Deploying China’s trade surplus into US private equity
We’ve previously discussed China’s plans to recycle its $1.2 trillion dollar foreign exchange account, possibly through an acquisition binge of buying companies. It looks like this has begun, though indirectly. China is about to take a $3 billion stake in buyout firm Blackstone Group. WSJ:
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…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.
This is a significant, yet cautious, development in China’s program to redeploy its capital surpluses. More aggressive actions undoubtedly lie ahead in the coming years.