Buyout funds are making a comeback, scouring deals from Australia to America after nearly two years of virtual shutdown, but private equity-backed M&A volumes remain far short of the boom times.

Bankers say that while a return to the mega-deals of 2006/07 is still some time away, there is now a steady flow of transactions, with private equity activity picking up in the second quarter.

As of June 22, private equity-backed mergers and acquisitions in the second quarter were up 125 percent from a year earlier to $40 billion, and were up by a third from the first quarter, Thomson Reuters data showed. For the year, such deal totaled $70 billion, more than double a year earlier.

The general stock market recovery early this year encouraged PE funds to push through listing plans, while a freeing up of debt markets opened up markets for secondary sales to other buyout funds.

But with the European debt crisis denting the stock rally, there are concerns about whether PE activity can keep up the recent momentum.

M&A markets are fragile. There was a slight loss of momentum in the second quarter. Coming off year-end into Q1, momentum was good, said Jeffrey Kaplan, global head of mergers and acquisitions at Bank of America Merrill Lynch.

There was strong strategic activity and active PE bidding, much of which slowed down. EMEA has seen the biggest slowdown, he added, referring to Europe, the Middle East and Africa.

The $70 billion of PE-backed deals this year through June 22 compares with the record $542 billion in the first half of 2007.

Availability of easy credit is the key for a pickup in PE buying, and bankers say the U.S. market has seen the most dramatic improvement in financing, driven by large financial institutions.

Europe has lagged in its ability to leverage because it is more of a bank-funded market.

Overall, choppy equity markets and the rising cost of debt funding will make private equity dealmaking more of a challenge, though bankers say the market for mid-sized deals should open up.

It will be a while before we get back to mega-deals, said Mike Netterfield, head of financial investor coverage for Asia at RBS.

We're seeing some larger deals, but it'll be a while before we see the days of the TXU, HCA kind of deals, he said, referring to big U.S. private equity deals involving the likes of TXU, now Energy Future Holdings, and hospital operator HCA Inc.

The liquidity isn't quite there just yet for mega-deals.

FAILED DEALS

While the sector has offered some hope to investors this quarter, it has also brought disappointment.

A $15 billion buyout for payment processor Fidelity National Information Services was among the deals that failed after differences over price.

Other public-to-private transactions are in process, though.

Australian hospital operator Healthscope Ltd has had bids from two private equity consortia in a deal valued at about $1.5 billion.

For private equity, $3-$5 billion will be a large deal, Merrill's Kaplan said.

The Street has been working on $10-$12 billion deals, but there have been concerns about underwriting and spreading the risk. We don't want to discount the fact that large deals can get done, but we see $3-$5 billion as the large deals now.

Among prominent exits this quarter, Bain Capital and Kohlberg Kravis Roberts & Co have filed for an IPO at HCA, as has retailer Toys R Us, again owned by Bain.

More exits are likely as PE funds aim to cash out of some pricey investments made at the height of the M&A frenzy in 2006/7.

Another trend to watch out for over the coming quarters is cashed-up PE funds chasing minority stakes in India and China, the fast-growth Asian emerging powerhouses where public-to-private deals are hard to come by.

You're still going to see minority deals getting done. In China and India you always get a lot of minority deal opportunities, where there aren't that many control situations available, said RBS' Netterfield.

You're in a situation where stock markets are choppy and it's hard to get public-to-private deals done. So minority deals are easier.

(Reporting by Jessica Hall in Philadelphia and Denny Thomas in Hong Kong; editing by Ian Geoghegan and John Wallace)

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