The devil is in the detail of data
The reality is that ETFs owning publicly listed private equity firms could easily have indirect exposure to hundreds or thousands of private companies that are not obvious - and do not need to be reported by the ETF. Investors who want to find out what they ultimately own need access to extensive data on ETFs and public companies, and this is also true for the mutual funds that are increasingly being converted into ETFs.
Some US mutual funds, including those run by Fidelity, have directly invested into private equity, such as Twitter and TikTok owner Bytedance. This has raised some controversy over valuation issues. Since Bytedance is a private company, it does not trade every day like a publicly listed stock, and is valued whenever it has a funding round and raises capital, or in the interim it could be valued by a financial model. This can create a situation where different funds use a different valuation price to mark their holding in Bytedance.
They do not expect this to be a long term issue. Mutual funds usually invest in pre-IPO private equity, in the expectation of a public offering. If this never materializes, they might be left holding a private equity stake that could sometimes be difficult to sell, though secondary markets do exist for private equity interests.
ULTUMUS data analysis also reveals that some ETFs also have indirect exposure to various private companies, including TikTok, via their holdings of two listed companies that have stakes in TikTok’s owner.
A group of ETFs tracked by ULTUMUS have an average of 0.79% weighting in Japan’s Softbank, which owns 3% of TikTok’s current owner, private company Bytedance. This stake is worth about USD 8 billion ( 0.03 x 268 billion ) or about 11% of Softbank’s valuation, at the time of writing, which percolates through to an average of about 0.08% of the ETFs. In addition, a group of ETFs that we track have an average of 0.40% weighting in KKR, which in turn has some small exposure to Bytedance. In the wider scheme of things, the ETFs’ look through exposure to Bytedance is a few basis points (hundredths of one percent) or a fraction of one percent.
Investors in such ETFs should not worry about their products being left with private equity that may be hard to sell, because Softbank and KKR are publicly listed companies.
But there is nonetheless some uncertainty and political sensitivity around the future ownership and US government approval of TikTok.
There may be a ByteDance IPO and/or a TikTok Global IPO. According to a recent US ruling, if no buyer is found for TikTok after a 9 or 12 month deadline, TikTok may be banned in the US, though there could also be legal challenges. Yesterday, Bytedance said publicly that it does not want to sell TikTok and would challenge the ban on the basis of the First Amendment of the US constitution, which basically guarantees freedom of expression. Appeals to the US Supreme Court in Washington DC can take years, so the TikTok saga could drag on well beyond the next US Presidential election later this year.
If the US Government does eventually prevail in its desire to ban TikTok, this might perhaps force some ETFs to try and divest their stakes in ByteDance, depending on the details of how the ban is defined, such as ownership percentage thresholds.
But this would not really be a unique event. The US has previously imposed sanctions on a number of Chinese companies including some that were deemed to be part of the “military industrial complex”, which also required various funds to sell those stakes.
Sanctions monitoring is an important part of the range of ULTUMUS data capabilities, and we will be keeping abreast of any changes to the status of TikTok or Bytedance.