The private equity market in China is set to be challenging this year, with investors citing headwinds like geopolitical concerns and policy uncertainties, according to a report by global consultancy Bain & Co.

The report comes as PE deal value peaked at a decade-long high last year of $128 billion, though there was a drop in the second half of 2021 per the report released on Tuesday.

"We expect more investors turning into 'wait and see' mode in 2022 due to rising investor concerns amid macro headwinds, policy risks and increased competition," said Zhou Hao, head of Bain's private equity practice in Greater China. "The gap between seller's and buyer's expectation in deal valuation has widened after the recent retreat of public stock market, leading to more challenges in deal making."

The other challenge is pressure on exit conditions due to the tightening of regulations on US IPOs. As such, portfolio exits are more likely to go through alternative channels such as Hong Kong IPOs, while trade sales are emerging.

Experts suggested focusing on sectors that enjoy policy incentives, such as business-to-business technology services and advanced manufacturing.

"Technology continues to be a high point in the space and has been for some time, and it's interesting and positive to finally see ESG taking such a strong placement in being attractive sectors for potential investments, and in the diligence of all deals," said Kelly Pu, a Bain partner and report author.