Blackstone founders to get huge IPO payout

Shared $2.3 billion likely to be a record

June 12, 2007|By Bloomberg News

Stephen A. Schwarzman and Peter G. Peterson, who started Blackstone Group LP two decades ago with $400,000, stand to collect a combined $2.33 billion from the largest initial public offering by a leveraged buyout firm.

The 60-year-old Schwarzman will receive $449.2 million for selling some of his holdings, leaving him with a 24 percent stake, Blackstone said yesterday in a filing with the Securities and Exchange Commission.

Peterson, 80, who is retiring next year, will get $1.88 billion and retain 4 percent of the company. He served as secretary of commerce in the Nixon administration.

Blackstone, manager of the world's second-largest buyout fund, is going public after spending $199 billion to acquire companies since its founding in 1985.

The payouts to Schwarzman and Peterson top those earned by partners at Goldman Sachs Group Inc. and the founders of Google Inc. when their companies went public.

"The world has shifted to private-equity and hedge-fund companies," said John A. Challenger, chief executive officer of executive-search firm Challenger, Gray & Christmas Inc. in Chicago. "That's where the real money is and that's going to draw talent."

Blackstone's offering is scheduled to be priced the week of June 25, according to a calendar posted on the Web site of Morgan Stanley, one of the managers of the initial public offering. The company plans to sell shares for $29 to $31.

At $30, Blackstone would have a market value of $32.4 billion, with 12.3 percent of the stock held by the public and China's state investment company buying a 9.7 percent stake in a private transaction.

Schwarzman's holdings will be valued at $7.73 billion if Blackstone's shares sell for $30 each in the IPO, according to the filing. Peterson's remaining shares will be worth $1.31 billion.

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

Schwarzman made $398.3 million last year, according to the filing. Peterson earned $212.9 million. That tops the $54 million Goldman Sachs paid to Chief Executive Officer Lloyd C. Blankfein for running the world's most profitable investment banking firm.

The executives' compensation is based on their ownership stakes and the New York firm's fees and profits from its buyout, real estate and investment funds, Blackstone said in the SEC filing.

The value of Schwarzman's stake would place him at number 32 on the Forbes magazine list of richest Americans, tied with News Corp. CEO Rupert Murdoch and eBay Inc. Chairman Pierre Omidyar.

In Goldman's 1999 IPO, partners in the investment bank took home stock then valued at $63.6 million, with senior executives receiving as much as three times that amount.

Google founders Sergey Brin and Larry Page each sold about $41 million in shares when the Internet-search company went public in 2004. They kept stock worth $3.2 billion.

Schwarzman's compensation fell short of his colleagues in the hedge-fund industry, where the average pay of the top 25 hedge-fund managers was $570 million last year, according to Institutional Investor's Alpha magazine. James Simons, chairman of Renaissance Technologies Corp., earned an estimated $1.7 billion, according to the magazine.

If Blackstone's shares sell at $30, the company would raise about $3.83 billion after underwriting costs, according to the SEC filing. Underwriters may sell an additional 20 million shares depending on demand. China's soon-to-be-formed State Investment Co. is paying $3 billion for its nonvoting stake, a 4.5 percent discount to the IPO price.

Private-equity firms including Apollo Management LP, run by former Drexel Burnham Lambert banker Leon D. Black, and David M. Rubenstein's Carlyle Group also are considering IPOs or private placements of shares.

"Everybody is looking at it," said Henry Higdon, managing partner of Higdon Partners LLC, the New York executive recruiting firm. "People are looking at how to monetize their business if it's private."

Blackstone's net income rose 71 percent to $2.27 billion last year. The company said it may post net losses "for a number of years" as it accounts for the cost of buying stakes from its executives. Blackstone estimated that it may amortize $4 billion of these costs, as well as about $3.6 billion in goodwill, over three to 10 years.

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