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The collapsed Blackstone deal shows that “everything is political” in China

From his office in New York last Thursday at 8:30 am, Stephen Schwartzmann, global chief executive officer of $ 648 billion private equity giant Blackstone, is a fan chair of Beijing’s chief financial regulator. You have logged in to a video call with Shin Hai.

The timing of the “China-US Financial Roundtable,” an annual meeting among a handful of Wall Street veterans selected to talk to a small group of top Chinese officials, was awkward.

The world isn’t just obsessed with the looming risks of real estate developer defaults EvergrandeBut less than a week later, Blackstone’s biggest bet on China’s real estate market, which is part of the driving force behind Asia’s growth plan, was thwarted by Beijing regulators without warning.

Buyout Group Forced to Stop Trading $ 3 Billion Buy Real Estate Developer Soho ChinaThe skyscrapers line the skyscrapers of Shanghai and Beijing, accused of the founder’s millionaire husband and wife Ban Xin and Zhang Xin attempting to “escape” to the United States by cashing their business. After that.

“Steve is a very diplomatic man and has been very successful in China by doing the right thing and saying,” one person explained on the phone.

The same person said it was a mistake to “hit the table” and that Schwartzman had not mentioned Soho China when he gave another briefing over the phone. Blackstone denied that “regular meetings” had nothing to do with the transaction.

But the collapsed deal remains an elephant in the room, and the latest episode leaving the private capital industry is Trillions of dollars Globally reassess how to bet on the world’s second largest economy.

Blackstone has canceled Soho China’s bid in an attempt to flee to the United States by Beijing trying to cash its owners Zhang Xin and Ban Xinling © Anthony Kwan / Bloomberg

It also emphasizes that even highly connected ones can have a hard time navigating China’s political whims.

“We were one of the most influential US deal makers in China and couldn’t get a seemingly conscientious real estate acquisition approval,” said Schwartzmann, the chief investment of Hong Kong’s private equity firm Kaiyuan Capital. The person in charge, Block Silvers, said.

Blackstone isn’t the only one to face obstacles.The foreign listing of a Chinese company, the main investor in Wall Street, derailed following a disastrous initial public offering of the Ride Hailing app. Didi, The dollar bond market Evergrande..

“Now, foreign private equity funds are likely to be looking more carefully at China,” Silvers said.

The collapse of transactions has had a “shrinking effect” on rivals planning large-scale cross-border transactions of assets that are considered “strategic” for the Chinese economy, addressing some of China’s largest transactions. But a senior M & A lawyer in Hong Kong said. Some people are trying to guess which industry the government will look at next and steer it clearly.

The National Immigration Administration’s decision to suspend the acquisition of Blackstone has sparked widespread speculation about the motives of Chinese officials.

A Wall Street bank executive who advised on the deal said no one close to it was officially informed. There was nothing to point out the monopoly risk. “

“We know that individual big names are being targeted. The government says you’re sold out, live in New York, and move your wealth abroad. There’s no chance.”

Beijing Soho Shopping Center
Beijing’s Soho Shopping Center, founded by billionaire couple Ban Xin and Zhang Xin, icon of China’s real estate industry © Sheldon Cooper / SOPA Images / Getty

The deal with Blackstone has brought a serious plunge to the couple behind Soho China, which owns more than 60% of the stake through Zhang-controlled companies, and is a corporate tycoon as Beijing distributes their wealth. I ordered.

The case, said the CEO of Hong Kong’s $ 10 billion private equity firm, said the case “means that many are” deeply concerned about the regulatory approval process. ” For those who are trying to buy something practical in China with a non-candid seller, the idea is not to waste your time. “

According to bankers, some Chinese entrepreneurs have already been freed from widespread regulatory crackdowns and restrictions on foreign listings and are beginning to rethink their listing or sales plans.

The head of M & A at a major bank in Hong Kong said: of. “

The failed Blackstone deal follows a broader scrutiny of foreign investment as it targets what the Chinese authorities recognize as a monopoly business practice.

Crackdowns on technology, education, games, and cosmetic surgery under President Xi Jinping’s “common prosperity” movement, as well as restrictions on listing abroad, have worried foreign investors in a hurry to sell off Chinese stocks. I did.

In August, owners of a Chinese tutoring company suffered billions of dollars in losses when regulators effectively outlawed profitable sectors. A company’s stock has lost 90 percent of its value while private backers are trying to regain some capital.

“Is China a scary place to invest? Yes,” said a senior deal maker at a major global private equity firm. “Anyone who allocates money in China is asking, can you buy one that has a government touchpoint?”

“It’s bad because the government is willing to get involved if it’s related to technology, consumers, or data. For now, we’re doing much less and China is me It will be a smaller part of our portfolio. ”

Private equity groups have agreed to trade $ 26 billion worth of money in China since the beginning of this year, well above $ 10 billion in 2019 overall.

A vertical bar graph showing private equity transactions targeting China from 2016 to 2021 (year-to-date).The transaction amount is billions of dollars, the number of transactions is

According to Dealogic figures, a $ 11.3 billion worth of transaction involving a Chinese-based company has been agreed, but has not yet been completed. This includes the merger of the Canadian chain Tim Hortons’ Chinese operations with a US-listed Spac backed by private equity firm Ascend Capital Partners.

But as more regulatory measures are announced each month, foreign investors are watching more closely than ever for signs that Beijing is opposed to other sectors such as tutoring and online games.

A year-over-year growth bar chart (%) of M & A transaction value by target country in 2021 shows that China is being left behind by the global takeover boom.

In June, Hong Kong’s private equity firm Primavera Capital Group acquired Reckitt Benkeiser’s infant formula business, Mead Johnson, for $ 2.2 billion.

However, “the transaction was completed in a timely manner,” said the head of M & A at a European bank in Hong Kong. “Anyone who wants to buy or sell a company in the field needs to rethink. China is watching carefully what increases the cost of raising children.”

Real estate developers were already affected by tightening regulations before Soho China’s catastrophe, as Beijing vowed to end an increasingly affordable housing cycle from around 2017.

Nonetheless, global investors are increasing their bets on China’s commercial and rental real estate. Last year, Blackstone acquired a majority stake in a large logistics park in the Greater Bay area for $ 1.1 billion and purchased Westlink, an office and retail complex on the outskirts of Shanghai, for $ 1.25 billion.

A senior partner of another US-based private equity firm with offices in China said China was “too important to leave.”

The secret is to find a deal that is not politically sensitive.

“I think it’s okay if foreign capital doesn’t help or get in the way of the people of the country,” said another private equity maker, adding that “we’re not close to those who make a lot of money.” In a way that is considered to benefit “from people”.

Senior executives at Wall Street banks in Asia warned that investing in China always carries regulatory risk. “Regulators do not always interpret and apply the rules equally.”

“But everything that happened in the last six months will now tell ordinary investors that everything is political.”

The collapsed Blackstone deal shows that “everything is political” in China

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