Private markets: unknown unknowns
Last week, the House of Lords Financial Services Regulation Committee published its Report, “Private Markets: Unknown Unknowns” (the Report), outlining the conclusions of its 6 month inquiry into private markets, encompassing both private equity and private credit.
In light of much discussion in the past year concerning private credit, including a 23 December 2025 FT article which suggested that private credit was expanding into unsecured consumer lending and “piling into riskier areas such as credit cards and buy now, pay later debt”, the Report most definitely warrants a closer look on the private credit side.
The Report
As with most governmental, regulatory and media commentary on the industry, the Report questions the impact of recent private credit growth on general financial stability and expresses concern about transparency around the level of interconnectedness with the rest of the financial system, leverage, conflicts of interest and valuations.
From the civil litigation and regulatory enforcement perspective, unsurprisingly, the same themes of last year’s Perspectives on challenges for private credit funds emerge, in particular, risks related to renegotiations, underwriting standards, conflicts of interest and valuations - all with the common theme of transparency, or lack thereof.
The Report noted that, despite recent large increases in interest rates - leading to an on-average doubling of the cost of debt - there do not appear to have been increased defaults aside from a few well-documented instances, such as First Brands and Tricolor. Private credit lenders appear to have been able to renegotiate the terms of loans to prevent default which could result in weakening underwriting standards, including “the increasing share of leveraged loan deals with weaker covenants, a rise in the use of earnings add-backs to reduce headline leverage multiples, and looser documentation standards.”
The Committee concluded that whilst most direct lenders “are targeting senior secured, safe, first-ranking type structures” underwriting standards in other sections of the market may not be comparably rigorous.
With regard to valuations, the Committee warned that the integrity of valuations could be impacted both by managers having an eye on (i) management fees where those fees are calculated off values invested; and (ii) on their own borrowing (i.e. leverage, where funds use borrowed money, as well as investor funds, for investment), to attract a greater amount of initial borrowing or avoid breaching loan-to-value covenants. It noted that isolated instances of inaccurate valuations had implications for investor protection and could become a particular issue in any period of stress if confidence in valuations is lost.
The Committee also commented on the use of third-party rating agencies and, in particular, smaller agencies, “and the extent to which they can be optimistic in comparison with the ratings of the bigger agencies.” The Report even quotes the Governor of the Bank of England, speaking of his conversations with people from private equity and private credit, “Of course, they told me that everything was fine in their world, apart from the role of the rating agencies. I said, ‘We are not playing that movie again, are we?’”
Looking forward
There will no doubt be continued commentary during 2026 on private markets, and private credit specifically. We also expect more regulatory commentary this year: having looked at valuations in March 2025, the FCA told the Committee that, in June 2025, it had initiated a multi-firm review focusing on conflicts of interest at firms managing private assets. An area to watch!