Were you wondering which sector of the U.S. economy would be next to take a dive from the year-old credit crunch? Well look no further, because Barron's [subscription required] reports that private equity firms like Apollo Global Management, Kohlberg Kravis Roberts, and Blackstone Group (NYSE: BX) are hurting gators thanks to too much borrowed money and the weak financial performance of the companies they bought. And business is way down, Barron's reports that through mid-August, the 2008 total deal volume "stood at $67 billion, versus more than $400 billion in the corresponding 2007 period."

This does not come as a surprise to me. In February 2007, I appeared on CNBC arguing that private equity had peaked. And I began to question its long-term viability back in August 2006 when Barron's Alan Abelson quoted my thoughts on the matter. The basic problem is that when debt is cheap, private equity booms and when it starts selling itself to the public, investors should hold onto their wallets for dear life. People who own private equity firms tap their superior knowledge of the coming downturn to convince the public to bail them out by buying their stock.

Barron's cites -- as evidence of trouble in private equity land -- examples of the declining value of the publicly traded debt in companies that private equity took private at too-high prices with too much borrowed money. It writes that bonds of "many companies taken private in the past two years have plunged to 50 cents on the dollar or less, signaling that investors fear they won't be fully repaid. Many companies that were the subjects of buyouts a year or two ago are so grossly over-leveraged that they're struggling simply to pay interest. If they were to default, debt investors would be stung, but equity investors would be even worse off; the value of their holdings would be deeply impaired or wiped out."