"First, on managing risk. We have held positions in Alibaba since the inception of the Polen Global Growth Portfolio in 2015, and it has performed very well during that period. We invested via the variable interest entity (VIE) structure, given that t is the only channel for foreign capital to invest in the company. Investing in a VIE involves a contract for ownership in a business (that cannot be owned by non-Chinese investors), rather than direct equity ownership, as we have in all other businesses in the Portfolio. The Chinese government has never explicitly endorsed nor condemned the VIE structure, so a certain amount of risk remains.
From our point of view, China has always had the capability to appropriate businesses from foreign owners but had not demonstrated the will to do so. We felt that changed when the Chinese government enacted a series of regulatory policies that turned for-profit, after-school tutoring companies into non-profit entities. While a logical argument could be made that such actions are not likely to bleed over into China’s tech sector, we think increased regulation and the potential for government-directed capital allocation from these businesses could lead to lower-thanexpected earnings growth.
To be clear, we are not “making a call” on China. We believe that the risk of such draconian regulation of China’s tech sector is unlikely. That said, given our global opportunity set, we decided to reallocate capital into businesses likely to produce similar earnings growth over the next five years with a greater degree of certainty. We still believe that Alibaba is a great business and could be owners of one or both in the future, but we felt there were easier ways to achieve our objective at the present time."
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