Private Credit’s Reckoning: A Legal Perspective on Transparency in a Market Under Scrutiny

Introduction

Private credit has grown from a niche alternative to bank lending into one of the most consequential segments of global capital markets. As reported by Neil Unmack in Reuters Breakingviews, investor scrutiny has intensified as the sector faces its first true stress test: funds targeting wealthy individuals, set up by major institutions such as BlackRock, Morgan Stanley, and their peers, have begun limiting withdrawals as smaller investors retreat from what has become a USD235 billion market.

Advances in artificial intelligence have raised doubts about the long-term durability of enterprise software companies, many of which were financed by private credit loans, adding further pressure to an already strained environment.

This scrutiny has revived a debate that has long circulated among legal practitioners, regulators and institutional investors alike: the fundamental opacity of private credit as an asset class. Unlike public debt markets, where disclosure obligations under securities law impose consistent and enforceable transparency standards, private credit operates largely outside those frameworks. Loans are bilaterally negotiated, portfolios are valued internally, documentation is custom-drafted and reporting obligations to non-institutional participants remain limited. The result is an information asymmetry that, during periods of market stress, can amplify systemic risk and erode investor trust.

This article examines the transparency deficit at the core of private credit, analyses the legal and structural mechanisms through which that deficit might be addressed, and explores how practitioners across the jurisdictions where White & Case advises clients, including the United States and Mexico, can contribute to a more legible and resilient market architecture.

The anatomy of opacity: what private credit does not disclose

To understand why transparency matters, one must first understand where the opacity lies. Private credit lending takes place outside the regulated securities markets. Loans are not registered, not rated in most cases and not traded on any exchange. Valuation is performed by fund managers themselves, typically on a quarterly basis, using methodologies that vary significantly across firms and that are not subject to real-time market discipline.

The valuation problem

The valuation of private credit portfolios has emerged as perhaps the most acute transparency concern. According to Robert Armstrong in the Financial Times, distressed investment firm Glendon Capital Management has publicly argued that business development companies (BDCs), closed-end funds that primarily invest in loans to small and mid-sized businesses, often owned by private equity, place more favourable valuations, or “marks”, on assets than the public markets would assign to the same or closely related assets.

Whether pervasive mispricing exists across private credit remains uncertain, but such marks are ultimately unsustainable: at some point, returns must be delivered in cash to investors, whether through BDC dividend payments or non-traded fund redemptions.

The concern is not merely academic. According to Jill R Shah and Eric Platt in the Financial Times, JPMorgan Chase clamped down on its lending to private credit groups, informing certain lenders that it had marked down the value of loans in their portfolios – loans that serve as collateral against which funds borrow from the bank – thereby limiting how much JPMorgan would extend to those groups going forward. This signals that traditional Wall Street banks are growing cautious of an industry that expanded rapidly as non-bank lenders became top creditors to higher-risk borrowers.

The problem is compounded by a fundamental structural asymmetry. Publicly traded software stocks and debt have fallen sharply, while private credit lenders, who tend to hold loans for the entire term, have not marked down their portfolios in lockstep. This divergence raises a legal foundational question: are fund managers fulfilling their fiduciary obligations when they decline to mark assets to market in conditions where market-based pricing signals are readily available?

EBITDA adjustments and the leverage illusion

According to Madeline Shi in PitchBook News, opacity in private credit is reinforced at the borrower level by the aggressive use of adjusted EBITDA figures. In M&A deals, companies strip out or add back one-time, non-cash expenses such as restructuring costs, transaction-related fees and excessive owner compensation. In recent years, however, the interpretation of what counts as a one-time charge has expanded well beyond historical norms, with some arguing that sellers and investment bankers engineer aggressive EBITDA adjustments solely to inflate corporate valuations.

Research by S&P Global has concluded that the definition of EBITDA in private equity deals is becoming “increasingly inconsistent and inflated”. In an analysis of 700 M&A and leveraged buyout transactions, S&P found a direct correlation between the value of add-backs a business applies to its EBITDA and the likelihood of failing to service bank loans or private debt on schedule. Adjustments now account for up to 30% of the EBITDA figures seen on deals, compared with approximately 10% a decade ago.

S&P further concluded that a majority of US speculative-grade corporate issuers present unrealistic earnings, debt and leverage projections in their marketing materials at deal inception.

From a legal standpoint, the problem is structural. Private credit loan documentation is negotiated bilaterally, with definitions of “EBITDA” and “Consolidated Net Income” crafted to accommodate the financial projections and representations of individual borrowers. Without standardised definitional frameworks or external verification requirements, lenders and investors cannot easily benchmark a borrower’s financial performance against peers or against market conventions.

The systemic dimension

The opacity of private credit would be a contained concern if the asset class remained the exclusive preserve of sophisticated institutional investors with the resources and mandate to perform independent analysis. That premise no longer holds.

BDCs have served as the engines of a retail boom in private credit, providing a convenient mechanism to open the world of bilaterally negotiated, high-yield non-bank loans to the broader wealthy individual market, whereas accessing private, lightly regulated big-ticket investments had historically been the preserve of institutional investors such as insurers and pension plans.

According to Michael S Derby in Reuters, Federal Reserve Chair Jerome Powell has stated publicly that the US central bank is watching developments in the private credit sector for signs of trouble, noting that regulators are monitoring its connections to the banking system and the potential for contagion, though those connections are not currently visible.

On the issues faced by what he described as an “opaque” sector, Powell acknowledged that there will be “people losing money and things like that”, while expressing the view that it does not appear to have the makings of a broader systemic event. He noted that private credit “is a relatively small part of a very large asset pool” but that the Fed is “watching it super carefully”.

Legal pathways to greater transparency

The transparency deficit in private credit is not immutable. Legal practitioners can identify several existing and emerging mechanisms – regulatory, contractual and structural – through which the market could become more legible without sacrificing its core attributes of flexibility and speed.

Regulated vehicles as disclosure channels: the BDC model

BDC shares can trade at a premium or discount to the net asset value (NAV) of the fund, which is disclosed quarterly, and lately many of the funds have traded at significant discounts. The BDC model, however, is imperfect, as quarterly NAV disclosure remains less frequent and less granular than real-time market pricing.

According to Lisa Fu in Creditflux, a meaningful iteration of this model is currently underway: JPMorgan Asset Management is launching a new semi-liquid fund for affluent individual investors seeking exposure to both private and public credit under one strategy, structured as an interval fund that requires less paperwork from investors and provides limited exit opportunities on a quarterly basis. Notably, the fund provides investors with daily NAV marks, with shares traded at NAV via the manager, a meaningful increase in pricing frequency relative to standard quarterly BDC disclosure.

Daily NAV reporting, if adopted more broadly across non-traded BDCs and interval funds, would represent a material transparency upgrade. This would allow investors to detect valuation drift more rapidly and would reduce the information asymmetry that currently benefits fund managers at the expense of beneficial owners.

Hybrid structures as pricing bridges

A distinct but related approach involves linking private credit portfolios to publicly priced markets through structural design. According to Kathryn Gaw in Creditflux, discussions are underway to bring the first hybrid private credit and broadly syndicated loan (BSL) collateralised loan obligation (CLO) to the European market, with the Kroll Bond Rating Agency (KBRA) currently in discussions with arrangers and managers about structuring a deal that would combine private credit loans and BSL loans.

The rationale is partly that transactions need to reach a certain level of diversification in terms of loans, and a way to address the lack of diversification in the portfolio is to mix broadly syndicated and private credit loans. From a transparency perspective, the hybrid CLO structure offers an additional benefit: BSL loans are priced daily in liquid secondary markets, providing a continuous external price signal that anchors the valuation of the private credit portion of the portfolio.

This is a contractual rather than a regulatory solution to the opacity problem, and one that is increasingly available to sophisticated arrangers across North America and Europe. While the European private credit CLO sector is still in its infancy, at least half a dozen new issuances are believed to be in the pipeline, with Golub, Apollo and Blackstone among the firms believed to be working on their own private credit CLO offerings.

Standardisation of loan documentation and financial definitions

Perhaps the most impactful and underappreciated legal tool for improving transparency is the standardisation of loan documentation. In the BSL market, the Loan Syndications and Trading Association (LSTA) in the United States and the Loan Market Association (LMA) in Europe provide model document frameworks that establish common definitional baselines, including definitions of “EBITDA”, “permitted payments”, “consolidated net income” and covenant trigger events.

These frameworks allow investors, rating agencies and regulators to compare credits across issuers and assess portfolio risk on a portfolio-wide basis.

Private credit, by design, diverges from these standards. The bilateral nature of direct lending allows for significant definitional flexibility, which borrowers and sponsors value. However, that same flexibility is a primary source of the opacity problem identified in the EBITDA context.

The legal community’s contribution to addressing this problem lies in advocating for, and drafting towards, a set of voluntary standardised financial definitions that can be incorporated by reference into private credit agreements. These need not be mandatory; market pressure from institutional investors, rating agencies and bank counterparties is already moving in this direction.

As reported by Jill R Shah and Eric Platt in the Financial Times, JPMorgan, for example, considers individual analysis and macroeconomic factors when valuing loans, and also looks to public proxies, such as investment vehicles that buy private credit loans, and occasional private trades it can evaluate. Legal counsel can facilitate the development of definitional annexes that provide both flexibility for borrower-specific circumstances and a standardised core that supports cross-portfolio comparability.

Regulatory developments: the United States and Mexico

At the regulatory level, the transparency agenda is being advanced through multiple channels. In the United States, the Securities and Exchange Commission has in recent years expanded reporting obligations for private fund advisers, including requirements related to quarterly statements, annual audits and adviser-led secondary transactions.

While the most expansive rules proposed under the prior administration were partially vacated in litigation, the direction of regulatory travel is clear: private fund advisers face increasing pressure to disclose fee structures, performance calculations and conflicts of interest in standardised formats.

In Mexico, private credit as a distinct asset class is at an earlier stage of development than in the United States or Europe, but the transparency discussion is directly relevant to the legal frameworks governing the two primary vehicles through which institutional private capital is deployed: development capital certificates (certificados de capital de desarrollo – CKDs) and real estate and infrastructure investment trusts (fideicomisos de inversión en infraestructura y bienes raíces – FIBRAs). Both vehicles are listed on Mexican stock exchanges and are subject to periodic reporting obligations under the regulations of the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores – CNBV). In this respect, Mexican structured finance regulation already embeds a degree of public-market discipline into what are functionally private capital investments.

The challenge for Mexico is that the CKD and FIBRA frameworks were designed primarily for equity-like and infrastructure exposures, and the legal infrastructure for private credit, meaning bilateral direct lending by non-bank entities, remains underdeveloped relative to the size and sophistication of the potential demand.

As Mexican institutional investors, including retirement fund administrators (administradoras de fondos para el retiro – AFOREs), increasingly seek diversified credit exposures and yield enhancement, the legal community has an opportunity to contribute to the development of structures that balance the flexibility of bilateral lending with the disclosure standards that public market regulators and sophisticated investors increasingly demand.

Governance, fiduciary duties and the marking problem

The valuation problem in private credit is, at its core, a governance and fiduciary duty problem. Fund managers are required by their limited partnership agreements and applicable law to act in the best interests of investors and to provide accurate and timely valuations. When internal marks diverge persistently from external market signals, the question arises whether managers are fulfilling those obligations.

In an interview with AnnaMaria Andriotis of The Wall Street Journal, John Zito, co-president of Apollo’s asset-management arm, stated that the private markets’ next cycle will be “a big moment in time” because “if you don’t mark your book, you actually lose trust with the clients”, affirming that his firm intends to be “a market leader in actually marking our book”. This is a significant admission from a senior executive at one of the largest private credit managers in the world: transparent valuation is a prerequisite for trust, and trust is the foundation of the asset class’s continued growth.

Zito further stated that “I literally think all the marks are wrong”, a comment that Apollo subsequently clarified as referring specifically to software company valuations, with the firm adding that “we believe software valuations do not yet reflect first-quarter market conditions”. Whether the scope of the problem extends beyond software is a question that only consistent, standardised and independently verifiable valuation practices can answer.

Legal advisers can play a constructive role by helping fund managers design governance frameworks that reduce conflicts of interest in the valuation process, for example through the use of independent valuation agents, valuation committees with independent members or contractual requirements for third-party verification in circumstances where internal marks diverge materially from market-observable proxies.

Private credit funds can already dispute marks from bank lenders under some credit financing agreements, a process that could take months and require a third-party valuation. Expanding this model, on a voluntary basis, to the fund’s own portfolio valuations would represent a meaningful governance improvement.

The secondary market as a transparency mechanism

Another underappreciated pathway to greater transparency in private credit is the development of a robust secondary market. Secondary transactions in private credit portfolios generate observable pricing data that, over time, can provide an independent check on internal valuations.

According to Tom Cane in Creditflux, a pivot from primarily limited partner (LP)-led deals to general partner (GP)-led transactions is driving an unprecedented wave of activity across private credit secondaries. Historically, credit secondary transactions were driven by LPs looking to rebalance portfolios, but that dynamic has now reversed.

Thom Spoto, a partner at Goldman Sachs Alternatives, noted that in 2024 roughly 75% of deal volume was LP-led, while in 2025 the reverse was true, with GPs driving 75% of transactions. That shift helped more than double private credit’s share of global secondaries from 5% to 11% between 2024 and 2025, according to data from Evercore.

While the total credit secondaries volume reached approximately USD20 billion last year, still comparatively modest, credit secondaries’ growth is currently outpacing that of other asset classes, pointing to further expansion ahead.

From a legal perspective, the development of the secondary market requires a supportive framework, including standardised transfer mechanics, clear regulatory treatment of secondary buyers and sellers, and a growing body of market practice around GP consent rights, confidentiality obligations, and right of first offer and right of first refusal provisions in fund partnership agreements.

As this market matures, it will generate the pricing data necessary to calibrate internal valuations and reduce the information asymmetry that has defined private credit since its emergence.

Conclusion: transparency as a competitive advantage

The transparency debate in private credit is often framed as a tension between flexibility, the defining commercial advantage of direct lending, and disclosure. That framing may not be completely persuasive. A serious argument could equally be made that the most durable private credit franchises will be those that can demonstrate to investors, regulators, and bank counterparties that their valuations are sound, their financial definitions are meaningful and their governance frameworks are robust.

Federal Reserve Chair Powell has acknowledged that there will be “people losing money” in private credit, but that the sector does not yet appear to have the makings of a broader systemic event, noting that private credit remains “a relatively small part of a very large asset pool”. That assessment may not survive a prolonged stress scenario, particularly if internal valuations prove to have materially overstated portfolio quality. Most industry players expect a shakeout, with vehicles overexposed to software losses or carrying too much leverage struggling to survive, and history suggests leaner times ahead.

The legal community’s role in the future of private credit is to design the documentation, governance structures and regulatory frameworks through which the asset class can grow sustainably, with the confidence of investors, the trust of regulators and the credibility of a market that is willing to be seen. The question is no longer whether private credit will become more transparent, but how quickly practitioners can build the legal infrastructure to make that transparency real. That infrastructure demands, at a minimum:

• standardised financial definitions that restore meaning to leverage metrics;
• independent valuation mechanisms that align internal marks with observable market signals;
• governance frameworks that insulate the marking process from conflicts of interest; and
• secondary market structures that generate the pricing data necessary to discipline portfolio valuations from the outside.

What remains is the institutional will to deploy them – a recognition that in a market where opacity has been the norm, transparency is the most credible signal of durability. The firms and advisers that build that infrastructure now will define the terms on which private credit earns its place as a permanent feature of global capital markets.