‘Essentially dead’: China closes off foreign investors’ route into tech deals

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China’s tech crackdown intensifies

China’s grip on its high-flying tech companies such as Alibaba and Tencent has tightened this year through a series of measures that have scared away some foreign investors.

Now, authorities in Beijing are going further by strengthening rules on attracting foreign capital and listing overseas, the FT’s Ryan McMorrow and Sun Yu reveal.

Beijing plans to blacklist companies that use variable interest entities (VIEs), vehicles that have for years allowed Chinese tech groups to raise billions of dollars from foreign investors while also staying within the bounds of domestic rules.

It works like this: foreigners take shares in offshore holding companies set up in the Cayman Islands, which then enter into a series of contracts with the onshore Chinese businesses and their founders such as Alibaba’s Jack Ma or Tencent’s Pony Ma, who own and run the businesses on the ground.

The plans come amid a severe crackdown on the tech sector, which last week led to ride-hailing company Didi Chuxing saying it would delist from the New York Stock Exchange and instead prepare to go public in Hong Kong.

VIEs have allowed large investors such as Japan’s SoftBank and Sequoia Capital China to funnel billions of dollars from family offices, university endowments, and foreign pension and sovereign wealth funds, into China’s most promising internet start-ups.

For China-focused general partners and their limited partners, it’s been a great run. Of the 241 Chinese companies listed in New York, 79 per cent use VIEs to run their businesses, according to FT analysis of Capital IQ data.

Chinese tech billionaire Jack Ma celebrates the IPO of his ecommerce group Alibaba in New York in 2014. Soon, such listings may be a thing of the past © Getty Images

Two people close to financial regulators in Beijing told the FT that the list being drawn up wasn’t intended to affect existing companies using the VIE structure. Instead, it’s aimed at ensuring that future national champions critical to the country’s economy, like those that hold a lot of data, won’t be dominated by foreign shareholders.

“VIEs are not dead entirely, but essentially they are,” one of the people said.

“In the future, foreign investors can put money into traditional industries as opposed to tech,” the person said. (Without the foreign investment restrictions, such industries don’t need to use VIEs.)

Didi, with its real-time location data on thousands of Chinese officials, brought those fears to the forefront. The company was ordered to delist from the NYSE even though it wasn’t sharing data with its shareholders.

Simply put, Beijing wants complete control of its private companies. It would rather not have foreign shareholders getting in its way.

Blackstone’s James cashes in 

Blackstone shares are the gift that keep on giving.

Last year, co-founder Stephen Schwarzman pulled in at least $615m, mostly from dividends the firm paid to shareholders, while president Jonathan Gray received $217m in combined pay. Outgoing executive vice-chair Hamilton James earned more than $100m.

James, 70, is set to leave Blackstone in January, ending a two-decade run with the firm during which he helped oversee its growth from a small partnership into the world’s largest alternative investment manager with a more than $160bn market capitalisation.

On Wednesday, Blackstone disclosed that James sold $500m of stock a few days after announcing his looming retirement, DD’s Antoine Gara and Mark Vandevelde report.

From 2002 to 2018, Hamilton James was the firm’s chief operating officer, helping to oversee its daily operations © Bloomberg

While James still plans to hold on to billions in Blackstone stock, his kids want to diversify the trust portfolio despite inheriting one of the world’s greatest annuities.

Over the past 12 months, Blackstone has paid out $3.57 per share in dividends, an 11.5 per cent yield on its 2007 initial public offering price of $31.

The stock has also soared from $31 to $135.34 since that listing, inclusive of an over 100 per cent gain in 2021, dramatically outperforming the S&P 500.

James is happy to hold his $3.3bn net worth mostly in Blackstone, but the urge to diversify on the part of his children actually forced the firm to buy back its own stock as it doubled its share repurchase authorisation to $2bn.

If other heirs to the Blackstone fortune follow suit, it might push the private equity giant to continue increasing share repurchases, a manoeuvre often requested by shareholders.

Of course, that would only increase the pot of cash profits that will be paid to people like James who don’t see a better alternative.

Bain seeks LV’s loving 

After a fraught public battle, it’s crunch time for members of UK life insurer LV.

On Friday they’re set to vote on whether to sell to US private equity group Bain Capital, a move which would end the 178-year-old insurer’s member-owned status.

The potential deal comes just two years after LV sold a chunk of its general insurance arm to Germany’s Allianz for £1.1bn, prompting LV members to ask why external capital is needed so soon. The FT’s Ian Smith has more here.

Bain’s £530m deal was announced last year and its terms set out last month. The sale of the insurer has stoked a fierce debate between management and some members over whether the benefits on offer justify surrendering mutual status and the rights that come with it.

The LV-Bain deal saga has reopened a debate over mutuals, which have fewer options than regular companies to raise cash © Geoffrey Swaine/Shutterstock

As online voting began, fellow mutual insurer Royal London, which lost out in last year’s bidding war, added to the drama. It publicly suggested other “options”, including LV members becoming members of Royal London — something that wasn’t on the table last year, according to people involved in the discussions.

Bain’s offer is inevitably complicated, affecting LV members differently depending on what policies they’ve historically bought. It’s partly intended to fund some of the liabilities belonging to members holding with-profits policies, who share in the benefits and obligations of their invested capital.

Upping the pressure, LV’s board told members last week that it needs to find a buyer regardless of the outcome of Friday’s vote, and that the terms next time are likely to be worse.

Members are left having to decide on the Bain offer without a clear idea of the alternative.

Opponents of demutualisation fear a yes vote will open the way to a flurry of similar takeovers of mutuals: though that is assuming that US private equity buyers aren’t put off by the inevitable political pain involved.

Job moves 

  • Taylor Wimpey’s chief executive, Pete Redfern, is stepping down after more than 14 years running the housebuilder. It comes days after it emerged that activist investor Elliott had taken a stake in the company.

  • Houlihan Lokey has hired Geoff Wilson as a managing director in its power and utilities group, based in New York. He was previously a managing director at Whitehall & Company.

  • Brunswick Group has hired Jason Farkas, formerly vice-president and general manager of CNN Business, as a partner in its New York office.

  • Sidley Austin has promoted 42 lawyers to the role of partner.

Smart reads

No Lehman moment China’s Evergrande crisis has barely touched the broader debt market, thanks mostly to support from Beijing. (Bloomberg)

Slow integration Salesforce’s $6.5bn takeover of MuleSoft, the latest in a series of deals as it seeks to bolster its software and cloud business, is turning out to be a dud as it struggles to retain workers and compete against Amazon and Microsoft. (Business Insider)

Battle inside Biogen A controversial Alzheimer’s drug has pushed Biogen’s executives to the brink. Regulatory scrutiny, slow take-up of the medicine and questionable data risks fracturing the company. (Stat News)

News round-up 

Elizabeth Holmes wraps up testimony in Theranos fraud trial (FT)

French shipping group CMA CGM agrees $3bn logistics deal (FT)

Nestlé trims L’Oréal stake by €9bn (FT)

Credit Suisse admits chair Horta-Osório breached quarantine rules (FT)

Saudi Aramco/BlackRock: pipeline deal shows kingdom is open to FDI (FT)

Monzo valuation hits $4.5bn on back of drawing thousands of new customers (FT)

Justice Department told Deutsche Bank lender may have violated criminal settlement (WSJ)

Tech IPOs: newly listed companies are growing more expensive (FT)

Jefferies asks staff to work from home again as firm’s Covid cases rise (BBG)

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