Private Credit Transparency Under Pressure

As publicly traded private credit BDCs faced nearly $20 billion in investor outflows during the first quarter, pressure has intensified on managers to demonstrate liquidity discipline, portfolio quality, and valuation transparency. The volatility has also accelerated industry discussions around more frequent NAV reporting, particularly after firms like Apollo Global Management moved toward enhanced disclosure practices.

Against that backdrop, Gen II Fund Services head of credit operations and strategy Leslie DeRoss discusses how private credit managers are responding to rising investor scrutiny, what operational and accounting hurdles stand in the way of faster reporting cycles, and whether smaller firms can realistically match the transparency initiatives being rolled out by larger alternative asset managers.

CM: We saw nearly $20 billion in outflows from large BDC platforms in Q1. What do you see as the primary drivers behind that shift in investor sentiment?

LD: I do think some of the shifts in investor sentiment were headline driven. Retail investors were spooked by recent events and did not fully appreciate the complexity and nuances related to the way redemptions function in these structures, for example managers gating redemptions – which is normal for these types of semi-liquid funds.

Additionally, I think potential credit risk also raised concerns among investors. Factors like industry exposure – for software in particular – and economic uncertainty increased the likelihood of defaults and PIK elections among borrowers. Lastly, I think overall market volatility and uncertainty encouraged investors to reduce their exposure to less liquid asset classes like BDCs and move into something more liquid.

CM: How much of this is about liquidity perception versus underlying credit quality?

LD: As stated above I believe that both liquidity perception and underlying credit quality contributed significantly to the BDC outflows in Q1. I also think the recent rotation out of software companies in the public sector has had a real impact on the valuation of these private companies.

CM: From an accounting and administration standpoint, what complexities are often underestimated in private credit valuation?

LD: Private credit is inherently an illiquid and difficult to value asset class. Private credit instruments often lack observable market prices, making valuation reliant on models, limited comparable transactions, and management assumptions, which may not always be impartial. Valuation assumptions are typically backed by forecasts like future cash flow, yield, and terminal value multiples data, and this type of analysis takes time. Additionally, many loans and credit agreements are bespoke, requiring tailored valuation approaches and additional review of covenant terms, payments schedules, and other options embedded in loan agreements.

CM: Are investors beginning to demand more real-time insights into portfolio performance and risk?

LD: Yes. As it relates to data and performance, this is where outsourcing to a fund administrator can add value because fund admins have the infrastructure in place to provide daily reconciliations and near real-time access to portfolio data and performance – capabilities many investors do not have internally. Increasing valuation frequency, however, can prove to be too complex and burdensome and add little value.

As stated in the previous response, private credit valuations rely heavily on models and assumptions of company data. Those data and assumptions do not change daily, and, barring any macro events, generally will not change materially monthly, either. Before investing in technology and processes to increase valuation frequency, credit firms and their fund admins should take a hard look at whether it delivers real value and work to both educate investors and manage expectations.

CM: What aspects of private credit valuation and fund accounting are often misunderstood by investors or advisors?

LD: This is a bespoke, complex asset class, and the models and assumptions used to determine private credit valuations are often misunderstood by investors as the subjectivity involved can lead to variability in reported values. Loans do not work like equity securities, and it can be challenging to recognize when a loan is non-performing. The mechanics of loan agreements, methods of accruing interest, and how restructures and amendments are handled and accounted for, differ significantly from public markets, and are often misunderstood.

CM: How much pressure are allocators placing on managers today to provide enhanced transparency around portfolio composition, leverage, and liquidity?

LD: As the market trends toward more granular, frequent, and investor-friendly reporting, allocators are putting significant pressure on managers to increase reporting frequency and deliver more transparency around portfolio composition, leverage, and liquidity.

Investors increasingly expect detailed, frequent reporting of underlying holdings, investment type groupings, and industry exposure.

Allocators require clear breakdowns of leverage at both the portfolio and underlying investment levels reflecting utilization, sources, and risk exposures to help them understand performance.

Transparency around liquidity, such as asset liquidity profiles, redemption terms, and historical cash flow patterns, is now a standard expectation from allocators seeking to monitor risk and plan capital calls or distributions.

Improved reporting, tools like customized Statements of Investments (SOIs), and portals with near real-time access to this data, can help managers meet these transparency demands. Those that do are more likely to maintain strong relationships with their allocator base and differentiate themselves in a competitive market.

CM: Looking ahead, what structural changes do you expect to emerge across private credit fund administration and reporting over the next 12 to 24 months?

LD: I expect broader use of AI, digital, and automated solutions will provide enhanced transparency, automate operational processes like investor onboarding, and reduce the operational burden of tasks like valuations. I also expect to see reporting changes both in customization for investors – such as tailored transparency reports – and more stringent financial and regulatory reporting requirements. The SEC is currently soliciting comments on private credit funds reporting requirements for Form PF, so I also expect potential changes may come in the next few months. Finally, I expect we will see increased use of liquidity sleeves to bring more transparency to investors.