Private equity fundraising activities have been growing rapidly in China in recent years, and with this, there has been a significant increase in private equity operators focused on this market. These private equity managers and their firms are under increased pressure to invest quickly as competition for deals heats up, but this should never be a reason for compromising a thorough due diligence of the target companies before completing deals.

According to several private equity fund managers, they are often pushed to conclude their due diligence in China within two weeks, compared to an average of two months in the rest of the world. In some cases, the owners of target portfolio companies are not willing to sit and wait until the investment managers have gone through the proper due diligence process. As a result, to secure the best deals and deploy the capital investment quickly, some fund managers in China are accelerating the due diligence process, which may lead to making a decision based on incomplete or insufficient information.

Indeed, when it comes to conducting due diligence, it is suggested that financial statements of some Chinese companies tend to be 'less trustworthy' than those of their counterparts in mature markets such as Hong Kong. To conduct proper due diligence, the fund managers may need to appoint accounting firms, law firms and other specialists to review target portfolio firms, and undertake their own due diligence measures. During that process, the fund managers and their advisers need to interview the key suppliers, customers, and do cross-checking on inventory and major sales receipts, as well as talk to employees at various levels of the target companies.

Having a sufficiently sizeable due diligence team focused on conducting a thorough investigation for a sufficiently long period of time gives fund managers sufficient information to decide if the target portfolio company is trustworthy and merits the investment.

When it comes to deal valuations however, entrepreneurs of target portfolio companies often have the upper hand in setting prices and timescales, this is because a significant amount of investment funds are chasing a limited pool of 'good' investment opportunities in China. In addition, difficulties in accessing valuation benchmarks for emerging markets, such as China, make it hard to evaluate and price potential investments.

Having said that, for all the challenges of investing in China, China's macroeconomic outlook is still more compelling than that of other markets, as its industrial sectors have been enjoying highly robust growth in the past decade and are likely to continue to grow strongly for the decade ahead.

There is also an increased need for investors to be conversant in Putonghua because of the growing proliferation of domestic Chinese private equity fund houses and acquisition companies. While there are some top investment managers who speak only English, being fluent in Putonghua helps 'go behind the story' by talking to dealmakers, junior private equity executives and senior corporate executives.

It is expected that, despite the obstacles, capital inflows into China's private equity markets remain strong as the country enjoys a more favorable economic outlook than markets in the West, and that foreign capital will continue to look to China for investment opportunities.

The author is a partner at financial services firm Grant Thornton Hong Kong Ltd. The views expressed here are entirely his own.