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-plus 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.
News of the deal came as Blackstone unveiled details of initial public offering. The group said on Monday that it would raise up to $4.75bn – higher than the previously expected $4bn – through the issue of 133.3m common units at $29-$31 apiece.
Blackstone said it will China sell $3bn of non-voting common units at a 4.5 per cent discount to the IPO price. The number of non-voting common units purchased by the Beijing investment vehicle will be reduced if necessary so that its equity interest in Blackstone remains under 10 per cent, Blackstone said in a filing with the Securities and Exchange Commission.
Beijing has also agreed to keep the stake for at least four years.
Stephen Schwarzman, Blackstone’s chief executive, hailed the Chinese 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 flowsï¿½?.
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 US Treasury pointed out that it had decided last week to allow the Chinese to invest more in foreign stocks and was working to create “opportunities for US financial services firms like thisï¿½?.
The announcement comes just before Tuesday’s visit to the US by Wu Yi, China’s vice-premier, to discuss bilateral trade relations.
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.
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 favoreable 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.