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By Nell Mackenzie

LONDON, Feb 26 (Reuters) - Some private credit firms that borrow from retail investors may be embellishing their financial health, Rubric Capital, a $3 billion hedge fund founded by a former Point72 star manager, warned its backers in a letter seen by Reuters.

The hedge fund said some business development companies (BDCs), which lend to small enterprises, are shifting borrowings from the balance sheet between quarters, making them appear less indebted, the February 18 letter shows. The debt then reappears on the balance sheet a few days after quarter end, it added.

"Our key takeaway from this behavior is that distribution cuts are so worrisome that some bad actors are playing Enron-like accounting games," the letter said.

The firms are using repo-like loans from one particular investment bank to mask debt, the letter says.

Rubric Capital did not name the bank nor the BDCs involved and Reuters was unable to independently verify whether this practice is being deployed and at what scale.

Rubric Capital declined to comment when contacted by Reuters.

The private credit market has been gripped by anxiety in recent months since the bankruptcies of auto-parts maker First Brands and subprime lender Tricolor last year. The fallout has sharpened scrutiny of a market that has grown quickly, drawing large institutional investment and rising corporate lending in recent years. A renewed bout of uncertainty has flared up in recent weeks.

The BDC industry oversees over $300 billion in assets under management and accounts for roughly one quarter of direct lending in the United States, according to a Bank for International Settlements note in July. The closed-end investment vehicles can be private or listed on stock exchanges.

Enron went bankrupt in 2001 after using off-balance-sheet vehicles and other accounting tricks to hide tens of billions of dollars of debt.