Chinese backing for Blackstone IPO shows new order in markets

AWILLIS

Globe and Mail Blog Post

Published Tuesday, May 22, 2007 

Pete Peterson CFR/Blackstone/TC

"The Boys", The Trilateral Commission...Peterson bottom left

Public markets are becoming the minor leagues, stocked with players that can't make it into the big show that is private equity.

Think about what happened this weekend: China gave private equity an unqualified endorsement by taking a 9.9-per-cent stake in the planed public offering of Blackstone, one of the world's largest and most sophisticated private equity funds. How badly did the communist government want into this deal? Well, Beijing was willing to forgo voting rights on its stock in order to pre-empt political concerns.

With this move, the Chinese government is signalling that $1.2-trillion in foreign reserves are moving off the sidelines. That huge pile of cash won't all be invested in treasuries any more. It's going to be deployed on deals.

The evolution that played out with the Ontario teachers pension money in the 1990s is now going to play out with the world's largest pool of capital. And we all know where the teachers' portfolio gets its performance juice.

Consider now what will happen as Blackstone and the rest of the private equity fund begin to deploy their money.

The vast majority of CEOs and boards consider private equity to be a more attractive business structure. They can make more money, take a longer-term view, and be free of many regulatory headaches. The single biggest remaining appeal to public markets was the greater access to capital. That advantage disappears if private equity is home to more cash.

With China as a backer, every public company is a potential target for Blackstone. The only limits on the private equity fund managers are their own good-sense and discipline. On that front, it is a tad alarming that Blackstone co-founder Pete Peterson, who is 80, will use the IPO as an occasion to step down from the firm.

Assume for a moment that the remaining Blackstone's principals aren't complete idiots, and can make decent returns in coming years, even in an over-heated market. That experience will attract more Chinese money to the sector, just as it has pulled in recycled Middle Eastern petro-dollars and the savings of tech billionaires such as Bill Gates.

< notice Canada's involvement

These investors will end up backing companies with the best prospects. Public investors will be left to invest in companies that didn't make the grade with private equity.

For those just catching up on the news, Blackstone revealed this morning that it is bumping up its IPO from a planned $4-billion to $7.8-billion after receiving a $3-billion investment from China. This values the 22-year-old asset manager at $33.6-billion, which would make it larger than all but a handful of Canadian companies.

After the IPO, the public will own 10 per cent of Blackstone and a newly formed foreign exchange arm of the Chinese government will hold 9.9 per cent. Shares in the offering will be priced at between $29 and $31. Blackstone principals, including Mr. Peterson and co-founder Stephen Schwarzman, will take out up to $4.47-billion after the stake is sold.