The Bank of England (BoE) faces a delicate balancing act when publishing the findings of its inaugural private credit stress test, with industry figures warning that a poorly communicated outcome could risk dampening the growth of the asset class.

The probe into the resilience of private markets, known as the system-wide exploratory scenario (SWES), models a global shock that sends equity markets down 35 per cent and pushes inflation to seven per cent – dubbed by many in the industry as “exceptionally severe”.

Alternative asset managers will need to assess how their portfolios respond to financial conditions over a five-year period, with industry figures suggesting that the macroeconomic elements of the BoE’s hypothetical scenario appear more severe than those seen during the global financial crisis (GFC).

Despite this, the severity of the exercise can be viewed as a testament to the “robustness” of the market, one industry source told Alternative Credit Investor, with the scenario needing to be sufficiently challenging to adequately test resilience. However, the key risk it now presents is how the results are communicated by the BoE afterwards.

Due to the severe nature of the test, which is also more extreme than the first SWES exercise conducted in 2023, the bank must ensure its findings are placed into context. The source warned that private credit funds are typically less leveraged than banks and that presenting the results in isolation could create a misleading picture of risk.

Therefore, when the BoE publishes its conclusions, it must make clear how other parts of the financial system would also respond under similar conditions.

“The exercise will only strike the right balance if the results are assessed in context and with a clear understanding of the way private capital funds operate,” UK Private Capital chief executive Michael Moore told ACI. “The bank’s hypothetical scenario appears more severe than the GFC, which makes it especially important that any conclusions are placed alongside comparable analysis of other parts of the financial sector.”

Industry participants have also suggested that the BoE must not communicate the findings in a confusing way or raise concerns where there should not be any, as it would overall undermine the value of the exercise.

“The goal is to shed light on the reality, and to understand the asset class better,” a source said. The danger, they added, would be creating a perception of risk that spreads across the wider financial system.

Read more: BoE weighs easing capital rules as stress test gathers pace

Impacting growth

The concern is that if the stress test results are taken out of context, it could affect the continued growth of private credit and perception of the asset class. Against this backdrop, UK defined contribution master trusts are increasing their allocations to private markets, including private credit, following the Mansion House Accord. This aims for 10 per cent of default funds to be invested in alternatives by 2030.

Another key concept the BoE must also distinguish is the scale of the private capital market, given its relatively small size compared with other parts of finance.

For private credit particularly, it comes as the European Central Bank recently suggested that euro area banks’ exposures to the asset class worldwide total €62.5bn (£52.9bn), equivalent to 0.2 per cent of total assets or 2.5 per cent of total equity.

Alternative managers taking part include some of the largest players in private markets, including Apollo Global Management, Ares Management, KKR, Barings and Blackstone.

Overall, the private markets stress test is now in the scenario modelling stage, with the information-gathering phase complete.

Firms are expected to complete their scenario work by September, with the central bank expected to publish interim findings later this year and a final report due in the first half of 2027.