We expect to use Round 1 of the private markets SWES to better understand how banks and non-banks active in private markets would respond to a severe but plausible global downturn, how their actions interact at a system level, and 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. Following Round 1 we will provide participants with aggregated feedback on how other participating firms acted and any implications for the financial system and real economy. Firms will then have the options to update their responses based on this feedback.
Background to the scenario phase of the private markets SWES
Background to the SWES
We have now launched the scenario phase of the SWES and have sent participants a hypothetical stress scenario that details a severe, but plausible, global macro-economic recession over a five-year period.
Participants will be asked to model the impacts of the scenario, including their behavioural actions in response to this stress. Over recent years, private markets have grown significantly, providing a diversified source of finance to the UK economy alongside banks and other lenders.
The private markets 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.
The participants in the exercise span a variety of key actors across the private markets ecosystem, including:
- Institutional investors, or limited partners (such as insurers, pension funds, endowments and foundations) that provide the capital supporting private equity (PE) and private credit (PC) funds and invest in debt assets issued by PE-sponsored corporates, directly and indirectly via funds run by asset managers (traditional and alternative).
- Alternative asset managers who operate PE and PC funds, making investment decisions and often managing collateralised loan obligations (CLOs).
- Banks who provide leverage across the private markets ecosystem, including directly to PE-sponsored corporates and indirectly via funds.
- Asset managers who provide finance via leveraged finance markets (comprising of leveraged loans, CLOs and high-yield bonds), which are key sources of financing for PE-sponsored corporates.
Participants in the exercise will be asked to assess the impact of the scenario on their portfolios and any actions they take in response. Once participants have submitted their responses, the Bank will analyse and aggregate these to assess the functioning of the private markets and related credit markets in scope, and the availability of financing to the UK real economy.
Interim findings will be discussed with participating firms, who will then be allowed 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. The 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. We are grateful to the firms involved for their participation in the exercise.
The private markets SWES will explore the following key questions:
What is the impact of a global downturn on UK private markets assets originated by alternative asset managers and how are they managed in stress?
How do the allocations of institutional investors to private markets and the willingness of banks to provide financing change during a downturn?
To what extent are private credit and related corporate financing markets (syndicated loans, high yield bonds) substitutable during a stress? Do they transmit risk or help to absorb the shock?
And ultimately, what is the impact on UK corporates (eg on investment and employment)?
The private markets SWES hypothetical scenario is not a forecast by the Bank of macroeconomic and financial conditions nor does it represent the Bank’s expectations of the consequences for financial markets of any particular shock. It will allow the Bank to explore the impact of such a shock on banks and non-bank financial institutions active in private markets, and how they behave in response to the hypothetical scenario.
The private markets SWES is a voluntary exercise being run collaboratively with 46 participants active in private markets and related credit markets. These include banks, pension funds, insurers, endowments, liquid credit managers and alternative asset managers. Further details on the objectives of the private markets SWES and its participants can be found on the private markets SWES launch page.
The Bank will share findings from its initial information gathering in the July Financial Stability Report. Interim findings from Round 1 will be shared later in 2026, and the final report in 2027.
Engagement with industry and other regulators
The private markets SWES is being run as a collaborative exercise. We have worked closely with participants, industry experts and regulators to inform the design of the private markets SWES scenario.
The Bank has completed initial information gathering. This will help to address key information gaps on the private markets ecosystem and has informed the design of the scenario.
The information gathering involved 46 firms participating in the SWES. The insights have informed the design of the stress scenario, such as the shape and severity, and helped ensure the scenario explores the most important private market dynamics that could occur during a downturn.
The private markets SWES is a voluntary exercise and firms have been engaged in the design and execution of the exercise. This feedback was helpful in forming the quantitative variable paths and narrative features that make up the final hypothetical scenario.
The Bank is conducting this exploratory exercise under the guidance of the Financial Policy Committee (FPC) and the Prudential Regulation Committee (PRC), supported by the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and The Pensions Regulator (TPR).
The Bank is committed to sharing our aggregate findings with other central banks, regulators and international bodies like the Financial Stability Board to advance understanding of private market developments globally.
Overview of Round 1 of the scenario phase
The private markets SWES scenario has been calibrated to represent a tail-risk outcome for the global economy and is broadly consistent with the severity of other stress tests we have run, such as the Bank Capital Stress Test (BCST). It consists of a severe macrofinancial shock that will allow us to explore the behavioural actions and interactions of participants active in the private markets ecosystem in response to stress.
The private markets SWES scenario is a hypothetical scenario and not a forecast of macroeconomic and financial conditions. The scenario is a tool to allow the Bank to explore the impact of a stylised shock to the private market ecosystem and related credit markets.
Chart 1: When calibrating the private markets SWES hypothetical scenario, Bank staff looked to benchmark against historical crises and past stress tests (a) (b) (c) (d) (e)
Footnotes
- Sources: Bloomberg Finance L.P., ICE BofA Indices, ONS and Bank calculations.
- (a) All variables are specified in annual averages.
- (b) UK GDP recovery is defined as the average annual growth rate of the three years following the GDP trough.
- (c) The ‘leveraged loan price index’ is the Morningstar LSTA US Leveraged Loan price index. The 2025 Bank Capital Stress Test value of this variable is shown as the change to the end of year 1 of that scenario rather than the annual average change.
- (d) Bank Rate shows the peak level for the private markets SWES and 2025 Bank Capital Stress Test and the trough level for the GFC.
- (e) ‘Total GBP HY borrowing costs’ are calculated as the sum of sterling high-yield corporate bond spreads and SONIA 3-year swap rates.
Components of the scenario
The private markets SWES hypothetical scenario is a severe but plausible global supply and geopolitical shock, which leads to a deep global recession. Supply chains are disrupted, particularly for tech hardware components, and energy prices rise sharply. Advanced economies experience a combination of high inflation and falling output, and policy rates increase. Financial conditions tighten sharply, and borrowing costs rise. Weak productivity growth leads to a slow recovery, with financial markets recovering slower than in past crises.
Weak activity and nominal GDP growth lead to a decline in corporate revenues. This happens alongside elevated funding costs and impaired exit markets, which puts pressure on leveraged corporates and the private market ecosystem.
Figure 1: The scenario plays out over a 5-year horizon (a)
Footnotes
- Source: Bank calculations.
- (a) Variables are shown in the following forms: UK CPI inflation, volatility index, Bank Rate and UK unemployment rate as peak levels; UK GDP and FTSE All-Share as start-to-trough falls; leveraged loan spreads as the start-to-peak change; and the UK GDP annual growth as the average of the annual growth rates from year 3 to year 5.
The scenario includes the variable path spreadsheet, providing around 200 quantitative variable paths, and the scenario narrative to add further colour. In addition to these, detailed guidance is provided to participants alongside templates to support participants in applying the scenario and providing their submissions.
Impact of the shock on private markets and participants
The exercise will improve the understanding of key actors in the private markets ecosystem and their actions under stress. It will allow the Bank to explore potential vulnerabilities and whether and how these may transmit across the ecosystem to pose systemic risks.
The FPC have previously highlighted vulnerabilities associated with private markets could arise from the use of leverage, opacity in valuations, and the interconnection with other risky credit markets.
The private markets SWES will assess the extent of the impact of the shock on participants across the ecosystem and how behavioural actions amplify or dampen the shock. Within this, there are some key vulnerabilities the SWES seeks to understand.
Valuations
Infrequent valuations can make it harder for actors across the private market ecosystem to assess risks during a stress, including when comparing to public-market equivalents. While this can help to reduce volatility in returns, it could also result in vulnerabilities arising from sharp and unexpected repricing.
The private market SWES will understand how behaviours around valuation develop during a stress, including any expectation mismatches in valuations between lenders, investors and sponsors.
Funding and liquidity
A prolonged stress can introduce liquidity challenges, particularly for funds approaching maturity, when borrowing needs to be refinanced, or where investor redemptions are possible.
The hypothetical scenario will explore how tools are used to mitigate these impacts and prolong asset life, including fund extensions, continuation funds and extension of loans.
Interconnections
Strong links between private markets, banks and institutional investors, combined with correlated strategies and concentrated exposures, could create knock on effects to or from other sectors.
The private markets SWES will consider the extent to which participants engage in correlated behaviours during a stress.
Credit quality
The hypothetical scenario is expected to generate a deterioration in credit quality, particularly among the most leveraged corporates and those in the hardest-hit sectors.
The private markets SWES will assess how participants manage this deterioration in credit quality, including how less transparency across the market can alter perceptions and behaviours between participants. The exercise will explore any mismatches in expected behaviours between participants.
Systemic transmission channels
The private markets SWES seeks to understand the extent to which these vulnerabilities could lead to systemic implications, and under what conditions.
We will assess this through the three key transmission channels:
- Risks to markets: The SWES will provide insights into how a stress will impact key private market actors and their actions. These will be aggregated to assess functioning at a market level (including potential spillovers to other markets) and at an overall private markets ecosystem level.
- Risks to real economy: The exercise will seek to understand how lenders, PE-sponsors and corporates themselves react to the scenario and the impacts on the corporate sector. SWES aims to understand whether behavioural actions could amplify (or dampen) a market dysfunction and whether financial conditions tighten beyond what is warranted by the scenario, and whether this is macroeconomically significant.
- Risks to institutions: The private markets SWES is not testing individual institution resilience or solvency. But it will assess if and how losses via private markets could prompt behavioural actions by institutions.
Next steps for the private markets SWES
The Bank will share findings from its initial information gathering in the July Financial Stability Report. Interim findings from Round 1 will be shared later in 2026, and the final report in 2027.