Welcome to the private equity game in China: you can buy in anytime you like, but you can never leave.
At least, that is how it is starting to seem for many of the firms that bought in big during the boom of last decade.
Starting from a base of almost nothing in 2000, global private equity funds and their start-up local counterparts rushed into the Chinese market — completing nearly 10,000 deals worth a combined $230 billion from 2001 to 2012, according to a report released this week by China First Capital, a boutique investment bank based in the southern city of Shenzhen.
But of those deals, some 7,500 remain ''unexited,'' according to the report, meaning the private equity investors have yet to find a way to cash out of their investments and pocket their profits.
In the West, private equity firms make money by selling to peers in a given industry, selling to other private equity funds or recouping their outlay via dividends that the target company pays by taking on new debt. But the Chinese private equity market has been overly reliant on one well-trodden exit route: the initial public offering.
In retrospect, that has proved to be a bad choice.
Beijing flashed a regulatory red light at new stock listings last summer, and since then, the backlog of applications for companies waiting to list on the Shanghai and Shenzhen markets has grown to nearly 900. Many of those include private equity investors seeking to cash out.
At the same time, interest among investors in American stock markets for new offerings from China remains scant after a series of accounting fraud scandals that triggered a crackdown by the Securities and Exchange Commission and, more recently, prompted a standoff between the regulator and the Chinese affiliates of the world's biggest auditing firms.
''In China, historically the exit route has been an I.P.O. on the U.S. markets, but at the moment that route is not looking very encouraging,'' Lucian Wu, managing director of Paul Capital, which has $6 billion in assets under management, said at an industry forum in Hong Kong on Thursday. ''With the domestic market essentially shut until the regulators decide otherwise, the I.P.O. market in China is not really there.''