Blackstone hopes China will bet on its funds

By Tamora Vidaillet

BEIJING (Reuters) - Blackstone Group hopes China's embryonic state investment company will buy into a broad range of its funds following its agreement to invest $3 billion in the New York private equity firm.

Stephen Schwarzman, chief executive at Blackstone, said the agency being set up to help diversify part of China's $1.2 trillion in foreign exchange reserves might look to the company he co-founded to seek better investment returns.

"We started an initial discussion on that, and that is our next order of business," he told Reuters by telephone.

Most of Blackstone's large clients, including the state investment authorities of Singapore and Abu Dhabi, had ploughed cash into a wide array of its funds that span private equity, real estate, debt products and hedge funds, Schwarzman said.

"We would hope to develop a similar type of relationship with the state investment company," he said, adding that no decisions had yet been made.

Money managers have been lining up to get a slice of Beijing's business as it looks to diversify its foreign exchange stockpile into asset classes that may yield higher returns than dollar bonds, long the mainstay of China's portfolio.

Blackstone is bound to be a front-runner after Premier Wen Jiabao gave China's state investment company the go-ahead to buy into Blackstone's initial public offering. The company now aims to raise $7 billion as early as June.

Top government officials have said the agency, which has yet to be named and will be headed by Lou Jiwei, a former vice finance minister, will be up and running by the end of the year.

MOVING FAST

Underscoring just how fast China's Communist rulers can move when they put their mind to it, Schwarzman said the investment was concluded within three weeks of Beijing -- not Blackstone -- suggesting the deal.

"We did not propose that they buy a large share in our IPO. It was their idea," he said. "I doubt that there is any government in the world that could have done it more efficiently or more professionally."

Schwarzman said the stake was likely to be the start of a trend as the state investment company buys into companies around the world, part of a wider strategy to spur outflows of capital as a way of trimming China's huge balance-of-payments surplus.

For Blackstone, the deal could help it make its mark in the world's fourth-largest economy, where it has yet to make a single investment.

Rival private equity firms such as Carlyle Group CYL.UL and Bear Stearns Cos. BSC.N have invested heavily in China despite regulatory hurdles and a resistance to ceding ownership to foreigners.

Industry players widely expect Blackstone to pour billions of dollars into the Chinese market over time as it plays catch-up.