By Rolfe Winkler, Jing Yang and Alexander Osipovich
No matter the outcome of the struggle between China and the U.S.
over video-sharing app TikTok, an unlikely winner will be a
secretive trading firm based outside of Philadelphia.
Susquehanna International Group LLP, an options-trading giant,
has largely avoided publicity during its three-decade history.
Susquehanna's core business is using quantitative models and
computers to execute rapid-fire trades in various markets. Such
firms tend to rake in profits by making thousands of small trades a
day, often holding securities for fractions of a second.
But in the case of TikTok, the firm bet big and held on to its
investment for years.
Susquehanna owns around 15% of TikTok owner ByteDance Ltd.,
according to people familiar with the matter. This makes
Susquehanna the largest outside investor in the Beijing-based
social-media company. Based on private trades of ByteDance shares
earlier this year, Susquehanna is sitting on a stake that could be
worth more than $15 billion on paper, according to data firm
PitchBook.
The firm's founding partners are poised to personally profit
from the investment more than traditional venture capitalists
would, because the firm invests only the partners' money, according
to Susquehanna's China website. Typically, venture-capital firms
raise funds from outside investors and must share profits with
them. Susquehanna declined requests to interview its founders.
Susquehanna got into ByteDance early, joining a $5 million
investing round in 2012, the year the Chinese company was founded,
according to PitchBook. The company's TikTok app now has hundreds
of millions of users globally, about 100 million of whom are in the
U.S., many of them teenagers. Susquehanna also invested in
Musical.ly, a video app that was bought by Bytedance in 2017 and
later folded into TikTok.
The future of the investment is still undecided, with
Susquehanna caught in a geopolitical standoff between Washington
and Beijing. ByteDance is currently seeking approval from both
governments for a deal that would include Oracle Corp. and Walmart
Inc. taking a stake in a newly created U.S.-based company and
running some of its operations. Regardless of how it plays out,
Susquehanna is likely standing on a significant return.
People close to ByteDance say the driving force behind the
investment was a pair of local executives at Susquehanna's China
venture-capital unit, SIG Asia Investments: Tim Gong, who has led
the unit, and Joan Wang, who was a big early supporter of ByteDance
founder Zhang Yiming.
Susquehanna invested in two startups that Mr. Zhang was involved
with before founding ByteDance -- travel site KuXun and real-estate
portal 99Fang -- and the firm invested in ByteDance even after the
failure of 99Fang. Ms. Wang met Mr. Zhang frequently to advise him
on strategy as he cycled through ideas for a business model in
ByteDance's early days.
During the Chinese New Year holidays in 2012, Mr. Zhang met Ms.
Wang at a cafe in Beijing and the two discussed artificial
intelligence. The meeting planted the seeds for an AI-powered
news-aggregation service called Toutiao, which would become
Bytedance's first big hit before TikTok.
At first skeptics doubted Toutiao's ability to compete with
larger rivals Sina Corp. and Sohu Inc. Ms. Wang, an early ByteDance
board member, connected potential investors to Mr. Zhang, says Hong
Chen, chief executive of Hina Group, a Chinese investment bank and
investing firm.
"She was a great helper for ByteDance," said Mr. Chen, who is
friends with Ms. Wang. "She is a very hands-on investor."
The bridge between ByteDance, Ms. Wang and Susquehanna's
headquarters in Bala Cynwyd, Pa., is Arthur Dantchik, who
co-founded the firm with a group of college friends in 1987.
Mr. Dantchik is on the ByteDance board, having taken over the
seat initially occupied by Ms. Wang. He would also be a board
member of TikTok Global, the proposed U.S.-based spinout that the
company is working to create to avoid the app being banned from the
U.S. by the Trump administration.
People close to Susquehanna say Mr. Dantchik is an affable,
well-liked figure within the firm who was more globally oriented
than some of the other founding partners. He helped start SIG Asia
Investments in 2004. He has traveled regularly to China and other
places where Susquehanna has investments, such as Israel, these
people said.
The firm's roots date back to the State University of New York
at Binghamton, where six of its co-founders were students in the
1970s. Most of them shared a love of poker. They initially set up
shop in the building of the Philadelphia Stock Exchange. Israel
Englander, the billionaire chief executive of hedge-fund firm
Millennium Management, helped the crew get its start by sponsoring
Susquehanna co-founder Jeffrey Yass for a seat at the exchange. Mr.
Yass's father Gerald also helped set up the firm.
Poker remains a big part of Susquehanna's culture. The game is
part of the training curriculum for new employees, and the firm
holds an annual employee poker tournament, detailed in a blog on
Susquehanna's website. Another co-founder, Eric Brooks, won first
place in a seven-card stud event at the 2008 World Series of Poker.
He gave his winnings of $415,856 to an educational charity.
Susquehanna now has more than 1,900 employees in offices
world-wide. The firm accounts for more than one-fifth of U.S.
options-trading volume, and it was sitting on more than $80 billion
worth of stocks, options and other securities and derivatives at
the end of 2019, according to an analysis of the firm's regulatory
filings by Alphacution, a research firm specializing in proprietary
trading firms. Options are contracts that give investors the right
to buy or sell a stock at a particular price.
Secrecy is another hallmark of Susquehanna, which doesn't
publicly disclose its financial metrics. The firm, like many
high-speed trading firms, requires employees to sign noncompete
agreements to keep trading secrets from being shared with
rivals.
"Susquehanna is like a black hole," said Paul Rowady, director
of research at Alphacution. "There's no light that escapes."
As ByteDance negotiates the fate of TikTok with U.S. and Chinese
authorities, Mr. Dantchik hasn't played a big role in talks with
officials, allowing other ByteDance investors such as Sequoia
Capital and General Atlantic to take the lead, people familiar with
the discussions said.
More than 30 years after its formation, Susquehanna is still
closely held by its remaining co-founders, and it has never brought
in outside investors, the people close to the firm said.
That explains in part how it ended up in China. The trading
business generated such hefty profits that it spurred the
Susquehanna co-founders to look for other places to reinvest their
money, these people said.
The firm branched out into traditional investing in the 1990s,
initially focusing on private investments in public equity, or
PIPEs, a type of deal in which private investors buy equity stakes
directly from a publicly traded company. Later, Susquehanna set up
units for venture capital and private-equity investments. As the
Internet boom spread to China and more Chinese startups were listed
in the U.S. in the 2000s, it launched SIG Asia Investments in
Shanghai.
In its early days in China, Susquehanna appeared alongside
Sequoia in several investments, such as Bona Film Group, producer
of the 2019 World War II epic "Midway," and fast-food chain Country
Style Cooking Restaurant Chain Co. Overall in China, Susquehanna
has invested in more than 260 companies since 2005 in such sectors
as media, internet, consumer and health-care, totaling more than $2
billion, according to its website. It co-invested with Sequoia 36
times, according to Chinese venture capital research firm
Zero2IPO.
In the coterie of entertainment financiers in China, Mr. Gong is
known for co-hosting an exclusive party with Bona Film during the
Shanghai Film Festival each year at a bungalow near the city's
famed waterfront promenade The Bund, according to people familiar
with the matter. Attendees are often the power brokers in China's
film industry, such as producers and directors. Mr. Gong, a proud
wine aficionado, handpicks the wines served at the parties.
Write to Rolfe Winkler at rolfe.winkler@wsj.com, Jing Yang at
Jing.Yang@wsj.com and Alexander Osipovich at
alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
October 01, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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