Private Equity Firms Pledge China-Free Investments Amidst US Crackdown

More than two dozen private equity firms have pledged to avoid investments in entities based in China and Hong Kong, signaling a growing trend in the US to restrict capital flows to Chinese sectors deemed a national security risk, reports Nikkei Asia.

The 33 signatories to the "Clean Capital Certification" pledge have committed to not accepting investors from China, Hong Kong, Russia, Iran, and North Korea. The funds also promise to refrain from investing in startups based in these nations.

This private initiative, spearheaded by Future Union, a nonprofit organization that monitors US institutional investments in China, enjoys bipartisan support from the Select Committee on the Chinese Communist Party.

The declaration comes as the US government intensifies efforts to curb investments in China, with the Treasury Department finalizing rules last month to restrict American investments in mainland Chinese, Hong Kong, and Macao high-tech sectors, including artificial intelligence, quantum computing, and semiconductors. These rules are set to take effect on January 2nd.

"American national security and economic prosperity are put at risk when U.S. companies invest in our foremost adversary or welcome CCP-backed investors on their boards," said Congressman John Moolenaar, chairman of the Select Committee on the CCP, to Nikkei Asia. "Instead, thanks to these patriotic investors, there will now be a standard for Clean Capital Certification that Americans can use to evaluate their investments."

The Clean Capital Certification, while lacking legal force, aims to promote transparency and bolster the credibility of participating firms.

"We see it as essential in today’s geopolitical landscape as it safeguards sensitive technologies and upholds liberal democratic principles," said Kurt Scherer, Managing Director at C5 Capital, to Nikkei Asia. "By restricting capital from adversarial states, we not only protect our investments but also promote a fair and transparent market that counters authoritarian objectives."

The declaration focuses on first-degree limited partners, acknowledging the challenges of tracing capital origins from diverse asset managers.

Several prominent US firms, including Moonshots Capital, AE Ventures, and Snowpoint Ventures, have signed onto the certification, alongside international players like London-based C5 Capital and Australian Beaton Zone Ventures. However, some of the largest US funds have yet to join.

"Not only is adversarial capital fundamentally at odds with national security, but from a commercial perspective it can be seen how it impacts the operational progress of some companies," said Steve Baxter, lead investor and managing partner of Beaton Zone, to Nikkei Asia.

The Clean Capital pledge reflects broader US policy shifts. The government has expanded its authority to review land purchases near military facilities, following President Biden's order for a Chinese cryptocurrency mining company to divest a plot near an Air Force base. Additionally, US states have implemented rules compelling public pension funds to divest from Chinese-owned companies, citing national security concerns. Last month, Kansas’s state pension fund divested nearly $300 million worth of investments in Hong Kong and China, while Texas’ governor mandated the rapid sale of Chinese assets by state agencies.

"This isn’t just a government problem -- it’s a private-sector responsibility," said Andrew King, founder of Future Union, to Nikkei Asia. "Venture and private equity firms are gatekeepers for innovation. They decide who gets to invest in tomorrow’s breakthroughs. By adopting the Clean Capital pledge, these firms can protect not just their portfolios but also the democratic principles that make free markets possible."

Private capital investment in China has significantly slowed, with deal volume yet to fully recover from the COVID-19 pandemic. This decline is attributed to waning foreign interest and tightening regulatory restrictions in China. The share of US investors in venture capital deals in China has plummeted to 5% as of June 30, down from 14% in 2021, according to PitchBook. This marks a third consecutive annual decline.