Small is beautiful again for private equity investors as they conclude that the mega buy-out funds that dominate the industry face prolonged agony, and switch to specialists in small buy-outs.

Investors and their advisers told the Financial Times that the tide had turned against the big buy-out groups, which rode the credit boom to become known as “the masters of the universe”.

The mega buy-out funds, such as Blackstone, Kohlberg Kravis Roberts, TPG, Permira, and Bain Capital, are blamed by investors for over-leveraging deals to buy blue-chip companies, many of which are expected to be hard hit by the financial and economic crisis. Now, many cash-strapped investors are either stopping new investments in private equity, or looking for smaller, local buy-out funds that specialise in acquiring little-known companies and helping them grow.