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A government that is good for business is good for private equity. Cameron and Osborne’s business-friendly approach, as part of the coalition, has been generally well received by the private sector and will ultimately benefit private equity.

The coalition started hesitantly, as George Osborne set off on his emergency Budget tightrope walk in June, treading the fine line between successfully cutting the deficit and plunging the country back into recession. So far, it looks as if he may have pulled it off. The VAT hike is unwelcome but not unexpected, and the changes to CGT, although not ideal, will do a lot to protect wealth creators and encourage deal flow.

More significantly, the Comprehensive Spending Review revealed much-needed plans to tackle the nation’s budget deficit by slimming down the public sector - something that the private sector has been doing over the past few years. The positive response from the financial markets following the announcements, and the subsequent improvements to the UK’s sovereign debt rating, indicate that the government is taking steps in the right direction in creating a stable economic environment for businesses and private equity investment.

As for the West Midlands, which is home to a large network of high quality engineering and manufacturing businesses, low interest rates maintained by the MPC and a depreciated sterling will be encouraging for those exporting to Europe and the rest of the world. Although any business with solid growth prospects and a quality management team will attract interest, the newly found competitiveness of exporting businesses will present a range of attractive buyout opportunities to private equity houses.

The private equity industry will also be heartened by the arrival of Cameron and his robust stance on Europe. The bureaucrats in Brussels have waged war on private equity in a misguided bid to reign in the power of hedge funds. Private equity houses will keep a close eye on these developments and will be keen to see the coalition take steps to protect the industry from the meddling and shenanigans in Brussels.

On a positive note, the market has clearly picked up in recent months as economic prospects improve. A combination of pent-up demand from private equity houses and owner managers sitting on businesses that they would like to sell has been conducive to a flurry of activity, and I can see that trend continuing into 2011. But this release of tension doesn’t mean that the market will return to the heady heights of 2007.

Despite the encouragement from the government, I feel that the banks will continue their dry spell of lending. The bank levy is likely to further squeeze banks margins to the point that they will return to what they were actually meant to do provide funding that is secured against real assets.

Meanwhile, the private equity and venture capital industries have cash to invest and can add real value to good quality businesses using sustainable funding structures. The days of excessive leverage and financial engineering are over. Private equity has matured and returned to its roots of growing businesses and providing external capital through equity investments. At the same time, regional PE houses have a distinct advantage in the mid-market as they are close to management teams and well integrated within the local professional network.

As we move forward into 2011, private equity will have an increasingly important role to play in supporting the growth of private businesses and plugging the funding gap. But times are changing and, like the private equity industry, businesses must change their behaviour and look to alternative funding sources, revenue streams and ways of working in order to thrive over the coming years.

Owen Trotter is a Birmingham-based partner at private equity firm Key Capital Partners