Private credit valuations

Overview

The private credit market has seen unprecedented growth over the last decade. As the asset class matures and moves increasingly into the mainstream of institutional allocations, the spotlight on how these inherently illiquid assets are valued has intensified.

The Regulatory Focus

Global regulators, including the FCA in the UK and the SEC in the US, have highlighted private market valuations as a key area of supervisory focus. The primary concern is ensuring that valuations are fair, robust, and consistently applied, particularly during periods of macroeconomic stress or market volatility where public market comparables may be moving rapidly.

Key Challenges in Private Credit Valuation

• Lack of Observable Inputs: By definition, private credit instruments lack active secondary markets, necessitating greater reliance on Level 3 (unobservable) inputs.
• Bespoke Documentation: The highly customized nature of direct lending and structured credit means standard valuation models often require significant adjustment to reflect specific covenant packages and term structures.
• Information Asymmetry: Valuers are reliant on sponsor or borrower-provided information, which may be subject to a time lag.

Best Practices for Managers

To navigate this evolving landscape, leading credit managers are increasingly adopting independent third-party valuation agents, either for full valuations or to provide positive assurance on internal marks. Furthermore, documenting the rationale for valuation decisions, particularly when deviating from model outputs or where significant judgment is applied, is critical from a governance perspective.