The U.S. Investors Caught in the Scrum Over TikTok

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

Now it’s gotten even more complicated.

A bill to force ByteDance to sell TikTok is winding its way through the Senate after sailing through the House this month. Questions about whether TikTok’s Chinese ties make it a national security threat are mounting. And U.S. investors including General Atlantic, Susquehanna International Group and Sequoia Capital — which collectively poured billions into ByteDance — are facing increased pressure from state and federal lawmakers to answer for their investments in Chinese companies.

Last year, a House committee began examining U.S. investments in Chinese companies. The Biden administration has curbed U.S. investments in China. In December, a Missouri pension board voted to divest from some Chinese investments, after political pressure from the state treasurer. And Florida passed legislation this month to require the state’s Board of Administration to sell off its stakes in Chinese-owned companies.

All of this comes on top of existing issues with owning a piece of ByteDance. The Beijing-based company has grown into one of the world’s most highly valued start-ups, worth $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 smaller company.

Yet in reality, these investors have an illiquid investment that is hard to spin into gold. Since ByteDance is privately held, investors cannot simply sell their stakes in it. A confluence of politics and economics means ByteDance is also unlikely to go public soon, which would enable its shares to trade.

Even if a 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 stop a deal for TikTok to American buyers a few years ago and recently condemned the congressional bill that mandates ByteDance divest the app.

For ByteDance’s investors, that means “their assets are stranded,” said Matt Turpin, former director for China at the National Security Council and a visiting fellow at the Hoover Institution. “They’ve made an investment in something that’s going to be very difficult to make liquid.”

ByteDance declined to comment, and TikTok didn’t respond to a request for comment.

U.S. investors have been involved in ByteDance since the company began in 2012. Apart from 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 roughly 15 percent of the company, a person familiar with the investment said. The Chinese arm of Sequoia Capital, a Silicon Valley venture capital firm, invested in ByteDance in 2014 when it was valued at $500 million. Sequoia’s U.S.-based growth fund later followed suit.

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

For years, these firms were able to hold up ByteDance as a star investment, especially as TikTok became increasingly popular around the world. Owning a stake in ByteDance helped the investment firms strengthen relationships in China and open up other deals in the country, a vast market with a population of 1.4 billion.

“The market is too large to ignore,” said Lisa Donahue, a co-head of the Asia and Americas practice at the consulting firm AlixPartners.

But as the relationship between the United States and China deteriorated in recent years, the spotlight on U.S. investments in Chinese companies got brighter — and more uncomfortable. Last year, President Biden signed an executive order banning new American investment in key technology industries that could be used to enhance Beijing’s military capabilities.

More recently, lawmakers have called out U.S. investors who supported Chinese tech advancements. In February, a congressional investigation determined that five American venture capital firms, including Sequoia, had invested more than $1 billion in China’s semiconductor industry since 2001, fueling the growth of a sector that the U.S. government now regards as a national security threat.

“China has almost been lumped in with E.S.G.,” said Joshua Lichtenstein, a partner at the law firm Ropes & Gray, referring to investing guided by environmental, social and governance principles, which has become a point of contention in some states.

Jonathan Rouner, who leads global mergers and acquisitions at the investment bank Nomura Securities, said the situation for ByteDance’s U.S. investors shared some similarities to how geopolitics scrambled economic bets on Russia. Russia’s invasion of Ukraine in 2022 pushed multinational companies to swiftly leave their investments in Russia, resulting in more than $103 billion in losses.

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

Some U.S. investors recently took steps to separate themselves from China. Last year, Sequoia spun off its Chinese operation into an entity called HongShan. HongShan’s managing partner, Neil Shen, sits on ByteDance’s board. Sequoia, which had been in China since 2005, said its global footprint had become “increasingly complex” to manage.

HongShan did not respond to a request comment.

Some of ByteDance’s U.S. 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 like free speech, which has become a key point of contention in the TikTok debate. He, through Susquehanna, was also the biggest institutional shareholder of the shell company that recently merged with former President Donald J. Trump’s social media company.

“There are donors that are very much mercenaries: They’re protecting their interest or business 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 Mr. Ford at General Atlantic, have sought to keep a low profile politically, people familiar with his actions said.

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

No resolution appears imminent, which means scrutiny of ByteDance’s investors is likely to linger.

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

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