Published as part of the Financial Stability Review, May 2025.
Private market financing can bring both benefits and risks for euro area financial stability. While private equity (PE) and private credit (PC) markets in the euro area remain small in comparison with their longer established and more developed North American peers and with the size of domestic bank lending and public markets, they have seen remarkable growth over the last decade.[1] Euro area corporates may also receive cross-border financing from the bigger global private markets in addition to domestic private markets.[2] This box studies the impact of private markets on the productivity and risk metrics of euro area firms and discusses the ways in which risks may propagate to the traditional financial system.[3]
Corporates financed via private markets tend to demonstrate higher levels of productivity, with investment increasing after private market involvement. Companies with access to private market financing show significantly higher productivity levels than companies financed solely by banks.[4] This applies across the entire sample, irrespective of sectoral composition (Chart A, panel a). At the same time, private market entry does not in itself seem to have any effect on the median company’s productivity levels in the short term (Chart A, panel b). This suggests that there is a positive screening effect by private market participants, who might have higher risk-bearing capacities and are better incentivised than banks to identify and finance innovative but riskier companies for several reasons. Private equity investors benefit more directly from productivity improvements as opposed to bank creditors whose upside is capped at the full repayment of the loan principal and whose relevant time horizon is often too short to capture long-term productivity gains. Furthermore, banks often rely on collateral, which more innovative and riskier firms might not be able to provide, and may prefer to finance companies with lower risk profiles in later stages of corporate lifecycles.[5] In addition, adding private market financing to a company’s financing mix seems to be followed by increases in companies’ intangible assets and long-term investments, showing the potential benefits private markets bring to financing innovations. These investments may continue to have a positive impact on productivity levels over the medium to long term.
Chart A
Private markets tend to finance more productive and innovative corporates
a) Distribution of TFP levels among euro area firms backed by PE and not backed by PE, by sector | b) Median TFP levels, intangibles and long-term investments before and after private market entry |
|---|---|
(2018-22, log TFP levels for selected sectors) | (difference between fiscal and investment year, index) |
 |  |
Sources: BvD Electronic Publishing GmbH – a Moody’s Analytics company, S&P Global Market Intelligence, PitchBook Data Inc. and ECB calculations.
Notes: TFP stands for total factor productivity. Panel a: Com. ser. stands for communication services; Con. discr. stands for consumer discretionary; Con. sta. stands for consumer staples. Companies backed by private markets are identified as those which have received financing from PE firms since 2015. The control group includes private corporates that have not been part of a PE or PC deal since 2015 and have not been part of M&A transactions with PE involvement, so we assume they are being financed solely by banks. Sector classification is based on S&P Global Market Intelligence. The size of the samples varies across sectors between 41 and 335 corporates for PE-backed firms and between 322 and 19,282 corporates for the control group. The energy, financials, utilities and real estate sectors are excluded due to an insufficient number of observations. Panel b: The x-axis depicts the difference between the fiscal year and the investment year. Constant samples of 471 (Log TFP), 1,045 (Intangibles) and 942 (Long-term investments) corporates per indicator receiving private market financing in t=0. Data have been cleaned of outliers and indexed to 100 in t = 0 to improve readability. Intangibles, other than goodwill, and long-term investments are relative to total assets.
While risk metrics worsen for companies following a private market investment, the potential for spillovers to euro area non-bank financial entities appears limited, but concerns remain around concentration of risks and complex bank lending exposures. For the median company, the entry of private markets is associated with higher indebtedness and decreased capacity to pay interest (Chart B, panel a).[6] Euro area financial institutions are exposed to the risks associated with private markets, both directly and indirectly, but data gaps hinder a full assessment of these interlinkages.[7] Banks are exposed via strategic partnerships with and lending exposures to private market players and via common lending exposures to corporates which are also financed by private markets. Empirical evidence shows that private credit appears to partly substitute bank credit, while leveraged buyouts (the predominant PE strategy) cause bank lending exposures to increase following a PE investment (Chart B, panel b).[8] Non-bank financial institutions’ aggregate direct exposures to private markets, which are primarily the result of investments by insurance corporations and pension funds in private funds, are not alarming in the euro area. The emerging trend of PE firms acquiring (life) insurance companies could, however, lead to the concentration of exposures in single entities.[9]
Chart B
Risk metrics worsen after private markets are added to the median company’s financing mix and firms’ bank exposures change with the entry of private markets
a) Interest coverage ratio and debt-to-capital over time | b) Bank loans to corporates receiving private market financing |
|---|---|
(difference between fiscal year and investment year; left-hand scale: ratio, right-hand scale: percentages) | (one year prior to two years after investment date, € millions) |
 |  |
Sources: BvD Electronic Publishing GmbH – a Moody’s Analytics company, S&P Global Market Intelligence, PitchBook Data Inc., ECB (AnaCredit) and ECB calculations.
Notes: Panel a: The x-axis depicts the difference between the fiscal year and the investment year. Constant sample of 866 (Interest coverage ratio) and 1,084 (Debt-to-capital) corporates per indicator receiving private market financing in t=0. Data have been cleaned of outliers. Interest coverage ratio is defined as EBITDA divided by gross interest payments. Panel b: The x-axis depicts the difference between observing date and investment date. Constant sample of 224 PE- and 81 PC-backed firms receiving bank funding from euro area banks. Bank funding is the average debt from bank loans other than overdrafts, convenience credit, extended credit, credit card credit, revolving credit other than credit card credit, reverse repurchase agreements, trade receivables and financial leases.
Private markets bring both benefits and risks for euro area financial stability, although data scarcity and opaqueness hinder a comprehensive risk assessment. Private markets finance productive and innovative firms, which has a positive impact on euro area financial stability. This is because a more productive and resilient economy is associated with better asset quality, stronger economic growth and hence reduced risk for financial institutions and markets. However, corporates’ risk metrics deteriorate after private market financing is added to their financing mix. Aggregate exposures to private markets in the euro area are not alarming, as the main investors in private markets are insurers and pension funds, which typically have high risk-bearing capacities and long-term investment horizons. But potential risks may be concealed in concentrated exposures, opaque interlinkages and bank lending exposure to private market players. Additionally, private-market-backed firms, and especially PE-backed firms, seem to continue to rely on banks after receiving private market funding, pointing to common exposures between banks and private markets. Data scarcity hinders a full risk assessment, and further monitoring is warranted.
According to PitchBook Data Inc., the total assets of PE and PC funds domiciled in the euro area stood at €628 billion and €106 billion respectively in the second quarter of 2024 while in North America they stood at €5 trillion and €1.2 trillion respectively. In the euro area, PE markets have grown at an annualised rate of 9% since 2010 and PC markets at 13% in the same period, although growth in PC funds has slowed down since 2021.
Out of 4,569 PE deals between 2015 and 2024 involving euro area domiciled firms, 25% of deals had a non-euro area sponsor. During the same period, out of 1,240 PC deals to euro area domiciled firms, 65% included a non-euro area sponsor. Data are based on S&P Global Market Intelligence and PitchBook Data Inc. releases.
For an introduction to private markets, see the special feature entitled “Private markets, public risk? Financial stability implications of alternative funding sources”, Financial Stability Review, ECB, May 2024. For estimates of total factor productivity (TFP), this box relies on the methodology used in the special feature entitled “Low firm productivity: the role of finance and the implications for financial stability”, Financial Stability Review, ECB, November 2024. It uses the approach adopted by Levinsohn, J. and Petrin, A., “Estimating Production Functions Using Inputs to Control for Unobservables”, Review of Economic Studies, Vol. 70, Issue 2, 2003, pp. 317-341, using data from Orbis for Belgium, Germany, Spain, France, Italy and Portugal. Since the estimation method does not account for intangible assets, it might overestimate TFP for firms with high levels of such assets.
Throughout this box, private market financing refers to private equity and private credit without further distinction. Data availability is better for PE-backed corporates, but a significant share of PE deals are financed by private credit.
This is in line with evidence that PE investors spend significant resources on screening and evaluating potential investments. See Gompers, P., Kaplan, S.N. and Mukharlyamov, V., “What do private equity firms say they do?”, Journal of Financial Economics, 2014. See also the special feature entitled “Low firm productivity: the role of finance and the implications for financial stability”, Financial Stability Review, ECB, November 2024.
While neither PE nor PC strategies are broken down further in this box, the evidence suggests in particular that leveraged buyouts − the main strategy of PE players − cause companies to leverage up. See the box entitled “Financial stability implications of private equity”, Financial Stability Review, ECB, May 2020. The relatively high level of liquidity coverage ratios might be due to biases in the firm sample where larger, less leveraged and public firms are overrepresented. Results may also be affected by changes in interest rates.
For a more detailed discussion of the links between euro area institutions and private markets and implications for banking supervision, see the special feature entitled “Private markets, public risk? Financial stability implications of alternative funding sources”, Financial Stability Review, ECB, May 2024 and the article entitled “Complex exposures to private equity and credit funds require sophisticated risk management”, Supervision Newsletter, ECB, November 2024. Lending exposures of banks to private market players, such as private market firms, investors and funds, can take the form of capital call financing, net asset value (NAV) lending and back-leveraging of loan portfolios.
Firms backed by private credit see an immediate decrease in bank credit, assumingly highlighting bank loan repayments. Firms backed by private equity see a steady bank debt increase, assumed to be due to leveraged buyout associated loans reported after investment dates.
See Cortes, F., Diaby, M. and Windsor, P., “Private equity and life insurers”, Global Financial Stability Notes, International Monetary Fund, December 2023; “Section 8: In focus – Emerging vulnerabilities at the intersection of the private equity and the life insurance sectors”, Financial Stability Report, Bank of England, November 2024; and Garavito, F., Lewrick, U., Stastny, T. and Todorov, K., “Shifting landscapes: life insurance and financial stability”, BIS Quarterly Review, Bank for International Settlements, September 2024.