Why Schwarzman's payday risks riling Blackstone investors

Sat, Feb 18 20:42 PM EST

* Schwarzman's 2011 dividends at least $120.6 mln

* Fee income contributed 82 percent of payout

* Investors concerned over alignment of interests

By Greg Roumeliotis and Bernard Vaughan

NEW YORK, Feb 17 (Reuters) - Stephen Schwarzman, the boss of Blackstone, the world's largest private equity firm, made his fortune by buying, restructuring and selling companies - delivering outsized returns for investors. These days, he is getting huge rewards for being the biggest shareholder in what is more like a souped-up asset manager.

The chief of Blackstone Group LP is set to receive at least $120.6 million in 2011 dividends from his 21 percent ownership of the firm, based on regulatory filings. That is many times what he gets for being CEO - he received a $350,000 salary and total compensation of $6.7 million in 2010. His compensation for 2011 has not yet been disclosed.

Fees for managing assets and advisory services accounted for 82 percent of Blackstone's dividend payouts in 2011, up from 63 percent in 2010, the statements show. That means Schwarzman's payout includes a lot more from fees charged to investors for managing their money than from Blackstone's slice of the profits from its buyout business, also known as carried interest.
(( The purchase of the entire holdings or interests of an owner or investor.
The purchase of a company or business: "If the workers do approve the buyout, their company will become the nation's largest employee-owned enterprise" (Harry Anderson).))
Blackstone, co-founded by Schwarzman in 1985, traditionally made most of its profits from the increase in value of the companies it bought, rather than from management fees. But fees have now made up the majority of Blackstone's cash distributions every year since the company went public in 2007.

The shift will increase concerns at pension funds, university endowments and other investors - which provide the funds for private equity firms - that public listings of firms such as Blackstone means stockholders are being favored over them.

While these investors, or limited partners, focus on returns on their investments, shareholders want dividends that can come from carried interest and management fees.

FEES ALREADY SLIDING

The investors have already been able to push down the average fee charged on asset management to 1.5 percent from the more traditional 2 percent in the past few years , but stories like Blackstone's will only increase the momentum for further reductions, according to some private equity executives and investors' representatives.

Other publicly traded private equity firms, such as KKR & Co LP and Apollo Global Management LLC, are also generating more of their revenue from fees but as yet it hasn't reached the proportion at Blackstone.

"As the industry has matured , some unintended consequences - like nine-digit management fees - have become apparent and problematic," said Stephen Moseley, president of private equity and advisory firm Rockland Management LLC. "Multiple sources of income can produce divided loyalties and divided loyalties make limited partners nervous."

Blackstone's fee-earning assets under management increased 25 percent in 2011 to a record $137 billion. On an after-tax basis, $502 million out of $610 million in dividend payouts last year came from fee-related income.

The large fee component of Schwarzman's pay will "add fuel to the fire in the argument between limited and general partners on the structure of funds," said Michael Moy, a managing director at Pension Consulting Alliance Inc, which advises some of the largest U.S. pension funds on private equity, including California Public Employees' Retirement System.

Blackstone spokesman Peter Rose said given the firm is the largest and most diversified alternative asset manager, private equity accounts for only about 25 percent of its business.

"Blackstone has a significant percentage of its businesses which generate fee income only, similar to all long-only money managers and financial advisory firms," Rose said. "We manage the business as we did before we went public, to maximize net returns to our limited partners, and, as such, we rank as one of the top-performing managers in the world."

KKR and Apollo declined to comment.

MAXIMIZE ASSETS OR RETURNS?

The managers of private equity funds, known as general partners, had traditionally followed the 2/20 model, seeking a management fee of 2 percent on committed capital and taking 20 percent of a fund's profits. They argue that compared with traditional asset managers, their work justifies higher incentive fees because returns are also outsized.

Moreover, the argument goes, sharing in profits from fund investments aligns their interest with limited partners, who commit their money for as long as 10 years in often illiquid assets that cannot easily be sold.

But internal rates of return from buyouts were down to 11.2 percent on a five-year basis in June 2011 from 29.6 percent in September 2008, according to market research firm Preqin.

Although the impact of the financial crisis, including much tighter financing conditions, is at least partly to blame, critics also say it may be a sign the private equity firms are losing some of their focus after growing much larger.

Cerberus Capital Management co-founder Stephen Feinberg, in a rare admission for an industry insider, argued last summer that many private equity executives were overpaid, focused too much on fees and were hampered by the size of their assets.

"I do think there's an issue here in funds that are too large and funds that have acquired too many assets under management," Feinberg said at a conference. "If your goal is to maximize your returns as opposed to assets under management, I think you can be most effective with a big company infrastructure and a little bit smaller fund size."

The interests of the investors and the general partners of the firms are best aligned when the latter is making most of their money from carried interest, said Kathy Jeramaz-Larson, an executive director at Institutional Limited Partners Association, which has more than 250 member organizations representing over $1 trillion of private assets globally.

AN OUTLIER

Besides the dividend payout and his CEO compensation, Schwarzman - whose wealth was pegged at $4.7 billion by Forbes last year - will also receive profits from co-investments through the firm, which are not disclosed.

The size of the dividend payout and its main source, though, is an outlier even among the handful of publicly traded private equity firms. At KKR, co-founders Henry Kravis and George Roberts, who together own 25 percent of the firm, are set to receive $64.2 million each in dividends in 2011, of which 46 percent will come from fee-related income.

At Apollo, co-founder Leon Black, who owns 24 percent of the firm, is set to receive $103.9 million in dividends for 2011, of which only 25 percent will come from fees.

Blackstone has diversified at a faster pace than rivals. It had assets under management of $166 billion at the end of 2011, up from $44.4 billion (when it was largely a buyout shop) in 1987, and it has diversified through a credit arm, real estate business and hedge funds.

For example, BAAM, its hedge funds group , manages $40 billion and is mostly a fees business, with just half the assets eligible for carried interest payments and the carry rate at 10 percent rather than 20 percent. GSO, Blackstone's credit arm, has a collateralized loan obligation business relying on fees.

Blackstone also runs advisory businesses that rely just on fees. Those businesses include an investment banking arm and a placement agent that helps other private equity firms raise funds.

Other private equity firms are taking a similar approach. At Apollo, which has $75 billion in assets under management, the credit investment business is set to overtake the buyout arm in size. And KKR, which has $59 billion in assets under management, is moving furher into real estate, hedge funds and capital markets .

BETTER RETURNS

It is not that Blackstone's performance is bad, it is the source of the returns that is the question. Blackstone said earlier this month its private equity portfolio was up 5 percent in 2011, its real estate portfolio was up 17 percent and credit-oriented hedge funds were up 9 percent, all outperforming benchmarks. The S&P 500 U.S. stocks index was flat in 2011.

These returns have come during what has been a particularly difficult period for global financial markets, which buffeted firms and investors. In the private equity business, exits from investments - which are needed to turn paper profits to hard cash - have fallen dramatically since the financial crisis, as IPO markets have remained choppy at best and frozen at worst.

Blackstone sees its business as cyclical and argues that carried interest will return as the global economy improves and it starts to sell its private equity assets. "You'll see more (M&A) volume coming in a more traditional fashion in the private equity area," Schwarzman told analysts on a recent call.

NEGOTIATING LEVERAGE

Blackstone and other publicly traded private equity firms argue that ultimately the interests of public shareholders and limited partners are the same. They say that if the firm does not make money for limited partners, they will stop giving it money to manage, which will also hurt public shareholders.

"I don't think there is a problem with the alignment of interest," said Steven Kaplan, a finance professor at the University of Chicago. "The founders of these firms are not selling their shares tomorrow and if their funds do not perform in the long term, the value of their holdings will suffer."

It also isn't easy for investors to negotiate the fees down.

"A lot of pension funds believe fees charged by the major private equity firms are too high but it's difficult to negotiate them down on an individual basis," said George Hopkins, an executive director of the Arkansas Teachers Retirement System, an investor in Blackstone. "The ability of these funds to charge large fees all depends on whether they continue to perform," Hopkins added.

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AIG sells $500 mln Blackstone stake -source
Fri, Mar 02 10:29 AM EST

NEW YORK, March 2 (Reuters) - Bailed-out insurer American International Group Inc sold its entire $500 million stake in private equity firm Blackstone Group LP on Friday, according to a source familiar with the situation.

AIG, which is majority owned by the U.S. government after it was bailed out during the financial crisis of 2008, had acquired the stake before Blackstone went public in 2007, the source said.

The sale is part of AIG's ongoing effort to monetize non-core assets, reduce risk and deleverage, another source said.

AIG and Blackstone declined to comment.

Blackstone's shares fell 1.9 percent to $15.43 during morning trading on the New York Stock Exchange, while AIG's shares fell 0.1 percent to $29.42.

CNBC earlier reported the stake sale.
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Blackstone expands Asia team with senior hires
Mon, Mar 05 01:23 AM EST

By Stephen Aldred

HONG KONG, March 5 (Reuters) - Global private equity fund Blackstone Group L.P. said on Monday it has hired Yi Luo from Carlyle Group and Edward Huang from Morgan Stanley's Asia private equity unit to fill senior positions in Asia.

News of the hires confirms earlier Reuters reports on the fund's expansion.

Both men will focus on Greater China and report to Michael Chae, Blackstone's Asia Pacific head of private equity and a former top New York dealmaker for the firm, who has been building a new team since arriving in the region in late 2010.

Luo joined Blackstone in January 2012 as a senior managing director based in the firm's Shanghai office and Huang joined as managing director based in Hong Kong earlier in March.

Luo worked for Carlyle in Shanghai and Hong Kong for more than eight years as a senior global partner and managing director. He was a member of Carlyle's Asia investment committee and the chairman of both Carlyle's renminbi fund and its operating entity in China. He also worked at Goldman Sachs , Merrill Lynch and the People's Bank of China.

Huang previously worked for Morgan Stanley Private Equity Asia in Hong Kong where, as managing director, he was heavily involved in one of the firm's most successful private equity deals in Asia, the privatisation of Sihuan Pharmaceutical Holdings Group Ltd. That deal is regularly cited as an example of returns that can be made by identifying the right targets to delist.

Morgan Stanley's private equity unit took Sihuan private in Singapore in 2009, identifying a company that required no additional work before relisting in Hong Kong in October 2010. The stock jumped 28 percent on its IPO, with top-end pricing valuing the company at 26.7 times 2011 earnings.
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RLPC-Blackstone to reinvest in Kloeckner -sources
Mon, Mar 12 13:19 PM EDT

* Blackstone PE, Oaktree seek debt-for-equity swap

* Lazard appointed to sell company if restructuring fails

By Claire Ruckin

LONDON, March 12 (Reuters) - Private equity firm Blackstone has agreed to reinvest in its struggling German plastic films firm Kloeckner Pentaplast alongside senior lenders Oaktree in a bid to restructure its debt, banking sources said on Monday.

Blackstone bought Kloeckner from Cinven in 2007, backed by 1.25 billion euros ($1.64 billion) of leveraged loans. The company breached its Dec. 31 senior leveraged covenants but managed on Friday to secure a covenant waiver until the end of June.

A loan covenant breach had been expected since November when Kloeckner asked lenders to form groups for a restructuring and commissioned an independent business review. [ID: nRLP57867a]

U.S. distressed debt investment fund Oaktree Capital bought a large portion of Kloeckner's loans in the secondary markets and together with Blackstone Private Equity is pushing for a debt-for-equity swap.

Blackstone declined to comment.

Junior lenders could suffer heavy losses in a restructuring. They have until March 21 to agree to a consensual restructuring otherwise Lazard, which has been appointed as M&A adviser, will go forward with a sale of the group.

Kloeckner's 187 million euro mezzanine loan is quoted at around 7 percent of face value in the secondary loan market, down from 32 percent in early November, according to Thomson Reuters LPC data.

A 187 million euro second lien loan is quoted at 18 percent, down from 42.8 percent in the same period, the data showed.
====== Factbox: Blackstone Group's candidates for CEO Mon, Aug 27 07:00 AM EDT (Reuters) - Blackstone Group LP CEO Stephen Schwarzman is grooming six senior executives as potential candidates to eventually take over the reins of the world's largest alternative asset manager, according to insiders with direct knowledge of the situation. The following are profiles of the main players in Blackstone's CEO succession: TOM HILL Hill, 63, heads Blackstone Alternative Asset Management, the firm's hedge fund-of-funds business with $42.9 billion of assets under management. He joined Blackstone in 1993 and previously co-headed its mergers and acquisitions advisory group. Hill began his career at First Boston, later co-founding its mergers and acquisitions department. He then led the mergers and acquisitions practice of Smith Barney and in 1982 he joined Lehman Brothers as a partner, eventually rising to the post of co-CEO. A graduate of Harvard Business School, Hill is cited in popular culture as one of the Wall Street grandees, alongside trader Ivan Boesky and activist investor Carl Icahn, that inspired Oliver Stone's notorious fictional character Gordon Gekko. BENNETT GOODMAN Goodman, 54, co-founded GSO Capital Partners in 2005, the credit-focused investment firm that was acquired by Blackstone in 2008. Following the takeover earlier this year of Harbourmaster Capital, a leading European leveraged loan manager, his business now has $50.5 billion of assets under management. Goodman's first stint in debt investment was in the high-yield business of Drexel Burnham Lambert from 1984 to 1988. He then joined Donaldson, Lufkin & Jenrette (DLJ) to launch its high-yield capital markets group, making it the No. 1 global issuer of high-yield bonds in 1993 and for 11 consecutive years. Like Blackstone President Tony James, Goodman joined Credit Suisse First Boston in 2000 with its acquisition of DLJ. He served there as the chairman of the corporate bank, overseeing Credit Suisse First Boston's $35 billion of global corporate lending activities. Goodman is a graduate of Lafayette College and the Harvard Business School. JOAN SOLOTAR Solotar, 47, was hired by Blackstone in 2007 -- the year it went public -- to lure new investors to its shares. She has management responsibility for shareholder relations and public affairs and also guides the firm on analyzing strategic development opportunities. Another veteran of DLJ, where she started her career in equity research in 1986, Solotar moved to Bank of America Corp in 2003 to become head of equity research. Solotar has an MBA in finance from the NYU Stern School of Business. She serves on the board of directors of the East Harlem Tutorial Program. LAURENCE TOSI Cordially known within Blackstone as LT, Tosi, 44, has been the firm's Chief Financial Officer since 2008 and has assumed more responsibility for running the business on a daily basis as James delegates more of his role. Before joining Blackstone, Tosi was Chief Operating Officer of global markets and investment banking at Merrill Lynch & Co. From 2004 through 2007, Tosi was Merrill's principal accounting officer for global finance. A graduate of Georgetown University, he was also global head of corporate development at Merrill from 1999 to 2007, where he managed many of the firm's strategic acquisitions and investments. Before joining Merrill Lynch in 1999, he was director of business development for General Electric Co's NBC division. JONATHAN GRAY In his two decades with the firm, Gray, 42, has emerged as the leader of Blackstone's most successful fund offering. His real estate business now manages $50.2 billion of assets under management. Gray joined Blackstone in 1992 straight after graduating from the University of Pennsylvania with degrees in English and economics. He quickly established a reputation for brilliant dealmaking acumen. He was given joint responsibility of heading the real estate business in 2005, one year before he executed the largest real estate deal in history, the $39 billion acquisition of Equity Office Properties. Gray then quickly sold off hundreds of the acquired buildings, deftly dodging the 2008 property crash. The public real estate companies taken private by Gray during his Blackstone career are valued at more than $100 billion in total. JOE BARATTA A Georgetown University graduate, Baratta, 41, joined Blackstone in 1998 and in 2001 moved to London to help establish the firm's private equity business in Europe. In July, he was appointed global head of private equity, overseeing a business with $46.6 billion of assets under management. Over the years, he had led a series of high-profile deals for Blackstone including British restaurant chain Tragus Group, healthcare staff provider Independent Clinical Services, and theme and holiday park operators Seaworld Parks and Entertainment, Merlin Entertainments Group and Center Parcs. Before joining Blackstone, Baratta was with investment firms Tinicum Inc and McCowen De Leeuw & Co, and also worked at Morgan Stanley in its mergers and acquisitions department. Source: Blackstone (Reporting by Greg Roumeliotis in New York, desking by G Crosse) ============