Britain's financial services authority (FSA) is to step up its scrutiny of large private equity groups in an attempt to come to grips with the risks the industry's growth poses to the stability of the financial system.

The investigation, which started last month, is the latest effort to keep tabs on the ever-increasing amounts of money being raised for alternative investments, which have generally enjoyed a lower level of regulatory scrutiny.

Last week the FSA concluded a lengthy investigation of hedge funds by recommending that retail investors be given access to the fast-growing asset class.

John Tiner, chief executive, said that the FSA was planning to look at disclosure by private equity groups as well as their impact on the transparency of the financial markets.

However, he stressed that the regulator had "no preconceptions" about what it might find.

The FSA's interest stems from the growing amounts of money flowing into private equity funds. The private equity industry raised £9.7 billion (€14 billion) in 2004, according to internal FSA research, while the total amount raised on the London Stock Exchange that year was £16.1 billion.

"That tells us we ought to go and have a look," Mr Tiner said.

Private equity groups have been eager participants in the recent boom in mergers and acquisitions and are increasingly targeting public companies. In the past few weeks, private equity consortiums have made offers for ITV and HMV, the music retailer.

Yesterday a consortium led by Goldman Sachs, the investment bank, said it was considering a bid for Associated British Ports, the UK port operator.

The FSA's move is likely to be watched closely by other financial regulators which are also grappling with the growing power of private equity firms.