China’s venture capital and private equity market went through a difficult 2022 with a drop in the number of new funds and overall subscription size.
Internet, real estate and consumption were the three sectors that saw the largest decreases in VC/PE investment. But VC/PE’s penetration rate in Chinese initial public offerings rose last year, with leading players getting more IPO deals.
The country’s overall VC/PE market shrank as uncertainties, both within and outside China, dented limited partners’ confidence. A total of 8,730 new funds were launched in 2022, a 6.6% decline from the previous year, according to market data. The subscription size decreased by 17.1% to US$677.5 billion.
Investments by VC/PE funds in the internet sector fell by 52%, followed by a 42.2% drop in real estate and a 31.9% decrease in the consumption sector.
However, VC/PE’s penetration rate in IPOs increased. Chinese analysts believe this indicates that IPOs have become the best exits for VC/PE funds in a complex environment like the one in 2022. The percentage of VC/PE-backed IPOs rose to 97%, an increase of 16% from the previous year.
Most of the Chinese listings took place in A-share market as a result of geopolitical issues. Only two were in the United States, a historical low. Forty VC/PE-backed Chinese listings chose Hong Kong, nearly the same as the previous year’s 41.
Leading VC/PEs were getting more deals as a result of the improved IPO registration mechanism. According to Zero2IPO Research, 17 VC/PEs notched up more than 10 IPOs in 2022, a 30% increase compared to the previous year.
In 2022, VC/PE-backed Chinese IPOs raised a total of 446.4 billion yuan (US$66.1 billion), a huge 17.9% drop from the previous year.
Looking forward, IPOs might not be able to meet all the exit demands from VC/PE funds given the market uncertainty and the time-consuming IPO application process.
There is discussion in the market on whether mergers and acquisitions can take over the main role. According to market analysts, most of the general partners in China don’t have enough experience in M&A. But the market has seen some GPs that appear to be ahead of the curve, talking about their plans and preparations to connect with interested parties, the analysts say.