NextFin News - Federal prosecutors in Manhattan are intensifying their investigation into how private credit firms value their assets, signaling a major regulatory shift for the $1.8 trillion industry. The U.S. Attorney’s Office for the Southern District of New York (SDNY) has recently sought information regarding valuation practices at BlackRock TCP Capital Corp., a publicly traded business development company (BDC), according to people familiar with the matter. The inquiry follows a rare off-cycle disclosure by the fund in January, which revealed a 19% slash in asset values, one of the most abrupt markdowns in the sector’s history.
U.S. Attorney Jay Clayton, who took office following the inauguration of U.S. President Trump in 2025, has made private credit enforcement a cornerstone of his tenure. Clayton, a former Chairman of the Securities and Exchange Commission (SEC), has publicly voiced concerns that firms may be "cherry-picking prices" to inflate net asset values and, by extension, the management fees they collect from investors. His office is currently examining whether these valuation discrepancies constitute criminal fraud, particularly in cases where funds collapsed shortly after maintaining stable marks.
The scrutiny is not limited to BlackRock. Prosecutors are also reviewing the fallout from the bankruptcies of Tricolor Holdings and First Brands Group, both of which were heavily backed by private credit and collapsed in September 2025. These failures have exposed a "valuation gap" between the internal marks held by lenders and the actual recovery values in liquidation. SEC Chairman Paul Atkins has confirmed that the commission is coordinating with the SDNY to investigate allegations of mismarking, focusing on whether fund managers intentionally delayed recognizing losses to prevent investor redemptions.
The private credit market has long operated in a regulatory gray area compared to the highly transparent public bond markets. Because these loans do not trade on exchanges, their values are determined by internal models or third-party valuation firms, often with significant discretion left to the fund manager. This opacity has become a flashpoint as interest rates remained higher for longer than many borrowers anticipated, straining the cash flows of mid-sized companies that form the backbone of private credit portfolios.
Industry defenders argue that the SDNY’s focus may be overly aggressive. Some fund managers contend that private credit is designed to be a "hold-to-maturity" asset class, meaning short-term market volatility should not necessarily trigger a markdown if the borrower is still making interest payments. They suggest that the SDNY’s intervention could create unnecessary panic in a market that has historically shown lower default rates than leveraged loans. However, the recent litigation against Blue Owl Capital Corporation, where shareholders alleged the firm concealed pressures on its direct lending vehicles, suggests that even investors within the ecosystem are becoming skeptical of "steady" valuations in a volatile macro environment.
The legal risks are mounting for investment advisers who serve in dual capacities—both as lenders and as the ultimate arbiters of what those loans are worth. If the SDNY successfully brings charges against executives for mismarking, it could force a industry-wide "mark-to-market" moment, potentially leading to a wave of devaluations across the sector. For now, the Manhattan prosecutors appear focused on establishing whether the 19% drop at BlackRock’s TCPC was a delayed recognition of reality or a proactive correction, a distinction that could define the next era of white-collar enforcement in finance.
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