Laying the groundwork?
China is significantly expanding its expertise in the private equity arena, allowing foreign firms in and building up a domestic private equity capability as well. It is certainly a logical step in the expansion and sophistication of its capital markets. Perhaps there is more to it as well. WSJ:
China is quietly cultivating a home-grown private-equity industry. That could soon mean fresh competition for high-powered foreign investors like TPG, Carlyle Group and Kohlberg Kravis Roberts & Co., which are going after the country’s prime assets.
This week, China’s securities regulator cleared two of the country’s strongest domestic investment banks, China International Capital Corp. and Citic Securities Co., to make direct-equity investments. That approval lifts a ban on private-equity-style investing by securities firms that had been in place since April 2001. They now join Bohai Industrial Investment Fund Management Co., which at the end of last year became the first yuan-denominated private-equity fund in China to adopt the same model as Western rivals…
turning to local institutions to restructure Chinese companies could be hazardous. When Chinese securities firms made unregulated investments in the late 1990s, including private-equity-type deals, Beijing dipped into its foreign-exchange reserves to bail out many of them and closed others. In the past, Chinese banks and state-run investment funds have come under pressure from local government officials to bankroll pet projects that fail to produce healthy investment returns. Investors such as Gao Xiqing are well aware of the risk. A Duke University-trained lawyer, Mr. Gao manages investments for the country’s $37.4 billion national social security fund, which is an investor in Bohai. “We were concerned that this was very much government-controlled,” Mr. Gao says. “At least for the near-term I feel positive, very positive, about it,” Mr. Gao told an investor conference earlier this year…
Last year, private-equity deals outside of the financial industry reached $817.9 million, continuing a steady uptrend. The march of China’s state bank toward listings in 2005 and 2006 provided a boost to private-equity deals in the financial sphere that is unlikely to be repeated. For instance, Goldman Sachs Group Inc.’s private-equity arm took a stake in Industrial & Commercial Bank of China Ltd., the country’s biggest bank by assets, as part of a $3.78 billion consortium. China signaled its growing interest in private equity this past May, when it agreed to purchase a $3 billion stake in Blackstone Group LP through a new state investment agency. This week, Blackstone reached an agreement to buy a 20% stake in China National BlueStar (Group) Corp., a state-owned chemicals maker, for $600 million.
China sits on $1.3 trillion of foreign exchange reserves, which have been growing recently by as much as $25 billion a month. Duke University lawyer Gao Xiqing has been tasked with investing $200 billion or so of these funds in investments that could well include LBO’s and foreign acquisitions. China’s admittance of US LBO giants to Chinese domestic deals, its investment in Blackstone’s IPO, and expansion of domestic LBO capability can perhaps be seen as laying the groundwork for a greater participation of China in cross border deals in the United States, similar to what Japan did in the 1980’s. We’ll certainly know if that is the case within the next year or two.