Home BusinessFinancial A hidden US-China decoupling | Financial Times

A hidden US-China decoupling | Financial Times

by Paul Morgan

The financial ties between the United States and China have been under strain in recent times, and one sector that is feeling the effects is private equity. Specifically, private equity’s “placement agents” are experiencing the breakdown of these ties firsthand. Placement agents are companies hired by buyout groups to help raise new funds.

A senior adviser to the industry in Hong Kong reveals that when these salespeople approach US investors about investing in funds that will be used for deals in China, they are not only being rejected but also facing criticism for even pitching the idea. Some have been told that they are out of touch, tone deaf, and even unpatriotic.

This rejection comes at a challenging moment, as US President Joe Biden has outlined plans to ban certain private equity and venture capital investments from sensitive sectors in China. In response, firms such as Sequoia Capital and GGV Capital have announced plans to split their US and China businesses.

Investors are becoming wary due to China’s anti-espionage and data laws, as well as raids on US consultancies. The recent travel ban imposed on Hong Kong-based Nomura banker Charles Wang Zhonghe has also rattled investors. Additionally, the US House of Representatives’ China committee accused BlackRock of profiting from investments that assist the Chinese military, causing other US groups to be cautious. Investors are also mindful of potential future sanctions if China were to attack Taiwan.

The pullback of North American investors from putting new money into private equity in China is significant since they have historically been the largest source of cash for the private capital industry. This year, they account for 50% of all capital invested in private equity globally, according to data provider Preqin. However, only $62 billion has been raised for Asia Pacific-focused funds so far this year, a significant drop from $173 billion in the same period last year. Meanwhile, fundraising for deals in Europe and the US, while slowed, has not experienced such a significant decline.

The challenge for private equity groups lies in the fact that they have raised multi-billion-dollar funds focused on Asia in recent years. Cutting off China from their dealmaking is not an easy option. Many are now turning their attention to India, as the Asia private equity businesses of Blackstone and KKR are run by India-based dealmakers.

However, deploying large sums of money in Asia without involving China is difficult given it is the world’s second-largest economy. Moreover, some non-US investors, especially Middle Eastern sovereign wealth funds, are eager for increased exposure to China.

To navigate this complex situation, private equity groups are attempting to find solutions that satisfy both groups of investors. This often involves legal and financial maneuvers. Investors are requesting a new scheme that removes the China component, while US investors are demanding restrictions on Chinese investor involvement in private equity funds, irrespective of where the funds are deployed.

This shift in dynamics is significant in the private equity industry, an industry known for its opacity. It signifies a long-term change in global capital flows and the increasing politicization of investors’ interests. Deal makers, who have traditionally focused solely on financial returns, are now being forced to navigate a landscape of competing demands from a fragmented group of global investors.

While this version of US-China decoupling in the private equity industry may be hidden from public view, it ultimately has far-reaching implications. It marks a transformative shift in capital flows and highlights the evolving role of dealmakers in navigating political complexities.

In conclusion, the breakdown of financial ties between the US and China is impacting the private equity industry, particularly with regards to investments in China. The rejection and criticism faced by placement agents, as well as the overall pullback of North American investors, highlight the significant shifts occurring in the industry. As private equity groups attempt to cater to the demands of different investors, they are witnessing a long-term change in global capital flows and the increasing politicization of investment decisions.

related posts