The Bank of England’s private markets system-wide exploratory scenario exercise

Background and objectives

The role and size of private markets have grown significantly over the past decade, including in the UK, and continue to evolve.

Total assets under management within private market funds have reached around $16 trillion globally, and within that global PE and PC have grown from $3 trillion to around $11 trillion over the past decade. Term financing of corporates that are PE-owned or non-investment grade is now dominated by large AAMs and other NBFIs. Many AAMs and other NBFIs aim to expand the range of financing they provide, in terms of products offered and types of corporates to which they lend. To support this, they are increasing the range of capital they can deploy – such as insurance premiums and accessing retail funds – and raising debt at the fund level. These may result in further growth in the role of private markets in financing the UK real economy and their importance to the financial sector.

Private markets already finance a material share of the UK real economy and have the potential to support its long-term growth. PE-sponsored corporates account for up to 15% of total UK corporate debt and 10% of UK private sector employment (representing more than two million jobs). These corporates are predominantly financed via alternative lines of credit (comprising private credit, leveraged loans and high-yield bonds), which comprise more than 80% of their debt, compared with only 30% of debt for the UK corporate sector at large. Private markets provide long-term capital that helps businesses scale, innovate, and invest in productivity-enhancing initiatives. An active ownership model of private equity can provide greater flexibility and hands-on support that can support companies’ growth and create long-term value. As set out in the June 2024 Financial Stability Report, from a macroprudential perspective, the long-term nature of private market funding – including due to the closed-ended nature of many private market funds – allows and incentivises fund managers to act less cyclically, which can reduce the volatility of financing flows during macroeconomic downturns.

However, the resilience of private markets in their current composition to a prolonged economic downturn and the implications of this for the UK real economy have been largely untested so far.

The rapid growth of private markets, interconnections with banks, insurers and leveraged finance markets, as well as potential vulnerabilities related to use of leverage (both by private market funds and their portfolio companies) and the extent of reliance on credit rating agencies, have the potential to amplify economic and financial shocks. And as the FCA’s private market valuations review highlighted,^{footnote [1]} while there are many examples of good practice in firms' valuation processes (eg quality of reporting to investors, using third-party advisors), these processes can necessarily involve significant judgement, including in periods of market stress. While the FPC and other international authorities currently monitor private markets, further work is needed to address data gaps that limit the ability of authorities to understand how the private markets ecosystem as a whole might operate following an economic shock, and how any stress may transmit to or from private markets, interact with the wider financial system and impact financing to the UK real economy.

In light of these factors, the Bank has launched a SWES exercise focused on the private markets ecosystem that will be run in collaboration with a group of banks and NBFIs that are active in these markets.

The aims of the exercise are to:

1. explore potential risks and dynamics associated with private market finance through understanding the actions taken by banks and NBFIs active in private markets in response to a shock and how these actions may interact at a system level; and
2. understand whether these interactions can amplify stress across the financial system and pose risks to UK financial stability and the provision of finance to the UK real economy.

The SWES is the second exercise of its kind and will build on our experience from the first exercise. In particular, it will be run in close collaboration with participating firms and will bring together data and information from various parts of the private markets ecosystem to develop system-wide (and sector-specific) insights, thereby accounting for interactions and amplification effects within the UK financial system that individual financial institutions working alone cannot assess. The Bank will share emerging thinking on design with participants and seek feedback on conclusions throughout, as well as the interim and final reports. This will help ensure that the exercise is rigorous and insightful for firms and regulators, while minimising the burden on participating firms.

The exercise is not a test of the resilience of the individual firms that will participate in the exercise. Its focus is system-wide, exploring the resilience of the provision of private market and related public market finance to the UK corporate sector.

The exercise will be exploratory, aiming to understand how the private markets ecosystem is changing and whether (and if so, at what point) systemic risks or system-wide dynamics may arise. Enhancing the transparency of any system-wide dynamics in a stress should help private market participants to better manage the risks they may face and allow the Bank, FCA, TPR and international authorities make better-informed judgements on the risks in private markets.

Scope and design

Though private markets encompass a broad ecosystem, this exercise will focus primarily on exploring the resilience of the provision of private market finance to the UK corporate sector. Specific asset classes that will be the focus of the exercise include:

• PE funds investing in UK corporates;
• credit supporting these PE-sponsored corporates, including PC funds and substitutable products such as leveraged loans and high-yield bonds; and
• PC funds lending to investment-grade or non-PE-owned corporates.

This exercise will not focus on venture capital, growth equity or commercial real estate. Figure 1 provides a simplified illustration of the private markets ecosystem that will be in the scope of the SWES.

Figure 1: Illustration of the private markets ecosystem in scope of SWES

The exercise will improve our understanding of key actors in the private markets ecosystem and their actions under stress. It will allow us to explore potential vulnerabilities and whether and how these may transmit across (as well as beyond) the ecosystem to pose systemic risks.

Key actors include institutional investors, or limited partners (such as insurers, pension funds, endowments and foundations) that provide the capital supporting PE and PC funds and invest in debt assets issued by PE-sponsored corporates, directly and indirectly via funds run by asset managers (traditional and alternative). AAMs operate PE and PC funds, making investment decisions and often managing collateralised loan obligations (CLOs). Alongside these, the corporate financing markets in the scope of this exercise are leveraged finance markets – comprising leveraged loans, CLOs and high-yield bonds – which are key sources of financing for PE-sponsored corporates. Furthermore, banks provide leverage directly to PE-sponsored corporates and indirectly via funds. The behavioural responses of these financial market actors can have real economy impacts most directly by constraining credit supply to corporates directly exposed to private markets, which may in turn result in triggering defaults or reducing employment.

Given the growth and developments in private markets, the SWES exercise will provide insights into how the UK private and related public credit markets function during stress and the potential consequences for the UK real economy. It will aim to explore the following key questions:

1. What is the impact of a global downturn on UK private markets assets originated by alternative asset managers?
– How are these managed during a stress?
– What is the impact on UK corporates (eg in terms of investment and employment)?
 
2. How do the allocations of institutional investors to private markets and the willingness of banks to provide financing change during a downturn?
– What may cause them to reduce capital provided or not support forbearing during a stress?
 
3. To what extent are related and potentially substitutable corporate financing markets (leveraged loans, CLO and high-yield bond markets) likely to function during a stress?
– Do they act as shock absorbers or transmitters of risk to other financing markets?

To inform these objectives, we will ask participating asset managers, institutional investors and banks active in UK private and related public markets to assess the impact of a prolonged global economic downturn on their portfolios, and any actions taken in response.

Similar to the first SWES exercise, we plan to run the stress scenario phase over two rounds, to ensure robust insights and analysis of key sensitivities.

We will ask selected participants (firms across asset managers, banks and institutional investors) to model the impact of the prolonged macroeconomic shock on their portfolios and their intended actions over the stress period. Once they have conducted their analysis and submitted their responses, these will be analysed and aggregated to assess the functioning of the private and public markets in scope and the availability of financing to the UK real economy. We will then discuss interim findings with, and provide feedback to, participating firms. We will allow them to adjust their responses, based on the behaviours of counterparties or the expected evolution of events under stress stemming from the collective actions of participating firms. A two-round structure will help us explore any feedback and amplification effects, as well as carry out sensitivity analysis on key aspects of the exercise.

The Bank plans to launch the stress scenario phase of the SWES exercise in early 2026.

We are currently running an information-gathering phase to address some key information gaps on the private markets ecosystem, including the AAM sector. This will inform the design of the stress scenario, such as its shape and severity, as well as help ensure the exercise explores and triggers most important dynamics that could potentially occur in private markets during a downturn, thereby providing valuable insights for both participating firms and authorities. It will also help ensure the exercise is proportionate for participating firms.

Participating firms

Participating firms in this exercise will cover key players in the private markets ecosystem, in particular AAMs, large banks providing credit to both private market funds and PE-sponsored corporates, and institutional investors that are the primary providers of capital to private and related public markets, both directly and indirectly via allocations to alternative and traditional asset managers. This reflects the wide range of institutions engaged in private market finance.

A range of AAMs that are active in private markets, particularly in the UK, have agreed to participate in this exercise. These AAMs cover a variety of business models and investment strategies, reflecting the diversity in the sector. The AAMs participating in the exercise collectively account for around one third of UK PE leveraged buyout activity, around half of UK and global PC activity to the corporate sector and around 40% of employment in UK PE-sponsored corporates over the past three years. Refer to Table A below for a list of participating AAMs.

Table A: List of AAMs participating in the exercise ^(a)

As we continue our engagement with key financial institutions active in the private markets ecosystem, we will in due course update this webpage with names of firms participating in the exercise. We will also draw on insights from our information-gathering phase to identify additional market participants that the exercise would benefit from, to contribute further perspectives.

Results and publications

We anticipate the scenario phase and firms’ active involvement in the SWES exercise to be completed in 2026, with the Bank finalising the results and publishing a final report to conclude the exercise in early 2027.

This will share aggregated system-wide findings (as well as sector-specific findings where possible), their implications for the UK corporate financing markets in scope of the exercise, and any conclusions for our assessment of risks to UK financial stability and the UK real economy. We will share findings more widely, including with other policymakers both domestically and internationally. Published materials will not provide information on individual firms or any commercially sensitive information. We also expect to publish an update over the course of 2026.