New Exit Pathways Emerge for Healthcare Investments Amid IPO Bottlenecks

Since 2023, the IPO channel for enterprises has significantly narrowed, whereas in the past, it was one of the primary exit pathways for investment institutions. Meanwhile, the intertwining difficulties in exiting investments and raising funds have posed substantial challenges to these institutions. More critically, in recent years, funds established around 2015 have successively reached maturity, compelling investment institutions to prioritize expedited exits. However, healthcare is a typical “slow industry” that requires long-term capital support.

On one hand, there is an urgent desire to exit while traditional exit routes are blocked; on the other, there is a demand for long-term capital. This contradiction highlights the urgent need for healthcare private equity investment to establish more diversified and healthier exit channels.

Over the past year, regions such as Shanghai, Zhejiang, and Guangdong have introduced policies to vigorously support the establishment of S funds (Secondary Funds, i.e., private equity secondary market funds), encourage diversified S transactions, and broaden exit channels for investment institutions.

In April 2023, Coller Capital announced the completion of its first RMB-denominated, GP-led transaction with Legend Capital. This marks the third transaction jointly executed by Coller Capital and Legend Capital, covering six high-quality healthcare assets with a total value of approximately RMB 315 million.

This transaction has also become a classic case in China’s healthcare SaaS market, and even in the broader SaaS market.S transactions offer new possibilities for investment institutions to achieve exits more effectively and efficiently.

In 2023, China Renaissance established a GP/LP investment exit business team to provide investment banking services for S-transactions across the industry, with healthcare being a key sector covered by China Renaissance. Within a few months of its formation, the team has signed agreements with several leading institutions, covering more than 130 underlying projects in sectors including healthcare, semiconductors, and new energy, with a total pending exit amount nearing RMB 40 billion.

To gain deeper insights into how S transactions facilitate smooth exits in healthcare investments, VCBeat interviewed Yuan Ye, Head of GP/LP Services and Investment Exit Business at China Renaissance Capital, to discuss related hot topics.

VCBeat: What was the general landscape of S transactions in the healthcare and medical sector in 2023? Please provide details on aspects such as penetration rate, key players, and transaction types.

Yuan Ye:Although S transactions have been widely discussed in China’s capital markets, their penetration rate remains low. The total value of S transactions across all industries in China accounts for less than 5% of the private equity market’s investment volume, whereas this proportion stands at approximately 15% in the global market. Within this landscape, S transactions in the healthcare sector represent roughly 17% of the total industry-wide S transaction volume, a share comparable to that of healthcare private equity investments within the overall private equity investment pool.

Another phenomenon is that healthcare-related M&A transactions in 2023 were smaller in scale compared to previous years. This was primarily driven by multiple factors, such as the anti-corruption campaign in the healthcare sector and underperformance of related companies.

The main participants in healthcare S transactions include prominent S funds, healthcare-focused GPs, and various types of LPs.

In terms of transaction types, the healthcare sector aligns with the broader market, with LP interest transfers remaining the dominant form. Transactions led by GPs through the establishment of continuation funds, such as those conducted by Legend Capital, remain rare. This pattern in transaction types is not unique to the healthcare sector but is prevalent across the entire industry.

VCBeat: Over the past year, what has been the general level of understanding and acceptance of S transactions among key stakeholders in the healthcare sector, including GPs, projects/assets, LPs, and various types of buyers?

Yuan Ye:Private equity in China has experienced rapid growth for only a relatively short period, and many general partners (GPs) have not yet fully navigated the challenges associated with fund maturities. Historically, GPs competed primarily on assets under management (AUM), deal volume, and investment performance. In terms of exit strategies, the primary motivation and pressure have rested with limited partners (LPs), which is why LP interest transfers have dominated the secondary (S) transaction market.

Nowadays,Blocked IPO channels and an increasing number of funds reaching maturity have placed exit pressure on GPs.However, most general partners (GPs) were generally ill-prepared at this stage, lacking the necessary teams and capability reserves. The transmission of market information within institutions requires a certain cycle; while frontline personnel involved in fundraising, investment, and post-investment management may have already sensed the difficulties in exiting investments, it takes time for decision-makers to respond accordingly. Meanwhile, the pace at which different institutions move from recognizing the problem to implementing countermeasures varies—some act swiftly, while others are relatively sluggish.

In summary,GPs have widely recognized the importance of “exiting well,” and their awareness and acceptance of exits via S transactions are rising rapidly., but in terms of actual implementation, it is still slower than expected.

VCBeat: In 2023, the industry witnessed a scenario where medical unicorn companies faced urgent exit pressures due to the maturity of their investors’ funds. However, these enterprises had not yet achieved profitability at scale, found it difficult to pursue an IPO in the short term, and failed to secure mergers or acquisitions, thereby confronting challenges such as layoffs and difficulties in business transformation. In your opinion, under what circumstances can such issues be resolved through S-transactions (secondary transactions), and under what circumstances cannot they?

Yuan Ye:This primarily depends on the company's own development status.

I would like to first make a distinction: when companies face capital pressure or financial distress due to their own development needs, they may need to employ comprehensive solutions from professional investment banks, including financing services, mergers and acquisitions, restructuring, and other approaches. S-transactions are one such instrument. It is worth noting that although the overall market conditions are less buoyant than in previous years, situations vary across different segments and among individual companies. Enterprises in hot sectors enjoy significantly better survival conditions and far more favorable exit prospects compared to average firms.

The greater value of S funds lies in proactive planning—addressing the exit and transfer needs of shareholders, particularly General Partners (GPs), before companies face genuine financial distress, thereby introducing longer-term, higher-quality new shareholders to support healthier and more stable corporate development.S funds primarily serve GPs and LPs directly, with enterprises being indirect beneficiaries.

If the underlying enterprise is a high-quality asset and the General Partner (GP) is sufficiently competent, secondary (S) transactions can indeed help resolve such dilemmas. The ideal scenario involves the GP establishing a new continuation fund to transfer assets from the legacy fund (particularly those nearing expiration) into the new vehicle for continued management.

Although the current transaction volume of continuation funds remains small, they represent an inevitable trend. Continuation funds not only meet the exit needs of existing funds but also enable new funds to support high-quality projects for longer periods. In contrast, the previously dominant transfer of limited partner (LP) interests could only facilitate exits for certain LPs, failing to fundamentally address the issues of fund maturity and the need for long-term capital support for portfolio companies.

VCBeat: To help the industry break through the exit dilemma, Capital Easy established a GP/LP investment exit business team in 2023. For healthcare projects, what is the composition of the team members?

Yuan Ye:The team includes professional members with medical backgrounds and colleagues who have transferred from investment banking divisions within the healthcare and medical sectors. It also comprises professionals from technology, finance, and other fields, including senior experts with extensive experience in secondary fund (S-fund) transactions as well as in establishing and managing large-scale S-funds.

The GPs we engage with in the healthcare sector include both vertical-focused and generalist firms. In transactions involving LP interest transfers or the establishment of continuation funds, our counterparties are predominantly fund-of-funds, secondary funds, financial institutions, state-owned enterprises, and strategic industry investors. The profile of institutional investors is complex, imposing high demands on teams’ expertise in specialized domains as well as their experience in private equity fundraising.

Notably, we received substantial support from various industry groups and the Equity Capital Markets (ECM) Department at iCapital. In the healthcare sector, iCapital’s Healthcare Investment Banking team has completed hundreds of transactions over the past 23 years, accumulating extensive industry resources and market insights that have helped us develop deeper industry understanding and solutions. Meanwhile, working in close coordination with the ECM Department, we connect clients with active domestic and international institutional investors, including local governments, central and state-owned enterprises, multinational corporations, listed companies, and sovereign wealth funds.

VCBeat: It is understood that within a few months of establishing its investment exit business team, Capital Kelun signed agreements with several leading institutions. Among the more than 130 projects involved, healthcare projects were included. Approximately how many of these were healthcare-related?

Yuan Ye:Healthcare projects account for approximately 15%-20%.

VCBeat: In the healthcare sector, what is the most advanced stage reached by CapVision’s fastest exit services? Are there any deals that have been closed or are pending closure?

Yuan Ye:Through our efforts in recent months, an increasing number of GPs have gained an understanding of our investment and divestment services and expressed willingness to collaborate with us, including the signing of several top-tier institutions. Our covered underlying projects span all stages; specifically, within the healthcare sector, some are nearing completion.Transaction, some are in the due diligence phase, others in the price inquiry phase, and even more in the early-stage market expansion phase, including engaging with various investment institutions.

Since 2023, a significant number of high-quality projects or market leaders in niche sectors have had to postpone their originally planned IPOs due to various factors, leaving investment institutions facing exit challenges. Such projects are our top priority. Overall, we comprehensively assess project value based on both internal and external factors; the more prominent the project and the greater its transactional value, the higher its priority.

VCBeat: The core strategies employed by China Renaissance Capital to facilitate S transactions include a focus strategy, a “shelf” strategy, an innovation strategy, and an institutionalization strategy. Specifically within the healthcare sector, how will these strategies be targeted, refined, and implemented in 2024?

Yuan Ye:These are our strategies for serving S transactions across all industries, which will be further refined specifically for healthcare projects.

In terms of strategic focus, we primarily serve two categories of GPs: one comprises large, well-established institutions with outstanding performance in healthcare investments, and the other consists of leading specialized GPs in the healthcare sector.

Our strategy is to develop top-tier projects from leading GPs based on our partnerships with them. We tailor comprehensive exit solutions, including single-asset transactions, secondary stake sales, continuation funds, or a combination thereof. In particular, for continuation funds, we collaborate with GPs to identify and select assets, establish the continuation fund, provide professional third-party fair value pricing advice, precisely match potential investors, execute transactions, and assist with closing.

The “shelf” strategy primarily targets buyers. Currently, there are hardly any S funds in China that invest exclusively in healthcare; instead, most are grouped by industry sector, while some at the opportunistic stage do not even categorize their investments, pursuing deals on a case-by-case basis. Against this backdrop, we will “tag” various institutions and investors to reflect their investment preferences.

Each GP’s underlying assets are diversified; partnering with a single GP typically provides access to multiple projects through look-through analysis. We have currently built up a substantial project pipeline, enabling us to select deals from our “shelf” in real time based on buyer-specific “tags” to meet diverse investor requirements. For government and state-owned enterprise buyers, we specifically highlight the geographic location of each project as a key attribute.

In terms of innovative strategies, we actively engage relevant stakeholders and explore various feasible exit pathways. For instance, in facilitating the exit of a large-scale Corporate Venture Capital (CVC) project, given the substantial transaction value, we collaborated with the client to design a structured solution featuring senior and junior tranches, while attracting participation from top-tier financial institutions, including banks and insurance companies. Additionally, for two leading institutions we currently serve, we have provided end-to-end support ranging from initial exit planning and the structuring of continuation funds to market outreach and matchmaking, thereby delivering the most authentic market feedback.

Given the unique characteristics of healthcare projects, we are not bound by existing transaction “templates” and will work with clients to explore innovative models.

Regarding institutionalized strategies, as previously discussed, we will collaborate closely with other business teams within iCapital to form a “group army” approach.

Overall, S transactions are highly non-standardized and require a high degree of customization. We are fully prepared to genuinely help GPs and LPs address real-world challenges.

VCBeat: In 2024, how do you think investment institutions in the healthcare sector should shift their exit strategies?

Yuan Ye:In the capital markets, annual inflows consistently exceed outflows; regardless of future market conditions, the stock of existing assets will become increasingly bloated. Going forward, investment banks will increasingly facilitate S-transactions (secondary transactions) and play a more significant role in such deals.

Meanwhile, as more participants join, transaction methods will become more diverse, transaction capabilities will strengthen, and both transaction amounts and volumes will increase.Although exiting a specific project and addressing the particular challenges of an individual GP remain complex, the overall trajectory of the secondary (S) market ecosystem is undoubtedly positive. Investment institutions must broaden their horizons, stay closely attuned to market dynamics, embrace change, and take decisive, swift action.