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Few things animate private equity investors like a growth story, especially one that promises scale, stability and policy predictability. For much of the past two decades, China offered all three in abundance. That era is ending.
China is still the biggest private equity (PE) market in Asia-Pacific by several measures. Yet by others, its pre-eminence is slipping fast. In 2016 the country accounted for 68% of Asia-Pacific PE fundraising. Last year that figure plunged to 21%. Globally the country’s share of fundraising has dwindled to a meagre 1%, from 13% at its peak. Deal activity has followed a similar path: Chinese firms represented 27% of regional deal value in 2024, down from 51% during 2014–2018. India, once a peripheral player, nearly matched China last year at 22%.
The reasons for the decline are neither new nor singular. A drawn-out regulatory crackdown has muddled investment theses while unpredictable policymaking has rattled limited partners, or LPs—those who provide capital to PE funds. Add to that persistent tensions between Washington and Beijing and the environment becomes more treacherous. In 2021 58% of institutional investors considered China among the most attractive markets in Asia. By 2024 the figure had collapsed to 3%, according to Probitas Partners, an investment advisory firm.
Much of the fallout has been felt in technology, once a reliable magnet for capital. Investments in China’s information technology sector fell by more than a third between 2021 and 2023. The US government’s curbs on outbound investment into sensitive sectors—semiconductors, artificial intelligence and quantum computing—have created legal uncertainty and reputational risk for investors. In a 2023 congressional investigation, several prominent American venture firms were publicly linked to companies alleged to support military applications. Sequoia Capital and GGV Capital have since spun off their China operations. Others are following suit.
For global general partners, or GPs, this makes China increasingly difficult to handle. Many have moved capital into pan-Asian funds, which allow more flexible deployment across markets. Japan and India have emerged as preferred destinations, providing large domestic markets and less regulatory opacity. “I don’t see international investors coming back to less-established Chinese sponsors until there is proof of concept in terms of institutionalisation,” said one Hong Kong-based lawyer advising global PE firms.
Domestic capital is stepping into the breach. Chinese city funds—state-backed investment vehicles—now account for the bulk of local deal activity, comprising 63% of volume between 2016 and 2022, according to one analysis. That creates an environment where commercial logic is increasingly subordinated to policy objectives. Mainland firms dominated China’s ten largest PE deals last year, a shapr reversal of the foreign-led transactions common a decade ago.
Still, capital is only part of the equation. As one American official put it, China is not short of money, it is short of know-how. Foreign PE firms provide more than cheques: they bring strategic guidance, global connections as well as operational expertise. A closed ecosystem may keep deals afloat in the short term but it risks stunting innovation and exit opportunities, especially as initial public offerings remain elusive and strategic buyers scarce.
There are signs, however tentative, of returning interest, albeit at a steep discount. The secondary market, where investors trade stakes in private companies or PE funds, has boomed. Yuan-denominated secondary trades hit a record $11bn in the first half of 2025, up 89% year on year. Some assets are trading at 40–50% below net asset value. Global investors with long-term horizons, such as LGT Capital Partners and Singapore’s GIC, are selectively re-entering via continuation funds, which recycle existing investments into new holding structures.
This does not mean renewed enthusiasm for the China growth story. It suggests although investors remain wary of China as a strategy, they may still find value in China as an opportunity so long as it comes at a markdown. Big institutional sellers like Canada’s CDPQ are looking to exit Chinese assets via secondaries, further feeding supply.
Sentiment may also be changing incrementally. The CSI 300 and Hang Seng indices have both posted gains this year, buoyed by stabilising macro indicators and a marginal thaw in trade rhetoric. Yet whether this manifests into durable investor confidence is uncertain. Geopolitical tensions can flare quickly, and regulatory reversals have been known to arrive without notice.
The structural impediments to foreign capital are unlikely to abate soon. Global LPs require not only economic growth but also legal clarity, exit pathways and less opacity, for example. Pan-regioal GPs with flexible mandates are better placed to steer through this terrain. Their success depends less on reading tea leaves in Beijing than on finding pockets of institutional reliability elsewhere in Asia.
Private equity by its nature is a long game. In China the game is still being played. But the rules have changed, and fewer outside investors are inclined to take the field. ■
