Global private markets have expanded rapidly over the past decade and a half, prompting renewed scrutiny from policymakers concerned about financial stability and access to finance for smaller businesses.
According to new findings from the House of Lords Financial Services Regulation Committee, assets under management in private markets have risen from less than $4tn in 2008 to around $16tn today, with approximately $185bn now held in the UK.
While the Committee acknowledged that private markets have delivered strong returns for investors and provided tailored funding for UK companies and infrastructure projects, it warned that the speed of this growth and the increasing interconnectedness with banks and insurers could pose emerging risks. The inquiry was launched to examine both the drivers behind this expansion and its potential consequences for the UK’s financial system.
The Committee pointed to post-Global Financial Crisis reforms as a key factor reshaping the lending landscape. Stricter bank capital and liquidity requirements have, as intended, pushed banks away from riskier forms of lending. However, this retreat has also reduced the availability of direct lending to certain parts of the economy, particularly SMEs. In parallel, banks have increasingly adopted an ‘originate to distribute’ model, where loans are packaged and transferred to other investors, with private credit playing an increasingly important role.
Despite the growth of private credit, the Committee noted that it has largely bypassed the SME finance market. Combined with subdued demand for borrowing, this has contributed to a squeeze on SME funding. The report suggested that easing constraints on smaller and specialist banks could help increase the supply of finance to SMEs if demand begins to recover.
A recurring concern throughout the inquiry was the lack of comprehensive data. Although private markets are clearly expanding, the Committee said there is insufficient evidence to determine whether private credit is systemic, leaving regulators facing what it described as significant “unknown unknowns”. It welcomed the Bank of England’s System Wide Exploratory Scenario exercise but stressed that authorities must move quickly and continue proactive monitoring.
The report also highlighted potential risks from the growth of collateralised loan obligations and significant risk transfers within the UK, calling on the Bank of England and the Prudential Regulation Authority to keep these developments under close review. The Committee expressed frustration at its inability to obtain detailed data from regulators, academics and industry bodies, warning this could represent a serious gap in the evidence base used by policymakers.
Concerns were also raised about what the Committee described as apparent passivity from HM Treasury. It reiterated that the Treasury has a responsibility to safeguard financial stability and reduce the risk of taxpayers acting as a backstop to the financial system.
Commenting on the findings, Lord Forsyth of Drumlean, Chairman of the House of Lords Financial Services Regulation Committee, said, “There were too many unknown unknowns to determine whether private markets pose a systemic risk to the UK’s financial stability. Our inquiry sought to shine a light on the implications of the rapid growth of private credit markets.”
He added, “The Bank of England, the Financial Conduct Authority, and the Prudential Regulation Authority are right to be vigilant and to monitor the dramatic growth of private markets and the implications for financial stability.”
Lord Forsyth also pointed to the broader economic impact, saying, “Post-Global Financial Crisis reforms have altered the UK’s lending landscape to the disadvantage of SMEs.”
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