Is China's investment in Blackstone a Bush payback to Schwarzman?

Posted May 20th 2007 4:40PM by Peter Cohan
Filed under: Deals, China, Private Equity, Rich in America, Politics, Blackstone Group L.P (BX)

Blackstone Group will sell 10% of itself [WSJ subscription required] to China's new investment arm prior to Blackstone's initial public offering (IPO). If there was ever an example of how capital is reducing the importance of national boundaries, this is it.

This Blackstone investment -- for a non-controlling stake -- is clearly a bargaining chip in the economically tense relationship between China and the U.S. We need China, since it's financing a big chunk of the $8.8 trillion U.S. federal debt -- it owns $350 billion worth of U.S. Treasury securities.

But China also accounts for a share of the politically sensitive U.S. trade deficit. And due to what Treasury Secretary Hank Paulson considers China's artificially low currency, this trade deficit is not going away. Somehow China, which is coming to the U.S. for trade talks, thinks that having its State Investment Company buy $3 billion worth of Blackstone Group at 95.5% of the IPO price will mollify its critics.

One thing for sure -- China's stake will help Blackstone avoid the problems that Carlyle Group encountered in its efforts to buy companies in China. I guess China would be better off if Blackstone owned the U.S. government. Then again, given that Steve Schwarzman raised $1.2 million last month for Republicans during a New York fund-raiser at his 34 room apartment featuring his Yale dorm mate -- George W. Bush -- maybe China's investment in Blackstone is Bush's payback for Schwarzman's fund-raising.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Tags: Blackstone, Blackstone Group, Carlyle Group, CarlyleGroup, China, federal debt, George W. Bush, Hank Paulson, IPO, Peter Cohan, State Investment Company, Steve Schwarzman, trade deficit, Treasury securities

Print this

Reader Comments (Page 1 of 1)

5-20-2007 @ 7:28PM

Michael Schneider said...

I don't know about the political connections but China's move to diversify from US treasuries and into equities could spark stocks once people start thinking about the huge influx that could come into stocks instead of worrying about the outflow from bonds.

Dr. Michael Schneider is Webmaster at http://www.Barrelomoney.com and http://www.Barreloworld.com. There are many items on China in the China Briefing section at http://www.Barreloworld.com.

10-05-2007 @ 11:38PM

Mark Rosner said...

I analyzed this news as well and went a bit more in-depth in terms of the capital inflows and outflows issue with dollars versus yuan. you can find it at

http://www.capitalai.com/blog/2007/05/20/china-blackstone-political-intrigue/

5-21-2007 @ 5:47AM

CrossProfit said...

Conspiracy theories are fairly easy to cook up. The litmus test with all theories is - would the outcome have been different without the conspiracy?

I'm not saying that it could not possibly be true; I am saying that the likelihood is very low. Not that CrossProfit hasn't posted a few wacky conspiracy theories of its own volition in the recent past; for example see http://www.crossprofit.com/article.asp?id=57 however this one seems to be further removed from reality than most.

Blackstone would like to insure the success of its IPO. By pre-selling 10% to an 'institutional' investor at a reasonable discount, this not only reduces the float but also acts as a floor price for the issue. Naturally the purchaser has to have the necessary credentials.

As for the theory; first, Steve Schwarzman would have held the fund raiser regardless of any impending Blackstone business activity of any sort. Second, this can not be a payback as George W. doesn't control China. In fact no one can tell China what to do. Third, the going 'payback' rate is 2% which is $60 million. Bush isn't that dumb, he knows the difference between $1.2 million and $60 million!

Now if you really want to get on board the Bush bashing bandwagon, list all the highly sensitive security related entities that are owned by Blackstone. Notice how all are silent concerning this facet of the sale.

America is being sold piecemeal to foreigners to finance the ever growing twin deficits. Yes, it is a shame that Blackstone doesn't own the US government. We could have unloaded 10% of our accumulated debt in one swoop!

Disclosure: This comment was written by a CrossProfit analyst. This is a personal view and may not reflect the opinion of CrossProfit.com.
http://www.crossprofit.com

As an aside; the twin deficits were not created by President Bush. They have grown out of control under his leadership and the argument is whether or not the President could have done a better job in this respect. The other question is whether or not any Democrat will do better! I would like to see the game plan not listen to more rhetoric.