US gov is the biggest risk to LPs with China exposure – report

LPs with exposure to the world's second-largest economy should expect more disruption from US policymakers, according to a report from Cambridge Associates.

The US government’s push against Chinese companies, not the Chinese Communist Party, is the biggest risk for investors with exposure to China in 2020, according to Cambridge Associates.

The consultant also noted in a report published this week that forcing US investors to divest from China would disrupt private equity and venture capital fundraising and valuations and impact the $1 trillion of US-listed Chinese companies.

“Halting US investment in China and limiting China’s access to US capital markets is part of the economic and financial decoupling of the two nations long advocated by Chinese hawks. The goal is to starve China of capital and customers, halting its rise as a strategic threat to the US,” Cambridge Associates noted in its Outlook 2020: Ten Investing Themes for the Coming Year.

Among US protectionist policies that make it harder to invest in China include Florida senator Marco Rubio’s Taxpayers and Savers Protection Act, which would restrict US pensions’ investments in China due to security concerns. TSPA, which was introduced by Rubio in October, blocks the Federal Retirement Thrift Investment Board – which administers the $599.5 billion Thrift Savings Plan on behalf of government employees and US armed forces – from investing federal retirement savings into mainland Chinese companies.

Catherine Crockett, managing partner and co-founder of separate account manager GroveStreet, which backs Chinese venture capital managers, told Private Equity International that the trade war and its ramifications have come up in conversations with its LPs, but this has not changed the firm’s fund commitments in a meaningful way.

“Within the VC segment there are increasing regulations about what Chinese investors can do with US companies,” she said.  It doesn’t change what we invest in, but it does change our view of the prospects for some companies. For example, US tech companies are less likely to have a Chinese buyer and are less likely to have a Chinese source of additional capital infusion than they might have had before.”

Private equity fundraising and investment into China decreased by 31 percent and 34 percent respectively as of the first half of this year, compared with the equivalent period last year, according to EMPEA’s latest industry statistics. While the ongoing trade war is not the primary reason for a slowdown in both capital raising and deal activity, investors are taking pause and are more cautious about deploying capital into the market.

LPs aiming to ramp up exposure to China despite trade tensions include some of the largest pensions in North America. Christopher Ailman, chief investment officer at the California State Teachers’ Retirement System, the US’s second-biggest public pension, told PEI in May last year that he expects the pension’s Asia exposure to double or triple in the next three to five years. Ailman highlighted China as lucrative market, with the sheer number of opportunities there.

Canada Pension Plan Investment Board, meanwhile, plans to more than double its China asset allocation by 2025. The pension is also considering opening an office in Beijing next year, according to media reports.

Cambridge noted in the report that the tensions between the US and China will continue to weigh heavily on LP sentiment in 2020, along with high valuations and the ever-increasing pile of private equity dry powder.