About half the returns made by private equity investors in the three years to 2007 came from debt they piled on to investments, research for the industry trade association shows.
In data highlighting how much firms relied on leverage to boost profits for investors, the British Private Equity and Venture Capital Association said the exits analysed had generated returns that outperformed the FTSE All Share index by some 330 per cent.
However, just a fifth of that return came from operational improvements made by companies' new private equity owners, with more than half of the gain coming from leverage.
Buyout firms typically buy a business, hold on to it for up to five years then sell it on to a buyer or via an IPO, aiming for high returns of typically 25 to 30 per cent a year. Using a lot of debt in the acquisition allows them to magnify the returns on their own cash invested in the deal.
But the high debt levels are now putting pressure on businesses owned by private equity as they breach banking covenants and struggle to service the debt.