U.S. Investors Face Challenges with ByteDance Stakes

U.S. Investors Struggle with ByteDance Stakes Amid Geopolitical Tensions

by Faruk Imamovic
U.S. Investors Face Challenges with ByteDance Stakes
© Getty Images/Joe Raedle

U.S. investors who have backed ByteDance, the Chinese tech giant that owns TikTok, are finding themselves in increasingly complicated waters. Recently, a bill that would force ByteDance to sell TikTok has moved through the House and is now making its way through the Senate. This comes amid growing concerns that TikTok’s connections to China could pose a national security threat. As a result, U.S. investors like General Atlantic, Susquehanna International Group, and Sequoia Capital, which have collectively invested billions in ByteDance, are under greater pressure from both state and federal lawmakers to justify their investments.

Over the past year, U.S. legislative actions have increased scrutiny on investments in Chinese companies. A House committee has begun examining these investments, and the Biden administration has restricted U.S. investments in China. In December, a Missouri pension board decided to divest from certain Chinese investments following political pressure, and Florida has passed a law requiring the state's Board of Administration to sell stakes in Chinese-owned companies.

These developments add to the existing difficulties of owning a part of ByteDance. The Beijing-based company, now valued at $225 billion according to CB Insights, is one of the world's most valuable startups. While this valuation is promising on paper for early U.S. investors, in practice, it presents significant challenges. ByteDance remains privately held, making it difficult for investors to liquidate their stakes. Additionally, the political and economic climate makes an initial public offering (IPO) unlikely in the near future.

The Chinese government's stance complicates matters further. Beijing previously blocked a deal that would have sold TikTok to American buyers and recently criticized the congressional bill mandating ByteDance to divest TikTok. As Matt Turpin, a former director for China at the National Security Council, put it, ByteDance’s investors are stuck with "stranded assets."

Investment History and Current Stakes

U.S. investors have been involved with ByteDance since its early days. Besides TikTok, ByteDance owns Douyin (the Chinese version of TikTok), a popular video-editing tool called CapCut, and several other apps. Susquehanna, a global trading firm, first invested in ByteDance in 2012 and now owns about 15 percent of the company. Sequoia Capital’s Chinese arm invested in ByteDance in 2014 when it was valued at $500 million, with Sequoia’s U.S. growth fund following suit later.

General Atlantic, a private equity firm, invested in ByteDance in 2017 when the company was valued at $20 billion. Bill Ford, General Atlantic’s CEO, holds a seat on ByteDance’s board. Other notable U.S. investors include private equity firms KKR, the Carlyle Group, and the hedge fund Coatue Management.

For years, ByteDance was a crown jewel investment for these firms, especially as TikTok gained global popularity. Owning a stake in ByteDance helped these investors build relationships in China and explore other opportunities in the vast Chinese market. "The market is too large to ignore," said Lisa Donahue, co-head of the Asia and Americas practice at AlixPartners.

However, as U.S.-China relations have soured, scrutiny of U.S. investments in Chinese companies has intensified. Last year, President Biden signed an executive order banning new American investments in key Chinese technology sectors. More recently, lawmakers have criticized U.S. investors for backing Chinese tech advancements. A congressional investigation in February found that five American venture capital firms, including Sequoia, had invested over $1 billion in China’s semiconductor industry since 2001, a sector now seen as a national security threat.

Joshua Lichtenstein, a partner at the law firm Ropes & Gray, noted that investing in China has become as contentious as investing based on environmental, social, and governance (ESG) principles.

Jonathan Rouner, head of global mergers and acquisitions at Nomura Securities, compared the situation for ByteDance’s U.S. investors to the geopolitical disruptions that affected investments in Russia. Following Russia’s 2022 invasion of Ukraine, multinational companies rapidly pulled out of their Russian investments, resulting in over $103 billion in losses. “It’s a cautionary tale,” Rouner said, acknowledging the limited parallels but significant concerns.

Navigating a Complex Landscape

Some U.S. investors are starting to distance themselves from China. Last year, Sequoia spun off its Chinese operations into a new entity called HongShan, with Neil Shen, HongShan’s managing partner, sitting on ByteDance’s board. Sequoia cited increasing complexity in managing its global footprint as the reason for this move.

Meanwhile, some ByteDance investors have been politically active. Jeffrey Yass, a founder of Susquehanna, is a major Republican donor and a supporter of the Club for Growth, an anti-tax group that also focuses on issues like free speech, central to the TikTok debate. Through Susquehanna, Yass was also the largest institutional shareholder in the 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 interests or business interests,” said Samuel Chen, a political consultant at the Liddell Group. "Yass does both," he added.

Other investors, like Bill Ford at General Atlantic, have chosen to stay politically low-profile.

To maximize their stakes in ByteDance, U.S. investors need either a public listing or a sale, potentially even one mandated by the government. However, it remains uncertain if the bill to force a TikTok sale will pass the Senate. Senator Maria Cantwell, head of the Senate Commerce Committee, supports TikTok legislation but emphasizes the importance of getting it right.

No immediate resolution seems likely, meaning the scrutiny on ByteDance’s investors is set to continue. "From their perspective, they just want this attention to go away," said Turpin. "The more attention it has, the worse it means for their investment."U.S. Investors Struggle with ByteDance Stakes Amid Geopolitical Tensions