Lead Edge Capital's Mitchell Green: China Tech Still a Good Bet

Key Concepts

TikTok USA, Bytedance, US-China relations, tariffs, secondary market, AI regulations, Chinese economy, investment strategy, liquidity drought, DPI (Distributed to Paid-In Capital), IPO market, over-allocation to private equity, secondary market opportunities.

TikTok USA and Bytedance

• The speaker acknowledges the ongoing uncertainty surrounding the negotiation between the White House, Bytedance, and the Chinese government regarding TikTok USA.
• The speaker mentions that their firm has previously modeled TikTok USA as being worth zero, but they anticipate some resolution to the situation, though the timeline is unclear (1-6 months).
• The speaker confirms interest in owning TikTok USA if it were extricated from Bytedance and had US ownership, depending on the price.
• Approximately 60% of Bytedance's investors are non-Chinese.

US-China Relations and Tariffs

• The ongoing tariff war between the US and China is impacting the Bytedance/TikTok situation.
• The speaker avoids expressing strong opinions on political matters, preferring to observe and analyze.
• The speaker references a statement by the US President suggesting a deal was possible if not for the tariffs.
• Uncertainty surrounding tariffs is slowing down the economy.

Investment Strategy and Market Observations

• The speaker's firm has not purchased any Bytedance shares this year due to concerns about potential restrictions related to AI model speed regulations imposed by the Chinese government. It's unclear if Bytedance falls under these restrictions, but they are acting conservatively.
• The speaker notes increased activity in the secondary market for Bytedance shares, with valuations ranging from $200-320 billion, driven primarily by Asian investors.
• The Chinese business of Bytedance is performing exceptionally well despite the perceived weakness of the Chinese economy.
• The speaker's firm tends to adopt a contrarian investment strategy, buying into Chinese companies when others are hesitant.
• The firm's portfolio is primarily focused on high-margin software companies in North America and Western Europe.
• The firm has a team of associates that speak to around 9000 companies a year, including 10-20 companies across Asia.

Technology and Global Collaboration

• The speaker emphasizes the importance of global collaboration in technology, particularly between the US and China.
• The speaker cites Jensen Huang, CEO of Nvidia, stating that over 50% of AI computer scientists are in or from China.
• The speaker suggests the US could learn from China's approach to regulating social media, particularly regarding educational content. In China, TikTok is used to teach science and math, while in the US, it's often used for frivolous content.

Liquidity Drought and Secondary Market Opportunities

• The speaker believes the "year of the IPO" (previously anticipated for 2024-2025) is no longer happening.
• A liquidity drought is expected to continue, leading to endowments and other large institutional investors becoming overallocated to private equity and other private assets.
• This over-allocation will force institutions to turn to the secondary market to sell assets, creating significant buying opportunities for firms like the speaker's.
• The speaker emphasizes the advantage of buying from sellers who are forced to sell.

DPI and Fundraising

• The speaker believes that investors will prioritize funds with strong DPI (Distributed to Paid-In Capital) over the past five years when making future investment decisions.
• The speaker acknowledges the difficulty of the current environment, where companies that were expected to go public are now unable or unwilling to do so.

Conclusion

The speaker provides insights into the complex interplay of geopolitical factors, technological advancements, and market dynamics affecting investments in companies like Bytedance and the broader private equity landscape. The speaker highlights the importance of a contrarian investment approach, the potential for secondary market opportunities arising from liquidity constraints, and the need for global collaboration in technology. The speaker also emphasizes the significance of DPI as a key metric for evaluating fund performance in the current environment.