The Bank of England (BoE) has announced a system-wide stress test for the global private equity and private credit industries, valued at $16 trillion. The test aims to evaluate how these sectors would respond to a significant financial shock and its potential impact on the broader British economy. The final report is expected in early 2027 and will focus on the overall impact rather than individual firm vulnerabilities. The Bank of England does not directly regulate investment funds or private equity companies, which are often headquartered overseas. The BoE said it had secured participation from firms that make up around a third of Britain’s private-equity leveraged buyout activity, half of private credit in the UK corporate sector and 40% of employment in private equity-funded businesses.
The central bank noted that private equity and private credit are playing an increasingly vital role in supporting UK companies’ innovation, investment, and growth. BoE Deputy Governor Sarah Breeden emphasised the importance of understanding how risks within these sectors might affect the broader financial system during times of stress. Companies backed by private equity employ over two million people in Britain. The stress test will involve two stages, allowing financial firms to demonstrate how they would respond to other companies’ actions during a crisis. The assessment will concentrate on investments in major British businesses, their financing methods, and any potential spillover effects on financial markets, while excluding venture capital for smaller firms and commercial real estate.
Some of the alternative asset managers participating in the stress test include Apollo Global Management, Bain Capital, Blackstone, Carlyle, CVC Credit Partners, Goldman Sachs Asset Management, KKR, and Permira. These firms are prominent players in the private equity and credit markets. The Bank of England had previously highlighted the need for such an assessment in its half-yearly Financial Stability Report, noting the growing size of private markets and the lack of testing for resilience against major economic shocks. The report cited the collapses of First Brands and Tricolor as potential warning signs of underlying vulnerabilities, highlighting the risks associated with high leverage, weak underwriting standards, and complex structures.
Governor Andrew Bailey has also stressed the importance of private credit on financial stability as a key area of focus for the Group of 20 leading economies’ financial risk watchdog. The Bank of England has committed to sharing the findings of its private market stress test with international policymakers, further underscoring the global relevance of its assessment. The Bank of England is the central bank of the United Kingdom and its mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. It is responsible for setting the UK’s monetary policy and regulating banks.
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