Research on the Performance and Influencing Factors of Pre-IPO Round Investments by Private Equity Funds in Chinese STAR Market Listed Companies

By the end of 2024, since the launch of the STAR Market in 2019, the number of listed companies has grown to 581 with a total market capitalization reaching RMB 6.72 trillion. These listed firms primarily focus on high-tech industries, such as semiconductors, artificial intelligence, new materials, new energy, etc. The STAR Market has become the preferred listing venue for “hard-tech” companies in China and an important investment exit channel for private equity (PE) funds. This paper aims to analyze the investment performance of PE funds that invest in technology-innovation enterprises’ Pre-IPO rounds and the factors influencing these performance outcomes. Through an empirical approach, it offers practical insights that help guide PE funds to make well-informed decisions, select appropriate metrics to evaluate prospective Pre-IPO investments, and ultimately enhance returns on successful deals.
Regarding the factors affecting investment performance, this paper investigates founders' educational background, corporate governance, Pre-IPO round listed filing cycle, R&D intensity, operating efficiency, and valuation indicators. In light of the potential impact of market fluctuations and variations across industries, the paper also performs a regression analysis on net returns after adjusting for the CSI 300 Index fluctuations and controlling for industry-specific fixed effects.

The findings indicate that, after excluding the CSI 300 Index gains, the average pure internal rates of return (IRRs) for PE funds exiting 3, 6, 9, and 12 months post lock-up are 48.5%, 44.8%, 41.9%, and 38.7% respectively. The regression analysis shows no relation between the founder’s educational background or corporate governance indicators and the Pre-IPO returns of PE funds in STAR Market investments. However, the listing application cycle of technology-innovation enterprises and the proportion of master’s or doctoral holders in the R&D team are positively related with Pre-IPO returns. In contrast, current-year operating revenue for these enterprises is negatively related with Pre-IPO returns, whereas net profit excluding non-recurring items and gross profit margin both exhibit a positive relation with Pre-IPO returns. Regarding valuation metrics, the “price-to-research ratio”is significantly negatively related with Pre-IPO returns.