The market report “Private Markets: Unknown Unknowns” published by the Financial Services Regulation Committee of the House of Lords in January highlights the strong growth of private equity and private credit in recent years. It assesses the implications for the financial system and identifies open questions as well as emerging risks. The report is addressed to policymakers, regulators and market participants alike.
Key Findings of the Report
- The private credit segment has seen strong growth since 2008. Volumes have increased steadily in both the EU and the UK. Investors are increasingly allocating capital to loans with fixed coupons and longer maturities.
- Banks are retreating from parts of the corporate lending market due to rising capital requirements. Private credit is increasingly filling this gap.
- Private credit is highly interconnected with the banking and insurance sectors. Banks finance private credit funds, arrange loans and invest in related securitisations (CLOs) or funds. Insurers allocate significant portions of their investment portfolios to private credit.
- The private credit market shows greater volatility in valuation and risk. At the same time, the authorities identify major data and knowledge gaps regarding market size, structures and interconnections, which hinders a clear assessment of risks.
Relevance for the Real Economy
Private credit is no longer a niche topic. The segment now plays an increasingly important role in corporate financing, including for SMEs without direct access to the capital markets. Private credit structures provide companies with fast and flexible liquidity as well as long-term capital. They also offer tailored financing solutions that traditional bank lending can often no longer provide. In this respect, the role of credit platforms is becoming increasingly similar to that of banks. Given the close links with banks and insurers, shocks in times of crisis could therefore spill over into the real economy.
From the perspective of the report’s authors, private credit therefore remains a double-edged sword. While the market supports growth and innovation, it also creates new vulnerabilities. Swift action by policymakers and regulators appears necessary in order to stabilise both existing and emerging funding sources for the real economy.