Money managers on Wall Street and in Silicon Valley are learning once again that investing in China can be fraught.
(Bloomberg) — Money managers on Wall Street and in Silicon Valley are learning once again that investing in China can be fraught.
The Biden administration is close to completing an executive order that would curb US investment in China’s tech industry, foreshadowing a further slowdown in bets on the world’s second-largest economy.
Uncertainty over policy related to China has already contributed to a decrease of capital flowing into the Asian country. In recent years, money-losing buyouts and Beijing’s intervention into deals have diminished firms’ appetite to take majority stakes in Chinese companies. They were the targets of just 0.29% worth of deals US private equity investors were part of in 2022, down from 1.19% a decade ago, according to PitchBook data.
Curbing China’s reach over semiconductors and global supply chains has galvanized Democrats and Republicans and will be a key campaign priority for 2024. Against that backdrop, the Biden administration’s executive order would create a system for monitoring and potentially blocking US investments in China.
It would aim to curb investments into certain sectors there, such as advanced semiconductors, some types of artificial intelligence, decryption capabilities and industries bolstering Beijing’s military and economic might, said people familiar with the matter. Lawmakers have been developing similar legislation in recent years, though nothing has passed yet.
The potential new measure has been closely watched by private equity and hedge fund managers as it took shape in recent months. It could require US companies to provide more reporting on their dealings with China and give the government new authority to challenge deals on national security grounds.
‘Extra Step’
In anticipation of the order, some private equity and venture firms are calling in advisers to conduct more formal evaluations of their Chinese investments through the lens of national security, said H.K. Park, managing director of Crumpton Global and a former Pentagon official who performs these reviews.
“Some investors have taken the extra step of divesting from problematic Chinese companies now rather than divesting at a discount after the executive order is released,” he said.
President Joe Biden is prepared to request funding for it later this week in his fiscal 2024 budget, according to reports to Congress obtained by Bloomberg. US Assistant Treasury Secretary Paul Rosen and General Counsel Neil MacBride have told money managers and business executives in recent weeks that an order is coming by the second quarter, some of the people said.
Treasury Department officials declined to comment.
Earlier: Biden Weighing Actions to Curb US Investment in China Tech
US officials drafting the order have signaled it will cover new investments and not past wagers, said people familiar with their thinking. It will also go through a months-long notice and comment period, meaning any curbs won’t take effect immediately.
The shift toward more restrictions is a change from previous years, when US companies sought to profit from China’s burgeoning middle class and steer the country’s startups to even faster growth. Firms such as Blackstone Inc. counted China’s sovereign wealth fund and state institutions as key clients, and Chief Executive Officer Steve Schwarzman served as an intermediary between US administrations and Beijing.
Sequoia Capital’s China arm piled into Chinese bets such as semiconductors and biotech, and its US arm joined some deals, including a 2020 financing for Tiktok parent ByteDance. The firm’s China investments have helped gather momentum for outbound investment curbs among US officials and lawmakers, said people familiar with their thinking. And Sequoia representatives have pushed for a targeted and defined set of restrictions in talks with Washington, people familiar with the matter said. The firm declined to comment.
China’s Crackdown
After President Xi Jinping wiped out the for-profit education industry and cracked down on Jack Ma’s Alibaba, private equity firms learned the hard way how investor fortunes could turn if their bets collide with Beijing’s priorities.
For example, Blackstone invested in Didi Global Inc., the ride-hailing giant that ran afoul of Chinese authorities over its New York stock listing. After Didi announced plans to reverse its listing in 2021, its shares plunged. Blackstone dropped a $3 billion bid for Chinese property developer Soho China in the face of a longer-than-expected review.
The firm has put more emphasis on ensuring returns justify the mounting regulatory and political risks in China, said people familiar with the matter. Potential rules screening investments, especially those relating to China, “could further negatively impact our ability to deploy capital in such countries,” Blackstone said last month in its annual report.
Several private equity firms have tried to show they make targeted wagers that don’t bleed into political terrain — a difficult task in a country where the state apparatus looms large.
KKR & Co.’s co-CEO, Joe Bae, who built the firm’s Asia-Pacific business, told investors in April that it focuses on areas such as financial services in China — not semiconductors and advanced technologies.
Last year, Carlyle Group Inc. set new investment parameters for its latest Asia fund that will allow it to invest a smaller amount in China than in previous such funds.
All three private equity firms declined to comment.
Stateside Scrutiny
Talks between US policymakers and money managers about Chinese investments have been ongoing for months. Last June, several large private equity firms gathered at a secure facility in New York for a briefing, said people familiar with the matter. During the discussion, Senator Mark Warner, a Virginia Democrat, detailed how private equity investments in China could undermine US efforts to stymie Chinese military and technology advances.
“US investment, lending and structured finance firms are the envy of the world, and the CCP hopes to attract and exploit these resources in order to achieve its larger strategic aims,” Warner said in an emailed statement, referring to the Chinese Communist Party. “The American private sector should be wary of inadvertently supporting the CCP in those efforts.”
Warner has expressed concerns to associates that investment firms are funding tools for Beijing to gain influence, said people familiar with his thinking. One firm he has raised these concerns about is General Atlantic, a growth investor whose China bets include ByteDance, one of the people said. Sequoia and KKR are also among investors in ByteDance.
General Atlantic declined to comment.
Last week, Commerce Secretary Gina Raimondo acknowledged that any attempt to monitor the flow of investments into China is complicated.
“You certainly don’t want to do anything that has an unintended consequence,” she said in an interview. “It’s one thing to deny goods. It’s another thing to deny any money flows.”
Meanwhile, some firms outside the US are stepping up as their American counterparts retreat. Swedish firm EQT AB’s Asian platform BPEA EQT is betting that a less crowded field will allow it to swoop in on Chinese deals at attractive valuations, said people familiar with the matter. EQT declined to comment.
US officials said they’re talking with other countries about the plan.
–With assistance from Allison McNeely and Daniel Flatley.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.