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Blackstone CEO Collected $400 Million in 2006

Private-equity powerhouse Blackstone Group LP said Monday that Chief Executive Stephen Schwarzman made $400 million in 2006 -- almost double the combined compensation for the CEOs of Wall Street's five biggest investment banks.

Schwarzman, 60, will lead the New York-based firm to the highly anticipated initial public offering of its management company within the next few weeks. He could cash in as much as $677.2 million of his stake during the IPO, and still walk away with a 24 percent interest in the company valued at as much as $7.7 billion.

Stephen Schwarzman
Stephen Schwarzman

Blackstone's top five executives, including Schwarzman, earned a combined $771.5 million in 2006 -- part of the $2.27 billion in net income the company paid out last year. Blackstone Group expects to record significant losses for a number of years following its IPO, because of amortization and compensation costs.

"It is a really surprising number," said Richard Ferlauto, director of pension and investment policy for the American Federation of State, County and Municipal Employees, about Schwarzman's compensation package. "There's a concentration of the super-wealthy that is being created in the financial services marketplace that is unhealthy for the rest of the economy."

The sale of 12.3 percent of Blackstone's management arm is expected to value the entire company at just more than $32 billion. Investors in the IPO will be given little voting rights in Blackstone itself, though. Instead, their stakes will be tied to the management committee that runs the firm -- and not the companies and real estate it controls.

Schwarzman's compensation easily eclipsed the CEOs of Wall Street's biggest investment banks: Goldman Sachs Group Inc., Merrill Lynch & Co., Lehman Brothers Holdings Inc., Bear Stearns Cos., and Morgan Stanley. The highest paid CEO on Wall Street last year was Goldman's Lloyd Blankfein, who made $54 million.

Schwarzman's big payday comes as the firm -- which launched in 1985 with a $400,000 investment -- makes the final arrangements on its public offering.

The flotation of the interest in the management division to the public is designed to cash out its founders' stakes, and secure a more permanent source for financing. In addition, another 9.7 percent will be controlled by the Chinese government as part of a $3 billion investment announced in May. Blackstone's management and underwriters will own the rest of the company.

Co-founder and Chief Operating Officer Peter Peterson, 80, will get $1.88 billion from the IPO, and retain a 4 percent stake valued at about $1.3 billion. Peterson, who plans to retire by the end of 2008, received $212.9 million in compensation last year.

Schwarzman and Peterson jointly own a helicopter, for which Blackstone paid them $158,500 in hourly rates for business use last year. Schwarzman was paid $1.54 million in hourly fees for use of the airplane he owns. Otherwise, the firm did not break out the specific details of their executives' compensation plans for 2006.

Among other top executives, Blackstone said President Hamilton James would receive at least $147.9 million after its IPO. That is on top of the $97.3 million he earned last year.

Payouts described in the regulatory filing reflected not just annual salary, but top management's stake in the firm and profits gained from its portfolio of companies and real estate.

Going forward, Schwarzman will not receive annual compensation other than a $350,000 salary. However, he will own a significant portion of the so-called carried interest -- which is profit generated from the investments by Blackstone's funds. This is considered to be the most moneymaking part of a private equity firm.

Blackstone -- which owns companies such as Madame Tussauds wax museum and real estate company Equity Office Properties Trust -- pockets about 20 percent of the net gains generated by its funds.

"The numbers you're seeing in this are balanced when you consider the incredible returns, the incredible amount of debt available to put deals together, and the incredible amount of capital able to be raised," said Colin Blaydon, a professor at Dartmouth's Tuck School of Business and head of its private equity department. "This is really the perfect storm of value creation."

Blackstone's portfolio -- which IPO investors will not have a say in -- has grown at an annualized rate of 41.1 percent since the start of 2002, according to the filing, and totaled about $88.4 billion. The firm posted $2.26 billion of profit in 2006, and in the first three months of this year made $1.13 billion, according to the filing.

The Blackstone IPO is being watched closely by Wall Street, and could set off a pattern among private equity firms to float all or part of their businesses. It also is the first time analysts have gotten information about Blackstone's business and compensation plans.

It is also garnering attention much like Goldman Sachs did when it went public in 1999 and search engine Google Inc.'s splashy IPO in 2004.

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