For the past year, silver linings have been in short supply. Even as financial markets claw their way back up, the wealth lost has been neither forgotten nor completely recovered. In the private equity sector, the good news is that, frankly, the situation could have been worse. Though returns plunged, the asset class still outperformed the public equity markets.

A new analysis from alternative investment research firm Preqin puts the private equity industry's return at -30% for the 12 months ending March 31, 2009, a period that encompasses the bulk of the lows without the benefit of the upswing that followed. For the same year-long period, the S&P 500's return was -38.1%, with the MSCI Europe's at -49.9%, and the MSCI Emerging Markets' return at -47.1%.

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.

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.

The operator of the Tropicana Casino and Resort, which was featured in the films Viva Las Vegas and Diamonds Are Forever, filed for bankruptcy protection in May 2008. But Canadian private equity firm Onex Corp. (TSE: OCX) has now succeeded in taking over the Las Vegas icon.

Onex's main buyout fund has cobbled together a stake in the casino's senior debt that will make it the largest shareholder when a restructured Tropicana emerges from bankruptcy protection.

Though Onex will gain control of a prime location in one of the hottest spots in the city and one of the busiest pedestrian intersections in the world, it comes at a time when the fortunes of sin city are suffering due to economic conditions.

Not much more than a year ago, private equity firms were the masters of the universe. Graduates of the top business schools who once wouldn't have dreamed of anything other than investments banking were beating down their doors for a chance at seven-figure bonuses.

Now the private equity bubble -- along with the housing and credit ones -- is deflating. A new report from Heinrich Liechtenstein, a professor at Spain's IESE Business School, and Heino Meerkatt, a Munich-based senior partner and private-equity expert at Boston Consulting Group predicts that a astonishing 20-40% of private equity firms will go under. Thirty percent will survive and have a shot at prospering over the long-term. The remaining 30-50% will "hang in the balance" -- not shuttering just yet but not exactly the influence-peddlers they once were.

The role that private equity firms have played in the stock market over the past few years has been hugely important. By making bids for undervalued companies, buyout shops provided activist investors with an outlet for activating value at companies that had underperformed. Without the benefit of private equity firms, activist hedge funds will have a new challenge: Can they create alpha through more long-term oriented approaches like management changes, seats on the board of directors, and operational insight? It will be interesting to watch.

The potential collapse of the $10.6 billion buyout of Huntsman Corp. (NYSE: HUN) is hardly a shock.

For one thing, rising oil prices are crushing specialty chemical makers. Another thing is that the deal was announced almost a year ago, an eternity for the closing of a merger and acquisition. The Wall Street Journal argues that private equity shop Apollo Management and its Hexcion Specialty Chemicals Inc. are making a "novel" argument to get out of the deal.

"In a complaint filed in the Delaware Court of Chancery, Hexion said Huntsman's poor financial results -- increased net debt and lower-than-expected earnings -- would render the combined company insolvent," the paper said, adding that legal experts expect Huntsman to file a countersuit. Of course, shares of Salt Lake City-based Huntsman were plunging in premarket action and will likely open much, much lower. CNBC's David Faber points out that the Huntsman deal was "held out" to be the strongest of the LBO deals. That's scary.

In a press release, Huntsman CEO Peter Huntsman said, "These actions appear to be a blatant attempt to deprive our shareholders of the benefits of the Merger Agreement that was agreed to nearly a year ago." The company added that it intends to "vigorously enforce" its rights under the merger agreement and seek to consummate the merger under the agreed upon terms.

You think subprime is a mess? We may have another big-time problem -- the leveraged buyout (LBO) binge. This week's Barron's [a paid publication] has a good piece on the matter.

Private equity firms tend to focus on mature companies, which produce lots of cash flows. There is usually a good amount of cost-cutting as well. But for the private equity firms to make real money, they need to pile on the debt. This is fine -- so long as there is enough cash flow.

Unfortunately, it looks like the U.S. economy is slowing down. As a result, some LBO deals may fall apart because they can't meet debt payments.

Wall Street is already getting nervous. For example, Barron's points out the sluggish bond prices for companies like Realogy, Swift Transportation, Linens 'n Things, Claire's Stores and Dollar General. Some buyout deals are even trading at about 50 cents on the dollar.

All in all, we may see wipe-outs of the equity stakes for private equity firms. It's a good bet that the returns -- for 2008 to 2009 -- will pale in comparison to the boom times.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Shares of Trans World Entertainment Corporation (NASDAQ: TWMC) were up big today for the first time in a long time. CEO Robert Higgins handed the company's board a "preliminary proposal" seeking to take the company private for $5 per share in cash. Mr. Higgins already controls about 40% of the company's stock, and the board is evaluating the offer.

Shares of TWMC soared more than 27% to close at $4.96 -- so close to the "preliminary proposal" that it indicates that investors expect that the company could well sell for a higher price.

Here's what makes this interesting. According to the company's latest proxy statement, Mr. Higgins has been CEO for a little more than 5 years, although he founded the company more than 30 years ago. The chart at right shows how the stock has performed during that period. In early 2005, shares of Trans World were trading well over $14 per share -- Mr. Higgins' offer is for just over a third of that.

What has happened since then? Trans World is in the CD and DVD business, with stores including FYE, Strawberries, Sam Goody, and Suncoast, some of which were acquired by the company out of bankruptcy. Of course, the internet has made those industries sluggish at best, and declining same-store sales and profitability have sent the stock tumbling.

Does Higgins deserve all the blame for the company's woes? Of course not. But as an executive in the industry, he should have seen the changes coming and made adjustments. He didn't, and now he is looking to take the company private at a fire-sale price, way below the company's book value.

To some, this may be akin to hiring a carpenter to renovate your house, watching him trash it, and then receiving an offer from him to buy it -- at a small fraction of its value before he went to work.

Despite the plunge in the markets Thursday, the shares of i2 Technologies Inc. (NASDAQ: ITWO) were able to post a 6.6% increase to $18.08. The company, which develops supply chain software, announced its Q3 results. Actually, revenues fell $4.9 million to $66.4 million and net income was $4.5 million, or $0.17 per share.

But what got investors excited was i2's announcement that it is exploring strategic alternatives; the company is thinking of selling out. JPMorgan Chase (NYSE: JPM) is the investment banker on the assignment.

In light of the recent spurt of tech M&A – such as Oracle Corp.'s (NASDAQ: ORCL) bid for BEA Systems (NASDAQ: BEAS) – it seems like a good move. Besides, i2's shareholders seem to be antsy. Keep in mind that hedge fund SAC is a major holder.

However, the major software vendors don't appear willing to pay premium prices. After all, the software seems to be maturing. Moreover, because of the ongoing credit crunch, private equity firms have much less firepower.

So, in the case of i2, don't expect a high-priced deal – if one even gets done.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Shares of Trump Entertainment Resorts (NASDAQ: TRMP) are up 17% after the Star Ledger of Newark reported that the Cordish Co., a Baltimore developer looking to get into the casino industry, is looking a buying the company.

Shares of Trump have plummeted in recent months after the company dismissed an offer from Dennis Gomes as too low.

According to The Ledger, "Analysts have long said finding a buyer for Trump Resorts is a long shot. The company carries a heavy debt load -- $1.25 billion plus a $500 million line of credit -- and would be an expensive proposition. A buyer also would have to pay a premium on the price of the company's bonds. And Trump has veto power over the sale of any of the casinos. If he waives that right, the company would have to pay up to $100 million to cover taxes he would owe in a sale."

The huge jump in the stock price is hard to fathom. Merrill Lynch spent months searching for a buyer with little success even as the stock price tanked which, in theory, should have made it a more attractive target.

Trump is bloated and in terrible shape, lacking the funds to revitalize itself. Oh, and Trump Entertainment Resorts is in a similar situation too.

I'll be shocked if anything comes of this latest rumor.

The gunfight at the OK Corral: Private equity firm JC Flowers tried to back out of its deal to buy student loan company Sallie Mae (NYSE: SLM). Then the firm came back with an offer $10 below the original $60/share price.

The whole matter put the Sallie Mae board in a bind. Take a lower price, or take nothing and watch the shares fall. The stock trades just above $49 now.

But SLM got a big vote of support in its efforts to push Flowers to honor the original deal. Three of its big institutional shareholders said that the private equity firm has to do the right thing and write the $60-a-share check. The firms include Barrow, Hanley Mewhinney & Strauss, New York hedge fund QVT Financial and Capital Guardian Trust Company.

"We strongly support your decision to hold firm to your contract and a $60-per-share sale price and hope you will continue to reject any overtures to renegotiate the contract price or the structure of the consideration," QVT Managing Director Nick Brumm said in a letter obtained by The New York Post.

Now, it would appear that Flowers is on the hot seat. These large investors are saying that it is liable for the $25 billion deal. No one should be surprised if they decide to take the buyout operation to court.

With $25 billion on the table, the action has turned very unfriendly.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Perhaps there are not enough good opportunities to "cherry pick" assets among U.S. mortgage lenders, so U.S. buyout firms Cerberus and JC Flowers have gotten approval to deal with the board of Northern Rock (LSE: NRK), the large and troubled U.K. mortgage bank.

The two funds would probably take different approaches. Flowers is interested in having Northern Rock continue to operate, but perhaps with many fewer employees. Cerberus is interest in the bank's assets, which it believes it can get at a discount and then sell off to other institutions.

According to The Telegraph, British authorities "have said Northern Rock is solvent, but sources close to the restructuring warn that it is living on borrowed time."

A buyout of Northern Rock could be a trial for whether similar deals could work in the U.S. There is little hope that the U.S. mortgage market will be better this year and may even stay depressed into 2008. Banks like Accredited Home Lenders (NASDAQ: LEND) are still not out of the woods. And, private equity and hedge fund interests may be the only buyers left for some of these companies.

Douglas A. McIntyre is a partner at 24/7 Wall St.

This morning, 3Com (NASDAQ: COMS) announced that private equity firm, Bain Capital, would put it out of its misery and pay $2.2 billion in cash for the company. 3Com has lagged so far behind that it has been painful to watch. 3Com and Cisco Systems (NASDAQ: CSCO) indeed could provide at least two to three chapters in an investing teaching and history book. Here's the Cliffs Notes version:

Summer of 1994 was a tough technology environment. Technology had a great run from 1990 through 1994, till summer that is. Valuations contracted and investor fatigue set in for about four to five months. I was traveling through Silicon Valley with a couple of British portfolio managers, visiting companies. One day we had a breakfast meeting with then CEO Eric Benamou of 3Com and lunch with a senior VP at Cisco (whose name escapes me). Benamou was an intellectual, a refined man, but did not possess the street smarts necessary for a tech company CEO. He was arrogant, and bluntly declared that Cisco's days were numbered and 3Com would acquire any tech company necessary to achieve total domination. OK, great, and we went on to Cisco for lunch.

The senior VP was a classy guy, never said a bad word about any competitor and just explained Cisco's game plan and execution philosophy. Here is the funny part: In July 1994, BOTH companies had a market capitalization of $9 billion.

3Com went on to make some stupid acquisitions like US Robotics, paying top dollar for a company in serious decline with evaporating margins. 3Com has never been the same since. Eric Benamou went on to pursue "other interests" and 3Com has languished at the bottom of the tech food chain.

When operations like Morgan Stanley (NYSE: MS), Lehman Brothers (NYSE: LEH), and Goldman Sachs (NYSE: GS) reported earnings, it was obvious that they had been hurt by being forced to mark down assets in private equity deals. Some had losses in their hedge funds or from the subprime mortgage meltdown. But, the hope remained that global M&A markets would help drive earnings going forward.

It looks like that was a pipe dream. According to a survey by Dealogic covered in the Financial Times, M&A activity dropped 42% from Q2 to Q3 of this year. That deal activity may not come back. One Morgan banker told the paper: "If there is no recession, strategic acquirers will be active across sectors, and mid-sized private equity deals will get financed."

That's a big "if." Part of the problem is private equity. Those deals fell 68% during the third quarter. And that business is not likely to recover soon, especially if credit markets remain volatile. These deals are only a modest amount of deal flow. That means that there could also be a drop-off in normal company-to-company M&A.

What the information means to investors in the big financial firms is that there may still be more downside on these stocks, and the downside could be considerable. At $62, Lehman's shares are significantly down from their 52-week high. But the low for the same period is $49. It has been there once, and it could go back again.

Douglas A. McIntyre is a partner at 24/7 Wall St.

According to the Wall Street Journal [subscription required], Marlborough, MA-based 3Com Corp. (NASDAQ: COMS) is going private with the help of Bain Capital and Huawei Technologies, for more than $2 billion -- or $5.50 a share. 3Com is up 34% to $4.94 in pre-market.

3Com has been hobbled for most of this decade but it has a storied history. Its founder invented Ethernet -- a way for computers to share information. It bought a company that made a very popular modem during the era when people dialed up the internet on a telephone line. And with this acquisition came a technology which became the Palm Pilot -- a Personal Digital Assistant (PDA) which was an indispensable appendage for dot-commers in the 1990s.

Unfortunately, 3Com's financial position was weak -- it lost $89 million on $1.27 billion in sales in the year ending June 2007, but it generated $58 million in cash. It couldn't maintain its technology lead and was surpassed by competitors in all its markets.

I am not sure how Bain Capital and Huawei Technologies expect to get a return on their investment. However, 3Com's ability to generate cash in the most recent year suggests that a combination of cost cutting and entry into new markets could make it a profitable investment.

Regardless -- if I owned 3Com stock -- which has lost 20% of its value in the last year -- I would be happier today.

Peter Cohan is president of Peter S. Cohan & Associates,. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.