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Asset Prices Stretched?

The Bank of England has raised concerns over a potential sharp repricing of private equity valuations in light of a difficult fundraising environment for the sector due to higher interest rates, and rising default rates on debt linked to private equity. 

"The extent of transparency around asset valuations, overall levels of leverage and the complexity and interconnectedness of the sector make assessing financial stability risks difficult and mean that risks need to be managed carefully, both by those in the sector and by their counterparties," it said. 

The warning follows concerns in recent months about the challenges in assessing the financial stability risks posed by private credit vulnerabilities in a higher interest rate environment. 

In its latest financial stability report, the Bank of England argued private credit and leveraged finance, which have roughly doubled in size in the last decade, appear "particularly vulnerable" to "sharp revaluations".

The Bank of England has issued a stark warning about the increasing risk of a “sharp correction” across a broad range of asset prices, including private equity. In its financial policy summary and record published today (27 March), the central bank said that as markets expect the economy to continue to recover and inflation to fall, asset prices are "stretched". The BoE said the prices of many assets, such as shares and bonds, appear to be high relative to historical norms in the context of risks to the economic outlook.  That means there is a "greater risk of a sharp fall" in asset prices, the Bank said, which could ultimately make it more costly and difficult for UK households and businesses to borrow.


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