In recent weeks, officials at Blackstone Group and the private equity arm of Goldman, Sachs & Co. (GS ) have said they see PIPEs as a lucrative opportunity--comments that followed a spate of recent PIPE investments by other firms. It's not private equity's usual playground. In a typical deal, an investor negotiates directly with a company to buy a minority stake, usually purchasing restricted stock at a deep discount or high-yield bonds that convert into equity at a predetermined price. Owners of such securities usually take a passive stance toward management.

This is a far cry from the activist role private equity firms usually play, a strategy that has been the key to their high returns. Investors in private equity funds may come to resent forking over the usual 1% to 2% in annual fees and 20% of profits, if the funds' managers don't have the power or will to force change at underperforming companies through their PIPE investments. "We're not looking to pay private equity fees for something that we could replicate in public markets," says Erik Hirsch, chief investment officer at Hamilton Lane, a money manager with $10 billion of investments in private equity funds.

Having raised more than $300 billion last year, private equity firms are scrambling to find new ways to deploy their cash. That was the case the last time this crowd jumped into PIPEs in 1999 and 2000--an ill-timed bet at the peak of the tech boom. The bust bruised many players, a big reason why the industry has shied away from PIPEs until fairly recently.

This time around, buyout firms may be hoping to capitalize on the changing nature of PIPEs. The market, long dominated by fast-money hedge funds and marred at times by trading scandals, has historically been a funding source for small, cash-starved companies hoping to stay afloat. Now with more traditional corporate lenders tightening their purse strings, bigger companies looking for faster financing are increasingly raising money this way. In August, troubled mortgage lender Countrywide Financial Corp. (CFC ) sold a $2 billion stake to Bank of America Corp. (BAC ) Rather than going to the open market, BofA got an advantageous deal straight from Countrywide for preferred stock that can convert into common shares at $18. That and other big deals are fueling a boom: Through August companies raised $36.6 billion with PIPEs, compared with $28 billion in all of 2006, according to research firm PlacementTracker.

SMALLER BASKETS
Such supersize pipes started to pique private equity's interest even before the buyout boom faded this summer. In April, 2006, Blackstone invested $3.3 billion in Deutsche Telekom (DT ) in exchange for a 4.5% equity stake. Kohlberg Kravis Roberts & Co. bought $700 million in convertible bonds last January from tech giant Sun Microsystems Inc. (JAVA ) The list has only grown in recent months. Elevation Partners has a $325 million deal in the works for a piece of handheld maker Palm Inc. (PALM ), and in late September, General Atlantic in Greenwich, Conn., paid $1 billion for a piece of the Bolsa de Mercadorias & Futuros, a Brazilian financial exchange that is pursuing a public offering. Douglas A. Cifu, a partner at law firm Paul Weiss who worked on the General Atlantic deal, anticipates private equity firms may complete more PIPE deals this year than classic buyouts. "The buyout shops put a lot of eggs into one basket," says Cifu. "Now they are having to diversify their skills."