Perks under the microscope

This article originally appeared in the April 2010 Private Equity Manager Monthly, a monthly printer-friendly publication delivered to subscribers to Private Equity Manager.

March yielded interesting disclosures from some of the largest publicly traded private equity firms: both the Blackstone Group and Apollo Global Management went into detail about their expense arrangements with their top executives.

In a Securities and Exchange Commission filing ahead of a listing on the New York Stock Exchange, Apollo revealed that chief executive Leon Black earned a base salary of $100,000, and wasn’t paid a bonus in 2009. But the firm paid $140,202 for his car and driver, and $26,400 for “tickets to sporting events for Mr. Black’s personal use”.

As for the car and driver, Apollo said that it provides that benefit for Black because “its cost is outweighed by the convenience, increased efficiency and added security that it offers to him”. 

The Blackstone Group’s 10-K report for 2009 revealed a seemingly more austere culture: “Since filing our registration statement relating to our IPO, we have not incurred for or advanced funds to any named executive officer or member of the board of directors for any material personal related expenses,” the firm said.

Chief executive Steve Schwarzman earned a base salary of $350,000, and was not paid a bonus. His total compensation for the year was actually -$409,217 after taking carried interest accruals into account.

Blackstone took pains in its report to emphasise that Schwarzman bears the full costs of any personal expenses. In footnotes, Blackstone explained that Schwarzman pays for his own car and driver, as well as the use of an airplane and a helicopter that he owns jointly with Blackstone. He also pays for the time Blackstone personnel spend taking care of his “personal matters”.

Blackstone does pay Schwarzman in proportion to his ownership stake when other Blackstone employees use the airplane or the helicopter, however. In 2009, Blackstone paid Schwarzman $2.1 million for company use of the airplane, and $300,000 for company use of the helicopter. In its 10-K, Blackstone went into detail about how the payments work:

“Mr. Schwarzman paid for his purchases of the aircraft himself and bears all operating, personnel and maintenance costs associated with their operation. In addition, Mr. Schwarzman is charged for his and his family’s personal use of Blackstone assets based on market rates and usage. Payments by Blackstone for the use of the Personal Aircraft by other Blackstone employees are made at market rates. Personal use of Blackstone resources are also reimbursed to Blackstone at market rates.”

For non-listed private equity firms, expenses like these are generally not broken out in such detail. Rather than revealing which employee racked up the most miles on the corporate jet, a GP’s financial statements might simply have a line item for “Transportation”. But as LPs fight for an expense-based management fee rather than a flat 2 percent, more private equity firms might have to follow Apollo and Blackstone’s lead. 

“Though LPs do not necessarily ask for the details on due diligence, once something like Leon’s car and driver becomes public it often becomes something that investment staff have to answer to as their boards ask questions – and may result in more pressure during fee negotiations,” one placement agent said.