The European Central Bank published a Financial Stability Review analysis on how private equity and private credit financing affects euro area firms and how associated risks could propagate to the financial system. It finds that companies financed via private markets tend to be more productive and invest more, but that the median firm’s risk metrics deteriorate after private market entry, with higher indebtedness and weaker ability to service interest. Private markets remain small relative to euro area bank lending and public markets, yet assets in euro area-domiciled funds reached EUR 628 billion for private equity and EUR 106 billion for private credit in the second quarter of 2024, following annualised growth since 2010 of 9% and 13% respectively. Cross-border activity is material, with 25% of 4,569 private equity deals and 65% of 1,240 private credit deals involving euro area firms over 2015-24 including a non-euro area sponsor. Spillover channels include banks’ strategic partnerships and lending exposures to private market players and common exposures to corporates, with evidence that private credit partly substitutes for bank credit while leveraged buyouts are associated with higher bank loan exposures after private equity investment; direct non-bank exposures are mainly via insurers and pension funds investing in private funds, but a growing trend of private equity firms acquiring (life) insurers could concentrate risks in single entities. The ECB notes that data scarcity and opacity hinder a comprehensive assessment of interlinkages and concludes that further monitoring is warranted.
European Central Bank 2025-05-01
European Central Bank assesses euro area private equity and private credit and flags rising corporate leverage and opaque spillover channels
The European Central Bank's Financial Stability Review notes that private equity and credit financing boost productivity and investment in euro area firms but increase indebtedness and weaken interest servicing ability. Despite being smaller than traditional bank lending, significant cross-border activity and strategic bank partnerships pose risks. The ECB stresses the need for more monitoring due to data scarcity and opacity in assessing financial interlinkages.