Banks, they love buyouts too

NEW YORK (Fortune) -- Gone are the days when investment banks sat on the sidelines of the private-equity boom, content to let their M&A divisions collect advisory fees on deals. In 2006 they put their own money to work on some of the most ambitious buyouts of the year, including the $22 billion Kinder Morgan (Charts) deal, the $8 billion Aramark deal, and the HCA deal.

The banks are discovering, though, that there's a fine line between competing hard for a lucrative buyout and annoying one of their clients. The pure private-equity shops are valuable customers, since they generate billions of dollars in fees to borrow debt to finance their takeovers. To avoid locking horns with buyout-hungry clients, J.P. Morgan (Charts) spun off J.P. Morgan Partners, last year.

Other banks have proved adept at managing the competing agendas - often co-investing on deals rather than taking the lead, or focusing their energies abroad. Here's a rundown on four of the major players.

Bear's (Charts) most recent fund from 2006 is worth $2.7 billion, with investments in smaller finance and insurance companies. But the bank's private-equity arm (officially called BSMB, short for "Bear Stearns Merchant Banking") has taken an interest in all kinds of investments - from designer jeans (Bear has a 50% stake in the brand Seven for all Mankind) to a 95-year-old packaging company in Michigan.

One of the earliest banks to get into the private-equity industry, Goldman (Charts) could make our list of the top ten private-equity firms simply by the sheer size of its fund. Its newest one is closing in on $19 billion. The GS Capital Partners V fund stands at $8.5 billion, giving Goldman the heft to pull off major deals like Raytheon, Aramark, and Kinder Morgan.

Merrill (Charts) has been involved with private equity since the mid- '80s, but recently the bank's Global Private equity unit has become a profit machine. And it's no wonder, given the bank's involvement in the HCA deal. Let us count the ways: advising the buyout group for a reported $75 million in fees, taking a $1.5 billion equity stake in the group itself, and underwriting $22 billion in bank loans and bonds to finance the deal.

Lehman (Charts) launched its private-equity group in 1984 and now manages $13 billion in five asset classes: merchant banking, venture capital, real estate, credit-related investments, and private funds. Deals like its 2006 funding of Talgo, the Spanish train manufacturer, are typical of Lehman's middle-market focus.