China invests $500m in Blackstone fund

China’s currency-reserves manager has committed $500 million to a real-estate private-equity fund managed by Blackstone Group LP, according to people familiar with the matter, as China seeks to diversify its mammoth foreign-exchange holdings into higher-yielding assets.

The State Administration of Foreign Exchange, an arm of China’s central bank that oversees the country’s $3.2 trillion in foreign-exchange reserves, has been increasingly looking for investments in private equity as a way to enhance returns on the reserves. China boasts the world’s largest currency reserves, much of which have been parked in ultra-low-yielding assets such as US government bonds.

SAFE’s plan is to allocate about 5 percent of the reserves for alternative asset classes such as private equity, one of the people with direct knowledge of the matter said. government bonds, cash and other liquid assets still make up for the bulk of the reserves.

But SAFE’s initial foray into private equity turned out to be an embarrassing failure for China. That involved SAFE’s $2.5 billion investment in 2008 in a fund run by US private-equity firm TPG. SAFE suffered losses after the fund’s subsequent investment in Washington Mutual, the largest US savings and loan firm at the time, was wiped out after the lender’s closure by the US government.

It was unclear how large SAFE’s loss was. But that black eye caused the reserve manager, whose duty is to preserve and increase the value of the reserves, to move “ultra cautiously” in its future private-equity endeavors, one of the people said.

Blackstone runs the largest property private-equity business in the world, based on more than $48 billion in real-estate assets under management. The firm has raised more than $12 billion for its latest real-estate fund, the one SAFE has agreed to invest in, making it on track to become the largest fund of this type ever raised.

Stephen A. Schwarzman, Blackstone’s chair and chief executive, said in a call to investors last week that he is “extremely confident” the fund will reach $13.3 billion at the final close in the next few months.

“This gives us by far the largest pool of dry powder capital in the industry at a time when we are seeing highly attractive investment opportunities due to the level of distress and the need to deleverage around the globe,” he said.

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Category: China