China goes to BX?
A state-run, and -owned, Chinese investment fund decided to place $3Bn in Blackstone, just before the latter went public. The Chinese asked for no control in exchange and it's also unclear as whether or not they did any meaningful due diligence.
From a different perspective, those who claim BX is a poor investment choice based on the decision of its two founders to sell overlook one of the two pillars of private equity: TRUST (the other being a combination of influence/relationships and competency). Indeed, BX cannot afford to make the Chinese position look bad in Pekin's books.
The question then becomes: Why has China gone to Blackstone?
a) To test (an investment concept/a type of relationship)?
b) To learn?
c) To buy American?
d) To start finding homes for money that's burning holes in pockets?
e) For they knew no better?
Is there more than what meets the usual eye?
In looking at this, it's also useful thinking at how the Chinese perceive time AND systems in their entirety.
Nota Bene: I hope you'll have as much fun reading/replying as I had writing this.
Clarification added August 2, 2007:
The Chinese Government sits in good company at BX:
On 21st of June 2007,
Brian Mulroney, Director with BX, bought 100,000BX @ $31.00 ($3,100,000)
AND
Nathaniel Charles Jacob Rothschild, Director with BX, bought 700,000BX @ $31.00 ($21,700,000)
Clarification added August 2, 2007:
The first purchase by the Chinese government's new overseas investment fund, a $3 billion stake in the Blackstone Group, has backfired badly and produced an unusual public backlash within China.
"O senior officials of the Chinese government, please do not be fooled by sweet-talking wolves dressed in human skin," said one of several Internet postings compiled by an anonymous blogger on Sina.com, a Chinese Web site. "The foreign reserves are the product of the sweat and blood of the people of China, please invest them with more care!"
"These fierce wolves are similar to the foreign thieves who pillaged our forefathers, only they are all the more cunning and manipulative, but their goal of pillaging China does not change with the centuries."
"It is really alarming the speed with which the Chinese government entered into this investment," said another posting, signed as "anonymous person 586215."
Over the last several years, the People's Bank of China has led the way among central banks in buying U.S. mortgage-backed securities, accumulating an estimated $100 billion worth of them, according to people with knowledge of the central bank's trading. The People's Bank of China has long chosen some of the most creditworthy tranches of these securities.
The Chinese central bank abruptly halted purchases of U.S. mortgage-backed securities in May, although it does not appear to be liquidating existing holdings, said one person who follows the bank's trading practices closely.
The China Development Bank, a state-owned institution, agreed last week to invest €2.2 billion in Barclays, the British bank, and to invest another €7.6 billion if Barclays won the ongoing bidding for ABN AMRO.
Chinese officials have called for other countries to accept government investments in their companies without discrimination.
Excerpts from: http://www.iht.com/articles/2007/08/02/opinion/backlash.php
Clarification added August 3, 2007:
Blackstone Group lands Chinese state mandate Harry Wilson
03 Aug 2007
The Chinese Government last week handed the Blackstone Group one of its largest mergers and acquisitions mandates, giving the US buyout company its third large M&A mandate since hiring former HSBC investment banking chief John Studzinski last year.
Blackstone’s emergence as an adviser to China Development Bank on its potential €9.8bn ($13.6bn) investment in UK financial group Barclays comes just over two months after the Chinese Government spent $3bn (€2.2bn) buying a 10% stake in the company.
The deal was seen as a precursor to Blackstone winning more deals in China. It emerged last month as a bidder for a 30% stake in the chemicals business of industrial group China National BlueStar corporation, a state-owned company.
The Chinese bank’s investment in Barclays is the fourth largest deal the firm has worked on in the region, according to data provider mergermarket. Studzinski said its mandate on the Barclays investment came from the advisory business’ close connections with John Varley, chief executive of Barclays.
Good Answers (3)
Morgan F
founder, portifiolio manager of manchester explorer fund LP,
Best Answers in: Hedge Funds (2), Equity Markets (1)
china is a very close knit and corrupt/nepotistis system.
only through your local connections can you get the goods opportunities and prevent successful ventures from being appropriated.
the government is cracking down on this with increasing seriousness. so this gives those at the fund the ability to leverage their connections without looking to be getting their hands dirty.
further it's a great investment in more ways that one. not only do they get the enhanced returns they know will come from being well connected, but the fact of their investment (and right before the IPO to maximize the publicity) makes the fund look great to those who want to invest in china. many governments spend big money attracting foreign capital. the cinese are getting paid to do it.
this counters the increasing perception that china is too treacherous a place to do business and that assets get stolen etc. this way, you invest right next to the chinese government. perception problem solved. so the money keeps flowing in.
quite a tidy day's work IMHO.
Roberto A
Consultant / Investment Banking
Best Answers in: Equity Markets (2), Job Search (1), Commodity Markets (1)
I guess it is pretty hard to answer you without having a deep knowledge of this business. However knowing a little bit the chinease policy for investment I guess it is a good mix between b) using it as a well tested troy horse (or better one of the troy horses thay are using to get inside us and european markets) and d) because with internal market rising so crazily and uncontrolled it's clear that a shangai bubble soon or later will collapse so better to move as much you can outside china pokets?
Maurizio P
Director at S&I Savings and Investments Ltd.
Best Answers in: Equity Markets (15), Hedge Funds (14), Government Policy (2), Derivatives Markets (2), Futures Markets (2), Job Search (1), Risk Management (1), Personnel Policies (1), Business Development (1), Corporate Governance (1), Commodity Markets (1), Distribution (1), Career Management (1)
d) is a good start as a reply...but there's more to it obviously.
China has patiently leased Hong Kong to the British, waited patiently for that lease to expire, and quietly took back an asset worth an unimaginable amount of money that they would have not...probably, been able to create in the first instance.
That makes them smart investors for such a long run , that for us, in the West makes for Lord Keynes maxim : "In the long run...we'll all be dead."
They can think to reaping fruits in the next generation...and that gives them an edge.
Do not discount them... they are smart investors. And think differently by us.
Clarification added August 1, 2007:
To go deeper in the fact if BX was worth paying those money at that time....would require an in depth analysis of it's investments portfolios and the possibility of those investments to pay off succesfully the leverage bestowed to them by the acquisition.
The LBO curse, is that you have a stream of debt servicing payments to be made...if the leverage was reasonable, the efficiency recovered by making the Company lean and mean, will suffice...if the leverage was wrong...then you start divesting the growth options, the stars, selling them off to pay off chunk of debts and concentrate yourself in the cash cows in mature BAs...the contrary of any strategic logic, using the old but still known BCG matrix terms.
Therefore, deciding if it was well paid or not will require an in depth analysis I would not be able to carry ou right now.
Or....the political consideration of owning a good chunk of Western companies that , in case of a downturn, could be easily "rescued" and bought for a song leveraging the more than 1 trillion dollars in cumulated reserves superseeded any analysis...And i have the suspect they will be dead right!
Al Waalid bought chunks of Citicorp and other Western jewels at distressed prices...sat on them a few years...and smiled.
I have the feeling a lot of Chinese officials will be smiling soon, sitting on a mountain of cash and able to cherry pick at firesale prices overleveraged jewels.
