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For financial markets, August is always a slow time as Wall Streeters head for their vacations. But this year, there was more than just seasonality. Simply put, it was a very tough month for M&A operators.

In fact, according to Reuters, August was the worst month since 1992.

It's been about a year since the credit crunch started, and it looks like things aren't getting better. If anything, it's a good bet we'll continue to see volatility and layoffs in the financial services space.

In August, the M&A volume in the U.S. came to about $28.5 billion, which is 53% off from the same period a year ago.

Ironically, while private equity funds have a huge amount of capital to put to work, there is not much bank financing. As a result, most of the private equity deals have been fairly small (below $2 billion or so).

Also, some of the recent mega deals – such as InBev's $45 billion acquisition for Anheuser-Busch Cos. (NASDAQ: BUD) – are crowding out the financing market.

In other words, investment bankers may need to wait until next year for things to warm up again.

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 MergerBook.com.

In one of the least convincing editorials in recent memory -- no small accomplishment -- Service Employees International Union international president Andy Stern argues that "short-term capital infusions from private-equity funds will only make the banking crisis worse, by encouraging risky behavior and abusive banking practices."

He's so wrong. Risky behavior is encouraged by compensation systems that reward returns regardless of risk, supine directors lacking true independence, and an ownership structure so diffuse that there is no one to enforce accountability.

A private equity fund with a large equity stake and no ulterior motives -- they make money from increased shareholder value, not fees and bonuses -- which paid cash for their shares is the best thing for shareholders. The one valid point that Stern makes is this: "It's hard to imagine private-equity funds resisting the urge to double down on the tactics banks have used to drive profits in recent years – unfair lending practices, higher fees, and exorbitant interest rates on credit cards and other consumer products."

That's probably true -- private equity funds may push public companies to improve their profitability, but that's their job. Consumer protection is the domain of regulators, and publicly-traded banks have a responsibility to increase their profits as much as possible within the confines of the law.

We shouldn't blame private equity for lax regulation.

According to a report from the Ernst & Young's quarterly US IPO Pipeline Report, IPO activity is flattening as companies are waiting and watching to market to make their move. While that observation is obvious as a heart attack, there are some rather good details that may lead to help determine good IPO's versus bad IPO's in that report.

In the first quarter of 2008, 90 IPOs sat in the pipeline, the same amount as the last quarter of 2007. New registration was stable across the quarters, but the slide is still downward sequentially. In January there were 10 while February and March saw only 6 and 7, respectively. While the amount the registrations represent grew this quarter compared to last, $16.8 billion up to $17.3 billion, the numbers slowed toward the end of the quarter. It seems pre-IPO companies are holding tight and watching the market.

As expected, first quarter 2008 weakened compared to the first quarter in 2007. In the first quarter of 2007, 103 deals waited in the pipeline compared to 90 in 2008. In 2007, the registrants represented $22.8 billion compared to $17.3 billion in 2007. The average deal size also dropped, down to $192 million from $221 million. The largest deal in 2007, The Blackstone Group L.P. (NYSE: BX) reached $4.0 billion while in first quarter 2008, the largest was American Water Works at $1.6 billion. Visa Inc. (NYSE:V) was left off because of an end of quarter and for size issues as 'one of a kind.' Companies are also sitting in the pipeline much longer, 163 days on average compared to 113 in 2007.

Technology takes up the bulk of the pipeline with 26 registrants and $3.3 billion in dollar amount, up from $2.8 in fourth quarter 2007. Technology attracts foreign issuers with four out of five foreign issuers in the technology sector. While technology went up first quarter 2008, oil and gas dropped 60% from $5.3 billion fourth quarter 2007 to $1.9 billion. Biotech accounts for a solid 12 registrants and pharmaceuticals tally 11. California leads on a state-to-state basis, filing 16.7% of the total filings at 15. Texas and New York followed with 11 and 8, respectively.

Also according to the report... Patience and confidence are likely to ebb by June, but if you're a good company with solid business plans, practices and proven results, opportunities still await you in the markets.

Dubai International Capital and Chinese private equity First Eastern Investment Group have announced a new joint fund, China Dubai Capital.

The fund will focus on China's growing economy in sectors such as infrastructure, health care, and resources and will attempt to capitalize on the growing ties between the UAE and China. Companies with strong growth possibilities and the potential to eventually trade on Dubai national securities markets will be primary recipients of the fund. The first closing of the fund will tag at least $500 million and will close this May. By the final closing expected in October, the fund is expected to reach $1 billion.

First Eastern currently manages over $1.5 billion for direct Chinese investments and is the first Chinese financial company to be established in the Dubai International Financial Center. Dubai International Capital manages Jordan Dubai Capital, a $300 million fund, and plans to launch a fund focused on Saudi Arabia.

$100 per barrel oil is increasing the face amounts of funds being committed. As high oil prices remain, expect more and more from Middle Eastern private equity and sovereign wealth funds to buy up infrastructure projects. That's the new world.
If you think this is a big deal for private equity or sovereign wealth funds, check out the Dubai $54 billion proposed eco-project.

TriZetto Group Inc. (NASDAQ: TZIX) is being acquired by private equity firm Apax Partners. The private equity group will acquire this health-care software company for about $1.4 billion, or $22.00 per share.

What is interesting in this deal is that BlueCross BlueShield of Tennessee and The Regence Group, both of which are customers of TriZetto, are providing some funding in the deal. That portion was not disclosed, although they will be equity investors in the newly private company. Regence is a combination of several BlueCross BlueShield operations in the U.S.

Apax partners has some $35 Billion "in funds under advice according to the company. Trizetto provides IT solutions that enable payers and other constituents in the healthcare supply chain to improve the coordination of benefits and care for healthcare consumers.

See the full story at 247WallSt.com.

Private equity firm Behrman Capital has announced that General Peter Pace, retired USMC and former Joint Chiefs of Staff Chairman, took the role as Operating Partner with the firm. General Pace was also named as Chairman of the Board to Pelican Products, an advanced lighting systems and valuable equipment case manufacturer. He will also direct ILC Industries, Inc., a company that provides defense electronics (of course the defense angle).

Grant Behrman of the firm noted that General Pace has forty years tenure in the Marines and then as Chairman of the Joint Chiefs of Staff. Pace graduated from the U.S. Naval Academy and has an MBA from George Washington University.

Behrman Capital is a private equity investment firm with more than $2 billion of capital under management and it invests in management buyouts, leveraged "buildups" and recapitalizations of established growth companies. If you look through the private equity firm's portfolio companies, you can see why having a former general and Joint Chiefs of Staff Chairman would be a good thing.

The late 1990's and early 2000's were the years of venture capital funds. 2006 and 2007 were the years of private equity funds. Gone are the multi-billion dollar club deals that were nothing short of the old leveraged buyouts. But 2008 and perhaps beyond may end up being the years of sovereign wealth funds.

The Financial Times is reporting that sovereign wealth funds grew 18% last year as commodity prices rose and as foreign exchange reserves in Asia built up. But the raw dollar amount is astronomical..... $3.3 Trillion.... $3,300 Billion....

It looks like high oil and gold prices suck away dollars faster than they can be spent otherwise, plus all the goods that come to America and Europe from Asian countries has created a vast wealth transfer. That's the new world, like it or not.

If you'd like to compare this $3.3 trillion figure, this compares to an estimated $13.79 to $13.86 Trillion total GDP according to the CIA's World Factbook.

It's pretty tough to plunk down $10 Billion in a transaction because the size of that alone is massive. If they could magically place that much money each time, there would be enough for 330 investments of $10 Billion per transaction.

Having $3.3 trillion in liquidity and being able to place $3.3 Trillion into raw investments is another issue entirely. If the U.S. needs help with those mortgages they will end up taking, maybe its time to pick up the hotline. The reality is that this would take thousands of transactions before that $3.3 trillion would be fully invested.

There has been much talk about how the credit squeeze and slowing economy has affected the public markets, but how has it affected private-equity firms? An article in the Hartford Business discusses how private equity firms are feeling the pain, especially as many private-equity owned companies have very high risk ratings and default risks. This appears to be more concerns of the past coming to fruition over leverage and credit quality more than breaking news, but it may come front and center before long.

Additionally, private equity-backed companies have large debt loads and when combined with decreased consumer spending, companies have less cash to service those loans. Leverage has enhanced returns, but it also augments the losses and decreases the returns to the private-equity firms that own the companies. This states that 25 of the 42 companies that ratings agency Standard & Poor's says have the lowest credit ratings are owned or controlled by private-equity firms, which gives them the highest chances for default.

It also appears that many private-equity firms overestimated the potential value and performance of the companies they bought, or at least that conditions exists now that credit is tight and the economy slower. If many industries and sectors are struggling in today's economy, it should come of no surprise that private-equity firms that purchased them with leverage are feeling the burn as well. A less-leveraged economy isn't leaving the billionaires entirely immune.

There is an interesting article out of the International Herald Tribune that is discussing the competitive environment in Asia that has essentially pitted private equity investment money against venture capital investment money.

As economies in South Asia have rapidly expanded over the last decade, U.S. investors have jumped at the opportunities to capitalize on the growth. However, venture capitalists and private equity investors alike have learned that they have to approach investments more cautiously than they do in the United States. Until the markets in South Asia mature, U.S. investors will likely continue to tread carefully when investing in early-stage growth opportunities.

This article notes that investors are putting their money into companies that have already tested the waters, avoiding early-stage investments that are subject to higher risks and regulatory issues. The size differential here is also surprising when you read into it. Initial funding for a deal in China and India runs much higher, up to $50 million, compared to $2 to $12 million in the United States, because the companies are often already in business, requiring more first-round capital. As a result, the distinction between private equity and venture capitalists is narrowing as they compete for the same mid-stage or later-stage deals in India and China.

In the U.S., the policies are much more clearly defined. Venture Capital firms (and angels) are the ones approached here for seed, start-up, and early stages of financing for emerging companies. Private Equity firms buy established businesses that either can be turned around and run more efficiently or they buy companies essentially for the cash flow streams.

One of the after effects of the recent private equity boom is a record number of buyout shop-owned companies that may find their way back to the public markets.

The Wall Street Journal's Dennis K. Berman wrote (subscription required) about this today, saying that, "The mergers-and-acquisition markets have shut, as potential buyers wait for asset prices to decline. One can only hope that a mass of over-leveraged and overpriced assets will stay out of public-investor portfolios. But don't bet on it. There is too much inventory to move."

Given that a glut of private equity cash-out IPOs seems inevitable, I think that investors should exercise extreme caution with these companies. Private equity firms won't be taking their holdings public out of an altruistic desire to share the wealth with you: they'll be looking to cash out and book profits when they feel they can get a compelling valuation.

In some ways, I think it's analogous to the IPO of Blackstone Group (NYSE: BX), which amounted to a perfectly-timed effort by CEO Stephen Schwarzman to cash in his chips -- at the expense of anyone who bought in to the IPO.

Investors looking for bargains should bear in mind that private equity firms look to acquire assets at a bargain and sell them at a premium. If you're buying assets from a private equity firm, you should expect that you will have to pay that premium.

A good sign of a bottom in an industry or market is when private equity firms start to get interested. LBO interest indicates that the stocks are so beaten down that some very smart people think they can use debt to buy the entire company, and then use the company's cash flow to service it.

Now the Carlyle Group, the famed private equity firm that was among the first to spot signs of trouble in credit is "getting close" to buying up beaten-down financials. According to the Wall Street Journal, "In July, the firm hired Edward "Ned" Kelly, former chief executive of Mercantile Bankshares Corp., to head a new, 10-person team to look for financial-services deals. His focus includes distressed businesses where a jolt of Carlyle capital could help mend things. He also is watching big, integrated financial-services companies that may need to divest themselves of solid subsidiaries to raise cash in a hurry."

KKR has also expanded its team looking at financial services stocks. Should ordinary investors follow suit? I'm not so sure. There are tremendous transparency problems associated with the sector, as the wave of surprise subprime writedowns showed. It's hard to do securities analysis to determine if a stock is a good value when the financials aren't reliable.

You might miss out on a great buying opportunity by waiting for more information and disclosure, but that's a price I'm willing to pay. Buying companies with financials you don't really understand isn't value investing: It's speculating.

Carlyle Group co-founder David Rubenstein spoke at a Washington symposium on the private equity industry, and his predictions for the future aren't too rosy.

According to TheDeal.com, he said that "I think the golden era of private equity is probably behind us, and we're in a new era and need to adapt."

Among the challenges are a tightening of the credit industry (duh), and a political climate that is becoming increasingly hostile to the industry.

Addressing the image problem, he opined that "It's very good for people like Carlyle to say we have great rates of return, but now that isn't enough. We have to explain to people why it's a good thing for the economy and go to members of Congress and the government and the press. If you ignore this function, you won't be a very successful private equity professional, in my view. We can't run away from our critics.'"

Much of the industry's image problem can be related to the greed of Steve Schwarzman. His Blackstone (NYSE: BX) has lost around 40% of its value since it closed trading on the day of its IPO. The public offering was widely seen as an attempt by Schwarzman to cash out part of his holdings at the height of a bubble of sorts, at the expense of minority shareholders.

But Rubenstein is right. The industry can fix its image problem if it makes a concerted effort. The benefits of buyouts are many, but little understood by most people because the only people bothering to address the issue publicly have been special interest groups opposed to buyouts.

According to research firm Dealogic, the M&A market is in a big-time downward spiral. For November, the U.S. market saw a 71% drop in deal values to $58.1 billion.

If history is any guide, the M&A market is a feast-or-famine business, and the transition can happen fairly quickly.

Of course, a key factor is the credit crunch. It takes gobs of debt to get deals done, especially for private equity. Also, with an uncertain economy, strategic buyers may also be holding off – even if the valuations look compelling.

Interestingly enough, five of the top 10 deals in November were from foreign-based buyers. With sovereign funds bulging with U.S. dollars, the trend should continue. Although, some of the latest deals have been minority investments, such as the $7.5 billion Citigroup (NYSE: C) transaction from Abu Dhabi Investment Authority.

However, without the juice from private equity, it's hard to make a case for a strong 2008 (the average deal size was a measly $127 million in November). So, for M&A dealmakers, they may want to be thinking of getting another career.

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.

One of the pioneers of private equity is The Carlyle Group. The firm has minted billions and is a major force in finance, managing about $76 billion.

But lately things have cooled off. For example, Carlyle's Blue Wave hedge fund is down 9.3% for the year (this is according to a piece on Bloomberg.com). The problem was exposure to pesky mortgage investments.

So it should be no surprise that Carlyle's co-founder, David Rubenstein, is kind of glum. He recently commiserated for the folks at the American Enterprise Institute (there was also coverage in TheDeal.com, which is a paid publication).

Rubenstein thinks that private equity may be facing some tough times, and looks at the parallels of the conglomerates of the 1960s.

It's a pretty apt analogy. After all, as private equity firms get bigger and bigger, they look like bloated entities of disparate business units. In other words, might there be lots of complications in managing all this?

I think so.

Besides, the other big issue is finding liquidity for these private companies. Keep in mind that the IPO market has yet to recover from its boom days of the 1990s. And, M&A appears to be tailing off. Oh, and with the credit crunch, how will private equity funds get financing for deals?

So far, there aren't many clear answers. Or, at least Rubenstein isn't giving us any ideas so far.

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.

This would not happen in the U.S., or most other places for that matter. But, China is China, and the rules there are different. Goldman Sachs (NYSE: GS) "China partner, Fang Fenglei, is moving forward with plans to set up a private-equity fund that could complicate his relationship with Goldman as both hunt for investments in China," according to The Wall Street Journal. Fang will probably get to keep his title as chairman of the investment banking joint venture, Goldman Sachs Gao Hua Securities.

But why? Feng is about to take dollars out of Goldman's pockets. Feng's new fund will be partners with an investment arm of the Chinese government. Who is going to get first look at the best deal, Goldman or a fund run by the locals? The Journal points out that insiders already have an advantage. "Foreign private-equity investors have found their ability to close deals hampered amid booming Chinese stock prices and mounting concern within China about foreigners buying into important industrial assets."

Yes, the Chinese want to keep the best part of the steak for themselves. It is a closed system, so it can do that. But, Goldman does not have to make it easier.

Douglas A. McIntyre is an editor at 247wallst.com.