One of the biggest lenders to private equity gave a warning to investors yesterday that a glut of cheap debt meant buy-out firms are not pricing in risk on their bids or leaving any room for deals to turn sour.

Intermediate Capital Group said the structure of deals was now so risky that it was almost inevitable there would be defaults, especially on the larger multibillion deals where the appetite for risk was even greater, driven by lucrative underwriting and arranging fees.

ICG’s chairman, John Manser, said: “We are turning down many more transactions because risk is not being properly priced and there is often little or no margin for error.”

Private equity firms, which buy up companies using mostly debt then sell or float them three to five years later for hefty profits, have been accused by MPs and trade unions of being asset-strippers. The Government and the Treasury Select Committee are conducting reviews of the industry.

ICG is one of the biggest providers of so-called mezzanine finance, which typically sits below senior bank debt in leveraged private equity deals. Tom Attwood, the group’s managing director, said senior debt was now being priced so cheaply that it was squeezing the market for mezzanine finance.

“Just imagine what’s going to happen if one of the big deals goes wrong?” Mr Attwood said.

ICG’s warning came as the group reported record pretax profits, up 37 per cent to £224 million in the year to March 31 2007, from £163 million a year ago. But its shares fell 12 per cent, or 230p, to £16.70 after it said its balance sheet would be hit by a frothy debt market.

Philip Isherwood, European strategist for Dresdner Kleinwort in London, said: “The risk is that default rates rise, then the cost of debt starts to rise and some of these deals will inevitably start to fall over.”

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