Private markets

Background

The amount of capital deployed in private markets,¹ including private equity and private credit, has grown substantially over the last 20 years. Current estimates put assets at over $15 trillion globally.² A recent forecast projected global private credit assets under management alone to increase from ~$2.3 to ~$4.5 trillion by 2030.³ This expansion is inevitably attracting increasing supervisory and regulatory focus, mirroring the broader and ongoing scrutiny of market-based finance and non-bank financial institutions (NBFIs), including hedge funds, money market funds and insurers.

None of this will surprise those familiar with the extensive material that global standard setters, especially the Financial Stability Board (FSB), and many national regulators and supervisors, including the Bank of England (BoE), Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and European Central Bank (ECB), have published on private markets and NBFIs. Yet, many countries have been slow to translate global standards and good practices into national regulations and rules. We do not expect this to change in 2026, absent an event significant enough to require both swift tactical interventions and a concerted global response.

Nonetheless, we do expect 2026 to be different. Financial services firms that are active in and/or exposed to private markets should be ready for an increase in supervisory activity. More importantly, boards and senior management teams need to set their appetite for private market risks at the right level and put in place effective systems and controls to operate within it.

Supervisory priorities for 2026 – what will be different and why?

Many supervisory concerns about NBFIs and private markets are longstanding; some date back to the Financial Stability Forum’s (the FSB’s predecessor) report on highly leveraged institutions published in 2000.⁴ These concerns include leverage, counterparty credit risk management, concentration risk, interconnectedness with the wider financial system, and data limitations hindering supervisors’ ability to identify and measure risks. Although the precise nature of these concerns will continue to evolve, they remain relevant – a “supervisory constant”.

Another key (and growing) concern for regulators is that private markets are untested in stress. To that end, a key development in 2026 is the BoE’s system-wide exploratory scenario (SWES), which will explore whether the actions taken by banks and NBFIs in response to a global macroeconomic downturn scenario can amplify stress across the system and pose risks to financial stability.

We also expect two new developments in relation to private markets to drive increased supervisory activity in 2026. First, governments both need and want private markets to support their economic growth objectives. This includes efforts to “democratise” markets, making private assets more accessible to pension funds and retail investors. 

Unsurprisingly, most regulatory statements about private markets and private assets now start by striking a careful balance, to acknowledge the benefits they bring as well as the risks.⁵ But if governments want private markets to continue to play a key role, they (and their regulators) also need to ensure that the risks they pose are properly identified and controlled, with due regard to investor protection [see the investment management & wealth op-ed for further details]. Any significant missteps could undermine confidence in these markets.⁶

Second, two recent US corporate defaults have drawn attention to private markets and, in particular, private credit. These incidents raised questions about weak underwriting standards on the part of those that financed the corporates, the use of collateralised loan obligations (CLOs) and other asset-backed securities in funding structures, high leverage and complicated corporate structures, as well as concerns about possible fraud. Although the initial market reaction was to treat these defaults as idiosyncratic events, we expect supervisors will undoubtedly look for signs of system-wide weaknesses.⁷

These defaults summon up memories of some of the conditions and weaknesses that contributed to the Great Financial Crisis (GFC). In a similar vein, some supervisors have raised questions about:

• The effective removal of (private) credit risks from banks’ balance sheets, for example when banks lend to the same NBFIs, including private credit vehicles, that are also providing credit insurance; and
• The role of (secondary) ratings agencies in rating private assets, and the increased use of confidential rating assessments in the form of Private Letter Ratings and credit opinions. This raises the concern that firms may over-rely on ratings at the expense of their own due diligence and rigorous underwriting standards.

While there may well be significant differences between these current developments and those that preceded the GFC, we do not expect supervisors to give firms the benefit of the doubt. On the contrary, they will be keen to demonstrate that they can remember the past and are not condemned to repeat it.
 

What firms can expect from supervisory scrutiny of their involvement in private markets in 2026

Supervisory oversight of private markets operates on two distinct, yet complementary, levels: micro-prudential, focusing on individual firms' exposure management, and macro-prudential, assessing how private markets may affect systemic stability in the UK. This year, the BoE’s SWES will serve as the key macro-prudential exercise, specifically focusing on private markets. It will explore the risks and dynamics of actions taken by banks and NBFIs in response to a shock, how these actions may interact at the system level and whether they can amplify stress across the system and pose risks to financial stability.

Although the SWES will not test the resilience of individual firms, the concerns driving the SWES (and the results) will also shape the priorities of the micro-prudential supervisors – the PRA and FCA, with the latter also addressing conduct risks. Within the micro-prudential context, we see two supervisory priorities that will apply across all sectors. 

First, firms can expect supervisory scrutiny of their ability to identify, quantify and aggregate their direct and indirect private market exposures, regardless of their involvement in the SWES. Supervisors are not yet convinced that firms can do this effectively, given persistent challenges in monitoring exposures comprehensively across debtors, instrument types, business lines and legal entities. Boards and senior management also have a strong incentive to fix any data gaps, given that understanding the nature and extent of their firm’s exposure is a prerequisite for effective risk management and governance.

The second supervisory priority that cuts across sectors is valuations: specifically, the accuracy and frequency with which firms can (re)value positions in private credit or equity funds, CLOs, collateralised fund obligations, private placements or other private assets. The FCA has already reviewed valuation practices across a sample of private markets firms [see the investment management & wealth op-ed for further details]. 

However, valuation considerations extend to many other private market participants. These include banks and insurance companies that hold private assets on their balance sheets or take them as collateral, and investment managers or advisory firms planning to offer private assets to retail customers.

Beyond these cross-sector themes, we also expect micro-prudential supervisors to focus on several sector-specific issues.

The BoE’s SWES will include key firms active in private markets, including traditional and alternative asset managers. This will put a spotlight on their stress testing capabilities, including the maturity of their models, data quality, scenario design and analysis and aggregation and reporting. In time, we expect supervisors to extend their interest in stress testing to other firms. More generally, and as signalled by the FCA, we expect supervisors to ask private markets firms for more data to inform their risk assessment. Our investment management & wealth op-ed gives our view of broader supervisory priorities for private markets.

Banks should prepare for continuing supervisory scrutiny of their approach to counterparty credit risk management, building on prior work done by the PRA and ECB. In addition, we expect more work on banks’ direct and indirect exposures to private credit, given the extent to which private credit firms and funds rely on banks for their own financing.⁸

There are also at least two liquidity and funding angles. First, NBFIs provide funding to banks; for example, NBFIs are net lenders to euro banks.⁹ This raises questions about banks' preparedness for significant fund withdrawals should NBFIs face liquidity stresses. Second, banks provide committed facilities to private credit and equity funds, which may call on any undrawn portion when faced with funding needs. Supervisors will look to banks to demonstrate that these risks are fully considered in their liquidity (and credit) stress tests.

The life insurance industry has increased its exposure to private markets in the last five years, both directly and through the use of asset intensive reinsurance (AIR, or FundedRe in the UK). European insurers increased their allocations to illiquid assets from 8% in 2017 to about 15% in 2023.¹⁰ European insurers’ exposure to private credit instruments as at end-2024 was c13% of their total assets.¹¹

We expect these developments to result in continuing supervisory focus on insurers’ use of AIR, their approaches to credit risk management and to valuations [see the life insurance op-ed for further details]. Some supervisors may emulate Belgium and Germany in setting up specialised teams to monitor private credit. Private equity-owned insurers will attract particular supervisory attention, given that they “invest substantially more in illiquid assets, such as private credit, around the world than the average insurer”. ¹²

Final considerations

We expect 2026 to be a testing year for firms active in private markets, amid growing concerns over whether the current market cycle has reached its peak. Opportunities and investor interest will endure but will be accompanied by a sharper focus on the risks and increased supervisory scrutiny. 

In some respects, the slow progress on national adoption of global standards will prompt some supervisors to step up their activity to fill the vacuum, especially given how much private markets business is done on a cross-border basis. Supervisors have been transparent about their concerns. Boards and senior management should address the same issues, as part of their own risk management.