Private credit has growing importance in global financial markets, with managed assets estimated at $3 trillion in 2025 and projected to reach $5 trillion by 2029. Pension funds are among the largest investors in private credit funds, and retail investors are participating more through publicly traded business development companies and now exchange-traded funds.
The asset class’s continuing, rapid growth has brought heightened regulatory scrutiny.
Recent bankruptcies of companies that deployed private debt in their capital structure reportedly have drawn interest from the Department of Justice. Against this backdrop, private credit funds should start bolstering their compliance programs by focusing on valuation practices, conflict management frameworks, and underwriting standards.
Private credit investments are non-publicly traded instruments provided by non-bank entities to fund private businesses outside the traditional banking system. The market’s rapid expansion is due to investors seeking diversification and companies needing flexible financing, especially after post-2008 regulations tightened bank lending. Private credit offers bespoke terms and faster execution for borrowers, along with higher yields for investors.
Retail capital in the private credit market has climbed from virtually zero to roughly $280 billion over the past decade. And retail access will probably keep expanding as fund managers explore private credit ETFs and regulators open the door to private credit investments in 401(k) plans.
While Securities and Exchange Commission Chairman Paul Atkins recently noted that private markets are important but not “systemically important,” the significant growth and “retailization” of private credit raise questions about whether the sector’s scale and interconnectedness could introduce systemic vulnerabilities.
Institutions such as the International Monetary Fund have warned that private credit expansion could amplify financial weaknesses and have urged regulators to take a more macroprudential approach.
The last SEC administration showed particular interest in private funds, including private credit. The current SEC administration appears to be less inclined to focus its enforcement resources on the private fund space given its largely sophisticated investor base.
As more retail investors gain exposure to these markets, the SEC’s priorities may shift back—particularly if current or future enforcement investigations uncover misconduct enabled by a lack of transparency inherent in private credit, or if issues in the private credit market trigger collateral market concerns.
Regulatory Risks
Valuation remains one of the leading regulatory concerns in private credit, given the illiquid and bespoke nature of many loans. Unlike public markets, where securities are traded regularly and prices are determined transparently, private credit valuations rely heavily on manager-developed models that can differ across originating firms.
Certain assets may be widely held by business development companies that are subject to SEC reporting. Divergent valuations for the same asset based on firms’ internal models may prompt regulatory interest. Such valuation risks have been highlighted by recent high-profile bankruptcies, where secondary market prices for defaulted loans have plunged below par value. This has raised questions about whether internal marks in private credit portfolios fully captured deteriorating credit quality.
Conflicts of interest can arise in many ways, such as when a firm manages both a credit and an equity fund, creating potential misalignment between those funds’ interests. Another possible area of conflict—and one that the SEC highlighted in its 2025 examination priorities—relates to the use of affiliated service providers.
Private credit funds engage in origination and syndication, lending to corporate borrowers directly and distributing portions of those loans to other investors. In some cases, a fund adviser or an affiliated entity originates or warehouses loans before transferring them to the funds it manages. This can create conflicts of interest if the adviser benefits from embedded fees or non-arm’s-length pricing, even when such transfers occur at cost.
Unlike banks, private credit funds aren’t subject to a standard of supervision or capital requirements, leaving underwriting standards largely self-regulated. This allows managers the flexibility to tailor their underwriting and due diligence to meet diverse market needs, and the industry historically has reported lower default rates compared with publicly traded debt instruments.
But as loans scale up and managers compete for larger deals, funds should remain vigilant in maintaining rigorous underwriting standards—relaxing them could cause unsustainable leverage and heightened default risks.
Key Takeaways
Private credit faces growing regulatory and legal risks, which might intensify with the influx of retail capital. The variance in regulatory standards expected or required in private credit transactions in different regions (the EU versus the US, for instance) may widen, creating greater market confusion.
Given these developments, fund managers should consider proactive steps to strengthen governance and compliance frameworks.
- Develop clear compliance policies. Institute clear written policies and procedures that highlight fiduciary duty obligations and disclosure requirements.
- Strengthen valuation practices. Implement written valuation policies, including regular use of independent third-party valuations and requirements for regular review of valuation methods to ensure accuracy and market alignment.
- Enhance conflict management framework. Establish controls for affiliated transactions, fee structures, and cross-fund dealings to mitigate conflicts of interest. Provide more detailed disclosures and obtain investor consent for related-party transactions.
- Strengthen due diligence and underwriting standards. Ensure robust scrutiny and ongoing monitoring of underlying collateral. Where feasible, include maintenance covenants in lending agreements to monitor borrower’s financial health.
- Safeguard non-institutional investors. Develop investor-education materials targeted at retail investors and ensure marketing disclosures are clear, balanced, and accurate.
Implementing or revisiting the adequacy of such controls protects against two related concerns: risk of financial loss, of course, but also regulatory risk arising from costly and distracting government inquiries. Robust policies and controls offer a powerful response or antidote to prosecutors’ and regulators’ concerns when they come knocking at the door.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Joel M. Cohen is a partner at White & Case and chair of its global white collar practice group. Ladan Stewart is a white collar partner at the firm. Jasmine Chen is a law clerk at the firm.
Any views expressed in this publication are strictly those of the authors and should not be attributed in any way to White & Case LLP.
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