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Record income for private equity firm founder reflects dividend payments and asset sales

Stephen Schwarzman, the founder of Blackstone Group, received record income of nearly $1.3bn in 2022, as assets under management and profits rose at the world’s largest private equity firm.

Schwarzman’s haul came mostly from more than $1bn in dividend payments due to his ownership of nearly 20 per cent of the private equity group’s shares. In addition, he earned $190mn in “carried interest” pay as Blackstone completed the sale of assets, most of which were arranged before Russia’s full-scale invasion of Ukraine and rising interest rates sent equity markets into a tailspin.

Bolstered by Blackstone’s rising dividend, Schwarzman’s income surpassed by 15 per cent the $1.1bn the chief executive received in 2021, even as a 42 per cent decline in Blackstone shares cut the value of his holdings by more than $12bn.

Late last year Blackstone shares were hit hard after the New York-based investment group limited investor redemptions from a fast-growing $71bn real estate fund, as wealthy individual investors pulled money due to concerns about the long-term health of the property market and a need to raise cash.

The decision to limit withdrawals from the fund, called Blackstone Real Estate Income Trust, or Breit, cast doubt on Blackstone’s future growth and has caused stock analysts to lower their expectations for the firm’s fee-based earnings. Similar Blackstone funds have also faced pressure from investors seeking to withdraw money, the Financial Times has reported.

Despite the volatile conditions, Blackstone’s rising overall profitability helped other top executives take home nine-figure incomes, led by president Jonathan Gray, who received nearly $480mn in pay and dividends in 2022, a nearly 50 per cent increase from the prior year, according to filings released on Friday.

Gray’s pay was bolstered by more than $78mn in Breit shares that were delivered to him in early 2022 as a result of bonuses earned from the fund’s 30 per cent gain in 2021.

“Significant portions of our most senior executives’ listed compensation relate to 2021 performance that, due to the timing of awards, was paid the following year,” Blackstone said, adding that incentive-based pay came from the first half of 2022 when the firm recorded “the highest period for realisations in our history”, referring to asset sales.

The income earned by Schwarzman and Gray has dwarfed the pay of executives in investment banking. Schwarzman took home more than 30 times the pay of Jamie Dimon and David Solomon, respectively the chief executives of JPMorgan Chase and Goldman Sachs.

Joseph Baratta, the head of Blackstone’s private equity unit, and Michael Chae, its chief financial officer, received more than $50mn in 2022, again surpassing the earnings of top banking heads.

Top executives at private equity firms typically receive salaries that are modest compared to their entitlement to receive “carried interests”, giving them a share of the profits on successful investments. Founders and top executives such as Schwarzman are also large shareholders, meaning that they receive sizeable dividend income. Schwarzman’s and Gray’s shares are worth $20.6bn and $3.7bn, respectively, at current prices.

Distributable profits at Blackstone, which pays out the majority of its profits in the form of dividends, rose 7 per cent to $6.6bn last year, allowing it to pay $4.40 per share in dividends.

Blackstone’s about 4,700 employees collectively received total pay and benefits of $3.5bn, or nearly $1mn per employee, although this is skewed somewhat by the top earners. That represented a drop from 2021, when pay and benefits exceeded $8bn, or more than $2mn per employee.

The group’s assets under management ended last year at a record $975bn and it holds nearly $6.8bn in unrealised performance-based profits on its books.

Blackstone said it had “a performance-driven compensation model that is built on long-term alignment with our investors”.

Bank is one of many western companies struggling to exit after Putin’s intervention

For years, Austria’s Raiffeisen Bank vaunted its staying power in Russia as western rivals came and went.

“Russia,” Raiffeisen’s former chief executive Herbert Stepic liked to say, “separates the wheat from the chaff”.

Now, the situation is reversed.

One year into Russia’s bloody invasion of Ukraine, as western companies flee the country, fearful of the reputational and legal risk of continuing to do business there, Raiffeisen finds itself stuck.

The bank’s huge Russian subsidiary is trapped in the grip of Vladimir Putin’s regime, the policies of which allow it to rack up unprecedented profits, while barring those gains from leaving Russian territory.

Earlier this month, Raiffeisen — a bank dating back to the days of the Austro-Hungarian empire, with a virtually ubiquitous presence across eastern Europe — reported it had made €3.6bn in profit in 2022, compared with €1.4bn in 2021. Of that, €2.2bn, more than 60 per cent, was attributable to businesses in Russia and Belarus, up fourfold from 2021.

“We have very, very good results on the one hand, but on the other hand enormous problems,” said chief executive Johann Strobl.

The market has made its view of the dichotomy clear: Since their pre-invasion February peak, shares are down more than 40 per cent.

Last week, Strobl’s concerns were borne out, when news broke that the US Treasury was probing Raiffeisen over its Russian business. There is no suggestion of wrongdoing. But it signals Raiffeisen is in the sights of both regulators and politicians.

Raiffeisen is not alone. Many western businesses remain in Russia. Banks such as HSBC, Barclays and Bank of America are among them. But Raiffeisen stands out both for the size of commercial activities and its role at the centre of other, remaining businesses’ operations: Raiffeisen, a senior executive at the bank told the Financial Times, now handles 40-50 per cent of all the money flows between Russia and the rest of the world.

One year on from the invasion, the bank’s situation epitomises the difficulties — and conflicted motivations — of the business community when it comes to working on the Kremlin’s territory.

“No other western bank is as deeply embedded in the Russian financial system,” said Marcus How, head of research at Vienna-based risk consultancy VE Insight.

Ukraine’s ambassador to Austria is more forthright: Raiffeisen’s earnings are “tainted with blood”, Wassyl Chymynez said last month, when news emerged that the bank was granting special personal loans to Russian soldiers, as part of a Kremlin-mandated scheme. Under the scheme, soldiers killed in battle are granted automatic debt forgiveness. Raiffeisen has about €7mn in loans to Russian soldiers outstanding.

The question of how much has been written off already is particularly sensitive for the bank. It does not easily square with official casualty figures produced by the Russian Ministry of Defence, one senior Raiffeisen banker said.

A spokesperson for Raiffeisen stressed that the bank was fully complying with EU and US sanctions against Russia, but declined to comment further on its ongoing business in Russia.

Strategically, completely divided

Raiffeisen’s bind stems from the Kremlin’s swift action to block the withdrawal of foreign companies following the invasion.

Dividend payments back to parent companies are banned, trapping earnings within Russia, and companies from “unfriendly” countries must have any sale of Russian subsidiaries approved directly by the Kremlin.

The official criteria for approval are onerous: the value of a business will be determined by Russian authorities, and subject to a 50 per cent discount. A seller can then choose to receive the money in instalments over several years, or else make a “voluntary donation” equivalent to 10 per cent of the transaction value directly to the Russian government.

“We would call these criteria for rejection, not for approval,” said Alan Kartashkin, a partner at the law firm Debevoise & Plimpton. “Every approval has its own specific terms and requirements because each application is assessed on a case-by-case basis.”

French Bank Société Générale was an early leaver: its management divested its ownership of Rosbank in April last year, taking a €3.1bn hit to its balance sheet, as it sold the entire business to oligarch Vladimir Potanin for a pittance. More than 40 banks remain.

Some western businesses are already admitting publicly the situation means they will never leave. “There is no hope . . . So then I’d rather keep this whole thing,” the chief executive of tobacco giant Philip Morris, Jacek Olczak, told the FT last week, citing his fiduciary duty to make money for his shareholders

“We are strategically completely divided,” a Raiffeisen executive said, but behind the scenes, he noted, decisions have been taken.

Raiffeisen has severed relationships with about three dozen big Russian clients — oligarchs and businesses — since the invasion began. In the last year it has reduced its lending to Russian businesses by 30 per cent, which management believes is a remarkable achievement.

All the same, Raiffeisen is less able to say whether it will be able to continue to scale back lending in the months ahead.

“Ultimately, if you want to sell a bank, who do you sell it to if you don’t have a loan book any more?” the executive said, defending the decision to continue lending in Russia. Raiffeisen has so far only had one conversation about a possible sale, but it was a dead end, he added.

Raiffeisen’s Russian subsidiary’s book value is €4.1bn. The bank values it at just less than €1bn. Two senior western bankers who have tried to negotiate exits for western banks said any offer to buy the business for more than 0.2 times book value was highly unlikely.

Raiffeisen has sought to reassure its shareholders. Even if it wrote off its Russian business, it has told investors, it will still have a core tier one equity ratio — the crucial measure of a bank’s balance sheet health — of 13.5 per cent, comfortably above the minimum required by regulators.

But analysts question what a future for Raiffeisen would look like without the jewel in its crown.

“Raiffeisen is the bank most exposed to Russia, Ukraine and Belarus in our coverage universe, and lacks leading market shares in most of the remaining countries in its footprint,” said Hugo Cruz, an analyst at Keefe, Bruyette & Woods.

Riding out the storm

Raiffeisen’s commitment to Russia runs deep within the culture of the bank.

It entered the Russian market in 1996, well ahead of most peers, and expanded as fast as it could — often at the expense of due diligence or scrutiny of its clients, critics say. “I buy time,” Stepic told Euromoney magazine in 2007, when questioned about the speed of his decision- making. In 2006, it took Raiffeisen less than a month to decide it wanted to acquire Russia’s Impexbank and its 200 branches for $563mn.

In reverse, there is less urgency. “A bank is not a sausage stand that can be closed in a week,” Strobl, who became chief executive in 2017, irascibly told a reporter last March.

Perseverance in Russia has paid off for Raiffeisen in the past.

“After the 1998 financial crisis, it was one of the very few Western banks not to close up shop. So its reluctance to leave now reflects its expectation, its hope, that it can ride out the storm,” How, of VE Insight, pointed out.

Meanwhile, in its native Austria, Raiffeisen faces little pressure to act. Just last month, Austria’s influential chamber of commerce was advertising a cross-country skiing trip to Moscow for its members, to help them make business contacts.

Pressure from government is also muted. It helps Raiffeisen that many Austrian MPs and ministers have close connections to the bank. Raiffeisen is considered the “house bank” of the ruling Austrian People’s Party.

And then there is its ownership structure. Just 41.2 per cent of the bank’s shares are publicly traded. The remainder are owned by a complex web of regional Raiffeisen affiliate banks in Austria. Trying to understand who is actually in charge, joked one senior Austrian corporate adviser, “is an art I call Raiffeisonology”. The situation means Raiffeisen has little to fear from shareholder activism.

“This situation is extremely complicated, of course,” said Helmut Brandstätter, an Austrian parliamentarian for the liberal Neos party who campaigns for a tougher stance towards Russia.

But, he said, the real question is not what Raiffeisen has or has not done in the past year, but rather, over the past few years.

“Raiffeisen’s leadership have to ask themselves: why did their Russian business became so important in the first place?”

Air hubs are exposed to volume risk but not the cut-throat competition on fares that can hurt airlines

As a traveller, it is hard to love airports. The queues, the strip lighting, the overpriced lattes — and plenty of time to enjoy all three.

For investors, however, airports might be a good way to play the post-lockdown resurgence of flying — and the welcome return of the Chinese traveller. Friday’s news that British Airways owner International Airlines Group has returned to profit is a sign of that recovery.

Top-tier hubs generally have three revenue streams. The meat of the business is aeronautical — the money that airlines pay to the airport for each passenger they carry. Next up is retail, which is driven by what people buy when they are in the airport. Third, come other services — think train services, or real estate revenues from hotels and depots.

That makes hubs good businesses. They are the utilities of air travel — exposed to volume risk but not to the cut-throat competition on fares that can prove so painful for airlines. They have an element of growth, as air travel inches its way back from the pandemic lows. French airports group ADP expects 2023 passenger numbers to be between 95 and 105 per cent of pre-pandemic levels.

And the pricey brands on airport premises make them a bit of a luxury stock, too — a sector that is expected to do well this year as China reopens.

Airports are not one-way bets, of course. Labour and energy-price inflation take a chunk out of profits. Operating costs at Heathrow, part-owned by Spanish infrastructure owner Ferrovial, were 7 per cent higher last year than in 2019, despite much lower footfall. And the upward trajectory of passenger numbers is not as steep as projected pre-pandemic, given the ubiquity of the Zoom call. Indeed, airports serving leisure destinations have outperformed those serving business customers, suggesting most of us still like to attend our holidays in physical form.

The business of flying has, to some extent, changed. But the stock prices of leading European-listed airports more than reflect that. Both Frankfurt’s Fraport and ADP are still at least a fifth lower than they were at the start of 2020. Both shares trade at an enterprise value-to-forward ebitda of 11.5, below the 10-year average. For investors who believe in a return to the skies, they may be a good alternative to — very bumpy — airline stocks.

Industry rejects call for transparency over use of strategy that can delay competition from generic medicines

Several of the world’s biggest pharmaceutical companies are fighting shareholder proposals to force them to disclose information on their use of a controversial patent strategy that can delay rivals from launching cheaper versions of blockbuster drugs.

A coalition of ethical investors have asked Johnson & Johnson, Merck, Pfizer, Eli Lilly, Gilead, Amgen, Regeneron, Bristol Myers Squibb and AbbVie to publish a report on the process they follow when applying for multiple patents on a single drug.

The reports should provide details on whether their patent strategies are designed to extend the exclusivity of top-selling drugs and what impact this is likely to have on patient access, according to the shareholders, which include Mercy Investment Services and Trinity Health.

Eight of the nine companies are fighting the proposals at the Securities and Exchange Commission. Companies routinely challenge shareholder proposals at the SEC and often win. BMS is still involved in discussions with the investors.

The shareholder proposals come amid a public debate over drug companies’ use of so called “patent thickets”, whereby they file multiple and sometimes hundreds of patents beyond the primary patent covering a particular compound. Critics allege the strategy delays the launch of generic medicines by rivals even after the 20-year exclusivity period on the primary patents of blockbuster drugs elapses.

“If you don’t have competition then manufacturers can just run prices amok and that is what you have seen in the US, which is the single most expensive healthcare system in the world,” said Lydia Kuykendal, director of shareholder advocacy at Mercy Investment Services.

She said differences in the patent systems between the US and EU mean European patients typically gain access to cheaper, generic drugs up to five years before their American counterparts.

Humira, the world’s best-selling drug, which has amassed $200bn in global sales for AbbVie, faced competition in Europe in 2018. But the first biosimilar competitors were only able to launch this year in the US due to an extensive “patent thicket” created around the drug, claim rivals.

“You can’t litigate through 100 patents: its just too expensive and too risky,” said Rachel Goode, head of legal and Intellectual Property at Fresenius Kabi, a healthcare company which makes generic drugs.

She said many branded drug companies deployed a so-called “double patenting” technique, whereby they claimed the same or an obvious variation of an invention in more than one patent. These are not incremental innovations that improve therapies for patients, said Goode.

The US Patent and Trademark Office and Food and Drug Administration are reviewing their work practices to ensure more timely access to market of generic and biosimilar drugs following a request from the Biden administration, which is targeting high drug prices.

Big pharma defends their patent strategies, arguing that intellectual property protection is required to justify continuing investment in existing drugs. These investments drive innovations that benefit patients, such as new dosing regimens, delivery methods and combinations with other drugs that provide real benefits to patients, they say.

The eight companies have told the SEC the shareholder proposals should be excluded for several reasons, including that they are an attempt to “micromanage the business” and involve complex scientific and legal topics outside the expertise of shareholders. Implementing the proposals could undermine the company’s core business model, said Merck in response to a proposal made by The Capuchin Franciscan Province of St. Joseph.

The Capuchin Order’s proposal cites a 2021 study by I-Mak, a research group focusing on health inequity, which found Merck had filed 95 secondary patents on its cancer drug Keytruda. Two out of five of these patent applications relate to “methods of production and processes that can be used to manufacture the drug”, which can thwart competition even after the primary patent on the drug has expired, said the Order in its proposal.

I-Mak research suggests Merck has sought up to 180 patents on Keytruda, which is forecast to be the world’s top-selling drug this year, notching up about $24bn in sales. The drug is scheduled to lose exclusivity provided by its primary patent in 2028 but many analysts believe Merck will be able to use its “patent thicket” to delay the introduction of competitor drugs.

“The Keytruda patent estate really does go well beyond 2028,” said Umer Raffat, analyst at Evercore ISI. “They are innovating beyond the existing drug compound and this strategy should support Merck’s earnings into the next decade.”

Last week US Senator Elizabeth Warren sent the director of the US patent office, Kathi Vidal, a letter urging closer scrutiny of Merck’s requests for new patents on Keytruda, including a new delivery method — an injection under the skin.

“It is not at all clear that Merck is doing anything other than extending its monopoly power over the drug,” Warren said.

A Merck spokesperson said the company had developed many innovations that enhanced the benefits of Keytruda to reach a greater number of patients and increase efficacy of the treatment. “When appropriate, Merck seek to protect its additional innovation,” he added.

Merck said it continued to point to late 2028 as the most likely timeframe for biosimilar entry into the market.