Some of the most popular asset classes for private equity in the next 12 months are likely to be infrastructure, emerging markets, and distressed banks, according to global law firm Walkers.

One sector that will struggle in 2009 is the secondary market, which has slowed down considerably since last year, says Walkers. The law firm has had an office in Hong Kong since 2004 and opened a new one in Singapore last month.

"A number of factors point towards a more optimistic longer term position for private equity," says Richard Addlestone, a private equity partner at Walkers in the Cayman Islands. "Flexibility within financing structures should provide some refuge from current market difficulties for private equity firms."

While further weakness can be expected in the short term, Addlestone says there are hopes for a return to pre-credit crunch levels of investment and returns within 18 months.

"The silver lining is that, with asset prices at current lows, 2009 could be a great year for acquisitions, but first banks need to start lending to each other and to businesses," he says.

There are a number of other areas within private equity which present opportunities for investors, according to Walkers.

Heavy markdowns of between 40% to 60% can currently be achieved on the cost of senior debt, although there is some risk if the underlying corporations that own the debt fail, the law firm says.

"These discounts are likely to be short-lived, so interested parties need to act quickly," says Addlestone.

Infrastructure funds, which have not been as severely impacted by the credit crisis, are earmarked for further growth in 2009, Walkers says, due to their role in bridging the funding gap in government budgets and their inclusion in some of the stimulus and job-growth plans of the new Obama Administration.

After some astounding growth in 2008, emerging markets are now generally accepted as a mainstream class in private equity, Walkers says. The law firm expects emerging markets will remain attractive to investors, although perhaps not to the same extent as in recent years since their growth is slowing.

For example, Walkers says, the Brazilian private equity market is expected to grow just 10% in 2009 compared to the 50% rate that has been recorded since 2004. Some firms have also had some difficulties disposing of emerging market assets as weak stock markets complicate exit opportunities. CVC Capital Partners recently failed to dispose of Singapore metal stamping company Amtec Engineering, the law firm notes.

Interest in distressed banking assets by private equity participants and a desperate need for fresh capital from the financial sector has resulted in significant speculation about what role private equity might take in reshaping the post-credit crunch environment, Walkers says. With some $320 billion of cash ready to deploy and private equity's traditional strength in adding value and management expertise, struggling financial institutions are seen as particularly suitable investment targets.

Meanwhile, secondary market activity, where private equity investors can sell interests in existing funds and remaining unfunded commitments to the fund, has ground to a virtual halt. The large number of current sellers is in stark contrast to the previously competitive phase, Walkers says, where premiums of 10% on notional value were commonly commanded on sales.

"As a result of the credit crisis, certain over-allocated investors are looking to transfer their entire commitments in some funds. This clearly demonstrates what the industry is up against and how cautious investors are being," says Richard May, a private equity partner in Walkers' British Virgin Islands office. "Expectations of both buyers and sellers need to realign for the secondary market to begin functioning again, but there might be some bargains in the meantime."