Buyout Kings Put CEOs’ Pay to Shame

06/25/2007 12:00 am EST

Focus:

Michael Brush

Columnist, MSN Money

Michael Brush, contributing editor for MSN Money, writes that last week's IPO of the Blackstone Group revealed "breathtaking" compensation for top executives.

If you thought CEOs were overpaid-with average compensation of $14 million last year at companies in the Standard & Poor's 500 index-brace yourself for an even bigger shock.

For the first time, we're getting a glimpse of how much top money managers in the rarified world of private-equity investment rake in, and the numbers are breathtaking.

For example, check out how much loot they make at the helm of the Blackstone Group (NYSE: BX ), which began trading Friday in one of the largest-ever initial public offerings. The IPO priced Thursday at $31, the top of its expected range, and zoomed to $37 at the open on Friday. (It closed slightly above $35-Editor.)

Stephen Schwarzman, a Blackstone founder and its chief executive, will get $677 million when he sells Blackstone shares in the IPO (at $31 a share). And he'll still have an estimated $7.7 billion stake in the company.

Blackstone co-founder and Chairman Peter Peterson, who was Commerce Secretary under Richard Nixon, will get $1.9 billion for the stock he sells in the IPO. (He intends to donate to charity a "substantial" amount.)

The [money] that Schwarzman will get when he cashes in some Blackstone shares is about 7,600 to 11,500 times the average household pay in this country, which was $58,712 in 2005. And that's only part of his reward this year.

[But] with the legal structure of his investment shop, he gets taxed at a 15% rate on his income because it comes in the form of distributed capital gains from an investment partnership. In contrast, most workers pay 25% to 35% of their income in taxes.

"The person serving Schwarzman drinks at his poolside is probably paying a higher percentage of his income in taxes than Schwarzman," says Daniel Pedrotty, a corporate-governance expert at the AFL-CIO's office of investment.

The top managers at the big private-equity shops typically take 20% of any profits the companies' investments generate, after earning 8% for investors, plus an annual fee of 2% of assets under management. That 20% cut has been adding up to a lot of money because these managers have been getting great returns.
Indeed, many wonder whether the fact that partners at Blackstone are now cashing out by selling their companies to public shareholders is a signal that the private-equity party is over.

"On a historical basis, the valuations that are being paid for companies and the leverage they are putting on are high," says Michael Gray, the chairman of the Fund Formation & Investment Management Practice Group at the law firm Neal, Gerber & Eisenberg in Chicago.

Just don't feel too sorry for Schwarzman if the juicy investment returns vanish and his annual 20% [cut] dwindles. 

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