The chairman of the Venture Capital Board in Australia has warned institutional investors to beware of the lack of transparency and high levels of debt associated with some private equity ventures.

Roger Sexton told an audience of superannuation trustees in South Australia that although there were big opportunities to be had investing in private equity, funds should be aware of the risks.

"One of the potential costs relates to the fact that private equity firms are not subject to the same corporate governance standards and regulations that apply to public companies," Sexton said.

"Private equity firms often argue that they can be fast on their feet because they are governance light and operate without the restraint or control of regulators.

As a result, some private equity firms have been known to take capricious and oppressive actions against minority shareholders in private companies."

Sexton's warning comes at a time when Australia's pension industry is ramping up its exposure to the private equity market.

Some analysts expect funds to increase their allocation to the sector from the current average of 5 per cent of their portfolios up to 7 per cent over the next two years.

This would mean another $23 billion would pour into the private equity industry.

As it stands, over $17.5 billion of Australian pension money is invested in the sector.

For Sexton, however, many private equity managers operate with high a level of debt that is relatively covenant free.

"These covenant light arrangements can . . . work to the disadvantage of the minority shareholders in private companies if not appropriately managed," he said.

He added, however, that investors should not be put off investing in the sector.

"Like many situations, it is the few bad apples in the private equity industry that create problems for the rest. Fortunately, these soon get found out.

The majority of operators in the industry are respectable and reputable," Sexton said.