Funds News

China's Blackstone deal just hint of things to come

NEW YORK (Reuters) - China’s symbolically powerful move to take a $3 billion stake in prominent U.S. private equity firm, Blackstone Group LP, has China watchers wondering which American companies are next on Beijing’s shopping list.

Is it too far-fetched to think stakes in companies as diverse as General Electric CoGE.N, Google IncGOOG.O or Goldman Sachs Group GS.N could be of interest to China?

After all those three alone would give the Chinese access to infrastructure, technology and investment banking growth and prowess.

Blackstone co-founder Stephen Schwarzman is among those who expects to see the Chinese to put large amounts of money into liquid securities.

“Blackstone is the first, but over time I would suspect there would be others,” he said in a phone interview.

“To the extent that the state investment company stays below the 10 percent threshold for governmental review...and invests in securities that are liquid, which this security eventually will be, that’s a very easy way for the state investment company to put large amounts of money to work with minimum to no controversy,” Schwarzman said.

Others see Beijing targeting brand names.

“They want to have good brands,” said William Overholt, director of the RAND Corp’s Center for Asia Pacific Policy.

He pointed to the 2005 deal where Chinese computer company Lenovo Group Ltd. bought the PC arm of International Business Machines for $1.25 billion.

“IBM (Lenovo) is the model of what they would like,” Overholt said, adding that China wants the distribution network, stores and brands that come with U.S. companies.

Still, he said he doubts China is quite ready to target the biggest U.S. brands such as Google.

In the deal, which was announced on Sunday, China's state investment company will take a $3 billion stake in Blackstone Group LP BG.UL, ahead of the firm going public.

It is a visible sign of the growing investment muscle that China can wield. China said in March it was creating an investment vehicle to diversify part of its $1.2 trillion in foreign reserves.

The new state agency could invest up to $200 billion from its reserves, state media reports have said, giving China the wherewithal to take on sizable stakes. Its Blackstone interest will be just under 10 percent.

China will learn how to structure and value private equity deals, as well as gaining a network of well connected people, said James Oberweis, president of Oberweis Asset Management Inc., who oversees an $800 million China fund.

“The Blackstone deal is as much about education on how to invest as it is about the actual investment itself,” Oberweis said. “From the perspective of Blackstone, what better way to increase your penetration into the fastest-growing, major economy in the world than to have that government invested in you?”

The Blackstone deal is one of the most visible signs of China’s growing clout. In 2005, Chinese offshore oil developer CNOOC Ltd. was forced to drop an $18.5 billion takeover bid for Unocal Corp., due largely to stiff U.S. political opposition.

But China has invested almost as much in other, smaller energy deals. Several Chinese companies have invested more than $15 billion in various energy companies and projects around the world since 2002, according to data compiled by Reuters.

As for its investment style, China will take various tacks, investing some of its money aggressively, some more carefully and part of it hedged against currency swings, said Jeanne Mockard, a managing director at Putnam Investments.

“You’d want a lot of it to be very liquid, some of it you would be willing to tie up,” Mockard said.

Because of China’s demand for raw materials, the new state investment agency will likely invest a good deal in commodities, which will help portfolio performance, she said.

China will look to learn about technology, as well as gain a good return on their money, she said. Like good investors, China will not trumpet its plans, if past actions are a sign, such as its creation of a strategic oil reserve, she said.

“They wouldn’t tell us how much they needed, what kind of storage they were going to have, how far along they were in buying it. None of that was ever available,” Mockard said.

Others concurred, and some say that the quieter approach would avoid political objections from Washington as well.

“Obviously they will not let anyone know where they will deploy their capital. However, I would not be surprised if they move into energy-related ventures,” said Chen Zhao, managing editor of BCA Research, via his Blackberry.