Private Credit’s Verification Problem | EI Blog

Private credit faces a fundamental verification and information problem. Recent market developments have brought these issues into sharper focus. As liquidity tightens, and redemption pressures increase, private markets are undergoing what appears to be a structural test rather than a cyclical slowdown. Years of capital accumulation in semi-liquid structures are now colliding with more constrained liquidity conditions, exposing tensions between asset valuation and the ability to realize those valuations.

The misalignment between fund managers and investors is evident in the persistent discounts seen in business development companies (BDCs) relative to reported net asset values (NAVs). These discounts reflect credit risk, liquidity, and market conditions, but they also signal that investors are applying a discount when they cannot fully interpret or validate model-based valuations against market pricing. These discounts reflect credit risk, liquidity, and market conditions, but also highlight the gap between model-based valuations and market pricing—particularly when investors attempt to infer value from non-traded assets.

Private credit lacks comparable public market mechanisms—continuous price discovery, mandatory disclosures, and standardized auditing—that provide transparency and external validation. As a result, investors have limited ability to independently verify how valuations are constructed.

Verification does not make valuation assumptions correct, but it does make them transparent, reproducible, and open to scrutiny. In a market where key inputs remain judgment-based, improving verifiability does not eliminate uncertainty, but it can reduce ambiguity around how valuations are constructed.

This post examines how a combination of approaches, including statistical data screening, cryptographic proof, and stress testing, can improve different aspects of the verification process and strengthen confidence in private credit valuation.