Match made in heaven

China’s investment in Blackstone has intriguing implications for private equity as we know it. Philip Borel investigates

So just how important was the decision by the Chinese government to buy 9.9 percent of US alternative assets giant The Blackstone Group for $3 billion?

According to Blackstone chief Stephen Schwarzman’s post-deal assessment private equity has witnessed a seminal development. In an interview with the New York Times, he hailed the agreement as an “historic change. It’s a paradigm shift in global capital flows.”

Some commentators drew attention to the terms of the deal as evidence that Blackstone is, in a sense, an even more powerful beast than the People’s Republic. A slightly tongue-in-cheek observation, perhaps, but did the PRC government not agree to be a passive investor? In the words of the Financial Times, it took “the unusual step of giving up its voting rights”.

On the face of it, $3 billion is far from being a drop in the ocean. But if ever such a description could be applied to such a considerable sum, it would have to be with reference to China’s $1,200 billion of foreign exchange reserves whence the money has come.

Consider this: in the first quarter of 2007, China’s reserves grew by an average $50 billion per month. By this yardstick, a mere two day’s worth of growth is accounted for by the commitment to Blackstone.

China could of course up the stakes going forward and move a greater portion of the mountain of money it is sitting on into the asset class. Why not ask Blackstone to run a $50 billion separate account – or should it be $100 billion?

Blackstone has a one-year exclusivity clause built into the deal, preventing China from investing in any other private equity firms for the time being.

But once the clause expires, more Chinese state capital might well be coming private equity’s way. In fact, the PRC would have to re-up if this first foray into private equity is to make much investment sense at all.

Received wisdom has it that in a diversified portfolio, private equity should account for at least 5 percent of total assets to make a difference. By that rationale, China the private equity investor has a long way to go.   

The deal also sends a signal that fundamentally, the Chinese authorities are more pro private equity than has been evident. Thus far, the country has been difficult for international private equity firms in general and LBO shops in particular to operate in.

Now that the country has an economic interest in seeing private equity succeed, it seems reasonable to expect that its regulators will adopt a more favourable stance on the industry’s activities in China itself.