NEW YORK (AP) – The Chinese government has agreed to acquire a $3 billion stake in U.S. private equity firm Blackstone Group LP in a deal that marks China's long-anticipated move to diversify how it invests its massive foreign exchange reserve.
The transaction calls for China's upstart state investment company to buy nonvoting shares in the buyout company, concurrent with Blackstone's highly anticipated initial public offering of its management division, which is expected to raise up to $4 billion. The IPO was announced earlier this year, though no date has been set for its debut on the New York Stock Exchange.
China's stake will mark the first time that country's government has sunk cash into a foreign private equity firm, which makes its money by acquiring ailing companies, turning them around, and then selling them at a profit.
“We hope this is an important first step in broadening the capital flows between China and the U.S.,” Blackstone's chairman and co-founder, Stephen Schwarzman, said in a statement.
Under the terms of the agreement, the Chinese investment company will own no more than a 10 percent interest in New York-based Blackstone. It also agreed to hold its investment for four years, and after that can only divest $1 billion per year, a Blackstone spokesman said. The transaction also restricts China from investing in competing private equity firms for a year.
The actual investment will not become solidified until Blackstone completes the IPO of its management side, which does not include any direct stake in the companies the private equity firm holds. Blackstone, which has racked up some $400 billion in deals and announced its public offering in March, operates a $15.6 billion fund, and its holdings include everything from Madame Tussauds wax museums to real estate company Equity Office Properties Trust.
Blackstone, founded in 1985, said the IPO will help it tap new sources of capital for multibillion-dollar acquisitions. The deal with China will allow Blackstone to directly buy into Chinese companies as that nation becomes more receptive to foreign investments. The firm in January hired former Hong Kong finance secretary Antony Leung to head its Asia-Pacific operations; he joins Blackstone's senior managing director Ben Jenkins, who relocated to Hong Kong from New York.
China has been seeking alternative places to invest its large reserves, estimated at more than $1 trillion. Most have been held in U.S. Treasury bonds and other government debt, but officials have said they planned to put a portion into investments with higher returns.
“We are very pleased to be able to make the State Investment Company's very first investment in such a well-respected firm as Blackstone,” said Lou Jiwei, head of the working group of the Chinese investment company, which is being established by the Chinese government to invest its foreign-exchange reserve.
A spokesman for the U.S. Treasury Department did not immediately return a call seeking comment.
The deal was announced three days before high-level trade talks open between top Chinese and U.S. officials in Washington. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and the heads of nine Cabinet-level agencies are set to discuss trade violations and tariffs on imports.
For U.S. financial firms, spanning from Wall Street investment banks to unregulated private equity firms, the talks take on an even more important significance. Private equity firms are looking to become a more important part of the Chinese economy as companies there are looking for experience in becoming global corporate players. Meanwhile, the Chinese government still wants to remain an economic force even as it downscales investments in U.S. government debt.
“They will use their money to gain influence, and this is a good example of this,” said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. “Blackstone isn't just a fund, it's a very influential group in the United States. Basically, it's the Chinese government making a significant stake in a highly influencial Wall Street firm. And, in turn, that firm has an influence on U.S. policy.”
About 70 percent of China's foreign currency reserves are believed to be held in safe but low-return U.S. Treasury bonds and other dollar-denominated assets. Some economists have suggested creating a company to make more profitable use of its reserves could affect Beijing's purchases of Treasurys, which helps to finance the U.S. government budget deficit. But Chinese Premier Wen Jiabao said in March that it will not have an impact.
China's reserves are growing by about $20 billion a month as surging exports bring in a flood of foreign currency, forcing the central bank to drain billions of dollars a month from the economy by selling bonds to reduce pressure for prices to rise.