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Private equity investors are using current financial market constraints on liquidity to negotiate favorable deals, as private equity general partners have watched the values of their portfolios fall profoundly. Efforts to attract additional investment haven't been easy, as potential limited partners are reluctant to make long commitments in an uncertain marketplace. This has given limited partners a stronger position from which to negotiate both fees and terms and conditions.

Limited partners are getting a leg up on the private equity funds in which they invest, signaling a change from the historical trend in which funds could push for aggressive compensation based on the returns they provide. In a poll conducted by Preqin, 43% of investors noted a power shift from fund to limited partner, with only 2% seeing a shift toward the general partner.

When The Blackstone Group (NYSE: BX) went public, many observers -- myself included -- were concerned by the total lack of corporate governance checks and balances.

But at the time, the private equity industry was so hot that Blackstone could do no wrong, and no one cared enough to complain. Now that KKR is mulling a plan to list on the New York Stock Exchange, things could be different. The wheels have come off the industry, at least for now, and the arrogant attitude of "We'll tell you what we feel like telling you and you'll like it" may not play so well.

On Thursday, the Federal Deposit Insurance Corp. (FDIC) is expected to propose new guidelines for private-equity investors seeking to buy failed banks. Those guidelines are intended to ensure that these largely unregulated firms don't take too many risks with troubled banks or buy and flip them.

The new rules come as private-equity firms have grown increasingly active in the banking sector. FDIC Chairman Sheila Bair said she's comfortable with the private-equity deals the agency has struck for failed banks such as IndyMac and BankUnited, but that a more structured process needs to be put in place.

While the Blackstone Group (NYSE: BX) is primarily known as a private equity firm, this actually understates things. In fact, it is a diverse global platform that spans hedge funds, corporate advisory, and real estate investments.

Actually, the real estate segment is getting bigger. This week Blackstone announced that it raised a $4.3 billion real estate fund with the main focus on opportunities in Europe. It's called the Blackstone Real Estate Partners Europe III fund (for whatever reason, these funds can be a mouthful).

American International Group (NYSE: AIG), once the world's largest insurer, is selling assets outside the U.S. to repay a government bailout. The Carlyle Group, KKR, JC Flowers, and other U.S. private equity firms and Asian financial groups are reported to be interested in AIG's Taiwanese unit Nan Shan Life Insurance Co.

"Everyone hopes this is going to be a fire sale as AIG is in a difficult situation," said a local partner of Standard & Poor's.

From 2004 to 2007, the titans of private equity tapped yield-hungry investors to raise massive amounts of buyout capital. Eager to deploy this easy money, they spent billions taking huge companies private, shattering records for mega-deals only to see them surpassed a few weeks later. The list of companies taken private includes many famous names: Toys 'R' Us, Hertz, Harrah's Entertainment, Tribune Co., and TXU, the Texas utility that set a record for buyouts in a deal worth over $44 billion.

Now many of those companies are staggering under the sheer weight of their debt. Bond investors, who once eagerly poured their money into the high-yield debt that made leveraged buyouts possible, have seen their holdings decimated. With the bonds that helped pay for some of the biggest private equity deals trading at less than 50 cents on the dollar, some worry whether the companies can stay afloat.

For details on eight big buyout targets that are now teetering on the brink, click through the following gallery.

Stepping up its scrutiny of offshore investing, the IRS has demanded that hedge-fund and private-equity investors disclose hundreds of billions of dollars they have invested offshore. This is part of a crack down on questionable use of offshore tax havens, which started with a very public case filed against UBS.

UBS agreed to pay $780 million to settle accusations that it had defrauded the IRS by allowing wealthy Americans to hide billions of dollars using secret offshore bank accounts.

The complicated legal fight over the implosion of the private equity buyout of Huntsman (NYSE: HUN) has been settled. The firm was able to get $632 million in cash and $1.1 billion in financing from Credit Suisse (NYSE: CS) and Deutsche Bank (NYSE: DB).

Basically, Huntsman claimed that these financial firms failed to uphold their responsibilities in backing the takeover from Hexion Specialty Chemicals, which was struck in July 2007 at $28 per share. Now, Huntsman is trading at $5.92, primarily because of the plunge in the global chemicals sector.

Many of the bit players are being flushed out of private equity by the tight credit market, and Fidelity Investments, which will close its private equity division next month, is no exception. While buyouts have never been a significant part of the company's business, the firm was managing $500 million as part of an operation that was founded two years ago -- at or near the height of the private equity boom.

Fidelity's private equity arm has investments in four companies, but spokeswoman Ann Crowley told The Wall Street Journal (subscription required) that "Basically debt financing is largely unavailable because of the economic conditions of the last several months."

The $52 billion merger of Anheuser-Busch InBev has resulted in some nice opportunities for private equity firms. For example, KKR recently purchased a division of the firm -- Oriental Brewery Co. (the number two brewer in South Korea) -- for $1.8 billion.

Doesn't sound like a lot? Well, it is a big deal. In fact, it's the biggest private equity deal in nine months.

Over the past few years, the private equity powerhouse KKR has tried to go public. First, the firm attempted a typical public offering, but this failed because of the credit crunch. Then KKR tried to go public by using a complicated structure by purchasing another entity, KKR Private Equity Investors (KPE), which is listed on the Euronext.

Well, it looks like this plan may also be dead, according to the Financial Times, as KKR is considering an approach to purchase KPE without triggering a listing on the New York Stock Exchange.

Back in 2007 -- at the height of the private equity bubble -- the Chinese sovereign wealth fund, China Investment Corp. (CIC), agreed to invest $3 billion in Blackstone (NYSE: BX). Of course, it was a disaster. In all, the investment lost roughly two-thirds of its value.

Despite all this, it looks like CIC hasn't given up on Blackstone. In fact, according to the Wall Street Journal (subscription required), CIC is prepared to invest $500 million into a Blackstone hedge fund vehicle.

Eddie Bauer Holdings Inc. (NASDAQ: EBHI), the once-proud seller of expensive, sporty outerwear, today filed for Chapter 11 bankruptcy protection, becoming the latest retail chain destroyed by the worst financial crisis since the Great Depression (Wall Street Journal, subscription required).

Under the terms of the bankruptcy, Eddie Bauer has agreed to sell its assets to CCMP Capital Advisors LLC., a private equity firm, for $202 million in cash. The investor, which supported debtor-in-possession financing of $100 million, plans to retain most of Eddie Bauer's employees and continue to operate most of its 371 stores.

In 2005, several Chinese entrepreneurs started a milk production company, Modern Dairy. No doubt, the company realized there was a huge opportunity in China for milk (right now, the country is third in the world in terms of production).

Besides, in light of some of the contamination problems in the industry (especially last year's melamine scandal), there was a need for a better approach.

Well, this Chinese dairy has caught the attention of the mighty private equity firm KKR. This week, the firm invested $150 million in Modern Dairy, according to Bloomberg.

The Carlyle Group, which is an $85 billion private equity powerhouse, recently published its annual report. It's a sobering document.

However, there are some interesting tidbits. For example, despite the financial turmoil -- where three deals went bust -- Carlyle was still able to raise $19.9 billion. What's more, the firm invested $12.6 billion in equity last year.

What about the future? Well, Carlyle's co-founder, David Rubenstein, who gave a presentation at the Aspen Global Leadership Network conference, offered some insight on what's ahead, as reported by BusinessWeek.