Critics of private credit have previously warned about rising defaults, overleveraged borrowers, and the risks lurking in a $1.8 trillion market that grew rapidly as banks retreated from lending. Now, a different concern is coming into focus: whether the loans themselves are being valued accurately.

The issue gained fresh attention this week after Manhattan U.S. Attorney Jay Clayton said his team is investigating inconsistencies surrounding how private credit funds value their assets, including situations where similar assets are assigned different values by different firms.

The comments come as private credit managers face growing pressure from both investors and regulators.

Reuters recently reported that unrealized losses at U.S. business development companies (BDCs), a key segment of the private credit market, rose to their highest level since 2022 during the first quarter. The review of 51 BDCs found paper losses climbed to 2.35% of net asset value in Q1.

Meanwhile, markdowns are becoming more visible across the industry. Reuters also noted that some private credit funds have marked their investments about $1.2 billion below amortized cost in the first quarter, reflecting pressure from wider credit spreads and weakening conditions in some sectors.

The timing is notable because valuation questions are emerging just as investors are demanding more liquidity.

Blackstone’s $79 billion BCRED fund limited withdrawals after redemption requests reached roughly 10% of net asset value during the quarter. 

Other private market managers, including Partners Group and Cliffwater, have also faced elevated redemption activity.

Partners Group restricted investor withdrawals from its $8.6 billion Global Value SICAV fund after redemption requests exceeded 5% of the net asset value, a move that rattled sentiment across private markets, while Cliffwater's flagship private credit fund capped redemptions at 5% in Q2 after investors sought to redeem approximately 17% of the fund's shares.

The surge in redemption requests is making valuation practices harder to ignore. Unlike publicly traded bonds or leveraged loans, many private credit investments rarely change hands, meaning managers often rely on models, comparable transactions and internal assumptions to determine fair value.

For investors seeking to redeem shares, those valuations effectively determine the price at which they can exit.

The issue has also attracted regulatory attention elsewhere. 

Last month, it was announced that federal investigators were examining valuation practices at BlackRock TCP Capital Corp., highlighting growing scrutiny of how private market firms assess asset values when market conditions deteriorate, the Wall Street Journal reported.

While there is little evidence of widespread distress across private credit portfolios, industry advocates note that default rates remain relatively contained and argue recent markdowns demonstrate valuation frameworks are functioning as intended. However, some analysts believe the industry could face tougher questions if economic conditions weaken further.

The broader debate underscores a challenge unique to private markets. Public securities are repriced every day by buyers and sellers. Private loans often are not.

That has helped private credit maintain a reputation for stability during periods of market volatility. But as redemption requests increase and regulators take a closer look, investors may be asking whether that stability reflects underlying fundamentals—or simply the absence of daily price discovery.

For an industry built on the promise of consistent returns and lower volatility, the next test may not be whether borrowers can repay their loans.

It may be whether investors trust the values assigned to them.

Photo: AI-generated image, created with ChatGPT