CORRECTED - CORRECTED-Private equity coming out of shadows in Australia

(Corrects first name in paragraph four to Peter, instead of Paul)

By Alison Tudor and James Grubel

SYDNEY, March 5 (Reuters) - Secretive private equity firms are starting to engage in a public debate about their impact on Australia's economy, galvanised by fear of greater regulation.

Over a third of Australians are hostile to the concept of private equity - a headache for Prime Minister John Howard in the run-up to a hotly contested election expected later this year.

Private equity firms are bidding for several Australian household names including Qantas Airways Ltd. (QAN.AX) and retailer Coles Group Ltd. CGJ.AX and bankers predict the list of mergers and acquisitions will grow in coming years, fanning public concerns about foreign ownership and job cuts.

Australia Treasurer Peter Costello said in a speech on Monday that The Council of Financial Regulators was preparing a report on the impact of private equity on the market place.

"Private equity does present some regulatory challenges," Costello said.

He listed concerns about steep levels of cheap debt that private equity funds use to fund acquisitions and a lack of covenants on those loans, which could eventually pose a risk for global capital markets.

But Costello stressed too much regulation could hurt the efficiency of capital markets, and analysts pointed out that the bigger political issue will be longer-term if one of private equity's prize portfolio companies goes bankrupt.

"I for one, have met 140 politicians in the last month as part of our consultation process for Qantas," said Ben Gray, managing director of buyout firm TPG Capital Australia TPG.UL.

Private equity has been active in Australia for over a decade, but in the last couple of years the world's biggest funds have landed in Asia and started snapping up blue-chip companies.

Funds' Australian investments hit US$25 billion last year, a nine-fold increase on levels in 2005, according to HK-based AVCJ.

Elsewhere in Asia, politicians have reacted quickly to a public backlash against private equity.

In South Korea and Japan, funds' profits have been heavily taxed. In China and India, private equity is only allowed to acquire companies in certain sectors.

It is "essential that the private equity industry recognise the private element relates to style of investment and not the absence of a presence or profile in the broader market," said Simon Moore, managing director at The Carlyle Group CYL.UL, one of the world's largest private equity firms with US$54 billion under management.

Moore, the son of a politician, said he took the threat of increased regulation seriously because it was a way "for politicians to feel that they are reacting to interest groups and often just to be seen to be doing something."

Australians' perceptions have been coloured by reports of private equity piling towering debt onto local companies, funds clubbing together to corner targets at below market prices and company insiders teaming up with funds to delist firms from stock exchanges at prices unfair to retail investors.

(For more on these topics please double click on [ID:nSYD341625] and [ID:nSYD95028])

"We're going to get (radio) talk-back callers talking about Texans taking out Qantas jobs, call-centres taken abroad by faceless wealthy financiers and saying the government must do more," said Ian Smith, chief executive of public relations firm Gavin Anderson & Co Australia.

Smith said 39 percent of respondents have a negative view of private equity versus 37 percent with a positive view, citing a poll of 1,200 Australians by Gavin Anderson and News Poll.

JOBS FOR WORKERS!

Government lawmakers have raised concerns about possible job cuts at Qantas with Howard and Costello in closed-door party room meetings in Canberra.

But other lawmakers have cautioned against setting conditions on deals, saying that could leave the government responsible for problems that may emerge in future.

Leaving aside a flurry of inflamatory headlines in recent months about foreigners taking over national assets, analysts said Australia's current 31-year low unemployment rate means jobs will not be central to winning the elections this year.

The Australian private equity pressure group AVCAL weighed in, citing research showing private equity-backed companies expect to hire additional workers in 2007.

So far private equity seems to be winning the debate. Prime Minister Howard reportedly has rejected calls for the government to stymie private equity's US$8.7 billion bid for Qantas.

But private equity may be making a rod for its own back by paying high prices for Australian icons, and if one goes bankrupt under a fund's stewardship, the government may feel pressure to step in.

"At some stage, one them is going to blow up and the politics will get tricky. I just don't expect that before the election," said analyst Chris Richardson from private economic forecasters Access Economics.