The buy-out market is looking decidedly dodgy.

A survey by the Nottingham-based Centre for Management Buy- out Research, sponsored by Barclays Private Equity and Deloitte, tried to paint a rosy picture, with buy-out values reaching £5 billion - resulting from 154 deals - in the first quarter of 2005.

But the gradual rise in the number of deals in the Midlands since 2002 appears to have slowed with just 12 in the first quarter. And nationally the figures are skewed by a few mega deals.

Dark clouds in the guise of the debt bubble and new tax rules are also looming on the horizon and could lead to a unsettled private equity market for the rest of the year.

Nick Johnson, corporate finance partner at Deloitte in Birmingham, said: "The buy out market appears to have performed strongly in the first quarter of 2005.

"This is mainly due to a number of mega deals which account for nearly 80 per cent of deal value year to date. Availability of highly aggressive debt packages particularly on the larger deals is a key feature.

"How sustainable this is remains to be seen. The figures also mask lower deal volumes particularly in the Midlands which has achieved very low volumes and low values. This must be concerning and serve as a wake up call for all who work and operate in the region."

Debt is not the only unsettling factor threatening the private equity market at the moment. The Inland Revenue has recently announced that it intends to eliminate tax relief on private equity loan stock.

Phil Griesbach, director of Barclays Private Equity in Birmingham, said: "It appears that the Inland Revenue's decision could reduce private equity returns by around ten per cent and will definitely have an impact on the price private equity houses are prepared to pay for businesses.

"In terms of how this is likely to affect deals which are currently work in progress, there is likely to be hiatus with private equity teams downing tools. At the very least, there will be a major impact in the second quarter."

Nationally, while value is higher in the first quarter compared to 2004 - £5 billion and £4.7 billion respectively - deal flow is well below with only 154 deals completed this year to date, compared to 185 in the same period last year. The largest deals this quarter were Warner Chilcott, a £1.6bn buy-out and Travelex, a £0.7bn secondary buy-out.