The credit crunch has cut off a source of profits for private equity groups by shutting down the option to add new debt to companies they own for the purpose to pay themselves a dividend.

According to S&P LCD, the market information service, such deals, known as dividend recaps, made up almost one fifth of the â?¬118.4bn ($185.3bn) in new borrowing by private equity owned companies in Europe in the first half of last year.

Even as leveraged finance markets show signs of stabilising and with â?¬31.6bn of new loans sold in the first half of this year, banks and other investors are no longer willing to fund dividend recaps. Not a single such deal has been done this year.

European private equity deals and loan markets were much more reliant on these kinds of deals to generate activity and profits than in the larger and more mature US markets, although a similar decline in dividend recaps has been seen there.