Danny Dieleman: Money for nothing and risks for free?
This column was originally written in Dutch. This is an English translation.
By Danny Dieleman, Founder of D-Squared Capital
Since this spring, various regulators have been taking a closer look at private markets. In May 2026, the ECB devoted particular attention to private credit in its Financial Stability Review. Less than a month later, Bloomberg reported that the ECB had requested additional data from 20 European banks regarding their exposure to private credit. That same month, the Bank of England (BoE) announced the Private Markets System-Wide Exploratory Scenario (PM SWES). De Nederlandse Bank (DNB) also recently published its report ‘Private assets and financial stability: the role of Dutch insurers and pension funds’.
So there is a lot going on in the private markets. This column discusses the concerns, the PM SWES, and looks ahead to possible consequences.
Regulators’ concerns
Regulators emphasise the benefits of private credit: increased and alternative lending, funding diversification and, consequently, greater economic stability. At the same time, they also have concerns: the market is growing rapidly and lacks transparency. Banks, insurers and funds are becoming increasingly intertwined, and leverage may create additional vulnerabilities. Furthermore, the sector has not yet weathered a prolonged period of stress.
High time, according to regulators, for a thorough investigation. However, the necessary data is fragmented and inconsistent: there is no central dataset. The commercial datasets that are available have been compiled by the market itself and are therefore unsuitable for independent research.
Furthermore, supervision is also fragmented: there is no single regulator responsible for the sector as a whole. The ECB focuses solely on banks, DNB solely on insurers and pension funds, and participation in the BoE’s PM SWES is voluntary. Consequently, there is no insight into the actual risks within the sector. Regulators’ concerns cannot, therefore, be investigated.
The PM SWES is the most far-reaching study, which is why I find it interesting to explore it in more depth in this column.
Structure of the PM SWES
In April, the BoE announced its approach, and the details of the stress scenario followed in June. The aim is to gain a better understanding of how market participants react to a downturn, and whether this behaviour could exacerbate financial instability.
The PM SWES does not test individual institutions, but rather the entire private markets ecosystem. An initial phase of data collection is followed by a calculation of the impact. Participating banks, asset managers and institutional investors assess the impact of a prolonged recession on their portfolios and formulate management actions. The BoE will then share interim findings. Participants can subsequently adjust their own actions. In this way, the BoE examines feedback and amplification effects within the system. The BoE will publish the aggregated results in early 2027. Individual or commercially sensitive data will remain confidential.
The scenario
The scenario is extreme but plausible, calibrated for tail risk and comparable to banking stress tests. It spans five years: two years of deep recession, stabilisation in year three, followed by a cautious recovery in years four and five. Share prices fall sharply, by up to 50 per cent in the tech and finance sectors. Credit spreads widen by 800 basis points and primary markets close completely.
Redemptions from open-ended and semi-liquid structures increase, sometimes exceeding the limit. New funds struggle to get off the ground due to difficult fundraising conditions. Borrowers needing to refinance run into difficulties; credit losses rise, forcing banks to protect their capital positions.
For Private Credit, credit spreads determine the margins on new loans, as well as valuations and liquidity. Credit spreads are therefore a key driver of the scenario. An increase of 800 basis points is not far-fetched: at the start of the war between Russia and Ukraine, spreads on tradable CCC-rated loans rose by between 400 and 800 basis points. Unlike B-rated loans, spreads on CCC-rated loans have still not recovered.
Possible observations and outcomes
I expect the BoE to encounter significant reconciliation problems due to the lack of unambiguous definitions. For example, institutions do not use a single definition of default. Is Payment In Kind (PIK) a default? How is the exposure of a partially drawn loan determined? Definitions of secondary risk drivers such as the Debt Service Coverage Ratio and EBITDA multiples may also vary from one party to another.
A logical conclusion is that unambiguous definitions are needed for private markets. Perhaps these should align with existing banking frameworks, so that a consistent picture emerges across the entire ecosystem, which is a major benefit.
Banks have been familiar with this since 2014 thanks to stress tests and ECB supervision. Nevertheless, there is a major difference compared with banking stress tests: participation in the PM SWES is voluntary and results remain aggregated. It is therefore not a pass-or-fail test. I do not, therefore, expect any compulsory capital increases or restructurings, such as those seen at Monte dei Paschi di Siena (2014 and 2016).
Nevertheless, regulators are taking an important first step. They are now gathering insights across the entire market. Regulators are gaining an understanding of best practices throughout the market and can gradually raise the bar for methodologies and risk management. I therefore expect this to be the first step in a series of regulatory actions.
Is this good news for investors? Certainly; transparency and clear reporting definitions help everyone. Institutions themselves can also benefit, provided they establish a structured framework to systematically monitor exposures at client, counterparty, sponsor, sector and country level, rather than relying on a one-off Excel solution. Such consistent risk analysis is extremely valuable for internal use. Reports to the regulator are then a by-product.
However, I am not in favour of far-reaching standardisation and uniform capital requirements across the entire sector. That would stifle business models: institutions would then optimise for the same framework, with less scope for distinctive strategies. Pluralism, on the other hand, keeps the market healthy and stable: there is a choice for both borrowers and investors. Not everyone has the same blind spot. This benefits systemic stability.
Conclusion
Private markets are very much in the spotlight of regulators. But supervision is fragmented. Consequently, there are various initiatives underway to gather information about the private markets ecosystem. This is good news for investors, as transparency benefits everyone. Institutions can also benefit by establishing robust and well-structured internal reporting systems, thereby making reports for regulators a by-product. This is particularly important, as this is only the first step taken by regulators.
Disclaimer
The ideas and opinions expressed in this article are my own and not those of my current or former employer(s). I am writing this column purely for information purposes, as I find the subject interesting and hope to inspire others. It does not constitute investment advice. Always carry out your own research before deciding whether or not to invest in anything.
I would like to thank S&P Global Market Intelligence for providing the data, and Bash Yumol for compiling it.