Just 10 months ago, private equity tycoon Henry Kravis confidently stated: "The private equity world is in a golden era right now. The stars are aligned."

At the time, Kravis probably wasn't too far from the truth. Money flowed freely, giving private equity firms ample ammunition to fund gargantuan buyouts. Around the same time, Blackstone (NYSE:BX) poster-boy Steve Schwartzman stated that he looked at deals as high as $50 billion. Some observers even hinted at a $100 billion deal in the not-so-distant future. The future of private equity looked as dominant as it ever had.

What a difference a year makes
Oh, how the times have changed. Since going public last summer, Blackstone has shed more than 50% of its value. Headlining deals like the buyout of Sallie Mae (NYSE:SLE) and United Rentals (NYSE:URI) have gone up in smoke, and pending deals like Clear Channel's (NYSE:CCU) offer to be bought for $39.50 in cash remains as uncertain as a game of Deal or No Deal.

You don't have to look too far to find the base of the problem: The banks that once provided the multibillion-dollar loans have been stung by a soured credit market, and they've largely shut the door on private equity firms anxious to scoop up companies at even lower prices than they saw in years past.

Banks like JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Merrill Lynch (NYSE:MER) conducted a lucrative business by funding buyout loans, then turning around and selling the packaged debt to investors. Once that market slid to a halt, banks were left holding $230 billion in deeply unwanted debt. Until they get rid of that backlog, the big banks are likely to laugh off the possibility of loans for new deals.

That puts private equity in a tough position. These firms make big profits by leveraging themselves to the hilt, then either milking a company's cash flow, or rebuilding their acquisitions in hopes of of reselling for a higher price. Without access to huge amounts of cheap money, their business model is pretty much toast. So how do these savvy operators plan to get back on track?

Get rid of the middleman
Speaking earlier in the week, Blackstone President Hamilton James signaled that his private equity behemoth plans to push banks aside. Instead, it will deal directly with other parties known for their deep pockets: hedge funds, mutual funds, and pension funds with mountains of money and a hunger for predictable returns.

This strategy lets Blackstone work with the same investors who were likely buying banks' offerings of private equity debt in previous years. Such funding could cut the borrowing costs for private equity players, who previously coughed up big fees to the banks that orchestrated their loans.

In the past two years, Blackstone alone has shelled out more than $1.3 billion in fees to banks. While some of that went toward advisory fees, a good portion came from underwriting loans. If Blackstone can find its own sources of capital, a significant amount of the money it once happily paid to Wall Street banks will stay put in its own coffers. That news has made investors smile, sending shares up nearly 10% since last Friday.

Leveraging a new road?
Even if debt markets settle down, and banks open their lending arms again, Blackstone seems content with its new source of financing. It gains greater bargaining power, and it's now better able to compete with other private equity firms for lower borrowing costs. When dozens of private equity firms deal with similar banks, the odds of obtaining significantly cheaper financing than their rivals are far slimmer than when they meet face-to-face with interested investors.

As Blackstone's James described, "We'll stay with [tapping investors directly] because it allows us to find pockets of capital that may not be generally available.'' He adding, "When there's a staple from a big bank and they're syndicating it, the problem with that is all buyers get the same financing.''

Such words provide yet another thorn for banks already dealing with big writedowns. Citigroup took in $856 million in fees from private equity firms in 2007. JPMorgan pulled down $412 million, and Bank of America brought in $607 million in fees last year, all from providing services to private equity firms. If other private equity players follow Blackstone and start arranging their own financing, banks may watch a former star division fade away.

Both private equity and banks had an incredible run over the past decade. Now the market is purging that excess, and weaker players are struggling to survive. Those who once collaborated are fending for themselves, turning a once-bubbly ecosystem into a feast-or-famine environment. Many industry players await the day when banks clear up the ugly loans plaguing their balance sheets. But even when that happens, the future may look quite different than the past.

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