China’s VC Market Frozen: IPO Drought Creates “Worst” Exit Landscape in Decades

China’s once-sizzling venture capital (VC) market is facing a harsh reality check, with a stagnant IPO market causing a full-blown “winter” for startups and investors alike.

The world’s second-largest economy is witnessing a historic downturn in initial public offerings (IPOs). During the first half of 2024, the total value of IPOs in mainland China plummeted by a staggering 84% to a mere 32.5 billion yuan ($4.48 billion). This chilling figure is dwarfed by the figures from the same period last year. The number of companies going public also reflects the harsh reality, with a 75% decline, bringing the total to a meager 44.

Experts point to a confluence of factors behind this downturn. Dick Kay, Deloitte’s head of capital markets services, highlights the “much slower” pace of listings, with “no deals” recorded in March and April. This stagnation can be attributed to two main culprits: geopolitical tensions and a domestic market that’s simply not receptive to new listings.

The ongoing geopolitical friction has cast a shadow over Chinese companies seeking overseas listings, a popular route in the past. While the number of companies going public globally has seen a 95.7% increase year-on-year (218 companies listed), the funds raised through these listings have shrunk by a dramatic 75.7%. This indicates a significant decline in investor appetite for Chinese companies on foreign exchanges.

Domestically, the A-share market, China’s mainland stock market, hasn’t provided much relief. Traditionally a less welcoming environment for tech startups, it hasn’t ramped up activity to compensate for the decline in overseas listings. This leaves many companies struggling to find an exit strategy, hindering the entire VC ecosystem.

The consequences of this “worst” IPO market in decades are far-reaching. Startups face difficulties securing funding, potentially hampering innovation and growth. VC firms, burdened with unlisted companies in their portfolios, are likely to be more cautious when deploying capital in the future.

With the second half of 2024 just beginning, it remains to be seen if the IPO market will thaw. The Chinese government’s approach to regulations and its ability to de-escalate geopolitical tensions will be crucial factors to watch. Until then, China’s once-vibrant VC landscape will likely remain in the grip of a cold winter.

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