BlackRock Probe Deepens Scrutiny of $3.5 Trillion Private Credit Market

Federal prosecutors are probing BlackRock Inc.’s TCP Capital fund over its valuation practices, a sharp escalation of scrutiny on a corner of finance that has swelled to $3.5 trillion. The investigation by the Manhattan U.S. attorney’s office follows a surprise 19% write-down in the fund's net asset value earlier this year, according to people familiar with the matter.

"Because many private loans rarely or never change hands, marking their fair value is a subjective exercise," Jack Pitcher and Corinne Ramey wrote for the Wall Street Journal, highlighting the core of the valuation challenge.

Shares of the publicly traded fund (ticker: TCPC) have plummeted 45% over the past year and trade significantly below the managers' stated net asset value. The January write-down saw the value of numerous loans slashed, even though they had been marked at or near their original cost just a few months prior.

The probe into the world's largest asset manager could become a watershed moment for the private credit industry, where opaque valuations have fueled investor unease. The outcome may trigger stricter regulatory oversight and force a repricing of risk across a market that has attracted trillions in search of higher yields.

The investigation brings a new level of legal and regulatory risk to the private credit boom. While the TCP Capital fund's roughly $350 million market value is a small fraction of BlackRock's total assets, the probe's implications are far-reaching. It touches on a systemic issue that has worried regulators and investors alike: the potential for inflated valuations in illiquid credit portfolios.

This skepticism is not isolated to BlackRock. Wealthy investors have been increasingly heading for the exits from private credit vehicles in recent months. HSBC Holdings Plc, for instance, recently paused a $4 billion investment plan for its own private credit funds after taking a $400 million loss linked to a collapsed mortgage lender, as reported by Reuters.

The core of the problem lies in the subjectivity of valuing loans that don't have a public market price. Managers often rely on third-party firms for quarterly estimates, but as the BlackRock case shows, these values can shift dramatically and unexpectedly, eroding investor confidence. The TCPC fund's sharp NAV decline served as a stark example of this risk, reigniting worries about what may be hiding in the opaque portfolios of private lenders.

This article is for informational purposes only and does not constitute investment advice.