Private Credit Boom Faces SEC Scrutiny Over 'Illusion of Stability'
Regulators are intensifying oversight of the multi-trillion-dollar market, citing opaque valuations, high fees, and rising liquidity risks.
The private credit market, a once-niche corner of finance that has swelled into a global force, is facing a significant regulatory reckoning. Wall Street’s top watchdogs are firing warning shots over the sector's rapid, often opaque, expansion, signaling an end to the era of unchecked growth and placing fund valuations, fee structures, and liquidity management under an intense microscope.
The U.S. Securities and Exchange Commission (SEC) has made its concerns clear. The agency’s Division of Examinations recently announced its fiscal year 2026 priorities, explicitly targeting the “valuation and liquidity of illiquid assets” for scrutiny. This move comes as officials voice concerns about the inherent risks in a market that has ballooned to over $1.5 trillion and is projected by some analysts to reach $3 trillion by 2028.
The core of the issue lies in the market's opacity. Unlike public stocks and bonds, private loans do not trade daily, leaving their valuation largely to the discretion of the fund managers who hold them. SEC Commissioner Hester Peirce recently acknowledged this creates an “illusion of stability,” where infrequent and subjective valuations can mask underlying credit deterioration and risk.
These theoretical risks were cast in a harsh practical light by recent events at Blue Owl Capital, a major player in the industry. The firm was forced to cancel a planned merger of two of its credit funds—one private and one publicly traded—due to a yawning gap in their perceived values. The publicly traded fund’s shares were trading at a steep discount, reflecting investor skepticism about its loan portfolio. Forcing a merger would have meant marking down the private fund’s assets to align with the public vehicle, a move that would have crystallized losses for its wealthy investors.
The Blue Owl episode highlights a central conflict for the industry: the difficulty of reconciling managers' private “marks” with public market sentiment. It also underscores the dangers of the sector’s aggressive push toward retail investors through publicly traded vehicles known as Business Development Companies (BDCs) and other “semi-liquid” funds. These products can create a dangerous liquidity mismatch, offering investors periodic redemption options while the underlying assets are long-term, illiquid corporate loans.
Regulators and lawmakers are taking notice of this “retailization” of private credit. In late 2024, Senators Sherrod Brown and Jack Reed wrote to federal regulators expressing alarm over the trend, citing concerns about “opaque and potentially generous loan valuations” and liquidity. The Financial Stability Oversight Council (FSOC) has also flagged that “increased retail investor participation” may be an expanding risk.
As the private credit market matures, it is moving from the shadows into the regulatory spotlight. With SEC Chair Gary Gensler questioning whether the industry is sufficiently “shock tested” for an economic downturn, fund managers should brace for more rigorous examinations and demands for greater transparency. For investors who have poured capital into the sector in search of higher yields, the message is clear: the perceived stability of private credit may soon be put to the test.