Long before the credit crunch made villains of the moneymen of Wall Street and the City, the kings of private equity were seen by many as the bad guys.

At the time, there was little warmth towards them as they sought their fortunes via deals of mind-boggling proportions - and there will be little sympathy now after a study suggesting that Britain is falling behind other countries in Europe as a favourable environment for buyout firms.

Inside the industry, though, there is concern - especially among those who see the resurgence of private equity as one way to aid recovery from the financial crisis.

Last week the European Venture Capital Association (EVCA) released its fourth Benchmarking Study, a barometer of legal and fiscal conditions in European countries assessing where private equity works best, and why.

Britain is falling down the rankings. In 2003 and 2004 it was top. By 2006 it was third and the latest study puts it fourth out of 27 countries, behind France, the Republic of Ireland and Belgium.

Javier Echarri, secretary-general of the EVCA, asserted that Britain's slide was a reflection of the greater efforts of other countries, not of changes in UK regulation, with the exception of controversial reforms to Capital Gains Tax (CGT).

“It's not so much that the UK has lost its competitiveness with wrong measures; it's that other countries, like France and Belgium, have been doing so much more in order to attract this long-term capital, to retain entrepreneurs and retain talent,” he said.

Simon Walker, chief executive of the British Venture Capital Association (BVCA), responding to the study's findings, pointed directly to the reforms to CGT and the taxing of non-doms - non-domiciled British citizens with interests abroad who do not pay tax on earnings made ou>tside the UK.

He said: “While competitiveness is comparative, it is clear that over the last 12 months changes have been made to the UK's tax framework that have made the environment less favourable and pushed the UK down the international competitiveness league, undermining confidence in the UK being a leading place to do business.”

Figures from the BVCA illustrate the fall in British buyout activities over the past year: in this year's first half £11.7billion (£6.7billion) was invested, compared with £24.5billion in 2007. The number of buyouts fell to 255, a 15-year low.

So will private equity firms start to look abroad? A recent Populus poll of BVCA members suggests that they might. It found that 32 per cent of buyout houses had considered moving all or part of their British operations offshore in the past 12 months and 47 per cent expect to reconsider in the coming year.

Yet there is good news for private equity. Last week, for example, the London Business School announced the launch of the Collier Institute of Private Equity, dedicated to education and research in the sector.

Moreover, the credit crunch may have removed the cheap debt on which private equity relied to finance its huge deals, but cash is still flowing into the industry. BVCA figures for global fundraising show that 372 funds have raised $323billion in the first half of this year, not far off the $323.6billion in the “hugely successful” first half of 2007.

Mr Echarri said: “This crisis has found the industry well-capitalised. Private equity is sitting on a lot of money now and is willing to invest in good companies over the next few years. That's going to be a healthy flow of capital.”

Top Ten

1 France
2 The Republic of Ireland
3 Belgium
4 Britain
5 Greece
6 Spain
7 The Netherlands
8 Portugal
9 Luxembourg
10 Lithuania

Source: EVCA

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