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China to buy 10% stake in Blackstone while yielding voting rights

Section: Daily Dispatches

By Francesco Guerrera
Financial Times, London
Sunday, May 20, 2007

NEW YORK -- The Chinese government is to use $3 billion of its vast foreign exchange reserves to buy a 9.9 percent stake in Blackstone, the US buyout 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 $40 billion stock market listing, expected in the next few months, and will allow the private equity group to nearly double its original target of raising $4 billion.

Stephen Schwarzman, Blackstone's chief executive, hailed the 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 flows."

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 investment -- announced on Sunday -- will come through a new Chinese agency charged with managing part of the country's $1,200 billion in foreign reserves.

The price of the stake to be sold to Beijing will be at a slight discount to the one paid by investors in the initial public offering. Beijing has also agreed to keep the stake for at least four years.

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 buyout 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 buyout 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 favourable 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.

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