Schwarzman's Big Payday Could Irritate Investors

Stephen Schwarzman, the boss of the world's largest private equity firm, made his fortune by being a financier who delivered outsized returns for investors from buying, restructuring and then selling companies. These days, he is getting huge rewards for being the biggest shareholder in what is more like a souped-up asset manager.

The Blackstone Group LP

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[BX  Loading...      ()   ]  head 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 though it hasn't yet been disclosed for last year.

AP Stephen A. Schwarzman

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.

Blackstone, co-founded by Schwarzman in 1985, has historically made over two-thirds of its private equity revenues from carried interest. 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, who 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 which 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

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[KKR  Loading...      ()   ] and Apollo

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[APOL  Loading...      ()   ] declined to comment.