Jan. 23 (Bloomberg) -- Cerberus Capital Management LP Chairman John Snow said banks need to ``purge'' about $200 billion of loans for which they haven't found buyers before leveraged buyout firms can resume last year's record pace.

``The big issue here this year is the seizure of the credit markets and the prospect of a sharp downturn in economic activity,'' Snow said in an interview at the annual meeting of the World Economic Forum at Davos, Switzerland. ``There's got to be a purging'' of un-syndicated loans before deals will resume, he said.

Investor demand for the loans the LBO firms use to pay for acquisitions evaporated in August as the collapse of U.S. subprime mortgages caused financing costs to more than double. Banks are reducing a $350 billion backlog of debt they agreed to provide, making them less willing to back new buyouts.

Cerberus, which has canceled recent deals including takeovers of United Rentals Inc. and Affiliated Computer Systems Inc. amid tightened credit markets, faces a slowing U.S. economy and housing market recession with its purchases of automaker Chrysler Corp. and GMAC LLC, General Motors Corp.'s former financing arm.

`Big Thaw'

``The whole market for transactions has slowed down some and will continue to slow down until the big thaw takes place,'' Snow said. ``We are seeing a slight thawing but credit markets are still tight. There's a lot of paper still not been priced yet.''

Snow declined to comment on whether Cerberus is still interested in pursuing Northern Rock Plc, the U.K. bank bailed out by the Bank of England. ``We wouldn't comment on any given deals,'' he said.

Snow joins other private equity executives at Davos in saying the lack of credit is crimping the pace of buyouts.

``Today a pure buyout of $40 billion to $50 billion is not likely because the debt markets aren't there,'' Carlyle co- founder David Rubenstein said in an interview at the forum. ``2008 will be a slower time to do larger buyouts.''

Rubenstein says firms will target minority investments in companies and takeovers in emerging markets in the meantime. He also said he expects private equity firms will attempt to add hedge and real-estate funds through buying up other fund managers. Blackstone Group LP, manager of the world's biggest buyout fund, bought hedge-fund manager GSO Capital Partners LP for $930 million this month.

Cerberus and companies including New York-based J.C. Flowers & Co. have submitted initial proposals to buy the Newcastle, England-based bank, which owes about 24 billion pounds ($47 billion) in emergency aid to the central bank.

Northern Rock, the U.K.'s third-biggest mortgage lender, is in advanced separate talks with London-based Virgin Group Ltd. and Olivant Advisers Ltd. about a private sale after the U.K. government backed a plan by Goldman Sachs Group Inc. to convert its assets to bonds to repay the loans.

To contact the reporter on this story: Edward Evans in London at eevans3@bloomberg.net

Last Updated: January 23, 2008 05:33 EST