U.S. investors who have backed ByteDance, the Chinese internet company that owns TikTok, have long grappled with the complexities of owning part of the geopolitically fraught social media app.
Now it's even more complicated.
A bill to force ByteDance to sell TikTok is moving through the Senate after passing the House this month. There are growing questions about whether TikTok's ties to China pose a national security threat. And U.S. investors including General Atlantic, Susquehanna International Group and Sequoia Capital, which have poured billions of dollars into ByteDance, are facing increasing pressure from state and federal lawmakers demanding answers about their investments in Chinese companies. facing increasing pressure.
Last year, a House committee began investigating U.S. investments in Chinese companies. The Biden administration is curbing U.S. investment in China. In December, the Missouri State Pension Commission voted to divest from some Chinese investments following political pressure from the state treasurer. And this month, Florida passed a bill requiring the state executive board to sell shares in Chinese-owned companies.
All of this comes on top of the existing problems of owning a piece of ByteDance. The Beijing-based company has grown to become one of the world's most highly valued startups, valued at $225 billion, according to CB Insights. That's a boon, at least on paper, for U.S. investors who put money into ByteDance when it was a small company.
But in reality, these investors have investments that are illiquid and difficult to convert into gold. ByteDance is a private company, so investors can't simply sell their shares. Due to the convergence of politics and economics, ByteDance is also unlikely to go public anytime soon, allowing its shares to be traded.
Even if the sale of TikTok were easily successful, the Chinese government appears reluctant to relinquish control of the influential social media company. The Chinese government moved several years ago to halt TikTok's transactions with U.S. buyers, and recently criticized a Congressional bill that would force ByteDance to sell the app.
For ByteDance investors, that means “an asset stuck,” said Matt Turpin, former National Security Council director of China affairs and visiting fellow at the Hoover Institution. “They have invested in things that are very difficult to liquidate.”
ByteDance declined to comment, and TikTok did not respond to requests for comment.
ByteDance has had US investors involved since it was founded in 2012. Apart from TikTok, the company also owns Douyin, the Chinese version of TikTok, a popular video editing tool called CapCut, and other apps.
Susquehanna, a global trading company, first invested in ByteDance in 2012 and now owns about 15% of the company, people familiar with the investment said. The China arm of Silicon Valley venture capital firm Sequoia Capital invested in ByteDance in 2014 when it was valued at $500 million. Later, US-based Sequoia Growth Fund followed suit.
Private equity firm General Atlantic invested in ByteDance in 2017 at a valuation of $20 billion. General Atlantic CEO Bill Ford is a member of ByteDance's board of directors. Other notable U.S. investors in the company include private equity firms KKR and Carlyle Group, and hedge fund Cortue Management.
These companies were able to keep ByteDance a star investment over the years, especially as TikTok gained popularity around the world. By owning a stake in ByteDance, the investment firm could strengthen its ties in China and explore other deals in the huge market of 1.4 billion people.
“The market is too big to ignore,” said Lisa Donahue, co-head of Asia and the Americas at consulting firm AlixPartners.
But in recent years, as U.S.-China relations have deteriorated, the focus on U.S. investment in Chinese companies has become brighter and more unpleasant. President Biden last year signed an executive order banning new U.S. investment in key technology industries that could be used to strengthen China's military.
More recently, lawmakers have criticized U.S. investors for supporting China's technological advances. A Congressional investigation in February found that five U.S. venture capital firms, including Sequoia, have invested more than $1 billion in China's semiconductor industry since 2001 and that growth in the sector is now considered a national security threat by the U.S. government. It was found that it was promoting
“China is pretty much on the ESG and They are being lumped together,” he said.
Jonathan Rauner, head of global mergers and acquisitions at investment bank Nomura Securities, said the situation for ByteDance's U.S. investors is similar to that where geopolitics has scrambled economic bets on Russia. Russia's invasion of Ukraine in 2022 prompted multinational companies to quickly withdraw their investments in Russia, resulting in losses of over $103 billion.
“This is a warning,” Rauner said. “The similarities are obviously limited, but they're in the back of people's minds.”
Some U.S. investors have recently taken steps to distance themselves from China. Last year, Sequoia spun off its China operations into a separate entity called Hongshan. Neil Shen, managing partner of Hongshan, is a member of ByteDance's board of directors. Sequoia, which has been based in China since 2005, said managing its global footprint has become “increasingly complex.”
Hongshan did not respond to requests for comment.
Some of ByteDance's U.S. investors have made large donations to political candidates and influence groups. Susquehanna founder Jeffrey Yass is a major donor to the Republican Party and an anti-tax group that also focuses on issues such as free speech, which is a key issue in the TikTok debate. It is also a financial supporter of “Growth''. Through Susquehanna, he was also the largest institutional investor in a shell company that recently merged with former President Donald J. Trump's social media company.
“Some donors are very mercenary. They're protecting their own interests and business interests,” said Samuel Chen, a political consultant at the Liddell Group. Others, he says, are ideological. “Jas does both,” he said.
Other investors, including General Atlantic's Mr. Ford, have tried to keep a low profile politically, according to people familiar with his actions.
For U.S. investors to get the most out of ByteDance stock, a listing or sale would be necessary, even if mandated by the federal government. However, it remains unclear whether the bill to force the sale of TikTok will pass the Senate. Sen. Maria Cantwell, a Washington Democrat who chairs the Senate Commerce Committee, supports the TikTok bill, but said she is “important to get it right.”
With no immediate resolution in sight, scrutiny of ByteDance investors is likely to be prolonged.
“From their perspective, they just want this attention to go away,” says Turpin of the Hoover Institution. “The more attention it gets, the worse it is for their investments.”