Escalation of the on-going trade war between the US and China is not expected to substantially impact the flow of private equity investments from China to the US particularly in high technology companies.

The key reasons are: Chinese investors will learn how to deal with restrictions imposed by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee that reviews the resulting control of a US business by a foreign entity; they will learn how to keep their investments at a certain level that will be acceptable to the legal and political requirements in the US; the urgent demand for technology needed to meet requirements of the Chinese economy; and the huge volume of capital flowing out of China seeking investment opportunities is just too irresistible for US companies to resist.

CFIUS, in particular, has come into focus after it has rejected billions of dollars worth of deals that would have resulted in Chinese entities acquiring US technology companies in the past year.

“There is an increased focus on CFIUS because of awakened interest from the United States in technology investments by China and I think that will deepen. This is a very politically sensitive topic. How do you become an investor in US technology if you’re a Chinese investor,” says Scott Peterman, Hong Kong-based partner of Orrick, Herrington & Sutcliffe and member of the firms M&A and private equity group.

The key question that is sought by CFIUS, particularly, when evaluating an investment that would result in the acquisition of a US technology company by a foreign entity is: who is doing the investment. The foreign entity has to go through a clean review.

“You can, under some circumstances, get a pass. For example, if you’re a passive investor in a private equity fund, there is no clear definition by CFIUS of what it means to be a passive investor,” Peterman says.

In an extreme example, a passive investor can put up an investment that is below 10% of the private equity fund. In addition, the investor will need a waiver which guarantees it will not exercise any interest in the fund.

“It’s probably a very safe bet that that will be considered a passive investment. That’s common for a lot of investors. They would expect not to have any real authority or control over the investment activity of the fund. But a lot of Chinese investors are not comfortable with that approach,” Peterman says.

On the other hand, US companies that are potential targets of Chinese private equity investments want to retain substantial control and authority after the completion of the investment.

“Some of this comes from a lack of trust. It’s also reinforced by a lot of bureaucratic tendencies that you would see in many organizations such as a voluminous checklist about how things happen or should happen, procedures, controls and things like that,” Peterman says.

Despite these developments, there are ways of structuring private equity investments that would be able to meet the challenges of investing in the US by Chinese companies seeking US technology particularly in areas such as chip design, wafer manufacturing, and cleantech manufacturing.