ICI Considers Valuation Risk in Private Credit

The Investment Company Institute ("ICI") warned that retail-accessible private credit funds face serious valuation risks as the nearly $1.75 trillion asset class outpaces the oversight frameworks designed to protect everyday investors.

In a newly released paper, the ICI highlighted that the private credit markets have grown from a $357 billion niche market at year-end 2010 to nearly $1.75 trillion in assets under management as of mid-2025, with direct lending alone accounting for 56% of that total. The ICI asserted this asset class was increasingly finding its way into regulated funds accessible to retail investors — including interval funds, tender offer funds, and business development companies. The ICI said that accurately and consistently valuing illiquid, privately negotiated loans has moved from a back-office concern to a front-and-center governance imperative. They argued that while private credit lacks the price transparency of public markets, well-established fair value frameworks under SEC Rule 2a-5 ("Fair value determination and readily available market quotations,") and US Generally Accepted Accounting Principles provide a sound and flexible foundation to address the challenge.

The authors focused on the inherent tension between valuation frequency and investment illiquidity. They advocated for a risk- and materiality-based approach to valuation frequency, emphasizing that the absence of daily valuation changes does not mean the absence of daily oversight: ongoing monitoring of credit market spreads, borrower financial performance, and covenant compliance is expected regardless of how often a formal valuation is updated.

The authors also provided practical guidance on what robust monitoring looks like in practice. They encouraged funds to track a layered set of indicators across three domains: (i) broad credit market conditions (including leveraged loan indices, high-yield spreads, and interest rate curves), (ii) portfolio company performance (EBITDA trends, liquidity metrics, management changes, and material events), and (iii) covenant compliance (including trends toward breaches, not just breaches themselves). They suggested that quantitative thresholds — calibrated through back-testing and sensitivity analysis — can help managers identify when market movements warrant a formal valuation review. 

The ICI said it anticipates meaningful change in how private credit is valued as market infrastructure matures. They said the growth of secondary trading platforms, third-party data aggregators, and private market indices will increase the availability of transaction-based pricing signals — inputs that could eventually support more timely and precise valuations. They acknowledged that artificial intelligence and machine learning were emerging tools for analyzing financial reports, flagging covenant breaches, and detecting early warning signals of credit deterioration. They concluded that private credit valuation is an evolving discipline requiring clear governance, documented methodologies, ongoing monitoring, and a commitment to reflecting fair value at every NAV calculation, regardless of how infrequently the underlying loans actually trade.