Wow! That was my initial reaction when I read the Bloomberg News story about the pay accruing to Blackstone Group's top executives. And yet, compared to hedge funds, these guys are lightweights. When you look at their photos, though, you can only come to one conclusion -- it pays to be bald!

Blackstone Group LP co-founders Stephen Schwarzman and Peter G. Peterson will get $2.33 billion and keep 28% of the company after its planned initial public offering. That was interesting but what really got my attention is their pay -- Schwarzman made $398.3 million last year and will own Blackstone shares worth $7.7 billion while Peterson took in $212.9 million in 2006 and will own $1.31 billion worth of stock after the deal is done.

This seems like a nice payday but it depends on whose you compare it to. Schwarzman's pay is about 7.4 times that of Goldman Sachs Group Inc.'s (NYSE: GS) CEO Lloyd Blankfein -- who made only $54 million in 2006 and 6,638 times that of the average U.S. family which pulled in $60,000 last year.

Yet Schwarzman's $398 million is less than a quarter of the $1.7 billion that top hedge fund manager, James Simons, pulled in last year. Do you feel sorry for Schwarzman now?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs.

When it comes to investment banking, private equity and trading, there's not much you can find fault with Goldman Sachs Group (NYSE: GS).

Even so, there continues to be a nagging problem -- that is, the Global Alpha fund. With $10 billion in assets, its Goldman's biggest hedge fund.

And the performance has been lackluster over the past year.

According to a report in Bloomberg.com, Global Alpha shed 5.7% in February (a big problem was a wayward bet on the yen). For the year, the fund is down about 2%.

Oh, and in 2006, the fund lost 9%.

Yes, this is a pretty bad trend. While it's true that Goldman continues to rack up huge management fees, this cannot go on for very long. Basically, investors may start moving some money out.

This does show that Goldman is human (the funny thing is that Global Alpha relies heavily on computer trading). But if things don't improve, I think we will probably see new managers at Global Alpha.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

BusinessWeek magazine recently ran an article highlighting the best private equity takeover candidates according to Goldman Sachs Group (NYSE: GS). Goldman's investment banking department ran certain proprietary screens to identify which companies would be most appealing to private equity buyers.

Private equity, which is a softer, fancier title than leveraged buyout, has become the investment style favored by many institutional investors as well as large pension funds. Many institutions are allocating 5-10% of their assets to private equity investing. It is a long term, fairly non-liquid, approach to buying, focused on re-building and growing existing businesses.

The dollar amount of recent transactions has not yet hit the ceiling and probably won't for a while. The next barrier to crack is $50 billion, then who knows how high it could go. As sensational as the headlines can be, the multi-billion dollar takeovers are not at the point of ridiculousness yet. The number one key component in analyzing a potential transaction is what is the cash flow yield? For example, the pending First Data Corp (NYSE: FDC) acquisition at $29 billion, eye-popping as it appears, actually carries a minor amount of risk. Why? Say the acquirer KKR puts down $5 billion and leverages the other $24 billion. The $24 billion can be borrowed at about 5-5.5%, but the First Data Corp existing operations yields about 8% in free cash flow, or about $2.2 billion. This cash flow will more than cover the debt service and this is all taken into account before cost-cutting measures and growth initiatives are put into place. The concept is the growing business will correspondingly grow the cash flow to $2.5-2.8 billion. Not only does this cover the debt service, but the underlying growth will enhance the value of the business as well. Then the private equity firm hopes to IPO the newly revamped company and earn large performance fees. Under normal circumstances, this is a win-win situation.

The Goldman Sachs list is interesting and covers a vast array of different businesses. From Supervalu (NYSE: SVU) to Sunoco (NYSE: SUN) to Rite Aid (NYSE: RAD), the businesses listed are basically recession-proof and high cash generators. The predictability of the businesses fits the private equity mold of "do not surprise me with volatile revenues and earnings." Keep it simple and keep it consistent.

Others on the Goldman list include AmerisourceBergen (NYSE: ABC) in the pharma services and products business, BJ's Wholesale Club (NYSE: BJ) and Electronic Data Systems (NYSE: EDS), the huge information technology and business process-outsourcing firm. All have the cash flow machine in place with decent to good growth rates fueling the businesses. All 21 companies on Goldman's list could be in play along with another 1,000 companies too.

Private equity firms will see a cash infusion of several hundred billion dollars this year and next, which when put to work should collectively represent between $1.2-1.5 trillion worth of acquisitions.So we are going to see many, many more announcements of "blockbuster" acquisitions.

The next time your broker or advisor recommends a stock to you, after asking about the PE and other usual questions, be sure to ask about the cash flow yield!!

In the next week or so, I will write another article about the coming shortage of publicly traded shares of stock to satisfy mutual fund needs. Interesting times . . .

Georges Yared is the chief investment officer of Yared Investment Research.

West Side Story-style turf wars are taking hold in the private equity industry. Although Goldman Sachs Group (NYSE: GS) denied any hard feelings, The Blackstone Group didn't give Goldman a role in the company's IPO. The New York Times' DealBook speculates that Blackstone is looking to compete with the big investment banks, while Goldman is trying to raise $20 billion for a new buyout shop -- the same amount Blackstone is raising for its own fund.

As a big fan of corporate battles (I don't have the stomach for watching real boxing), I am dying to see the tension break out into outright war. In a way, this seems inevitable. Where investment banks used to act in advisory roles to private equity firms, they are now aiming for direct competition with them. It's kind of like corporate raider Victor Posner's story about quitting his job working at his parent's newsstand as a child to set up his own across the street. It's just not a good way to make friends.