Blackstone CEO''s high profile sparks backlash
NEW YORK (Reuters) - If private equity firms had aimed to steer clear of political controversy heading into an election year, the message may have been lost on Stephen Schwarzman.
The CEO and co-founder of Blackstone Group this week became a lightning rod for criticism over perceptions that he makes too much money and leads an overly lavish lifestyle.
Blackstone revealed his stake in the firm could be worth $7.73 billion after its initial public offering this month and that he will get a one-off payout of up to $677.2 million.
One of his private staff also exposed his penchant for very expensive food: $400 crabs (working out to $40 a leg) and $3,000 for a weekend''s food shopping for himself and his wife.
The disclosure of such spending could prove even more costly. By the end of the week, powerful Republican and Democrat politicians were proposing legislation that would impose much higher taxes on private equity firms going public.
Their big concern is that buyout groups are structured in a way that allows them to pay far less in tax, by paying capital gains taxes, than businesses hit with corporate tax rates.
"The public responds to things that are very much in the news and visual," said Columbia University Law School Professor John Coffee. "That Mr. Schwarzman will be worth $8 billion and that he''s paying only capital gains taxes has to bother ordinary citizens."
Image consultants say Schwarzman has lost a sense of what sounds acceptable to many Americans.
"This isn''t rocket science," said Daniel Keeney, president of crisis communications firm DPK Public Relations. "It''s about being a responsible steward on behalf of your brand."
Schwarzman''s behavior has only served to arm his critics.
In February, he hosted a few hundred friends at an opulent 60th birthday gala in New York that featured British rocker Rod Stewart, singer Patti LaBelle and comedian Martin Short.
That same month he was lionized on the cover of Fortune magazine, which crowned him "The New King of Wall Street."
On Monday, Schwarzman will be feted by the New York Public Library. He is due to sip cocktails in the historic building''s Astor Hall, with author and humorist Calvin Trillin and TV anchorwoman Maria Bartiromo the featured guests.
Then there was this week''s Wall Street Journal profile, which mentioned not only an appetite for $400 stone crabs but also his intolerance for domestic staff with noisy shoes. He found the squeaking distracting while sunning poolside at his 11,000-square-foot home in Palm Beach, Florida, the Journal reported.
Schwarzman also made it clear he doesn''t take prisoners when chasing deals. "I want war, not a series of skirmishes," he told the Journal. "I always think about what will kill off the other bidder."
"You might say Steve Schwarzman is behaving with the excesses of your average Hollywood mogul or celebrity athlete," said University of Florida finance professor Jay Ritter, adding, "In terms of how Congress actually makes laws, perceptions do matter."
The conspicuous consumption is juxtaposed by calls from some Wall Street firms for greater discretion on the part of executives who received record bonuses this year.
Blackstone has become emblematic of a private equity buyout wave that has left few industries untouched, from casinos to utilities to technology companies.
The firm this year led a $22.9 billion buyout of Equity Office Properties Trust, last month agreed to pay $6.8 billion for business services company Alliance Data Systems Corp. and in February offered $1.2 billion for Pinnacle Foods Corp., owner of Lenders Bagels.
More than anything else Wall Street has fixated on Blackstone''s plans to join the ranks of public companies in a $4 billion initial public offering, even while seeking to skirt such typical requirements as having a majority of independent directors and holding annual stock holders'' meetings.
Those plans coincided with increased scrutiny by unions and politicians of the private equity industry and its excesses.
"Just the filing of this deal was opening a Pandora''s box," said Bruce Foerster, president of South Beach Capital Markets in Miami and former equities syndication managing director at Lehman Brothers.
Yet it is private equity firms'' favorable tax treatment in particular that touches a nerve on both sides of the Atlantic.
THE CHINA CARD
"Any common-sense person would say that a highly paid private equity executive paying less tax than a cleaning lady or other low-paid workers ... can''t be right," Nicholas Ferguson, chairman of SVG Capital, the largest investor in European buyout firm Permira, said this month.
Compounding the risk to Blackstone''s image could be a deal to sell just under 10 percent of itself to China''s new state investment agency at a time when Congress is asking questions about China''s huge trade surplus with the United States.
The $3 billion stake, announced last month, may add the Chinese government to the list of beneficiaries of Blackstone''s favorable tax treatment.
Schwarzman, who made the list of Pioneers by raising at least $100,000 for President George W. Bush''s last re-election campaign, will likely be keeping a wary eye on developments in Washington. The question for image consultants is whether he will now be keeping a more discrete profile.
"Sometimes a toe has to be stubbed to get across a message," said Keeney of DPK Public Relations. "It''s not uncommon that entrepreneurial types don''t gladly take advice, especially from people saying ''Cool it''."
(Additional Jeffrey Goldfarb in London and Lilla Zuill in New York)