LONDON, Dec 4 (Reuters) – The Bank of England said on Thursday that it was launching a stress test of how the $16 trillion global private equity and private credit industries would deal with a major financial shock.
The central bank said the system-wide exploratory scenario will produce a final report in early 2027 which will focus on the impact on the British economy as a whole, rather than publishing details on the vulnerabilities of individual firms.
“Private equity and private credit play an increasingly valuable role in helping UK companies to innovate, invest and grow. To keep delivering those benefits, we need a robust understanding of how risks might flow through the financial system in a stress,” BoE Deputy Governor Sarah Breeden said.
Companies backed by private equity employed more than 2 million people in Britain, the BoE said.
Unlike the BoE’s regular stress tests of Britain’s banking system, the central bank cannot compel the participation of all financial firms as it does not directly regulate investment funds or private equity companies, which are often headquartered overseas.
FOCUS ON INVESTMENT IN LARGE UK BUSINESSES
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 details of the test have not been decided, but it will be carried out in two stages to allow financial firms to tell the BoE how they would respond to other companies’ actions in a crisis.
The test will focus on investment in large British businesses and how the investors finance themselves and any wider spillover to financial markets. It will not focus on venture capital for smaller firms or commercial real estate.
Some of the alternative asset managers taking part include Apollo Global Management (APO.N), opens new tab, Bain Capital, Blackstone (BX.N), opens new tab, Carlyle (CG.O), opens new tab, CVC Credit Partners (CVC.AS), opens new tab, Goldman Sachs Asset Management (GS.N), opens new tab, KKR (KKR.N), opens new tab and Permira.
On Tuesday, the BoE said in its half-yearly Financial Stability Report that although private markets had proven resilient so far, they had grown in size and had not been tested for their resilience to a big economic shock.
BoE Governor Andrew Bailey said in October that the collapse of two big U.S. companies, car parts maker First Brands and auto dealership and lender Tricolor, might be a warning of bigger problems to come.
On Tuesday, the BoE said these collapses showed how “high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies” could bite both banks and credit markets.
As Financial Stability Board Chair, Bailey has also stressed the impact of private credit on financial stability as a key area of focus for the Group of 20 leading economies’ financial risk watchdog.
“This will be an important part of the FSB’s surveillance work in the year ahead,” he said in a November letter to G20 leaders.
The BoE has promised to share the findings of its private market stress test with international policymakers.
Reporting by David Milliken and Phoebe Seers; Editing by William James and Emelia Sithole-Matarise
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Source: Reuters