China to invest $3 billion in Blackstone

NEW YORK —  China has agreed to acquire a $3-billion stake in U.S. private equity firm Blackstone Group in a deal that marks that country’s long-anticipated move to expand how it invests its massive foreign exchange reserves.

The transaction calls for China’s upstart state investment company to buy nonvoting shares in the buyout firm, concurrent with Blackstone’s highly anticipated initial public offering of its management division, which is expected to raise as much as $4 billion.

The IPO was announced in March, though no date has been set for the company’s debut on the New York Stock Exchange.

China’s stake will mark the first time that the country’s government has sunk cash into a foreign private equity firm, which makes its money by acquiring ailing companies, turning them around and then selling them at a profit.

The Chinese government had been set to shift some of its foreign exchange reserves of more than $1 trillion into other world currencies because of the sluggishness of the dollar.

“We hope this is an important first step in broadening the capital flows between China and the U.S.,” Blackstone’s chairman, Stephen Schwarzman, said in a statement.

Under the terms of the agreement, the Chinese investment company will own no more than a 10% interest in New York-based Blackstone.

It also agreed to hold its investment for four years, and after that the Chinese company can divest only $1 billion a year, a Blackstone spokesman said. The transaction also restricts China from investing in competing private equity firms for a year.

The actual investment will not become solidified until Blackstone completes the IPO of its management side, which does not include any direct stake in the companies held by the private equity firm.

Blackstone, which has racked up about $400 billion in deals, operates a $15.6-billion fund, and its holdings include Madame Tussauds wax museums and real estate company Equity Office Properties Trust.

China has been seeking alternative places to invest its large reserves. Most have been held in U.S. Treasury bonds and other government debt, but officials have said they planned to put a portion in investments with higher returns.