Financial ties between the US and China are deteriorating, impacting the private equity industry. “Placement agents,” which are hired by buyout groups to raise new funds from US investors, are being rejected and criticized for pitching deals in China. The timing of this rejection coincides with US President Joe Biden’s plans to ban certain private equity and venture capital investments in sensitive sectors of China. Additionally, China’s anti-espionage and data laws, as well as raids on US consultancies, have rattled investors. The pullback of North American investors from private equity in China is significant since they have historically been the largest source of capital for the industry globally.
This shift in investment patterns is causing private equity groups to seek alternative ways to satisfy both non-US investors, who are eager for exposure to China, and US investors, who want restrictions on Chinese involvement. These requests have led to legal and financial complexities in structuring funds. Some investors are requesting the creation of new schemes that remove the China component, while others demand limits on Chinese investors’ participation. Chinese state-backed groups, which can provide large investments, are particularly scrutinized, often resulting in turning down significant sums. The decoupling between the US and China in the private equity industry is a significant development that will likely shape the future flow of capital across the globe.
This decoupling of financial ties between the US and China in the private equity industry is a behind-the-scenes shift that has major implications. While other industries have been more openly affected by this trend, the private equity sector is experiencing a significant transformation. The change in capital flows is likely to persist in the long term and is placing private equity firms in a unique position. Previously focused solely on financial returns, these firms now face the challenge of balancing competing demands from a fragmented group of global investors, whose interests are becoming increasingly political. This shift highlights the growing importance of political considerations in investment decisions within the private equity industry.