After months of attention on redemption requests and liquidity, another private credit issue is drawing increased scrutiny: valuation. Unlike publicly traded bonds and syndicated loans with observable market prices, many private credit investments are valued using models, comparable transactions and other inputs because the underlying loans rarely trade. Recent weakness among business development companies has brought those valuations into sharper focus, with some BDCs reporting unrealized losses and lower net asset values as credit conditions have become more challenging.
The question is particularly relevant because market signals and reported private-asset values do not always move together. PIMCO recently noted that publicly traded BDC shares continue to trade at significant discounts to reported NAVs, which it says reflects investor skepticism toward private credit marks. Meanwhile, recent second-quarter results from some BDCs have shown NAV pressure from unrealized losses, and Ares Management reduced the targeted size of a European private credit vehicle following investor concerns over loan valuations. These developments do not necessarily mean private credit assets are being incorrectly valued, but they reinforce the importance of understanding how managers determine fair value when observable market prices are limited.
Why We’re Watching
The issue isn’t simply whether private credit valuations are “right” or “wrong.” For advisors, the more useful question is how those valuations are being determined — and whether changes in reported values are consistent with what other portfolio and market indicators are showing.
That makes valuation a comparative due-diligence issue. A reported NAV becomes more informative when viewed alongside changes in credit quality, portfolio performance and other indicators over time. Looking across multiple quarters can provide context that a single valuation point may not reveal.
As private credit becomes a larger part of wealth-management portfolios, understanding how managers value less-liquid assets — and how those valuations behave as credit conditions change — deserves continued attention.
For advisors evaluating private credit through nontraded BDCs, interval funds and other alternative investment vehicles, valuation deserves a place alongside yield, credit quality and liquidity in the due diligence process. Changes in NAV, unrealized gains and losses, non-accrual rates, payment-in-kind income, portfolio company leverage and valuation methodology can provide important context about portfolio health. Historical data can be particularly valuable: comparing NAV and credit metrics over multiple quarters can help advisors distinguish temporary market movements from a developing deterioration in underlying portfolio performance.
