Beijing to buy stake in Blackstone
By Francesco Guerrera in New York
Published: May 20 2007 19:22 | Last updated: May 20 2007 19:22
The Chinese government is to use $3bn of its vast foreign exchange reserves to buy a 9.9 per cent stake in Blackstone, the US buy-out fund, in an unprecedented move that underlines Beijing’s desire to tap into the private equity boom.
The investment will coincide with Blackstone’s landmark $40bn stock market listing, expected in the next few months, and will allow the private equity group to nearly double its original target of raising $4bn.
Stephen Schwarzman, Blackstone’s chief executive, hailed the deal – the first time Beijing has invested its foreign reserve in a commercial transaction – as an “historic event that changes the paradigm in global capital flows”.
Under the terms of the deal, which is believed to have been agreed in just a few weeks, the Chinese government has taken the unusual step of giving up its voting rights associated with the stake in Blackstone.
The move appears aimed at defusing any US political opposition to the deal at a time of tension between Washington and Beijing over the renminbi.
The investment – announced on Sunday – will come through a new Chinese agency charged with managing part of the country’s $1,200bn in foreign reserves.
The price of the stake to be sold to Beijing will be at a slight discount to the one paid by investors in the initial public offering. Beijing has also agreed to keep the stake for at least four years.
It is understood that China’s foreign reserve agency has agreed not to invest in rival private equity groups for 12 months. A number of Blackstone’s rivals, including Kohlberg Kravis Roberts, Texas Pacific Group and Apollo are exploring listings or private placings.
China’s decision to buy a stake in Blackstone’s IPO rather than in one of its buy-out funds, which are more volatile and risky, is a sign of Beijing’s cautious approach to private equity.
The Chinese government has been looking to diversify its foreign exchanges reserves away from low-yielding US Treasuries.
However, buying into Blackstone’s listed entity may deprive the Chinese government of some of the large returns earned by its buy-out funds.
In its prospectus, Blackstone warned that its priority was to return cash to the private investors in its funds, rather than to pay dividends to shareholders.
Over the past two years, private equity has been one of the best performing asset classes, as private equity funds have exploited favourable debt market conditions to buy ever-larger companies.
However, there are growing fears the private equity cycle may be nearing its peak, as takeover prices and debt levels reach record levels
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the WSJ take ---
China to Take Stake in Blackstone
By KATE LINEBAUGH in Hong Kong and ANDREW BATSON in Beijing
May 20, 2007 12:38 p.m.
China has agreed to take a $3 billion stake in U.S. private-equity giant Blackstone Group, which marks an unusually aggressive start to the country's long-anticipated campaign to diversify how it invests massive foreign-exchange reserves.
Under the terms of the deal, a soon-to-be-established state foreign-exchange investment company will buy nonvoting shares in Blackstone, according to a joint press release. The move comes as private-equity firms have faced problems ramping up their own investments in China. The state investment company agreed not to sell the shares for four years. According to a person briefed on the deal, the investment company also agreed not to invest in a competing private-equity firm for one year. At the end of the four-year lock-up period, the company may begin selling one-third of its shares a year.
The deal is expected to be completed alongside Blackstone's announced $4 billion initial public offering. For these nonvoting shares, the Chinese investment company will pay 95.5% of the public-offering price. The State Investment Company's stake will be kept below 10%, the statement said.
Blackstone and other private-equity firms are going public to tap a source of permanent capital, which unlike money raised for specific funds, doesn't have to be returned. Investing at the management-company level -- rather than just giving Blackstone money to manage -- appealed to China as a way of benefiting from the plethora of fees Blackstone takes from its investments, another person familiar with deal said.
China's venture into private equity would be a bold first step as the country seeks alternative investments for its $1.2 trillion in foreign-exchange reserves, which are the world's largest. Most of the country's reserves, which support China's currency and the domestic banking system, have long been held in safe but low-return U.S Treasury bonds and other government debt.
But early this year, Chinese officials said they would begin investing a portion of the reserves more aggressively, in hopes of earning higher returns, and they are setting up a new government company to handle those funds. That company, which is being modeled on similar entities in countries such as South Korea and Singapore, hasn't yet been established, but it will report directly to the State Council, China's cabinet.
How exactly to adjust the investment strategy for the reserves is still under debate in Chinese official and academic circles. Some have advocated a freewheeling approach that would pursue political as well as financial ends, for instance by buying stockpiles of minerals that China needs to import. Others have pushed for a conservative style more like a pension fund, which could involve buying blue-chip stocks to supplement the current heavy reliance on bonds.
"I think they're doing what any responsible investor does and that is to diversify one's portfolio," U.S. Deputy Treasury Secretary Robert Kimmitt told reporters in Potsdam, Germany, at a Group of Eight meeting during the weekend. Mr. Kimmitt said the Treasury hadn't seen any drop in China's interest in buying U.S. debt since it announced plans for the investment agency. "I don't see it as a zero-sum game," he said.
News of the planned Blackstone stake came just before this week's U.S.-China economic talks in Washington led by U.S. Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi. The run-up to talks has been dominated by U.S. complaints about China's currency, which many U.S. politicians say is kept artificially low to give Chinese exports an unfair advantage.
Chinese leaders say they don't have a policy of pursuing a trade surplus and have repeatedly said they want to reduce the imbalance, which contributes to inflationary pressures at home as well as to trade frictions abroad. An investment in Blackstone would be one way for China to show it is willing to increase its flow of dollars to the U.S. to try to balance the flood of dollars into China. It would also help the U.S. administration defend itself against charges of protectionism, which has been a sore point for the Chinese since U.S. political opposition helped scuttle the Chinese state oil firm Cnooc Ltd.'s attempt to buy Unocal Corp.
China's Ministry of Commerce and several Chinese chambers of commerce have organized a delegation that is visiting more than 20 U.S. cities with the aim of boosting Chinese imports of U.S. products and increasing Chinese investment in the U.S., ministry spokesman Wang Xinpei told reporters last week.
A high-profile government investment in Blackstone could also help improve the image of Western private-equity firms in China, where they have struggled to duplicate their success in other markets and have sometimes encountered political resistance from the government on deals they do manage to arrange. In one highly public case, private-equity firm Carlyle Group has encountered numerous delays in its attempt to buy a Chinese construction-equipment company, and has revised terms of the proposed deal several times.
In part because of that example, U.S. officials have publicly raised worries that "economic nationalism" in China could be blocking foreign investment. Bankers and lawyers say it has become more difficult for private-equity groups to get the requirement government approvals to buy local firms.
Blackstone in January hired former Hong Kong finance secretary Antony Leung as chairman of its China business. Mr. Leung who is an independent director of China's largest bank, was involved in the negotiations, the person said. Prior to his government post which he resigned in 2003, he was the Asia chairman for J.P. Morgan Chase & Co., after two decades at Citigroup Inc. |
