Private credit valuations

The market landscape

Private credit has recorded significant growth in both borrower demand and investor supply. While institutional investors continue to constitute the predominant source of capital, private wealth investors represent a small but materially expanding share. Exposure vehicles now include publicly traded business development companies (BDCs), non-traded semi-liquid funds, exchange traded funds, investment trusts, European Long-Term Investment Funds (ELTIFs), and UK Long-Term Asset Funds (LTAFs). Each vehicle carries distinct liquidity profiles and imposes specific requirements with respect to asset holdings and disclosure obligations.

The conversion of illiquid assets into investable products has unlocked new pools of capital. Recent market developments have prompted a degree of reflection and simultaneously presented an opportunity for the industry to refine and reinforce its structural frameworks.

Pricing dynamics and valuation complexity

Pricing of private credit is generally regarded as less volatile than that of public credit or private equity, given the risk profile of the underlying asset class. A recent study indicates that the market broadly functions well and that the risk of private debt is priced correctly.

In theory, the only distinction between the price of an asset in a private versus public market is an additional discount for illiquidity, with the asset's intrinsic value assumed to be equivalent. In practice, supply and demand dynamics diverge materially between private and public markets, generating meaningful differences in pricing, volatility, and market participant behaviour.

These market dynamics complicate the attribution of price movements: a change may reflect a shift in risk appetite, a liquidity preference adjustment, or a genuine revision to the intrinsic value of the underlying asset. Maintaining a comprehensive and current understanding of the investment landscape, regulatory priorities, and valuation principles is essential to mitigating risk and effectively navigating the evolving private credit market.

Recent developments: Volatility and liquidity pressure

The current episode of private credit volatility has been shaped by questions regarding the long-term cash flow prospects of asset-light software companies – many of which assumed significant debt when interest rates were materially lower – following the release of new AI-driven large language model (LLM) products in February 2025. In response, investors reduced exposure to software companies and reallocated capital to other sectors. The consequent share price declines affected semi-liquid and open-ended private credit funds (Barclays estimates that software constitutes approximately 20% of portfolio exposure in BDCs), and redemption requests exceeded statutory caps at several semi-liquid vehicles.

The acute increase in liquidity demand has also generated opportunity. Several asset managers have made tender offers to acquire shares in semi-liquid funds at a discount, providing an exit mechanism for investors at a cost. This pattern suggests that current volatility reflects a liquidity dislocation rather than a deterioration in fundamentals – a position further supported by reports of insider buying at funds managed by Blackstone. Asset managers with significant uncommitted capital have not yet moved to acquire undervalued assets at scale, and banks do not presently identify a broader deterioration in credit quality.

Notwithstanding, volatility and asset price compression attributable to liquidity demand can impair a company's ability to refinance debt and may cause investors to reassess the soundness of underlying fundamentals. Fitch Ratings reported an increase in US private credit defaults earlier this year, albeit with limited investor losses. In February 2025, Blackstone's largest private credit fund recorded its first month of negative total return since September 2022, driven by markdowns of software company positions and lower benchmark interest rates. An increasing number of borrowers are also electing to satisfy interest obligations in kind rather than in cash.

Market volatility is currently concentrated in semi-liquid and open-ended vehicles, which represent a limited portion of the overall private credit market; the majority remains closed-ended and institutionally funded. While closed-ended funds are structurally insulated from the redemption dynamics currently affecting retail-oriented vehicles, pricing and volatility nonetheless provide relevant signals for institutional investors.

Regulatory interest and priorities

Regulators have materially increased their focus on private credit, driven by the sector's growth as an alternative to bank lending and by the expanding participation of private wealth investors. Regulatory attention is concentrated on structural risk – including market participant behaviour in distressed conditions – as well as governance and valuation uncertainty for private assets.

The significant growth in private asset demand presents an industry opportunity to reinforce underwriting standards, particularly in semi-liquid vehicles targeting private wealth investors, where deployment activity tends to be more active. Regulators have emphasised the importance of ensuring that private wealth investors – who may approach due diligence differently from institutional counterparts – are appropriately supported with the information required to assess risk accurately. The regulatory focus is directed toward strengthening information frameworks for private wealth investors and equipping them with the disclosures and analytical tools to calibrate risk as a prerequisite to the market's continued evolution.

Specific regulatory initiatives of note include the following:

• The Financial Conduct Authority (FCA) has designated private markets as a supervisory priority and recently introduced a consultation on expanding consumer access to private and public capital.
• The Bank of England is conducting a System-Wide Exploratory Scenario exercise (SWES) focused on the behaviour of private capital market participants in distressed conditions; the final report is anticipated in 2027.
• The International Organisation of Securities Commissions (IOSCO) reported in September 2023 on risks in private finance.
• The Australian Prudential Regulation Authority (APRA) conducted a survey in 2024 and identified material gaps in how funds value private assets, characterising its findings as "concerning and indicative of the need for a continued drive to lift practices across the industry."
• The Securities and Exchange Commission (SEC) adopted rules in 2023 requiring private capital managers to provide investors with detailed quarterly performance reports and enhanced expense disclosure. Although these rules were subsequently vacated by the US Fifth Circuit Court, regulatory interest in this domain persists.

Valuation policy, governance, and best practice

While the current headlines are largely driven by liquidity mismatches in retail-oriented and semi-liquid vehicles, closed-ended private credit managers are not insulated from investor concern regarding the volatility and pricing of illiquid assets. As the European private credit market matures and further converges with US market practice, more frequent and more robust valuation standards are increasingly expected.

Addressing investor concern and evolving market expectations requires the implementation of a robust valuation policy – one that reduces ambiguity in the valuation process and clarifies what portion of a valuation remains subject to professional judgement.

Where value is assessed on a consistent basis over time and relative to comparable asset classes, investors can be more confident that holdings can be realised at stated value and are better positioned to execute sound capital allocation decisions. A well-constructed valuation policy also strengthens fund governance by separating responsibilities with clarity – a consideration of particular importance where valuations bear on compensation arrangements.

In the context of private credit funds specifically, applying appropriate valuation methodologies may – in an environment of declining interest rates or tightening spreads – permit managers to price debt assets above par (subject to any call rights held by the borrower), rather than treating par as an absolute ceiling.

Recent regulatory and industry developments of direct relevance include the following:

• IPEV Guidelines (December 2025): UK Private Capital (formerly the BVCA) published a revised edition of the International Private Equity and Venture Capital Guidelines, providing further guidance on complex capital structures, prices observed in secondary transactions, and ad hoc valuations. Core concepts and best practice – including calibration, robust documentation, back-testing, and distressed market valuations – remain unchanged. The revised guidelines take effect from 1 April 2026.
• AIFMD II (effective 16 April 2026): The updated AIFMD regime requires authorised alternative investment fund managers to maintain a valuation function that is functionally independent and applies appropriate and consistent procedures in respect of valuation methodology, frequency, and investor disclosure. AIFMD II materially strengthens these requirements, particularly with respect to disclosure obligations. Fund managers retain responsibility for the valuation function even where an external valuer is appointed.

In response to these developments, fund managers across Europe and the United States are actively seeking external advice and augmenting internal teams to professionalise their valuation functions. This trend is most pronounced in Europe, where fund managers have historically trailed their US counterparts due to the lower prevalence of semi-liquid products in that market.

Key implications for fund managers and private capital counsel

• Evaluate valuation risks and address control gaps without delay. In light of the revised IPEV Guidelines, AIFMD II's impending application, ongoing regulatory scrutiny of private capital markets, and investor concern regarding reported NAV accuracy, fund managers should assess their valuation governance frameworks now and implement improvements where required.
• A robust valuation policy is foundational, not optional. Reducing ambiguity in the valuation process, clearly separating responsibilities, and aligning methodology with industry best practice are measures that protect both investor confidence and fund manager governance standards.
• Semi-liquid and open-ended vehicle managers face heightened exposure. The current liquidity dislocation is concentrated in retail-oriented vehicles. Managers operating in this segment must address structural risk proactively – particularly with respect to information frameworks for private wealth investors and the adequacy of redemption and liquidity management mechanisms.
• Regulatory convergence across jurisdictions warrants close monitoring. The coordinated scrutiny of private credit valuation practices by the FCA, Bank of England, IOSCO, APRA, and SEC signals a structural shift in regulatory expectations. Fund managers with cross-border operations should anticipate further disclosure and governance requirements as this convergence progresses.

This article provides general information only and does not constitute legal or valuation advice. We will continue to monitor developments in private credit regulation, valuation governance, and market structure as the sector evolves.