Why Stephen Schwarzman's Payday Risks Riling Blackstone Investors

Co-founded by Schwarzman in 1985, Blackstone traditionally made most of its profits from the increase in value of the companies it bought, rather than from management fees. But fees have now provided 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 -- which provide the funds for private-equity firms -- that public listings of outfits such as Blackstone means stockholders are being favored over them.

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While these investors, or limited partners, focus on returns on their investments, shareholders want dividends that 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 percent from the more traditional 2 percent in the past few years, but stories like Blackstone's will only increase the momentum for more reductions, according to some private-equity executives and investors' representatives.

Other publicly traded private-equity firms, such as Apollo Global Management LLC and KKR & Co. LP, are also generating more of their revenue from fees, but as yet it hasn't reached the same proportion as at Blackstone.

"As the industry has matured , some unintended consequences -- like nine-digit management fees -- have become apparent and problematic," said Stephen Moseley, president of private-equity and advisory firm Rockland Management LLC. "Multiple sources of income can produce divided loyalties, and divided loyalties make limited partners nervous."

Blackstone's fee-earning assets under management increased 25 percent in 2011 to a record $137 billion. On an after-tax basis, $502 million out of $610 million in dividend payouts last year came from fee-related income.

The large fee component of Schwarzman's pay will "add fuel to the fire in the argument between limited and general partners on the structure of funds," said Michael Moy, a managing director at Pension Consulting Alliance Inc., which advises some of the largest U.S. pension funds on private equity, including the California Public Employees' Retirement System.

Blackstone representative Peter Rose said given the firm is the largest and most diversified alternative asset manager, private equity accounts for only about 25 percent of its business.

"Blackstone has a significant percentage of its businesses which generate fee income only, similar to all long-only money managers and financial advisory firms," Rose said. "We manage the business as we did before we went public, to maximize net returns to our limited partners, and, as such, we rank as one of the top-performing managers in the world."