IT PRODUCED one of the most heated series of exchanges in recent years in the Commons committee rooms. The four representatives of the private-equity industry faced the scorn, testy comments and tough questions of members of the Treasury select committee as it continued its inquiry into the sector.

They faced calls to "cut the nonsense", from the committee chairman, Scottish MP John McFall, while his committee colleague George Mudie urged them to "stop waffling" and concluded: "You're treating us like mugs."

The four were: Robert Easton, managing director of the Carlyle Group; Philip Yea, chief executive of 3i; Dominic Murphy, a partner with Kohlberg Kravis Roberts; and Damon Buffini, managing partner of Permira.

They defended their industry but their comments appeared to leave the committee dissatisfied.

Quizzed about a prior statement by Nicholas Ferguson, head of SVG Capital, criticising the fact that private-equity chiefs paid "less tax than a cleaning lady", Buffini replied: "Nick's comments highlighted a concern and we welcome the review into that by the Treasury."

The industry should pay heed to history (see panel right) and the kind of huge changes that may occur when people feel that the tax system is unfair.

Tax is a highly emotive issue, especially among people who work hard for a minimum wage and pay hefty percentages of that to outgoing Chancellor Gordon Brown. They take a dim view of those with Croesus-like wealth whose adroit use of the tax regime allows them to pay a few percent on what is often massive capital gains.

Right now, however, private equity seems determined to plough on regardless. Its trade association, the British Private Equity and Venture Capital Association (BVCA), insists that the comment from Ferguson that started it all off was "not an accurate reflection of the true circumstances", as a spokesman said last week.

Ferguson, a private equity pioneer in Britain, had said that "any commonsense person would say that a highly paid private equity executive paying less tax than a cleaning lady or other low-paid worker can't be right". He had yet to hear a proper explanation why such a favourable tax treatment was justified, he added.

Others have since weighed in behind him - and, interestingly, they are not politicians. City stalwart Paul Myners, a former chairman of Marks & Spencer, author of a 2001 government report into the fund management industry, and chairman of the Low Pay Commission, put the big question: "It is reasonable to ask whether it is fair reward for the contribution that private equity makes and the value it delivers, and whether the favoured tax treatment is justified."

The BVCA is not, however, apologising. Pointing out correctly that private equity operates under the same tax rules as the rest of the business world, its spokesman insisted the generous allowances on capital gains, which are the nub of the issue, are "very important to private equity and venture capital industries". The tax system was a significant reason why Britain has become the location of choice for private-equity operations within Europe, and the BVCA said it would continue to lobby the Treasury, MPs and anybody else who mattered for its retention. "We are doing our best to make as cogent and robust a case as possible for it," he said.

This is a co-ordinated defence.

Across the Channel, Javier Echarri, secretary-general of the BVCA's counterpart, the European Private Equity and Venture Capital Association, last week leapt to the barricades. Furious at a commentator's observation that private equity and hedge funds were "among the wildest animals in the jungle", he replied that his organisation had compiled no less than 60 research reports all "pointing to the economic benefits of private equity".

One of these may be a study by three heavyweight US professors. Called The Impact of Private Equity: Setting the Record Straight, it cites a formidable body of evidence to show "that private equity deals do indeed make a positive contribution, on average, in financial, economic and human resource management terms".

Focusing on private equity in Britain, it pored through data on 37,000 companies to reveal that most picked up dramatically after a private equity-led management buyout.

Total factor productivity, as measured by assets and labour, made gains of up to 90% after private equity had worked its magic. New and profitable products often appeared, wages rose and staff "felt more empowered". Similarly, other studies suggest that private equity-backed companies grow faster, create more jobs and are generally much more robust than those that lack the benefit of such tidal flows of investment and skills.

BUT the report goes on to imply that the intense debate over private equity is something the public will grow out of. "It is worth recalling," it wrote, "that the kind of concerns now being expressed in the UK and across continental Europe were also evident in the early days of the market in the US."

With the greatest respect to the professors, the role of the private-equity industry is not the same here today as it was in the past on the other side of the Atlantic. In general, the industry is much more active here than it was 25 years ago in the US, as the statistics show. In 2005 alone, private equity invested £11.7 billion in more than 1500 UK companies employing around 1.2 million people, according to the BVCA's own figures. And Financial Services Authority (FSA) statistics show that UK-based funds raised over £31bn in each of the past two years. Across the globe, annual fund raisings have more than doubled. The biggest buyouts may still be happening in America, but the UK and Europe are not far behind.

Indeed there is so much private-equity money washing around Britain that it has affected the flow of investment into the London Stock Exchange as companies wonder whether a public listing, with all its attendant costs and procedures, is worth the candle. In a prophetic statement, the FSA observes that "private equity fundraising currently outstrips public market capital-raising in the UK". For example, in just the first half of last year, UK-based private-equity fund managers raised £11.2bn in capital, nearly £1bn more than companies raised on the London exchange. If anything, the trend seems to be accelerating.

This year's spate of "club deals", whereby the giants of the industry combine to bid for icons of British commerce such as the successful £11.1bn bid for Alliance Boots led by Kohlberg Kravis Roberts & Co, has raised the private equity game by several gears.

Behind this seismic shift in the nature of company ownership lie the behemoths of the private equity business. Although there are more than 1000 UK companies involved in private equity, nearly all of them are minnows. Of the thousands of deals in 2005, it was a mere 102 buyouts that accounted for nearly 80% of the total value.

Rightly or wrongly, concern is growing at the consequences of this sea change in the commercial climate. And it explains why the FSA has established a special team to troubleshoot private equity. One of its first jobs, as the FSA has just announced, will be to conduct twice-yearly surveys of banks' exposure to leveraged buyouts. Clearly unhappy with the quality and extent of its information about the industry, the FSA will also require more data related to debt and "excessive leverage".

Elsewhere, regulatory agencies are on the case. The International Organisation of Securities Commissions has launched a task force "to assess the impact of recent developments in the private-equity market and identify issues which can be addressed within its remit". A banker's banker, Sir David Walker, who is chairman of the London Investment Banking Association and a former executive director of the Bank of England, is chairing a group charged with improving levels of disclosure about the industry under a voluntary code.

Echarri, secretary-general of private equity's European trade association, may claim that "private equity is fully regulated within each of the 27 European member states", but all this activity suggests the existing regulation leaves much to be desired. The general tightening up means that private equity's long holiday from the same level of supervision required of publicly-listed companies is effectively over.

Meantime, there is the emotive issue of tax. It has long been common knowledge, although obviously not publicised, that many private-equity players pay low percentages of tax on their total remuneration. In self-defence the industry pleads that it does not get any special favours under the tax code. In its submission to the Treasury select committee inquiry, the BVCA pointed out that just about everybody in the industry is liable for a potpourri of taxes including corporation tax, employment tax, capital gains tax and VAT: "All these are general taxation rules that apply to other taxpayers across the economy."

Peter Linthwaite, who has since resigned as BVCA chief executive, went on record to say: "There is no special deal for private equity and I think that's the point that needs to be emphasised."

An unabashed supporter of private equity, he sees nothing but virtue in it and expresses hurt at the TUC's current campaign against it. (The Transport & General Workers' Union made an impassioned contribution to last year's illuminating, 102-page study on private equity.) "We're about supporting innovation, about growth All private equity creates wealth," Linthwaite said in May. Perhaps, but the fact remains that the biggest and most successful practitioners reap most of that wealth and the tax rules were not designed for their benefit. Rather, they were meant to reward entrepreneurs battling to build young companies.

In a normal private-equity deal, a firm's executives put their own, often borrowed, money into the company concerned along with that of outside investors such as pension funds. That makes them eligible for tax deductions on what is often the considerable interest payments. (Some of these deals are done on 90% debt.) And under the so-called "taper relief" scheme, private equity may pay 10% or less of the eventual capital gain to the Exchequer provided the business has been owned for at least two years.

The industry hints that it might pack up and leave Britain for more tax-friendly environments if the rules were to be changed, and this would be a significant loss to the economy. Roughly equivalent to saying private equity is only here for the money, it may prove a dangerous game to play.