Financial ties between the US and China are deteriorating, as evidenced by the struggles faced by private equity’s “placement agents”. These companies, hired by buyout groups to raise funds, are facing rejection and criticism for pitching investment opportunities in China to US investors. The timing of their pitch is particularly unfavorable, with President Joe Biden planning to restrict certain private equity and venture capital investments in sensitive sectors in China. China’s anti-espionage laws, data laws, and raids on US consultancies have also unsettled investors. Moreover, the US House of Representatives’ China committee has accused BlackRock of profiting from investments that support the Chinese military, making other US groups cautious. As a result, North American investors are hesitant to invest new money in private equity in China at the moment.
This withdrawal by North American investors is significant because they have traditionally been the largest source of capital for the private capital industry. They account for 50% of all private equity investments globally. Consequently, fundraising for Asia Pacific-focused funds has significantly declined this year, while fundraising for deals in Europe and the US has slowed, but not as sharply. However, it is challenging for private equity groups, which have raised multi-billion-dollar funds focused on Asia in recent years, to completely cut off China from their dealmaking. This has prompted the groups to seek ways to satisfy both North American investors and non-US investors, such as Middle Eastern sovereign wealth funds, who desire exposure to China. Legal and financial maneuvers are being employed, with some investors requesting new schemes that remove the China component, while others are imposing restrictions on the involvement of Chinese investors in private equity funds.
This decoupling between the US and China in the private equity industry is largely hidden from the public due to the industry’s opacity. Nonetheless, it represents a significant long-term shift in global capital flows. Private equity dealmakers, who used to primarily focus on financial returns, are now confronted with the task of balancing the demands of a fragmented group of global investors whose interests are becoming increasingly political. The buyout groups are grappling with the challenge of keeping both North American investors satisfied and accommodating the desires of non-US investors for exposure to China. As a result, they are engaging in creative tactics to navigate this complex landscape and maintain investor confidence.