Venture Capital And Private Fund Exits By IPO In China And The Rationale

This paper studies exits by venture capital and private equity fund (VC/PE) and factors related to exits. The statistics show that younger VC/PE, VC/PE with shorter investment periods and younger supporting companies are more likely to exit through initial public offering (IPO), especially when the market experiences higher returns. In addition, no significant differences are observed in terms of the age of the supporting companies and IPO underpricing between young and old VC/PEs. These findings suggest that unlike in other mature capital markets, the Information Asymmetry and Grandstanding hypotheses are insufficient to explain exits by VC/PE in China. Instead, our data reflects VC/PE’s intention of maximizing investment returns through investing in firms with the potential of going public and cashing in upon IPO when stock price is high.The VC/PE prefer to cash in firms with high potential of going public and exits immediately when the firms going public, We can attribute the reasons to the special stage of development of China venture capital market. Three characteristics can be used to explain the VC/PE’s cash in behavior. The newly established VC/PE is lack of experience to assist firms to grow up; The smaller scale of VC/PE limits their financial strength to provide long times assistants for firms; The profits gap during different exit ways stimulates VC/PE cash in the firms upon IPO.