The corner of the private equity sector focused on distressed investment opportunities has a considerable amount of cash on the sidelines. Distressed debt funds lead the private equity industry in terms of dry powder, followed by special situation and turnaround funds, according to alternative investment research firm Preqin.

Though global dry powder has fallen from its worldwide high of $59.9 billion in December 2007, its January 2010 level of $42.5 billion is still far above the $18.7 billion reached in December 2004. This does represent a decline of 29% from the 2007 peak, but the dry powder levels remain robust.

If your job last year was to raise private equity capital, you couldn't have been all that happy. Capital raising hit its lowest level since 2003, according to Dow Jones LP Source by way of VentureBeat, falling to $95.8 billion for 331 funds. In 2008, $300 billion had been raised across 508 funds, translating to a 68% year-over-year decline. Nobody was spared the struggle to raise funds, except secondary funds, which reported a 50% surge in fund raising.

The buyout fund, among the largest sectors in the private equity business, saw the capital raised fall 72.5%, from $195.5 billion in 2008 to a mere $53.7 billion in 2009. The largest buyout funds suffered most: only six funds with more than $6 billion under management raised an aggregate $14 billion. The year before, it took only 12 funds of this size to pull in a combined $75.2 billion in fresh capital.

Our continent is home to more family offices and foundations than any other part of the world. These institutions are companies (limited partnerships, usually) that exist primarily to benefit a particular family (as the name implies). So, if you have a boatload of family cash, you set up an LP rather than manage your holdings individually. There are advantages involving taxation and liability, among others.

Family offices are quite active in the hedge fund space, according to Preqin, with the average family office in North America allocating 14% of its assets to this class.

Over the past five years, TPG has raised a whopping $52.35 billion for its private equity funds. The upshot: the firm is now the biggest player in the space.

True, last year was particularly tough for TPG, which suffered some horrendous deals (such as the wipeout on Washington Mutual). But the firm has shown that -- over the long term -- it can find ways to morph itself and ultimately produce competitive returns.

And yes, this time TPG is making some interesting moves. For example, the firm is highly averse to LBOs (leverage buyouts). Essentially, this is a way to use large amounts of debt to buy a company. However, with the credit squeeze, it's hard to make these deals work.

Portfolio reports on the hedge funds and other money managers that are looking to make a killing buying up those badly beaten down, highly illiquid mortgage assets that have been the ruin of so many of the world's largest financial institutions.

According to Portfolio, "There are now ample opportunities for distressed-asset investors. . . Prices for such securities are very low, even considering the awful state of the economy. That's because the market for mortgage-backed securities is flooded with sellers, as banks, hedge funds, and other investors in collateralized-debt obligations, or CDOs, head for the exit."

With global markets in turmoil – and as the credit crunch worsens – AIG (NYSE: AIG) has the miserable task of raising $75 billion to meet its capital requirements. The firm has talked to various private equity firms (who have basically wanted the keys to the operation). There were even talks with Warren Buffett.

No doubt, AIG is scrambling to assess its asset base as well. Which could fetch good values?

Interesting enough, there is one asset that hasn't received much attention: an equity stake in Blackstone Group LP (NYSE: BX).

About 10 ears ago, AIG invested roughly $150 million in the private-equity powerhouse. Now, the stock is worth about $700 million. Moreover, AIG has investments in Blackstone funds that amount to about $1 billion.

So yes, AIG may dump these holdings on the market – and put pressure on Blackstone's shares, right?

Perhaps. Although, investors don't seem to be concerned (the stock price has held steady in the current financial storm). Then again, Blackstone doesn't have balance sheet issues. More importantly, the firm has been bulking up its abilities to capitalize on distressed investments – which seems spot-on right now.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity, a valuation website

According to the Blackstone Group LP (NYSE: BX) conference call, it appears that the buyout market is getting somewhat better. For example, in Q2 the firm struck deals like the purchase of the The Weather Channel.

Despite all this, things are still far from good. In fact, Blackstone predicts that the slowdown will continue into 2009 and perhaps 2010. Actually, it looks like the problems are slipping over into Europe and even Asia.

So it should be no surprise that Blackstone's recent financial results are fairly lackluster. The firm posted a net loss of $156.5 million, or $0.60 per share, which compares to a profit of $774.4 million or $0.20 per share in the same period a year ago. Revenues plunged 63% to $353.7 million. Of course, the main reason is that Blackstone hasn't had opportunities to exit investments from its portfolio.

However, Blackstone believes there are juicy investment opportunities. For example, the firm's credit-focused hedge fund, GSO Capital, is investing in distressed debt and even providing financing for Blackstone buyouts. Interestingly enough, the alternative asset management segment saw a 34% spike in revenues to $225.2 for Q2.

Some other good news: Blackstone is still collecting large amounts of assets. So far, the amount is about $113 billion, providing the firm with lots of power to capitalize on things.

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.