China Bets On Black(Stone)

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China has been developing a plan to deal with its foreign currency reserves for some time, and in March announced the set-up of a state investment agency. The latest news (timed just before the US-China dialogue) is that China is jumping on the private equity bandwagon (if you can’t beat them, join them!) with a pre-IPO investment of US$3 billion for 9.9 percent of Blackstone. The FT reports:

    “The news came as private equity executives and business and political leaders said the Chinese investment in Blackstone was more than just a financial coup for the buy-out group.

    They said that the backing of a powerful Beijing agency would help Blackstone navigate China’s treacherous market for private equity deals, which have proven difficult to come by for rival buy-out groups such as Carlyle and Kohlberg Kravis Roberts.

    According to Mr Schwarzman [Blackstone’s chief operating officer] the deal signalled Beijing’s willingness to continue to invest part of its $1,200bn of foreign reserves in US assets, despite its stated policy of moving away from low-yielding US Treasuries. “From what I understand it should be, or will be, part of a trend,” he told Reuters by phone. “Blackstone is the first, but over time I would suspect there would be others.”

    But the one-year exclusivity period secured by Blackstone could ensure that rival private equity groups considering a listing, such as KKR and Texas Pacific Group, may not be able to tap into Beijing’s funds.”

Interestingly the political aspects of the deal seem to have been taken care of as “Washington observers said the deal was unlikely to run into political opposition, particularly because Beijing had agreed to forego its voting rights.”

According to the FT, Blackstone played a good guanxi card when it hired Antony Leung, the former Hong Kong Finance Minister, as its Greater China Chairman. It seems Leung played a key role in the deal:

    “Hong Kong-based Mr Leung got the landmark deal started with a visit to Beijing last month to see Lou Jiwei, head of the state investment company’s working group. The meeting was part of a charm offensive driven by the proposition that China should use its vast reserves to invest in Blackstone’s funds.

    Within days, Beijing let it be known that it was interested in taking a direct stake in Blackstone’s IPO, after which Steve Schwarzman, Blackstone’s co-founder, led the discussions.”

So guanxi is not dead, big bets can pay off, and China is going to be a Player as the “go global” story opens a new chapter. And the winnings (and I assume they will be winnings) will not just be for China. I have already heard about one Blackstone-invested company that hopes the trickle-down effect will give them advantages in the China market. Long-suffering Carlyle must be kicking themselves.

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4 Responses to “China Bets On Black(Stone)”

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