SJ Berwin's Josyane Gold and Joshua Gregory survey the global funds market for 2011

The European business environment in 2010 was challenging to say the least, with the fallout from the global financial crisis still settling and governments seeking to balance budgets by cutting public spending and increasing taxes across the board.

Private equity firms were on the front line of this economic battleground. They rely heavily on debt to finance acquisitions, and that has been hard to come by as banks seek to shore up their balance sheets under new capital adequacy rules. They have also had to deal with the threat of increased regulation, not only from Europe but also from the US (where recent rules have the potential to substantially increase the cost of doing business with US investors).

However, recent figures from the Centre for Management and Business Research has demonstrated what many had predicted: companies owned by private equity funds did better than other listed and private companies during the global economic downturn. Indeed, one of the attractions of the private equity asset class is that it is less volatile than public markets during booms and busts. And though it is too early to give a definitive view, the signs are that 2011 will be a positive year for the private equity industry.

Following a brief pause to give investors time to regain confidence in the asset class, most established European private equity houses are getting ready to raise a new fund this year or in 2012. To raise these funds, they are deploying their 'dry powder' – uncalled capital – from previous funds to make investments, and are looking for ways to realise their existing assets.

Now that the stock markets have made a recovery (albeit fragile), these realisations should be easier. Private equity houses have taken advantage of improving conditions to return to dealmaking, driving deal values far higher than in the past few years, and (at least in the UK) accounting for a large share of M&A.

With instability and sovereign debt in Europe, many private equity firms have looked again at their geographic reach, surveying the opportunities in the emerging markets of Asia, Latin America and, increasingly, Africa (giving due consideration to recent political unrest in the region). The BRIC countries continue to see growth and a number of buyout firms are racing to establish local presences.

Some far-sighted firms have worked hard to cement relationships with investors from emerging markets, such as sovereign wealth funds, pensions and regional banks. They have been heartened to see that those investors are enthusiastic about the private equity business model and the returns it can offer. In today's world of low interest rates, the internal rates of return for private equity funds look very tempting to investors with longer time horizons.

Above all, 2011 has already seen the industry recover much of its confidence and hunger. In the UK, the 2011 Budget was received very positively by private equity and business leaders alike, delivering various tax reliefs to encourage investment in small enterprises, a reduced corporation tax, a promise to cut business red tape and an ambitious programme of tax simplification. The recent raising of €4bn (£3.5bn) in six months by BC Partners, one of the biggest players in Europe and the US, is surely a good sign. Cinven, another titan, has announced that it will start raising its €5bn (£4.4bn) fund this autumn. First a trickle, then comes the flood.

This is not to say it is back to business as usual. Investors chastened by the financial crisis are demanding better terms from funds, such as fairer alignments of economic incentives and stronger transparency and governance provisions. The Institutional Limited Partners Association (ILPA), a powerful investor pressure group, released a set of guidelines during 2010 intended to address any perceived balance of power issues between managers and investors, and although the recent update to these guidelines – known as ILPA 2.0 – saw retreat on some issues, the general thrust is towards more investor-friendly terms. And then investors must also be tempted back into the asset class – BC Partners' new fund contains novel terms such as a substantial management fee discount for early bird investors.

The private equity house of 2011 is leaner and more focused than its predecessors. The crisis has provided an opportunity for executives to pause, consider and in many cases go back to basics by reducing reliance on debt and slimming down their businesses. The industry has avoided the worst European regulatory threats and is ready to deal with new rules in the US. Private equity has weathered the storm; the future bodes well.

Josyane Gold is a partner and Joshua Gregory an associate at SJ Berwin.