China’s private equity market is either going through the dark ages or a renaissance, depending on whom you ask, with advocates for both sides represented at the HKVCA China Private Equity Summit this week in Hong Kong.

The deceleration of China’s economic growth and bottleneck in IPOs for mainland companies has had a knock-on effect on PE deal flow and exits, says Alvin Li, head of direct investment at CCB International Asset Management.

As more than 95% of PE exits in China are through IPOs, “the shutdown of the A-share market has slowed down the whole process”, says Li, speaking on a panel of offshore managers at the summit, organised by the Hong Kong Venture Capital and Private Equity Association.

“The money allocated to private equity has slowed down as well because the existing investments can’t exit,” he notes. “Therefore the whole environment is not good for PE investments.”

The returns are also lower. Three years ago, PE investments exiting through the A-share market could yield deal multiples of 7-8x and a 40%+ internal rate of return, says Li. “The normal return we would expect now for growth capital [deals] would be 2.5x or 20% IRR.”

Other industry executives view the stalled IPO market as a likely turning point for the PE industry, leading to more sophisticated deals.

“The traditional bread and butter of the China private equity business, which is the IPO market, is dead,” notes Max Chen, executive director at Primavera Capital Group. As a result, PE firms need to come up with new ideas, including take-private deals, outbound and cross-border investments, he says. “We’ll see more diversified sources of deals.”

The big returns that marked China as a PE hotspot in recent years did not all live up to their billing, says Derek Sulger, managing partner of Lunar Capital. “We have to be somewhat mindful that [a] fairly substantial portion of the companies that were telling us that they were growing 20-[to]-50% a year were wildly overstating themselves.”

Presenting the viewpoint from a fund-of-PE-funds manager, Doug Coulter, partner at LGT Capital Partners, says “there were a very small number of managers that put those very unrealistic multiples on the board, and in most cases they weren’t realised multiples.

“[One] thing we forget about China is how much risk managers are taking on to deliver the kinds of returns that they’re talking about, or promising to their [limited partners],” he adds.

It will take time for China PE firms to adjust to what panellists call the “new normal”, but Sulger is optimistic that it will lead to a better industry overall.

“I think you’re going to look back, five years down the road from this point, [and see] this as being one of the best times to not just make investments, but come up with new ideas and new approaches to making investments,” he says.