Remember all those in-house private equity funds staffed by investment bankers when times were good? What’s happening to them now banks are eager to preserve every last drop of capital on their balance sheet? It’s not altogether pretty, according to some with their fingers on the principal finance pulse.

“Private equity groups in investment banks are coming under pressure because capital is in short supply,” says one headhunter. “Banks are redeploying people internally.”

“Some of the captive funds are going to be less active for lots of reasons, ranging from liquidity issues to regulatory factors like Basel II,” says David Giampaolo, chief executive of investment club Pi Capital.

Investment professionals who don’t get uprooted may depart of their own accord. “Private equity funds in investment banks typically pay salaries and bonuses rather than carried interest, and it’s difficult to give someone a good bonus when the bank as a whole is performing poorly,” Giampaolo adds.

Citigroup closed its US mid-market buyout group in May, allegedly junking seven private equity professionals in the process.

Not everyone buys the story that captive funds are on their knees, though. David Sherrat, head of Kaupthing Principal Investments (set up at the propitious moment of October 2007), says access to capital isn’t an issue because it’s raised Kaupthing Capital Partners II, a £500m mid-market fund, from third party investors, with the bank acting as a cornerstone investor. “We’re hiring a director and a VP,” he adds.

Morgan Stanley and Merrill Lynch have also been building up in private equity, with $4bn of Morgan Stanley’s fund coming from outside investors. The bank hired two principals from Permira and Apax in May, but Brian Magnus, co-head of European private equity at Morgan Stanley, says there are no plans to add anyone else soon: “We’re done, we moved people internally long ago.”