Private Equity and Venture Capital Firms in China Hope for Revival
Private equity (PE) and venture capital (VC) funds in China had another gloomy year in 2024, but many in the industry are hoping that a revival is on the cards in the wake of renewed enthusiasm in the domestic stock market after a string of supportive measures from the government.
IPO Gloom
The benchmark Shanghai Composite Index has risen more than 12 per cent since the government released a slew of stimulus measures starting September 24, while the Shenzhen Component Index has jumped more than 17 per cent. PE/VC firms are waiting to see whether the fervour in the secondary market will spill over into the primary market where IPO candidates raise funds and early-stage shareholders exit their investments.
A Capital Winter
"Everyone has seen the secondary market warming up again, but for those of us in the primary market doing PE investment, we are still in the depths of a capital winter," said Shan Junbao, chairman of CICC Capital Operation, at a forum last October.
With nine IPO exits achieved in the first three quarters of 2024, CICC Capital – the PE investment arm of state-owned investment bank China International Capital Corp – was the best-performing institution in China’s PE/VC industry during that period.
Regulatory Support
In April 2024, a meeting of the Communist Party’s 24-member Politburo, chaired by President Xi Jinping, called for strengthening the role of "patient" capital – a term referring to investment that is willing to forgo short-term profit and focuses on sustainable long-term growth and returns – in supporting innovation.
The same month, the State Council released guidelines on promoting the high-quality development of capital markets that called for efforts to smooth the cycle of fundraising, investment, management, and exit, and to harness the role of PE/VC investment in supporting technological innovation.
Exit Difficulties
Exit difficulties are really the crux of the problem, an industry insider said. Chinese PE/VC investors have always favored IPOs as their exit channel, but a slowdown in new listings has made this an extremely difficult route, spelling trouble for both investors and startups.
M&A Exit Option
One alternative exit route now being promoted by regulators is mergers and acquisitions (M&As). The CSRC in September rolled out guidelines for M&A involving listed companies that encourage PE investment funds to buy listed companies if they promote industrial integration.
Conclusion
While the current market urgently needs M&A cases, a batch of good cases, some market analysts believe that with encouragement from new policies and pent-up demand for exit routes, M&A could become a significant channel. However, others are not optimistic, citing the need for a healthy IPO ecosystem to be established in the capital markets.
FAQs
Q: What is the current state of the private equity and venture capital industry in China?
A: The industry is still struggling due to the lack of exit options for investors.
Q: What are the main exit options for private equity and venture capital funds in China?
A: IPOs and mergers and acquisitions (M&As) are the two main exit options for private equity and venture capital funds in China.
Q: What is the current state of the IPO market in China?
A: The IPO market is still in a deep freeze, with a significant decline in the number of new listings and the amount of capital raised.
Q: What are the regulatory support measures for private equity and venture capital funds in China?
A: The government has introduced a series of measures to support the industry, including relaxing listing criteria and encouraging M&As.
