China has agreed to acquire a $3 billion stake in U.S. private equity firm Blackstone Group in a deal that marks that country's long-anticipated move to expand 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 buy acquiring ailing companies, turning them around, and then selling them at a higher profit. The Chinese government had been set to shift some of its foreign exchange reserves of more than $1 trillion into other world currencies because of the sluggishness of the dollar.
"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% 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 also help open the door for direct stakes in 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, who 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. Most have been held in U.S. Treasury bonds and other government debt, but officials have said they planned to put a portion in 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.