The TikTok bill would complicate ByteDance's investments if passed

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

Now it has become even more complicated.

A bill to force ByteDance to sell TikTok is making its way 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 collectively poured billions into ByteDance — are facing growing pressure from state and federal lawmakers to account for their investments in Chinese companies.

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 board voted to divest from some Chinese investments after political pressure from the state treasurer. And this month Florida passed legislation requiring the state's board of regulators to sell its stakes in Chinese-owned companies.

This all adds to the existing problems with owning a piece of ByteDance. The Beijing-based company has become one of the world's most valued startups, valued at $225 billion, according to CB Insights. This is an advantage, at least on paper, for US investors who invested in ByteDance when it was a smaller company.

Yet in reality, these investors have an illiquid investment that is difficult to turn into gold. Because ByteDance is a private company, investors can't simply sell their holdings. A confluence of politics and economics means ByteDance is also unlikely to go public anytime soon, which would allow its shares to trade.

While the sale of TikTok was easy to pull off, the Chinese government appears reluctant to relinquish control of an influential social media company. Beijing moved to end a deal for TikTok with American buyers a few years ago and recently condemned a congressional bill requiring ByteDance to divest the app.

For ByteDance investors, that means “their assets are tied up,” said Matt Turpin, former China director at the National Security Council and visiting fellow at the Hoover Institution. “They made an investment in something that will be very difficult to liquidate.”

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

US investors have been involved in ByteDance since its founding in 2012. In addition to TikTok, the company owns Douyin, the Chinese version of TikTok, as well as a popular video editing tool called CapCut and other apps.

Susquehanna, a global trading firm, first invested in ByteDance in 2012 and now owns about 15% of the company, a person familiar with the investment 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. Sequoia's US-based growth fund later followed suit.

General Atlantic, a private equity firm, invested in ByteDance in 2017 at a valuation of $20 billion. Bill Ford, CEO of General Atlantic, has a seat on ByteDance's board of directors. The company's other major U.S. investors include private equity firms KKR and the Carlyle Group, as well as hedge fund Coatue Management.

For years, these companies have been able to view ByteDance as a marquee investment, especially as TikTok has become increasingly popular around the world. Owning a stake in ByteDance has helped the investment firms strengthen relationships in China and open more 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. investments in Chinese companies has grown brighter — and more uncomfortable. Last year, President Biden signed an executive order banning new American investments in key technology sectors that could be used to improve Beijing's military capabilities.

More recently, lawmakers have called out U.S. investors who have supported Chinese technological advances. In February, a congressional investigation found that five American venture capital firms, including Sequoia, had invested more than $1 billion in China's semiconductor industry since 2001, fueling growth in an industry that the U.S. government now considers it a threat to national security.

“China has almost been subsumed into the ESG theme,” 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 leads global mergers and acquisitions at investment bank Nomura Securities, said the situation for ByteDance's U.S. investors shares some similarities with how geopolitics has muddled economic bets on Russia. Russia's invasion of Ukraine in 2022 prompted multinationals to quickly exit their investments in Russia, resulting in losses of more than $103 billion.

“It's a warning,” Mr. Rouner said. “The parallels are obviously limited, but they are in people's minds.”

Some US investors have recently taken steps to decouple from China. Last year, Sequoia spun off its China operations into an entity called HongShan. HongShan managing partner Neil Shen sits on ByteDance's board of directors. Sequoia, which has been in China since 2005, said its global footprint had become “increasingly complex” to manage.

HongShan did not respond to comment on the request.

Some of ByteDance's US investors have made substantial donations to political candidates and influential groups. Jeffrey Yass, a founder of Susquehanna, is a major Republican donor and funder 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 over TikTok. He, through Susquehanna, was also the largest institutional shareholder of the shell company that recently merged with former President Donald J. Trump's social media company.

“There are donors who are largely mercenaries: they protect their own interests or commercial interests,” said Samuel Chen, a political consultant at the Liddell Group. Others, he said, are ideological. “Yass does both,” he said.

Other investors, such as General Atlantic's Ford, have tried to keep a low political profile, people familiar with his actions said.

To get the most out of their holdings in ByteDance, U.S. investors would need a public listing or sale, even a federally mandated one. But it's unclear whether the bill to force the sale of TikTok will pass the Senate. Senator Maria Cantwell, Democrat of Washington and head of the Senate Commerce Committee, said she supports TikTok's legislation but that it is “important to get it right.”

No resolution appears imminent, meaning scrutiny of ByteDance investors is likely to persist.

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

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