Private Equity Investing: Whose Next

Last month China agreed to buy a stake in Blackstone Group, one of the leading private equity firms in the United States. The question now is which governments will be the next to partner up with a major private equity firm?

Oil producing nations are believed to be the most likely candidates. The rise in the oil prices has lead to huge trade surpluses and lots of cash for Middle East and Central Asian countries. The cumulative surplus in trade and investments for oil-producing countries grew to 20% of GDP last year, up from 5.4% in 2002. Oil states don’t publicize much about their investments so tracking where their funds is difficult. So far the oil nations have invested most of their oil riches into low-risk assets like U.S. Treasury bonds. But some governments have been putting money into more aggressive, return-oriented investment funds. Not only government, but retail investors around the world are investing in the world of private equity.

UAE has formed private equity firms which have been involved in major buyout deals in the U.S. Taking a stake in the private equity firm is different from merely investing in its funds. China’s deal with Blackstone gives them 9.9% stake in Blackstone’s management company. This deal opens the door for oil producing nations to also experiment with their investments to seek high returns. This is a scary feeling all together for the U.S. government and the Federal Reserve will be watching very closely for any such deals.

As of now this is all speculative. Oil producing nations especially UAE is hesistant to invest in U.S. after the Dubai Ports World’s debacle. Dubai Ports World’s effort to manage U.S. ports was met with a strong backlash from U.S. politicians which eventually lead them to sell off their investments. Dubai Ports World scared a lot of people in the Middle East and made them wary of large investments in the U.S. China found an intermediate solution to this politician backslash by limiting their ownership to less than 10% and taking non-voting rights. This solution can work for other nations in the future.

It is going to be interesting to see what other nations are going to do about investing in U.S. private equity.