Shining a light on private equity backed corporates in four findings

Neha Bora, Sarah Burkinshaw, Alice Crundwell and Tuli Saha

Private equity (PE) has rapidly become an important source of financing for UK businesses. Funds use pools of capital, largely from institutional investors, to primarily invest in non-publicly traded companies. We shed light on this growing sector with a new and novel data set of around 9,000 privately backed corporates in the UK. These corporates employ over two million people, with business activity concentrated in London and in certain sectors such as information and communications. We find that they are relatively more vulnerable to default than all other corporates, and they are financed with relatively larger proportions of shorter tenor debt, like private credit and leveraged loans.

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Leverage finds a way: a comparison of US Treasury basis trading and the LDI event

Adam Brinley Codd, Daniel Krause, Pierre Ortlieb and Alex Briers

We both drive cars, but the US drives on the right while the UK drives on the left. We both walk, but we do so on sidewalks in the US and pavements in the UK. We both have asset managers, who want to take leveraged positions in interest rates. US asset managers had around US$650 billion of long treasury futures in June 2023. UK asset managers, in Autumn 2022, held around £200 billion in leveraged repo. However, the ways in which the financial system found willing lenders for these borrowers, and intermediated the risk through the system of market-based finance, differ.

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Strengthening the resilience of market-based finance

Naoto Takemoto, Simon Jurkatis and Nicholas Vause

In less than two decades, the system of market-based finance (MBF) – which involves mainly non-bank financial institutions (NBFIs) providing credit to the economy through bonds rather than loans – has both mitigated and amplified the economic effects of financial crises. It mitigated effects after the global financial crisis (GFC), when it substituted for banks in providing credit. But it amplified effects at the outbreak of the Covid pandemic, when NBFIs propagated a dash for cash (DFC), and more recently when pension fund gilt sales exacerbated increases in yields. This post outlines five different aspects of MBF that contribute to such amplification and summarises some policy proposals – suggested and debated internationally by regulators, academics and market participants – to make MBF more resilient.

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Macroprudential policy beyond banking

Jon Frost and Julia Giese.

A seismic shift is occurring in the European financial system. Since 2008, the aggregate size of bank balance sheets in the EU is essentially flat, while market-based financing has nearly doubled. This shift presents challenges for macroprudential policy, which has a mandate for the stability of the financial system as a whole, but is still focused mostly on banks. As such, macroprudential policymakers are focusing increasing attention on potential systemic risks beyond the banking sector. Drawing from a European Systemic Risk Board (ESRB) strategy paper which we helped write along with five others, we take a step back and set out a policy strategy to address risks to financial stability wherever they arise in the financial system.

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