since it's mostly of our performance fees. Our Bad income applicable to our public entity is taxed at corporate rates. As a result after-tax fee-related earnings are not impacted whether we are taxed as a partnership or corporation as it is treated the same.

The only difference is the treatment of our performance related earnings which is predominately passed through to our investors and tax at the individual level. As the majority of our revenue comes from management fees, we have already had the majority of our revenue taxed as if we are a corporation. Our unitholders are public partners in Ares and are allocated their provided share of partnership income and losses annually through the issuance of K-1s to all unitholders.

Investors then pay taxes based on the respective tax status and the character of income reported through the K-1s which generally consists of a mix of ordinary income, qualifying dividend income and capital gains or losses. Since our IPO we have declared to paid quarterly cash distributions as a public partnership. I want to highlight that the common misconception about our industry is that our cash distributions or dividends they are not as unitholders receive their taxable income to allocations reported in their K-1s.

The cash they receive is intended to provide unitholders with cash to pay their taxes. Ideally provide unitholders with positive after-tax cash. The nature of K-1s also results in the possibility that certain unitholders may have to file state tax returns in multiple states and incur higher tax preparation costs, due to the complicated nature of K-1s in comparison the simple Form 1099 DIV reporting.

Under our corporate tax status election Ares will pay corporate taxes on all common shareholders revenue and common shareholders will not have tax obligations are raising from their investment in Ares of shares other than on the receipt of qualifying dividends.

Common shareholders will receive Form 1099 DIVs for the dividends they receive and they would no longer receive pass through income or any schedule K-1s with possible multi state tax filing obligations from owning our shares.

Turning to slide nine, starting March 1, 2018 we were no longer declared cash distributions or rather declared actual after-tax qualifying dividends. We have adopted a dividend policy effective March 1 that we believe achieves the following. First, our intention is that after-tax fee-related earnings become the basis for our dividend.

With the dividend being targeted at a level that we estimate reflects a full payout of our after-tax fee-related earnings. As fee-related earnings reflect the core earnings of our business and consist of management fees, less compensation and general and administrative expenses having our recurring dividends based on this amount, we lose volatility from our dividend, and enables investors to receive what we believe is an attractive after-tax qualifying dividend yield. We intend to grow the dividend in line with the growth of our fee-related earning.

Our dividend policy reflects our intention to retain net performance fees. As we have historically paid out on average 90% to 100% of distributable earnings, we have not retained earnings for future growth in the past. We now intend to do so and we have the opportunity through low corporate tax rates to retain after-tax performance fees, and a lower rate than investors would have and use the retrained earnings for potential share repurchases and to fund future growth with the objective of accelerating our fee-related earnings growth per share.

I do want to spend a moment reviewing the procedural steps and timeline related to us making a corporate tax selection. Our last day taxed as a partnership will be February 28th, of 2018, and K-1s will be issued for the stock period of 2018, starting in January 1st, ending at the end of February. As Carl stated, there'll be one final distribution while being taxed as a partnership, a $0.40 per common unit reflecting the five-month period, ending February 28, 2018 that will be paid on that date.

Going forward, we expect to pay qualified dividends under our adopted dividend policy. For March 2018, the one-month stop period of the first quarter post the change, we are declaring a $0.0933 per common share dividend reflecting one-third of a full quarter $0.28 per share dividend for holders of record on April 16th to be paid on April 30th. Starting the second quarter of 2018, we intend to pay a $0.28 per common share dividend per quarter for the remainder of the year.

Page 11 presents an illustrative financial impact of this change. To keep this simple we have assumed reported fee-related earnings and realized performance related earnings matched taxable income. As I previously mentioned, fee related earnings have been taxed as if we had been a corporation. The reduction in the corporate tax rate results in an increase to after tax fee-related earnings of 23%. This reduction in taxes already been incurred on fee-related earnings offset the new taxes that will now be incurred at the entity level for realized performance related earnings. The extent of this offset will be a function of the ratio of fee-related earnings to net realized performance-related earnings. We refer to the sum of FRE and realized PRE as realized income. The breakeven level of this offsetting tax has been realized PRE as approximately 35% or less of realized income. For 2017, a year that overall was strong for realizations, realized PRE represented approximately 33% of our realized income.

In summary, the top of slide 11 shows you that with our large contribution of FRE as a percentage of total realized income, the reduction in corporate tax rates would more than offset the taxes on the incremental income being taxed. While we believe this analysis is useful it's most important for our investors to understand the after-tax impact to them. Remember, when tax is a partnership we pay corporate taxes on fee-related earnings and investors are allocated pass-through income or performance-related earnings which primarily consists of a mix of ordinary income and capital gains.

When taxed as a corporation, we will pay taxes on PRE at the corporate level. To illustrate this point on a look-through basis, under this assumption the table in the middle of slide 11 shows you that an individual investors would receive higher after-tax income if we pay out a 100% of our after-tax earnings. The point here is that individual common shareholders may benefit from an increased percentage of income tax at qualifying dividend rates versus ordinary individual income rates.

On slide 12 we also illustrate our dividend policy of paying out our after-tax FRE, which is a lower total payout ratio of realized income. Under this scenario, the total shareholder economics are higher when one includes the value to a shareholder of the retained earnings at Ares and the corresponding growth in our book value. As previously mentioned, we believe our ability to retain earnings for potential share repurchases and to invest in the growth of Ares represents an opportunity for value creation for our shareholders.

On slide 13, using our actual 2017 FRE, PRE, and ENI we present the illustrative impact on both current and deferred taxes. To asses to impact to common holders and appropriately and conservatively we assume all private units are exchanged into common units. And thus all of our earnings are subject to statutory tax rates. Under this scenario the after-tax ENI per unit is approximately 8.9% lower inclusive of the deferred tax on unrealized performance-related earnings. Excluding this deferred tax you could see that the impact is negligible. We highlight the distinction between current and deferred taxes since we find this to be important. The deferred tax amount is based on unrealized gains and does not translate into current tax obligations until realized.

For example, unrealized performance fees driven by the appreciation of a portfolio company in a private fund we manage does not trigger tax until we realize that amount, which often may occur over several reporting periods or more. So, while the 8.9% implies after-tax ENI dilution it's a function of the nature of our industry where we are recording unrealized income and a provision against it. If that income were to be reversed, then a reversing deferred tax benefit would be recorded. Further, we looked at the impact on our 2017 actual reported ENI per total unit under our current ownership, which reflect a tax rate on the 38.75% of our common unit ownership of all units. The impact was approximately 3%.

In summary, we believe this change positions us to meet our objective of growing future shareholder value in several ways. First, the simplification of our tax reporting, that the elimination of K-1s should enable us to appeal to a broader shareholder universe, and in turn we believe enhance our liquidity and trading volume. Next, we have adopted a dividend policy designed to support a value creation for our shareholders through both growth and income by pegging our after-tax dividend or a stable growing level of core earnings driven by our management fees, and through retaining earnings for potential share repurchases and future investments in growth. Last, our shares after the change should provide us with a more liquid and attractive currency to use for strategic transactions to further long-term growth and value creation.

With that, I'm going to turn the call back to Mike for closing remarks.

[Mike Arougheti, CEO]

Thanks, Mike. I know that's a lot to digest but we really are just so excited about what this all means for our opportunity to continue to drive value for our shareholders going forward. In the four years since our IPO, we've executed well, we believe, on our organic and non-organic growth strategies, resulting in strong growth in both FRE and economic net income.

Performance in our underlying funds continues to be solid and our fund investors are rewarding us with AUM which have grown 44% to $106.4 billion since our IPO. And importantly, as I discussed, the composition of our AUM continues to improve towards higher fee and longer dated structures. The management fee contribution to our total fee income continues to exceed 80%, contributing to the stability in our earnings. And we hope that this stability and growth will be better appreciated and rewarded as a corporation for tax purposes paying a qualified dividend.

As I highlighted earlier, our significant growth has been against the backdrop of an increasing global appetite for alternative investments from both institutional and retail investors. And in addition, we've seen consolidation in our space in two notable ways. LPs are aggregating more capital with fewer GP relationships and subscale single-strategy managers are merging into larger platforms. And while these trends have supported our growth up to this point, I believe that these trends will only accelerate going forward, providing further momentum to our already meaningful growth trajectory. And we also hope that our decision to be taxed as a corporation will help us capitalize on this opportunity with a simpler corporate structure, a more liquid and attractive stock, and the ability to retain earnings to fund our growth.

We appreciate everybody's patience today. And I'm sure folks have some questions. So with that, operator, let's open up the line.

[Operator]

[Operator Instructions] First question comes from Chris Harris with Wells Fargo. Please go ahead.

[Chris Harris, Wells Fargo]

Great, thanks. Hi, guys.

[Mike Arougheti, CEO]

Hi, Chris.

[Chris Harris, Wells Fargo]

Just a quick question on the new dividend policy, the $0.28 per share on a quarter basis, isn't that above your pro forma fee earnings on a per share basis?

[Mike Arougheti, CEO]

Yes. I mean, as we mentioned in the call, announcing the fact it'll be a forward-looking [ph] dividend during the course of 2018. So, it implies our expectations for continued growth in the platform. And we want to highlight the comments we just made a moment ago, we are pegging this dividend level to FRE. And as [indiscernible] as forward-looking, it's not necessarily a backward-looking concept. This is really a key distinction, and how to think about this as a Corp versus the public partnership model we had before, we are previously because of the flow through nature of the business you can look at distributable earnings and we are looking backwards to come up with the payout ratio audit to provide investors with cash to cover taxes and get income. Now we are operating as a corporation where we will have forward looking dividend.

[Chris Harris, Wells Fargo]

Right now, I get that. I just wanted maybe a little more clarity as to how you bring to cover that dividend if it's over your fee earnings. I guess, it's just going to be through investment sales, is that how you planning on doing that?

[Mike Arougheti, CEO]

I think if you keep it light Chris as we've talked about we have a number of drivers that are growing the absolute level of FRE through the course of the year. We also have things like the turning on of the ARCC fee post the ACAS waiver. We do have the lingering benefit of the ACAS tax benefit, so we think of where we will end 2018 and the trajectory of our FRE through 2018. We feel that the dividend will be well covered.

[Chris Harris, Wells Fargo]

Got you. Okay. And then, a quick question on Slide 13, where we are showing the $66 relative to the $51. I guess, shouldn't we be really comparing things to what you guys actually just reported. So $93, it's another word just change in status is really like 20% dilutive to the results you reported and that just seems like a high level dilution given how much your fee earnings are?

[Mike Arougheti, CEO]

Well, we are showing you here on Slide 13, what's - well, we presented the fact that we using our accordion numbers, not assuming any deductions we wanted to give practically to our investors, our simplistic back at the on a globe way to understand this impact. So that 9% is an apples-and-apples comparison with the numbers on this slide. So you were positive that this is - this gets you actually this back of the on a globe map approximates our report in numbers but there is other things going to reported numbers not necessarily captured through reported ENI in a hurry.

[Chris Harris, Wells Fargo]

Okay.

[Mike Arougheti, CEO]

One thing, I highlight guys in terms of this simplification of the model, which is the challenge of the PTP and I think Mike McFerran in his prepared remarks tried to articulate the very significant different between a cash distribution reported on a Form-K1, the differential character of that income what it means for an individual tax payers, tax position and after-tax in their pocket income relative to this - I think one of the challenges that the industry has had is by using ENI as a framework for how to think about value, there is a lot of variability in what the actual shareholder experience is and obviously a lot of volatility in that ENI number not just based on realized performance fees but unrealized performance fees as well what we've tried to do throughout the course of this presentation is boil it down to what the actual shareholder experience will be owning a common unit tax as a C-Corp versus a publicly traded partnership unit.

[Mike McFerran, COO and CFO]

Hey, one other point real quick we need to clarify is, in your question you were comparing the amount shown in this table to our reported ENI per unit, keep in mind in this table we assume a 100% conversion. So the app - the comparison you should make is if you look at number three two third is down the slide of number 13, which would have been a 3% dilution. Again when we report our numbers, we expect after-tax per unit - we want to compare to after-tax per unit here, which is 3% difference.

[Chris Harris, Wells Fargo]

All right. Thank you, guys.

[Mike Arougheti, CEO]

You are welcome.

[Operator]

Next question is from Craig Siegenthaler with Credit Suisse. Please go ahead.

[Craig Siegenthaler, Credit Suisse]

Hi, good morning guys. And good morning to the LA folks and good afternoon to those of you - excuse me, those who are in New York City. Michael just starting with the last point you had there. I think many of us do appreciate ENI because it does attract the accrued carry build, which is really just future of DE. But do you have any thoughts on switching your main EPS metric and you know, this is one of the sales side tracks from ENI to distribute earnings through reduced downside volatility to sales side estimates?

[Mike Arougheti, CEO]

Yes, it's a good question. We think the value of distributable earnings was one we were partnership to frankly measure total distributable cash because going back to the flow through nature of the business. What I would see because giving more appropriate going forward Craig is to look at two matters. One; we are showing realized income in our presentation, which is our realized earning to business being fee related earnings and realized performance earning fees and ENI, which the difference between those two captures the unrealized. I think those two metrics should be with the two pieces of the business to understand it but again DE was I think more appropriate for our partnership, not a corporation.

[Craig Siegenthaler, Credit Suisse]

Got it. And now that your shareholders will be filing a 1099, but you flow this to under 20%, do you have any thoughts on which major passive indexes ARES could be added to post the conversion and also can you update us on any modifications we've seen here in corporate governance. I may have miss that point?

[Mike Arougheti, CEO]

So there have been no changes to our legal structure or corporate governance. We can't speak for all indices because these are the indices that have their own roles and will take their own determination of what's included but since we are not making a sort of legal structural change we don't think broadly for the major industries like the S&P, at this point just we make it in that's eligible.

[Mike McFerran, COO and CFO]

Although we do believe Craig and it's all subject to further analysis, that's certain of the Russell indices given the percentage of our freely traded shares we would likely qualify but there is still work to do there.

[Craig Siegenthaler, Credit Suisse]

Thank you, Michael.

[Operator]

Our next question is from Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

[Unidentified Analyst]

Hi, good morning guys. This is Mike [indiscernible] on for Mike Carrier. So just first one around on a C-Corp conversion, I guess, how close were you to making this decision now is it no-brainer or not? From the numbers it looked like things are pretty breakeven financially so maybe it was a no-brainer? And then, if you could just touch on the potential for higher taxes at some point in the future and I think if you were to switch back like the tax consequences could be significant. So like how that scenario factored in? And then, just a clarifying point you guys just touched on some of it but if like if you were to enter 2018 and your income make up would've been the same, so you benefit from the lower FRE rate, is the ENI, is that still a wash under your structure?

[Mike McFerran, COO and CFO]

So, great question. So let's take those in pieces. A part of your - first part of your question Michael was what?

[Unidentified Analyst]

Was it a no-brainer or not?

[Mike McFerran, COO and CFO]

Oh, was it a no-brainer? Look, I said 2020 as Mike Arougheti mentioned on the call, we have thought about this in advance would we be making this announcement on the call say if tax reform had not past, I don't know. It was appealing enough that there was a good chance we would. And part - the main reason for that as we've highlighted and as I know you know, we have a management fee centric model. We've been paying taxes as if we are corporation on the majority of our revenue since we went public.

So and FRE continues to grow as a percentage of the total. So while there is a part of our income that was previously flow through and clearly the distinction now between individual and corporate tax rates have made this. But you might call it no-brainer. This probably would have been pretty appealing to us regardless and I think we have messaged that in the past there was always something that we've been thinking about.

[Unidentified Analyst]

As on the cost of…

[Mike McFerran, COO and CFO]

With regard to converting back, this election is not irreversible but to your point it could be, could come with some adverse tax consequences. It's interesting now that we've elected to make the change. I have so much conviction that this is the right corporate structure for this company and actually think there has been so much operational and financial constraint within the alternative space because of the structure and so I hope through good execution the market will come to appreciate the regardless of the enrolling corporate tax rate that this is value enhancing the right way to position this company for the long-term.

We ask you the question that with volatile tax rates we don't see C-Corps going through a exercise I'm wondering if they should convert back to partnerships and I think that we are some and maybe including ourselves have been guilty as we have used the desire to optimize tax and it's constrained or strategic opportunity and so I think we are committed to being a C-Corp, I think our shareholders are better off net after-tax and I think we are to reverse, I think we are going to demonstrate because of this unique model that we have a high dividend rate relative to what people are used to seeing with a very high degree of our dividend being supported by long dated permanent capital and the opportunity not to build balance sheet to drive growth as just something that people haven't seen before. And we have a lot of conviction around it whether corporate taxes are 24% or 28%.

[Mike Arougheti, CEO]

And then, Michael, the last part of your question, if you - going back to Slide 11 in the presentation.

[Unidentified Analyst]

Yes.

[Mike Arougheti, CEO]

We highlight here that this is likely just basic math or its' not unique to ARES. I think it's a function of the decline in tax rates that from the 2017 tax rate that we are already paying on fee-related earnings dropping 40% for the federal rate, that offset, I think a good amount of income that we would now pay taxes on for performance earnings. Again, we highlight that breakeven is being - if this composition of fee-related earnings and realized performance related earnings was 35% the latter then the decline in tax rates has offset it and your tax bill is the same. So it effectively gives you cover there as a benefit of doing your post tax reform and again if you look at this past year our realized performance earnings were just under that. So the same ratio held through for 2018 than the decline in tax rates did offset the implemental tax.

[Unidentified Analyst]

Okay. That makes sense. And just one more quick one on buyback that you guys mentioned there is a possible use of extra - retain cash. Would you do buybacks at the current float level or is this like a longer term deal?

[Mike Arougheti, CEO]

You know, we are going to have to institute and we haven't technically converted it yet, March 1, but one of the things we are going to have to put in place is a share repurchase program. So we will think about the details of it. Clearly, it would be more appealing when it's accretive, but at the same time managing to more of constant outstanding counts when you think about restricted grants to employees is advantageous to us.

[Unidentified Analyst]

Okay. Thank you.

[Operator]

Our next question is from Michael Cyprys with Morgan Stanley. Please go ahead.

[Michael Cyprys, Morgan Stanley]

Hi, good morning. Thanks for taking my question. Just curious as you convert to C-Corp what the implications are for the inside holders and structured any sort of the nuances mechanics there, it seems like there are still, and correct me if I'm wrong we are healing there sort of allocable earnings partnership and so the earnings are not as it relates tax to the entity level, that's not going to be paying taxes on an individual basis on the allocable earnings, can you just help us just kind of flush out and understand the differences between the inside holders and the public?

[Mike McFerran, COO and CFO]

Sure one thing to bear in mind is the inside holders do also own a decent amount of the public units. So there - inside holders have ownership both of ARES through a private partnership as well as the decent ratio of the public vehicle. As I mentioned, there is no change in the legal structure. So the allocation of income between the two frankly the public side and the private side does not change and only changes with any conversion of units from the private public which would take that 39% ratio upward.

[Mike Arougheti, CEO]

Michael maybe just to put it a final point on that to. Given the dynamic that we just discussed receiving pass-through income at an individual tax rate probably not lost on you that in the absence of distributing realized performance related earnings. The tax burden if you will in terms of cash received to the private holders is actually significantly lower and the reason I highlight that as I think that's a good demonstration of the amount of conviction that my partners and I have around the value creation opportunity through the conversion because some of the challenges that we talked about around net in the pocket distribution doesn't actually change for the inside holders but other than fact nothing actually changes.

[Michael Cyprys, Morgan Stanley]

Okay, great. And just as a follow-up question just on M&A, it seems like you mention that a number of times in your prepared remarks. So just curious two thoughts here; one, if you could expand on your point you made earlier that M&A seem to have maybe limited opportunities in the past. What sort of structural issues were created for seller under the PTP structures; and then related to that. Second; how you are thinking about M&A at this stage you mentioned that a number of times, it sounded like you looked at a few trillion dollar worth of deals over the past couple of years. Is there any color on what you are looking at in recent quarters, what criteria you have? What sort of product and distribution channels to make sense next? Thank you.

[Mike McFerran, COO and CFO]

Well, I will take the first part of that then Mike can talk about how the things about M&A strategically. As a public partnership, you know, we had a public currency but again because of the nature of the flow through public unit, if we were based on what we could potentially acquire, it would be taxable to the seller at acquisition whereas you traditionally expect and you acquire another business with your public traded equity, it will be deferred transaction of the seller.

So we felt that while this was a record currency, it was a less record currency that constrained our ability, one for to be attractive to certain sellers, especially by the tax nature of it. Now with us making this corporate tax election, our currency is frankly a lot more liquid because it's going to operate just like any another corporate stock would in an equity acquisition and we believe that will make it more attractive with potential sellers those businesses we may want to buy. Mike?

[Mike Arougheti, CEO]

I think we've talked on past calls, just what requirements we have when looking an acquisition and as I highlighted in our prepared remarks around indices and area and other things that we've done. We have been quite active acquiring companies. For us it has really - there are three very obvious requirements but it's hard to check box on all of them. One; it has to make strategic sense for us i.e. we have to have a view that we can add value to the business, in a way that we did in some of our prior acquisitions by enhancing their distribution and asset gathering giving them research and information benefits to add value to their information, their investment process. We frankly have to feel that they make us better where they are bringing some kind of a capability or perspective to us that we don't have. Two, it has to make financial sense, it has to be accretive and we have to feel that the transaction stands on its own and again that we can grow it but the math has to make sense and probably most importantly and our business, it has to be a cultural fit and because the investment business is really rooted in great culture.

I think our culture is one of our greatest assets and if we are going to make an acquisition, we have to have a lot of conviction that's a good cultural fit. So those may seem like three very simple filters but, it's very hard to make all three of those works. In terms of what we are looking at, we are really looking at a full spectrum of opportunities across each of our businesses in our private equity, credit and real-estate. They range in size from small tuck-in acquisitions to some larger more transformational types of opportunities and I think we will continue to do it.

Some of the things that we've talked about before that are driving this are you know, this move to scale that I highlighted in the prepared remarks is very real. The global demand for alternatives while growing is flowing disproportionally to the large platform as investors are seeing better performance, more diversity of strategies, the ability to drive efficiencies in their own business. So I think even from a well-run, a high performing institutional quality managers, if they are not scaled, it's very hard for them to compete for capital and compete for investment opportunities over time. So this move to scale, I think is driving some of it, the other which we've talked about is just the evolution of the private funds business. And if you think about the evolution of the private equity and leverage finance markets that we largely participate in, most of the businesses that are of a certain size and quality today probably launched sometime in the late 80s or early 90s and just the fact is you have founding partners like we starting to think about Generational Transfer, what the future for their business holds. And so, we're also just at a point in time in the evolution of the private funds business where a lot of these platforms not only are having a difficult time scaling but also I think contemplating the future in a way that they probably hadn't been 10 years ago.

[Michael Cyprys, Morgan Stanley]

Great, thanks so much.

[Operator]

[Operator Instructions] Our next question is from Ken Worthington with JPMorgan. Please go ahead.

[Ken Worthington, JPMorgan]

Hi, good afternoon. Thanks for taking my question. Yes, really just one for me to the extent that you - to what extent will your conversion to a C-Corp be accompanied by more conforming to the earnings reporting done by similar structures? So for example, you present the idea of the hypothetical conversion in slide I think it was 13, the other publicly traded Up-C structures do all report on if converted basis, so is that something you're contemplating and if not maybe why and then the other Up-C structures also include things like stock-based comp and where playable placement fees, would you be thinking about conforming to those reporting standards as well? Thanks.

[Mike McFerran, COO and CFO]

Sure. Look as we continue to evolve and make sure our reporting is that transparent as possible, we're going to do what we've done to keep challenging ourselves to make sure you and all of our investors see the business through the same lens we do.

With respect to the slide 13 on the 100% converted basis, that information that metric is presented if you report on a per common unit basis, so it's the same math, so I think we do provide that today. Here we wanted to illustrate it with the detail. That's anything we have not already reported. On the placement fees and equity comp I will make sure those numbers are appropriately disclosed they happen, so one has all the pieces of the picture.

[Mike Arougheti, CEO]

The only other thing I hired Mike brought it up earlier, I do think that we want to focus people on realized income, we want to simplify the lens that people are thinking about our business and seeing it through, we do believe that some of the existing frameworks and conventions that are being used in both traditional C-Corp Managers and alternatives are not the right way to think of it. So, we do have growing conviction around focusing on realized income but to Mike's point, I think we have a good track record of giving information to the market and during a dialog with you, how you want to think about us but as we're thinking about the transition that's where we're anchoring.

[Ken Worthington, JPMorgan]

Okay. And then just a follow-up on the ACAS portfolio, is the repositioning of that largely done, I think last quarter you said you're about halfway there, I recall and depending on where we are, how close is ARCC at being at a good run rate for the Part 1 fees outside of the normal variations in that fee stream? Thanks.

[Mike Arougheti, CEO]

Sure. I would encourage you to if you have the time just check in on the ARCC transcript from their earnings call earlier in the week because there is a pretty significant amount of dialog around ACAS but to summarize it the transition is largely done. The experience that we have had, I think has been better than was underwritten both in terms of the speed with which we were able to rotate the portfolio and improve yields as well as both the realized and unrealized gains that rolled through that portfolio in the first year. So whilst not completely finished, it's largely, largely finished. As a result of the re-leveraging of the portfolio, the rotation out of some of the lower yielding assets, the replenishment of the lost income from SSLP with new income from STLP, there are a lot of drivers for continued earnings growth at ARCC which will show up in incremental revenue to ARES without regard to the fee waiver.

As we mentioned in the prepared remarks, we are currently within the fee waiver period that rolls off in the third quarter of 2019 and so there will be a step function change in the income coming off of ARCC all else being equal beginning in the fourth quarter of 2019. But if you look at the Q4, Q1 to Q4 sequential growth you'll see that the income coming up coming off ARCC has been sequentially growing.

[Ken Worthington, JPMorgan]

Yep, great, thank you.

[Operator]

Our next question is from Robert Lee with KBW. Please go ahead.

[Robert Lee, KBW]

Thanks, thanks for taking my questions and congratulations on pulling the trigger. I guess in a way this is maybe a little bit of follow-up to one of Ken's question. So pegging the future dividend to after-tax FRE, I mean that's actually not a number though that you've historically disclosed. And understanding that highline tax rate historically 37.8% but the best that I can tell your effective tax rate through the corporate blockers probably I think has been more in the 20s, so could you maybe help us know number one think about what kind of how we should think about your reporting going forward? Will we see an after-tax FRE and will it be on a fully converted or just the common basis and how should we think of your actual cash tax rate for forecasting purposes?

[Mike Arougheti, CEO]

Good question. I think the important thing to remember is again, we're declaring a - and Rob I know you know that, well I think it's helpful for you to understand this FRE performance, we're not declaring a dividend with book capacity in the past, there is lot of background. And I think trying to tie the numbers out precisely is not the best exercise, as far as retaining the tax rates I would think of it is in simplicity 38.75% of Ares today is public, exactly 24.4% tax rate that gives you a 9.5% effective tax rate. However, that's without any deductions, so I would kind of view that as the effective tax rate after that putting deductions behind that. So net of those, I would expect us probably be showing something around 20%.

Moving forward with this change, we are going to have very transparent current income tax provision disclosure in our financial statements whereas previously it just wasn't relevant as partnership. So I think there'll be great transparency on current taxes versus what will call this provision of growth.

[Robert Lee, KBW]

Okay. Look forward to seeing that and then, I guess this is also maybe a follow-up to maybe a little bit Craig's question earlier but I mean and also can I guess I mean just going back and trying to kind of simplify and obviously some private structure and then there's also the complexity around all these questions on reporting and stuff. So I don't know why not even think about going to method one and you can still kind of disclose in accrued carry and those metrics and performance but I want to kind of even simplify that and even as Craig said, kind of cut off the tails of volatility?

[Mike Arougheti, CEO]

We're doing that by introducing realized income, I mean that's the reason why we've introduced that metric and you'll see it throughout our reporting our earnings presentation. So, the acronym RI is something new in this quarter but that's method one. And we felt, we were able to accomplish that clarity and reporting without actually having to make the accounting convention change.

[Operator]

Our next question is from Kenneth Lee with RBC Capital Markets. Please go ahead.

[Kenneth Lee, RBC Capital Markets]

Thanks for taking my question. Just to follow-up on C-Corp conversion given that the company will be retaining some earnings versus pay most out as distributions maybe could you expand upon some potential uses of that retained earnings for growth opportunities, specifically I'm just wondering whether there are anything outside of M&A and relatedly maybe help us think through the potential boost to earnings growth through this reinvestment?

[Mike Arougheti, CEO]

There I think there are three primary uses of the capital, one M&A as we talked about, two potential for share buybacks which we've talked about and three which is largely how we've been using our balance sheet up until this point is to invest in our own managed fund product and so we've highlighted in the prepared remarks, we currently have a balance sheet exposure to our own funds as the GP that $820 million and the good news is that's been generating gross returns and about 15% and net of investment interest expense were generated net returns about 12% on that portfolio in 2017.

So by investing in our balance sheet we're obviously generating some pretty exciting we think investment income but more importantly we're largely making those investments in support of the raising of new funds and so by making those investments in support of new funds that obviously is catalyzing new FREs new management fee streams are coming on board so fund investments, M&A, share repurchases.

[Kenneth Lee, RBC Capital Markets]

Okay, great, thanks. And just one more in terms of the I think you mentioned briefly in the prepared remarks about potential for annual savings, post conversion one of the many other more specific quantifiable changes the compensation or G&A after C-Corp conversion? Thanks.

[Mike Arougheti, CEO]

I think the most noteworthy is being a public partnership and all these K-1s wasn't the most inexpensive exercise in the world. So there should be some modest savings having to do all of this. So clearly from an internal operations standpoint now that's easier for and more simplified for our investors, this is definitely lot more simplified and easier for us.

[Operator]

And we have time for one more question today. Our last question will come from Doug Mewhirter with SunTrust. Please go ahead. Doug, your line is live; you may go ahead with your question.

[Doug Mewhirter, SunTrust]

Yes, just one question the dividend policy, do you have any sort of contingency plan if there's maybe a prolonged downturn in the credit markets or into equity markets where your net investment income or you get negative performance income that would be substantial fraction of your fee related income that may impair your ability to pay the dividend that set on the basis of fee related income is there a situation where you would have to maybe make an exception?

[Mike Arougheti, CEO]

We don't anticipate one now and for a couple reasons. First this get of this in two pieces on the fee related earnings as Doug and as we highlight our management fees are pretty insulated from market gyrations based on the longevity of the capital. So most of what we manage is not subject to redemption and based on how we charge management fees whether it be off invested or committed so markets could humble tomorrow an asset prices and again our management fees streams are stable and insulated nicely against that. So that give as we think about FRE has being the pegged for the dividend. We thought a lot of that was based on the comfort level of how what drives FRE; it's a very stable management fee stream.

[Mike McFerran, COO and CFO]

Mike, if I can interject one second before you switch to the second part the question because I think it's important to reference your comments in the prepared remarks when you think about not just the insulation but the imbedded growth one of the things that has been happening in our business is we've been scaling our credit businesses is the amount of management fee opportunity from deployment is quite significant and so as Mike talked about earlier. That $10.8 billion of our AUM not yet earning fees is available for deployment and with deployment that represents a $118 million of management fee revenue i.e. revenue available to us on capital that we've already gathered and so one of the things I think it's important people appreciate is as we're going into a new year given the fund raising track record from the prior year we have very good forward visibility not just in terms of the baseline FRE but a path to growth just from regular way deployment sorry Mike.

[Mike Arougheti, CEO]

No, Mike that's a great point and then on what you mentioned volatility realizing performance earnings that's clearly the nature of the industry to some extent, what I highlight a portion of our performance earnings all with the minority comes from recurring income of credit products whether it be more income oriented, credit funds we manage or our audience of some Co-investment on the CLO notes. Second, the reason we thought to kind of peg the balance sheet retention to performance earnings and the dividend being packed a fee related earnings is the latter is stable recurring we believe growing whereas the performance earnings is more volatile. But at the same time the uses of that capital or retained earnings would also be more volatile. So we think that match up works nicely, so in short there could be a lot of volatility in asset prices, credit markets, equity markets and we don't expect that would have an impact on our dividend injections.

[Doug Mewhirter, SunTrust]

Hey that's very helpful. Thank you.

[Mike Arougheti, CEO]

Thanks, Doug.

[Operator]

And we will take one final question from Kaimon Chung with Evercore ISI. Please go ahead. Your line is live. You may proceed with your question.

[Kaimon Chung, Evercore ISI]

Hi. Apologies, if you've addressed this before, maybe there is an obvious thing but why not fully covert to C-Corp with the legal structure to and follow up but given that your legal structure meant intact, do you have any thoughts and how much you expect investor base to upon given this change? Thanks.

[Mike Arougheti, CEO]

So why don't we start with the legal structure. We're making the tax selection today because frankly that's easy and immediate action it was not to belittle the simplicity of a bill that are required for signing a form yesterday and that was that. The legal structure change we are looking at and considering, so we have not made a decision to do it or not to do it we're evaluating it. As a more significant undertaking to change our legal structure, so more work has been done there but it's clearly something we're going to be thinking about in the coming months. I'm sorry the second part of your question came it was?

[Kaimon Chung, Evercore ISI]

Second part which is any thoughts of how much you expect your investor based upon given this change?

[Mike Arougheti, CEO]

Yes, we don't know I mean obviously we have conviction thinking of well because we based on our interactions with existing potential investors and there is a lot of work we've heard as well from some of the research from the different banks. We believe the investor base has had a fairly significant limitations why they would be the nature of the flow through income we generate and how that's just not all over board certain investors for example ECI to international investors.

The nature and the complexity of the K-1s which Whether that clearly a challenge for retail investors because there's a lot more complicated wait for a K-1 and higher your accountant to these aren't easy K-1s by the way. But have your accountants process all that for you and file extensions to your personal tax returns and frankly a lot of institutions that fund managers who are equipped to handle it which we don't blame it for, the complexity and the back office challenges just historically kind of steer people away. So I don't know what we don't have they can't give an estimate of what we think the eligible universe could expand to but we are optimistic that it is a potentially a meaningful change for us.

[Kaimon Chung, Evercore ISI]

Okay, thank you.

[Operator]

This concludes our question-and-answer session. I would just like to turn the call back to management for closing remarks.

[Mike Arougheti, CEO]

No, it's interesting. We had a record earnings in 2017 we didn't get any questions on our performance, so I guess that's the good thing but we do appreciate everybody's time and patience and interest as I said it is a lot to digest so we will be available to continue to help folks think through this but we're very excited and appreciative of everybody's time and I guess with that will say have a good day and speak again next quarter. Thank you.

[Operator]

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call and archived replay of this conference call will be available through March 15, 2018 by dialing 877-344-7529 and to international callers by dialing 1412-317-0088.

For all replays, please reference conference number 1011-6126 and archived replay will also be available on a webcast link located on the home page of the investor resources section of our Web site. Thanks everyone for attending. You may now disconnect.