The clamour around private equity reached a piercing crescendo last week with a strange concatenation of events.

First, there were screams of horror that the bidders for Jaguar and Land Rover may include the men in black hats from the dreaded private equity houses. Then there was the news that UK banks would have to have their exposure to private equity monitored every six months because of growing fears that there were serious risks of rising debt and leverage levels. And finally, to cap it all, the news came from America that the co-founders of Blackstone, the private equity outfit, were likely to benefit to the tune of $2.6 billion (£1.3 billion) from the group’s proposed initial public offering.

On both sides of the Atlantic it seemed clear that in the crazy world of private equity, everything is done to excess. There were urgent demands to rein it all in.

But what might the law do? Probably not very much. Lawyers play the crucial role as technical advisers to private equity houses both on the tax points and share ownership issues that are their hallmark. However, steered by their notoriously low-profile clients they are very reluctant to say anything significant in public about the market or the framework within which they operate. On a nonattributal basis, though, a number were prepared to speak last week and were steadfast in defending the private equity business.

“What you must remember is that there are no special rules for private equity,” one lawyer with a “premier league” law firm said. “For example, often people seem to think that they are given special tax breaks, but of course they are not. The same tax regime that applies to everyone else applies to them. But because they are intelligent people they take advantage of the law or regulations as they stand and turn it to their advantage.”

It is for this very reason that the trade unions’ demands that something must be done stand little chance of success (unless Gordon Brown turns out to be much more revisionist than many people expect). In the same way that there are no special benefits for private equity, it would be hard to target any penalties or corrections in their direction. Any change in the tax regime is likely to be a scatter-gun measure that would affect many other innocent passers-by – including struggling businesses that need all the help they can get.

Nonetheless, there is concern among lawyers that private equity clients seem to do a very poor job as advocates of their own case. “I’m very surprised that the private equity lobby does not put up a better show in explaining what it does,” another lawyer said. “Private equity is fundamentally a good business model which is operated by some of the brightest people in the business. That’s why it is so successful.”

As this lawyer pointed out, however, the reason that private equity has been thriving in recent years is primarily because of the relatively low rates at which they are able to borrow money. “It is nothing to do with the law or any special status at all,” he said. “They have been able to borrow money cheaply so it is relatively easy for them to service the debt. If, however, we start to see interest rates continuing to rise to the levels of the Eighties when they were 12 to 15 per cent, then it would be a different story.”

So what is the secret of private equity’s success? Nothing to do with the law as such (although favourable tax rates on “carried interest” certainly boosts the profits of the partners). Instead, it is all about picking potential winners and allowing management to manage with a view to the medium-term future. “Private equity is accused of thinking short term by comparison with public companies,” one lawyer said. “But the reality is that it’s the other way around.”

Richard Moulton, of Eversheds, agreed: “Management in public companies is under pressure, quarter after quarter, to deliver good results. But that is what leads to very short-term thinking and a failure to invest in the long term,” he said. “Managers in private equity-owned businesses by contrast are able to think into the medium term and plan ahead even if the short-term results are not so good. In that way they can turn poorly performing businesses around and sell them off three to five years later as attractive concerns.”

Eversheds has recently undertaken a survey of mid-market managements working for private equity-owned businesses. “These people say that the private equity guys make a significant difference,” Moulton said. “They add value and they drive value. They are talking about the issues all the time and working collectively with the management to improve the way the business operates.”

So if Gordon Brown does decide to change the tax regime it will have to be finely tuned not to drive these investors out of the UK, said one lawyer. “Personally I’m delighted that all this wealth is being created in Britain,” he said. “In the long run we all benefit.”

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