Finance:

Blackstone's founders to reap $2.3 billion in IPO

NEW YORK: Blackstone Group, the private equity company founded by Stephen Schwarzman and Peter Peterson, disclosed Monday just how lucrative its proposed $4.7 billion initial public offering is expected to be for its top executives.

Schwarzman, Blackstone's chairman and chief executive, is set to get $449 million as part of the offering, an amount that could reach $677 million if underwriters exercise their right to buy additional units in the firm, according to the latest version of its prospectus, which it filed with regulators on Monday.

After the IPO, Schwarzman would continue to own a 24 percent stake in the company, valued at about $7.7 billion, based on the forecast price of $30 per Blackstone unit.

Peterson, who is Blackstone's senior chairman and plans to retire by the end of 2008, is expected to get $1.88 billion in the offering and retain a 4 percent stake in the company, the prospectus said. The filing says Peterson earned $213 million last year.

Together, the two founders will be paid about $2.33 billion out of the proceeds from the offering and continue to own about 28 percent of Blackstone.

"The equity values are large enough that you can't ask the junior partners to buy you out at full value," said Frederick Joseph, managing director of Morgan Joseph in New York and former chief executive of Drexel Burnham Lambert.

Blackstone's IPO has been closely watched on Wall Street because it offered a glimpse inside the company's highly profitable operations, which, in addition to private equity funds, also include hedge funds, real estate investments and an investment banking arm.

The offering has also attracted the attention of the Chinese government, which has agreed to buy a 9.7 percent stake in Blackstone as part of the IPO.

The company, which started with $400,000, will have a market value of $32.4 billion after the IPO, with 12.3 percent of the stock held by the public

Blackstone said it expected to record significant net losses for a number of years after the IPO as a result of paying out the equity-based compensation.

The estimated payment of $449 million for Schwarzman would come on top of the large payout that he took home last year. Blackstone's latest filing said Schwarzman received nearly $400 million in cash distributions in 2006.

Blackstone's top executives have historically not received salaries or bonuses but were given distributions based on their ownership stakes, the prospectus said. Peterson received $213 million in cash distributions last year.

Blackstone is one of the world's largest private equity companies, and its portfolio of companies includes Equity Office Properties Trust, Michaels Stores and Freescale Semiconductor. Blackstone now has $88 billion under management. It earned $2.27 billion in net income last year, a previous filing said.

With frothy debt markets and a steady economy, private equity companies are experiencing the best investment climate to date, hauling in more than $400 billion worth of deals in the first half of this year alone - more than triple the amount in the year-earlier period.

Blackstone said its private equity fund had $19.6 billion in committed capital, making it the second largest such fund, behind Goldman Sachs.

Despite Schwarzman's huge 2006 compensation, it fell short of his colleagues in the hedge fund industry, where the average of the top 25 hedge fund managers was $570 million last year, according to Alpha, a magazine published by Institutional Investor. James Simons, chairman of Renaissance Technologies, was paid an estimated $1.7 billion, the magazine said.

Other top Blackstone executives will also be richly rewarded. Hamilton James, Blackstone's president and chief operating officer, will get $147.9 million for some of his stock and keep a 4.9 percent stake valued at $1.6 billion. In 2006 he was paid $97 million.

J. Tomilson Hill, 58, the vice chairman who heads the company's hedge fund unit, will own 1.6 percent of the shares valued at $535.4 million, after receiving $22.1 million. He was paid $45.6 million in 2006. The chief financial officer, Michael Puglisi, 56, will retain a 0.7 percent stake worth $231.2 million after getting $13.4 million. He was paid $17.4 million last year.

Private-equity companies, including Apollo Management, which is run by Leon Black, a former Drexel Burnham Lambert banker, and David Rubenstein's Carlyle Group, are also considering initial public offerings or private placements of shares.

Fortress Investment Group, which is based in New York, was the first U.S. manager of hedge funds and private-equity to sell a stake to investors, raising more than $634 million in February. Its shares have risen 38 percent since.

Source: The International Herald Tribune, Reuters
Monday, June 11, 2007