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One illustration of how financial ties between the US and China are breaking down comes from the recent experience of private equity’s “placement agents”. These are companies hired by buyout groups to help them raise new funds.
When their salespeople try to persuade US investors to commit cash to funds that will strike deals in China, they are in some cases not only being rejected but also criticised for even pitching the idea, according to a senior Hong Kong-based adviser to the industry. Some have been accused of being out of touch, tone-deaf, and unpatriotic.
They are making this pitch at a particularly challenging time. President Joe Biden has announced plans to prohibit certain US private equity and venture capital investments in sensitive sectors in China. Both Sequoia Capital and GGV Capital have revealed intentions to separate their US and China businesses.
China’s anti-espionage and data laws, as well as raids on US consultancies, have unsettled investors. Additionally, the travel ban imposed on Hong Kong-based Nomura banker Charles Wang Zhonghe has raised concerns. The US House of Representatives’ China committee recently accused BlackRock of profiting from investments that benefit the Chinese military, leading other US groups to be cautious. Investors are also mindful of potential future sanctions if China were to attack Taiwan.
According to a senior dealmaker who has made successful investments in China using funds raised in the US, many North American investors are currently hesitant to put new money into private equity in China. At best, they may reinvest some of their profits from previous funds into new ones managed by the same firm.
This reticence by North American investors is significant because they have traditionally been the largest source of capital for the private equity industry. Based on data from Preqin, they account for 50% of all capital invested in private equity worldwide this year. In contrast, only $62 billion has been raised for Asia Pacific-focused funds, a decrease from $173 billion during the same period last year. While fundraising for deals in Europe and the US has slowed, the decline hasn’t been as steep.
However, for several private equity groups, completely cutting off dealmaking in China is not a viable option since they have raised large Asia-focused funds in recent years. Many of these groups are focusing more on India. Blackstone and KKR, two of the world’s largest private equity groups, have India-based dealmakers running their Asia private equity businesses.
Deploying large amounts of money in Asia without involving the world’s second-largest economy is challenging. Additionally, some non-US investors, particularly Middle Eastern sovereign wealth funds, are eager for more exposure to China.
As a result, buyout groups are striving to satisfy both sets of investors, often resorting to legal and financial maneuvers. A lawyer advising the industry stated that investors might request the creation of a new scheme that removes the China component, allowing them to remain in the fund. Separately, US investors are seeking restrictions on the involvement of Chinese investors in the private equity funds they invest in, regardless of where the money is deployed. For instance, it has become increasingly common for North American pension funds to demand that Chinese groups account for less than 10% of the total fund.
Meeting these demands can sometimes result in turning down substantial amounts of money since China’s state-backed groups have the capacity to provide large investments. When Chinese capital is accepted for a private equity fund, US investors in the same fund often insist on imposing restrictions on Chinese investors, such as excluding them from the limited partner advisory committee and preventing them from co-investing directly in the fund’s acquired companies.
This decoupling between the US and China in the private equity industry, which occurs behind closed doors, will likely have long-term implications for global capital flows. Furthermore, it is forcing dealmakers to navigate competing demands from a fragmented group of politicized global investors, a departure from their traditional focus on financial returns.
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