Introduction 

In the aftermath of the 2008 financial crisis, one of the biggest beneficiaries was the private credit market, now estimated at about $2 trillion, ten times its size in 2009. Regulations such as Basel III required banks to hold much more capital against each loan, so lending to riskier, mid-sized companies became less attractive. In this environment, companies were desperate for credit, and investment funds could lend quickly and on flexible terms.

What went wrong earlier this year?

In Q1, the industry took a massive hit. In February, rapid advances in AI models led to fears that Software as a Service (SaaS) companies, which provide software to other businesses on a subscription basis, would be harmed. SaaS equities fell sharply, with the SEG SaaS index down 34.8% by 10 April. While these equities have since largely recovered, the sudden sell-off strongly affected the outlook for private credit.

According to the Bank for International Settlements (BIS), SaaS companies make up a “substantial share” of private credit loan portfolios. This triggered a rush of withdrawals from private credit funds, leading major funds such as Blue Owl to limit withdrawals to 5% a quarter. 

The episode exposed vulnerabilities, such as the illiquidity of its investments and its untested resilience in a downturn, as highlighted in a report by the Financial Stability Board, chaired by Bank of England Governor Andrew Bailey.

Regulators' Response

UK regulators have responded because the risks extend beyond the funds themselves: UK banks hold around £173 billion of exposure to private markets. Globally, around 10% of life insurers’ portfolios are invested in private credit. The Financial Conduct Authority (FCA) is considering requiring private credit managers to report loan-level data. This would give regulators greater oversight of a relatively opaque market. The Bank of England is also stress-testing 46 private market firms against a severe downturn, with results due in 2027.

Government policy and Borrowers    

The October Budget is likely to increase mid-sized UK companies’ reliance on private credit. From January 2027, the government will double the bank surcharge, a tax on banks' profits, from 3% to 6% for 15 months, raising the total tax on large banks’ profits to 31%. By reducing the profits, banks keeps profits to build their capital, the surcharge may make them  less willing to lend, leading more companies towards private credit.


The Bank of England has raised interest rates to 4%, increasing pressure on existing private credit borrowers. Almost all private credit loans carry floating rates, so repayment costs rise with the base rate. Regulators are increasingly concerned about the risks of private credit, but government’s own decisions are likely to make it more popular over the next year and add pressure on existing borrowers.

Legal Impact

For law firms, this means more private credit work. Those with substantial existing private credit practices will be particularly well placed, as traditional bank lending is likely to shrink due to the surcharge. Furthermore, as rising rates push up repayments on floating-rate loans, so demand for financial restructuring is likely to grow.

Future Outlook

Private credit is likely to keep growing over the next year, as government policy pushes more mid-sized companies towards it. Its resilience in a downturn is untested. Bank of England stress tests and FCA reporting rules will show whether it can cope.