The Unseen Separation: US-China Decoupling | Financial Times

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Financial ties between the US and China are experiencing a breakdown, particularly seen in the private equity industry. “Placement agents,” companies hired to assist buyout groups in raising funds, are facing rejection and criticism when pitching the idea of investing in China to US investors. President Joe Biden’s plans to restrict private equity and venture capital investment in sensitive sectors of China further exacerbate the situation. Concerns about China’s anti-espionage and data laws, as well as potential future sanctions, have rattled investors. As a result, North American investors are hesitant to put new money into private equity in China, impacting fundraising for Asia Pacific-focused funds.

This pullback is significant because North American investors have historically been the primary source of cash for the private capital industry worldwide. To navigate this challenge, private equity groups are seeking ways to satisfy both hesitant North American investors and non-US investors, such as Middle Eastern sovereign wealth funds, who are eager for exposure to China. The industry is exploring legal and financial maneuvers to accommodate both groups’ preferences, including creating separate schemes that exclude the China component for certain investors. Additionally, US investors are calling for restrictions on the involvement of Chinese investors in private equity funds, regardless of where the funds are deployed.

This shift in the private equity industry due to strained US-China ties is significant and likely to impact global capital flows in the long term. Private equity dealmakers must now navigate competing demands from fragmented global investors, whose interests increasingly intersect with politics. As the industry operates in relative opacity, this decoupling remains mostly hidden from public view. Nevertheless, it marks a pivotal change and forces dealmakers to take on a new role beyond solely pursuing financial returns.

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