Private equity: the pie is bigger and so are the slices

Barbarians at the gate or pigs at the trough? In a Friday night news dump, KKR announced that its recently named co-chief executives had been granted new shares that could be worth more than $1bn. KKR’s market capitalisation will have to reach $120bn in seven years from $65bn today for the full award to be won.

Both men have worked at KKR for decades and have helped transform it from a small buyout shop to diversified money manager with $459bn in assets. However, they are not the founders who took on personal entrepreneurial risk. Both already have shares worth more than $1bn too. That seems more than enough incentive to raise the company stock price.

KKR and its peers are slowly usurping the traditional banking, insurance and asset management industries. They boast fewer employees and bigger fees.

KKR rival Apollo Global Management is implementing a more radical transformation. Apollo, which is in the midst of merging with its insurance affiliate, will move away from incentive awards paid out from its carried interest “pool” to granting stock in the listed company. Apollo says the move not only puts managers on the same page as shareholders, but vesting requirements ensure talent is persuaded to stay for the long-term.

The firm’s co-presidents, who report to the CEO, have also received stock grants. These are worth more than $300m at Apollo’s current stock price. Unlike the KKR grants, they do not have a premium vesting price. They simply require the two to stay at the firm for several years. A separate, smaller grant requires publicly announced financial targets to be hit. The firms are quick to emphasise that the awards are essentially the only pay that bosses will receive.

In October, Goldman Sachs announced a long-term stock grant for its chief worth potentially $30m. That figure now seems quaint. Then again, Goldman is now smaller, by market cap, than Blackstone, the leading alternative investment manager. Both examples reveal just how much Wall Street’s pecking order has changed.