PAI has sought to appease its anxious investors by promising to shrink its new €5.4bn ($7.9bn) buy-out fund, which was frozen after its top two chiefs announced surprise plans to leave continental Europe’s biggest private equity group.

The moves, discussed at a meeting between PAI and its biggest backers in Paris last week, underline how investors are pushing to cut back the world’s biggest buy-out funds in response to the shrinking private equity market.

Candover, Permira and TPG have already frozen or shrunken their latest buy-out funds.

This has dealt a humbling blow to some of the buy-out chiefs, who until recently dominated the mergers and acquisitions scene.

The planned departure of Dominique Mégret as PAI’s chairman and chief executive and his right-hand man Bertrand Meunier after an acrimonious bust-up with other partners has triggered a “key man” clause in the company’s agreement with investors.

This means the French firm’s €5.4bn fund V, raised amid great fanfare last year, is now frozen for as long as six months, preventing it from doing new deals while investors decide if they will support the new team.

If a large majority of investors decide not to support it, PAI could be wound up and its portfolio put into run-off. Investors told the Financial Times they expected it to survive while shrinking PAI fund V by 30-50 per cent.

At last week’s meeting, Lionel Zinsou was confirmed as the new chief executive of the group, which owns several big European companies, including Kwik-Fit and United Biscuits in the UK, Cortefiel in Spain and Yoplait in France.

PAI on Sunday denied a Bloomberg report that it planned to shrink its fund by 20-40 per cent. “Any future changes to fund V will be the subject of discussions with investors over the coming weeks,” it said.

It plans to analyse what sized fund is needed in the new environment, in which buy-out deals are fewer and smaller, but require more equity, in the absence of bank debt.

The difficult environment facing buy-out groups will be underlined on Monday by the publication of an Ernst & Young study that shows realisations from big European buy-outs slowed to a trickle last year.

The value of large buy-out exits in Europe – deals with an entry value of more than €150m – shrank to €12bn last year.

This was a fraction of the €54bn reaped from big buy-out deals in the region in 2007 and the €65bn raised in 2006.

“If the private equity industry does not exit existing investments or create strong cash flows to reduce debt levels, it will have trouble refinancing a significant amount of the debt used to acquire these businesses,” said Ernst & Young.

But the study also found that buy-out deals exited between 2006 and 2008 had outperformed other equivalent companies in growth of profits, employment and productivity.