M&A in the private equity sector appears to be on the edge of another slowdown given the rattled state of capital markets, says Scott Humphrey, the Chicago-based head of BMO Capital Markets’ U.S. mergers and acquisitions group.

While private equity firms that had been looking at buying companies aren’t completely heading for the exits, they’re certainly slowing the pace at which they are looking to invest capital while waiting for more clarity about what comes next in the markets, Mr. Humphrey says.

At the same time, the impetus for many private equity firms to sell assets could be diminishing. In the latter part of 2010 right through until recently, a number of firms who want to raise capital in 2012 have been selling assets in order to build up an investment track record that they will promote to raise their next fund.

“The challenge is that in this market environment, if we see this ongoing volatility, it will be hard to raise new funds,” Mr. Humphrey says. “Not just because it will be harder to have economic realizations, but also because of the way pension funds and other institutional investors make their asset allocation decisions.”

Many institutional investors scaled back their private equity commitments during the downturn of 2007 and 2008, and those had just rebounded again heading into this summer.

On the flipside, M&A among strategic players doesn’t appear to be dented, and might even pick up, Mr. Humphrey suggests. “When you’re sitting with large amounts of cash on the balance sheet and a relatively low interest rate environment for the foreseeable future, now’s a great time to buy,” he says.