The U.S. Buyers 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 chunk of a geopolitically fraught social media app.

Now it’s gotten much more difficult.

A invoice to pressure ByteDance to promote TikTok is winding its manner by the Senate after crusing by the Home 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 Basic Atlantic, Susquehanna Worldwide Group and Sequoia Capital — which collectively poured billions into ByteDance — are dealing with elevated stress from state and federal lawmakers to reply for his or her investments in Chinese language corporations.

Final yr, a Home committee started analyzing U.S. investments in Chinese language corporations. 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 dump its stakes in China-owned corporations.

All of this comes on prime of current points with proudly owning a chunk of ByteDance. The Beijing-based firm has grown into one of many world’s most extremely valued start-ups, price $225 billion, in keeping with CB Insights. That’s a boon, not less than 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 be unlikely to go public quickly, which might allow its shares to commerce.

Even when a sale of TikTok was simple to tug off, the Chinese language authorities seems reluctant to relinquish management of an influential social media firm. Beijing moved to cease a deal for TikTok to American consumers a couple of years in the past and lately condemned the congressional invoice that mandates ByteDance divest the app.

For ByteDance’s buyers, meaning “their belongings 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 funding in one thing that’s going to be very tough 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. Aside from TikTok, the corporate owns Douyin, the Chinese language model of TikTok, in addition to a well-liked video-editing software known as CapCut, and different apps.

Susquehanna, a worldwide buying and selling agency, first invested in ByteDance in 2012 and now owns roughly 15 p.c of the corporate, an individual acquainted with 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.

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

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

“The market is just too massive to disregard,” mentioned Lisa Donahue, who co-heads the Asia apply on the consulting agency AlixPartners.

However as the connection between the USA and China deteriorated lately, the highlight on U.S. investments in Chinese language corporations bought brighter — and extra uncomfortable. Final yr, President Biden signed an govt order banning new American funding in key expertise industries that could possibly be used to reinforce Beijing’s army capabilities.

Extra lately, lawmakers have known as out U.S. buyers who supported Chinese language tech developments. In February, a congressional investigation decided that 5 American enterprise capital agencys, 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 virtually 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 develop into a degree of rivalry 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 corporations to swiftly depart their investments in Russia, leading to greater than $103 billion in losses.

“It’s a cautionary story,” Mr. Rouner mentioned. “The parallels are clearly restricted, however they’re at the back of individuals’s minds.”

Some U.S. buyers lately took steps to separate themselves from China. Final yr, Sequoia spun off its Chinese language operation into an entity known 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 develop into “more and more advanced” 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 significant Republican donor and funder of the Membership for Development, an anti-tax group that additionally focuses on points like free speech, which has develop into a key level of rivalry within the TikTok debate. He, by Susquehanna, was additionally the greatest institutional shareholder of the shell firm that lately merged with former President Donald J. Trump’s social media firm.

“There are donors which can be very a lot mercenaries: they’re defending their curiosity or enterprise pursuits,” mentioned Samuel Chen, a political guide on the Liddell Group. Others, he mentioned, are ideological. “Yass does each,” he mentioned.

Different buyers, corresponding to Mr. Ford at Basic Atlantic, have sought to maintain a low profile politically, individuals acquainted with his actions mentioned.

To get probably 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. But it surely stays unclear if the invoice to pressure 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 “vital to get it proper.”

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

“From their perspective, they simply need this consideration to go away,” mentioned Mr. Turpin of the Hoover Establishment. “The extra consideration it has, the more severe it means for his or her funding.”