Private equity firms struggle for new direction

By Megan Davies

DUBAI (Reuters) - A battle-scarred private equity industry, facing disgruntled investors and souring portfolios, has few options but to dress its wounds and try to stop them from festering right now.

Buyout firms have been hamstrung by the shutdown in credit markets and stared into the abyss when liquidity in the banking system dried up.

And their optimism about finding bargain investments amid the carcasses of blown-up companies may mean little until they can deal with their own deteriorating assets and questions about whether their leveraged model of investing works anymore.

That was starkly evident at the Super Return private equity conference in Dubai this week, where titans including Kohlberg Kravis Roberts & Co's Henry Kravis, Carlyle Group's David Rubenstein and Blackstone Group's (BX.N) Stephen Schwarzman gathered.

"Despite aggressive steps by governments around the world, investor's and business confidence remain shaken to its core," Kravis told a packed-out room of delegates.

Loaded up with cash raised during their hot 2005-2007 period, buyout firms are loathe to give it back to the pension funds and other powerful investors that allocated the money during the boom.

Instead, they have to find places to invest, while avoiding corporate failures such as Apollo Management's Linens 'n Things, which filed for bankruptcy protection, or Texas-based TPG's $1.35 billion loss on Washington Mutual. They also have to make those investments without the leverage they relied on during the boom.

Perhaps most important is making sure the companies they already overleveraged and overpaid for do not default or go bust.