They say private equity is the smartest of smart money, able to generate massive profits out of thin air. Well, the folks at Apollo Management probably aren't feeling too smart today, as their $1.3 billion investment in Linens 'n Things has taken a significant turn for the worse.

Linens 'n Things has now confirmed the growing speculation that it would declare bankruptcy. As Zac Bissonnette reported in April, the company lost $242 million in 2007, after the company had gone private in February of 2006. In the last few months, it was said to be having trouble with its suppliers, which rightly feared providing it with credit and merchandise.

The odd thing is that many private equity funds saw the housing and credit crunch coming. It would stand to reason that a billion dollar chain that feeds on the housing market may not be the best investment towards the end of a great speculative housing boom, but I guess the people at Apollo thought they could work their magic whatever the market conditions.

The good news is that Linen Holdings has secured $700 million in financing from GE Capital. This should enable the company to continue operating as it restructures, although it will close 120 stores. But at least the majority of its 17,000 employees still have hope that they won't lose their jobs, at least not right away.