However, attitudes are changing. Officials from local and central governments, financial institutions, entrepreneurs and management teams are receptive to PE/VC activities today due to the spectacular growth in businesses, job creation and the entrepreneurial achievements that PE/VC's created, and the initial public offerings in both local and foreign stock exchanges.
"In 2009, China emerged as the No 2 market for PE investments after India," said Michael Thorneman, managing partner for Greater China at consulting firm Bain & Co.
China currently constitutes 5 percent of global PE investments. This year alone, about 29 deals were completed in China in the first two months, he added.
While opportunities abound, the industry faces challenges too. Competition is fierce - PE investors now have to compete with the global likes of KKR, Blackstone, TPG and Carlyle. Yuan-denominated funds have also cropped up.
A relaxed lending approach by banks means companies could easily obtain funds from an additional source.
In addition, PE/VCs and investment bankers would have to battle it out to win over companies, especially when the stock markets offer high valuations.
"In 2007 when the stock markets were robust, I know of company owners who would meet bankers in the morning and PEs in the afternoon to shop for the best deal on whether to list the company now or keep it private, grow the business and IPO later," said Maurice Hoo, a partner at legal advisory firm Paul Hastings.
"Hence, while overall opportunities and economic growth rise, more people are aiming for a piece of a pie that is growing."
The way companies are managed remains a high priority for PE/VCs before any investments can be made.
"For us, people are the most important factor. We look for passion and the right attitude in what they (entrepreneurs) do, their vision, integrity and how they treat their staff," said Brian Zhou, Carlyle's director of communications for China.
"We usually know what sort of companies they are running based on the first meeting," he added. Word of mouth, third party investigation, networking and referrals are key in the industry where PE/VCs source for potential deals.
But the industry is further challenged by questionable company management behavior, failed deals and poor investment returns. Despite that, most PE/VC practitioners remain positive on prospects.
"Opportunities are more than challenges. It was tough a few years ago but the industry is in a better position now. It is maturing and we'll see diversity and specialization in the near future," said Zhou.
China Venture Capital Association said the major investment sectors for yuan-denominated funds of foreign PE/VC firms are environmental protection and new energy, consumer goods and services, healthcare, Internet and education/training.