WHY are politicians so obsessed with private equity finance? It is a question that I would love to answer, but for which I can find no rational explanation.

After more than 40 years as a charted accountant and as someone who has created and managed a number of successful companies, I am baffled by politicians who think that private equity will somehow solve all their problems.

Let me explain what private equity is. According to private equity capitalists, what they do is find companies that have significant potential but are suffering from a shortage of funding. They then make an investment in that company with the aim that it should then make significantly more profit than it would have done without the involvement of the private equity capitalist.

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Supposedly everyone is a lot happier as a result. The people who founded the company are, supposedly, now wealthier. The private equity capitalists have made a very significant return on the money that they have invested. The employees of the company have now seen growth, supposedly providing them with the greatest security. The economy is bigger than it would otherwise have been, which always keeps politicians happy. People in the area where the company is located are supposedly better off because of the benefits that are claimed arise as a consequence of the additional spending that the growth in the company creates in that area. So, the private equity capitalist would ask, what is there not to like about what they do?

Rachel Reeves and Ed Miliband appear to have fallen for this argument. Reeves's supposed "National Wealth Fund" is, in reality, nothing more than an £7.3 billion bung to the private equity market. She claims that this money will, in her words, "catalyse" up to £70bn of investment in UK businesses, but those who understand private equity know that this is nonsense because almost every private equity deal does, in practice, involve a syndicate of investors who spread their risk by investing in a range of projects, rather than backing anyone in particular, so all that she is actually saying is that the Government is going to become a member of some of those private equity syndicates.

Meanwhile, Ed Miliband’s GB Energy project is just another private equity fund that is, again, looking to put together a range of private equity investors who might, between them, invest in the sustainability of the UK economy. To pretend that this will result in any additional energy-generating capacity being directly owned by the UK Government or that GB Energy might ever, in practice, sell any of the energy that it is supposedly going to help create is farcical. All that this £8.3bn operation will be is an investment fund that might, and might just as easily not, generate profit for the Government over time.

Reeves and Miliband have, therefore, fallen for the myth because the reality is that private equity is, like a great deal of what is now sold, something other than what it claims to be.

In reality, private equity is a financial services activity that was once known as asset stripping. What the private equity capitalist really does is look for a business they that they think is undervalued. They then offer that business funding with the intention that its management should, as a consequence, be obliged to create significant financial returns over a relatively short period of time, at the end of which one of two options usually exists.

The first is that some are all of the business will be sold. That sale might be on a stock exchange, but it is much more likely in most cases that some or all parts of the business will be sold out of it to make a significant profit for the private equity operator, who has, under the terms of their funding, the right to demand that this happens.

Alternatively, if it becomes apparent that the management are not going to succeed in delivering this plan, then the private equity capitalist usually has the option of taking the business over and selling it anyway, but in that case for their sole gain. This is a business in which the private equity operator rarely loses as a result.

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In the meantime, under the quite bizarre rules of accounting that now exist for such operations, the private equity capitalist is able to report profits on their activities by simply revaluing the investments that they have made to reflect what they claim to be the increase in their value that they have created, whether or not they can prove that increase in value actually exists. This lets them represent their activities in ways that can be quite misleading but which are entirely within all the rules that currently exist.

What is the consequence of this? It is not that value is added in a business. It is that the business is used as a tool by the private equity investor as an opportunity for speculation out of which they can extract profit, whether or not anybody else benefits as a consequence.

No private equity capitalist has ever acted benevolently. They really do not care about the people who created the companies in which they invest. Nor do they care about the companies themselves, which, in most cases, will cease to exist in the form in which they were created as a consequence of the private equity capitalist’s involvement. Nor do they care about the wider returns to society from beneficial business activity. All that they care about is getting a financial return as soon as possible. To pretend otherwise is ludicrous.

In that case, why should pension funds – and most especially local authority pensions funds – be investing in private equity, which is what Rachel Reeves seems to think they should be doing? Private equity does not create the long-term value that pensions require. Instead, it is all about short-term profits, which often destroy that long-term value.

Similarly, why should a National Wealth Fund or GB Energy want to partake in this speculative activity, whose only goal is the making of money and not the creation of long-term wealth or sustainability in the energy sector? I wish I knew the answer to that, but the only one that I can offer is that private equity capitalists have money, and politicians are always seduced by that because they are desperate to fund their next election campaign.

Giving these people too much influence undermines our democracy since a process that lets money and not people speak isn’t democracy at all. We have already seen the consequences. Rachel Reeves has already backed down from taxing private equity appropriately, and she is now loosening financial services industry regulation to give it free rein in the UK economy, at a cost to everyone, not least to the people of Scotland. This will end in tears.