By Andrew Verity BBC Radio Five Live, Wake Up To Money

Birds Eye has a new captain in the form of private equity

The head of one of Britain's best known private equity firms has warned that his sector is now "near the top of a crest of a wave" - which, when it breaks, is likely to cause some businesses to fail.

Private equity groups have taken over businesses ranging from the AA to Birds Eye, and one consortium is considering a takeover of supermarket giant Sainsbury.

Most of these deals have been leveraged buyouts, where a company is bought with borrowed money in the hope of improving profits and selling it on at a higher price.

But the company must earn enough to keep up the repayments on the debt.

In cases such as Debenhams or the AA, the private equity firms have made hundreds of millions of pounds - a success that has prompted a boom in such deals.

If a company has too much debt, stops investing, runs itself to the point where it can't even buy enough stock to run the business, then you have bankruptcies Jon Moulton Alchemy Listen to Wake Up To Money

In Europe alone last year, �118bn was spent in private equity takeovers, up 41% on 2005.

Overheated

But experts in the City, including some in the banks that lend to the private equity firms, are increasingly worried by the levels of debt being taken on - especially when interest rates are tipped to rise.

Jon Moulton, managing partner of the private equity firm Alchemy, said he believed the market was overheated.

"I don't think it's a bubble, but it's certainly getting a bit near the top of a crest of a wave," he said.

"The debt levels have been rising very rapidly in the last few years."

Mr Moulton said there were two main scenarios for companies over-burdened with debt.

"If there's nothing else wrong, it just gets restructured and it doesn't have much effect on the business or its employees. That's the benign scenario," he said.

"If a company has too much debt, stops investing, runs itself to the point where it can't even buy enough stock to run the business, then you have bankruptcies.

"Then you will have unemployment coming out of it and business failures."

The AA was sold by Centrica to Permira in 2004

Pecking order

Unions have attacked private equity firms on different grounds. The GMB union has branded Permira, involved in the takeover of the AA, as "buccaneering asset-strippers".

The AA got rid of 3,000 staff - more than a quarter of its workforce - while under Permira's ownership.

Permira's chief executive Damon Buffini has written to the GMB this week inviting them in for a meeting to "set the record straight".

Unions point to comments by Michael Gordon, the chief investment officer of Fidelity, a giant US investment house, who has said "employees are a little further down the pecking order in private equity".