China’s Languishing IPO Market Strains Startup-Investor Relations

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The frequent buyback cases initiated by investors harm not only the startup industry, but also society’s capacity to innovate, a partner at Shanghai-based law firm Lifeng Partners said.

Tensions are growing between China’s startups and investors as the latter find it increasingly difficult to exit their investments through a sluggish IPO market, instead resorting to pre-listing agreements with refund clauses, which in many cases lead to litigation.

Private equity (PE) and venture capital (VC) funds will have trouble exiting around 130,000 investments in China, involving about 14,000 companies, Shanghai-based law firm Lifeng Partners estimated in a recent report.

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Chinese startups and investors face tension due to difficulties exiting investments, turning to pre-listing agreements with refund clauses, often leading to litigation.
PE/VC funds are struggling to exit around 130,000 investments worth $14,000 companies due to a sluggish IPO market, with many resorting to arbitration or litigation.
Courts favor investors in over 82% of buyback disputes, but only 4.62% result in full reimbursement, often bankrupting companies and impeding innovation.

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What Happened When

Over the past two years：: It has become more difficult for PE/VC investors in China to exit investments via public listings due to a lackluster stock market and a slowdown in domestic and overseas IPOs.

Last year (2023)：: China’s top securities regulator vowed to slow the pace of IPOs to help prop up the slumping market.

By an agreed deadline (2024)：: Many PE/VC investors have signed pre-IPO agreements with their portfolio companies that allow them to redeem their investments if the companies fail to go public.