Tough Times For Deep Pockets.(Global Investor)(private equity firms)

Byline: Mohamed A. El-Erian

The worry is that private equity will become yet another of the dominos falling in the global financial system.

Glenn Hutchins, the highly successful and respected founder of Silver Lake, recently noted that private-equity firms "have returned to the obscurity that we so richly deserve." If so, that is quite a change for an industry that McKinsey labeled last October one of the "new power brokers" in international finance.

At first sight, the slipping prominence of private equity reflects the attention being given to two other segments of the financial industry: the struggling Westernbanks and brokerage firms who are still reeling from huge losses and the sovereign wealth funds that have given them $69 billion in capital in less than a year.

Yet as important as this two-sided relationship is--and it is important as the United States tries to avoid a recession that could affect other countries--it should not totally overshadow what is also happening to private equity. The industry has fallen on tougher times, with a recent spate of unraveling deals and languishing bank loans. Indeed, the worry is that private equity will become yet another falling domino in the global financial system.

Until recently, private equity was on a major bull run. And with that came lots of media reporting on some managers' large paychecks, lavish lifestyles, and high-profile presidential-campaign financing. Private-equity firms had no problem finding lots of attractive targets among companies that had built up significant cash balances, in large part as a response to the financial dislocations experienced in 2002 (including the collateral damage to corporate balance sheets occasioned by the demise of Enron and WorldCom).

At the same time, credit was readily available. Moreover, after delivering superior investment returns for a number of years, some managers sought to capitalize further on the wave of public interest by selling part of their firms through an IPO, most notably the $4 billion NYSE debut of Blackstone last June.