Private credit valuations: navigating volatility, regulatory risk and an evolving market

Private credit has seen significant growth in demand from borrowers and supply from investors. Although most private credit funds remain funded by institutional investors, private wealth investors represent a small but growing share of capital. They can now get exposure to private credit through publicly traded business development companies, non-traded semi-liquid funds, exchange traded funds, investment trusts, European Long-Term Investment Funds (ELTIFs) or UK Long-Term Asset Funds (LTAFs). These vehicles have varying degrees of liquidity and can have specific requirements with respect to asset holdings and disclosures.

Turning illiquid assets into investable products has unlocked new pools of capital and whilst recent developments have invited a degree of market reflection, they also present an opportunity for the industry to refine and strengthen its structural frameworks. 

Pricing of private credit is generally considered to be less volatile than pricing of public credit or private equity, given the risk profile of the underlying asset class. A recent study suggests that the market generally functions well as the risk of private debt is priced correctly.

In theory, the only difference between the price of an asset in a private versus public market is an additional discount for illiquidity, as the asset’s intrinsic value is assumed to be the same. In practice, supply and demand dynamics are quite different between private and public markets, which has an impact on pricing, volatility and market participant behaviour.

These market dynamics make it difficult to untangle what is driving a change in price: does it reflect a change in risk appetite, liquidity preference, or the intrinsic value of the underlying asset? Having a comprehensive and up-to-date understanding of the investment landscape, regulatory priorities and valuation principles helps mitigate risk and navigate the evolving private credit market.

Recent developments

The current episode of private credit volatility has been shaped by questions about the long-term cash flow prospects of asset-light software companies (following the release of new AI driven LLM models in February) - many of which had taken on significant debt when interest rates were lower. As a result, investors cut exposure to software companies and reallocated capital to other sectors, which resulted in significant share price declines for semi-liquid and open-ended private credit funds (Barclays estimates that software accounts for approximately 20% of portfolio exposure in business development companies) and redemption requests exceeding caps at several semi-liquid funds.

The sudden increase in demand for liquidity also provides opportunities. Some asset managers have made tender offers to buy shares in semi-liquid funds at a discount, providing liquidity to investors who want out, but at a cost. This suggests that current volatility is more about liquidity than fundamentals, which is a position that is further supported by reports of  insider buying at funds managed by Blackstone. Asset managers, who have a lot of dry powder, have also not yet stepped in to buy undervalued asset although banks do not see a broader deterioration in credit quality.

Nonetheless, volatility and lower asset prices due to an increase in demand for liquidity can make it difficult for companies to refinance debt and will make investors question whether company fundamentals are still sound. Earlier this month, Fitch Ratings reported an increase in US private credit defaults, but with limited losses to investors. In February, Blackstone’s largest private credit fund recorded its first month with a negative total return since September 2022, driven by markdowns of positions in software companies and lower benchmark interest rates. More borrowers are also opting to pay interest in kind instead of cash.

Market volatility is currently mainly observed in semi-liquid and open-ended vehicles, which represent only a small portion of the private credit market as most remain closed-ended and funded by institutional investors. While closed-ended funds are structurally sheltered from the narrative around private credit redemptions, pricing and volatility still provide relevant signals for institutional investors.

Regulatory interest

Given the growth of private credit as an alternative to bank lending and the increase in exposure of private wealth investors, regulators are taking more of an interest. Regulators are focused in particular on structural risk, including the behaviour of market participants in distressed market conditions, governance and uncertainty around the valuation of private assets.

The significant growth and demand for private assets presents an opportunity for the industry to reinforce underwriting standards, particularly in semi-liquid vehicles targeting private wealth investors, where deployment activity tends to be more active. Regulators have highlighted the importance of ensuring that private wealth investors - who may approach due diligence differently from institutional counterparts - are appropriately supported with the information needed to assess risk accurately. Their focus is likely on strengthening information frameworks for private wealth investors, recognising that equipping them with the right tools and disclosures to calibrate risk is an important step in the market's evolution. 

The FCA has classified private markets as a supervisory priority following the sector’s growth in recent years and has recently introduced a consultation on expanding consumer access to private and public capital (see our article). The Bank of England is currently conducting a System-Wide Exploratory Scenario exercise (SWES) focused on understanding how private capital markets participants respond to distressed market conditions - the final report is expected in 2027.

The FCA and Bank of England are joined by regulators including the International Organisation of Securities Commissions, which in September 2023 reported on risks in private finance, and the Australian Prudential Regulation Authority, which conducted a survey in 2024 and found material gaps related to how funds value private assets, calling its findings "concerning and indicative of the need for a continued drive to lift practices across the industry".

Similarly, the SEC adopted rules in 2023 requiring private capital managers to provide investors with detailed quarterly reports on performance and increased disclosure on expenses. This impacted not only US private funds but also managers with US investors. These rules have since been vacated by the US Fifth Circuit court, but regulatory interest remains.

For a deep dive into the regulatory environment, see our recent webinar in which we examine the increasing regulatory scrutiny affecting private capital managers in more detail.

Valuation policy and governance

While the headlines are largely driven by a liquidity mismatch in retail-oriented, semi-liquid, and open-ended vehicles, closed-ended private credit managers may still face investor concern about volatility and pricing of illiquid assets. Furthermore, as the European private credit market matures (and follows that of the US) more frequent and more robust valuation practices are likely to be expected. Addressing both investor concern and evolving market expectations begins with implementing a robust valuation policy, which reduces ambiguity around the valuation process and clarifies what portion of a valuation remains subject to judgement.

If value is measured on a consistent basis over time and relative to other asset classes, investors can be more confident that their holdings can be realised at their stated value and make better capital allocation decisions. A well thought out valuation policy also benefits the fund manager as it improves governance by clearly separating responsibilities, especially if valuations are tied to compensation.

In the case of private credit funds, using appropriate valuation methodologies might, in an environment in which interest rates decline or spreads tighten, allow managers to price debt assets above par (subject to call rights held by the borrower), rather than treating par as a ceiling.

Valuation practices remain under regulatory scrutiny, including by the Bank of England, who included valuation in the scope of the current SWES and has previously highlighted vulnerabilities from opaque valuations, and the FCA, which conducted a survey on private market valuation practices last year. We also see legislative interest, with private asset valuation risk covered in a recent report from the House of Lords Financial Services Regulation Committee.

We summarised the FCA guidance and our recommendations on valuation best practice in an article last year. There have been some new developments since.

In December 2025, UK Private Capital (formerly the BVCA) published a new edition of the International Private Equity and Venture Capital Guidelines (IPEV) with 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 new guidelines will come into effect from 1 April 2026.

In addition, AIFMD II, an update to the AIFMD regime, will come into effect from 16 April 2026. For authorised alternative investment fund managers, AIFMD requires a valuation function that is (functionally) independent and follows appropriate and consistent procedures on valuation methodology, frequency and investor disclosure. AIFMD II further strengthens these requirements, in particular on disclosure. Fund managers remain responsible for the valuation function, even if an external valuer is appointed.

As a result of these developments, we currently observe fund managers actively seeking advice and recruiting to professionalise their valuation function. We observe this trend both in Europe and the US, but with stronger impetus in Europe where fund managers have historically lagged US counterparts due to the lower prevalence of semi-liquid products.

In light of the changes to the guidelines, ongoing scrutiny of private capital markets and valuation practices and investor concern around how reported NAV is set, we encourage fund managers to act now to evaluate valuation risks and, where necessary, improve control processes. For managers which already have a valuation process in place, or have established an internal valuations team, this is an opportune time to review whether their valuation processes are robust.

We can assist by reviewing your current valuation policy and suggest how to align this with industry best practice. We can also assist in the valuation process itself by valuing fund investments or by reviewing third-party valuations to ensure that reported NAV is set in line with your valuation policy and Valuation Committee expectations.

Key takeaways

• The market for private credit will continue to evolve while it grows further and matures. Its structure and supply and demand dynamics makes it likely that liquidity and pricing will remain topics of discussion and concern for investors.
   
• As the investor base broadens for private assets, this will heighten regulatory scrutiny, particularly in relation to valuation practices, governance and investor protection.
   
• Uncertainty around pricing, volatility and governance can be alleviated by having a good understanding of regulatory priorities and implementing a valuation policy that reflects industry best practice.
   
• We encourage fund managers to evaluate valuation risks and, where necessary, improve control processes. We can assist by reviewing your valuation policy and suggest how to align this with industry best practice. We can also assist in the valuation process by valuing investments or by reviewing third-party valuations to ensure that reported NAV is set in line with your valuation policy.

Contacts

Get in touch with Steven Koppenaal, Rhiannon Kinghall Were or Margarida Ferreira to discuss how we can assist navigating private credit, valuation challenges and the broader regulatory environment.