Pressure on the private credit industry is highlighting an emerging area of potential regulatory scrutiny and civil litigation – the valuation of illiquid, rarely traded credit assets that are particularly hard to value, and thus vulnerable to extensive second-guessing. That risk is particularly acute in environments that are prone to dramatic fluctuations caused by market events, especially if fund managers’ policies and procedures – often developed during, and in anticipation of, steadier conditions – are not equipped for those circumstances.

This article details the impetus for scrutiny of private credit valuations; the focus of regulators and private plaintiffs on these issues; and what can be done by those in the industry – ranging from fund managers to their boards and valuation committees – to prepare to address this emerging dynamic.

See “SEC Examinations and Enforcement Staff Warn Against Certain Private Credit Practices, Fee and Expense Conflicts (Part Two of Two)” (Feb. 20, 2025).

Scrutiny of Private Credit Asset Valuations

Redemption Concerns

In the first quarter of 2026, a wave of investor withdrawal requests simultaneously hit the largest private credit funds. For example, Blue Owl Capital disclosed that investors sought significant redemptions from its flagship fund and a technology-focused vehicle. The firm capped withdrawals at five percent, honoring less than a quarter of the requests.

That series of wide-scale redemptions shine a spotlight on private credit valuations. An investor who redeems at an overstated net asset value (NAV) receives more than their proportionate share of the fund’s value, leaving the remaining investors in the fund to absorb the shortfall. As a result, accurate valuations are essential to ensure a fund treats all of its investors fairly. And the perception of potentially inflated valuations will intensify investors’ temptation to redeem early and avoid being left “holding the bag.”

Valuation Challenges

Although investors in any illiquid assets face the same redemption risk, the private credit industry may be particularly vulnerable because its asset valuations are far more subjective than most other widely held assets. Unlike publicly traded bonds with observable market prices – or even assets that can be valued with reference to comparable instruments – private credit loans are almost universally classified as Level 3 assets under the Financial Accounting Standards Board’s fair value hierarchy (ASC 820).

Level 3 classification means that asset valuations depend on “significant unobservable inputs” requiring substantial judgment. Of course, there are well-accepted methodologies to value Level 3 assets, such as discounted cashflow analysis and comparable transaction pricing. However, those methodologies require the fund to make numerous assumptions about which reasonable professionals often disagree. In extreme cases, valuation processes may also be vulnerable to manipulation or even falsification.

To illustrate the point, consider a few examples about the range of assumptions left to fund managers’ discretion when valuing Level 3 assets:

• What discount rate reflects the current risk of a loan to a software company whose business model may be disrupted by artificial intelligence (AI)?
• What recovery rate should be assumed for a borrower that is technically current but operationally deteriorating?
• How should a valuation committee weigh a third-party pricing service’s mark against its own internal analysis?

Small changes in those and other valuation assumptions can produce materially different outcomes. For example, a $100‑million loan priced at par when the discount rate matches the coupon (e.g., SOFR + 5.5 percent) could be worth significantly less if credit deterioration means the market would demand SOFR + 8 percent. And whereas mispricings in public markets are corrected by daily trading, private credit marks are only tested when an actual transaction occurs – which may be many quarters or years later.

See “SBAI Introduces New Standards and Accompanying Guidance on Valuing Illiquid Assets” (Apr. 3, 2025).

Regulatory and Litigation Risks

None of that means that private credit valuations are likely to be wrong. Many funds apply rigorous methodologies, maintain independent valuation committees and engage third-party pricing services. But the fact that the accounting rules require parties to make so many subjective judgments to produce Level 3 marks means that any valuation can be challenged after the fact by:

• a regulator armed with hindsight;
• an investor who redeemed at a price that was worse than other investors who got out earlier; or
• a plaintiff’s expert making different assumptions.

In those instances, the question may not be whether the fund committed fraud; it is whether the fund’s process was robust enough to withstand that second-guessing.

When pursuing investigations and litigations, regulators and disgruntled investors may also be able to take advantage of the built-in incentives fund managers may have to increase or decrease their valuations, including the following:

• Management fees are typically calculated on assets under management, so higher marks generate higher fees and higher portfolio manager compensation.
• Managers may have an incentive to smooth their returns or otherwise manage their track record.
• Managers will think twice before making significant markdowns that could trigger investor anxiety and, in open-end funds, further redemption requests, creating a reflexive cycle.

Although those incentive structures do not prove misconduct, they provide the narrative that enforcement authorities and plaintiffs’ lawyers can use to frame their respective cases.

Regulatory Shift: From Hedge Funds to Private Credit

Historic Hedge Fund Scrutiny

Regulators have brought a number of high-profile valuation cases in the last 20 years, typically focused on the holdings of hedge funds. The paradigmatic enforcement cases involved managers of funds holding complex derivatives or thinly traded structured products that allegedly inflated marks to collect performance fees, attract new investors or avoid triggering redemptions during periods of stress.

In SEC cases, the allegations typically focused on whether the hedge fund had adequate processes and procedures to produce reliable marks. The DOJ also brought periodic criminal cases against hedge fund managers in more extreme circumstances when there was evidence of intentional manipulation, including:

• laundering false marks through a nominally independent party;
• deliberately overriding pricing models; or
• purchasing assets at knowingly inflated prices to “paint the tape” and use those prices for valuation purposes.

See “SEC Enforcement Action Targets PE Sponsor’s Write‑Down Mechanics and Related Disclosures to LPs” (Jul. 13, 2023); and “SEC Enforcement Action Scrutinizes Substantive Details of Level‑3 Valuation Policies and Procedures” (Jun. 29, 2023).

Present Private Credit Pressure

The focus among regulators has now shifted to the private credit industry. The SEC’s Division of Examinations explicitly identified valuations and liquidity of private credit funds and funds with extended lock-up periods in its 2026 examination priorities (2026 Priorities), singling out “the methods and controls surrounding the fair valuation of illiquid assets, especially in periods of market volatility.”

The SEC also flagged the “retailization” of private credit as an area of heightened concern in its 2026 Priorities. Private credit products that were traditionally limited to institutional investors are increasingly distributed through semi-liquid vehicles marketed to high-net-worth and retail investors. Regulators have questions about whether those investors fully understand the liquidity risks, valuation challenges and fee structures involved with those private market assets.

See “SEC 2026 Examination Priorities Highlight Classic Compliance Issues, Retailization Efforts and AI Oversight” (Jan. 8, 2026); and “SEC Investor Advisory Committee’s Recommendations to Facilitate Retail Access to Private Markets” (Oct. 30, 2025).

On the criminal side, the signal has been equally direct. In November 2025, Jay Clayton, the former SEC chair now serving as U.S. attorney for the Southern District of New York, publicly warned that “sketchy marks” in private market valuations had drawn prosecutorial attention. Clayton specifically flagged inter-fund transfers, observing that when a firm moves a position from one fund to another and can set the price internally, the opportunity to pick a price that benefits one fund at the expense of the other is self-evident. Although Clayton’s remarks addressed private markets generally, the financial press immediately connected his warning to the private credit industry.

The emerging trend was further illustrated when the SEC settled charges against a credit fund adviser in early 2026 for negligence-based anti-fraud violations and breaches of fiduciary duty in connection with the sale of originated loans to affiliated funds. The case involved a narrow window during the early coronavirus pandemic when the adviser continued to sell performing loans to its affiliate fund at par value without complying with the requirement in its policies and procedures to reassess whether the extreme market dislocation had affected fair market value.

The SEC’s theory in the enforcement action is significant because it establishes that failure to update valuations during a period of market stress can result in scrutiny and negligence-based fraud charges even when the underlying loans are performing. That theory has obvious implications for the current environment, where market conditions are shifting rapidly and portfolio stress is building across the sector.

See “SEC Penalizes Private Credit Adviser for Pandemic‑Related Valuation Practices in Season and Sell Program” (Apr. 16, 2026); and “Eye of the Storm: Q2 Valuations of Private Debt and Equity During the Coronavirus Pandemic (Part One of Two)” (Jul. 14, 2020).

Civil Litigation Landscape: Current and Future Claims

The combination of investor losses, redemption restrictions and questions about valuation accuracy has already produced civil litigation in addition to regulatory focus. Although the current wave of cases is likely just the beginning of this trend, several categories of claims are emerging.

Securities Fraud Class Actions Against Publicly Traded BDCs

Business development companies (BDCs) are publicly registered, their shares trade on exchanges and they are subject to the full apparatus of federal securities law. When a BDC’s reported NAV drops sharply, the familiar securities fraud template applies as plaintiffs allege:

• materially misleading statements about portfolio health and valuation;
• artificial inflation of the stock price during the class period; and
• shareholder losses when the NAV drops after the truth emerged.

At least two cases of this type have already been filed. In February 2026, a shareholder class action was filed against a financial institution after the fund disclosed a significant NAV decline in a single quarter. In March 2026, Hercules Capital was sued after a short seller report alleged overstated due diligence processes, misclassified portfolio investments and software debt marked at full value despite industry-wide distress. Any publicly traded BDC that takes a significant markdown in the coming quarters is at risk of similar claims.

Breach of Fiduciary Duty Claims by Fund Investors

For non-traded funds and private vehicles falling outside the purview of federal securities fraud claims, investors are likely to pursue state-law fiduciary duty claims against fund managers and boards. The core theory is that fund advisers owe their investors a duty to value portfolio assets accurately and manage redemptions fairly, and that maintaining stale or inflated marks during a period of known stress breaches that duty. The redemption context gives these claims particular force. An investor who was denied a full redemption before a fund’s NAV was written down has a concrete damages narrative: the investor remained in the fund involuntarily and absorbed losses that were already embedded in the portfolio but not yet recognized in the marks.

See “Overview of the SEC’s Standards for Resilient and Effective Compliance Programs and Fiduciary Practices (Part Two of Two)” (Oct. 4, 2022).

LP‑GP Disputes in Closed‑End Fund Structures

Although closed-end private credit funds do not offer periodic redemptions, they still present valuation exposure. LPs rely on quarterly NAV reports for portfolio allocation decisions, fair value determinations in secondary market transactions and performance benchmarking. If a GP maintained inflated marks while fundraising for a successor vehicle and used the existing fund’s track record as a marketing tool, then the LP’s damages theory is straightforward: the LP committed capital based on performance data that was, in hindsight, unreliable. Those types of disputes may play out through litigation, arbitration or LP advisory committee confrontations, depending on the fund’s governing documents.

Derivative and Board‑Level Claims

For BDCs and registered funds with independent boards, directors face potential exposure for failure of oversight. Under the Investment Company Act of 1940, boards bear specific obligations regarding the fair valuation of fund assets. If a board’s valuation committee arguably rubber-stamped management’s marks without adequate independent analysis or failed to challenge valuations when market indicators were signaling distress, then derivative claims by shareholders are foreseeable. The current environment, where redemption pressure creates obvious incentives to delay markdowns, will put board independence and diligence under particular scrutiny.

See “Converting a Private Fund Into a Registered Fund: Investor Relations, Track Record and Board of Directors Issues (Part Two of Two)” (Mar. 19, 2026).

Short Seller‑Driven Litigation

The Hercules Capital case illustrates an emerging dynamic that is also applicable in other contexts. The typical arc of litigation involves short sellers publishing research questioning a fund’s valuation practices or underwriting discipline; the stock subsequently price drops; and a securities class action suit follows immediately.

Private credit’s reliance on Level 3 marks makes the sector uniquely vulnerable to that pattern. The absence of observable market prices means a motivated party can typically construct an argument that the marks are wrong, regardless of whether the fund’s methodology is sound. Funds should expect short sellers to increasingly target BDCs and publicly traded private credit vehicles, with valuation skepticism as their core thesis.

Issue‑Spotting for Fund Managers, Boards, Investors and Their Counsel

The convergence of market stress, regulatory attention and active litigation means that the window for proactive preparation is narrowing. Fund managers and boards who wait for an enforcement inquiry or complaint to arrive before examining their valuation practices will find themselves playing defense on unfavorable terrain.

Fund managers can consider the following steps to mitigate those risks, while investors can consider these same issues as avenues for investigating potential claims.

Pressure‑Test Valuation Governance Against Current Conditions

Fund managers typically design their valuation policies and procedures during periods of steady inflows and benign credit conditions. Those policies and procedures need to be reexamined, however, in light of the current environment.

Interested parties should ask specific questions about how well those policies are tailored, such as:

• Have discount rates been updated to reflect current market spreads and sector-specific risk, particularly (at the moment) for software-exposed (or other AI-vulnerable) credits?
• Are third-party pricing service marks being independently verified, or are they being accepted without analysis?
• Is the valuation process genuinely independent from portfolio management, or does the committee’s composition and practices create a risk that it is ratifying marks rather than scrutinizing them?

The SEC’s enforcement action in early 2026 establishes a clear baseline: the duty to update is affirmative, not reactive. In that case, the agency found fiduciary duty violations where a fund failed to reassess its valuations during a period of market stress even though the underlying loans were performing.

See “Improving Compliance Programs With Gap Analysis and Risk Assessments” (Dec. 14, 2023).

Build a Contemporaneous Record That Can Withstand Hindsight Scrutiny

For a fund that wants to be able to defend its valuations against prospective attacks, the most important thing it can do is document valuation judgments thoroughly and contemporaneously. Every significant assumption should be supported by a written rationale. Every decision not to mark down a credit should be explained, with reference to specific data points. The goal is to create a record that demonstrates that the fund’s process was rigorous and its conclusions were reasonable at the time they were made, even if subsequent events ultimately required a write-down.

Conversely, a regulator or a plaintiff’s lawyer will try to show that indicators of impairment were visible quarters earlier but not acted upon in a timely manner. Gaps in a fund’s documentation will enable a party attacking valuations to identify unsupported or stale assumptions, or to argue inconsistent treatment.

Address the Redemption Fairness Problem Explicitly

Funds processing redemptions during a period of portfolio stress have a particularly urgent obligation to evaluate whether their valuation methodology adequately balances the interests of both redeeming and remaining investors. If marks are stale, reflecting last quarter’s conditions rather than current ones, redeemers may be receiving more than their fair share at the expense of remaining holders.

To mitigate that risk, boards and valuation committees should consider whether interim or ad hoc valuation updates are warranted during periods of elevated redemption activity. The failure to consider this question is itself a governance gap that regulators and investor plaintiffs will scrutinize.

Conclusion

The valuation of illiquid assets has been a significant regulatory and civil litigation issue since at least the 2008 global financial crisis. The combination of current market volatility and the proliferation of illiquid untraded private credit assets should make valuations an urgent priority for managers and investors alike.

 

Stephen Ascher is a partner in the New York office of Jenner & Block and co-chair of its securities litigation practice. He represents clients in a wide variety of financial disputes, and has handled significant valuation issues in private litigation, against regulators, and in criminal cases.

Charles D. Riely is a partner in the New York office of Jenner & Block. He has experience representing hedge funds, PE funds and individuals in high-stakes government investigations and litigations, as well as helping clients proactively address compliance and anti-money laundering risks.

Shailee Diwanji Sharma is a senior associate in the New York office of Jenner & Block. She represents clients in high-stakes government investigations, complex commercial litigation and internal investigations, with a particular emphasis on financial services and fintech, including hedge funds and PE sponsors.