Insurers brace for legal storm over $1.8 trillion private-credit valuations

Insurers are preparing legal defenses against boards and executives of private-credit firms over disputed valuation practices, people familiar with the matter said.

"The valuation disputes create significant directors-and-officers liability exposure for fund boards," Gabriel Yomi Dabiri, global head of private credit at Squire Patton Boggs, said in a June 1 analysis.

The $1.8 trillion private credit industry has lent $560 billion to US businesses since 2023, according to the Managed Funds Association. Recent high-profile defaults at First Brands Group, Tricolor Holdings and MFS have exposed concentration risk across auto-adjacent and covenant-lite borrowers, raising questions about underwriting discipline and portfolio monitoring standards across the asset class.

First Brands, one of the largest aftermarket auto parts manufacturers, filed for Chapter 11 bankruptcy in September 2025. Founder Patrick James and senior vice president Edward James were later criminally indicted on allegations of $3 billion in lender fraud involving fabricated invoices and collateral that never existed. The bankruptcy court approved bridge financing from General Motors and Ford, with asset sales proceeding through February 2026.

Tricolor Holdings, a subprime auto lender, filed for Chapter 7 liquidation the same month. MFS, a UK mortgage lender, collapsed after approximately 1.2 billion pounds in loans were backed by only 230 million pounds of genuine collateral, with double-pledging allegations mirroring the First Brands case.

JPMorgan's decision to mark down the value of collateral on software loans in private-credit financing facilities has reduced funding availability for lenders, adding pressure on portfolio valuations. The moves have led some observers to question whether fund managers marked assets at fair value or inflated holdings to avoid triggering margin calls and redemption thresholds.

The legal storm could trigger a repricing of risk across private credit, increase due diligence costs and tighten lending conditions for mid-market borrowers. Insurers are scrutinizing valuation methodologies used by business development companies and direct-lending funds, particularly those with concentrated exposure to software and auto-adjacent sectors.

For holders of private-credit fund shares, the litigation raises the prospect of lower net asset values and potential redemption gates. The next catalyst will be the resolution of the First Brands bankruptcy proceedings, where asset sales are expected to conclude by mid-2026 and could set a precedent for how collateral valuation disputes are resolved.

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