Banking & Finance, Talking Point

Come buy with me

How Blackstone’s Schwarzman became China’s go-to man for M&A deals


Well plugged in: Blackstone boss Schwarzman shares a joke with Liu Yandong, China’s vice-premier

Backed by archaeological studies, Chinese historians claim that jiaozi, meaning “exchange paper”, are the world’s earliest bank notes. The printed money came into circulation about a thousand years ago in Kaifeng, a city in Henan province. According to a documentary on state television, the paper currency was a “conduit for Chinese financial wisdom” to pass along the ancient Silk Road. Other scholars have suggested the contrary: that jiaozi were indeed an innovation, but that they were introduced by Jewish merchants who had settled in Kaifeng, rather than by the Han Chinese.

The Jewish community thrived for several centuries in China before being assimilated almost entirely into local society. Several hundred Kaifeng residents can still trace their ancestry back to Jewish roots, however, and some of the ‘Kaifeng Jews’ have emigrated to Israel over the last 15 years.

Seven years after the first of those departures, Xi Jinping took over as Chinese president and proclaimed his determination to revive the ancient Silk Road via the Belt and Road Initiative.

That plan has seen a swathe of Chinese firms embark on ambitious overseas expansions. And where they’ve looked to buy foreign companies and real estate, it is coincidentally enough an influential Jewish dealmaker that has been taking their modern day jiaozi in exchange for assets. Step forward Blackstone Group’s chairman Stephen Schwarzman. Following a slew of sales by his private equity firm, Schwarzman has become the go-to man for Chinese buyers. But why him?

What is the latest asset Blackstone’s sold to the Chinese?

The New York-listed private equity fund announced last week that it had agreed to sell European logistics firm Logicor to China Investment Corp (CIC), China’s sovereign wealth fund, for €12.25 billion ($13.8 billion) including debt. The sale is the largest of its type in European real estate.

Logicor owns and operates a portfolio of more than 600 warehouses and distribution centres across 17 countries. Most are located along primary transport corridors and in close proximity to large European cities, and CIC’s investment is being hailed as a bet on growth in e-commerce and the distribution networks that support online sales – likewise by facilitating trade it can also be positioned within the Belt and Road theme.

Blackstone has built Logicor via 50 acquisitions since 2012 and seemed destined to IPO the London-based property firm. CIC then made its interest known. It wasn’t the only sovereign wealth fund keen on bidding, the Financial Times reports, with a unit of Government of Singapore Investment Corp (GIC) eventually losing out. GIC acquired P3, a European storage firm, for €2.4 billion last year and in 2014 it bought IndCor Properties, also created by Blackstone using the Logicor model, for $8.1 billion.

However, the past deals with the Singaporeans weren’t enough to trump Blackstone’s relationship with CIC, which – already strong – looks set to deepen further. CIC opened an office in New York last month to replace what had been its sole representative office overseas in Toronto. “The opening of the CIC offices abroad was a strategic decision and the fund plans to make more direct investments in the United States,” CIC’s president Tu Guangshao said during the branch’s opening ceremony.

Yet again Blackstone looks well placed to capitalise. Assets under management hit a record high of $356 billion last year and the world’s biggest private equity firm reported in April that first-quarter earnings had more than doubled after it sold the biggest assortment of assets in its 32-year history. Significantly, these included a number of headline deals with Chinese investors.

How strong are Blackstone’s links with China?

Blackstone has taken on a more influential role in Beijing since the Chinese began diversifying portions of their foreign exchange reserves away from low-yielding US government debt a decade ago.

CIC, the sovereign wealth fund, was set up as part of that asset reallocation process and its first commercial transaction was to invest in Blackstone itself.

In 2007, when China’s forex reserves stood at $1.2 trillion, China’s sovereign wealth fund paid $3 billion for a 10% stake in Blackstone, boosting the money manager’s valuation ahead of a New York listing. Blackstone’s founder Schwarzman described the deal as a “historic event that changes the paradigm in global capital flows”.

That paradigm didn’t look too promising initially, however, because CIC was soon staring at a 50% paper loss after Blackstone’s stock price flopped spectacularly during the global financial crisis.

CIC came under heavy fire from domestic critics for making a mess of its first overseas investment (in 2014 a vindicated Schwarzman told a conference in Beijing that CIC’s gross returns owning Blackstone’s shares had reached 35%).

CIC is now a longstanding investor in a number of Blackstone funds and it has also used the relationship to acquire assets from Blackstone’s books, not just Logicor but also Chiswick Park, an office development in London that it purchased from Blackstone for $1.3 billion in 2013.

It is also reported to be a prime contender in the bidding for an A$3.5 billion portfolio of shopping centres that Blackstone has put up for sale in Australia.

And Blackstone’s other Chinese VIPs?

In spite of the shaky start (occasioned by the disastrous initial performance of its stock after the 2007 IPO), Schwarzman has struck up healthy relationships with senior figures in Chinese business and politics.

For example, in 2007 Blackstone bought a 20% stake in China National Bluestar, a chemicals firm, for $600 million. The investment was relatively small but it brought together Schwarzman’s firm with Bluestar’s then chairman Ren Jianxin, who has been dubbed China’s “king of M&A” (Ren oversaw ChemChina’s $43 billion bid for Syngenta last year, after a slew of domestic acquisitions; see WiC313).

Blackstone also became an advisor on a number of megadeals by state-owned firms, including China Development Bank’s €2.2bn investment in Barclays in 2007. A year later the American firm would set up an office in Beijing and in 2009 it launched its first fund denominated entirely in renminbi, which resonated with the wider push to promote international usage of the Chinese currency.

M&A-mad insurer Anbang has proved to be another of Blackstone’s key counterparties in recent years, giddily snapping up assets.

In a parallel to Japan’s financial firms in their 1980s heyday, Anbang has been hungry for commercial property and Blackstone has had much to offer the insurer from its own portfolio.

Anbang made its first bold foray into global M&A in 2014 when the then little known firm acquired the iconic Waldorf Astoria hotel in New York for $2 billion from Blackstone-controlled Hilton Worldwide.

A few months later it bought the office portion of 717 Fifth Avenue from Blackstone for $415 million and the building is now the Chinese insurer’s New York headquarters. (Earlier this year speculation was rife that Anbang was closing in on a $4 billion deal to buy 666 Fifth Avenue from the Kushner family’s property firm, although it seems to have stepped away from the plan after Jared Kushner’s father-in-law Donald Trump became US president.)

And in May 2016 – just three months after Blackstone acquired Strategic Hotels and Resorts – the private equity giant flipped the portfolio of hotels to the insurer in a $6.5 billion sale. The deal was described as a consolation prize at the time, following Anbang’s failed $12 billion bid for Starwood Hotels (see WiC319).

How about Schwarzman’s personal connections?

Some of Anbang’s shareholders are believed to be powerfully-connected relatives of China’s former leaders. One of its board directors Chen Xiaolu is the son of Chen Yi, a legendary figure from the People’s Liberation Army, and its chairman Wu Xiaohui is the grandson-in-law of Deng Xiaoping. So Schwarzman has established a rapport with some of the most influential businesspeople in the country. The Blackstone billionaire helped Anbang to arrange a recruitment event at Harvard in 2015, for instance, during which Wu described him as a “good friend”. In another speech in New York Wu revealed that Schwarzman’s staff had offered help when his father was seeking medical treatment in the US.

Schwarzman’s dealings in China have also taken on a philanthropic focus. In 2013 he announced the $300 million Schwarzman Scholars programme. Modelled on the Rhodes scholarships at Oxford University, the endowment will fund study for foreign students at Beijing’s Tsinghua University, the alma mater of Xi Jinping and other senior leaders. “The motivating reason for me is to help create leaders from around the world who can learn about China and go back and explain China to their countries,” Schwarzman told Xinhua.

The Blackstone boss also admits that his affiliation with Tsinghua has been an important part of his firm’s success. In particular, he says that his position on the board of the university’s school of economics and business has served as “a feeder into the senior levels of the Chinese government”.

“It’s very much like Harvard in the 1960s with [President] Kennedy. And so I got to meet all these people at board meetings and so forth. It was a very easy introduction to China, and Chinese institutions have given us a lot of money to invest in private equity and alternative products,” he told Bloomberg Markets in an extensive interview this week.

Of course, rumours have been rife in recent weeks that Anbang’s political influence may be fading and the Financial Times reported on June 2 that its boss Wu Xiaohui has been barred from leaving China (Anbang says the speculation is unfounded).

In the meantime Schwarzman’s firm has continued to make sales to the Chinese insurer. Dutch media reported at the end of May that Anbang is buying an Amsterdam hotel from Blackstone for almost $400 million, while Reuters has suggested that longstanding talks to acquire Blackstone’s $2.3 billion property portfolio in Japan are ongoing.

How about the HNA Group?

The Hainan-based aviation conglomerate is among China’s most acquisitive firms and once again Blackstone has been the counterparty on many of its deals.

In June last year HNA bought a controlling stake in Tysan Holdings, a thinly-traded construction company in Hong Kong, from Blackstone for about $340 million. HNA has since used it as its property flagship in the former British colony, snapping up four sizable residential projects for more than $3.5 billion.

A few months later HNA acquired a 25% stake in Hilton Worldwide from Blackstone for $6.5 billion. Around the same time Blackstone agreed to sell the China-based IT outsourcing firm Pactera to a unit of HNA’s for $675 million.

In February, when the Jewish Museum of Manhattan held its annual ball, HNA’s co-founder Wang Jian was a major honoree. Schwarzman presented him with a crystal bowl decorated with two roosters, while Wang called Schwarzman “a god of fortune” and “the key to opening up the chest of treasures”.

Through a translator Wang added that he was “looking forward to [making] more friends” like the Blackstone boss, and later announced that he was pledging 10,000 air tickets to the museum.

“How the paths of a Jewish museum and a Chinese company converged is in some ways a familiar tale: the mix of business and culture is a pillar of philanthropic fundraising,” Bloomberg noted at the same event, which the newswire described as the “coming-out party” for HNA in Manhattan.

“The party was a tableau of financiers, dealmakers and lobbyists mingling and huddling, sipping wine and breaking bread,” it reported.

What other deals is Blackstone doing in China?

In March it agreed to sell its remaining 21% stake in SeaWorld Entertainment, a leading theme park operator, to China’s Zhonghong Zhuoye Group for about $449 million. Last year Blackstone sealed the $1.9 billion sale of its commercial property holdings in China to Vanke, at a time when the Shenzhen-based developer was entrenched in a hostile takeover battle.

Simply aggregating the deals mentioned in this article means that Blackstone has been involved in the sale of about $32 billion of assets to Chinese buyers – and that’s just over the last two years. With data from Dealogic, the Wall Street Journal reckons that Blackstone or its portfolio funds did at least $16 billion of business with Chinese buyers in property assets alone between 2014 and 2016. Indeed, the newspaper classes Blackstone as one of the biggest beneficiaries of “China’s global shopping spree”.

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