The reopening of credit and speculative debt spreads returning to pre-crisis levels is helping buyout firms and lenders alike emerge from the past year's turmoil. But LBO funds are largely shut out of bidding for troubled financial institutions at this time, due to the rise of strategic acquirers (other banks) and regulatory restraints on private equity.

Those are our takeaways from a Wall Street Journal Q&A interview with the two pioneers of the LBO business, Henry Kravis and George Roberts. Their 33-year old firm, Kohlberg Kravis Roberts & Co., manages $50 billion of assets.

During the 1990 savings-and-loan crisis, KKR successfully invested in at least two banks. But the firm has made no investments in the sector this time around, the WSJ observed.

Kravis' reply is worth pondering:

"This cycle is playing out differently. First there was unprecedented and massive government intervention in the banking sector. Then capital markets re-opened, triggering a sharp rise in bank stocks and new confidence for strategic acquirers. There are also tougher regulatory requirements for private equity that mean only the smallest and weakest of the failed banks are available to us. Of course this could change and we are talking to a number of banks."

That tells us that, as the banking industry's realignment continues to unfold, the PE sector will likely focus on the mid-market distressed segment – far from the forefront of restructuring the big global institutions. That parallels where PE activity has gravitated for other industries as well – smaller and mid-market investments are in, mega-deals are out.

Recovery of Appetite – Or Speculative Fever?

We were also intrigued by Kravis' remark about risk appetites:

"What's really amazing is how much the spreads have come down. People are now prepared to take more risk because they need to get return and can't get a money-market return."

That's great for all those multi-billion dollar deals KKR lined up earlier this decade, often putting in 20 percent and relying on bank financing for the rest. When Grant Thornton surveyed PE executives for a report released last month, 81 percent expected some of their portfolio companies to breach banking covenants and 52 percent foresaw difficulty refinancing. For its part, KKR says it's already refinanced and termed out $13 billion of debt from purchases of companies such as First Data, TXU (now Energy Future Holdings), and HCA.

So while banks aren't supporting risky deals on the scale they were a few years ago, other institutional investors seem willing to step into the breach. We'll leave it to you to judge whether that's a healthy development or a sign of renewed excess.