Private markets, public risk? Financial stability implications of alternative funding sources

Katharina Cera, Pierce Daly, Lieven Hermans, Philippe Molitor, Oscar Schwartz Blicke, Andrzej Sowiński and Elisa Telesca

Financial Stability Review, 2024, vol. 1

Abstract: Euro area private markets have grown significantly in recent years, providing alternative funding sources for companies and diversification benefits for investors. While private markets are currently small relative to public markets and bank lending in the euro area, continued strong growth, financial innovation and opaqueness in private markets could contribute to financial stability risks. Adverse economic shocks could result in rising defaults, valuation corrections and losses for private funds and their investors. Additionally, such shocks may be exacerbated by multiple layers of leverage at company, fund and investor level, or by liquidity mismatches for some open-ended private funds. For banks, risks could arise from lending exposures to these markets, as well as from rising competition with private funds, which could incentivise lower underwriting and credit standards. JEL Classification: G20, G21, G23, G24, G30, G32

Keywords: alternative investments; direct lending; financial stability; investment funds; private credit; private equity; private markets; real assets (search for similar items in EconPapers)
Date: 2024-05
Note: 3597820
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