U.S. private equity firms are discovering that capital markets in China are more like the U.S. capital markets of the 1970s than those to which they are accustomed today. In the U.S, acquiring majority stakes in companies of all sizes has been limited only by one’s imagination—and the willingness of capital markets to provide financial lubricant in the form of cheap debt financing.

Until the recent credit tightening brought on by the sub-prime mortgage crisis, lots of cheap credit with little in the way of restrictions has given private equity firms a virtual blank check to hunt for corporate elephants. Despite the temporary lull in lending activity, it is likely that those days will return once the current backlog of deals clears.

China is a completely different story, however. Carlyle, a Washington D.C.-based private equity firm with plenty of political clout provided by an army of former administration officials, tried to buy an 80 percent plus stake in Xugang, one of China’s major construction equipment companies, only to find its bid rejected by Beijing. Over the past several years, China’s central government has become increasingly concerned that too many of its leading companies are coming under the control of foreign investors and firms. Acquiring majority ownership of a company of any reasonable size in China is very difficult as a result, and it may already be too late to have any hope of doing so in the future. The last time I checked, Beijing has not yet approved even a minority investment in Xugang by Carlyle.

No doubt learning from Carlyle’s experience, other large private equity firms are setting their sights lower and appear content to take minority positions in Chinese companies. In September, Blackstone announced that it would invest up to $600 million for a 20 percent stake in China National Bluestar Corp., a specialty chemical subsidiary of China National Chemical Corp., a leading international diversified chemical company.  This represents Blackstone’s first ever investment in China.

The Bluestar investment comes just months after China’s new state agency decided to invest $3.0 billion for just under 10 percent of Blackstone’s newly listed shares. The investment by China is one of the first of what is expected to be more financially oriented investments as China seeks to increase returns on its foreign currency reserves. At the time, many observers predicted that Blackstone’s investment program in China would be helped by its new relationship with China.

In another first, KKR announced that it would acquire a minority interest in Tianrui Group Cement Co., a Chinese cement maker for $115 million.

Beyond the fact that they represent minority stakes, the investments by Blackstone and KKR are very different than those typically made by these firms in the United States and Europe, reflecting their strong desire to find some way to invest in the China market. First off, a few board seats may come with a minority interest, but not the management control which both Blackstone and KKR would insist upon in the United States. Secondly, the investments are unleveraged and are being made with all equity. In the United States, a company’s shares are purchased with a relatively small amount of equity plus a large amount of debt that is based solely on the borrowing power of the company itself. In the United States, buying a company is like buying a house with some savings and a mortgage. In China, it is like buying an apartment with all savings and no mortgage.

The fact of the matter is that, unlike the U.S. capital markets with its diversity of financial instruments, China’s capital markets are undeveloped and consist primarily of short term working capital loans from Chinese banks. That is why KKR had to call upon JP Morgan and the International Finance Corp., two foreign based financial institutions, to provide an additional $335 million of USD and RMB long term financing to Tianrui to help finance its growth and expansion needs.

With the continued growth of the China market and the strong market positions which Bluestar and Tianrui undoubtedly have, these investments are likely to do just fine. The point is that both Blackstone and KKR have decided to depart from well honed investment strategies developed in their home markets to adapt to actual conditions on the ground in China. In the U.S, they do leveraged buyouts where they have management control. In China, they are providing growth equity to industrial companies where they don’t—two very different investment strategies.