The Financial Services Authority (FSA) is to further investigate a number of concerns it has regarding the growth of private equity-led takeovers.
The FSA wants to see if private equity is taking on too much debt
Such deals have hit the headlines this year, including the takeover of pharmacy group Alliance Boots.
Without naming any specific deals, the FSA said it would probe issues such as excessive debt and market abuse.
It added that feedback it had received indicated that its supervision of the sector was "broadly appropriate".
The British Private Equity and Venture Capital Association (BVCA) said it welcomed the FSA findings.
"This has been an in-depth study of the industry which consulted widely and effectively with key stakeholders," BVCA chief executive Peter Linthwaite said.
"We look forward to continuing to work with the FSA on these important matters, and maintaining the venture capital and private equity's position as a fully and effectively regulated market."
However, the FSA did say that the two "most significant risks" it recognised surrounding private equity were "those posed by market abuse and conflicts of interest".
Regarding conflicts of interest, the FSA said it would further study how banks can advise private equity firms before then lending to them, and possibly also running their own buyout arms.
Its comments on market abuse follows the increase in the share price of some target firms before private equity firms have announced takeover plans.
The FSA will also investigate the large levels of borrowing that some private equity firms can build up to fund their takeovers.
"We maintain a risk exists that leverage in individual transactions increases to excessive levels making the financial viability of the underlying firms unsustainable," the FSA said.
Its comments came as it published its response to a discussion paper issued last November.
Private equity firms have come in for heavy criticism from trade unions, who argue that some buy companies on the cheap before making staff redundant and selling off assets.
However, business groups such as the CBI have defended the private equity sector, saying they generally improve the performance of the companies they buy.