Why Private Credit Valuations Can Lag Reality, and What Investors Can Check

Staff Writer

November 13, 2026

Why Private Credit Valuations Can Lag Reality, and What Investors Can Check — Image: Matti Blume / Wikimedia Commons, CC BY-SA 2.0

Unlike listed bonds, the loans held by private credit funds do not trade on an exchange, so there is no market price to tell investors what they are worth each day. Instead, the fund’s manager or a valuer estimates their value. This article explains how private loans are valued, why reported unit prices can lag reality, and what Australian regulators have said about valuation practices.

Why private loans are hard to value

The Reserve Bank of Australia (RBA) describes private credit as “bilaterally negotiated lending to businesses arranged by non-banks”. Because each loan is negotiated privately, the RBA notes, private credit loans are typically not traded in secondary markets or publicly rated. Without trades or ratings, there is no independent reference point for value.

The RBA’s 2024 review of global private credit observed that valuations in the sector “are typically less frequent and subjective”, and that the relevant accounting principles do not mandate specific valuation techniques. In practice, managers rely on internal processes, models and judgement about the borrower’s ability to repay, the value of any security, and prevailing interest rates and credit spreads.

A common starting point is to carry a performing loan at, or close to, its face value. That is reasonable when the borrower is paying on time and security values are stable. The difficulty arises when conditions change gradually: a borrower’s cash flow weakens, a construction project runs late or property values fall. If the valuation is not updated until a payment is missed, the reported value can overstate what the loan would fetch if sold.

Stale valuations and why they matter

A fund’s unit price, or net asset value (NAV), is the value of its assets less liabilities, divided by the number of units. If loan values are stale, the NAV is stale too, and this affects investors in three ways.

First, reported returns look smoother than the underlying risk, which can make a fund appear less volatile than it is. Second, investors entering or leaving at an inaccurate price transfer value between each other. Third, a sudden catch-up write-down can arrive as a shock, sometimes alongside redemption restrictions.

Illustrative example. Consider a hypothetical $200 million fund in which one $10 million loan, 5 per cent of the portfolio, is still carried at face value. The borrower’s position has deteriorated. A valuer estimates a 30 per cent chance of default with 60 cents in the dollar recovered if it defaults, and full repayment otherwise. Ignoring discounting, the expected value is (0.7 × $10 million) + (0.3 × $6 million) = $8.8 million. The loan is therefore overstated by $1.2 million, or 0.6 per cent of the fund’s NAV. Investors redeeming before the markdown receive about 0.6 per cent more than their units are worth, and that difference is borne by those who remain.

What ASIC has found

The Australian Securities and Investments Commission (ASIC) examined valuation practices in its 2025 review of private credit, Report 814. According to a summary by law firm Clayton Utz, ASIC identified quarterly independent valuations, or at least quarterly review by an independent third party, as better practice, and treated valuations at six-monthly intervals or less often as weaker practice. It also flagged valuations performed internally by the same staff who assessed the original loan as a concern for objectivity and conflicts of interest.

ASIC has continued to scrutinise the sector, publishing a further review, Report 846, on 10 November 2026. The Australian Prudential Regulation Authority said in its November 2026 System Risk Outlook that ASIC has found persistent weaknesses in governance, valuation, disclosure and liquidity management, and that APRA has proposed stronger requirements for superannuation investment governance with an emphasis on valuations.

Valuation and liquidity are linked

Valuation problems become most visible when investors want their money back. The RBA notes that private credit funds invest in illiquid assets and that many are structured to allow restrictions on withdrawals in a given period. Those restrictions protect remaining investors from forced sales, but they also mean that an investor cannot necessarily exit at the stated NAV when they choose.

Listed private credit trusts face a different dynamic: their units trade on the ASX, so the market price can sit at a premium or discount to the reported NAV, sometimes signalling investors’ own view of the portfolio’s value.

Questions investors can ask

Drawing on the practices ASIC has highlighted, investors and advisers can ask how often loans are revalued, who performs the valuation, whether an independent party is involved, how arrears and impairments are reflected, and how the fund’s liquidity terms align with the term of its loans. Disclosure documents should describe the valuation policy; where they do not, that absence is itself informative.

Key points

Private loans are not traded or rated, so their values are estimated using models and judgement rather than market prices.
Infrequent or internally driven valuations can leave a fund’s unit price out of step with its underlying assets.
Stale prices can smooth reported returns and shift value between entering, exiting and remaining investors.
ASIC has identified quarterly independent valuation as better practice, and APRA is tightening expectations for super fund valuation governance.
Valuation and liquidity are linked: withdrawal limits and listed-trust discounts often reflect uncertainty about true asset values.

This article is general information only and does not take into account your objectives, financial situation or needs. It is not financial advice.