Blackstone, Chairman Mao, And Musical Chairs

There are two problems with the game of musical chairs. The first is that someone is left without a seat after each turn. The other is that there is only one winner.

The communist Chinese government, decedents of Chairman Mao, has decided to put $3 billion into the huge US buy-out firm Blackstone. After the Blackstone IPO, the Chinese cannot hold more than 10% of the firm and will only have non-voting shares. But, they will get a slight discount on the price of their stock.

The investment is odd. The Chinese clearly have a lot of excess money, $1.2 trillion in foreign-exchange reserves. But, private equity is a strange place to put it. Blackstone and similar firms make most of their money by looking for discrepancies between the value that the public market puts on corporations and what they may be worth as private enterprises. Their work is based, in sum, on an assumption that shareholders in public companies do not understand the value of what they own.

The Chinese now enter a portion of the capitalist system that is based on the assumed superior intelligence and growing bankrolls of private equity interests. In doing so, one of the most closed economic systems is the world will profit from what is perhaps the most open investing system on the planet, a marriage of the best intellectual capital with the largest sums money.

As is true with all such systems over time, the last money in generally gets the worst deal, The earliest money in already has the best seats. Over time, a system like private equity becomes less efficient, due to a ever-increasing number of players and a shrinking pool of attractive takeover targets. The Chinese are making their investment at the tail end of the cycle. On the final day, there is only one winner that will have made money on all transactions–the firms, like Blackstone, that collect fees on every deal.

The Chinese have the last money in.

Douglas A. McIntyre