International private equity houses are stepping up their efforts to invest in China in the next few years, reflecting a gold rush mentality that could leave some investors disappointed.

Private equity funds with good connections and deep insights account for the bulk of recent investments. But some new entrants have relatively untested China investment teams.

The influx of new money reflects the pulling power of the "China story," which suggests that there are opportunities that investors cannot afford to miss. Supporters of this contention point to a handful of pioneers who have made big profits by listing their portfolio companies on overseas stock exchanges such as the Nasdaq.

In practice, however, most investors will continue to struggle to pull off successful deals in China as investment conditions worsen. Many private equity investors might be better served by investing their funds in overseas companies that will benefit from China's economic boom. Those who are willing to make a bet on the growing pool of Chinese companies will face a number of challenges.

First, an oversupply of capital is placing more negotiating power in the hands of the target companies, possibly limiting potential investment returns. It could also be increasingly difficult for...