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By Clara Ferreira-Marques

DAVOS, Switzerland, Jan 26 (Reuters) - Buyout firms are facing a tough year ahead, with default rates set to rise from the historic lows of recent years and deals shrinking in size, senior private equity executives said on Saturday.

Speaking at an annual summit of business leaders and policymakers in the Swiss resort of Davos, David Rubenstein, a founder of private equity giant Carlyle Group [CYL.UL], said he saw firms seeking to make more of businesses already in their portfolios rather than chase hefty new deals.

"Those (big) buyouts will come back in time, but money over the next few years will be made not by doing new deals, but by improving companies they already have," he said in a panel discussion with other industry veterans including Clayton, Dubilier & Rice head Donald Gogel.

"There will be leveraged buyouts (in 2008), but deals will be smaller -- most likely one, two, three billion dollar deals, as opposed to 30 to 40 billion dollar deals," he said on the sidelines of the meeting.

The cost of financing leveraged buyouts has risen since the middle of last year when defaults on subprime loans caused turmoil in the credit and equity markets, prompting a number of high-profile deals to fall through.

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