Private equity groups have been shut out from bidding in the first round of the £7bn ($13.6bn) auction of Royal Bank of Scotland's insurance business, which includes Direct Line and -Churchill.

Kohlberg Kravis Roberts, Blackstone and Apax Partners were among those firms that had been hoping to participate in the auction, but were told by RBS bankers they could not submit indicative offers amid the continuing difficulty in financing leveraged buy-outs, according to people familiar with the situation.

The bankers sent the sales memorandum to a group of eight trade bidders yesterday, who they believe have a clear operational rationale in acquiring the insurance business. Indicative proposals are due by May 28.

Those potential bidders are: Allianz, Zurich Financial, Assicurazioni Generali, Berkshire Hathaway, Allstate, Travelers, Ping An and American Inter-national Group.

RBS has said it is looking for a £4bn net gain from the sale of its insurance business.

To achieve that, the bank would have to sell the business for between £6.5bn and £7.5bn, according to analysts.

However, Sir Fred Goodwin, chief executive of RBS, said he would not hold a "fire sale of assets".

RBS received more than 15 expressions of interest from trade and financial buyers, according to people familiar with the situation. RBS declined to comment.

Last month RBS announced that it would sell its insurance business as part of a wider plan to shore up its weakened balance sheet. The UK bank has launched a £12bn rights issue and earmarked several non-core assets for disposal.

The move to exclude private equity from the bidding process highlights the continuing difficulty buy-out firms have had with deals valued at more than £1bn since the credit crunch slashed the amount of debt banks were prepared to lend to finance leveraged deals.

During the first four months of the year, the volume of deals announced by private equity firms collapsed by 71 per cent to $52.6bn - the lowest -volume in four years, according to Dealogic, the financial data provider.

The auction will highlight the power that strategic bidders have had over their private equity rivals since the onset of the credit crunch last summer.

Unlike buy-out firms, trade buyers tend to sign acquisition agreements directly, and are therefore liable for failure to complete a deal.

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