Sir Ronald Cohen with Gordon Brown

Private equity can also argue that it adds to biodiversity in the corporate jungle. The world of work would be duller and less efficient if all companies were public corporations. In the old days, prime targets were badly managed businesses and neglected subsidiaries of industry giants, and nobody considered that remarkable.

So far, so good. Modern private equity, though, is a different beast. It is bigger and seemingly eager to buy anything. Financial engineering, not the rescue of unloved corporate orphans, has become its hallmark.

The rewards, but not the risks, also appear greater than in the past. The fees charged by private equity firms are staggering. A large firm may number only 50 individuals, including 15 or so partners. If the firm is running an investment pool of £5bn, about 2% of that sum - up to £100m - will disappear every year in management fees.

For the partners, that's just the appetiser. Their real money is made when the bets come good. About 20% of the profit of any investment would be retained by the partnership. With the industry now capable of mounting multibillion pound take overs, personal fortunes for the most successful individuals can exceed £200m.

Maybe that is just how modern capitalism rewards those who deliver investment value - except private equity has yet to prove it leaves anything substantial on the table. Study after study has shown that the performance of private equity and quoted companies tends, over time, to be roughly equivalent if you ignore the different financing models.

So why are our pension funds so eager to hand over our savings to be managed by private equity? That's the real scandal here. Private equity is now so well funded that it can contemplate a £10bn bid for Sainsbury's which is in no need of Gekko-style liberation. Sainsbury's has been making excellent progress under respected management for the past two years. Private equity, on the other hand, can't sit on its cash because that's the only time it doesn't get paid.

The suspicion is that pension fund trustees have not bothered to examine private equity's boasts of investment greatness or to insist on lower management fees. Nor have they demanded sufficient financial disclosure to allow a proper assessment of the financial risks in leveraged buy-outs. In other words, they have swallowed some slick rhetoric.

The debt-ridden Labour party faced an angry backlash from trade unions last night for accepting cash from private equity tycoons.

In news that could prove particularly embarrassing for Gordon Brown, party sources told The Observer that Sir Ronald Cohen, one of the Chancellor's closest political allies, was among a trio of wealthy businessmen who have come to Labour's rescue in the past few months.

The gifts come amid a high-profile union campaign against private equity firms for alleged asset-stripping and the cutting of jobs in recent takeovers of companies like Birds Eye and the AA.

Within minutes of reports of the donations, the GMB union called on the party's ruling National Executive Committee to investigate the donations.

Paul Kenny, general secretary of the GMB, said: 'Only in the last few weeks has the GMB put names and faces to the multi-millionaire elite who run the private equity industry and made clear what they do. Maybe it is now time for the NEC to look into the background of where this money is coming from.'

Party sources confirmed recent gifts of £250,000 each from Cohen, fellow private equity businessman Nigel Doughty, and hedge-fund manager Jonathan Aisbitt. The donations reportedly accounted for more than a third of the total amount given to Labour in the last three months of 2006. The details are due to be made public tomorrow in the Electoral Commission's latest release of donations.

The cash infusion has come at a crucial time for Labour. The 'cash for honours' inquiry has left the party desperate for funds to help reduce an estimated £25m debt and to fund a war chest to take on David Cameron's resurgent Tories. With the exception of the recent £2m gift from steel magnate Lakshmi Mittal, most large donations have dried up in the past year.

The money has risked putting Brown, frontrunner to succeed Tony Blair as party leader and prime minister, on a potential collision course with trade union figures. Unions including the GMB and the Transport & General Workers have led a general assault on private equity firms and have pressed Brown to impose tighter tax rules. Last week, the TUC urged the trustees of union pension funds to avoid placing investments with such 'casino capitalists'.

Cohen, whose gift brings his contributions since 2001 to more than £1.5m, is co-founder of London-based Apax Partners, one of the world's top private equity investment concerns, and first got close to the Chancellor when playing a leading role in an inner-city regeneration scheme.

Doughty, whose £250,000 gift brings his donations in the past two years to roughly £750,000, is chairman of private equity firm Doughty Hanson & Co. Aisbitt, a Goldman Sachs veteran who made a reported £80m when it floated, has made his second £250,000 donation.