Carlyle, the US private equity giant, yesterday closed a 5.3 billion euro fund for new buyouts, as investors shrugged off sub-prime losses in the group's Dutch listed subsidiary.

Carlyle said the new fund Carlyle Europe Partners III, would be used to buy companies in its traditional sectors of aerospace, automotive, energy and power, telecoms and media, among others. Since setting up in Europe in 1997, the group has put 3.7 billion of equity to work acquiring 36 companies, although globally Carlyle has invested $24.7 billion in leveraged buyouts.

The fundraising comes at a time of intense pressure for private equity firms after a three year M&A boom fueled in part by the cash-rich financiers.

After the collapse of the sub-prime mortgage market in America, spooked investors have fled from any form of risk, such as leveraged loans, and banks have been left holding billions of unsyndicated debt on their books. As a result, they have refused to lend until the backlog is cleared and private equity firms, in turn, have had to put their deals on hold.

In addition, Carlyle has suffered from direct exposure to sub-prime after its listed Dutch vehicle, which invested in asset-backed securities, including mortgages, could not meet margin calls from its banks. Carlyle's top partners, including co-founder David Rubenstein, were forced to extend an emergency lifeline to the unit to help shore up the fund.

In a statement announcing its fund yesterday, Mr Rubenstein said: "The European market is maturing and the investment environment has become more challenging. However, there remain significant opportunities across the continent."

Jean Pierre Millet, Carlyle Europe's chief investment officer for buyouts conceded that the megadeals that have characterised the industry were off the table for "some time." Earlier this year, Carlyle kicked off the auction for Virgin Media, the US cable group, with a $23 billion bid in what would have been one of the biggest buyouts on record. But that deal has since been put on hold and some say it may not get up and running until next year.

But Mr Millet said that it was still possible for buyout firms to do deals in the 1 billion euros to 2 billion range.

He told The Times. "I've been with Carlyle for 11 years and I've seen valuations go up and down and then back up again. We go through cycles and now we are at a low point, so in the next couple of years it should come back up."

He said it was good news that the credit market had come to a grinding halt because the excessive leverage had been driving valuations up to a point where it was harder for private equity to make a decent return.

"So now...the valuations will come down and it will be a more attractive environment....but that will take some time," he said.

Mr Millet argues that with less debt available, the multiples being paid for companies will come down and hence private equity's returns will go up, as they are able to get more for the businesses once they sell them three to five years down the line.

But others argue returns will go down, as private equity is forced to pay more of their own cash to make up for the reduced amounts of available debt.

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