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For those wondering where private equity’s cash piles go next, watch TPG. The firm’s latest mooted deals are anything but the mega-buy-outs that dominated last year.

The multi-billion dollar investment to recapitalise Washington Mutual exemplifies three trends. First, private equity will invest more cash in minority investments in public companies. That puts large amounts of money to work in a single deal. It does not require access to the moribund high-yield debt markets. If the terms are right – say, using convertible preferred shares – there is some downside protection.

Second, they will target distressed companies that require capital and, even without leverage, have scope for a big gain if the business can be fixed. Third, financial services companies will be increasingly popular. Again, many are distressed and usually highly geared already.

TPG’s other deal, to buy 50 per cent of the Russian pharmaceuticals group SIA International, hints at more money being invested in less developed overseas markets. China is one country where buy-out groups have worked hard to establish themselves. Until now, however, they have faced high prices, influenced by an over-valued stock market, and competition from plentiful capital from the same source. Now the Chinese market has corrected, opportunities should increase.

That is not to say buy-out funds will find the changes easy. Investing in overseas markets such as Russia is fraught with risks – as Royal Dutch Shell has discovered. Investments in public companies, meanwhile, come with limited control, embarrassing visibility if the share price falls and questions from investors about why they are paying huge fees on positions they could take themselves.

Finally, distressed investing is tough. Just ask Cerberus Capital Management. It is one thing to buy a good company that runs into trouble because of the economic cycle and is fixed to ride a recovery. It is quite another to buy a company, such as Chrysler, which was already struggling before recession became a clear and present danger.

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