Activate trillions in capital liquidity; M&A funds and S funds expand venture capital exit channels.

Author: Wang Xueqing

This year’s government work report proposed expanding exit channels for private equity and venture capital funds. On March 13, the China Securities Regulatory Commission held an expanded party committee meeting, emphasizing further development of exit channels for private equity and venture capital funds to encourage more social capital to invest early, small, long-term, and in hard technology.

With a flurry of policy signals, IPOs are no longer the only solution for venture capital exits. “Currently, there are over 228,000 existing projects in China’s primary market, relying solely on IPOs makes it difficult to solve most projects’ liquidity issues,” said Tian Chen, partner at Shengshi Investment, to China Securities Journal.

Against this backdrop, previously non-mainstream M&A funds and S funds are accelerating to the forefront. Industry consensus is forming: diversified exit channels built around M&A funds and S funds are expected to become important paths for venture capital exits, an inevitable step toward maturity in China’s primary market.

M&A Funds Moving Toward Systematic Development

“IPO cannot accommodate all projects, and the venture capital exit system will inevitably diversify,” said Tang Jincao, chairman of Shuimu Capital and founder of the Parent Fund Research Center. “The importance of M&A funds will increase as they enable more flexible capital turnover mechanisms.”

According to the “2025 China M&A Fund Research Report” published by LP Investment Advisory, M&A funds focus on acquiring control of enterprises, with no less than 50% of the fund’s committed capital allocated to controlling private equity investments.

Xin Yuesheng, managing partner at Xinchen Capital, vividly compares: “The task of M&A funds is to do ‘refined decoration,’ transforming ‘shell companies’ into high-quality targets suitable for acquisition by listed companies.”

In the past year, Shanghai accelerated the formation of a 50 billion yuan state-owned M&A fund matrix; Beijing, Zhejiang, Anhui, Jiangxi, and other regions also set up M&A funds intensively.

According to the Parent Fund Research Center, over 300 industry M&A funds have been established by A-share listed companies by 2025. Since the implementation of the “Six M&A Policies,” the number of M&A and restructuring cases in the Shanghai and Shenzhen markets has increased significantly.

A typical case is that in September 2025, A-share company Dongyang Sunshine and others formed a buyer group, investing 28 billion yuan to acquire 100% of Qinhuai Data’s China operations from Bain Capital, a well-known private equity firm. Bain Capital’s investment cycle in Qinhuai Data exceeded six years, during which the company underwent business split, integration and expansion, a U.S. IPO, and privatization delisting. Bain ultimately exited at about 28 billion yuan, achieving high returns and maximizing value compared to the initial acquisition cost of about 1 billion yuan.

“M&A exits are gradually returning to the main stage of the capital market,” said Tang Jincao. “In the future, M&A funds will play a greater role in industry consolidation exits.”

S Funds Opening Up Liquidity Space

If M&A addresses enterprise exit needs, S funds (secondary market private equity funds) solve the liquidity issues of fund shares.

Tang Jincao believes: “S funds allow old fund shares and project interests to be transferred, easing liquidity pressure on LPs and GPs.” Tian Chen added: “S funds not only facilitate project exits but also respond to complex scenarios like maturity of earnouts and state-owned shareholdings, becoming effective tools for revitalizing existing assets.”

According to ZERONE, the number of private equity secondary market transactions in China increased by 57% year-on-year in 2025, reaching 1,187 cases, characterized by small amounts and multiple transactions, indicating increased market activity. S funds have become an important tool for local state-owned enterprises to handle exit demands.

In practice, leading institutions are actively deploying. For example, Shengshi Investment has valued S fund strategies since its founding in 2010, currently managing nearly 5 billion yuan in S funds. In 2024, Shengshi proposed the “Big S Strategy,” and in 2025 completed its first S fund restructuring transaction, further enriching liquidity pathways.

However, S fund development still faces challenges. Tian Chen notes: first, multi-layer nesting restrictions. As S funds are inherently parent funds, they naturally involve nesting. In subsequent transactions, if early-stage funds invest via SPVs or similar structures, they risk exceeding three layers of nesting, affecting participation willingness of financial institutions and other restricted entities. Second, issues around tax base confirmation. Third, state-owned asset transfer issues. There is still room for improvement in valuation and assessment logic; whether valuation systems can replace traditional evaluation methods and support more flexible pricing mechanisms on platforms like the Equity Exchange Center remains to be explored.

Industry Looks Forward to National-Level M&A Funds

“Future mature venture capital exit ecosystems will involve multiple channels such as IPOs, M&As, S funds, and buybacks,” said several industry insiders. Currently, for M&A and S funds to truly become key exit channels, systemic breakthroughs are needed.

An important variable is the establishment of national-level M&A funds. During the recent National Two Sessions, a relevant official from the National Development and Reform Commission stated that the commission, together with the Ministry of Finance and the People’s Bank of China, plans to establish national M&A funds, expected to mobilize over 1 trillion yuan in capital.

Tang Jincao believes that national M&A funds will help smooth exit channels and improve turnover efficiency. By collaborating with industrial capital in advanced manufacturing, integrated circuits, biomedicine, new energy, and other fields, they will become vital tools for supporting new productive forces.

“We are very optimistic about the establishment of national M&A funds,” said Tian Chen. “They are not only important measures in the M&A field but may also encompass S fund functions, injecting new liquidity into the market and encouraging more capital participation.”