The venture capital (VC) and private equity (PE) sectors are undergoing significant transformations, driven by shifting market dynamics and evolving regulatory landscapesRecent data from the Asset Management Association of China indicates a sharp decline in the number of private equity and venture capital fund management companies, with figures dropping to 12,083 by the end of 2024, a reduction of 810 firms from 2023, equating to a 6.3% year-over-year decreaseThis trend underscores the growing challenges within primary market fundraising and the tightening of regulatory policies that demand higher compliance and professionalism from fund managersMany small and medium-sized firms are finding it increasingly difficult to adapt to these new regulations and are opting to exit the market altogether.

In light of the restrictive IPO environment in China's A-share market, industry experts suggest that the VC and PE sectors are pivoting away from a heavy reliance on initial public offerings toward a more diversified exit ecosystem

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This shift includes exploring alternatives such as activating merger and acquisition funds, secondary market investment funds (designated as S-funds), and secondary share transfersThese strategies aim to foster a healthy cycle of funding, investing, managing, and exiting investments.

To illustrate this new direction, Zhang Jiang, the founder and CEO of LongRiver Jiangyuan Investment, shared insights with reporters from a major financial outletHe revealed that his firm has recently launched the "Star Extraction Plan." This initiative focuses on acquiring existing equity stakes in medical and technology sectors, primarily to provide early investors with exit opportunitiesBy doing so, it alleviates the financial pressure on founders to buy back shares, while simultaneously allowing Jiangyuan Investment to capitalize on acquiring quality companies at a lower cost.

The challenges facing the exit side of investments constitute one of the most pressing hurdles for the VC and PE industries today

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Data from Rongzhong shows that as of 2024, the scrutiny of IPO approvals has intensified, resulting in a dramatic decrease in the approval rates for listingsThroughout the year, 422 companies withdrew their IPO applications, and 15 firms had their listings canceled, resulting in an overall approval rate sinking to a concerning 9.3%. This trend indicates that regulatory authorities are imposing more stringent requirements regarding a company’s profitability, compliance, and sustainability—a reality that has forced numerous firms to abandon their IPO ambitions due to their inability to meet these new standards.

The contraction of exit routes through IPOs has a knock-on effect on the efficiency and returns of VC and PE firmsBy the end of 2024, only 100 companies successfully completed their IPOs, marking a staggering 68.05% decrease from previous yearsThe total amount raised through initial public offerings fell to 67.353 billion RMB, a mere one-fifth of what was raised during the same period in 2023. From a book value standpoint, the Chenkong Research Center reports that the total value of shares held by VC and PE institutions in newly listed companies is estimated at 190.885 billion RMB, reflecting a drastic 50.6% decline year-on-year—an indication of significantly diminished exit values and profitability.

In recent years, the primary market has faced numerous challenges regarding capital allocation and identifying high-quality investment opportunities

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Zhang acknowledged the shortcomings in available exit channels, emphasizing that the increased difficulty and reduced number of IPOs have complicated the exit strategies for numerous funds, particularly as many funds reach their exit phase without viable options to liquidate their investmentsThis exit pressure is severely hindering the investment cycle in the primary market.

For many investment firms, the IPO was once the cornerstone for exitsHowever, with the narrowing of this channel, many are exploring alternative methods, such as mergers and acquisitions, equity transfer transactions, and trading in secondary marketsNonetheless, the efficiency and return rates of these alternatives often fall short of what IPOs once offered, exacerbating the pressures the industry faces.

Zhang Jiang emphasized the necessity for improvements in exit mechanisms to mitigate these challenges

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He advocated for the development of a more robust listing system, optimizing merger and acquisition procedures, and advancing the growth of S-fundsHe also highlighted the importance of fostering a dynamic environment in the A-share market that facilitates the turnover of listings and increases the IPO quotaIncreasing the delisting rate and enhancing the presence of productive new enterprises among public companies are critical to creating favorable exit conditions for players in the first market.

Despite the daunting landscape, some institutional players are bucking the trend by developing innovative strategies to identify new growth avenues and exit routesFollowing a contraction in IPO opportunities, the introduction of policies such as the "Venture Capital 17 Articles" and the "924 New Policy" has resulted in a modest uptick in merger and acquisition activity, although levels remain below peak periods.

Moreover, a rise in state capital involvement has been observed, with some state-owned capital managers collaborating with listed companies and local state-owned enterprises to create industrial funds that intensify investments in mergers, acquisitions, and non-controlling stakes

As of the end of the third quarter of 2024, transactions focused on non-controlling acquisitions and mergers accounted for 16.86% of the total deal volume.

Beyond mergers, domestic VC and PE firms are also actively exploring the S-fund model as a potential means to stimulate liquidity in the primary marketZhan Zheng, Vice President of Hanling Capital, believes that S-funds can serve as patient capital, offering significant opportunities within the domestic marketHowever, he pointed out that S-funds should not only offer discounted pricing but also provide regular liquidity solutions to investors.

For example, Jiangyuan Investment's "Star Extraction Plan" is specifically tailored to the medical and technology sectorsZhang Jiang noted that early investors often seek to transfer their stakes for various reasons, necessitating a pathway for liquidityJiangyuan Investment aims to address this demand by taking over these stakes, targeting companies with stable income, reasonable valuations, and appropriate discount potentials, spanning businesses in different stages from growth to public listing.

"While resolving exit difficulties may take time, there is hope for a gradual alleviation of fundraising challenges by 2025," predicted Zhu Shan, Chairman of Rongzhong

He anticipates an increase in investments into private equity from various sources, including financial asset investment companies (AICs), insurance capital, securities firms, and state-owned enterprisesEncouragement to cancel or reduce reinvestment ratios, emphasizing the need for market-driven and professional capital allocation, will ultimately lead to a more vibrant investment landscape.

Looking ahead, the industry widely anticipates a further stratification of the VC and PE sectorsGiven this context, specialization and refinement will be essential for firms to navigate their continued growth and survivalInstitutions will need to delve deeply into specific domains, establish industry barriers, and elevate their investment accuracyAdditionally, enhancing post-investment management capabilities will be crucial for helping portfolio companies realize value expansion and ultimately procure higher returns upon exit.

In conclusion, Jiangyuan Investment intends to persist in its pursuit of investment opportunities within the medical and technology spheres while fostering collaborations with additional early-stage investors to tackle cash exit challenges collaboratively