The U.S. Traders Caught within the Scrum Over TikTok

For years, the U.S. buyers who backed ByteDance, the Chinese language web firm that owns TikTok, have wrestled with the complexities of proudly owning a bit of a geopolitically fraught social media app.

Now it’s gotten much more sophisticated.

A invoice to power ByteDance to promote TikTok is winding its method by the Senate after sailing through the House this month. Questions on whether or not TikTok’s Chinese language ties make it a nationwide safety menace are mounting. And U.S. buyers together with Common Atlantic, Susquehanna Worldwide Group and Sequoia Capital — which collectively poured billions into ByteDance — are going through elevated stress from state and federal lawmakers to reply for his or her investments in Chinese language firms.

Final 12 months, a Home committee started inspecting U.S. investments in Chinese language firms. The Biden administration has curbed U.S. investments in China. In December, a Missouri pension board voted to divest from some Chinese language investments, following political stress from the state treasurer. And Florida handed laws this month to require the state’s Board of Administration to unload its stakes in China-owned firms.

All of this comes on prime of present points with proudly owning a bit of ByteDance. The Beijing-based firm has grown into one of many world’s most extremely valued start-ups, price $225 billion, in line with CB Insights. That’s a boon, at the least on paper, for U.S. buyers who put cash into ByteDance when it was a smaller firm.

But in actuality, these buyers have an illiquid funding that’s laborious to spin into gold. Since ByteDance is privately held, buyers can’t merely promote their stakes in it. A confluence of politics and economics means ByteDance can also be unlikely to go public quickly, which might allow its shares to commerce.

Even when a sale of TikTok was straightforward to drag off, the Chinese language authorities seems reluctant to relinquish management of an influential social media firm. Beijing moved to stop a deal for TikTok to American consumers just a few years in the past and lately condemned the congressional bill that mandates ByteDance divest the app.

For ByteDance’s buyers, which means “their assets are stranded,” mentioned Matt Turpin, former director for China on the Nationwide Safety Council and a visiting fellow on the Hoover Establishment. “They’ve made an investment in something that’s going to be very difficult to make liquid.”

ByteDance declined to remark and TikTok didn’t reply to a request for remark.

U.S. buyers have been concerned in ByteDance for the reason that firm started in 2012. Other than TikTok, the corporate owns Douyin, the Chinese language model of TikTok, in addition to a well-liked video-editing software referred to as CapCut, and different apps.

Susquehanna, a worldwide buying and selling agency, first invested in ByteDance in 2012 and now owns roughly 15 % of the corporate, an individual aware of the funding mentioned. The Chinese language arm of Sequoia Capital, a Silicon Valley enterprise capital agency, invested in ByteDance in 2014 when it was valued at $500 million. Sequoia’s U.S.-based progress fund later adopted swimsuit.

Common Atlantic, a non-public fairness agency, invested in ByteDance in 2017 at a $20 billion valuation. Invoice Ford, Common Atlantic’s chief govt, has a seat on ByteDance’s board of administrators. The corporate’s different notable U.S. buyers embrace the personal fairness companies KKR and the Carlyle Group, in addition to the hedge fund Coatue Administration.

For years, these companies have been in a position to maintain up ByteDance as a star funding, particularly as TikTok grew to become more and more standard around the globe. Proudly owning a stake in ByteDance helped the funding companies strengthen relationships in China and open up different offers within the nation, an enormous market with a inhabitants of 1.4 billion.

“The market is too large to ignore,” mentioned Lisa Donahue, who co-heads the Asia observe on the consulting agency AlixPartners.

However as the connection between the US and China deteriorated lately, the highlight on U.S. investments in Chinese language firms obtained brighter — and extra uncomfortable. Final 12 months, President Biden signed an govt order banning new American funding in key know-how industries that may very well be used to reinforce Beijing’s navy capabilities.

Extra lately, lawmakers have referred to as out U.S. buyers who supported Chinese language tech developments. In February, a congressional investigation decided that five American venture capital firms, together with Sequoia, had invested greater than $1 billion in China’s semiconductor trade since 2001, fueling the expansion of a sector that the U.S. authorities now regards as a nationwide safety menace.

“China has almost been lumped in with E.S.G.,” mentioned Joshua Lichtenstein, a associate on the legislation agency Ropes & Grey, referring to investing guided by environmental, social and governance rules, which has become a point of contention in some states.

Jonathan Rouner, who leads international mergers and acquisitions on the funding financial institution Nomura Securities, mentioned the state of affairs for ByteDance’s U.S. buyers shared some similarities to how geopolitics scrambled financial bets on Russia. Russia’s invasion of Ukraine in 2022 pushed multinational firms to swiftly go away their investments in Russia, leading to more than $103 billion in losses.

“It’s a cautionary tale,” Mr. Rouner mentioned. “The parallels are obviously limited, but they’re in the back of people’s minds.”

Some U.S. buyers lately took steps to separate themselves from China. Final 12 months, Sequoia spun off its Chinese operation into an entity referred to as HongShan. HongShan’s managing associate, Neil Shen, sits on ByteDance’s board. Sequoia, which had been in China since 2005, mentioned its international footprint had change into “increasingly complex” to handle.

HongShan didn’t reply to a request remark.

A few of ByteDance’s U.S. buyers have made substantial donations to political candidates and influential teams. Jeffrey Yass, a founding father of Susquehanna, is a serious Republican donor and funder of the Membership for Progress, an anti-tax group that additionally focuses on points like free speech, which has change into a key level of competition within the TikTok debate. He, by Susquehanna, was additionally the biggest institutional shareholder of the shell firm that lately merged with former President Donald J. Trump’s social media firm.

“There are donors that are very much mercenaries: they’re protecting their interest or business interests,” mentioned Samuel Chen, a political guide on the Liddell Group. Others, he mentioned, are ideological. “Yass does both,” he mentioned.

Different buyers, akin to Mr. Ford at Common Atlantic, have sought to maintain a low profile politically, folks aware of his actions mentioned.

To get essentially the most for his or her stakes in ByteDance, U.S. buyers would want a public itemizing or a sale, even one that’s federally mandated. Nevertheless it stays unclear if the invoice to power a sale of TikTok will go the Senate. Senator Maria Cantwell, Democrat of Washington and the top of the Senate Commerce Committee, has mentioned she helps TikTok laws however that it’s “important to get it right.”

No decision seems imminent, which implies scrutiny of ByteDance’s buyers is prone to linger.

“From their perspective, they just want this attention to go away,” mentioned Mr. Turpin of the Hoover Establishment. “The more attention it has, the worse it means for their investment.”