Tommy Yip, founder of Unicorn Capital Partners, a venture capital-focused fund-of-funds, described the market as still firmly in a state of dormancy although beginning to provide more inroads for opportunistic investors.

For Unicorn, the action has been mostly in secondary transactions, where after two years of stagnation and retrenchment in valuations and capital markets, sellers are starting to agree to more attractive pricing. Yip said this was happening both in terms of LP positions and direct company stakes.

“For people who have a legacy portfolio in China, they’re still going through pain at this moment before the capital market comes back,” he said. “But for people who have fresh capital and who don’t have a very high exposure to China, this is probably a once-in-a-lifetime opportunity to start doing some work and put some money to work.”

Scolet Ma, a senior investment director at Cambridge Associates, observed that while large LPs were deterred from China exposure by the sensitivities of their stakeholder networks and small LPs had difficulty justifying direct China exposure versus indirect exposure via global funds, mid-size institutions were more receptive.

She said Cambridge was fielding new interest for China from Asian and Middle Eastern LPs, as well as European family offices that have existing exposure to the market but want to upgrade to higher-quality managers at a lower cost.

“We definitely want to explore new interesting opportunities, even in a market like China,” Ma said. “After the reset, there’s going to be a lot of changes in the manager landscape. We want to make sure we bet on the next generation of emerging managers, and in the meantime stick with established managers that continue to do well. We don’t want to miss the bottom of the market.”

Christopher Wu, CIO of Blue Pool Capital, added that China’s valuation declines are not a bad development from a long-term view. He said that leading up to 2020, transactions in the country – both direct investment and fund commitments – were too aggressive and undisciplined on valuations and deal terms.

“It’s almost like intermittent fasting. It’s not a bad thing to starve a little bit to tighten everyone’s belts,” Wu said.

“When I talk to CIOs abroad and they want to talk about China, the ending comment they always make is that it’s too hard. It’s not a big part of their portfolio and they just don’t want to think about it anymore. The counterargument I always make is, you’re basically making a binary decision, and I’ll bet all my money that China’s not going to disappear in five years.”

The speakers agreed that GP-LP dynamics in China have shifted noticeably in favour of LPs. Fund managers are more transparent and making larger GP commitments. Their fees are down, and their funds are smaller. Yip noted that some GPs that raised USD 500m three years ago are now lucky to get USD 80m. They are also increasingly specialised.

Yip highlighted, however, that these changes were not a reflection of the discipline returning to the market but merely a lack of options. LPs targeting contrarian China opportunities will therefore need to pursue GP engagement with greater delicacy.

“When the market is going very well, alignment is always there between LPs and GPs. But when we’re in this market, when GPs worry about whether they’re going to be able to raise the next US-dollar fund and worry about their going concern, that’s when you will find a situation that there’s a misalignment of interests between GPs and LPs,” Yip said.

“So, I would just encourage both GPs and LPs to talk more, to communicate, to sort out these issues, because in this environment, we may not be on exactly the same page, and I can understand that.”