In Depth: Will 2025 Herald an IPO Revival in China?

In 2024, China's private equity (PE) and venture capital (VC) funds experienced another challenging year, but there is hope for improvement due to renewed interest in the domestic stock market following government supportive measures [para. 1]. The Shanghai Composite Index increased by over 12% and the Shenzhen Component Index by over 17% since the end of September [para. 2], but the primary market's response remains uncertain, say industry insiders [para. 3][para. 4]. Due to regulatory changes since August 2023, the number of IPOs has significantly declined, contributing to limited economic activity in the PE/VC sector [para. 5]-[para. 7].

In the third quarter, the number of new funds established decreased by 41% year-on-year, and more than half of companies didn't set up new funds, highlighting market instability [para. 6]. Only 52 Chinese firms went public in the quarter—a decrease of over 50% from the previous year—raising 86.6% less capital [para. 7]. Some industry insiders are optimistic, given the government's recent support and improvements in the stock market since late September [para. 8]. April's meeting, chaired by President Xi Jinping, emphasized the need for "patient" capital focused on long-term growth, directing attention to overcoming industry obstacles [para. 9][para. 10]. Attempts to promote venture capital intensified, with discussions on easing issues related to investment exits [para. 11].

Regulatory tightening has severely impacted the IPO market, leading to decreased investment activity [para. 13]. As of September, only 69 companies went public on the mainland, and 294 companies waited for IPO reviews, down over 60% from the previous year [para. 15]. IPOs have traditionally been the preferred exit route for investors, but with the downturn, this strategy is under pressure [para. 14]. These factors underscore the challenges in the current economic environment [para. 15]-[para. 17].

Despite a favorable inclination towards IPOs, regulatory restrictions and listing criteria compel PE/VC investors to seek alternative exit strategies [para. 21]. These changed dynamics require firms to adapt their strategies, focusing on larger companies or those integral to China's advanced technology vision [para. 22]. Smaller companies face difficulties going public due to substantial costs [para. 23].

Mergers and acquisitions (M&A) are being promoted as alternative exit strategies [para. 24]. The China Securities Regulatory Commission (CSRC) released guidelines in September to encourage M&A for listed companies to facilitate industrial integration and development needs [para. 25]. There are discussions within stock exchanges and with brokers to promote M&A as a viable exit strategy [para. 27][para. 28]. An emphasis is on creating impactful M&A cases to guide market regulations [para. 29][para. 30]. However, some experts express skepticism, emphasizing that M&A, without a robust IPO ecosystem, cannot solely support the industry [para. 31][para. 32].

The intricacies of the IPO and M&A landscape suggest a cautious yet hopeful climate for China's PE/VC sectors. Despite attempts to regulate, the industry acknowledges that a healthy IPO market is crucial for sustainable growth [para. 33].