Like a rock

Times are certainly challenging for private equity firms. Deals have been hampered due to the ongoing financial turmoil, but private equity giant Blackstone is trying to find new opportunities in the Chinese market.

Hong Kong-based VXL Capital recently announced that it had finished the deal with Blackstone, which acquired 95 percent stake in the Changshou Commercial Plaza office building in Shanghai from VXL at 536.7 million yuan.

Formerly the US-based firm had said it would pay 625.5 million yuan for a 90 percent stake in the Plaza.

"The global financial crisis weighs on China's real estate market, pegging down the prices," says Zhao Xiaobo, an analyst at Beijing-based Zero2IPO, a research firm tracking VC activities.

Blackstone HK's chairman Anthony K. Leung says Blackstone will keep an eye on real estate property in China because he believes the industry will continue to be brisk in the long term due to China's huge population and the acceleration of urbanization.

Blackstone Group's senior managing director Garrett M Moran tells China Business Weekly that China is the most important market in the future for Blackstone.

"We have big business in China and we will be involved on different levels," Moran says.

Last month, Blackstone completed the acquisition of a 20 percent stake in the State-owned China National Bluestar Group Corp, which is a subsidiary of the country's leading chemicals manufacturer China National Chemical Corp.

"For Blackstone, the financial crisis is not a threat because we do not have balance with a lot of liability on it, we are not really affected," says Moran.

But he also admitted that the financial crisis has made banks "become much more conservative", which has resulted in the reduction of "Blackstone's ability to do individual transactions".

"But at the same time, the prices of companies are going down. So we are still able to generate good returns because low asset prices reflect leverage and still generate very attractive returns," he adds.

Over the last 25 years, financial downturns have seen PE firms "make the best investment as the prices go down. PE companies are able to buy things at a low price and benefit from cyclical recovery earnings," says Moran.

"So we expect a few years later will present us with the best opportunities to return high benefits."

The interview occurred shortly before the giant publicly traded buyout firm reported a $502.5 million loss for its third quarter after it was forced to mark down the value of its holdings across nearly all its businesses. Stephen Schwarzman, Blackstone Chairman and Chief Executive Officer said in the report, " we believe that the current market dislocations will alter the competitive landscape, position our firm to enhance our market position and enhance long term unitholder value."

It's the great irony of the PE industry, observers say, that the best times to invest are when investors are most strapped for cash.

Private equity firms usually borrow most of the money they need to buy a company and then resell it for a bigger profit after restructuring the assets.

Blackstone used to have large commitments from big limited partners, such as state retirement systems when the economy was good, large-scale buyouts were abundant and distributions were plentiful, according to UK-based Private Equity News.

But times have changed. Larger transactions have been reduced because of the weak economy and uncertain stock market shrinks the size of limited partners' investment portfolios, resulting in less capital available for PE allocations.

The New York Times reported that the United States' largest public pension fund, the California Public Employees' Retirement System, is asking private-equity firms to ease off on requests for additional capital it had previously committed to deliver.

The buyout deals have also been hampered due to frozen credits. According to a recent report released by the Beijing-based research house ChinaVenture, private equity investment in China dropped to $2.117 billion in the third quarter of this year, a decrease of 17.1 percent from the previous quarter.

"Blackstone is taking a more cautious approach in China in large-scale transaction as fund-raising become difficult," says Fu Shan, chief representative of Blackstone Beijing Representative Office. "But China still has the most investment opportunities and Blackstone will continue to pay more attention to the Chinese market."

(China Daily 11/17/2008 page6)