The private equity market is set to emerge from the financial crisis as a transformed industry, with smaller deals, less leverage and more government oversight, according to David Rubenstein, co-founder and managing director of global private equity firm The Carlyle Group.

On Tuesday, Rubenstein spoke at the 2010 Private Equity Symposium in Toronto about the ways the global private equity market was impacted by the economic downturn and credit crisis.

He said private equity was impacted significantly, suffering a hefty drop in deal activity, fundraising and distributions. This followed a few years of monumental growth in private equity activity, Rubenstein noted.

Despite the reduced activity, however, he said private equity escaped much worse potential outcomes of the crisis. He noted, for instance, that no major private equity firms were driven out of business, and that private equity activity has already begun to rebound.

“The gravest concerns actually did not materialize,” he said.

But Rubenstein said that coming out of the crisis, the industry will be different. Significant changes to the market also occurred following the two previous recessions, he pointed out.

“The industry is now transforming itself once again,” he said.

He expects to see such changes as smaller deals, smaller private equity funds and smaller lending syndicates. In addition, he said leverage will be used more sparingly as debt will become more expensive.

Rubenstein also expects to see private equity firms attracting fewer financial professionals, and instead, more operating professionals who can add value to firms following acquisitions.

“You’re still going to need to do a lot of things to increase the value of the company,” he said. “A lot of the skill set is going to come from people with operating skills, not financial skills.”

The private equity investor base will also change a bit, according to Rubenstein, with fewer high net worth investors and more institutional investors, including sovereign wealth funds.

Returns are set to come down slightly, Rubenstein added. However, he expects the market’s returns to remain well above stock market returns, which will continue to attract capital.

Rubenstein also suspects that more government oversight could result from the crisis, as regulators crack down on the broader financial services industry.

“Scrutiny will continue to be placed on the financial services industry, including private equity,” he said. “The industry must act accordingly.”

As these changes set in, Rubenstein said there will also be plenty of private equity investment opportunities to emerge in the years ahead. He sees strong prospects for emerging markets, and China, India and Brazil in particular. By 2014, he pointed out, the combined GDP of global emerging markets will overtake the combined GDP of the developed world.

“You’re going to see much more activity in the emerging markets,” he said.

Other areas of investment opportunity include: the financial services industry, which is likely to undergo more consolidation; healthcare, which will expand rapidly as the population ages; U.S. real estate; and energy.

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