When Texas’s largest state pension funds and endowments moved to curb China investments in recent years, they still kept money with big names like Two Sigma Investments, Hillhouse Investment, PAG and HongShan Capital Group.
Now a new order for state entities to divest all of their China investments calls into question the ability of those firms to hold on to existing cash or raise fresh capital from Texas.
Gov. Greg Abbott on Nov. 21 wrote to state agencies, barring them from making new investments in China and decreeing exits from any existing ones “at the first available opportunity.” The fresh order capped years of moves by some of the state’s largest public-sector investors to reduce their China holdings in the face of growing geopolitical rivalry along with the Asian nation’s regulatory uncertainty, slowing economy and slumping markets.
The immediate impact on the likes of Hillhouse and Two Sigma may be modest, given that the allocations make up a small portion of the tens of billions of dollars they manage, and that, for the former, much of the money is tied up in relatively illiquid private assets. But there is a risk that other states may follow Texas as U.S.-China tensions are expected to heat up when President-elect Donald Trump returns to power.
The nearly $210 billion Teacher Retirement System of Texas, or TRS, and the $78 billion University of Texas/Texas A&M Investment Management Co. — better known as UTIMCO — are among investment giants in the state that remain exposed to China. The Employees Retirement System of Texas, also known as ERS, whose trust fund hit $40 billion, also disclosed allocations to asset managers with China exposure, such as Asia-based alternative assets investor PAG.
TRS received the governor’s letter and is reviewing its China investments, a spokesman said in an email, adding its exposure to China is estimated at less than 1% of its assets. A new TRS investment policy statement adopted on Sept. 23 excluded Hong Kong and China from benchmarks used for public equity investments. Its investment committee earlier this year discussed “zero percent allocation” to China, “due to the political environment shifting.”
The organization effectively halved the target allocation to Chinese stocks in September 2022, when it decided to reduce the country’s outsized weight in the MSCI Emerging Markets Index by switching to an equal mix of the original benchmark and a version without China.
An investment report available to Bloomberg News showed TRS had a touch under $211 million parked in the Two Sigma China Core Equity Fund at the end of June. It had another $282 million invested with Green Court Capital Management.
Those two investments are absent from the latest report for the end of September. Hillhouse, which managed nearly $500 million of public markets investments for the pension fund at the end of 2020, dropped off TRS’s list of external managers in the latest annual report for the year ended Aug. 31.
TRS also had investments in funds of Hony Capital and Orchid Asia Group, two China-focused private equity firms. Changes in the market value of holdings would have reflected the amount of committed capital called down by the funds for investments, cash distributions and market value changes in their underlying investments.
Hillhouse, GGV Capital, Two Sigma and HongShan Capital Group, the renamed former China arm of Sequoia Capital, also feature prominently among managers with significant China investments that UTIMCO parceled out money to.
ERS “is evaluating next steps” after receiving the governor’s letter, a spokesman said in an email. Representatives for EQT, Green Court, Hillhouse, PAG, Two Sigma and UTIMCO declined to comment. TPG couldn’t immediately comment. Coreview, HongShan, Hony Capital and Orchid Asia didn’t immediately respond to emailed requests for comment. Neither did Granite Asia, the entity that now runs GGV’s Asia operations.
Most of the funds have broader geographical coverage, and it’s not clear how much of the amounts are actually invested in China. PAG funds that Texas investors have allocated money to have minimal exposure to China, said a person with knowledge of the matter. BPEA Private Equity Fund VI, one of the EQT funds that have Texas state money, no longer has active investments in China after exits, said a person with knowledge of the matter.
Geopolitical tensions mounting
President Joe Biden in August 2023 issued a long-anticipated executive order imposing screening for U.S. investments in Chinese companies in some sectors. In October 2023, a U.S. congressional committee sent Sequoia a letter asking for information about its China investment, calling out several as “problematic” for security or human-rights reasons. Earlier that year, the Select Committee sent GGV Capital, GSR Ventures, Qualcomm Ventures and Walden International similar letters asking about various investments in China and Chinese investors in their funds.
Abbott joined his counterparts in South Dakota, Iowa and Mississippi in writing to Vanguard Group in May 2023, urging the investment firm to create an emerging markets fund that excludes China.
The Republican governor signed an executive order last month banning business travel by state employees to countries designated as “foreign adversaries,” including China. It required advance notification of planned personal trips to such destinations and post-trip debriefings. That would curb the ability of Texas public sector investors from conducting on-site meetings with managers in mainland China and Hong Kong.
Abbott’s Nov. 21 order cited threats to the financial security of the state from the Chinese Communist Party and called for all investments of state money in China to be “evaluated and immediately addressed.”
The order didn’t specify whether and how he expected private markets investments — such as private equity, venture capital and real estate — to be liquidated. A press officer wasn’t able to provide additional information. Even public market investments may take more than a year to exit, depending on lockup and redemption terms. The state investors may have money with other global or emerging markets or Asia regional funds that make part of their investments in China. It’s not clear how that will be treated.
