The Financial Services Regulation Committee has published a report following its inquiry into the growth of private markets in the UK. Private markets, mainly in the form of private equity funds and private credit funds currently account for around $185bn assets under management in the UK. Since the 2008 crisis, these markets have provided strong returns and provided finance in situations where banks have become less willing to lend, although it is still a small provider of corporate debt in the UK relative to banks.
The inquiry noted that banks have over the years reduced lending to UK companies, particularly to SMEs, relative to non-banks and other lenders, and rely increasingly on an “originate to distribute” model of lending, in which private credit plays a key role. The SME finance market is difficult, because of both changes to bank capital requirements and because private credit hasn’t entered the market.
Of late, there have been concerns that, because private markets are not regulated in the same way as banks, lending standards may be weakened – as exemplified by two recent high-profile failures in the US.
Overall, the Committee has concluded that there are too many unknown unknowns to allow effective assessment of whether private markets pose a systemic risk to the UK’s financial stability. It could not obtain information it repeatedly asked for, which would have helped it to form firmer views.
To improve the market for SME finance, it recommends addressing the current constraints on smaller and specialist banks’ ability to lend.
The Committee is concerned at the potential risks to the UK’s financial stability of the growth in collateralised loan obligations and significant risk transfers – and at the apparently passivity of HM Treasury about the concerns the Committee has raised with it.