Private equity firms have started to invest again after months sitting on the sidelines, which some experts say could signal the bottom of the market.

The past few weeks have seen a series of deals in which buyout firms have invested in equity stakes and discounted debt of troubled companies.

Investors, including Apollo, the US investor in distressed debt, and Permira, the British buyout group, have begun to buy up the underperforming debt in Gala Coral, the troubled bingo company whose debt is trading at about 80p in the pound.

The Times has also learnt that CVC and Blackstone have submitted a joint proposal to acquire 29.9 per cent of Mitchells & Butlers, the troubled UK pub group whose shares have tumbled after a property deal backfired.

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Leveraged buyouts have been derailed by the onset of the credit crunch as financing has ground to a halt while banks are forced to sit on a backlog of committed but unsyndicated loans.

However, buyout groups are sitting on billions of dollars of funds and are anxious to put their money to work, despite the lack of debt funding.

As cash-strapped banks continue to shrink their balance sheets and asset prices fall further, private financiers are starting to take advantage of cheap deals.

Although traditional leveraged buy-outs are on hold, banks are prepared to lend to private equity firms that are willing to buy up problem loans.

Apollo, TPG and Blackstone this week agreed to buy $12billion of discounted leveraged loans from Citigroup, or roughly 24 per cent of the bank's $43 billion backlog of unsyndicated loans. Bankers say that the deal is significant because, although it was heavily leveraged, it potentially set the price for other banks to begin to offload their backlog.

A senior banking source said: “It calls the bottom globally, although it's a terrible deal for Citi. By calling the bottom, they create the bottom and if it works they unblock the system and the market starts to recover.”

A partner in a private equity firm involved in the Citigroup deal declined to say whether the market had hit the bottom, but said: “The theory is that people desperately need capital and we have that capital. When things are more distressed, it presents a lot more interesting opportunities for us.”

Blackstone, KKR and Carlyle have recently all closed new distressed debt funds and in Europe both Permira and CVC Capital have small debt businesses that are also starting to invest in underperforming leveraged loans.

Other funds, including Apollo, Oaktree, Och-Ziff and Silverpoint are also scouring the market for cheap deals.

A senior banker who advises private equity said last night: “This is the smart money. They've structured their [buyout] deals in a way that they won't get hurt and now because they have lots of cash they are taking advantage of the dislocation that they frankly helped create. If the banks are desperate enough, I'm sure we'll see more of it.”

Jon Peace, European banking analyst for Lehman Brothers, said that Deutsche Bank and Credit Suisse could be two banks that might follow suit and approach private equity to try to offload some of their huge backlog of deals.

He said: “I'm sure they are looking to dispose of their inventory of leveraged loans. Obviously, they were planning to distribute these loans at close to par value [over 100 per cent of face value] when they took them on, but the market price is now well below this and the problem is finding a buyer to take them on at the highest price they can get.”

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