The Committee on Foreign Investment in the United States is in the early stages of an 18-month pilot program of broader jurisdiction to review foreign investment in U.S. businesses that could present national security risks.
But while sources say the heightened scrutiny is warranted, some fear an expanded CFIUS could hurt foreign investment in the U.S.
"A lot of foreign investors are going to look to put their money elsewhere than the United States because of this," said Richard L. Matheny, a partner and head of global trade at Goodwin Procter LLP in Washington. "I know that that's happening."
As of mid-December, there were 265 private equity deals backed by foreign investors in the U.S. in 2018, reaching a total of $81.6 billion, according to data from London-based alternative investment research firm Preqin. That's up from 253 such deals and $68.3 billion in 2017. Over the last decade, the peak year in terms of dollars for foreign investor-backed private equity deals was 2015 when 231 deals were completed for a total of $122.5 billion.
Judith Alison Lee, a Washington-based partner and co-chair of the Gibson Dunn's international trade practice group, said it's too early to know if foreign investment will fall, but it's possible.
"If people think it's too onerous and it's too expensive and risky to make a U.S. investment, there are other countries around the world that don't have the same types of requirements," she said.
The pilot program's impact on foreign investment will likely become more clear in the first half of 2019, Ms. Lee said.
The Foreign Investment Risk Review Modernization Act of 2018 garnered bipartisan support in Congress and was signed into law in August. Prior to the foreign investment legislation, CFIUS could only review transactions that would result in a foreign person exercising "control" over a U.S. business. While the bar for "control" was low, Mr. Matheny said foreign investments that would not exceed roughly 15% of the voting interest in a U.S. business and conferred no board representation or other special rights were usually considered outside of CFIUS' jurisdiction, irrespective of the nature of the U.S. business.
Following the foreign investment legislation, a pilot program launched on Nov. 10 that grants CFIUS the ability to review certain non-control foreign investments in U.S. businesses that both engage with certain "critical technologies" and operate in or develop products for one or more of 27 specifically identified U.S. industries.
The reason for the legislation was chiefly China, Ms. Lee said. "The main impetus was the aggressiveness of the Chinese companies in their investments in the U.S.," she said. "Congress was worried that these (transactions) were not being adequately reviewed for national security implications."