PAG’s USD 6.8bn sale of the industrial gas unit of AirPower Technologies, which closed in January, is the largest-ever exit from a control investment in China, according to AVCJ Research’s records.

The asset went to a consortium comprising Hangzhou State-owned Capital Investment & Operation (Hangzhou Capital), Ping An Life Insurance, Sunshine Insurance, China Reform, Nuerli, Sumin Investment, and CICC Capital. PAG is also part of the group: the GP sold positions held by its second and third Asian funds and reinvested for a 25% stake via Fund IV. But it could have been different.

The deal as initially envisaged would have seen Hangzhou Capital, the parent of Hangzhou Oxygen Plant, take the lead role as the first step in a large-scale domestic merger. Its relegation to a passive role, following a series of hiccups, underlines the challenges sponsors face when exiting to listed Chinese companies – even as regulators profess support for M&A involving onshore companies.

“Private equity firms can partner with listed companies that have strong industrial expertise and operating capabilities but struggle with deal sourcing and financing. On the exit front, M&A offers an alternative to IPOs, though it comes with its own challenges,” said Bo Cheng, a partner at Zhong Lun Law Firm.

“While public companies are keen on M&A nowadays because of performance pressures and regulatory policies have loosened somewhat, the process isn’t as straightforward as many expect.”

Backlog backed up

Trade sales are essential to any revival of China PE and VC exits. Excluding AirPower, deal volume reached USD 7.8bn in 2024, down 17% year-on-year and less than half the five-year high reached in 2021. There are stirrings in the capital markets, most visible in a revival in Hong Kong IPO activity, but volumes remain relatively low. GPs need alternative sources of distribution.

It appeared that M&A might deliver last September when regulators issued the first in a series of guidelines. These prioritise absorptions of unprofitable companies, deals that give traditional industries exposure to emerging industries, and M&A involving PE and VC-backed businesses to drive industrial integration. Share exchanges facilitating cross-border transactions are also favoured.

In the first quarter of 2025, 37 domestic listed companies announced “material assets restructuring,” defined as M&A events meeting criteria set by the China Securities Regulatory Commission (CSRC). This represented a more than 200% year-on-year increase. Most deals were in sectors aligned with China’s industrial innovation agenda – technology, manufacturing, and healthcare.

For example, a gold jewellery provider Beijing Kingee Culture Development agreed to buy 43.18% of software developer Beijing Kayakwise Technology from investors including HongShan. On the PE and VC-backed integration front, Qiming Venture Partners secured 26.1% of smart transportation platform Zhengzhou Tiamaes Technology, becoming the company’s controlling shareholder.

However, movements from announcement to implementation have not been so swift. “When it comes to something more recently policy-driven in terms of investment in China, you would always have to wait and see how it evolves,” observed Stephanie Tang, head of private equity for Greater China at law firm Hogan Lovells.

Since October 2024, 38 material assets restructuring events have been terminated, according to domestic advisory firm Renaissance M&A. They include Shenzhen Goodix Technology’s acquisition of Viewtrix, which was expected to provide exits for HongShan, Qiming, Vertex China, Hongtai Fund, Xiaomi Ventures, and Huawei Technologies-controlled Hubble Technology Venture Capital.

Failure to construct the appropriate narrative, especially around valuation justification, is a consistent issue. Qingfeng Huang, a partner at law firm Lifeng Partners, noted that listed companies favour targets with strong cash flow generation, revenue growth, and profitability.

“Without these financial metrics, listed companies may resort to benchmarking against industry peers at similar stages of development. However, this approach may lack conviction for public investors,” he said.

Financing challenges

Conviction is important when listed companies are making acquisitions on an all-cash basis. This structure is generally preferred to share swaps, which can lead to delays and uncertainty around execution because of extensive disclosure requirements. Moreover, a fairness opinion is typically required from a financial advisor, while there may be increased scrutiny by the stock exchange.

All-cash deals inevitably put pressure on buyers to come up with sufficient financing. Hangzhou Oxygen, for example, had a market capitalization of around CNY 20bn (USD 2.7bn), with CNY 2.12bn in cash on its balance sheet, as of year-end 2024. Merging with AirPower involved taking on a business that was more than twice its size.

“The target company is of a considerable size. The listed company may not be able to raise the necessary capital for this transaction in a timely manner,” Hangzhou Oxygen said in a May 2023 filing announcing the proposed acquisition of AirPower.

“This move [Hangzhou Capital leading the transaction] aims to enable the listed company to secure a high-quality investment opportunity, thereby reducing uncertainty and risk associated with direct investment by the listed company.”

Hangzhou Capital was supposed to be the largest shareholder in the special purpose vehicle established for the investment with a 30% stake. As the deal evolved, financing challenges emerged. Mergermarket reported in March 2024 that a CNY 25bn syndicated loan was moving slowly with Chinese banks and would likely be cut back, reducing the overall valuation.

A source familiar with the transaction said that, despite AirPower’s cash flow generation capabilities, the key pain point was the quantum of capital required amid constrained macroeconomic conditions. Internal adjustments by state-owned entities involved were also a concern because these would impact decision-making and potentially undermine deal certainty.

Multiple lawyers observed that listed Chinese companies are comfortable with M&A at the billion-renminbi level, but they struggle with deals at the CNY 10bn level.

In this context, Mindray Technology Holdings’ merger with APT Medical is exceptional. The former acquired a 21.12% stake in the latter for CNY 6.65bn, which equates to a valuation of CNY 31.5bn, to become the largest shareholder. The all-cash deal facilitated full exits for APT Medical investors Qiming and Firstred Capital. It was one of the largest China PE liquidity events of 2024.

Tang of Hogan Lovells added that, in the current environment, large-cap deals are likely to be influenced by non-economic issues as much as economic issues.

“Previously people thought mostly about price and markets, but what is happening now could be different because the tariffs are just getting started. And the geopolitics are broader. People no longer call it a ‘trade war’ but rather a ‘financial war’,” she said.

Perfect partners?

Interviews for this story were conducted shortly before the latest US-China tariffs tit-for-tat or as it was ratcheting up. Conditions are fluid, but most industry participants viewed the listed company M&A dynamic through a long-term lens.

For example, Frank Tang, chairman and CEO of FountainVest Partners, interpreted rising interest from domestic buyers as evidence of a gradual market recovery because it creates competition for assets. “If both strategic and private equity investors want to buy a company, who would you rather work with? That’s when things get interesting,” he said.

One option is for private equity and listed corporates to team up on deals. This is already apparent in the renminbi-denominated fund space, with several lawyers pointing to so-called “resource sharing” partnerships. Under this structure, the private equity firm is responsible for deal origination and capital raising and post-investment operations are handled by the corporate.

The recent merger of Shanghai-listed Shenzhen Original Advanced Compounds and Hong Kong-listed semiconductor player Advanced Assembly Materials International (AAMI) is perhaps the first instance in which this trend has gone cross-border. The CNY 3.5bn share swap facilitated a full exit for Wise Road Capital, which acquired a majority interest in AAMI in 2020.

Not all GPs are advocates of the resource-sharing approach. Trustar Capital describes its strategy as more classic buyout, focusing on small and medium-sized enterprises that are often not only ill-equipped source and execute deals, but also struggle to manage the post-deal integration. The firm’s value creation efforts range from financial reporting and governance to human resources and strategy.

“PE investors should focus on renovating raw assets, transforming them into a high-quality asset pool that is ‘move-in ready’ for listed companies,” said Eric Xin, a managing partner at Trustar.

When collaborating with listed corporates, private equity players typically want upfront assurances regarding exits. There is often pushback on calls for put options due to disclosure requirements, so the put might be structured so it applies to the controlling shareholder or founder rather than the listed company, according to Terence Foo, a partner at law firm Clifford Chance.

“The way to get alignment on exit is to make sure that there are enough carrots and sticks,” he added. “There must be a clear path to exit between the PE fund and corporate. The management of the target also needs to be incentivised to work towards an exit.”

Arrangements can become highly complex. Peilin Liu, a senior lawyer at Lifeng, referenced situations where the listed corporate has acquired a majority stake in the target first and granted a call option to the private equity investor for the remainder. This option is triggered on the achievement of certain performance milestones.

DCP Capital’s exit of SV Foods, a China poultry business carved out from Cargill in July 2023, was broken down into several events. Within four months of closing the deal, the private equity firm sold a 46% stake to Shenzhen-listed Fujian Sunner Development, a leading domestic poultry player, and a 4% interest to company management. The valuation was CNY 541.8m, according to a filing.

Last week, DCP completed its exit, selling to Sunner at a CNY 2.09bn valuation. The uptick in valuation may serve as evidence of a turnaround at SV Foods, which was unprofitable when acquired by DCP. But the more pertinent point is strategic: Sunner wanted to boost its annual breeding and slaughtering capacity from 700 million in 2023 to 1 billion in 2025. M&A is part of that effort.

Speaking to AVCJ in early 2024, Julian Wolhardt, CEO of DCP, said aligning with Sunner was a defensive move because Trustar, the largest shareholder in McDonald’s China, was bidding for the China poultry division of Tyson Foods. He agreed that Sunner ultimately may want to take 100% of SV Foods, noting that DCP had retained control in terms of equity and board seats to maximise its negotiating power.

Taking control

Another option for private equity is to take control of the listed corporate, fully control the M&A strategy and potentially sell other portfolio companies to it. This informed the underwriting for Qiming’s acquisition of a controlling stake in Tiamaes.

PE privatisations of China-listed companies are rare because mainland bourses have no compulsory squeeze-out mechanism to enable full ownership. Industry participants add that regulators prefer buyers to have a strategic rather than a financial background. However, it is possible to secure a significant minority — and controlling — stake.

Qiming didn’t get there with Tiameas by accident. Two years ago, when IPO markets were beleaguered with uncertainty, the venture capital firm appointed a partner to focus on M&A. This involves pursuing trade sale exits and assisting portfolio companies looking to make acquisitions.

“If we don’t find willing and interesting buyers, we are also happy to put more money into our portfolio companies so that they can become buyers. The net result is we want our companies to get bigger, and do so much faster, so that meet listing requirements,” Duane Kuang, a founding managing partner of Qiming, told AVCJ earlier this year.

In addition to identifying quality assets and running the regulatory gauntlet, PE and VC investors engaging in public markets must have all the financing lined up on signing the deal. Tiamaes was unusual in that it adopted a “fundraise-after-deal” model, one lawyer observed, but the regulatory viability of this approach remains ambiguous.

Private equity investors have intermittently pursued controlling positions in domestically listed companies for more than a decade. In 2014, FountainVest took control of Kehua Bio-engineering through the acquisition of shares from two retiring founders. The value creation plan had two strands: institutionalising a family-owned business and driving M&A.

While the first proceeded as expected, the second proved more challenging. FountainVest spent years exploring acquisitions that could enable industry integration, product line extension, and global expansion without fully realising Kehua’s potential.

“We found many inconveniences when we became the largest shareholder of the listed company. For example, we wanted to put some of our ecosystem companies into the listed companies but it’s very difficult because it’s a related party transaction,” Zhen Li, a managing director at the private equity firm, told a conference held in mainland China.

“The decision-making process and information disclosures made it difficult to participate in bidding for global assets. We wanted to help but the regulators weren’t comfortable at that time with us as the largest shareholder.”

Li expressed the hope that new policies encouraging M&A can support the development of a more accessible and mature ecosystem.

Ability to execute

FountainVest is an established buyout investor. Qiming is not. Yet it is not the only China-focused technology investor with a venture and growth heritage now looking for control positions. Wayne Shiong of China Growth Capital is wary of such strategies, citing small fund sizes and uncertainty over tech valuations, but Oceanpine Capital is working on a control deal for a listed company.

This is partly a response to China’s exit angst: controlling investors aren’t subordinate to founders when it comes to pursuing liquidity. LPs are thinking along similar lines. While Oriza FoFs built its business on early-stage VC, there are now buyout allocations in its latest local fund-of-funds. Nonetheless, due diligence is ingrained with a degree of wariness.

“Honestly, only a handful of GPs can execute buyout deals in China,” said Qing Xu, a managing partner at Oriza. “We appreciate and respect those GPs that are exploring innovative exit routes, but we also reflect on ourselves about how far we should pursue change and to what extent we should stick to our core strengths.”