Thursday, April 25

TikTok bill would complicate ByteDance investments if passed

For years, U.S. investors who backed ByteDance, the Chinese internet company that owns TikTok, have grappled with the complexities of owning part of a geopolitically charged social media app.

Now it has become even more complicated.

A bill to force ByteDance to sell TikTok is moving through the Senate after passing the House this month. The question of whether TikTok’s ties to China make it a national security threat is growing. And U.S. investors including General Atlantic, Susquehanna International Group and Sequoia Capital — which together have invested billions in ByteDance — are facing increased pressure from state and federal lawmakers to be accountable for their investments in companies Chinese.

Last year, a House committee began examining U.S. investments in Chinese companies. The Biden administration has curbed US investment in China. In December, a Missouri pension committee voted to divest from some Chinese investments, following political pressure from the state treasurer. And Florida passed a law this month requiring the state board to sell its stakes in Chinese companies.

This all adds to the existing problems with owning a piece of ByteDance. The Beijing-based company has become one of the most valuable start-ups in the world, worth 225 billion dollars, according to CB Insights. It’s a boon, at least on paper, for U.S. investors who invested in ByteDance when it was a small company.

Yet in reality, these investors have an illiquid investment that is difficult to turn into gold. Since ByteDance is a private company, investors cannot simply sell their stakes. A confluence of politics and economics means ByteDance is also unlikely to go public anytime soon, which would allow its shares to be traded.

Although it appears that TikTok’s exit was easy to achieve, the Chinese government is reluctant to relinquish control of an influential social media company. Beijing moved to halt a deal for TikTok with U.S. buyers a few years ago and recently condemned the Congressional bill that forces ByteDance to divest the app.

For ByteDance investors, that means “their assets are frozen,” said Matt Turpin, former director for China at the National Security Council and visiting fellow at the Hoover Institution. “They have invested in something that is going to be very difficult to make liquid.”

ByteDance declined to comment and TikTok did not respond to a request for comment.

American investors have been involved in ByteDance since the company was founded in 2012. Besides TikTok, the company owns Douyin, the Chinese version of TikTok, as well as a popular video editing tool called CapCut and other applications.

Susquehanna, a global trading company, first invested in ByteDance in 2012 and now owns about 15% of the company, a person familiar with the matter said. The China arm of Sequoia Capital, a Silicon Valley venture capital firm, invested in ByteDance in 2014 when it was valued at $500 million. The American growth fund Sequoia then followed suit.

General Atlantic, a private equity firm, invested in ByteDance in 2017 at a valuation of $20 billion. Bill Ford, chief executive of General Atlantic, sits on the board of directors of ByteDance. Other notable US investors in the company include private equity firms KKR and Carlyle Group, as well as hedge fund Coatue Management.

For years, these companies have been able to view ByteDance as a star investment, especially as TikTok has become increasingly popular around the world. Owning a stake in ByteDance has helped investment firms strengthen their relationships in China and secure other deals in the country, a large market with a population of 1.4 billion.

“The market is too big to ignore,” said Lisa Donahue, co-head of the Asia and Americas practice at consultancy AlixPartners.

But as U.S.-China relations have deteriorated in recent years, the spotlight on U.S. investment in Chinese companies has gotten brighter — and more uncomfortable. Last year, President Biden signed an executive order banning new U.S. investment in key technology industries that could be used to boost Beijing’s military capabilities.

More recently, lawmakers have called out U.S. investors for supporting Chinese technological advancements. In February, a congressional investigation determined that five U.S. venture capital firms, including Sequoia, had invested more than $1 billion in China’s semiconductor industry since 2001, fueling the growth of a sector which the US government now considers a threat to national security.

“China has almost been lumped in with ESG,” said Joshua Lichtenstein, a partner at law firm Ropes & Gray, referring to investments guided by environmental, social and governance principles, which have become a point of contention in some states.

Jonathan Rouner, who heads global mergers and acquisitions at investment bank Nomura Securities, said the situation for ByteDance’s U.S. investors shares some similarities with the way geopolitics has muddied economic bets on Russia. Russia’s invasion of Ukraine in 2022 caused multinational companies to quickly abandon their investments in Russia, resulting in losses of more than $103 billion.

“It’s a cautionary tale,” Mr. Rouner said. “The parallels are obviously limited, but they stick in people’s minds. »

Some U.S. investors have recently taken steps to divest from China. Last year, Sequoia spun off its Chinese operations into an entity called HongShan. HongShan Managing Partner Neil Shen serves on the board of directors of ByteDance. Sequoia, which has been operating in China since 2005, said its global footprint had become “increasingly complex” to manage.

HongShan did not respond to a request for comment.

Some U.S. investors in ByteDance have made substantial donations to political candidates and influential groups. Jeffrey Yass, founder of Susquehanna, is a major Republican donor and founder of the Club for Growth, an anti-tax group that also focuses on issues such as free speech, which has become a key point of contention in the debate on TikTok. Through Susquehanna, he was also the largest institutional shareholder in the shell company that recently merged with former President Donald J. Trump’s social media company.

“There are many, many donors who are mercenaries: They are protecting their interests or their business interests,” said Samuel Chen, a political consultant at the Liddell Group. Others, he says, are ideological. “Yass does both,” he said.

Other investors, such as Mr. Ford of General Atlantic, have sought to maintain a political low profile, people familiar with his actions said.

To get the most out of their ByteDance stakes, U.S. investors would need a public listing or sale, even if mandated by the federal government. But it remains unclear whether the bill to force the sale of TikTok will pass the Senate. Sen. Maria Cantwell, a Washington Democrat and chairwoman of the Senate Commerce Committee, said she supported the TikTok legislation but that it was “important to get it right.”

No resolution appears imminent, meaning ByteDance investor scrutiny is likely to linger.

“From their perspective, they just want this attention to go away,” said Mr. Turpin of the Hoover Institution. “The more attention paid to it, the worse it means for their investment.” »