While the credit crunch has put a damper on headline-grabbing large buyouts, private equity firms have found other ways to discover value in the current market. In this special report, produced in cooperation with the Wharton Private Equity Club, Knowledge at Wharton looks at how funds are adapting to changes in the credit environment, what opportunities exist in the developed markets of Europe and Japan, and the ways that proposed changes in taxation may affect the industry. Also included is a roundtable discussion on setting up a first-time fund in the current market, as well as an interview with David Rubenstein, co-founder and managing director of The Carlyle Group.

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Now that credit has dried up, the future of large private equity buyouts has become uncertain. Today, buyout firms are looking to compete in middle-market and foreign deals and, in many cases, are teaming up with strategic buyers and corporations in new types of transactions. According to PE firm partners and other industry experts, the economic downturn has also paved the way for a resurgence in distressed investing, as lenders and investors alike begin to adjust to new pricing realities.

With the collapse of credit markets, private equity funds are increasingly willing to tread into unknown territory to find new deals abroad. While international buyers continue to increase their presence in the U.S., opportunities for investment in Europe and Asia are equally abundant, according to private equity experts. Although individual markets have their inherent challenges, adopting a global strategy may be one approach to weathering the current economic slowdown.

At the 2008 Wharton Private Equity Conference, the topic of taxes sparked a lively debate. According to a panel of private equity and legal experts, U.S. congressional proposals to raise taxes on the PE industry could hurt it significantly, and perhaps even force it to move offshore. Given the forthcoming U.S. elections, the debate on carried interest may be moot for the time being, but the panelists agreed that it’s a hot-button issue.

Establishing a private equity fund as a founding partner is the objective of thousands of practitioners across the industry. With the market continuing to mature, what are the hurdles, and what will it take to successfully start a private equity shop going forward? A leading private equity fundraising advisor and two leading investors with extensive experience advising and backing new private equity firms discussed these issues with members of the Wharton Private Equity Club (WPEC).

David Rubenstein is co-founder and managing director of The Carlyle Group, the Washington, D.C.-based private equity firm with more than $70 billion in assets under management. In March, members of the Wharton Private Equity Club (WPEC) interviewed Rubenstein about the ongoing credit crisis, the industry outlook, the rise of sovereign wealth funds and why private equity is “one of the greatest exports of the United States.”