UK private credit stress tests: what they mean for private markets managers
The Bank of England has launched a system wide stress test of private credit, with major firms such as Blackstone, Apollo, KKR, Ares and CVC participating. The exercise is designed to examine how private lending structures would cope with a severe shock and what that means for wider financial stability.
For UK and European private markets managers, this is a clear signal that private credit risk is now firmly on the regulatory agenda. The results will shape how supervisors, banks and investors look at leverage, liquidity and governance across private markets.
Why this matters
Private credit is deeply intertwined with private equity and venture backed businesses. Financing structures influence valuations, covenants, exit options and downside protection. A stress test focused on this market will influence:
Bank appetite to provide subscription lines and portfolio level financing
LP questions about downside risk in leveraged strategies
Expectations on how managers monitor covenant headroom and liquidity
The way regulators assess systemic risk in non bank finance
Managers who understand the direction of travel will be better placed to respond to new expectations.
What is driving the focus on private credit
Several dynamics are behind the attention on private credit:
Rapid growth of private lending as banks pull back from some forms of corporate credit
Use of leverage, complex structures and tranching that can obscure where risk ultimately sits
Concerns about how portfolios would behave in a sharp rates, defaults or liquidity shock
Increased overlap between banks, funds and other non bank institutions through financing chains
The stress test is intended to shed light on how losses and liquidity strains might transmit through this network.
Where risk and opportunity sit for PE and VC managers
For private equity and venture capital managers, the focus on private credit is not just about lenders. Key areas to consider include:
Financing terms at portfolio company level, including covenants, maturities and refi risk
Use of fund level leverage, such as subscription and NAV facilities
Reliance on private credit funds as exit routes or bridge solutions
How downside scenarios are reflected in valuations and fundraising narratives
Stronger visibility on these points can improve conversations with investors and lenders, especially if the stress test highlights vulnerabilities.
Risks and controls to get right
The stress test underlines several themes that private markets managers should address:
Clear mapping of leverage across funds, portfolio companies and holding structures
Regular monitoring of covenant headroom and maturity profiles under different scenarios
Consistent documentation of how financing assumptions feed into valuations
Defined escalation paths when financing terms tighten or liquidity pressures emerge
Evidence that board and investment committees are engaging with these issues
These controls help demonstrate that leverage is understood and managed rather than treated as a static background variable.
KPIs to track
Useful metrics in this context include:
Proportion of portfolio companies relying on floating rate private credit facilities
Weighted average debt maturity and percentage of near term refinancings
Covenant headroom levels across key facilities
Share of fund NAV exposed to higher risk financing structures
Time needed to produce a consolidated view of leverage across funds and portfolios
Tracking these KPIs supports more informed discussions with LPs, lenders and regulators.
Takeaway
The Bank of England stress test marks a shift in how private credit is viewed within the financial system. For private markets managers, it is a prompt to sharpen understanding of leverage, liquidity and financing risk across funds and portfolio companies. Firms that can explain their exposures clearly and show robust governance around them will be better positioned as scrutiny of private credit continues to increase.