The central government's US$3 billion purchase of a 9.7 per cent non-voting stake in Blackstone Group as part of the firm's forthcoming initial public offering has made headlines around the globe.
Much has been said about how Beijing defied its conservative stereotype and approved the deal within weeks even though the State Investment Co, which is to buy the stake, is not expected to be officially established until the end of this year.
Much has also been said about the political message carried by the deal, which was announced a day before Vice-Premier Wu Yi left for Washington for this week's high-level Sino-US talks.
Yet, the fundamental question has not been asked. Is this a profitable deal? If the mainland leaders are true to their word that the investment agency will operate as a commercial entity, this will be the ultimate test.
Before answering this question, it's necessary to understand the animal that Beijing is buying into.
Blackstone is the world's largest private equity fund. It manages US$88.4 billion in assets. Riding on the ample supply of liquidity that is spurring the boom in buyouts and the bull market, the funds it manages have recorded 20 per cent to 30 per cent annual returns since the firm's inception. It doubled profits in the first quarter. Blackstone's offering, however, has intensified debate on whether the private equity industry is reaching its peak.
In fact, more than 50 per cent of the money from the offering will go to the firm's owners, including American International Group, and its two founders, Stephen Schwarzman and Pete Peterson.
It is also doubted whether Blackstone's success, which has a lot to do with the flexibility that only private entities enjoy, can continue after it goes public, putting itself under shareholders' scrutiny.
In response, the company said in its preliminary prospectus: 'As a public company, we do not intend to permit the short-term perspective of the public markets to change our own focus on the long term in making investment, operational and strategic decisions.'
Blackstone has woven these words into a structure that is very much different from most public companies. It will provide no earnings guideline, emphasising the importance of long-term strategy. Its public owners will have no right to elect general partners or directors. The right to remove them is also curtailed.
In short, 'trust me and you will get rich'. How well the market will receive this untested and opaque structure remains to be seen.
Its selling price doesn't look very demanding on the surface. The midpoint of the IPO range values Blackstone at about 14 times 2006 earnings. This compares with a multiple of 10 for Goldman Sachs Group and 20 times for smaller rival Fortress Investment Group.
However, it isn't cheap if you take into account the fact that Blackstone's profit, which largely consists of asset-based management and performance fees, has already reflected the run in the capital market.
The question is how well has Beijing digested this market risk and the potential political repercussions that may follow.
It is not an invalid doubt, given what Jesse Wang, chairman of the mainland government agency that managed the Blackstone deal, said in an interview with The New York Times.
He emphasised the purchase as simply a way to raise returns, noting that it is common in Hong Kong for tycoons and large companies to take large stakes in a company before its share sale.
Apparently, Beijing is betting that the 'China touch' will command more premiums for Blackstone. To shine its touch further, Beijing has even allowed Blackstone to say in its preliminary prospectus that 'the State Investment Co has agreed to explore in good faith' potential arrangements of investing in its funds and vehicles.
Yet, a bet that can't be fully cashed out in seven years' time is a brave one. It is only hoped that mainland officials have not been blinded by the fortune made by international investment banks in the pre-IPO deals of three state-owned banks.
Is there any intangible benefit to mitigate the market risk? Yes and no.
Theoretically, the deal will tie Beijing into one of the deepest pools of investment expertise in the world. This expertise would be invaluable not only for China's state investment agency but also for its green private equity industry.
Blackstone declined to comment on this. However, there is no official mechanism of any expertise transfer, according to the preliminary prospectus. Given the suspicion that the state investment agency has already aroused in US, it is not difficult for Blackstone to advise against it.
Informal contacts are perhaps the only way that China can peep into Blackstone's expertise. How helpful that is remains doubtful.
Beijing will need more proof to show the world that its first investment outside the fixed income market is a clever move in the business sense.