Private credit has been the fastest-growing corner of corporate finance for a decade and now measures more than US$2 trillion worldwide, a figure PwC expects to reach US$3.4 trillion by 2030. Funds have taken on lending that capital rules pushed banks away from: loans negotiated directly with a single borrower, faster than a bank and shaped around the company.
In May 2026, within less than a month, the European Central Bank devoted a special feature of its Financial Stability Review to the risks building in private credit, and the Financial Stability Board reported on the sector’s vulnerabilities, among them what it called ‘valuation opacity’. Neither forecast disaster; private credit ‘in isolation is unlikely to threaten financial stability in the euro area at present’, the ECB concluded, since euro area funds manage only around €100bn. But euro area insurers hold €211bn of it, and pension funds a further €52bn.
‘Valuation processes rely more heavily on models, judgment and comparable transactions’
The worry is subtler than a crash: nobody outside the funds can verify what any of it is worth. Economists at the Federal Reserve Bank of Boston found in August 2026 that loans on which interest was being added to the balance rather than paid in cash rose from around 6% to roughly 10% of the portfolios of US business development companies – the funds that dominate American mid-market lending – by early 2026, while the value reported for those loans stayed near what they originally cost.
Never traded
A listed company’s bond has a price because investors trade it every day. A private loan never trades, so evaluating its value is far more challenging. Its value can be estimated by projecting what the borrower will repay and discounting that back to a value today. Shift the view of risk slightly and the value moves.
‘By definition, these instruments are illiquid, which means valuation processes rely more heavily on models, judgment and comparable transactions than public market assets,’ says Rob Boulding, private credit partner at PwC. Testing that judgment falls to the auditor.
Auditor tests
‘Usually, the way we approach these estimates is not by independently estimating the value ourselves,’ says Graham Dyer, partner and chief accountant at Grant Thornton in the US and a former US bank regulator. ‘We look at the process by which management valued the asset, and whether they used reasonable, supportable inputs. The challenging part is evaluating the supportability of those inputs.’
Some of those inputs can be checked against bond and securitisation markets, or against what the fund is charging similar borrowers today. The borrower’s own figures cannot; the lender sees a private company nobody else does.
‘The more volatile the situation, the more touch points the lender should have’
That process is not always documented. Firms had valuation committees when the UK’s Financial Conduct Authority examined the sector but, in some cases, it reported in March 2025, ‘the independent committee’s minutes failed to record details of how valuation decisions were reached’. Senior investment professionals – the people who struck the deals – dominated the voting membership of some committees. The regulator also flagged an incentive it found poorly managed: conservative marks give a smoother profile over time and a better chance of an uplift on exit.
Boulding does not read that as evidence the numbers are wrong. ‘That doesn’t mean valuations are unreliable, but it does increase the importance of robust governance, transparency and independent challenge,’ he says.
Stale numbers
Even a sound process rests on figures that are months old. ‘It is a 31 December valuation and the last information the lender has from the borrower is from 30 September,’ says Dyer. ‘You have to ask whether things have materially changed since that update. The more volatile the situation, the more touch points the lender should have. Sometimes we see lenders with weekly data feeds.’
A Grant Thornton note in April 2026 warned that out-of-date information can ‘inappropriately delay loss recognition’. The Financial Stability Board reports that payment-in-kind arrangements (where a borrower adds the interest to the loan instead of paying it in cash) are increasing, and EY notes that supervisors are examining what that does to borrower monitoring.
The same pressure reaches the borrower’s accounts. Dyer’s example is a manufacturer with a US$100m credit line renewing every couple of years. When the market tightens, ‘your choice is reduced borrowing capacity – maybe that becomes a US$75m line – or paying a lot more’. Either runs through the financial statements: impairment of assets and goodwill, curtailed operations and a going concern judgment the auditor must test.
Point of no returns
Those returns are now expected to shrink. PwC’s survey of more than 120 credit portfolio managers, published in May 2026, found 93% expecting flat or lower returns in 2026, with competition cited by 67%, more often than defaults and credit losses (64%). Only 16% were seriously worried about defaults rising.
‘There will be winners and losers around the headline averages’
‘The survey suggests managers are more concerned about competitive pressures than an imminent deterioration in credit quality,’ says Boulding. ‘As significant amounts of capital continue to flow into private credit, competition can compress spreads and put pressure on returns even if defaults remain relatively contained.’
Falling returns are not the same as losses, and the money has somewhere to go. ‘During periods of market stress, managers can often deploy capital at wider spreads, lower leverage levels and more attractive terms,’ says Boulding. ‘Many also have the ability to allocate capital across distressed debt, special situations, asset-backed lending and other strategies.’ Every one of those is harder to value than a straightforward loan. As returns thin, the instruments behind them get more complicated.
That also splits the field. Boulding expects diversified managers to cope and concentrated ones to struggle: ‘There will be winners and losers around the headline averages.’
Increasing expectation
The revised Alternative Investment Fund Managers Directive, due for national transposition across the European Union from April 2026, brings leverage caps, risk retention and wider disclosure, and the Financial Stability Board has proposed common monitoring measures. Australia’s corporate regulator has floated the most direct remedy of all, though it has not settled on it: valuations performed quarterly by an independent third party.
Some of these practices may arrive in key markets like the US and Europe without being mandated. ‘There will be an increasing expectation for independent valuation processes and external validation that investors can access,’ says Boulding, ‘and investors are likely to differentiate more clearly between managers on those measures.’
