Old hands

Experience also counts for more. Private-equity firms used to be run only by financiers, but they are now adding partners (albeit not as fast as some would like) who have run big companies. These include superstars such as Jack Welch, formerly of General Electric (GE), and Lou Gerstner, once head of IBM.

Firms in private-equity portfolios are free of the most onerous regulations to which public companies are subjected. They are subject to less scrutiny in the press, especially when it comes to short-term dips in profits. And they can pay executives whatever they wish without facing an uproar. Compared with public companies, private-equity firms tend to be more generous in rewarding good performance, but they punish failure more heavily. Given that many of the most talented executives are risk-takers who want to get rich, it is no surprise that many are switching to private equity.

The “drain of management talent at all levels to private equity is one of the main reasons I am open to taking the firm private,” the boss of a company with a market capitalisation of $16 billion recently told The Economist. That is the most striking difference between private equity today and in the 1980s, says Chicago's Mr Kaplan. “In the 1980s company bosses were implacably opposed to LBOs. Now they see an opportunity to be able to do a better job and be better paid when they succeed.”

More threatening than criticism are the problems of success. With so much interest in private equity, more money than ever is chasing deals. To increase the number of deals they can do, several of the bigger firms are said to have become interested again in hostile takeovers, at least for the funds they are now raising. Club deals may also pose difficulties, especially if things do not go according to plan and partners have a difference of opinion.

And there are the diseconomies of scale common to any business that has grown so far from its entrepreneurial roots. Not for nothing have the biggest private-equity firms been called the “new conglomerates”. They are sprawling empires, with extremely diverse firms to manage.

When the credit stops

The credit markets show no sign of losing their appetite for lending. On the contrary, private-equity firms report turning down offers of credit because they are too generous. Nonetheless, leverage is rising steadily, to worrying levels. One day the market will dry up, perhaps suddenly, and what will happen then?

The repayment terms on loans to private equity are far more generous than in the 1980s, when repayment of the principal started immediately. Now there is often no requirement to start repaying the principal until after seven or more years. As a result, private-equity firms are likely to have a lot of time to put things right if one of their firms gets into trouble.

The industry also has to watch for a change in the behaviour of public companies, which are starting to respond to shareholder pressure to get a higher price from private-equity bidders.

Activist hedge funds are also putting pressure on likely targets to increase their borrowing. This, they think, will both increase the value of the firm in just the way it would under private-equity ownership, and remove one of the main incentives for private equity to buy.

Perhaps the greatest threat to the continued growth of private equity is regulation. Politicians may increasingly try to regulate the private-equity industry.

The new kings of capitalism must try to prevent this from happening by showing that they really are a force for good.