China to buy stake in Blackstone

In a startling development, a soon-to-be established state investment company of the People’s Republic of China will make a $3 billion investment in Blackstone as the alternative investment giant prepares to go public. Blackstone’s Schwarzman is calling the deal a ’paradigm shift in global capital flows’.

A state investment company “soon to be established” by the People’s Republic of China will make its very first investment in the form of a $3 billion (€2.3 billion) stake in New York-based The Blackstone Group.

The state investment company, which as yet does not have an official name, will draw on China’s foreign exchange reserves, according to a joint statement from the company and Blackstone.

China’s foreign exchange reserves are estimated to be valued at just over $1 trillion.

The deal gives China non-voting common units in Blackstone’s management company priced at 95.5 percent of Blackstone’s upcoming initial public offering. A mechanism in the investment will keep China’s ownership under 10 percent. The state investment company has agreed to hold its investment in Blackstone for “at least four years,” according to the statement.

“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 state investment company, in a statement.

Stephen Schwarzman, chairman and chief executive officer of Blackstone, said in a statement: “We are pleased to welcome the State Investment Company as an equity owner of our firm. We are proud to be part of such a significant transaction for both of our organizations.”

In an interview Sunday with the New York Times, Schwarzman called the deal an “historic change. It’s a paradigm shift in global capital flows.”

China’s new investment arm will “report directly to the State Council of the PRC” according to the statement.

Financial services company AIG already has a stake in Blackstone. Many large private equity firms have sold or are exploring selling stakes in their management companies, in part to allow founders to realisz some of the value of their franchises and in part to create capital for the retention of key professionals.

In a similar move to Blackstone’s, alternative investment group Fortress Investment Group sold a stake in itself to Nomura Holdings, the Japanese financial group, for more than $800 million a few months prior to its initial public offering.