Stephen Schwarzman, founder of Blackstone Group, often finds himself in interesting positions. But here’s a particularly intriguing (and personal) one, identified by Breaking Views, (via Dealbook).
Such is Mr Schwarzman’s stake in his buyout business (40 per cent, reportedly) and such is investors’ hunger for alternative managers (Blackstone might float at more than 30 per cent of assets under management — at least $25bn), Schwarzman might make more money paying himself nothing rather than banking his regular pay cheque.
How does that work? To illustrate Breaking Views cross-reads to Wes Edens, one of the founders of Fortress Investment Group, the first sizable alternative investment firm to list in the US:
“Say Edens (with an 18 per cent holding) cuts his pay by $100m — a result of the newly public management company receiving income that in the past accrued straight to him as a partner. After taxes, that would add some $65m to Fortress’s bottom line. The company trades at 29.5 times its 2007 earnings as forecast by Lehman Brothers. So swapping his partnership earnings for a smaller pay stub adds $1.9bn to the company’s value. And Edens’ chunk grows by nearly $350m.”
Cute, eh? Although since we have yet to see hard numbers for either Blackstone or Schwarzman, we can’t be sure the Eden arithmetic applies.
And then there’s that little issue of the Fortress valuation — an indication that investors backing this new issue might be under the influence, according Roger Ehrenberg at Information Arbitrage.
Compare Fortress with London-listed Man Group, the largest listed hedge fund manager. While twice the market cap of Fortress, Man commands a similar market value-to-assets under management ratio. But then Man trades at 17 times March 2007 projected earnings and 15 times those for March 2008 — roughly half that of the American upstart.
And don’t even look at traditional asset managers, like Britain’s Schroders — like Man, trading on 17 times earnings, but commanding a market value of less than three per cent of the $250bn it has under management.
But putting Fortress and Mr Schwarzman’s personal estate planning to one side, what does Ehrenberg make of the Blackstone float?
Well, it is simply a foreshadowing of what’s to come, namely a much tougher environment for private equity, where debt markets are less friendly, regulatory scrutiny tougher, and where attractive buyout candidates are harder to come by.
But then Ehrenberg has already moved on from Blackstone. Now he’s heard about Apollo using “toggle debt” to pay the coupon on existing debt – a new twist on PIKs, or payment in kind instruments.
“If I’ve said it once I’ve said it a thousand times,” warns Ehrenberg, “Watch these guys. Because unlike many of us, they are seeing the big picture. The institutional debt investor is myopically focused on deploying their cash and spreading risk around different credits…while the IPO investor is also interested in participating in the New New Thing… These are all signs of things to come, friends. Eyes wide open, ok?”