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Welcome to Going Private, I’m Sinead Cruise and this is Bloomberg’s twice-weekly newsletter about private markets and the forces moving capital away from the public eye. Today, we look at the debt drama bringing excitement to a bold turnaround specialist, the US real estate investment opportunity that survived a presidential executive order and we hear from a New York Knicks superfan still on Cloud Nine. But first we look at the nightmare scenario one of the world’s leading watchdogs wants private markets to confront. If you’re not already on our list, sign up here. Have feedback? Email us at goingprivate@bloomberg.net Severe But Plausible The Bank of England today revealed the scenario it wants the industry to model itself against in its groundbreaking private markets stress test — and it doesn’t make for pretty reading. The watchdog kicked off its year-long deep-dive into the $16 trillion private markets ecosystem on the back of fears about the sector’s ability to weather a downturn and the risks that might pose to the broader financial system. Skeptics suggested the BOE might go easy on the 40-odd participants, mainly to protect burgeoning relationships with private capital giants and prevent any suggestions of doom-mongering. The BOE has instead gone for the jugular. Andrew Bailey, governor of the Bank of England (BOE), during a Bloomberg Television interview at the Reykjavik Economic Conference in Reykjavik, Iceland, on May 29 Photographer: Betty Laura Zapata/Bloomberg In the first year of the hypothetical scenario, the FTSE All-Share index and the S&P 500 plunge by 30%-35% and the UK Consumer Prices Index —a key inflation marker — climbs to 7%. Sterling and US dollar denominated high-yield corporate bond spreads widen by 390 bps and 490 bps respectively, bringing nominal high-yield corporate bond spreads to around 800 bps. In the second year, a global recession ensues. UK real GDP plummets, coming in at -4%. Sterling and US dollar high-yield corporate bond spreads peak at around 1200 bps. Interest rates spike, bringing total sterling borrowing costs to around 1800 basis points, broadly in line with those seen in the GFC. In year three, unemployment peaks at 7.5% and companies face high volumes of refinancing needs as maturities roll round. Rated alternative asset managers are downgraded by two notches. Across years four to five, the economy shows green shoots but unemployment remains around 7% and equities in the most severely impacted sectors are still trading around 35% below starting point levels. And all the while participants are on their own to manage the stress, with no emergency interventions or extraordinary support measures from policymakers. The BOE has pledged to publish the findings of the stress test in early 2027. Michael Moore, CEO of industry body UK Private Capital, described the bank’s scenario as “very severe” and in some respects even more extreme than conditions seen in the GFC. With that in mind, Moore said it was important the exercise was placed in context. “It matters that everyone can see how all parts of the financial system would react in the same circumstances, and how that would impact on the real economy on a comparable basis,” he told Going Private. The BOE’s Financial Policy Committee has previously drawn attention to private markets’ expanding ties to banks and insurers, flagging potential vulnerabilities related to valuations, use of leverage, and possible reliance on credit rating agencies. The firms participating in the voluntary System-wide Exploratory Scenario (SWES), include alternative asset managers, mainstream lenders who supply credit to private market funds and PE-sponsored corporates, and institutional investors who stump up the lion’s share of capital in private credit and equity transactions. “As participants, we welcome the level of rigour the Bank has applied,” said Philip Best, Group Head of Risk and Compliance at Pemberton Asset Management. “There has been no shortage of speculation about private markets, and it is important that those discussions are informed by evidence.” Participants held talks with the BOE earlier this year about the possibility of using a third party firm to help gather the requested data, and keep the project timetable on track, Bloomberg has previously reported. Marc Chowrimootoo, portfolio manager and co-head of Direct Lending at Hayfin, one of the SWES participants, said it was “sensible for regulators to deepen their understanding of how the market behaves under stress.” “European private credit is an increasingly central pillar of supporting growth in Europe,” he told Going Private. “It has demonstrated resilience relative to more cyclical parts of the credit markets ... it’s predominantly institutional, closed-ended and patient capital base is an important part of that.” Those with meaningful ties to the $1.8 trillion sector will have to report details of those connections on an annual basis, my colleagues Nicholas Comfort and Laura Noonan report. An ECB spokesman declined to comment.  In the UK, PE-sponsored businesses account for up to 15% of total corporate debt and 10% of private sector employment, accounting for just over two million jobs, according to the BOE. Meanwhile in Frankfurt, the European Central Bank has almost doubled the number of banks covered by its probe into links with private credit to 20. Deutsche Bank, Barclays, BNP Paribas and HSBC account for almost two-thirds of the region’s exposure to private credit, according to Bloomberg Intelligence. That’s “a manageable risk” given that disclosed exposures account for just 2.3% of loans, BI said. Sharon Donnery Photographer: Aaron Schwartz/Bloomberg “The key issue is not only the size of these exposures, but also banks’ ability to aggregate them properly,” Sharon Donnery, ECB’s Supervisory Board member, said in a speech last week. Australia’s corporate watchdog is also investigating a number of private credit funds and warning industry managers to make sure that asset valuations are “grounded in realistic assumptions” before an end-of-month reporting deadline. “We’re absolutely 100% unequivocally ready, willing and able to use our full suite of regulatory enforcement tools,” Simone Constant, Commissioner of the Australian Securities & Investments Commission, told my colleague Sharon Klyne.