Earlier this month, the Bank of England (BoE) announced it would be launching its second System-Wide Exploratory Scenario (SWES), focusing on the private equity (PE) and private credit (PC) markets. This follows the first SWES which looked at the risks in the gilt, gilt repo and sterling bond markets (and was the subject of two previous Insights, which can be found here and here).
As the name suggests, private markets involve trading in securities, assets, and other investments that are not available on public markets (i.e. a listed stock exchange) or from lenders such as banks.
Growth in the PE and PC sectors has been significant. From the early days of venture capital in the 1940s to the 1980s leverage buyout era, then rapid growth following the Global Financial Crisis, to currently where assets under management in private management funds total some US$16 trillion globally.
Over the last decade alone, private equity and private credit have grown from around $3 trillion to $11 trillion, and they now play a major role in financing companies around the world, including here in the UK. The BoE notes that private equity-sponsored businesses account for around 15% of total corporate debt and 10% of private sector employment, totalling around 2 million jobs.
The sector’s rapid growth together with its perceived lack of transparency have sparked concerns that it poses a major risk to the global financial system. The sector, and potential signs of stress within it, was brought to into sharp focus a couple of months ago with the bankruptcy US companies First Brands and Tricolor Holdings. Both companies had also received financing from Wall Street banks, causing fears that wider financial institutions could be put at risk due to their exposures to non-bank lenders.
These interconnections and significant gaps in data are among the reasons cited by the BoE as making it very difficult to properly assess the potential systemic risks, including the potential vulnerabilities from the use of leverage, valuation challenges, and the reliance on credit ratings.
As with the first SWES, the scenario is not a pass/fail and will not report on the vulnerability of individual firms but instead will look at the impact on the British economy as a whole. Key sectors include alternative asset managers managing PE/PC funds, large banks which provide credit to funds and PE-sponsored firms, and institutional investors such as insurance companies and pension funds.
The scope of the exercise will focus primarily on the provision of private finance to the UK corporate sector, including PE funds investing in UK companies, the credit supporting these companies, and PC funds lending to investment-grade or non-PE-owned corporates. The exercise will not focus on venture capital, growth equity, or commercial real estate.
Some of the firms already participating in the exercise include some of the largest names in the sector, Apollo Global Management, Bain Capital, Blackstone, Carlyle, Goldman Sachs Asset Management, KKR and Permira.
The work will start in 2026, and the final report planned to be published in 2027. Two rounds of the SWES are planned so that the Bank of England can explore feedback loops and amplification by updating firms’ and others’ behaviours and consequences. The work will be conducted alongside the Financial Policy Committee and the Prudential Regulation Authority, and the BoE states that it is committed to sharing its findings with other central banks, regulators and international bodies in order to improve the general understanding of private markets and their developments globally.
While many of our clients continue to borrow from the ‘traditional’ lenders in their respective sectors, the increasing size of private markets opens up opportunities for potentially more competitive and more flexible borrowing, but as ever the key is understanding the pros and cons before proceeding.
For any readers wanting to find out more about how our services can help, please get in touch at info@arlingclose.com.
17/12/2025
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