London, UK – The Bank of England (BoE) announced on Thursday that it is launching a comprehensive stress test of the private equity and private credit industries to evaluate their resilience to potential financial shocks. The central bank emphasized that the exercise will focus on system-wide impacts for the British economy, rather than disclosing vulnerabilities of individual firms.

The exploratory stress test, expected to produce a final report in early 2027, aims to examine how alternative asset managers in private markets would respond under adverse economic conditions. Participation includes a range of major global private equity and private credit firms, reflecting the growing importance of these markets in financing large British businesses.

Context: Private Market Growth and Risk

While the BoE’s half-yearly Financial Stability Report noted that private markets have remained resilient, it also highlighted concerns over their size, leverage, and limited stress testing. BoE Deputy Governor Sarah Breeden said:

“A range of alternative asset managers that are active in private markets, including major global players, have agreed to participate in this exercise.”

BoE Governor Andrew Bailey previously pointed to recent collapses in the U.S., including First Brands, a car parts manufacturer, and Tricolor, an auto dealership and lender, as potential warnings. These incidents underscore the risks posed by high leverage, weak underwriting standards, opaque structures, and over-reliance on credit rating agencies, which can affect both credit markets and banks.

Importance of Private Equity and Private Credit

Private equity firms and other related lenders play a crucial role in financing large businesses across the UK, providing capital for growth, restructuring, and strategic acquisitions. The BoE’s stress test is designed to assess how these sectors would perform under scenarios such as economic downturns, market shocks, or liquidity crises, helping regulators identify potential vulnerabilities and enhance financial system stability.

The stress test also reflects the central bank’s broader effort to monitor systemic risks arising from alternative finance sectors, which have expanded rapidly in recent years but remain relatively untested under severe economic stress.