July 12 (Bloomberg) -- Investment banks earned a record $8.4 billion of fees in the first half from arranging leveraged buyouts for firms led by Blackstone Group LP and Apollo Management LP, according to an industry report.

Fees from LBO firms rose 34 percent from a year earlier, according to Freeman & Co. estimates based on Thomson Financial data. The industry paid $12.8 billion to Wall Street during all of 2006.

Private-equity firms have announced about $670 billion of takeovers since Jan. 1, more than double the total at this time last year, according to Bloomberg data. Blackstone, the New York-based firm founded by Stephen Schwarzman and Peter G. Peterson that sold shares to the public last month, spent $685.4 million on financial advice in the first half, Freeman & Co. said.

``They're paying these fees because business is very good,'' said Matthew Rhodes-Kropf, a finance professor at Columbia University's Columbia Business School in New York. ``Paying the fees gets you better deal flow. Everyone wants to be the first call'' when a company goes up for sale, he said.

Blackstone's $4.75 billion initial public offering and its purchase of Sam Zell's Chicago-based Equity Office Properties Trust in February helped vault it to the top of the rankings. Goldman Sachs Group Inc. paid out fees of $250.1 million for advice on LBOs, Freeman said. It also was the top earner among investment banks, getting $790 million of fees for helping arrange deals for companies including Dallas-based power producer TXU Corp. and Beverly Hills, California-based Hilton Hotels Corp.

Buying and Advising

Schwartzman earned $684 million from the IPO and his remaining stake is valued at $7.6 billion. The offering, and a lavish 60th birthday party he threw himself in February, increased scrutiny of buyout firms that has led to proposals in U.S. Congress to raise their taxes.

New York-based Goldman, the world's largest securities firm by market value, raised $20 billion for the biggest buyout fund earlier this year, putting it in competition with Blackstone, Apollo Management and Kohlberg Kravis Roberts & Co.

The ability to make takeovers and advise on them so lucratively may lead Blackstone and KKR to build up their banking and advisory operations, said Michael Holland, who helps manage $4 billion at Holland & Co. in New York. KKR said in a July 3 regulatory filing that it may expand its capital markets business in part to sell equity in its targets to other investors.

The Goldman Model

``Goldman is the example that everyone else is trying to follow,'' said Holland, who holds shares of Citigroup Inc. and JPMorgan Chase & Co. ``Blackstone and KKR both are looking at Goldman's numbers and saying `Wow, we pay out a lot. Is there anyway for us to get part of that stream as well?'''

New York-based KKR, co-founded by Henry Kravis and George Roberts, paid banker fees of $334.8 million, ranking third behind Blackstone and Apollo Management's $407.5 million, according to Freeman. London-based CVC Capital Partners Ltd. was fourth at $309.1 million.

JPMorgan, the third-biggest U.S. bank, took in the second- most fees from LBO firms in the first half after Goldman. Zurich-based Credit Suisse Group was third, followed by Frankfurt's Deutsche Bank AG and Citigroup of New York, Freeman said.

Debt Jitters

Earning all that money may come at a price during the second part of the year as banks seek to sell debt to complete announced deals. KKR and Clayton Dubilier & Rice Inc. finished their $7.1 billion buyout of U.S. Foodservice, a unit of Royal Ahold NV, after canceling a plan to sell $1.55 billion of bonds to finance the deal. The firms relied on bridge financing to complete the transaction, according to Standard & Poor's Leveraged Commentary and Data.

Seeing deals struggle may make banks wary about financing more buyouts until they sense investors are comfortable with the amount of risk involved, said Columbia's Rhodes-Kropf.

``The tension is going to be there if the debt market continues to fall apart,'' he said. ``They guaranteed the financing a long time ago, and so you have an awful lot of exposure.''

Below is a table of fees paid by LBO firms, according to data compiled by Freeman:

                          Share    Fees Paid
1)   Blackstone            8.2%    $685.4 Million
2)   Apollo Management     4.8%    $407.5 Million
3)   KKR                   4.0%    $334.8 Million
4)   CVC Capital Partners  3.7%    $309.1 Million
5)   Goldman               3.0%    $250.1 Million
6)   Warburg Pincus        2.9%    $246.3 Million
7)   Madison Dearborn      2.9%    $244.5 Million
8)   Apax Partners         2.7%    $222.8 Million
9)   Permira Advisers      2.2%    $187.5 Million
10)  Texas Pacific         2.2%    $181.7 Million

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Edward Evans in London at eevans3@bloomberg.net.

Last Updated: July 12, 2007 12:45 EDT