Aug. 17 (Bloomberg) -- Blackstone Group LP’s joint venture with Shanghai’s government may be a first step in China’s effort to build its own private equity industry as the government seeks to foster corporate governance and strengthen capital markets.
Blackstone, the world’s biggest private equity firm, will set up a 5 billion yuan ($732 million) fund, marking the first partnership between a global buyout firm and the Chinese government. The Blackstone Zhonghua Development Investment Fund will be created with the newly formed government of Pudong New Area, Blackstone said in a statement Aug. 14.
“The long-term goal is Chinese private equity,” said Adam Segal, a senior fellow of China studies at the Council on Foreign Relations. “The Chinese don’t want their industry to be dominated by Blackstone and Carlyle.”
The venture is part of China’s plans to establish itself as a major player in the global economy, said Doug Guthrie, a professor of management at New York University’s Stern School of Business. During the 1980s, China was aiming to be the world’s biggest manufacturer. In the 1990s, the country was seeking partnerships with multinational companies, including financial firms. Now they want to develop their capital markets, he said.
“This has nothing to do with needing capital and everything to do with gaining the institutional know-how to do it on their own,” Guthrie said.
Targeting Shanghai
The fund will target investments in Shanghai and neighboring areas. China and Blackstone didn’t disclose the structure of the fund. Blackstone spokesman Peter Rose declined to comment beyond the statement.
Blackstone will be the first global private-equity firm to secure investment from a tier-one city government in China.
The agreement signifies China’s endorsement of private equity to bolster corporate governance and profit, said Vincent Chan, co-founder of China-focused fund Spring Capital Asia Ltd. TPG, Carlyle Group and KKR & Co. haven’t established domestic funds.
“The Blackstone deal represents China’s willingness to use private equity to shake up the economy,” Chan said. “China’s future economy will be driven by its private enterprises.” Many first-time chief executive officers “will need help on matters from boosting corporate governance to acquisitions.”
Playing Catch-Up
Shanghai, home to the nation’s largest stock exchange, is playing catch-up with Tianjin, Beijing and Hong Kong to become a private-equity hub by proposing tax breaks to attract buyout firms.
The northern city of Tianjin became the first to allow buyout firms to set up in 2006. The Bohai Industrial Investment Fund Management Co., whose shareholders include Bank of China Group Investment Ltd., China Life Insurance Co. and China’s Social Security Fund, was the first domestic yuan-denominated private-equity fund set up in the nation.
Fang Fenglei, a Chinese partner at Goldman Sachs Group Inc., also is planning to raise a domestic private-equity fund for his Beijing-based Hopu Investment Management Co., after raising $2.5 billion from overseas investors.
Shanghai imposes tax rates of up to 35 percent on private- equity and venture-capital firms under limited partnership structures, and charges 20 percent on capital gains earned by non-executive partners, according to rules announced in August last year. In Hong Kong, capital gains are exempt from taxation and the corporate tax rate was cut to 16.5 percent.
