Private equity firm Permira bought Birds Eye for �1.1bn last year

But the Treasury stopped short of a wholesale review of the way debt is treated within the tax system.

Private equity companies use clients' money and borrowed money to buy whole companies and try to turn them around.

Critics dismiss such firms as asset strippers, but Gordon Brown has praised their ability to create jobs quickly and contribute to the economy.

Private equity deals recently hit the headlines amid news that a group was about to target supermarket group Sainsbury's, while leveraged buyouts have been used to acquire big-name firms such as Birds Eye, Madame Tussauds and the AA.

Treasury minister Ed Balls announced government plans to review the private equity sector during a speech at the London School of Economics.

Shareholder debt

He said the review would look at the tax benefits of shareholder debt - a commonly used component of private equity deals - to ensure tax rules were working.

He added the review would look at fears that investors in private equity groups were getting unfair tax breaks on their "shareholder debt" by disguising equity as debt.

"Concerns have been raised with the Treasury that something further may in some cases be occurring - in particular, that 'shareholder debt' is replacing the equity element in highly-leveraged private equity funding arrangements.

"This shareholder debt is a form of equity that is treated as debt for tax purposes, giving these arrangements a tax advantage that is inconsistent with the principle that interest is a business expense."

'Unfair' move

But Mr Balls added that the Treasury had "no plans" to examine the tax-deductible status of interest, which critics had called for.

Such a move would have crippled private equity groups, as they borrow heavily to finance their deals.

Mr Balls argued that it would be unfair to make such a move as other companies also use this tax benefit, which is also an international practise.

"The question has been raised in recent weeks as to whether our tax system gives an unfair advantage to private equity over other forms of ownership - in particular, as a result of the tax-deductibility of interest," he said.