Jessica DiNapoli and Chibuike Oguh

(Reuters) – Changes in the share structure of KKR & Co (NYSE:) Inc, Apollo Global Management (NYSE:) Inc and Carlyle Group (NASDAQ:) Inc. That strips the founders and employees of voting control at private equity firms are making them richer, according to a Reuters analysis of regulatory filings.

The filings reveal that founders and executive at KKR, Apollo, and Carlyle received payments in excess of $560 million, $384 million, and $346 millions, respectively, under relinquishing voting shares.

Monday’s announcement by KKR was that it will eliminate its dual-class structure of shares giving its founders Henry Kravis, George Roberts and voting control to its executive officers in an effort “to align its interests with those of shareholders.”

The executive voting rights would be proportional to how many shares they have, resulting in a collective 31.7% share of KKR.

KKR is planning to issue its executives 8.5million shares in a network of corporate mergers that will eliminate the dual-class shareholder structure. The shares are currently valued at $560 million.

According to filings, KKR must pay the amount due under a tax receivable arrangement (TRA), which it signed with its founders over a decade ago. This agreement was adopted by major private equity companies separately when they went public. It requires KKR pay 85% of tax benefits that it has accumulated through goodwill, amortization, and tax credits to its executive.

According to a filing, the New York-based company stated that the TRA payout is activated by the exchange of KKR executive special voting shares for common stocks.

According to the filing, it would be the final payout made by KKR executives under the TRA. The TRA will soon be repealed. According to one filing, the $560 million payment is equal to a 1% decrease in KKR’s first-half adjusted distributable earnings per share. It also represents a 4% drop in its book value per share as of June 30.

Because private equity firms often turn to TRAs when they are involved in deal-making, initial public offerings allow them to transfer the tax benefits to companies that they own to the public.

These private equity companies are unique in the way they end dual-class stock deals. Blue Apron Holdings, a meal delivery company, changed into one type of common stock last month, without any financial gain for its officers. Similar to Victory Capital Holdings, Inc. Asset manager Victory Capital Holdings NASDAQ:) Inc eliminated its dual-class structure.

Robert Willens is a Columbia Business School professor and tax expert. He stated that KKR executives could forfeit any TRA payments.

He stated that some KKR investor may be content because the executives were not allowed to exercise their right of asking for future payments under the TRA.

Willens stated that “the KKR executives” had undoubtedly left some money on their tables.

A KKR spokeswoman said that a filing showed that KKR’s independent board director approved the transaction to dissolve the dual-class shares structure. It was done in order to “increase our common stockholders’ rights” and to “enhance corporate Governance at KKR.” She declined further comment.

APOLLO and CARLYLE

Apollo’s founding executives and officers secured a payment of at least $584million over four years under the firm’s TRA. This was after it announced that in March, its dual-class structure would be eliminated. They chose cash instead of Apollo stock to receive their payout.

Sources familiar with the situation said that the payout was half the amount of accrued taxes benefits owed by the founders. Apollo shareholders agreed to give up the rest.

Carlyle became the first publicly-traded private equity company to eliminate special voting rights from its executives in 2019. Carlyle filed show that the change resulted a cash payout of $346 Million over five year to its executives, under its TRA.

Carlyle’s spokeswoman declines to comment.

U.S. lawyers were concerned about the use of TRAs in private equity companies in 2007. In 2007, Blackstone Group (NYSE 🙂 Inc revealed in its initial public offering, that it could offer tax benefits to its executives totaling $863.7 Million over the next fifteen years.

Congress did not pass legislation to tax TRA payments like ordinary income. TRAs gained popularity and were used by some private equity companies to gain value from the portfolio companies they make public.

Blackstone retained its dual-class structure of shares, with CEO Stephen Schwarzman still in charge.