A potential battle is brewing between two groups of Wall Street's most powerful players -- private-equity firms and hedge funds.

Both raise their money from the well-to-do and from large institutions and promise their investors outsize returns for hefty management fees. But they tend to have different angles on the gobs of debt that trades in financial markets.

Private-equity funds tend to borrow money to fund takeovers of companies they hope to turn more profitable and sell for a gain. A new generation of hedge funds have started to buy debt and trade it. Right now, that makes the two groups happy partners in a buyout boom. But this harmonious relationship could dissolve into a showdown if the economy turns sour.

As increasingly important holders of debt, hedge funds are playing a more pivotal role in the reorganization of companies that have gone bankrupt, which could put them on the other side of the table from the private-equity firms behind indebted companies.

"It's not like the old days" when banks held most of the debt, says John Danhakl, founding partner of Leonard Green & Partners, a private-equity firm with $3.7 billion under management. "You don't know who the lenders are and whether you can get waivers if you need them. Hedge funds can blow up your company."

Concerned about the possibility of showdowns, some private-equity firms are preparing for the day when their portfolio companies might stumble into the hands of aggressive creditors. Their tactics vary. In some cases they're reaching out to lenders. In others, they're doing everything they can to avoid them.

At this point, no major blowups have happened to test both sides, because interest rates are low and the economy relatively strong. But signs of tension are building, in some cases exacerbated by the different time horizons of the two groups -- private equity tend to be long-term players, while hedge funds tend to shoot for quicker gains.

Some private-equity firms have taken the unusual step of telling bankers who make loans and sell them to hedge funds that they want to choose who holds the loans on a name-by-name basis. Some -- including Apollo Management LP and JLL Partners -- have tried to exclude specific hedge funds known to be tough negotiators from deals. In some cases, they've also used side letters to their loan agreements to bar those firms from the right to vote if they acquire the debt in the secondary market.

Bond investors have played an important role in the reorganization of bankrupt companies for decades. The emergence of hedge funds in the game began a few years ago. In 2005, lenders elected Connecticut hedge fund Silver Point Partners to replace Morgan Stanley as the firm responsible for representing creditors in the Chapter 11 bankruptcy-protection proceedings of Tower Automotive.

Tower wasn't owned by private-equity funds in that case, but some private-equity managers said the case woke them up to the key role hedge funds would play in the future. At the time, it was virtually unheard of for a hedge fund to replace a bank in such potentially contentious proceedings. Private-equity firms consider banks predictable and friendly in a restructuring while hedge funds could be more antagonistic.

In another case, Black Diamond Capital Management, an investment firm in Lake Forest, Ill., used its own private-equity arm to unseat the Bank of Nova Scotia to become the lead agent negotiating on behalf of lenders when spaghetti company New World Pasta filed for Chapter 11 bankruptcy protection. New World Pasta emerged from court protection last year.

While hedge funds are becoming increasingly important owners of debt, private-equity firms are becoming increasingly important borrowers. Of the total $366 billion raised in the loan market for noninvestment-grade companies this year, $165 billion went to the portfolio companies of private-equity firms, says Standard & Poor's.

Carlyle Group, one of the titans of private equity with $44.3 billion under management, has begun holding retreats with bond holders, lavishing attention on them that was once the exclusive preserve of their own investors.

The firm keeps an extensive database to monitor its lenders. If a lender isn't cooperative, say people knowledgeable with their borrowing practices, the firm tries to exclude that lender from future deals, though such efforts are often hard to enforce, because loans and bonds often change hands after they are issued.

Other firms, such as Texas Pacific Group and Kohlberg Kravis Roberts & Co., say they are trying to avoid borrowing too much in some deals, in part because they are wary of allowing especially risky pieces of loans to fall into the hands of potentially hostile hedge funds who might buy the bonds or loans.

Right now, there aren't many blowups. In the past 12 months, fewer than 2 percent of companies with below-investment-grade debt had defaulted, an unusually low number, according to Standard & Poor's. With the notable exception of the troubled automobile sector, corporate balance sheets are unusually strong. That gives private-equity firms an advantage in debt negotiations for now.

With interest rates so low, private-equity firms have been able to secure favorable lending terms. Restrictions on lending are so light that "they make you wonder if you can default at all anymore," says David Rubenstein, co-founder of Carlyle Group.

Mr. Danhakl says trouble could be brewing. "Many companies recently purchased by buyout firms are burdened with significantly higher levels of debt than they ever were in the past," he says, speaking broadly of the sector.

The debt itself is widely diffused among lenders, meaning the dynamics of bankruptcies are bound to be different if they do start to rise. Some lenders aren't as concerned about a single company blowing up as they used to be, because they hold broad portfolios of loans and bonds. Moreover, many of the hedge funds doing the lending are more focused on the returns they might get today than on the possibility of defaults in the future, because they have promised their own investors big profits quickly.

But if the economy falters, or if interest rates move higher, the benign environment could change quickly. And the showdown could begin.