The co-founder of Carlyle Group, the US private equity giant, today gave a mixed outlook for 2008, when he expects defaults to rise but that lending will begin to return after six months.

Billionaire David Rubenstein, who is also managing director at Carlyle, said: “There will be leveraged buyouts but deals will be smaller, most likely $1, 2, 3, 4 billion deals as opposed to $30 to 40 billion deals.”

Mr Rubenstein added: “We will have a somewhat greater default rate but not nearly as high as last time in the late Eighties and Nineties.”

Speaking at Davos, Mr Rubenstein commented on the appetite for lending to fund buy-out deals. He said: ““It will take six months or so before it is back to normality, but it will come back.”

David Novak, a partner with private equity group Clayton Dubilier & Rice, agreed: "We clearly view that this will be a 6 to 12 month phenomenon.

“However, in the general scheme of private equity, to have 6 to 12 months’ slowdown is not a big deal. Some of the best private equity deals have been made after periods of slowdown.”

Earlier in the week, Mr Rubenstein was one of a number of leading business figures to speak about the growth of sovereign wealth funds.

Critics have accused state-owned funds as being a “national threat” as they build up stakes in Western organisations, especially US banks struggling to cope with billions of dollars of sub-prime mortgage-related write-offs.

While Carlyle has sovereign funds on its register, Mr Rubenstein said the funds should exercise better transparency.

Stephen Schwarzman, the chief executive of Blackstone, a rival US private equity firm, said the Government controlled entities were smart, long-term investors who were “good for the system.”

The American boss of one of the world’s largest private equity firms said it was “almost amusing” to see that funds his firm had been dealing with for years were now suddenly seen as some “inherent threat”.

“We’ve encountered sovereign wealth funds as investors in our funds and investors in our firm…this has been a 20 year relationship. They’re among the most professional investors in the world.”

Blackstone shocked markets last year when it announced the bold move to sell a 9.4 per cent stake in itself to the Chinese government.

Mr Schwarzman insisted China was a passive investor and had only bought the stake as a purely financial investment. They’re not trying to influence our activities”.

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