China: Private Equity: Buyouts & Venture Capital Investment (PRC Firms) Overview

China’s private equity and venture capital markets entered 2025 with cautious optimism after three years of contraction. While fundraising and M&A exits showed signs of stabilisation, intensifying US–China tensions, strict enforcement of the new Company Law, and evolving judicial approaches to redemption rights reshaped investment strategies, deal structuring and exit planning.

Market Dynamics, Geopolitics and Exits

Market recovery

China’s PE/VC sector showed tentative recovery in 2025. Exit activity improved unevenly. While this marked a meaningful rebound from prior years, recovery remained concentrated in strategic sales rather than public market exits.

The result was a bifurcated exit landscape: M&A and Hong Kong listings gained momentum while A-share IPOs remained structurally constrained, forcing funds to recalibrate exit expectations and portfolio timelines.

Geopolitical decoupling

US–China geopolitical tensions intensified throughout 2025, fundamentally reshaping cross-border investment flows and compliance obligations.

The US Treasury’s Outbound Investment Security Program (OISP) took effect on 2 January 2025, implementing Executive Order 14105. The regime prohibits or requires notification of US investments involving Chinese semiconductors, quantum technologies, and certain artificial intelligence systems. Early enforcement focused on notification compliance rather than aggressive prohibition actions, but the Treasury signalled a stricter position ahead.

In December 2025, the FY 2026 National Defense Authorization Act codified and expanded outbound screening requirements under the COINS Act, granting the Treasury enhanced enforcement authority and mandating further rulemaking. Implementing regulations expected by 2027 are widely anticipated to expand covered sectors – potentially capturing advanced manufacturing, synthetic biology, and additional AI applications – and to lower de minimis thresholds for notification. Market participants should assume the current framework represents a floor, not a ceiling.

Simultaneously, the Committee on Foreign Investment in the United States (CFIUS) scrutiny intensified for investments from “countries of concern”, while requirements eased for allied jurisdictions. The asymmetry is strategic: the US is constructing differentiated capital flow regimes that channel investment towards allied ecosystems while restricting China-bound flows in sensitive sectors.

US–origin capital flows into Chinese technology sectors continued to decline. Major global firms maintained strict operational and governance firewalls between China and non-China platforms following earlier structural separations.

Chinese companies and their investors now face the dual challenge of complying with both China's data localisation and cybersecurity requirements and US national security mandates – significantly increasing transaction complexity and compliance costs.

Technology investment and data compliance

Despite geopolitical constraints, technology investment rebounded. President Xi’s 2026 New Year address highlighted the rapid growth of AI large models and the new breakthroughs achieved by domestically developed chips, reinforcing policy support for hard technology sectors.

China announced large-scale semiconductor and AI funding initiatives, widely estimated at tens of billions of US dollars. AI accounted for a major part of 2025 global spending, with China remaining a major recipient despite US restrictions.

Life sciences and biotechnology continued to attract capital due to streamlined regulatory pathways and policy prioritisation. Real estate and infrastructure remained subdued amid tighter oversight of leverage and financing structures.

Exit strategy 1: M&A takes the lead

Facing persistent IPO uncertainty and low judicial recovery rates on share repurchases, PE/VC investors increasingly favoured M&A exits in 2025.

Policy support proved decisive. Key measures included:

• the China Securities Regulatory Commission’s (CSRC’s) June 2024 “Eight Measures” supporting M&A and restructuring, particularly for technology-oriented listed companies;
• September 2024 reforms easing certain cross-border M&A approval bottlenecks; and
• the May 2025 revised Asset Reorganization Measures (CSRC Order No 230), introducing simplified review procedures and a “reverse linkage” mechanism aligning PE fund investment terms with lock-up requirements for restructuring-acquired shares.

Compared with IPO exits, M&A transactions offered clear advantages: much shorter execution timelines, flexible pricing mechanisms including earn-outs and instalment payments, and reduced exposure to secondary market restrictions on share reductions and disclosure requirements.

Exit strategy 2: A-share IPOs remain constrained

The domestic A-share IPO market remained under sustained pressure. In 2024, A-share IPOs raised only approximately CNY67.35 billion, marking one of the weakest years in recent history. In 2025, more than 70 issuers withdrew IPO applications amid heightened regulatory scrutiny and valuation concerns.

By early 2025, the CSRC’s IPO review queue had declined to approximately 200–230 projects, down from prior peaks, but still reflecting a cautious approval environment. For many PE/VC-backed companies, the prolonged review cycle and uncertain outcomes reinforced the shift towards M&A and overseas listings.

Exit strategy 3: Hong Kong dominates – but VIE structures face headwinds

In contrast, Hong Kong re-emerged as the primary overseas listing venue for Chinese enterprises. From January 2024 through mid-2025, roughly 195 issuers obtained CSRC filing notices for overseas listings. Hong Kong captured the clear majority, with filing acceptance rates and processing times outperforming US listings. Among H1 2025 filing recipients, approximately 75% selected Hong Kong; among accepted submissions, Hong Kong accounted for over 90%.

A–to–H listings gained particular traction. Approximately 35 A-share companies announced H-share plans, benefiting from expedited CSRC filing timelines averaging about four months – signalling regulatory support for dual listings.

By contrast, VIE-structured issuers faced heightened scrutiny. VIE applications are time-consuming and it is very difficult to obtain CSRC filing notices, which reflects regulatory concerns over compliance, foreign investment restrictions, and practical enforceability. While the CSRC has not formally prohibited VIE structures, the filing process has become a de facto filter:

• Sector sensitivity matters – VIE applicants in data-intensive, media or education sectors face a substantially higher rejection risk than those in consumer or industrial businesses.
• Legacy v new structures – companies with long-established VIE arrangements and clean compliance histories fare better than recent formations.
• Contractual robustness – regulators increasingly probe the enforceability of VIE control agreements, particularly where wholly foreign-owned enterprise to variable interest entity (WFOE-to-VIE) payment flows raise transfer pricing or tax concerns.

Legal and Regulatory Developments

Company Law enforcement

The new Company Law, effective from 1 July 2024, had its first full year of enforcement impact in 2025. Market supervision authorities actively enforced the requirement that shareholders complete capital contributions within five years, placing pressure on startups with inflated registered capital or extended contribution schedules.

In practice, many portfolio companies were forced into capital reductions, down-round financings, or emergency bridge funding. Enforcement approaches varied by jurisdiction: cities such as Shanghai and Hangzhou adopted stricter interpretations, calculating the five-year period from amendment registration dates rather than permitting the national grace period extending to 30 June 2032.

Article 88’s supplementary liability for equity transferors initially chilled secondary transactions. The Supreme People’s Court later clarified that Article 88 does not apply retroactively to equity transfers completed before 1 July 2024, easing market concerns.

Director liability also expanded materially. Directors – particularly those appointed by PE/VC funds – now face potential personal exposure if they fail to issue formal capital call demands to defaulting shareholders. As a result, D&O insurance adoption surged, and many companies streamlined governance structures by replacing supervisory boards with audit committees.

Data security

Transactions increasingly incorporated cybersecurity audits, data mapping, and cross-border data transfer assessments, driven by:

•  the Network Data Security Management Regulation, effective 1 January 2025, transforming data governance from policy guidance into enforceable obligations; and
•  the amended Cybersecurity Law, adopted in October 2025 and effective 1 January 2026, increasing penalties and expanding extraterritorial reach.

AMAC compliance

The Asset Management Association of China (AMAC) further tightened private fund manager registration and ongoing compliance requirements. Managers increasingly faced demands for comprehensive internal control audits, independent legal opinions, and enhanced disclosure of fund structures and capital sources.

Regulatory enforcement accelerated through data-driven supervision, prompting PE firms to deploy AI-assisted compliance systems to monitor trading behaviour, related-party transactions, and capital movements.

Redemption rights: the six-month rule

In December 2025, a Supreme People’s Court justice publicly stated that where PE/VC agreements do not specify an exercise period for redemption rights or put options, the “reasonable period” should generally be six months from the triggering event, after which the right may be deemed waived.

This position echoed earlier commentary in the People’s Court Daily but stopped short of a formal judicial interpretation. The guidance triggered intense debate. Supporters argued it enhanced transactional certainty and corporate stability; critics warned it could incentivise premature redemptions, exacerbating liquidity stress at portfolio companies.

Judicial practice remains inconsistent. Notably, a Beijing court decision in 2025 explicitly declined to adopt the six-month rule, emphasising that such commentary does not constitute binding law.

Despite uncertainty, redemption rights remain prevalent – approximately 90% of PE/VC transactions include them, and around two thirds impose joint personal liability on founders. Enforcement has driven a surge in litigation, often accompanied by asset preservation orders, travel restrictions and credit sanctions against founders. In response, investors increasingly define precise trigger events, notice procedures, and exercise timelines to avoid default application of the six-month standard.