Readers of this blog will know that I have written at length about the paradox of "markets" - prices are public but their makeup are private. The notion of "private markets" is therefore a contradiction within a contradiction!
Data Black Holes Leave Policymakers ‘Flying Blind’ in Hunt for Next Crash
The rise of private markets has obscured data which regulators and economists rely on to identify risks in the global economy.
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Predicting the next economic crash or financial crisis has always been more art than science. Today there’s an added complication — the increasing paucity of information about what’s really going on in the economy and financial system.
The issue was thrown into sharp focus last year during the US government shutdown, when the Federal Reserve was starved of key data from inflation to retail sales and job numbers used to shape monetary policy. Yet the barriers to accessing data on key risks — some with the power to roil the global financial system — stretch far beyond recent political events in the world’s largest economy and into the darker, more opaque corners of finance.
Domestic Companies Listed in US Fall 50% From Peak
Source: World Federation of Exchanges
As private capital’s seemingly bottomless pit of funding lures ever more companies away from public markets, large swaths of the economy that once sent important warning signals about the health of companies and consumers, from quarterly earnings to major transactions, have gone dark. The number of domestic public companies in the US, once seen as a bellwether of how the domestic and global economy were performing, has more than halved over the last 20 years, while the number of American start-ups worth more than $1 billion has increased to over 850, according to PitchBook.
At the same time, the post-financial crisis surge in private credit at the expense of traditional bank loans has hushed some of the early warning signs officials traditionally relied upon — such as stress among borrowers — to alert them to wobbles with the potential to escalate into wider shocks.
“Significant data gaps make it difficult for us and the market to know where risks are building and so to anticipate stress,” says Sarah Breeden, deputy governor for financial stability at the Bank of England. Those gaps have prompted the BOE to stress test the non-banking system — everything from private equity to direct lending — to “help us shine a light in peace time on the opaque vulnerabilities that we may otherwise only see crystallize in an actual stress,” adds Breeden.
A new rush of pension and retail money into private finance looks set to stoke further growth in opaque corners of the market.
“We’re trading transparency for speed,” says Elizabeth McCaul, who dealt with risks from private finance as a member of the European Central Bank’s supervisory board, until 2024. “That may be fine in the good times, but in a downturn it leaves policymakers flying blind.”
“Private credit leans on complex, multilayered bank financing that even banks can struggle to assess holistically,” adds McCaul. “With concentrated assets, uncertain valuations, private ratings and fragmented supervision the opacity of this market is worrying.”
Policymakers have been notoriously bad at predicting when and where the financial system will next spring a leak. The 2007-08 crash predated much of the activity that has now migrated into the shadows. Still the collapse in subprime mortgages and subsequent global fallout caught officials off-guard.
Then, it was a case of not knowing where to look. Today the fear is more about not being able to probe the areas where trouble may be brewing.
“Anecdotally we know that the private credit firms, the private finance firms, are finding those riskier borrowers that maybe banks have pulled back from or that never received bank funding in the past and they are lending to them,” says John Schindler, secretary general of the Financial Stability Board. “The clients that they are choosing are riskier.”
“On top of that,” adds Schindler, “we don’t know what the funding models are, what the repercussions are of you defaulting.”
Fed officials last year found that banks' loan commitments to shadow lenders had risen by more than 50% to $2.2 trillion between 2019 and 2024. In a report they highlighted the limitations of current regulatory data, the difficulties in identifying banks’ exposure to private credit and urged greater scrutiny of the ties between traditional lenders and the providers of private credit.
“We’re all very concerned about leverage,” says Richard Portes of the European Systemic Risk Board of the current preoccupation with private credit risk. “The way that leverage is building up in various sectors and parts of the system.”
In The Shadows
The risks have existed, in some form or other, for years. The implosion of family office Archegos Capital Management LP in 2021, which helped topple Swiss bank Credit Suisse, after a series of leveraged stock bets went wrong, is cited as emblematic of the danger posed by private firms.
The difference now is the scale of activity.
Watchdogs are worried about hedge fund’s hugely leveraged bets on small pricing differences in the Treasuries market and the hard-to-monitor build up of risk in the $4 trillion-a-day foreign exchange swaps market. In 2020, pandemic-induced disruption to the basis trade left hedge funds unable to unwind positions, prompting the Fed to make massive asset purchases to stabilize financial markets — about $2.5 trillion across March and April, alone — and pledge hundreds of billions more to backstop emergency repo operations.
The 2025 collapse of direct lenders First Brands Group and Tricolor Holdings has amplified fears that the private corner of the financial sector will spawn the next global crisis.
UBS Group AG Chairman Colm Kelleher last year warned of a “looming systemic risk” in insurance because of a lack of effective regulation. His comments came after insurers shifted toward riskier, less liquid and difficult-to-value assets in private markets. That shift also left the industry more vulnerable to “concentrated losses” and hindered transparency, officials at the Bank for International Settlements warned in October.
The issue for policymakers has gone beyond simply not knowing how individual companies are performing or what kind of growth they might expect. Rarely changing valuations, and the increasing use of payment-in-kind, or PIK, in private equity and private debt, can obscure what have previously been key indicators of distress in private markets.
Expensive PIK loans allow borrowers to skip cash interest payments on their debts until the loan matures, flattering lenders’ balance sheets and potentially masking distress until much later. Fund managers are increasingly warning that the lack of income from PIK and similar instruments might force them to sell other investments, even when it may not be financially expedient.
There’s also concern that ineffective scrutiny from investors in private markets could lead to a failure to identify early warning signs of trouble.
“The discipline is supposed to be coming from the investors in the private companies, demanding the information that they need to assess risk,” says Andrew Feller, a former policy adviser at the US Securities and Exchange Commission who’s now a senior special counsel at Kohn, Kohn & Colapinto LLP.
But as an investor, “when you are putting $2 million of venture capital into 100 start-ups, perhaps you are willing to move with a little less transparency than with $500 million of VC into three companies,” adds Feller.
In an echo of the Fed, the ECB warned in November, that its in-depth analysis of the non-bank sector — part of its financial stability report — was “constrained” by a lack of data. This included key metrics about potentially leveraged non-banks, along with evidence of the extent of the reliance of banks on funding from these institutions.
It also complained that additional geographic data was unavailable from outside the euro area. “These data gaps make it more difficult to comprehensively analyze the risks associated with linkages between banks and NBFI entities,” the ECB said.
Watchdogs fear this lack of transparency could breed new problems. In the efforts to tame risks in shadow banking, “the biggest bang for the buck is better data,” says Klaas Knot, who chaired the FSB until July and spearheaded efforts to promote transparency.
Without that, “it will be tough to try to achieve the same degree of resilience as in the banking system,” he adds.
New Data Miners
The rise of private markets has spawned an industry of proprietary data sets which may be out of the price range of some officials, with growth in the alternative data market forecast to balloon to $135.7 billion by 2030 from about $11.7 billion in 2024, according to Grand View Research.
“You’re sometimes able to get access to more accurate and, certainly more timely, data through alternative datasets than maybe using vanilla traditional datasets,” says Daryl Smith, head of research at alternative data provider Neudata. In “the private markets world, I think a lot of investors, but also regulators, are likely to choose proxy performance indicators rather than very delayed — once a quarter — updates from a survey or something very lagged instead.”
Those proxies can range from weekly same-store retail sales to restaurant booking volumes. Bloomberg LP, the parent of Bloomberg News, competes with Neudata in providing financial data.
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The BOE invested heavily in private market data during the pandemic and is continuing to do so now, a person with knowledge of the matter says. The bank’s initial intention was to understand the corporate debt profiles of companies across the economy. It has retained subscriptions to most of the datasets to help it grasp the evolving landscape, the person says, asking not to be identified as the arrangements are private.
The BOE told the Treasury Select Committee last year that when it comes to private markets it relies on “a mixture of discussions with market participants, commercial data sources, and data from some regulated firms,” to assess the level of risk-taking and valuations.
Still, regulators and rate-setters know that there’s a lot they don’t know.
Officials in the UK learned that the hard way during 2022’s liability-driven investment crisis. Rapidly rising interest rates forced pension funds to sell government bonds to meet collateral calls, a move that helped end the brief premiership of Liz Truss. The blow-up, was caused in part by a lack of data on the fund industry, according to a Parliamentary committee report. A subsequent collapse in the price of UK debt, after Truss’ disastrous mini-Budget, forced retirement pots to sell off more gilts, and triggered more declines and sales.
“We learned in LDI,” says the BOE’s Breeden, “how concentrated, correlated positions can amplify stress.”
For McCaul the need for greater transparency is urgent: “You can’t mitigate risks you can’t see,” she says. “The less data policymakers have, the greater the chance that the next shock arrives undetected and hits harder than it should.”
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