(Bloomberg) -- Private equity firms are tweaking bonuses and other awards for rainmakers to give shareholders more steady income during a prolonged deal drought.
Apollo Global Management Inc. and KKR & Co. shifted their compensation in recent weeks to hand over more fee-related earnings — income derived from managing assets — to shareholders.
That gives stockholders a greater portion of recurring, predictable income as private equity asset sales stagnate due to higher interest rates and jitters over a potential recession. In exchange, the firms’ dealmakers will get a bigger slice of the gains when their investments pay off.
KKR said Wednesday that its employees would see their share of fee-related revenue decline to 15% to 20%, from 20% to 25%, while their take of carried interest — the profits from selling assets — would increase to 70% to 80%, from 60% to 70%.
“That will allow us to create more fee-related earnings for our shareholders,” KKR Co-Chief Executive Officer Scott Nuttall said in an interview on Bloomberg Television Wednesday.
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The changes also provide “our more senior employees with additional carried interest if we perform,” KKR Chief Financial Officer Robert Lewin said on a call with analysts Wednesday. That “further aligns employee compensation with the performance of our clients.”
The moves shift more of the swings in fortunes onto employees’ shoulders in what has been a tough time for exits. Fee-related revenue in KKR’s private equity business was up 7.5% in the first nine months of the year, while carried interest plunged by almost two-thirds.
Apollo said earlier this month that four of its next-generation leaders — Matt Nord, David Sambur, John Zito and Grant Kvalheim — would be compensated “substantially” in stock. The firm said it would take their share of fee-related earnings, spread-related earnings and carried interest, and replace a “very large portion” of it with stock. Apollo would then redistribute the carried interest to other employees.
Apollo CFO Martin Kelly said on the firm’s earnings call earlier this month that its most recent pay moves would help it reduce the compensation ratio on its fee-related earnings, while increasing the slice of principal investing income that employees get.
“We also are trying to do something for shareholders,” Apollo CEO Marc Rowan said on the earnings call. Shareholders value “highly predictable” income over “things that are volatile,” he said.
The firms’ compensation changes reflect private equity’s efforts to boost their share prices as they transcend their buyout roots into publicly traded alternative investment giants.
Still, Oppenheimer analysts Chris Kotowski and Kevin Tripp wrote in a note Wednesday that they have “mixed feelings” about the changes at KKR since “private equity carry is the most undervalued asset that investors can buy in the public markets.”
“That said, we think the market will like it, at least in the near term,” they added, “and it is relatively speaking an incremental shift that still leaves the shareholders with significant upside from carry.”
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