In brief
UK and global regulators are intensifying their focus on private markets, as interconnections with the wider financial system continue to increase. The Bank of England’s recently announced private markets system‑wide stress test, alongside heightened supervisory work by the Financial Conduct Authority (FCA) and international bodies, signals closer scrutiny of valuation practices, risk management, governance and data challenges across the sector. Firms active in private markets should consider how these developments could affect supervisory engagement, including their ability to explain and evidence existing governance, valuation and risk frameworks and their approach to stress scenarios.
In more detail
Growing regulatory concerns
UK regulators have expressed caution for some time around the rapid and significant growth of private markets over the last decade, which currently stands at USD 16 trillion assets under management (AUM) globally (of which private equity (PE) and private credit (PC) comprise USD 11 trillion).1 Whilst the resulting funding diversification and active ownership models have helped to support economic growth, financial system interconnections and material data gaps (such as data around repurchase financing) have made it more difficult to holistically assess systemic risks. Recent US bankruptcies of PC and trade finance borrowers have highlighted areas of possible weakness in the resilience of private markets and spillover risk to the banking sector (through, for example, credit exposure).2 There are also potential systemic vulnerabilities related to the increasing use of leverage by both private fund markets as well as portfolio companies,3 reliance on private ratings from credit rating agencies,4 and the interconnectedness of private markets with banks, insurers and leveraged finance markets.5 Valuation challenges in private markets are a supervisory priority for the FCA, which has expressed concern as to how valuations in private markets are conducted and the risks arising from incorrect valuations, which can be exacerbated in periods of market stress. Our previous alerts on the FCA’s Supervisory Strategy for the asset management sector and multi-firm review of private market valuation practices explain the FCA’s approach in more detail.
Most recently, in its March 2026 Regulatory Priorities report for the wholesale buy side sector (which replaces portfolio letters and will be published annually), the FCA continues to focus on continued growth of private markets, which it believes should remain underpinned by good governance and responsible practices. Planned work for 2026 includes:
- Continued engagement with the sector on valuation practices, managing conflicts of interest, and the responsible broadening of retail access to private markets products;
- Completion of a multi-firm review of conflicts of interest in private markets firms;
- Supervisory work on firms’ approaches to risk management in private markets; and
- Supporting international standard-setter workstreams relating to private markets.
The FCA will also engage in further monitoring and engagement around private markets integrity and resilience, particularly in relation to enhancing fund liquidity risk management and through data-led work to identify outlier firms and funds with high leverage, illiquidity or concentrated investment strategies to ensure appropriate risk management and liquidity management is in place.
The private markets system-wide exploratory scenario (SWES)
The UK regulators have set private markets in their sights more generally from a systemic risk perspective. In December 2025 the Bank of England announced the launch of its second SWES exercise focused on the private markets ecosystem. The stress test scenario phase of the SWES is expected to launch in early 2026, with findings anticipated in early 2027.
The private markets SWES will be run in collaboration with a group of banks and non-bank financial institutions (NBFIs) active in private markets. Key participants will include alternative asset managers (AAMs) that manage PE and PC funds; large banks that provide credit to both private market funds and PE-sponsored corporates; and institutional investors (such as insurers, pension funds, endowments and foundations) that participate in private markets and related public markets. The exercise aims to explore the following key questions:
- What is the impact of a global downturn on UK private markets assets originated by alternative asset managers?
- 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 related and potentially substitutable corporate financing markets (leveraged loans, collateralised loan obligations and high-yield bond markets) likely to function during a stress?
A number of major names in the private markets sector have agreed to participate. The Bank of England intends to share only aggregate system-wide findings when it publishes its final report in early 2027; individual firm results will not be published.
Global focus
The increasing supervisory attention on private markets and their impact on financial stability is not limited to the focus they are currently receiving from UK regulators. In the EU, the European Central Bank has noted that the growing interconnections and “cross-sector linkages” between banks and NBFIs can “create channels through which shocks can be transmitted, amplified and redistributed across the financial system”.6 It is understood that the EU is planning to undertake a similar private markets stress test exercise in 2026, though precise details have yet to be made public. At the global level, the International Monetary Fund (IMF) has expressed concerns about increasing financial system vulnerabilities, due in part to malfunctioning private credit valuation models and heightened interconnectedness between banks and NBFIs.7 Similarly, the Basel Committee on Banking Supervision (BCBS) has recently highlighted the need to increase resilience in the NBFI sector and better understand the interlinkages and spillover effects between banks and NBFIs.8 The Financial Stability Board (FSB) has also published a workplan to address nonbank data challenges,9 and is undertaking a deep dive on private credit to which the FCA is contributing.10
Going forward
It is clear that, as NBFIs and private markets gain an ever increasing share of financial sector assets, regulators will continue to scrutinise the sector. While the private markets have been less robustly regulated than banks and major investment firms, there are increasing calls to ensure that this less robust regulation does not put financial stability at risk, and we may see movement from the regulators to tighten supervision. Private market sector participants should ensure they have considered the FCA’s Regulatory Priorities report to prepare for supervisory engagement over the next year, and should review the findings of the SWES when published by the Bank of England to evaluate any relevant internal action points.
1 See the Bank of England’s private markets system-wide exploratory scenario exercise launch (updated 2 April 2026).
2 See, for example, the House of Lords Financial Services Regulation Committee report ‘Private markets: Unknown unknowns’ (9 January 2026).
3 As the FSB explains in its Final Report on Leverage in Nonbank Financial Intermediation (9 July 2025), systemic vulnerabilities relating to the use of leverage could arise from cascading shocks through, for instance, asset price depression arising from unexpected liquidity demands on leveraged positions from collateral or margin calls, or through the default or distress of leveraged entities leading to counterparty shock.
4 Private credit ratings are subject to limited compliance obligations and minimal transparency regarding methodologies. As the IMF explains in its Global Financial Stability Report, October 2025 (October 2025), systemic vulnerabilities relating to the use of private credit rating could arise through, for example, the risk of inflated ratings misclassifying below-investment-grade instruments into the investment-grade bucket which could result in default losses significantly exceeding those expected during an economic shock and consequent capital erosion and liquidity gaps because of insufficient cash flow from the defaulted entities.
5 See the Bank of England’s private markets system-wide exploratory scenario exercise launch (updated 2 April 2026).
6 ECB Supervision Blog, “Hidden leverage and blind spots: addressing banks’ exposures to private market funds” (3 June 2025).
7 IMF Global Financial Stability Report, October 2025 (October 2025).
8 BCBS horizon scanning report: Banks' interconnections with non-bank financial intermediaries (10 July 2025).
9 FSB Workplan to Address Nonbank Data Challenges (9 July 2025).
10 As confirmed in the FCA’s Regulatory Priorities report for the wholesale buy side sector.