Britain's financial regulator said today it would step up surveillance in the credit markets because of concerns about the amount of money banks are lending to finance private equity buyouts.
The Financial Services Authority's (FSA) plans were revealed in a review of the private equity industry, begun in March, which also highlighted other risks posed by a sector that has become a big player in UK financial markets.
Market abuse and conflicts of interest topped the list of risks identified by the FSA, followed by excessive leverage and unclear ownership of economic risk.
"This lending may not, in some circumstances, be entirely prudent," it said in its 102-page review, which also said loans to private equity could hurt financial stability in extreme circumstances.
The FSA found that the information flows in private equity deals created potential for market abuse, something the watchdog is trying to stamp out.
The regulator decided to review the private-equity sector earlier this year to understand better the workings of its increasingly influential players.
UK-based private equity firms raised £11.2 billion sterling ($21.28 billion) in the first half of 2006, more than the £10.4 billion raised via initial public offerings on the London Stock Exchange, according to the FSA.