Summary of Key Points
In the first half of 2026, China's M&A market saw a strong recovery driven by favorable capital market conditions and policies, with both the number and scale of transactions reaching record highs. However, there was a structural divergence in the exit strategies of private equity (PE/VC) funds: overall exit activities decreased by 9% year-on-year, raising concerns within the industry about how to recoup the invested capital. Nevertheless, the significant increase in IPOs on the Hong Kong Stock Exchange (HKEX) and the rise of the secondary private equity market (S funds), along with policy support for expanding exit channels, have contributed to a generally positive market trend.
I. The M&A Market is Booming: Record Numbers and Scale
The number of M&A transactions across the market reached 7,316 in the first half of the year, a nearly 30% increase year-on-year, while the total transaction value amounted to $241.6 billion, a 56% rise. In simple terms, there were more transactions and larger amounts of money exchanged between companies. This surge is fueled by both the capital market (e.g., a recovering stock market providing companies with funds for acquisitions) and policy measures (e.g., encouraging industry consolidation), indicating that market confidence is improving and companies are willing to expand or optimize their businesses through M&A.
II. PE/VC Firms Face Challenges in Exiting Their Investments
Although the volume and value of PE/VC transactions (acquiring assets) increased by nearly 200% and 86%, respectively, the overall exit volume decreased by 9%. This situation, where funds are invested but not easily recovered, has caused concern within the industry:
- M&A Exits: Dominant but with Reduced Momentum: Exits through sales to other companies accounted for 70% of total exits, but the number of such transactions decreased by 16% year-on-year, indicating that this route is becoming increasingly difficult. High-tech, industrial products, and healthcare companies, however, remain the easiest sectors for M&A-based exits.
- IPO Exits: HKEX Takes the Lead: The number of exits through IPOs increased by 50% year-on-year, with nearly half of these exits occurring on the HKEX (51 IPOs in the first half of the year, a record high), and the majority were from high-tech companies. The number of exits on the A-share market remained low due to stricter review processes, forcing many companies to consider the HKEX as an alternative.
III. Why the HKEX is an Attractive Option for IPO Exits
The HKEX's success in handling a large number of exits can be attributed to two key factors:
1. 18C Special Technology Mechanism: This mechanism provides a fast-track for high-tech companies to go public, allowing firms like Beren Technology and Zhipu (AI companies) to list on the HKEX.
2. A+H Listing Trend: The number of A+H listings (simultaneous listings on both the A-share and HKEX markets) increased in the first half of the year, accounting for 58% of total HKEX IPO fundraising. Hardware, semiconductors, and software services were the top sectors in terms of fundraising, indicating that the HKEX is a primary platform for high-tech companies looking to go public.
IV. The Rise of S Funds as a New Exit Option
In addition to IPOs and M&A, the secondary private equity market (S funds) is becoming a new exit channel. S funds involve the trading of existing fund shares: existing investors (LPs) sell their shares to new investors, allowing LPs to recoup their investment while new investors can acquire high-quality projects at lower prices.
Shanghai has seen particularly strong growth in this area: from January to April 2026, S funds in Shanghai generated new transactions worth 11 billion yuan, with a transaction volume of 3.8 billion yuan, a 10-fold increase year-on-year. GP-led S fund transactions (funds that continue to manage the invested projects) have been particularly successful, serving both LPs and fund managers.
V. Policy Support to Facilitate Exits
To address the challenges in exiting investments, the government has taken several steps:
- The 2026 Government Work Report explicitly mentioned the need to expand exit channels for private equity and venture capital funds.
- The National Development and Reform Commission has established a national-level M&A fund, expected to leverage approximately 1 trillion yuan to support corporate M&A and consolidation.
- Future growth in exits is expected to come from areas such as high-tech integration, state-owned enterprise reform, and inter-institutional transfers.
Despite the ongoing pressure on exits, the combination of policy support and new exit channels (HKEX and S funds) is driving the market in a positive direction.
In summary, while the M&A market was active in the first half of the year, there were concerns about the difficulty in exiting investments. However, the emergence of the HKEX and S funds, along with policy support, offers new opportunities for PE/VC firms. Understanding these developments helps to grasp the core logic of how capital moves and is recovered in the current investment landscape.