Loan rangers

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: top of the market could skew private equity’s record downward.

Optimists say that credit markets will eventually recover. They also argue that the fall in stockmarkets means more bargains are available. Yet, in spite of all the equity it has to invest, the buy-out industry cannot now raise the debt it needs for large transactions. The banking crisis and sickly markets mean that there are no big loans to be had. In any case, lower stockmarkets must be cold comfort to pension funds and sovereign-wealth funds that saw private equity spend their cash at the top of the cycle. The shadow cast by those boomtime deals is one reason why, even if credit conditions improve, big clients may view LBOs with jaundiced eyes.

Private-equity firms could always hand back their clients’ cash. That may yet happen, but they have every reason to resist. Many, including Kohlberg Kravis Roberts (KKR) and Apollo, plan to follow Blackstone and list their shares. That is hardly the time to be shrinking the assets they manage. In addition, a chunk of their fees is usually charged as a percentage of the capital they manage, regardless of whether it has been put to work. And most firms lock away cash for roughly a decade in funds that typically need a supermajority of investors to unwind them. Clients are complaining, but not that much.

This leaves a neat coincidence. On one side of the financial system are buy-out firms with ambition, long-term capital, discretion about how to invest it, and a dearth of opportunities to invest in industrial companies. On the other are banks, desperately short of capital and liquidity. It does not take a billionaire buy-out barbarian to put two and two together.

So buy-out firms are redirecting their buy-out funds towards financial assets and they are also raising new funds. Preqin estimates that a further $40 billion of new distressed-debt funds is waiting to be deployed. At the same time, big firms have been adding to their credit teams by buying fixed-income talent. In January Blackstone bagged GSO, a distressed-debt-management firm. Credit has already become a big part of the assets the leading firms manage: between a quarter and a fifth for Blackstone, KKR and Apollo (see chart).