The Valuation Gap: How Timing Mismatches Are Shaping Private Credit Risk Perception

Key Takeaways:

• Financial advisors are struggling with whether they have the right read on credit quality in the private credit industry.
• How funds are valuing their illiquid holdings and the time it takes to disclose these valuations are facing greater scrutiny. Managers are doing their best with what is an imperfect practice. But today’s private credit market involves individual investors and publicly traded vehicles, which makes revisiting valuation practices essential.
• In the near term, more frequent independent valuation assurance is a key step while longer term it will be a prerequisite for funds to continue scaling with individual investors.
• Portfolios that are well diversified and don’t reach for outsized yields with risky loans can meaningfully mitigate credit quality risk.

Investors are sounding the alarm on private credit. The public business development company (BDC) sector has sold off sharply, dividends may see an across-the-board cut, and major non-traded funds are experiencing historically high redemptions. These developments are separate from credit quality but collectively signal that something is wrong.

Our look into credit quality paints a different picture. Default rates–which will reflect default events and is nothing new to credit–currently reflect portfolio stability, losses remain low, and recent data suggest payment-in-kind (PIK) income may be declining. Still, many financial advisors are struggling to find hard evidence that credit portfolios are in good shape.

So how do we gain comfort in credit quality? The honest answer: it’s a process. There are steps the industry can and should take to remove the imperfections in the valuation process. But there’s also a timing mismatch raising questions about whether managers are proactive enough in adjusting portfolio valuations. This dynamic stems from the fact that private credit-owned loans reflect fair value. At the same time, investors view their allocations at market value. The various private credit vehicles (namely, public and private BDCs) are stretching the limits of how longer-duration fair value and shorter-term market value interact.

While risks exist, private credit portfolios that are well diversified across sectors, vintage and size – and don’t reach for outsized yields with loans to risky borrowers – can meaningfully mitigate credit quality risk.

Best Practices to Instill Investor Trust

Valuation scrutiny of private credit was kick-started by the threat AI poses to software companies. Private equity, which is heavily involved in software investments, leans on private lenders to finance transactions. On average, BDCs have about 15% to 20% exposure to software, though some funds carry higher concentrations.¹

Private loans are not publicly traded, so their value isn’t readily observable. The AI-driven sell-off in public software stocks has prompted investors to question what is in private credit portfolios and whether risks are being concealed.

In general, managers are doing their best with what is an imperfect practice. But today’s private credit market includes individual investors, which makes revisiting valuation practices essential. The more frequent subscription and redemption activity available to individual investors requires accurate and timelier valuations to preserve trust.

Beyond internal valuation process, the industry should establish independent valuations at regular intervals:

• Quarterly: Independent third-party valuation agents should review at least 25% of the portfolio, with 100% annual portfolio coverage.
• Monthly: Funds should engage independent valuation agents to support recurring net asset value (NAV) calculations.
• Daily: Moving to daily valuations is a newer area and a byproduct of the vehicles (i.e., public BDCs) that offer daily price discovery. The approach involves a model driven by market conditions and underlying fundamentals, supported by independent valuation specialists.

Using this approach to mark positions daily is not a substitute for daily price discovery and is not a perfect measure of borrower creditworthiness. But it does narrow the gap between fair value and investors’ market view lens.

In the near term, more frequent independent valuation assurance is a key step to reversing negative sentiment in private credit. Longer term, it will be a prerequisite for funds to continue scaling with individual investors.

Timing Mismatch

Private credit was built as a long-term, buy-and-hold-asset class. Modern private credit investment vehicles, however, offer price discovery on a more frequent basis. This tension plays out most visibly where public and private credit meet—in public BDCs.

The S&P BDC Index was down 13% in 2025.² Private BDCs returned approximately 8%- 10% over the same time period.³ The market’s signal is clear: either portfolios’ health has deteriorated, or valuations are inflated and concealing risk. Even if the market is wrong and credit quality remains strong, managers can’t ignore the signal — it’s weighing on new subscriptions and fundraising (Exhibit 1).

Slowing capital inflows may partly reflect a maturing industry—private credit has doubled in size to $2 trillion over the last five years and is due for a break.⁴ But the stronger argument is that the mechanism through which new information flows through private credit valuation is imperfect and vastly different than the public face of the asset class.

Valuation Consistency Between Funds

The leeway managers have in determining fair value is more heavily scrutinized as portfolio overlap between managers increases. The top ten BDCs had roughly 2% portfolio overlap from 2015 to 2020; by 2025 that figure reached 11% (Exhibit 2). This raises the need for cross-manager valuation consistency to prevent credit risk from spreading across interconnected portfolios.

The disparity is visible when valuations on the same loan vary differently across managers.  For example, private loans to software company Medallia were valued at 91%, 82% and 77% simultaneously by three of its lenders—a 14 point difference (Exhibit 3). To put this into context, one lender considered the loan distressed while another marked the same loan at 91%. This can happen as each lender has its own valuation process. Most are based on similar concepts, but each fund includes their own assumptions and forecasts. Companies, such as Medallia, that go through turnarounds or management changes can see larger differences in valuations due to a wider range of inputs.

This clearly illustrates why determining fair value of private assets is difficult and why it’s a growing concern to investors. While these discrepancies often converge over time (as seen in Exhibit 3), the increasing number of private credit vehicles offering share subscriptions and redemptions is upending the existing valuation process.

As turbulence in private credit continues, transparency and hard evidence of strong credit health are the clearest paths to reversing negative sentiment. The industry has evolved and its valuation practices should evolve with it.