Private equity firms are rewriting corporate and personal fortunes, and top among them is PEP. In the past year it has spent $1 billion buying a diverse range of businesses.

The six partners that run private equity firm Pacific Equity Partners don't look much like barbarians. Lead partner Tim Sims, an Oxford and Harvard graduate, is as articulate as the best-trained management consultant (that's his background). Yet he speaks carefully in a way that suggests he's not giving away too much.

That's hardly surprising. The private equity industry is not called private for nothing. Buying companies and taking them into the dark - far from the scrutiny of the public markets - is an essential part of what Sims calls the "enigma" of private equity.

It is also known as the leveraged or management buyout (MBO) industry, which was synonymous in the 1980s with the brutal takeovers of US industrial icons like RJR Nabisco, as chronicled in the famous business book Barbarians at the Gate.

Sims says his is a more civilised business - not so much cutting, slashing and charging as repairing, building and growing. He's riding a powerful wave: in the US and Europe many large corporate takeovers are being hatched by private equity funds. The trend suggests it mightn't be too long before it's the same in Australia.

So he and his partners sit on top of a booming industry that is re-writing corporate and personal fortunes in Australia. Just look at the fate of the Myer department stores this week. An iconic public company disappeared, gobbled up by huge US-controlled private equity fund Newbridge Capital, which paid $1.4 billion, the biggest private equity transaction Australia has seen.

Why didn't PEP grab this prize? The private equity appetite is voracious and PEP is Australia's most active fund in what has been a thriving industry in the past year.

Sims indicates it was just too hard. "It's a great business but we think it is a very tough business," he says. "We did not feel we could add a particular competitive advantage in that process."

Yet PEP does not seem to mind the odd risk. It has a reputation for often being prepared to pay the highest price at auction to secure its prey and PEP the predator has been very actively prowling in the past year: it has spent more than $1 billion buying businesses as diverse as food and beverages, advertising, security, share registries, fast-food restaurants, financial services and aged care. A private equity investment can be held for more than five or seven years but the return on an investment can be much quicker - something PEP has become expert at.

Private equity success is by definition invisible. But despite the opacity, returns from individual investments can be identified. In most large private equity deals of late, some investors have quadrupled their money, and more. Another sign of PEP's success is the $1.3 billion in equity its backers, largely international mutual funds, gave it to invest on the strength of its performance. PEP is out of reach of the average investor, who would have difficulty meeting the price of entry.

Last year, PEP reaped an estimated $NZ70 million ($60 million) profit in less than a year on-selling aged-care operator Guardian Healthcare to Australian-listed rest-home company DCA Group for $NZ300 million.

Another super deal is the upcoming float of heavy equipment supplier Emeco, which could float for as much as $2 billion. There is speculation that PEP and its co-owner Archer Capital paid less than $500 million for Emeco.

Late last year PEP nearly pulled off the biggest private equity deal yet seen in Australia, the $3.5 billion takeover of baking and spreads maker Goodman Fielder. But instead of selling it, NZ billionaire Graeme Hart opted to float Goodman at the 11th hour (returning it to the bourse after his 2003 takeover), unhappy that aspects of the negotiations had leaked.

Ideally private equity funds find assets to buy that others overlook. But more commonly assets are purchased in competitive auctions with other private equity funds or trade buyers. What distinguishes PEP is that it has won more of these auctions than others, by definition because it's willing to pay a higher price (although this is not always the case). Then there are the fees they charge.

Again these are hidden behind closed doors here, but there is some evidence that they are big enough to inspire envy in the most highly paid investment banker or fund manager. The standard fee is higher than a vanilla managed fund. Private equity funds generally charge a 2 per cent fee on committed capital. (PEP has just secured $1.2 billion in commitments for a new fund.)

While there is some grumbling among big super funds about the fee take, investors can't complain that the fees haven't been backed up by performance.

Formed in 1998, three of PEP's founding partners are former Bain & Co management consultants. Sims is its former Australian boss, while Rickard Gardell and Simon Pillar were senior executives within the firm. Another partner, Paul McCullough, is a former investment banker who came to Australia to take up what he calls a "mirage job" at Westpac's infamous Pacific Partnership unit and later ran both Prudential Securities and Salomon Brothers in Australia.

For PEP, any company is a potential target: public companies with undervalued share prices or underperforming divisions or private companies that have, say, succession problems. PEP has bought struggling or challenged companies. Examples include ASX Perpetual Share Registries (Link Market Services), which has failed to exploit its duopoly position, while Tegel Foods, like any chicken-product maker, is under the shadow of bird flu.

"I am sure a time will come when we will have real challenges, but we have managed to spend an enormous amount of time with businesses doing due diligence before we buy them," Sims says.

"We can easily put $1 million of cash resources behind a bid for a business we think is worth acquiring or has the right characteristics."

Caliburn Partnership's Ron Malek, a corporate adviser who has worked with them, says of PEP: "They make disciplined decisions about what they want and when they cross that threshold they go after it hard.

"There's no doubt they are smart operators and they have got quite a mix of skills in their team which has certainly worked to their advantage in a number of instances. Their background is a little more consulting-based, which means their style is more analytical."

Rival Archer Capital's Greg Minton says: "We have co-invested with them [PEP] and it's been a good experience for both of us.

"They are good, smart guys but we have looked at other things together and not always agreed on value."

Private equity funds generally target returns of at least 20 to 30 per cent to justify the risk of carrying large amounts of debt.

Gardell stresses that PEP doesn't actually run the companies it owns; the management it appoints does. But like other firms, it generally has board representatives to give strategic advice.

PEP's first investment and greatest success was NZ beverages company Frucor, which it bought for $NZ50 million from the Apple and Pear Marketing Board and partially floated at $NZ187 million before eventually on-selling to France's Danone Group. It delivered investors 10 times their money on the equity invested.

Sims says: "When you put together the financial and planning disciplines [we bring] to support management with management's own motivation, skill set and ability to move, that's the enigma of private equity explained."

Leverage is still a huge factor in the returns generated by the sector, but Sims reckons the maturity of the sector requires that value must be added to succeed.

With success has come greater acceptance from mainstream corporate Australia that selling assets to private equity funds is not an anathema, although public companies must be discomforted when private equity management turns around a lifeless bit of their empire.

Sims points out that the governance of public companies is designed to deal with "a normal set of circumstances", meaning they struggle with divisions that either underperform or grow too fast. And it can take time for management of target companies to embrace their style.

Alex Hamill, a doyen of the advertising industry who ran one of PEP's toughest investments, marketing services group The Communication Group, says he was initially worried that PEP just wanted a quick buck. In the end the company's management was keener to sell than PEP.

Hamill says: "I came away pleasantly surprised and impressed with these guys. I did not go in that way."

One thing is clear: the deals keep getting bigger.

Private equity funds, in the past two years, have unsuccessfully bid for three businesses worth more than $1 billion - Australian Leisure & Hospitality, Foodland and Goodman - but it's only a matter of time before they snare a mega deal.

Meanwhile, the investment banks are thrilled. They are the secondary beneficiaries of a trend that is driving a huge growth in mergers and acquisitions. All the more money for the bankers.