Leading article: An unfair reputation for financial barbarism

Private equity companies are being dragged from the shadows. The Financial Services Authority announced yesterday that it is beefing up its oversight of the sector. Meanwhile, the Treasury Select Committee has launched an investigation into private equity funds. So should we be cheering the fact that these secretive "masters of the universe" are finally being held accountable to the public?

Some of the shriller accusations made against the private equity companies are unconvincing. For instance, there is no evidence that they deliberately destroy profitable companies, or hack infrastructure to unsustainable levels. Their objective is to sell a company on at a profit, and a growing company is worth more than a shrinking one. There is, in fact, a case to be made for the benefits private equity brings to the economy. Such firms tend to target mature, but under-performing, companies. When they gain control they can push through decisions that the former management were too inept to take themselves, such as selling off poorly-fitting parts of an empire or cutting back an unproductive workforce. Such rationalisations may be harsh, but they can benefit the broader economy.

Another common complaint is that private equity achieves its results through financial trickery, such as selling land and leasing it back, or debt restructuring; that they do not actually create wealth. But if the market decides a business is worth more in the wake of such restructuring it is difficult to gainsay this verdict - although one could quibble with the short-termism of many in the private equity world. It is true that the vast rewards reaped by private equity directors have not helped their image. But we might ask whether these rewards are really any more obscene than some of the incentive packages granted by shareholders to the chief executives of public companies?

One of the more plausible complaints about private equity is that it is inherently risky. Takeovers end with a huge amount of debt being loaded on to the acquired company. This is encouraged by the climate of cheap credit, high liquidity and the fact that interest payments are tax deductible. It may be that in a few years' time, if credit conditions change dramatically, there will indeed be a slew of casualties. We should take this threat seriously. But we should also remember that the world economy survived the "junk bond" merchants of the 1980s and it will no doubt withstand whatever the current vogue for private equity brings in its wake.

There are, however, some issues of transparency that need to be addressed. Some 3 million people in Britain are employed by private equity-owned firms. And these companies have ambitions to take over more large employers such as Sainsbury's and Boots. They are steadily acquiring significant pension fund liabilities. So there is a strong public interest case for more disclosure. Directors' remunerations and shareholdings should be made public. This would go some way to making up for the loss of the democratic scrutiny formerly provided by shareholders of public companies.

There is also a legitimate public concern over the exploitation by private equity partners of a capital gains tax loophole intended to encourage business start-ups. Last week, one brave private equity partner questioned whether it was right that "I pay less tax than my cleaner". It is not. The period over which people have to hold an investment before they benefit from the special low rate of tax should be extended.

But these are not fundamental arguments against the principle of private equity. However much distrust such firms may inspire, we should be wary of regarding them as the "barbarians at the gate".