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China and Blackstone, Perfect Bubble Buddies

The combination of two ridiculously overinflated bubbles marks a top in private equity.
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This post by Doug Kass first appeared at 8:04 a.m. on May 22 on TheStreet.com's Street Insight.

The word over the weekend was that China's government was making a $3 billion investment in Blackstone; both factions stand to win in this deal.

The Chinese get to invest in a devalued currency in exchange for roughly 8% of the U.S.' leading private-equity firm. With an IPO of Blackstone Group imminent, the Chinese will get an immediate markup -- probably 10% to 25% -- on their investment. These two factors -- acquiring assets of a depreciated currency and a likely ebullient initial response to the Blackstone IPO -- give the Chinese a reasonably good cushion on their investment.

Blackstone, meanwhile, gets another $3 billion of capital to play with and expand its enterprise. It also serves to juice the already excitable marketplace regarding the future of private-equity -- after all, if the Chinese invest, you've got to be there. (Of course, few investors today are old enough to remember the Japanese purchase of the tony La Costa resort at a terribly inflated price nearly 20 years ago!)

From my perch, I see something different. I see private equity's "smartest man in the room," Blackstone chairman Stephen Schwarzman, capitalizing on his company's ever-increasing stature and cachet by selling even more stock than will be sold on the initial public offering in the coming weeks ($4.75 billion).

Taking his cue from Sam Zell's sale of Equity Office Properties -- who seemed to

top the real estate market

-- Stephen Schwarzman is likely to top-tick the private-equity market in his sale of a $3 billion minority stake to the Chinese government and a $4.75 billion stake to individual and institutional investors.

(Isn't it ironic that the top in the REIT market was reached on the Blackstone purchase of

Equity Office Properties

?)

There is something wondrous and symmetrical of one bubble (China) making an investment in another bubble (private equity). Of course, there are numerous bubblicious precedents that went awry.

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For example, in 2000

JDS Uniphase

(JDSU)

, one of the standard bearers of the 1990s tech bubble, purchased

SDL

(another bubble) for $40 billion. The deal was delayed for regulatory reasons and was ultimately consummated for $17 billion (JDSU's shares were moving into free fall). Several years later JDSU took a $44.8 billion write-off of goodwill for all of the acquisition, and then some.

As I opined earlier, both sides win in this transaction. It is less clear, however, whether investors taking a plunge on what might be a peak in private-equity will be as lucky with their Blackstone investment.

At time of publication, Kass and/or his funds had no positions in stocks mentioned, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box."

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