For more than two decades, buyout funds—or nonventure private equity funds—have been an important force in global corporate finance and restructuring. Top-quartile funds, in particular, have turned in consistently strong performances, generating attractive returns for their investors (Exhibit 1). In the 1980s the sector led a revolution in value creation and corporate restructuring that continues to reenergize economies in the developed and, increasingly, the developing world. Viewed from corporate suites, buyout players have alternately been willing acquirers of underperforming businesses, formidable competitors, and, under the right circumstances, valued partners. Storied firms such as Clayton, Dubilier & Rice, Kohlberg Kravis Roberts, and The Blackstone Group may be emblematic of the sector, but its ranks also include many other private limited partnerships, investment banks, and public-investment vehicles that follow a similar business model.

That model, however, may soon look quite different. A convergence of market forces has altered the competitive landscape in which private equity firms have thrived. More and more, they are encountering heavier competition for opportunities to invest, often against new competitors. The rise of the auction sales process is eroding the buyout players' ability...