Let's not be stinting in our praise for a new Labour aspiration that the many, not the few, should bathe in Krug

The four words that summed up the financial excesses of the late 1990s were "private equity" and "venture capital". If you knew anything about the financial engineering going on in San Francisco, New York and London, you had a cartoon-style reaction whenever you heard that a pal had joined a private equity or venture capital firm - dollar signs on springs would pop out of your eyeballs.

The money made by partners in these firms was mind-boggling. The also-rans made bonuses of a few million dollars. But a senior partner of Kleiner Perkins or KKR or Hicks Muse or Clayton Dubilier (among others) was in the brotherhood of billionaires. They described what they did as "privatisation", although it was a very different kind of privatisation from the sort pioneered by the economic liberals of the 1980s. What they did was to finance businesses outside of the "public" markets or away from stock exchanges. Funnily enough, WestLB - a German investment bank fronted by a glamorous Texan, Robin Saunders - is currently engaged in trying to "privatise" Railtrack in this reductio ad absurdum fashion. (It does not appear that Stephen Byers has been seduced yet.)

The partners profited from two kinds of market anomaly. They would buy businesses listed on the stock market whose shares were trading well below their intrinsic value. In this kind of case, they would install better management, sell off surplus assets and then recycle the rump by selling it back on to the stock market within a few years, making an enormous return along the way.

Or they would spot a new business, like an Amazon.com, that was too immature to be able to fund itself on the stock market. And in this kind of case, they would provide finance until the company had enough of a track record to be floated on a stock exchange. Once again, the spoils for those venture capitalists who backed winners could be immense.

Private equity firms profited twice, in fact. They invested money on behalf of others and charged a very fat fee for doing this. And they received a sizeable chunk of the capital gains. If you worked for one of these firms, the most important line in your contract specified your "carried interest", or what share of the profits on investments you took home to a wife and baby whom you could not afford to be with (how much dandling can you afford, when your going rate is $250,000 an hour?).

Another characteristic of this business was that it was the least democratic part of the investment market. Private equity firms needed to raise finance from outside investors but the leading ones rarely had to sully themselves by soliciting money - they were inundated by offers of cash from the egregiously well-heeled. Those that were given the "privilege" of investing were selected on the basis that they could provide something in return, such as access to other companies that could be taken private at a later date. As a result, the spoils went mainly to people who already had a few bob.

But, it turns out, private equity is not a one-way bet. On the side of the business that concentrated on backing young companies, investors have been badly burned by the bursting of the internet and technology bubble. Billions of dollars are tied up in companies that are unsellable and probably have no viable future in the gloomier economic environment of today.

That has been obvious for a year. The more recent trend is that the economic cycle is moving against the older, established companies that have been taken private - as was shown this month when UniPoly Enerka, a profoundly unfashionable manufacturer of conveyor belting, was sold for just £47.5m, or less than one-third of its valuation when privatised in 1998.

So my chums in private equities are feeling a bit anxious. They understood the theory that if they loaded up a company with debt, there could be one of two outcomes: the company could become leaner and meaner or, if it failed the fitness test, it could emerge meeker and weaker. But because few of them had ever backed a loser in the Darwinian Gold Cup, they did not believe it would happen to them - which it has now, in spades.

None of this would matter much if we were simply talking about a few boys in Gucci shoes losing a few million dollars. But the privatised businesses employ thousands of people and have borrowed billions from the mainstream banks. In the worst case, when a privatised business goes bust, real jobs are lost. And if bank loans are written off, there is less credit available for other companies (it really does work like that).

You may therefore be horrified that Gordon Brown wants to democratise private equity, or - to put it another way - he wants us all to make this sort of investment through our occupational pension funds. Regulatory reform is being pushed through by the Treasury to make it easier for the big pension funds to make riskier, less liquid investments of this sort.

Brown has not gone bonkers. The best time to invest in private equity is right at the bottom of the economic cycle, when assets are cheapest. Probably by luck rather than judgement, he has picked the best moment to encourage this investment (it must be luck, as the Chancellor would never have willed a global downturn). Sadly, I suspect the pension funds will not rise to his challenge, because their trustees are taking fright at the plight of UniPoly et al.

Even so, let us not be stinting in our praise of a new Labour aspiration that the many, not the few, should be able to bathe in Krug.

Robert Peston is editorial director of QUEST(TM); www.csquest.com; e-mail rpeston@csquest.com