Blackstone's Schwarzman payday risks irking PE paymasters

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 head is set to receive at least USD 120.6 million in 2011 dividends from his 21% ownership of the firm, based on regulatory filings. That is many times what he gets for being CEO - he received a USD350,000 salary and total compensation of USD USD 6.7 million in 2010 though it hasn't yet been disclosed for last year.

Fees for managing assets and advisory services accounted for 82% of Blackstone's dividend payouts in 2011, up from 63% 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% from the more traditional 2% 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