China IPO Market has almost dried up.

Why does anyone invest in an asset? The answer as you rightly guessed is to earn returns. But what if you are unable to earn returns on your investment? Such is a dilemma being faced by private equity (PE) firms in China. The PE firms typically invest in private companies and look to cash in on their investments when the companies go public. And this strategy worked well till recently as China and Hong Kong were the epicentres for mega IPOs. But given the gloomy stock markets in China, IPO activity has almost dried up. As a result PE firms are finding it increasingly difficult to realize returns on their investments. The tougher part is that most of them are nearing their usual investment horizon of 5 to 7 year period. As a result they are getting all the more jittery as the date to return cash to their investors gets closer. However till IPO activity picks up again PE firms are left stranded. Unlike other countries China does not have secondary market for transactions that fall within the purview of mergers & acquisitions. This means that one PE firm cannot sell its stake in a company to another PE firm with ease. In the current environment the need to develop this market has become increasingly important. Till that happens PE firms do not have much choice but to sit and wait for IPO activity to pick up again.