For years, U.S. investors who backed ByteDance, the Chinese web company that owns TikTok, have grappled with the complex problems with owning a part of the geopolitically charged social media app.
Now it has turn out to be much more complicated.
A bill forcing ByteDance to sell TikTok is moving through the Senate after passing the House this month. Questions are growing about whether TikTok’s ties to China make it a national security threat. And U.S. investors including General Atlantic, Susquehanna International Group and Sequoia Capital – who’ve collectively poured billions into ByteDance – are facing increased pressure from state and federal lawmakers to be accountable for his or her investments in Chinese corporations.
Last yr, a House committee began investigating U.S. investments in Chinese corporations. The Biden administration has restricted US investments in China. In December, Missouri’s pension board voted to divest from some Chinese investments under political pressure from the state treasurer. Florida passed a law this month requiring the state Board of Administration to sell shares in Chinese-owned corporations.
This all adds as much as the prevailing problems of owning a bit of ByteDance. The Beijing-based company has turn out to be some of the valued start-ups on this planet $225 billion– in response to CB Insights. That’s a boon, a minimum of on paper, for U.S. investors who invested in ByteDance when it was a smaller company.
However, in point of fact, these investors are making illiquid investments which can be difficult to show into gold. Because ByteDance is privately held, investors cannot simply sell their shares. The confluence of politics and economics means ByteDance is unlikely to go public any time soon, which might allow its shares to be traded.
Even if the sale of TikTok was easy to drag off, the Chinese government seems reluctant to present up control of the influential social media company. Several years ago, Beijing moved to halt TikTok deals with U.S. buyers and recently condemned a congressional bill requiring ByteDance to divest the app.
For ByteDance investors, which means “their assets are stranded,” said Matt Turpin, former director for China on the National Security Council and a research fellow on the Hoover Institution. “They invested in something that will be very difficult to obtain in liquid form.”
ByteDance declined to comment, and TikTok didn’t reply to a request for comment.
Since the corporate’s inception in 2012, American investors have been involved in ByteDance. In addition to TikTok, the corporate owns Douyin, the Chinese version of TikTok, in addition to a preferred video editing tool called CapCut and other apps.
Susquehanna, a worldwide trading firm, first invested in ByteDance in 2012 and now owns about 15 percent of the corporate, said an individual aware of the investment. The Chinese branch of Sequoia Capital, a Silicon Valley enterprise capital firm, invested in ByteDance in 2014, when it was valued at $500 million. Later, the American growth fund Sequoia followed suit.
General Atlantic, a non-public equity firm, invested in ByteDance in 2017 at a valuation of $20 billion. Bill Ford, CEO of General Atlantic, sits on the board of ByteDance. The company’s other significant US investors include private equity firms KKR and Carlyle Group, in addition to hedge fund Coatue Management.
Over the years, these corporations have been able to keep up ByteDance as a star investment, especially as TikTok has turn out to be increasingly popular world wide. Owning shares in ByteDance has helped investment firms strengthen relationships in China and open more deals within the country, an enormous market of 1.4 billion people.
“The market is too big to ignore,” said Lisa Donahue, who heads the Asia practice at consulting firm AlixPartners.
But as relations between the United States and China have deteriorated lately, the highlight on American investment in Chinese corporations has turn out to be brighter and more uncomfortable. Last yr, President Biden signed an executive order banning recent U.S. investments in key technology industries that may very well be used to strengthen Beijing’s military capabilities.
Recently, lawmakers have reached out to U.S. investors who’ve supported China’s technological advances. In February, a congressional investigation found that five U.S. enterprise capital firms, including Sequoia, had invested greater than $1 billion in China’s semiconductor industry since 2001, fueling the expansion of a sector that the U.S. government now considers a national security threat.
“China has almost been thrown into ESG,” said Joshua Lichtenstein, partner at Ropes & Gray, referring to investing guided by environmental, social and company governance principles, which has turn out to be some extent of contention in some countries.
Jonathan Rouner, who heads global mergers and acquisitions at investment bank Nomura Securities, said the situation for ByteDance’s U.S. investors is somewhat just like how geopolitics is affecting Russia. Russia’s invasion of Ukraine in 2022 forced international corporations to quickly withdraw their investments in Russia, leading to over $103 billion in losses.
“It’s a cautionary tale,” Mr. Rouner said. “The similarities are limited, of course, but they are in the back of people’s minds.”
Some U.S. investors have recently taken steps to decouple from China. Last yr, Sequoia spun off its China operations into an entity called HongShan. HongShan managing partner Neil Shen serves on ByteDance’s board of directors. Sequoia, which has operated in China since 2005, said managing its global footprint was becoming “increasingly complex.”
HongShan didn’t reply to comment on the request.
Some of ByteDance’s U.S. investors have made significant donations to political candidates and influential groups. Susquehanna founder Jeffrey Yass is a serious Republican donor and founding father of Club for Growth, an anti-tax group that also focuses on issues like free speech, which has turn out to be a key point of contention within the TikTok debate. Through Susquehanna, he was also the most important institutional shareholder in a shell company that recently merged with former President Donald J. Trump’s social media company.
“There are donors who are largely mercenary: protecting their own interests or business interests,” said Samuel Chen, a political consultant on the Liddell Group. Others, he said, are ideological in nature. “Yass does both,” he said.
Other investors, reminiscent of General Atlantic’s Mr. Ford, have tried to keep up political discretion, say people aware of his activities.
To get essentially the most out of their stake in ByteDance, U.S. investors would wish a public listing or sale, even one that will be federally required. However, it’s unclear whether the bill forcing the sale of TikTok will pass the Senate. Sen. Maria Cantwell, a Democrat from Washington state and chairwoman of the Senate Commerce Committee, said she supports the TikTok laws but “it’s important to do it right.”
No resolution appears imminent, which implies ByteDance investors will proceed to be monitored.
“From their perspective, they just want the attention to go away,” said Turpin of the Hoover Institution. “The more attention they get, the worse it means for their investment.”
