Private credit under the regulatory microscope
the FCA's private market valuations review (March 2025) and its conflicts work; the Bank of England's Financial Stability Reports and Financial Policy Committee commentary on private markets; the Bank of England's private markets system-wide exploratory scenario; and the Financial Stability Board's work on vulnerabilities in private credit.
Two regulators now examine private credit from opposite ends at once. Over a decade the asset class grew alongside private equity from about three trillion dollars to roughly eleven trillion, part of a private markets ecosystem the Bank of England now sizes at around sixteen trillion globally. In the United Kingdom, private-equity-sponsored businesses account for as much as fifteen per cent of corporate debt and around a tenth of private-sector employment. The Financial Conduct Authority has been through how the sector values its assets and manages its conflicts. The Bank of England, through its Financial Policy Committee and a new private markets system-wide exploratory scenario, is testing whether the whole thing would come through a serious stress. The Financial Stability Board has added a warning of its own on private credit vulnerabilities. So a credit manager is now read two ways at once: for how it treats the people whose money it handles, and for whether it could help destabilise the system it sits inside.
Those concerns are now supervisory. Managers that assemble the evidence now will have answers on file when supervision comes.
Read across the speeches and the reports and the official worry about private credit comes down to five linked vulnerabilities. The Bank of England has named each one, and each has a consequence a single firm can act on.
Leverage, and how hard it is to see. The Bank of England’s main worry is how much borrowing runs through the whole structure: at the fund level, in the portfolio companies the funds lend to, and in the financing the funds themselves take from banks. The amount matters, but the bigger problem is visibility, because the borrowing is layered through structures that make total exposure hard to measure. Opacity about leverage is the Bank of England’s specific concern.
Valuation of illiquid assets. Private loans have no market price, so they get marked to model, and the FCA’s review of March 2025 turned up the weaknesses you’d expect in that setting: conflicts that go past fees, thin governance, and independence that was asserted rather than evidenced. For credit specifically, the fear is that loan books get marked optimistically or too slowly, so stress doesn’t reach the NAV until it’s too late to do much about it. Both the FCA and the Bank treat valuation as both a conduct and a stability risk, because stale marks hide problems.
Liquidity mismatch. When private credit is sold in open-ended or evergreen vehicles that let investors redeem, the fund is promising liquidity it doesn’t hold, because the underlying loans can’t be sold quickly at par. The Financial Policy Committee has flagged liquidity mismatch in open-ended funds repeatedly and backed the Financial Stability Board’s recommendations for dealing with it. A credit fund offering monthly redemptions against a book of multi-year loans is the textbook version.
Interconnectedness. Private credit doesn’t stand on its own. It’s tied to the banks that finance the funds and lend alongside them, and to riskier corners of the credit market such as leveraged loans. The Bank has said UK banks’ exposure to private market funds and to highly leveraged sponsor-backed companies is material, measured in the data it gathered for its 2025 capital stress test, and its concern is that trouble in private credit could travel into the banking system, or the other way. Each manager is interconnected with the rest of the system.
Conflicts, and the complexity that hides them. The structures are complicated and the conflicts run right through them: cross-fund lending, related-party arrangements, allocation between vehicles, and the valuation conflicts the FCA has already named. Complexity is a concern in its own right, because it blurs where the risk and the conflict sit.
The Bank of England’s financial-stability language has turned into working supervision through one mechanism: the system-wide exploratory scenario.
The Bank has launched that scenario around private markets and put private credit funds inside it. The scenario is a severe but plausible global shock, a supply and geopolitical disruption tipping into a deep global recession, and it asks firms across private markets to show how they, and the system around them, would behave in it. The Bank has been open about why: private markets have grown to their current size without ever being tested by a broad macroeconomic stress, and the exercise is meant to map the dynamics before a real one arrives. A manager pulled into it has to set out, with data, its leverage, its liquidity, its valuation behaviour and how it connects to its counterparties in a stress.
The FCA’s conduct reviews feed the same picture. The valuation review of March 2025 said its findings would inform the Bank of England’s work on non-bank financial institutions, and the follow-on conflicts review covers the same private markets firms. Abroad, the Financial Stability Board has published a report on vulnerabilities in private credit and the International Monetary Fund has flagged the sector in its financial-stability work. Macro concerns will be put to individual firms. A manager that can answer from its own records is better placed than one meeting the macro story for the first time in supervision.
One thing sharpens all of this, and a credit manager should watch it: private credit is being opened, gradually, to wealth and retail channels. Evergreen and semi-liquid credit vehicles, and structures like the Long-Term Asset Fund built to bring private assets to a wider investor base, change the regulator’s sums, because liquidity mismatch and valuation opacity matter more when the investor is less sophisticated and expects to get money back on demand. A concern the regulators were content to watch while private credit stayed institutional becomes one they are far more likely to act on as it reaches ordinary savers. Moving into the wealth channel raises supervisory attention.
Each of the five concerns has a control that answers it. A manager that has built all five can meet supervisory attention with the evidence already in hand. Several of these controls have their own deep dive.
A consolidated leverage picture. The firm should be able to produce, and put in front of its board, a single view of leverage across the structure: fund-level borrowing, the leverage inside the portfolio companies it lends to, and the financing lines it draws from banks, with the total made visible rather than left implicit in the structures. The UK regime already asks for much of this. Under the onshored AIFMD rules a manager must set and comply with a maximum level of leverage for each fund (FUND 3.7.7 and 3.7.8 [R]), and a substantially leveraged fund, one whose commitment-method exposure runs to more than three times net asset value (FUND 3.4.6), must report its overall leverage and the five largest sources of borrowed cash or securities (FUND 3.4.5). That answers the opacity concern, and under AIFMD II it gets harder for loan-originating funds, with defined leverage caps the firm has to monitor and report.
Valuation governance you can evidence. The firm should mark its loan book through an independent valuation process that meets the standard the FCA set out in March 2025: a valuation function that is functionally independent, methodologies with their rationale and limitations written down, triggers for interim revaluation so stress shows up promptly rather than at the next scheduled cycle, and conflicts mapped and managed. Valuing a private loan book the way the FCA wants it evidenced is a discipline of its own.
Liquidity management that fits the promise to the assets. Where the firm runs open-ended or evergreen credit vehicles, it should choose and operate the right liquidity management tools, line its redemption terms up with the real liquidity of the loan book, and keep a stress-testing file showing it has tested that match under severe conditions. This answers the liquidity-mismatch concern, and it is what the Bank’s worry about open-ended funds comes down to.
A counterparty and interconnectedness map. The firm should know, and be able to describe, where it sits in the network: which banks finance it, which it lends alongside, where its exposures concentrate, and how a stress would move through those links. The point is to manage the risk and, just as much, to be able to tell a supervisor the firm’s own story before the supervisor tells it the system’s, which is the subject of a separate piece on the interconnectedness narrative.
A conflicts file built for a multi-vehicle platform. The firm should keep a conflicts framework aimed at the conflicts a credit platform carries: cross-fund lending, allocation of opportunities and follow-on funding across vehicles, and related-party arrangements, evidenced the way the FCA’s conflicts work expects. Cross-fund lending and allocation are a discipline of their own, with SYSC 10 sitting behind them.
The gap these close is usually mundane. Many firms report leverage vehicle by vehicle but cannot show it consolidated, with look-through, monitored against limits. Most have a valuation policy on the shelf; fewer run independent governance with interim-revaluation triggers and the conflicts written down. The distance between those two states is what a supervisor, or an allocator, tends to probe.
A private credit board can do something useful now: commission the firm-level story that the regulators’ macro story implies. The shape of it is plain. The board should be able to show: consolidated leverage; independent, timely loan valuation; liquidity tested against the asset profile; the firm’s position in the network; and how structural conflicts are managed. A firm that can evidence all five turns a sector-wide concern into a demonstration of its own control. The timing favours moving early: the content barely exists in the market yet, the supervisory exercises are running now rather than in theory, and an allocator’s operational due diligence is starting to ask the same questions, so a manager that builds the narrative early answers the regulator, the macro-prudential authority and the investor from one body of evidence.
Better to answer from records you have already assembled than under questioning.
- Leverage and opacity. Concern: layered, hard-to-see borrowing across funds, portfolio companies and bank financing. Answer: a consolidated leverage view with look-through, monitored against limits and shown to the board.
- Valuation. Concern: optimistic or stale marks on illiquid loans hiding stress. Answer: independent valuation with interim-revaluation triggers and conflicts managed.
- Liquidity mismatch. Concern: redemption promises made against illiquid loans. Answer: liquidity management tools, redemption terms fitted to the assets, and a stress-testing file.
- Interconnectedness. Concern: stress passing between private credit, banks and leveraged loans. Answer: a counterparty and interconnectedness map, and a firm-level account of how stress would transmit.
- Conflicts and complexity. Concern: cross-fund, allocation and related-party conflicts obscured by complicated structures. Answer: a conflicts file built for a multi-vehicle platform.
This insight is provided for general informational purposes only and doesn’t constitute legal, investment, or regulatory advice.