The Bank of England’s private capital SWES test – a blueprint for global regulators?

One of the primary concerns for regulators is the potential for liquidity mismatches, whereby investors are offered regular redemption rights from fund structures whilst the underlying assets remain invested in illiquid investments. Private credit funds are traditionally closed-ended and offer a fundamentally different proposition from retail-orientated funds in terms of subscription and redemption frequency, liquidity and life cycle. In this regard, a recent publication by the European Central Bank provided some reassurance that regulators were able to draw a distinction between the different fund types and the different risks they posed, noting that "liquidity mismatch in private credit funds appears limited in traditional closed-ended private credit funds".

That said, the continued growth in private credit is expected to be bolstered further by the expansion of evergreen fund structures. To manage liquidity, these types of funds typically include some liquidity in their portfolio, rely on robust governance and liquidity management frameworks and employ a range of liquidity management tools, such as redemption limits, notice periods and dilution adjustment. These measures are specifically designed to address liquidity mismatch concerns. In the European Union, revised and enhanced rules on liquidity management for credit funds have been introduced through the AIFMD II reforms, with open-ended loan origination funds required to demonstrate to national regulators that their liquidity risk management system is fit for purpose, and a mandatory requirement to select at least two liquidity management tools from a prescribed list. It is certainly possible that other global regulators in this space may seek to introduce similar specific requirements on liquidity management. 
 

A recurring theme is the concern that regulators lack sufficient data to monitor private credit effectively, creating an environment in which they feel unable to quantify the market or assess its risks with confidence. The Financial Stability Board (FSB) has identified four key challenges in this regard, which may signal the areas where local authorities choose to impose additional data requirements.

1. The FSB highlighted limited data at both fund and investment level, making it difficult to identify and quantify private credit within the broader financial system.
2. It noted unclear and inconsistent identifiers for underlying financial instruments and borrowers, resulting in insufficient granularity of exposures.
3. It identified an inability to assess risks arising from multi-layered investment structures, including the use of leverage within those structures, thereby obscuring indirect exposures.
4. It highlighted an overall lack of comprehensive reporting on leverage, limiting regulators' capacity to evaluate systemic risk.

Beyond the regulatory data gaps identified by the FSB, there are also questions about wider market transparency. Limited visibility can mean that creditors have little sight of deteriorating standards or borrowers' arrangements across their range of creditors.
 

The growing interest in private credit is expected to place increasing pressure on supervisors to review and strengthen reporting requirements, which may give rise to new regulatory guidelines. In the UK, the FCA is anticipated to undertake a review of AIFMD reporting obligations, whilst the EU will expand its existing reporting framework under AIFMD II with the aim of reinforcing consistent, high standards across private markets.

One of the key areas the BoE is exploring is the quality of governance practices, with the SWES exercise designed to test what decisions were made, the rationale behind those decisions, and by whom they were taken. Linked to this is the FCA's heightened focus on valuation practices and conflicts of interest, with targeted reviews of firms having been carried out over the last 18 months. The FCA has indicated that firms should expect continued "deeper dives" into the industry, and private credit managers should therefore prepare for more frequent touchpoints, more extensive evidence requests, and potentially greater regulatory challenge.

With the potential to see meaningful reform in the UK regulatory landscape this will in turn influence the development of global standards.
 

Supervisors are expected to focus on the adequacy of decision making by management and the frameworks in place to support investor outcomes. This could test the substance behind governance structures, examining board and committee minutes, escalation records, and evidence of challenge at a senior level. In practice, this means assessing whether investment committees are genuinely scrutinising individual credit decisions or merely ratifying recommendations, whether there are clear lines of accountability when positions deteriorate, and whether investor outcome frameworks translate into demonstrable action rather than policy documentation alone.
 

The exercise can be considered as part of the wider trend of more regulatory scrutiny of valuation methodology and practices. This scrutiny may move beyond policy review and into sampling of individual asset valuations, testing the inputs and assumptions used at each reporting date.

There is likely to be scrutiny over the degree of separation between portfolio managers and valuation functions. Regulators may review whether third-party valuers are rotated or subject to independence safeguards, and challenge the calibration of discount rates, recovery assumptions, and comparable benchmarks applied to illiquid positions where observable market data is limited or absent or where such data is subject to a higher level of uncertainty in case of distressed market conditions.
 

Supervisors may explore economic flows and associated decision-making across affiliated entities, testing whether conflicts registers capture real-world arrangements rather than generic risk categories. In practice, this is likely to involve examining specific instances of related-party lending or co-investment allocation, reviewing whether fee-sharing arrangements between management company affiliates are disclosed and appropriately governed, and assessing whether a firm’s monitoring programme can detect conflicts as they arise rather than relying solely on periodic tests.
 

Supervisors are likely to examine the end-to-end credit process, from initial origination through to watchlist management and workout. In practical terms, this could mean reviewing underwriting files for consistency of credit criteria, testing whether borrower covenants are actively monitored or only reviewed at refinancing, interrogating the severity and frequency of stress test scenarios applied to portfolios, and evaluating how concentration limits and refinancing timelines are tracked against fund-level liquidity positions. 
 

Regulators may review disclosures to investors, not merely for technical compliance but for whether they enable investors to make properly informed decisions. In practice, supervisors are likely to test whether marketing materials and investor reports present a balanced picture of downside risk alongside performance, whether fee waterfalls and carry mechanics are explained with sufficient clarity, and whether redemption terms and gating provisions are disclosed in a manner that reflects the realistic liquidity an investor can expect, particularly where funds are distributed to non-institutional participants.