There is an apocryphal story that, before the credit crunch hit home, the head of a $125 billion listed company approached Stephen Schwarzman of the Blackstone group, pleading with him to take him private. The story adequately highlights the soaring expectation placed in the private equity sector. Indeed the five years, from mid-2002 to mid-2007, saw private equity firms enjoy a period of extremely high growth. The consultancy Private Equity Intelligence valued the returns over the period at 25%. The big buyout end of the market was in buyout mood as the KKR buyout of Alliance boots and the mooted Sainsbury’s deal were valued in the double-digit billions. Yet, since last year’s summer, mega-deals have been hard to come by. First Year’s acquisition of the oil services firm Abbot Group and the takeover of Biffa are both less than two billion pounds worth.

Fundraising has rapidly changed. Whilst institutional investors such as banks had previously been fighting to finance the operations of general partners, now the Private Equity Firms (PEFs) find themselves having to pitch ever harder. The nature of the deals have become significantly more low-key, as the sector is advised to return to its ‘buy and build’ ethos. Good management of their current holdings could see them through these times. As sovereign wealth funds increasingly encroach on private sector territory, PEFs will have to maximise the advantage of their experience of business restructuring. Yet an intriguing trend has also emerged in the wake of the crisis. As financial institutions begin to feel the heat, distress deals are becoming ever more common. PEFs are realigning their sights to focus in on purchasing debt, currently being sold extremely cheaply, confident that they will be able to make a profit in the long-term. Take for example Texas Pacific Groups’ purchase of 23% of Bradford Bingley bank. They may also be hoping for later straightforward debt-for-equity swaps.

The credit crunch may have affected the flow of finance, but it is not the only issue that the sector is currently grappling with. There has been strong lobbying either side of the Atlantic to see that the carried interest of PEFS is taxed more heavily. The Republicans staved off the challenge to convert the 15% capital gains tax to a 35% income tax. However Gordon Brown’s government succeeded in raising the tax from 10% to 18%, causing voices to grumble that private equity will be pushed out of London. The past few years saw PEFs accused of short-termism and asset stripping. Trade unions, concerned about these management practices, have been making use of their ties with the Labour party over the prickly issue of job-protectionism. The diversifying of PEFS into into more and more sensitive areas such as children’s homes, alarmed the media and led to calls for far greater disclosure. Issues of privacy also had a more fiscal face. To argue that the KKR – Alliance Boots deal is private and that public accountability is not required has even been admitted by the sector itself to be too much of a stretch. The much-touted recommendations of the Walker report, offering to level out the information imbalance, are privately binding and non-enforceable. Nonetheless it is in the greater interests of PEFs to comply. After all, in the current market, they have to start thinking about the long-term. KKR already is. It is getting listed.