Private Credit's Valuation Problem: When the Numbers Arrive Too Late

October 12, 2026 • Updated October 12, 2026 • 11 min read

Most finance teams treat delayed borrower data as a valid reason to pause fair value adjustments or roll forward prior quarter marks. The SEC just rejected that entirely. With private credit exploding past $1.7 trillion globally and direct lending now 56% of the market, the regulatory position is clear: late financial statements from portfolio companies don't stop your ASC 820 obligations. Carrying illiquid debt at cost, relying on stale marks, or using uncalibrated models isn't a documentation problem. It's an enforcement violation. This will force finance teams to rebuild valuation frameworks with market-calibrated inputs, enforceable data delivery terms, and real-time backup procedures. At year-end 2025, over 70% of interval and tender offer fund assets sat in Level 3 or NAV-based holdings. The SEC is now instructing auditors to actively gather contradictory evidence and challenge management assumptions. That's the new baseline this article breaks down.

Private Credit's Valuation Problem: When the Numbers Arrive Too Late

When Borrowers Are Late on Their Financial Reports, SEC Says Asset Managers Still Have to Value Loans Correctly

1. Introduction

The private credit market has grown dramatically. Globally, assets under management jumped from $357 billion in 2010 to over $1.7 trillion by June 2025. Within registered investment funds alone, private credit investments grew almost 60% in five years, climbing from $170 billion in December 2020 to $270 billion by December 2025. At the same time, the makeup of private credit changed significantly. Direct lending (loans made directly to companies, rather than buying existing debt) jumped from just 13% of all private credit in 2010 to 56% by mid-2025. As fund managers rapidly expand these hard-to-sell, custom loan strategies, corporate finance teams and CFOs face a growing operational challenge: how do you estimate the fair value of hard-to-value assets when the private companies you've lent to fail to send you their quarterly financial statements on time?

To address this problem, the U.S. Securities and Exchange Commission (SEC) issued a joint staff statement on September 28, 2026. Written by Kurt Hohl, Chief Accountant of the Office of the Chief Accountant, and Brian Daly, Director of the Division of Investment Management, the statement sends a clear message to asset managers: delays in getting reports from borrowers do not excuse you from following fair value rules. Based on FASB Accounting Standards Codification (ASC) Topic 820, SEC Rule 2a-5, and existing regulatory requirements, the SEC reminder emphasizes that market volatility and illiquid assets make your duty to maintain strong valuation controls more important, not less.

2. Takeaway 1: Late Borrower Financial Reports Don't Stop the Fair Value Clock

Under FASB ASC Topic 820 (Fair Value Measurement), fair value must be determined as of the specific measurement date. The SEC Joint Staff Statement makes clear that a lack of timely financial data from borrowers or delays in quarterly reports from private portfolio companies does not excuse management from its legal and accounting responsibility to estimate fair value. Managers cannot simply "roll over" prior quarter marks or pause valuation adjustments while waiting for updated financial statements.

Finance Team Impact: To comply with ASC 820 under regulatory scrutiny, corporate finance leaders must actively reduce reporting delays. Modern valuation oversight requires negotiating strict information delivery terms in loan agreements to establish enforceable delivery schedules. Furthermore, finance departments must build pre-approved backup frameworks and documented procedures to measure fair value dynamically as of the reporting date, eliminating passive reliance on delayed borrower reports.

3. Takeaway 2: Borrower Relationships Aren't Enough (Valuations Require Market Context)

FASB ASC 820 defines fair value as the exit price that would be received to sell an asset in a normal transaction between market participants at the measurement date. The SEC staff emphasizes that direct lenders cannot rely only on internal borrower relationship data (such as payment history, operating performance, or loan term compliance) to justify carrying values. Given that direct lending now represents 56% of all private credit, relying solely on one-on-one lender-borrower metrics leaves managers exposed to severe valuation errors if overall market conditions move away from borrower performance.

To establish a defensible fair value from a market participant perspective, valuation frameworks must include broader market context, including:

Prevailing Credit Spreads and Yields: Adjusting discount rates to reflect current market spreads for similar credit risk profiles.
Liquidity Conditions: Accounting for market-wide liquidity demands and the risk premium required by unrelated market participants.
Secondary Market Indications and Bids: Evaluating pricing signals from similar secondary debt transactions, broker quotes, or market indications.
Public Market Equivalents and Indices: Comparing credit performance and yields against relevant liquid debt indices and public market instruments.
Required Risk Compensation: Factoring in the return an independent market participant would demand to take on the loan's specific risk profile.

4. Takeaway 3: Calibration Is Mandatory (Stale Marks and Cost Baselines Are Enforcement Targets)

Under FASB ASC 820-10-35-24C, calibration is a required accounting procedure. When a hard-to-sell asset is initially purchased, the valuation model's inputs that can't be observed in the market must be calibrated so that the model's output equals the initial purchase price. In later periods, management must re-evaluate model assumptions against observable market data (such as secondary trades, debt indices, or public market equivalents) to ensure the valuation model reflects changing market conditions without creating artificial gains or losses.

In addition to ASC 820, SEC Rule 2a-5 under the Investment Company Act of 1940 governs good-faith fair value determinations for registered funds. While Rule 2a-5 allows fund boards to assign fair value determinations to investment advisers, it requires active board oversight, rigorous testing of valuation methods, formal evaluation of pricing services and valuation specialists, and the active management of major valuation risks.

The SEC's enforcement history shows that carrying hard-to-sell debt at cost or using uncalibrated, static models directly violates federal securities laws and accounting standards.

"Carrying illiquid assets at cost without periodic calibration against available market information can constitute a violation of applicable accounting standards."

SEC Enforcement Precedents in Valuation Failures

| SEC Enforcement Case | Key Valuation & Governance Failure Identified | | :--- | :--- | | In re KCAP Financial, Inc. (SEC Release No. 34-68307, Nov. 28, 2012) / In re Deer Park Road Management Co. LP (SEC Release No. IA-5245, June 4, 2019) | Carrying hard-to-sell assets at cost or using stale marks without periodic calibration against available market evidence. | | In re Fifth Street Mgmt. LLC (SEC AP Release No. 3-18909, Dec. 3, 2018) | BDC valuation model failures resulting from a lack of quality-control reviews on quarterly portfolio company valuation models. | | In re Sciens Diversified Managers (SEC AP File No. 3-21445, May 24, 2023) | Inadequate compliance infrastructure, policies, and procedures for valuing Level 3 assets, establishing that deficient valuation oversight itself constitutes an enforcement violation even without proven intentional manipulation. |

5. Takeaway 4: Generic Disclosures Are Out (Especially for PIK Interest and Non-Accruals)

The SEC staff explicitly rejected generic, "overly aggregated," or boilerplate narrative disclosures in financial statements. This position aligns with recent SEC Staff comment letter trends, where division reviewers actively challenge registrants on inputs that can't be observed in the market for Level 3 assets, demand itemization of omitted Level 3 investments, require tabular numerical presentations with weighted-average methodology explanations, and question whether valuation frequency is appropriate relative to share repurchase and offering schedules.

Regulators are paying specific attention to payment-in-kind (PIK) interest recognition, non-accrual status, loan restructurings, and maturity extensions. PIK structures are under intense scrutiny because PIK arrangements allow a manager to recognize investment income on paper without collecting current cash flows. This approach artificially inflates reported earnings while expanding exposure to a potentially troubled borrower, hiding a sharp gap between reported financial performance and underlying cash flow liquidity.

To meet regulatory disclosure standards under ASC 820 and Regulation S-X, financial reports must provide structured numerical breakdowns, including:

Tabular presentation of significant inputs that can't be observed in the market for Level 3 valuations (e.g., specific discount rates, credit spreads, and market multiples).
Detailed weighted-average methodology explanations for inputs that can't be observed.
Sensitivity analysis detailing how changes in inputs that can't be observed impact the total fair value measurement.
Detailed disclosure of portfolio risk classifications, detailing non-performing investments, non-accrual loans, modified/extended debt terms, and the exact proportion of reported income generated through PIK interest.

6. Takeaway 5: The NAV Practical Expedient Is an Active Assessment, Not an Auto-Pilot Shortcut

Under FASB ASC Topic 820 and ASC Topic 946 (Investment Companies), investors holding interests in private funds, Business Development Companies (BDCs), or secondary fund vehicles may estimate fair value using the investee's reported Net Asset Value (NAV) as a practical expedient. However, the SEC reminds asset managers that applying the NAV practical expedient is an active, optional assessment that requires continuous verification, not an automated shortcut.

With secondary market volume expanding from $156 billion in 2024 to approximately $220 billion in 2025 (and secondaries funds capturing 15% of private equity fundraising in Q1–Q3 2025), real-time transaction data often exists that may contradict an investee fund's reported NAV.

When NAV Practical Expedient Is Valid:
The investment lacks a readily determinable fair value and is not traded on an established securities exchange.
The investee calculates NAV per share as of the reporting entity's exact measurement date.
The investee fund calculates NAV in a manner fully consistent with the fair value measurement principles of FASB ASC Topic 946 (valuing underlying portfolio holdings at exit price fair value under ASC 820).
There is no probable sale of the fund interest at a price that differs from reported NAV as of the measurement date.

When Adjustments or Level 3 Valuations Are Required:
The investee's NAV report is stale or not calculated as of the investor's exact measurement date (requiring management adjustments for market movements, underlying performance, and cash flows).
Management determines that the investee's underlying valuation methodology does not comply with ASC Topic 946 / ASC Topic 820 fair value standards.
It is probable that the investment will be sold in a secondary market transaction at an amount different from reported NAV.
Secondary market bids, broker indications, or secondary transaction volumes provide observable market evidence demonstrating that reported NAV does not reflect market participant exit value (requiring management to transition the holding to a Level 2 or Level 3 valuation framework).

7. Takeaway 6: Auditors Are Instructed to Challenge Management with Contradictory Evidence

The SEC Staff Joint Statement explicitly directs external auditors to increase their oversight of private asset marks, citing Public Company Accounting Oversight Board (PCAOB) standards, specifically AS 2110 (Risk Assessment), AS 2501 (Auditing Accounting Estimates, Including Fair Value Measurements), and AS 1105 (Audit Evidence).

Auditors are instructed that risk assessment is an ongoing process requiring heightened "professional skepticism." Citing established PCAOB frameworks, the SEC reminds audit teams that they cannot passively accept management's unconvincing assertions or uncalibrated models. Instead, auditors are required to evaluate the totality of audit evidence, explicitly gathering and analyzing data that contradicts management's fair value conclusions (such as declining public market equivalents, widening credit spreads, or discounted secondary market transactions). Where management relies on investee-reported NAV, auditors are instructed to audit the reliability of the investee's financial reporting and carefully review any management adjustments.

8. Forward-Looking Summary & Thought-Provoking Conclusion

As private credit and private market assets increasingly move into retail-accessible fund vehicles, regulatory scrutiny will intensify. At year-end 2025, 54% of interval fund assets and 44% of tender offer fund assets were classified as Level 3 holdings, while an additional 21% of interval fund assets and 42% of tender offer fund assets were valued using the NAV practical expedient. As a result, nearly three-quarters or more of these retail-facing fund assets depend on hard-to-value methodologies.

As highlighted in technical analyses from Simpson Thacher & Bartlett LLP, Cleary Gottlieb, CRC Oyster (Kaitlyn Wulfken), and the Journal of Accountancy (Yelena Mishkevich, CPA, CGMA), valuation oversight and compliance infrastructure under SEC Rule 2a-5 must evolve to match this portfolio complexity. Valuation is no longer a routine quarter-end accounting entry; it is a primary regulatory and operational exposure area.

Core Governance Question for Finance Leaders:

"If the SEC examined our Level 3 valuation models today, could we produce current, calibrated market evidence that justifies our asset marks, or are we relying on stale borrower reports, unadjusted cost baselines, and unverified NAV statements?"

When Borrowers Are Late on Their Financial Reports, SEC Says Asset Managers Still Have to Value Loans Correctly

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